NATIONAL HEALTHCARE CORP 10-Q

Item 1. Financial Statements. NATIONAL HEALTHCARE CORPORATION Interim Condensed Consolidated Statements of Operations (in thousands, except share and per share amounts) (unaudited) Three Months Ended June 30 Six Months Ended June 30 2024 2023 2024 2023 Revenues: Net patient revenues $ 279,918 $ 269,605 $ 565,741 $ 527,612 Other revenues 11,295 12,977 22,648 24,533 Government stimulus income 9,445 - 9,445 - Net operating revenues and grant income 300,658 282,582 597,834 552,145 Cost and expenses: Salaries, wages, and benefits 180,076 175,294 363,214 343,118 Other operating 78,154 73,234 155,583 144,723 Facility rent 10,570 9,901 20,918 19,993 Depreciation and amortization 9,338 10,083 19,924 20,131 Interest - 93 46 191 Total costs and expenses 278,138 268,605 559,685 528,156 Income from operations 22,520 13,977 38,149 23,989 Other income: Non–operating income 4,956 3,696 10,641 8,019 Unrealized gains on marketable equity securities 9,124 4,650 23,523 6,036 Income before income taxes 36,600 22,323 72,313 38,044 Income tax provision ( 9,494 ) ( 6,406 ) ( 18,956 ) ( 10,842 ) Net income 27,106 15,917 53,357 27,202 Net (income)/loss attributable to noncontrolling interest ( 262 ) 364 ( 300 ) 802 Net income attributable to National HealthCare Corporation $ 26,844 $ 16,281 $ 53,057 $ 28,004 Earnings per share attributable to National HealthCare Corporation stockholders: Basic $ 1.74 $ 1.06 $ 3.45 $ 1.83 Diluted $ 1.73 $ 1.06 $ 3.42 $ 1.83 Weighted average common shares outstanding: Basic 15,391,535 15,297,435 15,371,150 15,317,319 Diluted 15,555,612 15,322,344 15,530,624 15,339,240 Dividends declared per common share $ 0.61 $ 0.59 $ 1.20 $ 1.16 The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements. 3 Table of Contents NATIONAL HEALTHCARE CORPORATION Interim Condensed Consolidated Statements of Comprehensive Income (unaudited – in thousands) Three Months Ended June 30 Six Months Ended June 30 2024 2023 2024 2023 Net income $ 27,106 $ 15,917 $ 53,357 $ 27,202 Other comprehensive income/(loss): Unrealized gains/(losses) on investments in marketable debt securities 30 ( 1,378 ) ( 442 ) 580 Reclassification adjustment for realized losses on sales of marketable debt securities 1,398 20 1,388 20 Income tax (expense)/benefit related to items of other comprehensive income ( 296 ) 158 ( 251 ) ( 121 ) Other comprehensive income/(loss), net of tax 1,132 ( 1,200 ) 695 479 Net (income)/loss attributable to noncontrolling interest ( 262 ) 364 ( 300 ) 802 Comprehensive income attributable to National HealthCare Corporation $ 27,976 $ 15,081 $ 53,752 $ 28,483 The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements. 4 Table of Contents NATIONAL HEALTHCARE CORPORATION Interim Condensed Consolidated Balance Sheets (in thousands) June 30, 2024 December 31, 2023 unaudited Assets Current Assets: Cash and cash equivalents $ 136,214 $ 107,076 Restricted cash and cash equivalents, current portion 28,183 17,725 Marketable equity securities 133,317 111,117 Marketable debt securities 488 5,427 Restricted marketable equity securities 21,566 26,779 Restricted marketable debt securities, current portion 2,583 12,822 Accounts receivable 109,387 108,545 Inventories 6,632 7,386 Prepaid expenses and other assets 8,788 8,855 Notes receivable 713 503 Total current assets 447,871 406,235 Property and Equipment: Property and equipment, at cost 1,073,356 1,101,681 Accumulated depreciation and amortization ( 586,163 ) ( 608,352 ) Net property and equipment 487,193 493,329 Other Assets: Restricted cash and cash equivalents, less current portion 1,208 1,167 Restricted marketable debt securities, less current portion 116,724 109,478 Deposits and other assets 10,364 14,786 Operating lease right-of-use assets 80,819 94,201 Goodwill 168,295 168,295 Intangible assets 7,038 7,038 Investments in unconsolidated companies 20,187 16,267 Total other assets 404,635 411,232 Total assets $ 1,339,699 $ 1,310,796 The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements. 5 Table of Contents NATIONAL HEALTHCARE CORPORATION Interim Condensed Consolidated Balance Sheets (continued) (in thousands, except share and per share amounts) June 30, 2024 December 31, 2023 unaudited Liabilities and Stockholders ’ Equity Current Liabilities: Trade accounts payable $ 21,782 $ 19,194 Finance lease obligations, current portion - 860 Operating lease liabilities, current portion 30,233 29,352 Accrued payroll 82,237 84,110 Amounts due to third party payors 18,218 18,369 Accrued risk reserves, current portion 30,766 30,549 Other current liabilities 24,291 22,991 Dividends payable 9,408 9,051 Total current liabilities 216,935 214,476 Operating lease liabilities, less current portion 49,032 63,175 Accrued risk reserves, less current portion 78,488 72,710 Refundable entrance fees 5,856 6,376 Deferred income taxes 23,492 17,200 Other noncurrent liabilities 18,051 26,379 Total liabilities 391,854 400,316 Equity: Common stock, $ .01 par value; 45,000,000 shares authorized; 15,422,937 and 15,350,661 shares, respectively, issued and outstanding 154 153 Capital in excess of par value 229,410 227,604 Retained earnings 722,162 687,599 Accumulated other comprehensive loss ( 5,909 ) ( 6,604 ) Total National HealthCare Corporation stockholders’ equity 945,817 908,752 Noncontrolling interest 2,028 1,728 Total equity 947,845 910,480 Total liabilities and equity $ 1,339,699 $ 1,310,796 The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements. 6 Table of Contents NATIONAL HEALTHCARE CORPORATION Interim Condensed Consolidated Statements of Cash Flows (unaudited – in thousands) Six Months Ended June 30 2024 2023 Cash Flows From Operating Activities: Net income $ 53,357 $ 27,202 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 19,924 20,131 Equity in earnings of unconsolidated investments ( 651 ) ( 1,756 ) Distributions from unconsolidated investments 512 469 Unrealized gains on marketable equity securities ( 23,523 ) ( 6,036 ) Realized (gains)/losses on sale of marketable securities ( 350 ) 561 Gain on sale of unconsolidated company ( 1,024 ) - Deferred income taxes 6,041 1,197 Stock–based compensation 1,969 1,411 Changes in operating assets and liabilities: Accounts receivable ( 842 ) ( 1,274 ) Inventories 754 93 Prepaid expenses and other assets 4,489 ( 13 ) Operating lease obligations 120 ( 623 ) Trade accounts payable 2,588 ( 2,438 ) Accrued payroll ( 1,873 ) ( 5,181 ) Amounts due to third party payors ( 151 ) ( 972 ) Accrued risk reserves 5,995 3,751 Other current liabilities 1,300 9,786 Other noncurrent liabilities ( 8,328 ) 6,870 Net cash provided by operating activities 60,307 53,178 Cash Flows From Investing Activities: Purchases of property and equipment ( 13,788 ) ( 12,789 ) Acquisition of skilled nursing facility - ( 2,700 ) Proceeds from the sale of unconsolidated company 2,100 - Investments in notes receivable ( 210 ) ( 403 ) Investments in unconsolidated companies ( 4,856 ) - Purchases of marketable securities ( 18,898 ) ( 14,406 ) Proceeds from sale of marketable securities 34,662 28,051 Net cash used in investing activities ( 990 ) ( 2,247 ) Cash Flows From Financing Activities: Principal payments under finance lease obligations ( 860 ) ( 2,455 ) Dividends paid to common stockholders ( 18,137 ) ( 17,481 ) Issuance of common shares 11,239 6 Repurchase of common shares ( 11,402 ) ( 2,482 ) Entrance fee refunds ( 520 ) ( 479 ) Net cash used in financing activities ( 19,680 ) ( 22,891 ) Net Increase in Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents 39,637 28,040 Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents, Beginning of Period 125,968 74,865 Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents, End of Period $ 165,605 $ 102,905 Balance Sheet Classifications: Cash and cash equivalents $ 136,214 $ 78,492 Restricted cash and cash equivalents 29,391 24,413 Total Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents $ 165,605 $ 102,905 The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements. 7 Table of Contents NATIONAL HEALTHCARE CORPORATION Interim Condensed Consolidated Statements of Stockholders ’ Equity (in thousands, except share and per share amounts) (unaudited) For the six months ended June 30, 2024 : Common Stock Shares Amount Capital in Excess of Par Value Retained Earnings Accumulated Other Comprehensive Loss Non-controlling Interest Total Stockholders' Equity Balance at January 1, 2024 15,350,661 $ 153 $ 227,604 $ 687,599 $ ( 6,604 ) $ 1,728 $ 910,480 Net income – – – 26,213 – 38 26,251 Other comprehensive loss – – – – ( 437 ) – ( 437 ) Stock–based compensation – – 793 – – – 793 Shares sold – options exercised 150,194 1 8,412 – – – 8,413 Repurchase of common shares ( 101,131 ) – ( 9,900 ) – – – ( 9,900 ) Dividends declared to common stockholders ($ 0.59 per share) – – – ( 9,086 ) – – ( 9,086 ) Balance at March 31, 2024 15,399,724 $ 154 $ 226,909 $ 704,726 $ ( 7,041 ) $ 1,766 926,514 Net income – – – 26,844 – 262 27,106 Other comprehensive income – – – – 1,132 – 1,132 Stock–based compensation – – 1,176 – – – 1,176 Shares sold – options exercised 38,849 – 2,827 – – – 2,827 Repurchase of common shares ( 15,636 ) – ( 1,502 ) – – – ( 1,502 ) Dividends declared to common stockholders ($ 0.61 per share) – – – ( 9,408 ) – – ( 9,408 ) Balance at June 30, 2024 15,422,937 154 229,410 722,162 ( 5,909 ) 2,028 947,845 For the six months ended June 30, 2023: Common Stock Shares Amount Capital in Excess of Par Value Retained Earnings Accumulated Other Comprehensive Loss Non-controlling Interest Total Stockholders' Equity Balance at January 1, 2023 15,357,746 $ 153 $ 226,991 $ 656,664 $ ( 9,532 ) $ 3,238 $ 877,514 Net income – – – 11,723 – ( 438 ) 11,285 Other comprehensive income – – – – 1,679 – 1,679 Stock–based compensation – – 639 – – – 639 Shares sold – options exercised 7,046 – – – – – – Repurchase of common shares ( 44,349 ) – ( 2,482 ) – – – ( 2,482 ) Dividends declared to common stockholders ($ 0.57 per share) – – – ( 8,733 ) – – ( 8,733 ) Balance at March 31, 2023 15,320,443 $ 153 $ 225,148 $ 659,654 $ ( 7,853 ) $ 2,800 $ 879,902 Net income – – – 16,281 – ( 364 ) 15,917 Other comprehensive loss – – – – ( 1,200 ) – ( 1,200 ) Stock–based compensation – – 772 – – – 772 Shares sold – options exercised 100 – 6 – – – 6 Dividends declared to common stockholders ($ 0.59 per share) – – – ( 9,039 ) – – ( 9,039 ) Balance at June 30, 2023 15,320,543 $ 153 $ 225,926 $ 666,896 $ ( 9,053 ) $ 2,436 $ 886,358 T he accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements. 8 Table of Contents NATIONAL HEALTHCARE CORPORATION Notes to Interim Condensed Consolidated Financial Statements June 30, 2024 (unaudited) Note 1 – Description of Business National HealthCare Corporation (“NHC” or the “Company”) is a leading provider of senior health care services. As of June 30, 2024, we operate or manage, through certain affiliates, 65 skilled nursing facilities with a total of 8,421 licensed beds, 24 assisted living facilities with 1,365 units, five independent living facilities, three behavioral health hospitals, 34 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. Note 2 – Summary of Significant Accounting Policies The listing below is not intended to be a comprehensive list of all our significant accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. generally accepted accounting principles (“GAAP”), with limited need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. See our audited December 31, 2023 consolidated financial statements and notes thereto which contain accounting policies and other disclosures required by U.S. GAAP. Our audited December 31, 2023 consolidated financial statements are available at our web site: www.nhccare.com . Basis of Presentation The unaudited interim condensed consolidated financial statements to which these notes are attached include all normal, recurring adjustments which are necessary to fairly present the financial position, results of operations and cash flows of NHC. All significant intercompany transactions and balances have been eliminated in consolidation. The consolidated financial statements include the accounts of all entities controlled by NHC. The Company presents noncontrolling interest within the equity section of its consolidated balance sheets. The Company presents the amount of consolidated net income that is attributable to NHC and the noncontrolling interest in its consolidated statements of operations. We assume that users of these interim financial statements have read or have access to the audited December 31, 2023 consolidated financial statements and that the adequacy of additional disclosure needed for a fair presentation, except in regard to material contingencies, may be determined in that context. Accordingly, footnotes and other disclosures which would substantially duplicate the disclosure contained in our most recent annual report to stockholders have been omitted. This interim financial information is not necessarily indicative of the results that may be expected for a full year for a variety of reasons. Estimates and Assumptions The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and could cause our reported net income to vary significantly from period to period. Net Patient Revenues and Accounts Receivable Net patient revenues are derived from services rendered to patients for skilled and intermediate nursing, rehabilitation therapy, assisted living and independent living, home health care services, hospice services, and behavioral health services. Net patient revenue is reported at the amount that reflects the consideration to which the Company expects to be entitled in exchange for providing patient services. These amounts are due from patients, governmental programs, and other third -party payors, and include variable consideration for retroactive revenue adjustments due to settlement of audits, reviews, and investigations. The Company recognizes revenue as its performance obligations are completed. Routine services are treated as a single performance obligation satisfied over time as services are rendered. These routine services represent a bundle of services that are not capable of being distinct. The performance obligations are satisfied over time as the patient simultaneously receives and consumes the benefits of the healthcare services provided. Additionally, there may be ancillary services which are not included in the daily rates for routine services, but instead are treated as separate performance obligations satisfied at a point in time when those services are rendered. Contract liabilities are recorded for payments the Company receives in which performance obligations have not been completed. 9 Table of Contents The Company determines the transaction price based on established billing rates reduced by explicit price concessions provided to third party payors. Explicit price concessions are based on contractual agreements and historical experience. The Company considers the patient's ability and intent to pay the amount of consideration upon admission. Credit losses are recorded as bad debt expense, which is included as a component of other operating expenses in the interim condensed consolidated statements of operations. Bad debt expense was $ 2,053,000 and $ 4,524,000 for the three and six months ended June 30, 2024, respectively. For the three and six months ended June 30, 2023, bad debt expense was $ 1,852,000 and $ 3,663,000 , respectively. As of June 30, 2024 and December 31, 2023, the Company has recorded allowance for doubtful accounts of $ 10,074,000 and $ 8,054,000 , respectively, as our best estimate of expected losses inherent in the accounts receivable balance. Other Revenues Other revenues include revenues from the provision of insurance services to other healthcare providers, management and accounting services to other healthcare providers, and rental income. Our insurance revenues consist of premiums that are generally paid in advance and then amortized into income over the policy period. We charge for management services based on a percentage of net revenues. We charge for accounting services based on a monthly fee or a fixed fee per bed of the healthcare center under contract. We record other revenues as the performance obligations are satisfied based on the terms of our contractual arrangements. We recognize rental income based on the terms of our operating leases. Under certain of our leases, we receive variable rent, which is based on the increase in revenues of a lessee over a base year. We recognize variable rent annually or monthly, as applicable, when, based on the actual revenue of the lessee is earned. Government Grants We account for government grants in accordance with International Accounting Standards ("IAS") 20, Accounting for Government Grants and Disclosure of Government Assistance, and as such, we recognize grant income on a systematic basis in line with the recognition of specific expenses and lost revenues for which the grants are intended to compensate. During the second quarter of 2024, all conditions related to the Employee Retention Credit ("ERC") were met and the credit was recognized as government stimulus income. The ERC was established by the CARES Act and intended to help businesses retain their workforce and avoid layoffs during the pandemic. The ERC provided a per employee credit to eligible businesses based on a percentage of qualified wages and health insurance benefits paid to employees. The qualified wages and health insurance benefits paid by the Company were related to the second, third and fourth quarters of 2020. Segment Reporting In accordance with the provisions of Accounting Standards Codification ("ASC") 280, Segment Reporting , the Company is required to report financial and descriptive information about its reportable operating segments. 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. 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. See Note 6 for further disclosure of the Company’s operating segments. Other Operating Expenses Other operating expenses include the costs of care and services that we provide to the residents of our facilities and the costs of maintaining our facilities. Our primary patient care costs include drugs, medical supplies, purchased professional services, food, and professional liability insurance and licensing fees. The primary facility costs include utilities and property insurance. General and Administrative Costs With the Company being a healthcare provider, the majority of our expenses are "cost of revenue" items. Costs that could be classified as "general and administrative" by the Company would include its corporate office costs, excluding stock-based compensation and incentive compensation, which were $ 7,226,000 and $ 13,390,000 for the three and six months ended June 30, 2024, respectively. General and administrative costs were $ 4,995,000 and $ 10,648,000 for the three and six months ended June 30, 2023, respectively. The increased general and administrative costs incurred during 2024 are due to acquisition-related expenses for the White Oak Senior Living portfolio. See Note 16 - Subsequent Events for additional detail regarding the acquisition. Long-Term Leases The Company’s lease portfolio primarily consists of operating real estate leases for certain skilled nursing facilities, assisted and independent living facilities, homecare and hospice offices, and pharmacy warehouses. The original terms of the leases typically range from two to fifteen years. Several of the real estate leases include renewal options which vary in length and may not include specific rent renewal amounts. We determine if an arrangement is a lease at inception of a contract. We determine the lease term by assuming exercise of renewal options that are reasonably certain. The Company records right-of-use assets and liabilities for non-cancelable real estate operating leases with original or remaining lease terms in excess of one year. Leases with a lease term of 12 months or less at inception are not recorded and are expensed on a straight-line basis over the lease term. We recognize lease components and non-lease components together and not as separate parts of a lease for real estate leases. 10 Table of Contents Operating lease right-of-use assets and liabilities are recorded at the present value of the lease payments over the lease term. The present value of the lease payments are discounted using the incremental borrowing rate associated with each lease. The variable components of the lease payment that fluctuate with the operations of a health facility are not included in determining the right-of-use assets and lease liabilities. Rather, these variable components are expensed as incurred. Property and Equipment Property and equipment are recorded at cost. Depreciation is provided by the straight-line method over the expected useful lives of the assets estimated as follows: buildings and improvements, 20 - 40 years and equipment and furniture, 3 - 15 years. Leasehold improvements are amortized over periods that do not exceed the non-cancelable respective lease terms using the straight-line method. Business Combinations We account for acquisitions using the acquisition method of accounting in accordance with ASC 805, Business Combinations. Acquisitions are accounted for as purchases and are included in our consolidated financial statements from their respective acquisition dates. Assets acquired and liabilities assumed, if any, are measured at fair value on the acquisition date using the appropriate valuation method. Goodwill generated from acquisitions is recognized for the excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired and liabilities assumed. In determining the fair value of identifiable assets, we use various valuation techniques. These valuation methods require us to make estimates and assumptions surrounding projected revenues and costs, future growth, and discount rates Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill is not amortized but is subject to an annual impairment test. We perform our annual goodwill impairment assessment on the first day of the fourth quarter. Tests are performed more frequently if events occur, or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The Company’s indefinite-lived intangible assets consist of trade names and certificates of need and licenses. The Company reviews indefinite-lived intangible assets for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the fair value of the intangible asset is below its carrying amount. Accrued Risk Reserves We are self–insured for risks related to workers’ compensation and general and professional liability insurance. We have two wholly–owned limited purpose insurance companies that insure these risks. The accrued risk reserves include a liability for reported claims and estimates for incurred but unreported claims. Our policy is to engage an external, independent actuary to assist in estimating our exposure for claims obligations (for both asserted and unasserted claims). We reassess our accrued risk reserves on a quarterly basis. Professional liability remains an area of particular concern to us. The long-term care industry has seen an increase in personal injury/wrongful death claims based on alleged negligence by skilled nursing facilities and their employees in providing care to residents. The Company has been, and continues to be, subject to claims and legal actions that arise in the ordinary course of business, including potential claims related to patient care and treatment. A significant increase in the number of these claims, or an increase in the amounts due as a result of these claims could have a material adverse effect on our consolidated financial position, results of operations and cash flows. It is also possible that future events could cause us to make significant adjustments or revisions to these reserve estimates and cause our reported net income to vary significantly from period to period. We are principally self-insured for incidents occurring in all centers owned or leased by us. The coverage includes both primary policies and excess policies. In all years, settlements, if any, in excess of available insurance policy limits and our own reserves would be expensed by us. 11 Table of Contents Continuing Care Contracts We have one continuing care retirement center (“CCRC”) within our operations. Residents at this retirement center may enter into continuing care contracts with us. The contracts provide that 10 % of the resident entry fee becomes non-refundable upon occupancy, and the remaining refundable portion of the entry fee is calculated using the lesser of the price at which the apartment is re-assigned or 90 % of the original entry fee, plus 40 % of any appreciation if the apartment value exceeds the original resident’s entry fee. Non-refundable fees are included as a component of the transaction price and are amortized into revenue over the actuarily determined remaining life of the resident, which is the expected period of occupancy by the resident. We pay the refundable portion of our entry fees to residents when they relocate from our community and the apartment is re-occupied. Refundable entrance fees are not included as part of the transaction price and are classified as noncurrent liabilities in our consolidated balance sheets. We also annually estimate the present value of the cost of future services and the use of facilities to be provided to the current CCRC residents and compare that amount with the balance of non-refundable deferred revenue from entrance fees received. If the present value of the cost of future services exceeds the related anticipated revenues, a liability is recorded with a corresponding charge to income. As of June 30, 2024, and December 31, 2023, we have recorded a future service obligation liability in the amount of $ 1,606,000 . This obligation is reflected within other noncurrent liabilities in the interim condensed consolidated balance sheets. Other Noncurrent Liabilities Other noncurrent liabilities include reserves primarily related to various uncertain income tax positions, deferred revenue, and obligations to provide future services to our CCRC residents. Deferred revenue includes the deferred gain on the sale of assets to National Health Corporation (“National”) and the non-refundable portion ( 10% ) of CCRC entrance fees being amortized over the remaining life expectancies of the residents. Noncontrolling Interest The noncontrolling interest in a subsidiary is presented within total equity in the Company's interim condensed consolidated balance sheets. The Company presents the noncontrolling interest and the amount of consolidated net income attributable to NHC in its interim condensed 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 the subsidiary earnings, contributions, and distributions. Variable Interest Entities We have equity interests in unconsolidated limited liability companies that operate various post-acute and senior healthcare businesses. We analyze our investments in these limited liability companies to determine if the company is considered a variable interest entity (“VIE”) and would require consolidation. To the extent that we own interests in a VIE and we (i) have the power to direct the activities of the VIE and (ii) have the obligation or rights to absorb the VIE's losses or receive its benefits, then we would be determined to be the primary beneficiary and would consolidate the VIE. To the extent we own interests in a VIE, then at each reporting period, we re-assess our conclusions as to which, if any, party within the VIE is considered the primary beneficiary. The Company's maximum exposure to losses in its investments in unconsolidated VIEs cannot be quantified and may or may not be limited to its investment in the unconsolidated VIE. The investments in unconsolidated VIEs are classified as “investments in unconsolidated companies” in the interim condensed consolidated balance sheets. Recently Issued Accounting Guidance In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023 - 07, “Segment Reporting (Topic 280 ): Improvement to Reportable Segment Disclosures.” The ASU improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. In addition, the amendments enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit and loss, and contain other disclosure requirements. This ASU is effective for fiscal years beginning after December 15, 2023, which will be the Company's fiscal year 2024, and interim periods within fiscal years beginning after December 15, 2024. We are currently evaluating the impact this standard will have on our disclosures. Reclassifications Certain accounts in the prior year financial statements have been reclassified for comparative purposes to conform to the presentation in the current year financial statements. 12 Table of Contents Note 3 – Net Patient Revenues The Company disaggregates revenue from contracts with customers by service type and by payor. Revenue by Service Type The Company’s net patient services can generally be classified into the following two categories: ( 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 (in thousands) . Three Months Ended June 30 Six Months Ended June 30 2024 2023 2024 2023 Net patient revenues: Inpatient services $ 245,385 $ 236,760 $ 497,638 $ 462,929 Homecare and hospice 34,533 32,845 68,103 64,683 Total net patient revenue $ 279,918 $ 269,605 $ 565,741 $ 527,612 For inpatient and hospice services, revenue is recognized on a daily basis as each day represents a separate contract and performance obligation. For homecare, revenue is recognized when services are provided based on the number of days of service rendered in the period of care or on a per-visit basis. Typically, patients and third -party payors are billed monthly after services are performed or the patient is discharged, and payments are due based on contract terms. As our performance obligations relate to contracts with a duration of one year or less, the Company is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The Company has minimal unsatisfied performance obligations at the end of the reporting period as our patients are typically under no obligation to remain admitted in our facilities or under our care. As the period between the time of service and time of payment is typically one year or less, the Company did not adjust for the effects of a significant financing component. Revenue by Payor Certain groups of patients receive funds to pay the cost of their care from a common source. The following table sets forth sources of net patient revenues for the periods indicated: Three Months Ended June 30 Six Months Ended June 30 Source 2024 2023 2024 2023 Medicare 33 % 35 % 33 % 35 % Managed Care 10 % 9 % 10 % 10 % Medicaid 29 % 30 % 29 % 29 % Private Pay and Other 28 % 26 % 28 % 26 % Total 100 % 100 % 100 % 100 % Medicare covers skilled nursing services for beneficiaries who require nursing care and/or rehabilitation services following a hospitalization of at least three consecutive days. For each eligible day a Medicare beneficiary is in a skilled nursing facility, Medicare pays the facility a daily payment, subject to adjustment for certain factors such as a wage index in the geographic area. The payment covers all services provided by the skilled nursing facility for the beneficiary that day, including room and board, nursing, therapy and drugs, as well as an estimate of capital–related costs to deliver those services. For homecare services, Medicare pays based on the acuity level of the patient and based on periods of care. A period of care is defined as a length of care up to 30 days with multiple continuous periods allowed. The services covered by the payment include all disciplines of care, in addition to medical supplies, within the scope of the home health benefit. For hospice services, Medicare pays a daily rate to cover the hospice’s costs for providing services included in the patient care plan. Medicare makes daily payments based on 1 of 4 levels of hospice care. All hospice care and services offered to patients and their families must follow an individualized written plan of care that meets the patient’s needs. Our hospice service revenue is subject to certain limitations on payments from Medicare. We are subject to an inpatient cap limit and an overall Medicare payment cap for each provider number. We monitor these caps on a provider-by-provider basis and estimate amounts due back to Medicare if we estimate a cap has been exceeded. If applicable, we record these cap adjustments as a reduction to revenue. Medicaid is operated by individual states with the financial participation of the federal government. The states in which we operate currently use prospective cost–based reimbursement systems. Under cost–based reimbursement systems, the skilled nursing facility is reimbursed for the reasonable direct and indirect allowable costs it incurred in a base year in providing routine resident care services as defined by the program. Private pay, managed care, and other payment sources include commercial insurance, individual patient funds, managed care plans and the Veterans Administration. Private paying patients, private insurance carriers and the Veterans Administration generally pay based on the healthcare center's charges or specifically negotiated contracts. For private pay patients in skilled nursing, assisted living and independent living facilities, the Company bills for room and board charges, with the remittance being due on receipt of the statement and generally by the 10th day of the month the services are performed. Certain managed care payors for homecare services pay on a per-visit basis. This revenue is recorded on an accrual basis based upon the date of services at amounts equal to its established or estimated per-visit rates. 13 Table of Contents State Relief Supplemental Funding The Company received supplemental Medicaid payments from various states, including healthcare relief funding under the American Rescue Plan Act ("ARPA") and other state specific relief programs. The funding generally incorporates specific use requirements primarily for direct patient care including labor related expenses or various patient care related expenses. We have recorded $ 2,585,000 and $ 6,247,000 in net patient revenues for these supplemental Medicaid payments for the three months ended June 30, 2024 and 2023, respectively. We have recorded $ 6,047,000 and $ 11,130,000 in net patient revenues for these supplemental Medicaid payments for the six months ended June 30, 2024 and 2023, respectively. Third Party Payors Laws and regulations governing Medicare and Medicaid programs are complex and subject to interpretation. Noncompliance with such laws and regulations can be subject to regulatory actions including fines, penalties, and exclusion from the Medicare and Medicaid programs. We believe that we are following all applicable laws and regulations. Medicare and Medicaid program revenues, as well as certain Managed Care program revenues, are subject to audit and retroactive adjustment by government representatives or their agents. Settlements with third -party payors for retroactive adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient care. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and the Company’s historical settlement activity, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustment is subsequently resolved. Estimated settlements are adjusted in future periods as adjustments become known, or as years are settled or are no longer subject to such audits, reviews, and investigations. We believe that any differences between the net revenues recorded, and final determination will not materially affect the consolidated financial statements. We have made provisions of approximately $ 18,218,000 and $ 18,369,000 as of June 30, 2024 and December 31, 2023, respectively, for various Medicare, Medicaid, and Managed Care claims reviews and current and prior year cost reports. Note 4 – Other Revenues Other revenues are outlined in the table below. Revenues from rental income include health care real estate properties owned by us and leased to third party operators. Revenues from management and accounting services include fees provided to manage and provide accounting services to other healthcare operators. Revenues from insurance services include premiums for workers’ compensation and professional liability insurance policies that our wholly owned insurance subsidiaries have written for certain healthcare operators to which we provide management or accounting services. "Other" revenues include miscellaneous health care related earnings (in thousands) . Three Months Ended June 30 Six Months Ended June 30 2024 2023 2024 2023 Rental income $ 6,028 $ 5,965 $ 11,987 $ 12,009 Management and accounting services fees 4,081 5,763 8,518 9,860 Insurance services 816 882 1,688 1,930 Other 370 367 455 734 Total other revenues $ 11,295 $ 12,977 $ 22,648 $ 24,533 Rental Income The Company leases real estate assets consisting of skilled nursing facilities and assisted living facilities to third party operators. Additionally, we sublease four Florida skilled nursing facilities included in our lease from National Health Investors (“NHI”) as noted in Note 7 – Long Term Leases. Management Fees from National Health Corporation We manage five skilled nursing facilities owned by National Health Corporation (“National”). We recognized management fees and interest on management fees from these facilities of $ 1,346,000 and $ 1,276,000 for the three months ended June 30, 2024 and 2023, respectively. We recognized management fees and interest on management fees of $ 2,666,000 and $ 2,466,000 from these facilities for the six months ended June 30, 2024 and 2023, respectively. 14 Table of Contents Insurance Services For workers’ compensation insurance services, the premium revenues reflected in the interim condensed consolidated statements of operations for the three months ended June 30, 2024 and 2023 were $ 527,000 and $ 570,000 , respectively. The premium revenues reflected in the interim condensed consolidated statements of operations for the six months ended June 30, 2024 and 2023 were $ 1,109,000 and $ 1,307,000 , respectively. Associated losses and expenses including those for self-insurance are included in the interim condensed consolidated statements of operations as "Salaries, wages and benefits." For professional liability insurance services, the premium revenues reflected in the interim condensed consolidated statements of operations for the three months ended June 30, 2024 and 2023 were $ 289,000 and $ 312,000 , respectively. The premium revenues reflected in the interim condensed consolidated statements of operations for the six months ended June 30, 2024 and 2023 were $ 579,000 and $ 623,000 , respectively. Associated losses and expenses including those for self–insurance are included in the interim condensed consolidated statements of operations as "Other operating costs and expenses". Note 5 – Non – Operating Income Non–operating income is comprised of the following (in thousands) : Three Months Ended June 30 Six Months Ended June 30 2024 2023 2024 2023 Dividends and net realized gains and losses on sales of securities $ 1,724 $ 1,681 $ 3,780 $ 2,914 Interest income 2,648 1,794 5,186 3,349 Equity in earnings of unconsolidated investments 584 221 651 1,756 Gain on sale of unconsolidated company - - 1,024 - Total non-operating income $ 4,956 $ 3,696 $ 10,641 $ 8,019 Gain on sale of unconsolidated company In January 2024, the Company sold its 50 % joint venture ownership interest in a homecare agency located in Nashville, Tennessee. The total consideration paid to the Company was $ 2,100,000 , which resulted in a gain of $ 1,024,000 . Note 6 – Business Segments 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. 15 Table of Contents 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, 2024 Inpatient Services Homecare and Hospice All Other Total Revenues: Net patient revenues $ 245,385 $ 34,533 $ - $ 279,918 Other revenues 324 - 10,971 11,295 Government stimulus income - - 9,445 9,445 Net operating revenues and grant income 245,709 34,533 20,416 300,658 Costs and expenses: Salaries, wages, and benefits 148,059 21,296 10,721 180,076 Other operating 66,813 6,394 4,947 78,154 Rent 8,262 567 1,741 10,570 Depreciation and amortization 8,383 186 769 9,338 Interest - - - - Total costs and expenses 231,517 28,443 18,178 278,138 Income from operations 14,192 6,090 2,238 22,520 Non-operating income - - 4,956 4,956 Unrealized gains on marketable equity securities - - 9,124 9,124 Income before income taxes $ 14,192 $ 6,090 $ 16,318 $ 36,600 Three Months Ended June 30, 2023 Inpatient Services Homecare and Hospice All Other Total Revenues: Net patient revenues $ 236,760 $ 32,845 $ - $ 269,605 Other revenues 326 - 12,651 12,977 Net operating revenues 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 7,857 543 1,501 9,901 Depreciation and amortization 9,153 184 746 10,083 Interest 93 - - 93 Total costs and expenses 226,304 27,211 15,090 268,605 Income/(loss) from operations 10,782 5,634 ( 2,439 ) 13,977 Non-operating income - - 3,696 3,696 Unrealized gains on marketable equity securities - - 4,650 4,650 Income before income taxes $ 10,782 $ 5,634 $ 5,907 $ 22,323 16 Table of Contents Six Months Ended June 30, 2024 Inpatient Services Homecare and Hospice All Other Total Revenues: Net patient revenues $ 497,638 $ 68,103 $ - $ 565,741 Other revenues 339 - 22,309 22,648 Government stimulus income - - 9,445 9,445 Net operating revenues and grant income 497,977 68,103 31,754 597,834 Costs and expenses: Salaries, wages, and benefits 298,949 42,305 21,960 363,214 Other operating 135,496 12,367 7,720 155,583 Rent 16,374 1,133 3,411 20,918 Depreciation and amortization 18,013 374 1,537 19,924 Interest 46 - - 46 Total costs and expenses 468,878 56,179 34,628 559,685 Income/(loss) from operations 29,099 11,924 ( 2,874 ) 38,149 Non-operating income - - 10,641 10,641 Unrealized gains on marketable equity securities - - 23,523 23,523 Income before income taxes $ 29,099 $ 11,924 $ 31,290 $ 72,313 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 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 15,709 1,101 3,183 19,993 Depreciation and amortization 18,271 369 1,491 20,131 Interest 191 - - 191 Total costs and expenses 446,021 53,695 28,440 528,156 Income/(loss) from operations 17,505 10,988 ( 4,504 ) 23,989 Non-operating income - - 8,019 8,019 Unrealized gains on marketable equity securities - - 6,036 6,036 Income before income taxes $ 17,505 $ 10,988 $ 9,551 $ 38,044 17 Table of Contents Note 7 – Long-Term Leases Operating Leases At June 30, 2024, we lease from NHI the real property of 28 skilled nursing facilities, five assisted living centers and three independent living centers under one lease agreement. As part of the lease agreement, we sublease four Florida skilled nursing facilities to a third -party operator. The lease includes base rent plus a percentage rent. The annual base rent is $ 32,625,000 in 2024, $ 32,225,000 in 2025, and $ 31,975,000 in 2026 with the lease term expiring in December 2026. The percentage rent is based on a quarterly calculation of revenue increases and is payable on a quarterly basis. Total facility rent expense to NHI was $ 9,814,000 and $ 9,124,000 for the three months ended June 30, 2024 and 2023, respectively. Total facility rent expense to NHI was $ 19,286,000 and $ 18,419,000 for the six months ended June 30, 2024 and 2023, respectively. Minimum Lease Payments The following table summarizes the maturity of our operating lease liabilities as of June 30, 2024 ( in thousands ): Operating Leases 2025 $ 34,407 2026 33,695 2027 16,985 2028 524 2029 219 Thereafter 87 Total minimum lease payments 85,917 Less: amounts representing interest ( 6,652 ) Present value of future minimum lease payments 79,265 Less: current portion ( 30,233 ) Noncurrent lease liabilities $ 49,032 18 Table of Contents Note 8 – Earnings per Share Basic net income per share is computed based on the weighted average number of common shares outstanding for each period presented. Diluted net income per share reflects the potential dilution that would have occurred if securities to issue common stock were exercised, converted, or resulted in the issuance of common stock that would have then shared in our earnings. The following table summarizes the earnings and the weighted average number of common shares used in the calculation of basic and diluted earnings per share (in thousands, except for share and per share amounts): Three Months Ended June 30 Six Months Ended June 30 2024 2023 2024 2023 Basic: Weighted average common shares outstanding 15,391,535 15,297,435 15,371,150 15,317,319 Net income attributable to National HealthCare Corporation $ 26,844 $ 16,281 $ 53,057 $ 28,004 Earnings per common share, basic $ 1.74 $ 1.06 $ 3.45 $ 1.83 Diluted: Weighted average common shares outstanding 15,391,535 15,297,435 15,371,150 15,317,319 Effects of dilutive instruments 164,077 24,909 159,474 21,921 Weighted average common shares outstanding 15,555,612 15,322,344 15,530,624 15,339,240 Net income attributable to National HealthCare Corporation $ 26,844 $ 16,281 $ 53,057 $ 28,004 Earnings per common share, diluted $ 1.73 $ 1.06 $ 3.42 $ 1.83 For the six months ended June 30, 2024 and 2023, 233,486 and 641,310 , respectively, of stock options have been excluded from the calculation of diluted weighted average shares of common stock outstanding because the inclusion of these securities would have an anti-dilutive effect. Note 9 – Investments in Marketable Securities Our investments in marketable equity securities are carried at fair value with the changes in unrealized gains and losses recognized in our results of operations at each measurement date. Our investments in marketable debt securities are classified as available for sale securities and carried at fair value with the unrealized gains and losses recognized through accumulated other comprehensive income at each measurement date. Any credit-related decline in fair market values below the amortized cost of our available for sale debt securities are recorded in our results of operations through an allowance for credit losses. Realized gains and losses from securities sales are recognized in results of operations upon disposition of the securities using the specific identification method on a trade date basis. Refer to Note 10 for a description of the Company's methodology for determining the fair value of marketable securities. Marketable securities consist of the following (in thousands) : June 30, 2024 December 31, 2023 Amortized Cost Fair Value Amortized Cost Fair Value Investments available for sale: Marketable equity securities $ 30,176 $ 133,317 $ 30,176 $ 111,117 Corporate debt securities 494 488 2,497 2,441 U.S. Treasury securities – – 2,990 2,986 Restricted investments available for sale: Marketable equity securities 17,597 21,566 24,134 26,779 Corporate debt securities 57,688 55,536 59,586 57,731 Asset-based securities 18,421 16,924 19,388 17,659 U.S. Treasury securities 46,019 43,094 46,771 42,863 State and municipal securities 3,839 3,753 4,106 4,047 $ 174,234 $ 274,678 $ 189,648 265,623 19 Table of Contents Included in the marketable equity securities are the following (in thousands, except share amounts): June 30, 2024 December 31, 2023 Shares Cost Fair Value Shares Cost Fair Value NHI Common Stock 1,630,642 $ 24,734 $ 110,443 1,630,642 $ 24,734 $ 91,071 The amortized cost and estimated fair value of debt securities classified as available for sale, by contractual maturity, are as follows (in thousands) : June 30, 2024 December 31, 2023 Cost Fair Value Cost Fair Value Maturities: Within 1 year $ 20,602 $ 20,058 $ 19,664 $ 19,328 1 to 5 years 71,239 67,679 81,517 77,118 6 to 10 years 34,007 31,582 33,515 30,802 Over 10 years 613 476 642 479 $ 126,461 $ 119,795 $ 135,338 $ 127,727 Gross unrealized gains related to marketable equity securities are $ 107,735,000 and $ 84,514,000 as of June 30, 2024 and December 31, 2023, respectively. Gross unrealized losses related to marketable equity securities are $ 625,000 and $ 928,000 as of June 30, 2024 and December 31, 2023, respectively. For the three months ended June 30, 2024 and 2023, the Company recognized net unrealized gains of $ 9,124,000 and $ 4,650,000 , respectively, for the changes in fair market value of the marketable equity securities in the interim condensed consolidated statements of operations. For the six months ended June 30, 2024 and 2023, the Company recognized net unrealized gains of $ 23,523,000 and 6,036,000 , respectively, for the changes in fair market value of the marketable equity securities in the interim condensed consolidated statements of operations. Gross unrealized gains related to available for sale marketable debt securities are $ 142,000 and $ 326,000 as of June 30, 2024 and December 31, 2023, respectively. Gross unrealized losses related to available for sale marketable debt securities are $ 6,808,000 and $ 7,937,000 as of June 30, 2024 and December 31, 2023, respectively. The Company’s unrealized losses in our available for sale marketable debt securities were determined to be non-credit related. The Company has not recognized any credit related impairments for the six months ended June 30, 2024 and 2023. For the marketable debt securities in gross unrealized loss positions, (a) it is more likely than not that the Company will not be required to sell the investment securities before recovery of the unrealized losses, and (b) the Company expects that the contractual principal and interest will be received on the investment securities. Proceeds from the sale of available for sale marketable securities during the six months ended June 30, 2024 and 2023 were $ 34,662,000 and $ 28,051,000 , respectively. Investment gains of $ 350,000 and investment losses of $ 561,000 were realized on these sales during the six months ended June 30, 2024 and 2023, respectively. Note 10 – Fair Value Measurements The accounting standard for fair value measurements provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. This accounting standard establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs that may be used to measure fair value: Level 1 – The valuation is based on quoted prices in active markets for identical instruments. Level 2 – The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model–based valuation techniques for which all significant assumptions are observable in the market. Level 3 – The valuation is based on unobservable inputs that are supported by minimal or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar techniques that incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument, or valuations that require significant management judgment or estimation. 20 Table of Contents A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The following table summarizes fair value measurements by level at June 30, 2024 and December 31, 2023 for assets and liabilities measured at fair value on a recurring basis (in thousands) : Fair Value Measurements Using June 30, 2024 Fair Value Quoted Prices in Active Markets For Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Cash and cash equivalents $ 136,214 $ 136,214 $ – $ – Restricted cash and cash equivalents 29,391 29,391 – – Marketable equity securities 154,883 154,883 – – Corporate debt securities 56,024 40,169 15,855 – Asset–backed securities 16,924 – 16,446 478 U.S. Treasury securities 43,094 43,094 – – State and municipal securities 3,753 – 3,753 – Total financial assets $ 440,283 $ 403,751 $ 36,054 $ 478 Fair Value Measurements Using December 31, 2023 Fair Value Quoted Prices in Active Markets For Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Cash and cash equivalents $ 107,076 $ 107,076 $ – $ – Restricted cash and cash equivalents 18,892 18,892 – – Marketable equity securities 137,896 137,896 – – Corporate debt securities 60,171 42,860 17,311 – Asset–backed securities 17,659 – 17,210 449 U.S. Treasury securities 45,850 45,850 – – State and municipal securities 4,047 – 4,047 – Total financial assets $ 391,591 $ 352,574 $ 38,568 $ – Note 11 – Goodwill and Other Intangible Assets At June 30, 2024, the Company reviewed the carrying value of goodwill for impairment indicators. As a result of the review, there were no impairment indicators regarding the Company’s goodwill that required a quantitative test to be performed. However, our accounting estimates could materially change from period to period due to changing market factors. We will continue to monitor future events, changes in circumstances, and the potential impact thereof. If actual results are not consistent with our assumptions and estimates, we may be exposed to future goodwill impairment losses. At June 30, 2024, the following table represents the activity related to our goodwill by segment ( in thousands ): Inpatient Services Homecare and Hospice All Other Total January 1, 2024 $ 3,741 $ 164,554 $ – $ 168,295 Additions – – – – June 30, 2024 $ 3,741 $ 164,554 $ – $ 168,295 We also have recorded indefinite-lived intangible assets that consist of trade names ($ 4,340,000 ) and certificates of need and licenses ($ 2,698,000 ). 21 Table of Contents Note 12 - Stock Repurchase Program During the six months ended June 30, 2024, the Company repurchased 116,767 shares of its common stock for a total cost of $ 11,402,000 . During the six months ended June 30, 2023, the Company repurchased 44,349 shares of its common stock for a total cost of $ 2,482,000 . The shares were funded from cash on hand and were cancelled and returned to the status of authorized but unissued. Note 13 – Stock – Based Compensation NHC recognizes stock–based compensation expense for all stock options granted over the requisite service period using the fair value at the date of grant using the Black–Scholes pricing model. Stock–based compensation totaled $ 1,175,000 and $ 772,000 for the three months ended June 30, 2024 and 2023, respectively. Stock-based compensation totaled $ 1,969,000 and $ 1,411,000 for the six months ended June 30, 2024 and 2023, respectively. Stock–based compensation is included in “Salaries, wages and benefits” in the interim condensed consolidated statements of operations. At June 30, 2024, the Company had $ 6,962,000 of unrecognized compensation cost related to unvested stock–based compensation awards. This unrecognized compensation cost will be amortized over an approximate two -year period. Stock Options The following table summarizes the significant assumptions used to value the options granted for the six months ended June 30, 2024 and for the year ended December 31, 2023. June 30, 2024 December 31, 2023 Risk–free interest rate 4.40 % 4.52 % Expected volatility 24.1 % 29.3 % Expected life, in years 2.9 2.9 Expected dividend yield 2.63 % 4.41 % The following table summarizes our outstanding stock options for the six months ended June 30, 2024 and for the year ended December 31, 2023. Number of Shares Weighted Average Exercise Price Aggregate Intrinsic Value Options outstanding at January 1, 2023 445,144 $ 66.62 $ – Options granted 299,278 54.44 – Options exercised ( 103,481 ) 64.72 – Options cancelled ( 52,407 ) 60.58 – Options outstanding at December 31, 2023 588,534 61.30 – Options granted 297,986 94.42 – Options exercised ( 176,623 ) 63.53 – Options cancelled ( 25,702 ) 74.47 – Options outstanding at June 30, 2024 684,195 74.65 $ 23,089,169 Options exercisable at June 30, 2024 187,856 64.05 $ 8,331,795 Options Outstanding June 30, 2024 Exercise Prices Weighted Average Exercise Price Weighted Average Remaining Contractual Life in Years 354,954 53.94 - 69.19 59.08 3.2 329,241 71.64 - 96.03 91.44 4.2 684,195 74.65 3.7 22 Table of Contents Note 14 – Income Taxes The Company's income tax provision as a percentage of our income before income taxes was 25.9 % and 28.7 % for the three months ended June 30, 2024 and 2023, respectively. The Company's income tax provision as a percentage of our income before income taxes was 26.2 % and 28.5 % for the six months ended June 30, 2024 and 2023, respectively. Typically, these percentages vary from the U.S. federal statutory income tax rate of 21 % primarily due to state income taxes, excess tax benefits from stock-based compensation, benefits resulting from the lapsing of statute of limitations of items in our tax contingency reserve, and non-deductible expenses. For the three months and six months ended June 30, 2024, the accrual of state income tax was the most significant reconciling item. For the three and six months ended June 30, 2023, the accrual of state income tax was the only significant reconciling items. Our quarterly income tax provision, and our estimate of our annual effective income tax rate, is subject to variation due to several factors, including volatility based on the amount of pre-tax income or loss. The Company is no longer subject to U.S. federal and state examinations by tax authorities for years before 2020 (with certain state exceptions). Note 15 – Contingencies and Commitments Accrued Risk Reserves We have wholly–owned limited purpose insurance companies that insure risks related to workers’ compensation and general and professional liability insurance claims both for our owned and leased entities and certain of the entities to which we provide management or accounting services. The liability we have recognized for reported claims and estimates for incurred but unreported claims totals $ 109,254,000 and $ 103,259,000 at June 30, 2024 and December 31, 2023, respectively. The liability is included in accrued risk reserves in the interim condensed consolidated balance sheets and is subject to adjustment for actual claims incurred. It is possible that these claims plus unasserted claims could exceed our insurance coverages and our reserves, which could have a material adverse effect on our consolidated financial position, results of operations and cash flows. As a result of the terms of our insurance policies and our use of wholly owned limited purpose insurance companies, we have retained significant insurance risk with respect to workers’ compensation and general and professional liability. We consider the professional services of independent actuaries to assist us in estimating our exposures for claims obligations (for both asserted and unasserted claims) related to deductibles and exposures in excess of coverage limits, and we maintain reserves for these obligations. Such estimates are based on many variables including historical and statistical information and other factors. Workers ’ Compensation For workers’ compensation, we utilize a wholly–owned Tennessee domiciled property/casualty insurance company to write coverage for NHC affiliates and for third–party customers. Policies are written for a duration of twelve months and cover only risks related to workers’ compensation losses. All customers are companies which operate in the senior care industry. Business is written on a direct basis. General and Professional Liability Insurance and Lawsuits The senior care industry has experienced significant increases in both the number of personal injury/wrongful death claims and in the severity of awards based upon alleged negligence by skilled nursing facilities and their employees in providing care to residents. The Company has been, and continues to be, subject to claims and legal actions that arise in the ordinary course of business, including potential claims related to patient care and treatment. The defense of these lawsuits may result in significant legal costs, regardless of the outcome, and can result in large settlement amounts or damage awards. Additional insurance is purchased through third party providers that serve to supplement the coverage provided through our wholly owned captive insurance company. There is certain additional litigation incidental to our business, none of which, based upon information available to date, would be material to our financial position, results of operations, or cash flows. In addition, the long–term care industry is continuously subject to scrutiny by governmental regulators, which could result in litigation or claims related to regulatory compliance matters. 23 Table of Contents Qui Tam Litigation United States of America, ex rel. Jennifer Cook and Sally Gaither v. Integrated Behavioral Health, Inc., NHC HealthCare/Moulton, LLC, et al., Case No. 2:20 -CV- 00877 -AMM (N.D. Ala.) This is a qui tam case originally filed under seal on June 22, 2020. The United States declined intervention on March 1, 2021. Thereafter, the Plaintiffs filed an amended Complaint against Dr. Sanja Malhotra, Integrated Behavioral Health, Inc. and other entities that Dr. Malhotra was alleged to own or in which he allegedly had a financial interest. The Complaint also named multiple skilled nursing facilities as Defendants, including NHC Healthcare/Moulton, LLC, an affiliate of National HealthCare Corporation. The Complaint alleged that nurse practitioners affiliated with Dr. Malhotra provided free services to the facilities in exchange for referrals to entities owned by or in which Dr. Malhotra had a financial interest in violation of the False Claims Act and Anti-Kickback Statute. NHC Healthcare/Moulton, LLC denied the allegations and filed a motion to dismiss on November 4, 2021. On January 28, 2022, the district court stayed this matter and administratively terminated the motion to dismiss pending the U.S. Supreme Court's review of a petition for certiorari filed in an unrelated matter but involving one of the legal arguments raised in the motion to dismiss. Thereafter, the U.S. Supreme Court denied the petition for certiorari in the unrelated matter. As a result, NHC Healthcare/Moulton, LLC renewed its motion to dismiss. The District Court granted NHC Healthcare/Moulton’s Motion to Dismiss, along with other pending Motions to Dismiss, and entered an Order of Dismissal on March 23, 2023 and an Amended Order of Dismissal on April 4, 2023, which dismissed the case in its entirety with prejudice with respect to the claims asserted by the Plaintiffs. The Plaintiffs filed a Notice of Appeal on April 20, 2023 to appeal the dismissal to the United States Court of Appeals for the Eleventh Circuit. On December 21, 2023, the Eleventh Circuit entered an Order affirming the District Court’s dismissal of the claims. The time period for the Plaintiffs to file a Petition for a Writ of Certiorari with the United States Supreme Court has expired making the Order affirming dismissal issued by the Eleventh Circuit final. Civil Investigative Demand On or about May 21, 2024, Caris Healthcare, L.P. (“Caris”) received a Civil Investigative Demand (“CID”) from the U.S. Attorney’s Office for the Eastern District of Tennessee. The CID requests the production of certain medical records for patients at Caris’ Nashville office and other documents related to the billing for hospice services for the period of January 1, 2019, through the date of the CID. The Company is cooperating with respect to the requests and remains in the process of responding to the CID. 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. Note 16 – Subsequent Events White Oak Senior Living Asset Acquisition On August 1, 2024, the Company purchased the White Oak Senior Living (“White Oak”) portfolio including its long-term care pharmacy for a purchase price of approximately $ 221,400,000 . White Oak’s portfolio consists of six skilled nursing facilities in North Carolina, three of which are continuing care retirement centers, and including one leased facility. The portfolio also includes nine skilled nursing facilities in South Carolina, one of which also includes assisted and independent living units. The acquisition represents both an expansion of NHC’s operations into a new state and a strategic advancement of its growth in its existing operational footprint. NHC currently operates multiple skilled nursing facilities in South Carolina, as well as a long-term care pharmacy. The following table contains unaudited pro forma interim condensed consolidated statements of operations information for the three months and six months ended June 30, 2024 and 2023, assuming that the White Oak acquisition closed on January 1, 2023 (in thousands) . Three Months Ended June 30 Six Months Ended June 30 2024 2023 2024 2023 Net patient revenues $ 334,906 $ 318,606 $ 675,324 $ 624,381 Net operating revenues and grant income 355,631 331,738 707,393 649,370 Total costs and expenses 332,379 319,253 667,183 630,599 Income from operations 23,252 12,485 40,210 18,771 Non-operating income 4,956 3,696 10,641 8,019 Income before income taxes 37,332 20,831 74,374 32,826 Net income attributable to NHC $ 27,386 $ 15,177 $ 54,582 $ 24,143 New $200 Million Credit Facility On August 1, 2024, the Company entered into a $ 200,000,000 senior credit facility with a five -year term consisting of a $ 50,000,000 revolving facility and a $ 150,000,000 term facility (the “Credit Facility”). The Credit Facility is for general corporate purposes, including working capital and acquisitions. The loans bear interest at either (i) Term Secured Overnight Financing Rate (“SOFR”) for interest periods of one, three or six months, plus the applicable margin or, at NHC’s option, (ii) the Base Rate plus the applicable margin. The applicable margin is an interest rate per annum between 1.30 % and 1.65 % for Term SOFR loans and between .30% and .65% for Base Rate loans, depending upon the Company meeting certain conditions. NHC’s obligations under the Credit Facility are unsecured. The Credit Facility contains customary representations and warranties, financial covenants, and other customary affirmative and negative covenants. The Credit Facility also contains customary events of default.