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 17: Contingencies and Commitments);     ● 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 2022 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 June 30, 2023, we operate or manage, through certain affiliates, 68 skilled nursing facilities with a total of 8,732 licensed beds, 23 assisted living facilities with 1,181 units, five independent living facilities, three behavioral health hospitals, 35 homecare agencies, and 30 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 were significantly exposed to the public health and economic effects of the COVID-19 pandemic. NHC’s primary objective was and 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 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   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 was 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 $320,000 of government stimulus income from the Provider Relief Funds for the three months ended June 30, 2023 and 2022, respectively. The Company recorded $0 and $10,940,000 of government stimulus income from the Provider Relief Funds for the six months ended June 30, 2023 and 2022, respectively. The grant income was determined on a systematic 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 the U.S. Department of Health and Human Services (“HHS”).   We have also received supplemental Medicaid payments from many of the states in which we operate to help mitigate the incremental costs resulting from the COVID-19 public health emergency. We have recorded $6,247,000 and $5,001,000 in net patient revenues for these supplemental Medicaid payments for the three months ended June 30, 2023 and 2022, respectively. We have recorded $11,130,000 and $10,539,000 in net patient revenues for these supplemental Medicaid payments for the six months ended June 30, 2023 and 2022, respectively.     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 three months ending June 30, 2023 was 87.9% compared to 84.0% for the same period a year ago.  For the six months ended June 30, 2023, overall census in our owned and leased skilled nursing facilities was 87.7% compared to 83.3% for the same period a year ago.   Due to 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 us 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.    The tables below summarize NHC's overall performance in these Five-Star ratings versus the skilled nursing industry as of June 30, 2023:       NHC Ratings     Industry Ratings   Total number of skilled nursing facilities, end of period     68           Number of 4 and 5-star rated skilled nursing facilities     39           Percentage of 4 and 5-star rated skilled nursing facilities     57%       37%   Average rating for all skilled nursing facilities, end of period     3.6       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 Homecare     New Agency     1 agency     Anderson, SC     January 2022 Hospice     New Agency     1 agency     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 Hospice     New Agency     1 agency     Cedar Bluff, VA     March 2023 Skilled Nursing     Acquisition     66 beds     Nashville, TN     May 2023 Homecare     New Agency     1 agency     Tallahassee, FL     May 2023 Assisted Living Facility     New Operations     135 units     Vero Beach, FL     July 2023 Assisted Living Facility     New Operations     95 units     Merritt Island, FL     July 2023 Assisted Living Facility     New Operations     100 units     Stuart, FL     July 2023     Accrued Risk Reserves   Our accrued professional liability and workers’ compensation reserves totaled $106,220,000 at June 30, 2023 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   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).   In July 2023, CMS released its final rule outlining fiscal year 2024 Medicare payment rates and policy changes for skilled nursing facilities, which will begin on October 1, 2023. The fiscal year 2024 rule equates to a net increase of 4.0%, or approximately $1.4 billion, in Medicare Part A payments to SNFs in fiscal year 2024 compared to 2023 levels. The rule includes a 3.0% market basket rate increase, a 3.6% market basket forecast error adjustment, less a 0.2% productivity adjustment, as well as a negative 2.3%, or approximately $789 million, decrease in 2024 SNF Payment Prospective Systems rates as a result of the second phase of the Patient Driven Payment Model parity adjustment recalibration.   28 Table of Contents   For the first six months of 2023, our average Medicare per diem rate for skilled nursing facilities increased 1.8% as compared to the same period in 2022.    Medicaid – Skilled Nursing Facilities   Effective July 1, 2023 and for the fiscal year 2024, the state of Tennessee implemented specific individual nursing facility increases. We estimate the resulting increase in revenue for the 2024 fiscal year will be approximately $15,000,000 annually, or $3,750,000 per quarter.   Effective October 1, 2023 and for the fiscal year 2024, the state of South Carolina implemented specific individual nursing facility increases. We estimate the resulting increase in revenue for the 2024 fiscal year will be approximately $9,000,000 annually, or $2,250,000 per quarter.   Effective July 1, 2023 and for the fiscal year 2024, the state of Missouri implemented specific individual nursing facility increases. We estimate the resulting increase in revenue for the 2024 fiscal year will be approximately $5,000,000 annually, or $1,250,000 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 $6,247,000 and $5,001,000 in net patient revenues for these supplemental Medicaid payments for the three months ended June 30, 2023 and 2022, respectively. We have recorded $11,130,000 and $10,539,000 in net patient revenues for these supplemental Medicaid payments for the six months ended June 30, 2023 and 2022, respectively.   For the first six months of 2023, our average Medicaid per diem increased 7.8% compared to the same period in 2022.   State Medicaid plans subject to budget constraints are of particular concern to us. Changes in federal funding coupled with state budget problems and Medicaid expansion under the Affordable Care Act have produced an uncertain environment. Some states will not keep pace with post-acute healthcare inflation. States are currently under pressure to pursue other alternatives to skilled nursing care such as community and home–based services. Medicaid programs are funded jointly by the federal government and the states and are administered by states under approved plans. Most state Medicaid payments are made under a prospective payment system or under programs which negotiate payment levels with individual providers. Some states use, or have applied to use, waivers granted by CMS to implement expansion, impose different eligibility or enrollment restrictions, or otherwise implement programs that vary from federal standards.    Medicare – Homecare Programs   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.   In June 2023, CMS released its proposed rule outlining fiscal year 2024 Medicare payment rates. CMS projects payments to home health agencies in fiscal year 2024 will decrease by 2.2% or $375 million, relative to the prior year. This decrease reflects a 3.0% market basket update, reduced by a 0.3 % productivity adjustment. However, the agency also proposes to apply the full permanent behavioral adjustment due to the implementation of the Patient-Driven Groups Model, resulting in a decrease of 5.1% in CY 2024, which would reduce total payments by an aggregate of $870 million. In addition, the agency also proposes an estimated 0.2% increase in payments for high-cost outlier cases.   Medicare – Hospice   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 is $32,487.   In July 2023, CMS released its final rule outlining fiscal year 2024 Medicare payment rates. CMS issued a rate increase of 3.1%, or $780 million, effective October 1, 2023. This increase is the result of a 3.3% market basket increase reduced by a 0.2% productivity adjustment. The FY2024 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 FY2024 is $33,494.   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.   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 June 30, 2023       Inpatient Services     Homecare and Hospice     All Other     Total   Revenues and grant income:                                 Net patient revenues   $ 236,760     $ 32,845     $ -     $ 269,605   Other revenues     326       -       12,651       12,977   Net operating revenues and grant income     237,086       32,845       12,651       282,582                                     Costs and expenses:                                 Salaries, wages, and benefits     144,666       20,494       10,134       175,294   Other operating     64,535       5,990       2,709       73,234   Rent     8,165       543       1,193       9,901   Depreciation and amortization     9,153       184       746       10,083   Interest     93       -       -       93   Total costs and expenses     226,612       27,211       14,782       268,605                                     Income/(loss) from operations     10,474       5,634       (2,131 )     13,977   Non-operating income     -       -       3,696       3,696   Unrealized gains on marketable equity securities     -       -       4,650       4,650                                     Income before income taxes   $ 10,474     $ 5,634     $ 6,215     $ 22,323           Three Months Ended June 30, 2022       Inpatient Services     Homecare and Hospice     All Other     Total   Revenues:                                 Net patient revenues   $ 227,796     $ 32,281     $ -     $ 260,077   Other revenues     100       -       10,862       10,962   Government stimulus income     320       -       -       320   Net operating revenues and grant income     228,216       32,281       10,862       271,359                                     Costs and expenses:                                 Salaries, wages, and benefits     149,092       19,024       6,820       174,936   Other operating     61,886       6,444       2,981       71,311   Rent     8,392       592       1,427       10,411   Depreciation and amortization     9,084       111       806       10,001   Interest     149       -       -       149   Total costs and expenses     228,603       26,171       12,034       266,808                                     Income/(loss) from operations     (387 )     6,110       (1,172 )     4,551   Non-operating income     -       -       2,521       2,521   Unrealized losses on marketable equity securities     -       -       (3,549 )     (3,549 )                                   Income/(loss) before income taxes   $ (387 )   $ 6,110     $ (2,200 )   $ 3,523     30 Table of Contents       Six Months Ended June 30, 2023       Inpatient Services     Homecare and Hospice     All Other     Total   Revenues:                                 Net patient revenues   $ 462,929     $ 64,683     $ -     $ 527,612   Other revenues     597       -       23,936       24,533   Net operating revenues and grant income     463,526       64,683       23,936       552,145                                     Costs and expenses:                                 Salaries, wages, and benefits     283,605       40,737       18,776       343,118   Other operating     128,245       11,488       4,990       144,723   Rent     16,333       1,101       2,559       19,993   Depreciation and amortization     18,271       369       1,491       20,131   Interest     191       -       -       191   Total costs and expenses     446,645       53,695       27,816       528,156                                     Income/(loss) from operations     16,881       10,988       (3,880 )     23,989   Non-operating income     -       -       8,019       8,019   Unrealized gains on marketable equity securities     -       -       6,036       6,036                                     Income before income taxes   $ 16,881     $ 10,988     $ 10,175     $ 38,044           Six Months Ended June, 2022       Inpatient Services     Homecare and Hospice     All Other     Total   Revenues and grant income:                                 Net patient revenues   $ 452,638     $ 63,776     $ -     $ 516,414   Other revenues     213       -       22,775       22,988   Government stimulus income     10,940       -       -       10,940   Net operating revenues and grant income     463,791       63,776       22,775       550,342                                     Costs and expenses:                                 Salaries, wages, and benefits     291,276       38,426       15,928       345,630   Other operating     126,269       13,539       5,588       145,396   Rent     16,739       1,184       2,553       20,476   Depreciation and amortization     17,922       223       1,613       19,758   Interest     314       -       -       314   Total costs and expenses     452,520       53,372       25,682       531,574                                     Income/(loss) from operations     11,271       10,404       (2,907 )     18,768   Non-operating income     -       -       5,720       5,720   Unrealized losses on marketable equity securities     -       -       (423 )     (423 )                                   Income before income taxes   $ 11,271     $ 10,404     $ 2,390     $ 24,065     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, and share-based compensation expense 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 six months ended June 30, 2023 include facilities or agencies that began operations from 2021 to 2023, which is two behavioral health hospitals, two homecare agencies, and two hospice agencies. For the three months and six months ended June 30, 2022, included are facilities or agencies that began operations from 2020 to 2022, which is two behavioral health hospitals, one homecare agency, and one hospice agency.   The tables below provide reconciliations of GAAP to non-GAAP items (dollars in thousands, except per share data):       Three Months Ended June 30     Six Months Ended June 30       2023     2022     2023     2022                                     Net income attributable to National Healthcare Corporation   $ 16,281     $ 3,203     $ 28,004     $ 18,521   Non-GAAP adjustments                                 Unrealized (gains)/losses on marketable equity securities     (4,650 )     3,549       (6,036 )     423   Operating results for newly opened facilities or agencies not at full capacity     333       1,185       1,550       1,928   Share-based compensation expense     772       629       1,411       1,341   Income tax/(benefit) of income taxes on non-GAAP adjustments     922       (1,394 )     800       (960 ) Non-GAAP Net income   $ 13,658     $ 7,172     $ 25,729     $ 21,253                                                                       GAAP diluted earnings per share   $ 1.06     $ 0.21     $ 1.83     $ 1.20   Non-GAAP adjustments                                 Unrealized (gains)/losses on marketable equity securities     (0.23 )     0.16       (0.29 )     0.02   Operating results for newly opened facilities or agencies not at full capacity     0.02       0.06       0.07       0.09   Share-based compensation expense     0.04       0.03       0.07       0.06   Non-GAAP diluted earnings per share   $ 0.89     $ 0.46     $ 1.68     $ 1.37     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 six months ended June 30, 2023 and 2022.   Percentage of Net Operating Revenues and Grant Income       Three Months Ended June 30     Six Months Ended June 30       2023     2022     2023     2022   Net operating revenues and grant income     100.0 %     100.0 %     100 %     100 % Costs and expenses:                                 Salaries, wages, and benefits     62.0       64.5       62.2       62.8   Other operating     25.9       26.3       26.2       26.4   Facility rent     3.5       3.7       3.6       3.7   Depreciation and amortization     3.6       3.7       3.6       3.6   Interest     0.1       0.1       0.1       0.1   Total costs and expenses     95.1       98.3       95.7       96.6   Income from operations     4.9       1.7       4.3       3.4   Non–operating income     1.4       0.9       1.5       1.1   Unrealized (gains)/losses on marketable equity securities     1.6       (1.3 )     1.1       (0.1 ) Income before income taxes     7.9       1.3       6.9       4.4   Income tax provision     (2.3 )     (0.5 )     (2.0 )     (1.2 ) Net income     5.6       0.8       4.9       3.2   Net loss attributable to noncontrolling interest     0.2       0.4       0.2       0.2   Net income attributable to stockholders of NHC     5.8       1.2       5.1       3.4     Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022   Results for the quarter ended June 30, 2023 compared to the second quarter of 2022 include a 4.1% increase in net operating revenues and grant income. The net operating revenues and grant income increase was primarily driven by the continued occupancy increase in our skilled nursing facilities, as well as increases in skilled nursing per diems from some of our government payors. Excluding the government stimulus income and the seven skilled nursing facilities in Massachusetts and New Hampshire in which we ceased operations in September 2022, same-facility net operating revenues increased 11.5% during the second quarter of 2023 compared to the same period a year ago.     For the quarter ended June 30, 2023, GAAP net income attributable to NHC was $16,281,000 compared to net income of $3,203,000 for the same period in 2022. Excluding the unrealized gains and losses in our marketable equity securities portfolio and other non-GAAP adjustments, adjusted net income for the quarter ended June 30, 2023 was $13,658,000 compared to $7,172,000 for the same period in 2022. The increase in non-GAAP earnings for the quarter ended June 30, 2023 compared to the second quarter of 2022 was primarily due to the continued occupancy increase in our skilled nursing and assisted living facilities, skilled nursing per diem increases from some of our government payors, and the continued reduction of nurse agency staffing expense within our operations.     Net operating revenues and grant income   Net patient revenues increased $9,528,000, or 3.7%, compared to the same period last year.   The total census at owned and leased skilled nursing facilities for the quarter averaged 87.9%, compared to an average of 84.0% for the same quarter a year ago. Overall, the composite skilled nursing facility per diem increased 7.2% compared to the same quarter a year ago. Our Medicare per diem rates increased 1.6% and managed care per diem rates increased 7.6% compared to the same quarter a year ago. Medicaid and private pay per diem rates increased 11.8% and 2.4%, respectively, compared to the same quarter a year ago. For the three months ended June 30, 2023 and 2022, respectively, $6,247,000 and $5,001,000 have been included in our net patient revenues for supplemental COVID-19 Medicaid payments.   New operations, which include one skilled nursing facility acquired May 1, 2023, two behavioral health hospitals, two hospice agencies and two homecare agencies, have attributed to an increase of $5,890,000 in net patient revenues for the three months ended June 30, 2023 compared to the same quarter last year. In September 2022, the Company transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire, which resulted in net patient revenues decreasing $17,684,000 for the three months ended June 30, 2023 compared to the same quarter last year.    Other revenues increased $2,015,000, or 18.4%, compared to the same quarter last year, as further detailed in Note 5 to our interim condensed consolidated financial statements.   33 Table of Contents   During the three months ended June 30, 2023 and 2022, respectively, we recorded $0 and $320,000 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 three months ended June 30, 2023 compared to the same period of 2022 increased $1,797,000, or 0.7% to $268,605,000 from $266,808,000.   Salaries, wages, and benefits increased $358,000, or 0.2%, to $175,294,000 from $174,936,000. Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 62.0% compared to 64.5% for the three months ended June 30, 2023 and 2022, respectively. We continue to face workforce and labor shortages within all of our operations. The labor and workforce shortages have resulted in us contracting with agency nurse staffing companies in certain markets.  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. For the quarter ended June 30, 2023, our agency nurse staffing expenses decreased $10,587,000, or approximately 50.4%, compared to the same period a year ago.     New operations, which include one skilled nursing facility acquired May 1, 2023, two behavioral health hospitals, two hospice agencies and two homecare agencies, have attributed to an increase in salaries, wages, and benefits of $4,360,000 for the three months ended June 30, 2023 compared to the same quarter last year. In September 2022, the Company transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire, which resulted in salaries, wages, and benefits decreasing $11,838,000 for the three months ended June 30, 2023 compared to the same quarter last year.   Other operating expenses increased $1,923,000, or 2.7%, to $73,234,000 for the 2023 period compared to $71,311,000 for the 2022 period. Other operating expenses as a percentage of net operating revenues and grant income was 25.9% and 26.3% for the three months ended June 30, 2023 and 2022, respectively. The transfer of the operations of the seven skilled nursing facilities located in Massachusetts and New Hampshire, as noted above, resulted in other operating expenses decreasing $4,994,000 for the three months ended June 30, 2023 compared to the same quarter last year. 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 increased by $1,175,000 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 provision for the three months ended June 30, 2023 is $6,406,000 (an effective income tax rate of 28.7%).    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.     Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022   Results for the six months ended June 30, 2023 compared to the same period of 2022 include a 0.3% increase in net operating revenues and grant income. Excluding the government stimulus income and the seven skilled nursing facilities in Massachusetts and New Hampshire in which we ceased operations in September 2022, same-facility net operating revenues increased 9.6% for the six months ended June 30, 2023 compared to the same period a year ago.     For the six months ended June 30, 2023, GAAP net income attributable to NHC was $28,004,000 compared to net income of $18,521,000 for the same period in 2022. Excluding the unrealized gains and losses in our marketable equity securities portfolio and other non-GAAP adjustments, adjusted net income for the six months ended June 30, 2023 was $25,729,000 compared to $21,253,000 for the same period in 2022.  The increase in non-GAAP earnings for the six months ended June 30, 2023 compared to the same period in the prior year was primarily due to the continued occupancy increase in our skilled nursing facilities, skilled nursing per diem increases from some of our government payors, and the continued reduction of nurse agency staffing expense within our operations.   34 Table of Contents   Net operating revenues and grant income   Net patient revenues increased $11,198,000, or 2.2%, compared to the same period last year.   The total census at owned and leased skilled nursing facilities for the six months ended June 30, 2023 averaged 87.7%, compared to an average of 83.3% for the same period a year ago. Overall, the composite skilled nursing facility per diem increased 5.2% compared to the same period a year ago. Our Medicare per diem rates increased 1.8% and managed care per diem rates increased 5.1% compared to the same period a year ago. Medicaid and private pay per diem rates increased 7.8% and 2.7%, respectively, compared to the same period a year ago. For the six months ended June 30, 2023 and 2022, respectively, $11,130,000 and $10,539,000 have been included in our net patient revenues for supplemental COVID-19 Medicaid payments.   New operations, which include one skilled nursing facility acquired May 1, 2023, two behavioral health hospitals, two hospice agencies and two homecare agencies, have attributed to an increase of $8,873,000 in net patient revenues for the six months ended June 30, 2023 compared to the same period last year. In September 2022, the Company transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire, which resulted in net patient revenues decreasing $35,485,000 for the six months ended June 30, 2023 compared to the same period last year.    Other revenues increased $1,545,000, or 6.7%, compared to the same period last year, as further detailed in Note 5 to our interim condensed consolidated financial statements.   During the six months ended June 30, 2023 and 2022, respectively, we recorded $0 and $10,940,000 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 six months ended June 30, 2023 compared to the same period of 2022 decreased $3,418,000, or 0.6% to $528,156,000 from $531,574,000.   Salaries, wages, and benefits decreased $2,512,000, or 0.7%, to $343,118,000 from $345,630,000. Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 62.2% compared to 62.8% for the six months ended June 30, 2023 and 2022, respectively. We continue to face workforce and labor shortages within all of our operations. 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. For the six months ended June 30, 2023, our agency nurse staffing expenses decreased $15,528,000, or approximately 41.5%, compared to the same period a year ago.     New operations, which include one skilled nursing facility acquired May 1, 2023, two behavioral health hospitals, two hospice agencies and two homecare agencies, have attributed to an increase in salaries, wages, and benefits of $7,056,000 for the six months ended June 30, 2023 compared to the same period last year. In September 2022, the Company transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire, which resulted in salaries, wages, and benefits decreasing $23,722,000 for the six months ended June 30, 2023 compared to the same period last year.   Other operating expenses decreased $673,000, or 0.5%, to $144,723,000 for the 2023 period compared to $145,396,000 for the 2022 period. Other operating expenses as a percentage of net operating revenues and grant income was 26.2% and 26.4% for the six months ended June 30, 2023 and 2022, respectively. The transfer of the operations of the seven skilled nursing facilities located in Massachusetts and New Hampshire, as noted above, resulted in other operating expenses decreasing $10,060,000 for the six months ended June 30, 2023 compared to the same period last year. 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 increased by $2,299,000 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 provision for the six months ended June 30, 2023 is $10,842,000 (an effective income tax rate of 28.5%).    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.   35 Table of Contents   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) :       Six Months Ended June 30     Six Month Change       2023     2022     $     %   Cash, cash equivalents, restricted cash, and restricted cash equivalents, at beginning of period   $ 74,865     $ 119,743     $ (44,878 )     (37.5 )                                   Cash provided by/(used in) operating activities     53,178       (1,215 )     54,393       (4,476.8 )                                   Cash used in investing activities     (2,247 )     (8,163 )     5,916       72.5                                     Cash used in financing activities     (22,891 )     (18,797 )     (4,094 )     (21.8 )                                   Cash, cash equivalents, restricted cash, and restricted cash equivalents, at end of period   $ 102,905     $ 91,568     $ 11,337       12.4     36 Table of Contents   Operating Activities   Net cash provided by operating activities for the six months ended June 30, 2023 was $53,178,000 as compared to cash used in operating activities of $1,215,000 in the same period last year. Cash provided by operating activities consisted of net income of $27,202,000 and adjustments for non–cash items of $15,508,000. There was cash provided by working capital in the amount of $9,999,000 for the six months ended June 30, 2023 compared to cash used for working capital needs of $44,552,000 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 gains and losses on our marketable equity securities, deferred taxes, and stock compensation.    Investing Activities   Net cash used in investing activities totaled $2,247,000 for the six months ended June 30, 2023, compared to $8,163,000 for the six months ended June 30, 2022. Cash used for property and equipment additions was $12,789,000 and $17,033,000 for the six months ended June 30, 2023, and 2022, respectively. On May 1, 2023, we acquired the assets of a 66-bed skilled nursing facility in Nashville, Tennessee. Proceeds from the sale of marketable securities, net of purchases, resulted in cash provided by investing activity of $13,645,000 and $5,917,000 for the six months ended June 30, 2023 and 2022, respectively.    Financing Activities     Net cash used in financing activities totaled $22,891,000 for the six months ended June 30, 2023 compared to $18,797,000 for the six months ended June 30, 2022. We made principal payments under our finance lease obligations in the amount of $2,455,000 and $2,312,000 for the six months ended June 30, 2023 and 2022, respectively. Cash used for dividend payments to common stockholders totaled $17,481,000 in the current year period compared to $17,002,000 for the same period a year ago. We repurchased common shares outstanding in the amount of $2,482,000 in the current year period compared to $146,000 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 $78,492,000, our marketable equity and debt securities of $114,952,000, and our borrowing capacity on the $50 million credit facility 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 $78,492,000, our marketable equity and debt securities of $114,952,000, and our borrowing capacity on the credit facility. At June 30, 2023, we do not have an outstanding balance on our credit facility; therefore, leaving $50 million available for future borrowings. We also have substantial value in our unencumbered real estate assets, which could potentially be used as collateral in future borrowing opportunities.   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 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.   37 Table of Contents