NATIONAL HEALTHCARE CORP 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.   Forward – Looking Statements   References throughout this document to the Company include National HealthCare Corporation and its wholly owned subsidiaries. In accordance with the Securities and Exchange Commissions “Plain English” guidelines, this Quarterly Report on Form 10–Q has been written in the first person. In this document, the words “we”, “our”, “ours” and “us” refer only to National HealthCare Corporation and its wholly–owned subsidiaries and not any other person.   This Quarterly Report on Form 10–Q and other information we provide from time to time, contains certain “forward–looking” statements as that term is defined by the Private Securities Litigation Reform Act of 1995. All statements regarding our expected future financial position, results of operations or cash flows, continued performance improvements, ability to service and refinance our debt obligations, ability to finance growth opportunities, ability to control our patient care liability costs, ability to respond to changes in government regulations, ability to execute our three–year strategic plan, and similar statements including, without limitations, those containing words such as “believes”, “anticipates”, “expects”, “intends”, “estimates”, “plans”, and other similar expressions are forward–looking statements.   25 Table of Contents   Forward–looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected or contemplated in the forward–looking statements as a result of, but not limited to, the following factors:   ● national and local economic conditions, including their effect on the availability and cost of labor, utilities and materials;     ● the effect of government regulations and changes in regulations governing the healthcare industry, including our compliance with such regulations;     ● changes in Medicare and Medicaid payment levels and methodologies and the application of such methodologies by the government and its fiscal intermediaries;     ● liabilities and other claims asserted against us, including patient care liabilities, as well as the resolution of current litigation (see Note 16: Contingencies and Commitments);     ● the uncertainty of the extent, duration and effects of the COVID-19 pandemic and the response of governments     ● the ability to attract and retain qualified personnel;     ● the availability and terms of capital to fund acquisitions and capital improvements;     ● the competitive environment in which we operate;   ● our need to make investments continually in our processes and information systems to protect the privacy of patients, partners and other persons and reduce the risk of successful cybersecurity attacks;     ● damage to our reputation, regulatory penalties, legal claims and liability under state and federal laws that we could suffer upon any cybersecurity or privacy breaches;     ● the ability to maintain and increase census levels; and     ● demographic changes.   See the notes to the quarterly financial statements, and “Item 1. Business” in our 2021 Annual Report on Form 10–K for a discussion of various governmental regulations and other operating factors relating to the healthcare industry and the risk factors inherent in them. This may be found on our web site at www.nhccare.com. You should carefully consider these risks before making any investment in the Company. These risks and uncertainties are not the only ones facing us. There may be additional risks that we do not presently know of or that we currently deem immaterial. If any of the risks occur, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our shares of stock could decline, and you may lose all or part of your investment. Given these risks and uncertainties, we can give no assurances that these forward–looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them.   Overview   National HealthCare Corporation (“NHC” or the “Company”) is a leading provider of senior health care services. As of September 30, 2022, we operate or manage, through certain affiliates, 68 skilled nursing facilities with a total of 8,726 licensed beds, 23 assisted living facilities, five independent living facilities, three behavioral health hospitals, 35 homecare agencies, and 29 hospice agencies. We operate specialized care units within certain of our healthcare centers such as Alzheimer's disease care units and sub-acute nursing units. In addition, we provide insurance services, management and accounting services, and we lease properties to operators of skilled nursing and assisted living facilities. We operate in 8 states and are located primarily in the southeastern United States.     Impact of COVID-19   In early March 2020, COVID-19, a disease caused by the novel strain of the coronavirus, was characterized as a pandemic by the World Health Organization. As a provider of healthcare services, we are significantly exposed to the public health and economic effects of the COVID-19 pandemic.  NHC’s primary objective has remained the same throughout the COVID-19 pandemic: that is to protect the health and safety of our patients, residents, and partners (employees). We continue to follow all guidance from the Centers for Medicare and Medicaid Services (“CMS”), the Centers for Disease Control and Prevention (“CDC”), and state and local health departments to prevent the spread of the disease within our operations.    We began our first vaccination clinics in our skilled nursing facilities in December 2020. As the vaccination clinics progressed and as the vaccine became more accessible, we began to see a significant decline in COVID-19 cases among our operations, as well as a significant decrease in the adverse health events related to COVID. Despite the COVID-19 cases and adverse health events from COVID declining, our operating expenses have remained elevated with incentive compensation being paid to attract and retain frontline partners, as well as increased costs of personal protective equipment (“PPE”), sanitizers and cleaning supplies, and COVID-19 testing of our patients and partners. Despite the continued disruption of COVID-19 to our operations, our capital and financial resources, including our overall liquidity, remain strong. Our liquidity provides us with significant flexibility to maintain the strength of our balance sheet in periods of uncertainty or stress.   26 Table of Contents   At this time, we are not able to quantify the impact that the COVID-19 pandemic will have on our future financial results, but we expect the developments related to COVID-19 to adversely affect our financial performance in 2022.  The ultimate impact of the pandemic on our financial results will depend on, among other factors, the duration and severity of the pandemic, the volume of acute and post-acute healthcare patients cared for across the broader health care systems, the timing and availability of effective medical treatments and vaccines, and the impact of government actions and administrative regulations on our industry and the broader economy, including future government stimulus efforts.  We have received and may continue to receive payments and advances from the various federal and state initiatives. These legislative initiatives have been beneficial to partially mitigate the impact of the COVID-19 pandemic on our results of operations and financial position to date.  The federal and state governments may consider additional stimulus and relief efforts, but we are unable to predict whether any of the additional stimulus measures will be enacted or their impact.      Legislation and Government Stimulus Due to COVID-19   The U.S. government enacted several laws beginning in March 2020 designed to help the nation respond to the COVID-19 pandemic. The new laws impacted healthcare providers in a variety of ways, but the largest legislation from a monetary relief perspective is the CARES Act. Through the CARES Act, as well as the PPPCHE, the federal government allocated $178 billion to the Public Health and Social Services Emergency Fund , which is referred to as the Provider Relief Fund. The Provider Relief Fund is administered through grants and other mechanisms to skilled nursing providers, home health providers, hospitals, and other Medicare and Medicaid enrolled providers to cover unreimbursed health care related expenses or lost revenue attributable to the public health emergency resulting from COVID-19.       The Provider Relief Fund grants come with terms and condition certifications in which all providers are required to submit documents to ensure the funds are used for healthcare-related expenses or lost revenue attributable to COVID-19. The Company recorded $0 and $10,429,000 of government stimulus income from the Provider Relief Funds for the three months ended September 30, 2022 and 2021, respectively. The Company recorded $10,940,000 and $48,304,000 of government stimulus income from the Provider Relief Funds for the nine months ended September 30, 2022 and 2021, respectively. The grant income was determined on a systemic basis in line with the recognition of specific expenses and lost revenues for which the grants are intended to compensate. The Company’s assessment of whether the terms and conditions for amounts received have been met for income recognition and the Company’s related income calculation considered all frequently asked questions and other interpretive guidance issued to date by HHS.   Additionally, as part of the CARES Act, the legislation included an expansion of the Medicare Accelerated and Advance Payment Program. In the second quarter of 2020, we received approximately $51,253,000 as part of this program. These funds began to be applied against claims for services provided to Medicare patients after approximately one year from the date we received the funds. As of September 30, 2022, $138,000 of the accelerated payments remain and is reflected within contract liabilities in the interim condensed consolidated balance sheet.   The CARES Act and subsequent related legislation temporarily suspended Medicare sequestration beginning May 1, 2020 through March 31, 2022. The Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent. Beginning April 1, 2022, the sequestration reductions were 1% from April 1, 2022 through June 30, 2022. The full 2% reduction went back into effect July 1, 2022. The CARES Act extends the sequestration policy through 2030 in exchange for this temporary suspension, which the sequestration reduction for 2030 has been increased up to 3%.    The CARES Act also temporarily permitted employers to defer the deposit and payment of the employer’s portion of the social security taxes (6.2% of employee wages) that otherwise would have been due between March 27, 2020 and December 31, 2020. The provision requires that the deferred taxes be paid over a two-year period with half the amount required to be paid by December 31, 2021, and the other half by December 31, 2022. At September 30, 2022, we have deferred $10,545,000 of the Company’s share of the social security taxes included in the current liabilities section of the consolidated balance sheet.      Summary of Goals and Areas of Focus   Occupancy   A primary area of management focus continues to be the rates of occupancy within our skilled nursing facilities. The overall census in owned and leased skilled nursing facilities for the nine months ending September 30, 2022 was 83.4% compared to 80.0% for the same period a year ago.  For the three months ended September 30, 2022, overall census in our owned and leased skilled nursing facilities was 83.7% compared to 82.0% in the third quarter of 2021.   Due to the pandemic, as well as the increased strain the pandemic has caused on America's healthcare labor shortage, the challenge of maintaining desirable patient census levels has been amplified. Management has undertaken a number of steps in order to best position our current and future health care facilities. This includes working internally to examine and improve systems to be most responsive to referral sources and payors, as well as find creative initiatives to retain and attract qualified healthcare professionals. Additionally, NHC is in various stages of partnerships with hospital systems, payors, and other post–acute alliances to better position ourselves so we are an active participant in the delivery of post-acute healthcare services.   27 Table of Contents   Quality of Patient Care   CMS introduced the Five-Star Quality Rating System to help consumers, their families and caregivers compare skilled nursing facilities more easily. The Five-Star Quality Rating System gives each skilled nursing operation a rating ranging between one and five stars in various categories (five stars being the best). The Company has always strived for patient-centered care and quality outcomes as precursors to outstanding financial performance.   In July 2022, CMS launched its enhanced Five-Star Quality Rating System which integrates data nursing homes report on their weekend staffing rates for nurses and information on annual turnover among nurses and administrators. Through this enhancement, CMS will hold facilities to a higher standard and incentivize more robust staffing by strengthening personnel’s impact on overall star ratings.   The tables below summarize NHC's overall performance in these Five-Star ratings versus the skilled nursing industry as of September 30, 2022:       NHC Ratings     Industry Ratings   Total number of skilled nursing facilities, end of period     68           Number of 4 and 5-star rated skilled nursing facilities     42           Percentage of 4 and 5-star rated skilled nursing facilities     62%       37%   Average rating for all skilled nursing facilities, end of period     3.8       2.9     Development and Growth   We are undertaking to expand our senior care operations while protecting our existing operations and markets. The following table lists our recent development activities.   Type of Operation     Description     Size     Location     Placed in Service Hospice     Acquisition     28 offices     Various     June 2021 Homecare     New Office     1 office     Anderson, SC     January 2022 Hospice     New Office     1 office     Tullahoma, TN     March 2022 Behavioral Health Hospital     New Facility     64 beds     Knoxville, TN     April 2022 Behavioral Health Hospital     New Facility     16 beds     St. Louis, MO     June 2022   Accrued Risk Reserves   Our accrued professional liability and workers’ compensation reserves totaled $103,710,000 at September 30, 2022 and are a primary area of management focus. We have set aside restricted cash and cash equivalents and marketable securities to fund our estimated professional liability and workers’ compensation liabilities.   As to exposure for professional liability claims, we have developed performance certification criteria to measure and bring focus to the patient care issues most likely to produce professional liability exposure, including in–house acquired pressure ulcers, significant weight loss and numbers of falls. These programs for certification, which we regularly modify and improve, have produced measurable improvements in reducing these incidents. Our experience is that achieving goals in these patient care areas improves both patient and employee satisfaction.     Government Reimbursement Programs   Medicare – Skilled Nursing Facilities   On July 29, 2021, CMS released its final rule outlining fiscal year 2022 Medicare payment rates and policy changes for skilled nursing facilities, which began October 1, 2021. The fiscal year 2022 rule provided for an approximate 1.2% increase, or $410 million, compared to 2021 levels. The net increase included a 2.7% market-basket update that was offset by a 0.7% productivity adjustment and a 0.8% market-basket forecast error adjustment since the difference between the projected and actual market basket for FY2020 exceeded its threshold.   In July 2022, CMS released its final rule outlining fiscal year 2023 Medicare payment rates and policy changes for skilled nursing facilities, which began on October 1, 2022. The fiscal year 2023 rule provided for an approximate 2.7% increase, or $904 million, compared to 2022 levels. The net increase includes a 3.9% market-basket increase plus a 1.5% market basket forecast error adjustment, less a 0.3% productivity adjustment and a 2.3% decrease in the FY 2023 SNF PPS rates as a result of the recalibrated parity adjustment. The recalibrated parity adjustment is a total of 4.6% and is being phased in over the next two years (2.3% annually).   28 Table of Contents   For the first nine months of 2022, our average Medicare per diem rate for skilled nursing facilities increased 2.2% as compared to the same period in 2021.    Medicaid – Skilled Nursing Facilities   Effective July 1, 2022 and for the fiscal year 2023, the state of Tennessee implemented specific individual nursing facility increases. We estimate the resulting increase in revenue for the 2023 fiscal year will be approximately $3,200,000 annually, or $800,000 per quarter.   Effective October 1, 2022 and for the fiscal year 2023, the state of South Carolina implemented specific individual nursing facility increases. We estimate the resulting increase in revenue for the 2023 fiscal year will be approximately $3,735,000 annually, or $934,000 per quarter.   Effective July 1, 2021 and for the fiscal year 2022, the state of Missouri implemented specific individual nursing facility increases. We estimate the resulting increase in revenue for the 2022 fiscal year will be approximately $2,000,000 annually, or $500,000 per quarter.   We have also received from many of the states in which we operate supplemental Medicaid payments to help mitigate the incremental costs resulting from the COVID-19 public health emergency. We have recorded $4,736,000 and $5,053,000 in net patient revenues for these supplemental Medicaid payments for the three months ended September 30, 2022 and 2021, respectively. We have recorded $15,275,000 and $16,102,000 in net patient revenues for these supplemental Medicaid payments for the nine months ended September 30, 2022 and 2021, respectively.   For the first nine months of 2022, our average Medicaid per diem increased 2.3% compared to the same period in 2021.   We face challenges with respect to states’ Medicaid payments, because many currently do not cover the total costs incurred in providing care to those patients. States will continue to control Medicaid expenditures and also look for adequate funding sources, including provider assessments. There are several pieces of legislation that include provisions designed to reduce Medicaid spending. These provisions include, among others, provisions strengthening the Medicaid asset transfer restrictions for persons seeking to qualify for Medicaid long-term care coverage, which could, due to the timing of the penalty period, increase facilities’ exposure to uncompensated care. Other provisions could increase state funding for home and community-based services, potentially having an impact on funding for nursing facilities.   Medicare – Homecare Programs   In November 2021, CMS released its final rule outlining fiscal year 2022 Medicare payment rates. CMS projects payments to home health agencies in fiscal year 2022 will increase in aggregate by 3.2%, or $570 million. The increase reflects the effects of the home health payment update percentage of 2.6%, an estimated 0.7% increase that reflects the effects of the updated fixed-dollar loss ratio, and an estimated 0.1% decrease in payments due to the changes in the rural add-on percentages for 2022.   In October 2022, CMS released its final rule outlining fiscal year 2023 Medicare payment rates. CMS projects payments to home health agencies in fiscal year 2023 will increase in aggregate by 0.7%, or $125 million. The increase reflects the effects of the home health payment update percentage of 4.0%, a permanent behavioral assumption adjustment resulting in a decrease of 3.5%, and an estimated 0.2% increase that reflects the effects of an update to the fixed-dollar loss ratio used in determining outlier payments.   Medicare – Hospice   In July 2021, CMS released its final rule outlining fiscal year 2022 Medicare payment rates. CMS issued a rate increase of 2.0%, or $480 million, effective October 1, 2021. The increase is the result of a 2.7% market basket increase reduced by a 0.7% productivity adjustment. The FY2022 hospice payment updates also include an update to the statutory aggregate cap amount, which limits the overall payments per patient that are made annually. The cap amount for FY2022 is $31,298.   In July 2022, CMS released its final rule outlining fiscal year 2023 Medicare payment rates. CMS issued a rate increase of 3.8%, or $825 million, effective October 1, 2022. The increase is the result of a 4.1% inpatient hospital market basket increase reduced by a 0.3% productivity adjustment. The FY2023 hospice payment update also includes an update to the statutory aggregate cap amount, which limits the overall payments per patient that are made annually. The cap amount for FY2023 would be $32,487.   29 Table of Contents   Segment Reporting   The Company has two reportable operating segments: (1) inpatient services, which includes the operation of skilled nursing facilities, assisted and independent living facilities, and behavioral health hospitals; and (2) homecare and hospice services. These reportable operating segments are consistent with information used by the Company’s Chief Executive Officer, as chief operating decision maker (“CODM”), to assess performance and allocate resources.   The Company also reports an “all other” category that includes revenues from rental income, management and accounting services fees, insurance services, and costs of the corporate office. For additional information on these reportable segments see Note 2 – Summary of Significant Accounting Policies.       The Company’s CODM evaluates performance and allocates capital resources to each segment based on an operating model that is designed to improve the quality of patient care and profitability of the Company while enhancing long-term shareholder value. The CODM does not review assets by segment in his resource allocation and therefore, assets by segment are not disclosed below.   The following table sets forth the Company’s unaudited interim condensed consolidated statements of operations by business segment (in thousands ):        Three Months Ended September 30, 2022       Inpatient Services     Homecare and Hospice     All Other     Total   Revenues and grant income:                                 Net patient revenues   $ 228,138     $ 32,109     $ -     $ 260,247   Other revenues     (198 )     -       10,794       10,596   Net operating revenues and grant income     227,940       32,109       10,794       270,843                                     Costs and expenses:                                 Salaries, wages, and benefits     144,047       19,581       9,570       173,198   Other operating     66,522       6,310       51       72,883   Rent     8,088       575       1,631       10,294   Depreciation and amortization     9,198       248       807       10,253   Interest     137       -       -       137   Total costs and expenses     227,992       26,714       12,059       266,765                                     Income/(loss) from operations     (52 )     5,395       (1,265 )     4,078   Non-operating income     -       -       2,731       2,731   Unrealized losses on marketable equity securities     -       -       (11,056 )     (11,056 )                                   Income/(loss) before income taxes   $ (52 )   $ 5,395     $ (9,590 )   $ (4,247 )         Three Months Ended September 30, 2021       Inpatient Services     Homecare and Hospice     All Other     Total   Revenues:                                 Net patient revenues   $ 222,884     $ 31,933     $ -     $ 254,817   Other revenues     128       -       11,363       11,491   Government stimulus income     10,429       -       -       10,429   Net operating revenues and grant income     233,441       31,933       11,363       276,737                                     Costs and expenses:                                 Salaries, wages, and benefits     141,318       18,771       10,146       170,235   Other operating     64,755       5,618       2,736       73,109   Rent     7,998       594       1,612       10,204   Depreciation and amortization     9,300       118       811       10,229   Interest     198       -       -       198   Total costs and expenses     223,569       25,101       15,305       263,975                                     Income/(loss) from operations     9,872       6,832       (3,942 )     12,762   Non-operating income     -       -       3,399       3,399   Unrealized losses on marketable equity securities     -       -       (23,797 )     (23,797 )                                   Income/(loss) before income taxes   $ 9,872     $ 6,832     $ (24,340 )   $ (7,636 )   30 Table of Contents       Nine Months Ended September 30, 2022       Inpatient Services     Homecare and Hospice     All Other     Total   Revenues:                                 Net patient revenues   $ 680,776     $ 95,885     $ -     $ 776,661   Other revenues     15       -       33,569       33,584   Government stimulus income     10,940       -       -       10,940   Net operating revenues and grant income     691,731       95,885       33,569       821,185                                     Costs and expenses:                                 Salaries, wages, and benefits     435,322       58,007       25,499       518,828   Other operating     192,791       19,848       5,640       218,279   Rent     24,498       1,759       4,513       30,770   Depreciation and amortization     27,120       472       2,419       30,011   Interest     451       -       -       451   Total costs and expenses     680,182       80,086       38,071       798,339                                     Income/(loss) from operations     11,549       15,799       (4,502 )     22,846   Non-operating income     -       -       8,451       8,451   Unrealized losses on marketable equity securities     -       -       (11,479 )     (11,479 )                                   Income/(loss) before income taxes   $ 11,549     $ 15,799     $ (7,530 )   $ 19,818           Nine Months Ended September 30, 2021       Inpatient Services     Homecare and Hospice     All Other     Total   Revenues and grant income:                                 Net patient revenues   $ 644,986     $ 63,662     $ -     $ 708,648   Other revenues     324       -       33,592       33,916   Government stimulus income     48,304       -       -       48,304   Net operating revenues and grant income     693,614       63,662       33,592       790,868                                     Costs and expenses:                                 Salaries, wages, and benefits     407,534       39,922       35,807       483,263   Other operating     185,860       10,291       8,060       204,211   Rent     24,129       1,478       4,830       30,437   Depreciation and amortization     27,790       299       2,432       30,521   Interest     657       -       -       657   Total costs and expenses     645,970       51,990       51,129       749,089                                     Income/(loss) from operations     47,644       11,672       (17,537 )     41,779   Non-operating income     -       -       15,245       15,245   Gain on acquisition of equity method investment     -       -       95,202       95,202   Unrealized losses on marketable equity securities     -       -       (23,227 )     (23,227 )                                   Income before income taxes   $ 47,644     $ 11,672     $ 69,683     $ 128,999     31 Table of Contents   Non-GAAP Financial Presentation   The Company is providing certain non-GAAP financial measures as the Company believes that these figures are helpful in allowing investors to more accurately assess the ongoing nature of the Company’s operations and measure the Company’s performance more consistently across periods. Therefore, the Company believes this information is meaningful in addition to the information contained in the GAAP presentation of financial information. The presentation of this additional non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.   Specifically, the Company believes the presentation of non-GAAP financial information that excludes the unrealized gains or losses on our marketable equity securities, operating results for the newly constructed healthcare facilities or start-up operations not at full capacity, share-based compensation expense, and any gains on the acquisitions of equity method investments is helpful in allowing investors to assess the Company’s operations more accurately.   The operating results for the newly constructed healthcare facilities or agencies not at full capacity for the three and nine months ended September 30, 2022 include facilities or offices that began operations from 2020 to 2022, which is two behavioral health hospitals, one homecare agency, and one hospice agency. For the three months and nine months ended September 30, 2021, included are facilities that began operations from 2019 to 2021, which is one memory care facility.   The tables below provide reconciliations of GAAP to non-GAAP items (dollars in thousands, except per share data):       Three Months Ended September 30     Nine Months Ended September 30       2022     2021     2022     2021                                     Net income/(loss) attributable to National Healthcare Corporation   $ (2,429 )   $ (3,348 )   $ 16,092     $ 122,802   Non-GAAP adjustments                                 Unrealized losses on marketable equity securities     11,056       23,797       11,479       23,227   Gain on acquisition of equity method investment     -       -       -       (95,202 ) Operating results for newly opened facilities or agencies not at full capacity     2,105       115       4,033       480   Share-based compensation expense     639       726       1,980       1,905   Benefit of income taxes on non-GAAP adjustments     (3,588 )     (6,406 )     (4,548 )     (6,369 ) Non-GAAP Net income   $ 7,783     $ 14,884     $ 29,036     $ 46,843                                                                       GAAP diluted earnings/(loss) per share   $ (0.16 )   $ (0.22 )   $ 1.04     $ 7.97   Non-GAAP adjustments                                 Unrealized losses on marketable equity securities     0.53       1.14       0.56       1.12   Gain on acquisition of equity method investment     -       -       -       (6.16 ) Operating results for newly opened facilities or agencies not at full capacity     0.10       0.01       0.19       0.02   Share-based compensation expense     0.03       0.03       0.09       0.09   Non-GAAP diluted earnings per share   $ 0.50     $ 0.96     $ 1.88     $ 3.04     32 Table of Contents   Results of Operations   The following table and discussion set forth items from the interim condensed consolidated statements of operations as a percentage of net operating revenues and grant income for the three and nine months ended September 30, 2022 and 2021.   Percentage of Net Operating Revenues and Grant Income       Three Months Ended September 30     Nine Months Ended September 30       2022     2021     2022     2021   Net operating revenues and grant income     100.0 %     100.0 %     100 %     100 % Costs and expenses:                                 Salaries, wages, and benefits     63.9       61.5       63.2       61.1   Other operating     26.9       26.4       26.5       25.8   Facility rent     3.8       3.7       3.7       3.8   Depreciation and amortization     3.8       3.7       3.7       3.9   Interest     0.1       0.1       0.1       0.1   Total costs and expenses     98.5       95.4       97.2       94.7   Income from operations     1.5       4.6       2.8       5.3   Non–operating income     1.0       1.2       1.0       1.9   Gain on acquisition of equity method investment     -       -       -       12.0   Unrealized losses on marketable equity securities     (4.1 )     (8.6 )     (1.4 )     (2.9 ) Income/(loss) before income taxes     (1.6 )     (2.8 )     2.4       16.3   Income tax (provision)/benefit     0.5       1.5       (0.8 )     (0.7 ) Net income/(loss)     (1.1 )     (1.3 )     1.8       15.6   Net loss attributable to noncontrolling interest     0.2       0.1       0.2       0.0   Net income/(loss) attributable to stockholders of NHC     (0.9 )     (1.2 )     2.0       15.6     Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021   Results for the quarter ended September 30, 2022 compared to the third quarter of 2021 include a 2.1% decrease in net operating revenues and government stimulus income. The net operating revenues and government stimulus income decrease was primarily driven by the reduction in government stimulus income of $10.4 million during the third quarter of 2022 compared to the same period a year ago. Excluding the government stimulus income, same-facility net operating revenues increased 3.8% during the third quarter of 2022 compared to the same period a year ago.    For the quarter ended September 30, 2022, the GAAP net loss attributable to NHC was $2,429,000 compared to a net loss of $3,348,000 for the same period in 2021. Excluding the unrealized losses in our marketable equity securities portfolio and other non-GAAP adjustments, adjusted net income for the quarter ended September 30, 2022 was $7,783,000 compared to $14,884,000 for the same period in 2021.  The adjusted net income decrease was primarily due to the following three items: (1) the $10.4 million less Provider Relief Funds recorded during the third quarter of 2022; (2) the $1.5 million negative impact on our net patient revenues from Medicare sequestration that went into effect July 1, 2022; and (3) we are incurring higher inflationary pressures on our nursing labor costs.      Net operating revenues and grant income   Net patient revenues increased $5,430,000, or 2.1%, compared to the same period last year.   The total census at owned and leased skilled nursing facilities for the quarter averaged 83.7%, compared to an average of 82.0% for the same quarter a year ago. Overall, the composite skilled nursing facility per diem increased 2.4% compared to the same quarter a year ago. Our Medicare per diem rates increased 2.2% and managed care per diem rates increased 6.1% compared to the same quarter a year ago. Medicaid and private pay per diem rates increased 2.7% and 3.3%, respectively, compared to the same quarter a year ago. For the three months ended September 30, 2022 and 2021, respectively, $4,773,000 and $5,053,000 have been included in our net patient revenues for supplemental COVID-19 Medicaid payments.   The CARES Act temporarily suspended Medicare sequestration beginning May 1, 2020 through March 31, 2022. The Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent. The full 2% reduction went back into effect July 1, 2022 and this reduced our net patient revenues approximately $1,500,000 during the third quarter of 2022 compared to the same quarter a year ago.   In September 2022, the Company transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire resulting in net patient revenues decreasing $5,102,000 for the three months ended September 30, 2022 compared to the same quarter last year.   Other revenues decreased $895,000, or 7.8%, compared to the same quarter last year, as further detailed in Note 5 to our interim condensed consolidated financial statements.   During the three months ended September 30, 2022 and 2021, respectively, we recorded $0 and $10,429,000, respectively, in government stimulus income related to funds received from the CARES Act Provider Relief Fund. See Note 3 - Coronavirus Pandemic for additional information.     33 Table of Contents   Total costs and expenses   Total costs and expenses for the three months ended September 30, 2022 compared to the same period of 2021 increased $2,790,000, or 1.1% to $266,765,000 from $263,975,000.   Salaries, wages, and benefits increased $2,963,000, or 1.7%, to $173,198,000 from $170,235,000. Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 63.9% compared to 61.5% for the three months ended September 30, 2022 and 2021, respectively. We continue to face workforce and labor shortages within all of our operations, which increases wage pressure in regards to retaining and attracting qualified healthcare partners (employees). The labor and workforce shortages have resulted in us contracting with agency nurse staffing companies.  The agency nurse staffing companies charge inflated hourly rates; therefore, we are working diligently to find solutions to reduce and eliminate the agency nurse staffing within our healthcare operations.   In September 2022, the Company transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire resulting in salaries, wages, and benefits decreasing $4,587,000 for the three months ended September 30, 2022 compared to the same quarter last year.   Other operating expenses decreased $226,000, or 0.3%, to $72,883,000 for the 2022 period compared to $73,109,000 for the 2021 period. Other operating expenses as a percentage of net operating revenues and grant income was 26.9% and 26.4% for the three months ended September 30, 2022 and 2021, respectively. We continue to face inflationary pressures in certain categories within other operating expenses as well, such as food/dietary supplies and drugs/pharmaceutical supplies.     Other income   Non–operating income decreased by $668,000 compared to the same period last year, as further detailed in Note 6 to our interim condensed consolidated financial statements.   Income taxes   The income tax benefit for the three months ended September 30, 2022 is $1,140,000 (an effective income tax rate of 26.8%). We expect our corporate (federal and state) effective income tax rate for 2022 to be approximately 26.0%.    Noncontrolling interest   The noncontrolling interest in subsidiaries is presented within total equity of the Company’s consolidated balance sheets. The Company presents the noncontrolling interest and the amount of consolidated net income attributable to NHC in its consolidated statements of operations. The Company’s earnings per share is calculated based on net income attributable to NHC’s stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest.     Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021   Results for the nine months ended September 30, 2022 compared to the same period of 2021 include a 3.8% increase in net operating revenues and grant income. The net operating revenues and grant income increase is primarily driven by the June 2021 acquisition of Caris hospice and the continued occupancy increase in our skilled nursing facilities. But, these increases were offset by the reduction in government stimulus income of $37.4 million for the first nine months of 2022 compared to the same period a year ago.   For the nine months ended September 30, 2022, GAAP net income attributable to NHC was $16,092,000 compared to net income of $122,802,000 for the same period in 2021. The large increase in our reported GAAP net income for the 2021 nine-month period was primarily due to the $95.2 million gain recorded from the acquisition of Caris. Excluding the gain on Caris, as well as excluding the unrealized gains and losses in our marketable equity securities portfolio and other non-GAAP adjustments, adjusted net income for the nine months ended September 30, 2022 was $29,036,000 compared to $46,843,000 for the same period in 2021.  The decrease in adjusted net income for the nine-month period of 2022 compared to the same period of 2021 is primarily due to the $37.4 million less government stimulus income recorded during the 2022 period. We also continue to incur inflationary wage pressures within all areas of our operations.   Net operating revenues and grant income   Net patient revenues increased $68,013,000, or 9.6%, compared to the same period last year.   The total census at owned and leased skilled nursing facilities for the nine-month period averaged 83.4%, compared to an average of 80.0% for the same period a year ago. Overall, the composite skilled nursing facility per diem increased 1.6% compared to the same period a year ago. Our Medicare per diem rates increased 2.2% and managed care per diem rates increased 4.7% compared to the nine-month period a year ago. Medicaid and private pay per diem rates increased 2.3% and 5.6%, respectively, compared to the same period a year ago. For the nine months ended September 30, 2022 and 2021, $15,312,000 and $16,102,000, respectively, have been included in our net patient revenues for supplemental COVID-19 Medicaid payments.   In June 2021, the Company acquired the remaining ownership interest in Caris, which resulted in net patient revenues increasing $32,114,000 for the nine months ended September 30, 2022 compared to the same period of 2021. In September 2022, the Company transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire resulting in net patient revenues decreasing $2,375,000 for the nine months ended September 30, 2022 compared to the same quarter last year.   34 Table of Contents   Other revenues decreased $332,000, or 1.0%, compared to the same period last year, as further detailed in Note 5 to our interim condensed consolidated financial statements.   During the nine months ended September 30, 2022 and 2021, respectively, we recorded $10,940,000 and $48,304,000 in government stimulus income related to funds received from the CARES Act Provider Relief Fund. See Note 3 - Coronavirus Pandemic for additional information.     Total costs and expenses   Total costs and expenses for the nine months ended September 30, 2022 compared to the same period of 2021 increased $49,250,000, or 6.6% to $798,339,000 from $749,089,000.   Salaries, wages, and benefits increased $35,565,000, or 7.4%, to $518,828,000 from $483,263,000. Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 63.2% compared to 61.1% for the nine months ended September 30, 2022 and 2021, respectively. Our Caris acquisition increased salaries, wages, and benefits $18,962,000 in the nine-month period of 2022 compared to the same period a year ago. We continue to face workforce and labor shortages within all of our operations, which increases wage pressure in regards to retaining and attracting qualified healthcare partners (employees). The labor and workforce challenges have resulted in us contracting with agency nurse staffing companies. The agency nurse staffing companies charge inflated hourly rates; therefore, we are working diligently to find solutions to reduce and eliminate the agency nurse staffing within our healthcare operations.   In September 2022, the Company transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire resulting in salaries, wages, and benefits decreasing $5,150,000 for the nine months ended September 30, 2022 compared to the same period last year.   Other operating expenses increased $14,068,000, or 6.9%, to $218,279,000 for the 2022 period compared to $204,211,000 for the 2021 period. Other operating expenses as a percentage of net operating revenues and grant income was 26.6% and 25.8% for the nine months ended September 30, 2022 and 2021, respectively. Our Caris acquisition increased other operating expenses $9,601,000 in the first nine months of 2022 compared to the same period a year ago. We continue to face inflationary pressures in certain categories within other operating expenses as well, such as food/dietary supplies and drugs/pharmaceutical supplies.     Other income   Non–operating income decreased by $6,794,000 compared to the same period last year, as further detailed in Note 6 to our interim condensed consolidated financial statements.  The large decrease in our non-operating income is due to the June 2021 acquisition of Caris. Prior to the June 2021 acquisition date, Caris was our most significant equity method investment with a 75.1% non-controlling ownership interest. From the respective acquisition date, Caris’ financial information is now included in the Company’s consolidated financial statements and is no longer accounted for as an equity method investment.   Income taxes   The income tax provision for the nine months ended September 30, 2022 is $5,415,000 (an effective income tax rate of 27.3%). We expect our corporate (federal and state) effective income tax rate for 2022 to be approximately 26.0%.    Noncontrolling interest   The noncontrolling interest in subsidiaries is presented within total equity of the Company’s consolidated balance sheets. The Company presents the noncontrolling interest and the amount of consolidated net income attributable to NHC in its consolidated statements of operations. The Company’s earnings per share is calculated based on net income attributable to NHC’s stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest.     Liquidity, Capital Resources, and Financial Condition   Our primary sources of cash include revenues from the operations of our healthcare and senior living facilities, management and accounting services, rental income, and investment income. Our primary uses of cash include salaries, wages and other operating costs of our healthcare and senior living facilities, the cost of additions to and acquisitions of real property, facility rent expenses, and dividend distributions. These sources and uses of cash are reflected in our interim condensed consolidated statements of cash flows and are discussed in further detail below.   The following is a summary of our sources and uses of cash flows (dollars in thousands) :       Nine Months Ended September 31     Nine Month Change       2022     2021     $     %   Cash, cash equivalents, restricted cash, and restricted cash equivalents, at beginning of period   $ 119,743     $ 158,502     $ (38,759 )     (24.5 )                                   Cash (used in)/provided by operating activities     (3,192 )     46,871       (50,063 )     (106.8 )                                   Cash used in investing activities     (8,810 )     (52,837 )     44,027       83.3                                     Cash used in financing activities     (35,541 )     (25,769 )     (9,772 )     (37.9 )                                   Cash, cash equivalents, restricted cash, and restricted cash equivalents, at end of period   $ 72,200     $ 126,767     $ (54,567 )     (43.0 )   35 Table of Contents   Operating Activities   Net cash used in operating activities for the nine months ended September 30, 2022 was $3,192,000 as compared to cash provided by operating activities of $46,871,000 in the same period last year. Cash used in operating activities consisted of net income of $14,403,000 and adjustments for non–cash items of $44,221,000. There was cash used for working capital needs in the amount of $63,011,000 for the nine months ended September 30, 2022 compared to $31,297,000 for the same period a year ago. We also received cash distributions from our unconsolidated investments of $439,000 during the nine months ended September 30, 2022, compared to $6,314,000 for the same period a year ago.     Included in the adjustments for non-cash items are depreciation expense, equity in earnings of unconsolidated investments, unrealized losses on our marketable equity securities, deferred taxes, and stock compensation.   Investing Activities   Net cash used in investing activities totaled $8,810,000 for the nine months ended September 30, 2022, compared to $52,837,000 for the nine months ended September 30, 2021. Cash used for property and equipment additions was $24,563,000 and $25,774,000 for the nine months ended September 30, 2022, and 2021, respectively. In the prior period, we used cash of $28,713,000 to acquire Caris. Proceeds from the sale of marketable securities, net of purchases, resulted in cash provided by investing activity of $9,397,000 for the nine months ended September 30, 2022.  The Company also collected notes receivable of $4,181,000 and received proceeds from the sale of property and equipment of $4,175,000 for the nine months ended September 30, 2022.     Financing Activities     Net cash used in financing activities totaled $35,541,000 for the nine months ended September 30, 2022 compared to $25,769,000 for the nine months ended September 30, 2021. We made principal payments under our finance lease obligations in the amount of $3,495,000 and $3,292,000 for the nine months ended September 30, 2022 and 2021, respectively. Cash used for dividend payments to common stockholders totaled $25,830,000 in the current year period compared to $24,010,000 for the same period a year ago. We repurchased common shares outstanding in the amount of $6,907,000 in the current year period compared to $278,000 for the same period a year ago.   Short – term liquidity   We expect to meet our short-term liquidity requirements primarily from our cash flows from operating activities. In addition to cash flows from operations, our current cash on hand of $44,515,000 and our marketable equity and debt securities of $132,214,000 are expected to be adequate to meet our contractual obligations, operating liquidity, and our growth and development plans in the next twelve months.    Long – term liquidity   We expect to meet our long-term liquidity requirements primarily from our cash flows from operating activities, our current cash on hand of $44,515,000 and our marketable equity and debt securities of $132,214,000. We also have substantial value in our unencumbered real estate assets which could potentially be used as collateral in future borrowing opportunities. At September 30, 2022, we do not have any long-term debt.   Our ability to meet our long–term contractual obligations, and to finance our operating requirements and growth plans will depend upon our future performance. Our future performance will be affected by business, economic, financial and other factors, including potential changes in state and federal government payment rates for healthcare, customer demand, success of our marketing efforts, pressures from competitors, and the state of the economy, including the state of financial and credit markets, as well as many unforeseen factors.     Commitment and Contingencies   Governmental Regulations   Laws and regulations governing the Medicare, Medicaid and other federal healthcare programs are complex and subject to interpretation. Management believes that it is following all applicable laws and regulations in all material respects. However, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusions from the Medicare, Medicaid, and other federal healthcare programs. There have been several enacted and proposed federal and state relief measures as a result of COVID-19 which should provide support to us during this pandemic; however, the full benefit of any such programs would not be realized until these payments are fully implemented, government agencies issue applicable regulations, or guidance and such relief is provided.   36 Table of Contents