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. 24 Table of Contents 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. 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 15: 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 2023 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. 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. Centers for Medicare and Medicaid Services Minimum Staffing Standards On April 22, 2024, the Centers for Medicare and Medicaid Services (“CMS”) issued the Minimum Staffing Standards for Long-Term Care (“LTC”) Facilities and Medicaid Institutional Payment Transparency Reporting final rule. Included in this final rule are new comprehensive minimum nurse staffing requirements, which aim to significantly reduce the risk of residents receiving unsafe and low-quality care within LTC facilities. CMS is finalizing a total nurse staffing standard of 3.48 hours per resident day (“HPRD”), which must include at least 0.55 HPRD of direct registered nurse (“RN”) care and 2.45 HPRD of direct nurse aide care. Facilities may use any combination of nurse staff (RN, licensed practical nurse and licensed vocational nurse, or nurse aide) to account for the additional 0.48 HPRD needed to comply with the total nurse staffing standard. CMS is also finalizing enhanced facility assessment requirements and a requirement to have an RN onsite 24 hours a day, seven days a week (“24/7”), to provide skilled nursing care. The 24/7 RN onsite can be the Director of Nursing; however, they must be available to provide direct resident care. This final rule provides a staggered implementation timeframe of the minimum nurse staffing standards and a 24/7 RN requirement based on geographic location, as well as possible exemptions for qualifying facilities for some parts of these requirements based on workforce unavailability and other factors. 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, 2024 was 89.0% compared to 87.9% for the same period a year ago. For the six months ended June 30, 2024, overall census in our owned and leased skilled nursing facilities was 88.7% compared to 87.7% for the same period a year ago. 25 Table of Contents 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 ourselves so we are an active participant in the delivery of post-acute healthcare services. 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, 2024: NHC Ratings Industry Ratings Total number of skilled nursing facilities, end of period 65 Number of 4 and 5-star rated skilled nursing facilities 40 Percentage of 4 and 5-star rated skilled nursing facilities 62 % 36 % Average rating for all skilled nursing facilities, end of period 3.5 2.6 Development and Growth We are undertaking to expand our senior care operations while protecting our existing operations and markets. The following table lists our recent development activities. Type of Operation Description Size Location Placed in Service Hospice 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 Hospice New Agency 1 agency Morristown, TN April 2024 Hospice New Agency 1 agency Lawrenceburg, TN July 2024 On August 1, 2024, the Company purchased the White Oak portfolio including its long-term care pharmacy. 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 total portfolio consists of 1,928 licensed beds, 48 assisted living units, and 302 independent living units. Accrued Risk Reserves Our accrued professional liability and workers’ compensation reserves totaled $109,254,000 at June 30, 2024 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 2023, CMS released its final rule outlining fiscal year 2024 Medicare payment rates and policy changes for skilled nursing facilities, which began 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. In July 2024, CMS released its final rule outlining fiscal year 2025 Medicare payment rates and policy changes for skilled nursing facilities, which will begin on October 1, 2024. The fiscal year 2025 rule equates to a net 4.2% increase in Medicare Part A payments to SNFs in fiscal year 2025 compared to 2024 levels. The rule includes a market basket increase of 3.0%, an increase of 1.7% to the market basket forecast error adjustment, and a negative 0.5% productivity adjustment. This final rule also changes CMS’ enforcement policies to impose more equitable and consistent civil monetary penalties ("CMPs") for health and safety violations as part of the agency’s ongoing work to increase the safety and care provided in America’s nursing homes. CMS revised the regulation to expand the type of CMPs that can be imposed to allow for more per instance and per day CMPs to be imposed, as appropriate. In the final rule it also finalized updates to the SNF Quality Reporting Program ("QRP") to better account for adverse social conditions that negatively impact individuals’ health or healthcare. CMS also finalized its proposal to adopt a data validation process for the SNF QRP beginning the same year. 26 Table of Contents For the first six months of 2024, our average Medicare per diem rate for skilled nursing facilities increased 5.0% as compared to the same period in 2023. Medicaid – Skilled Nursing Facilities Effective July 1, 2024 and for the fiscal year 2025, the state of Tennessee implemented specific individual nursing facility increases. We estimate the resulting increase in revenue for the 2025 fiscal year will be approximately $11,000,000 annually, or $2,750,000 per quarter. Additionally, the state of Tennessee implemented non-recurring rate increases for fiscal year 2025 for continued stabilization payments and Medicaid rate rebasing. These non-recurring rate increases will result in an additional increase in revenue for the 2025 fiscal year of approximately $8,200,000 annually, or $2,050,000 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, 2024 and for the fiscal year 2025, the state of Missouri implemented specific individual nursing facility increases. We estimate the resulting increase in revenue for the 2025 fiscal year will be approximately $1,784,000 annually, or $446,000 per quarter. We have also received from many of the states in which we operate a supplemental Medicaid payment to help mitigate the inflationary labor and medical supplies costs resulting from the pandemic. 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. For the first six months of 2024, our average Medicaid per diem increased 8.1% compared to the same period in 2023. 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 November 2023, CMS released its final rule outlining fiscal year 2024 Medicare payment rates. CMS projects payments to home health agencies in fiscal year 2024 will increase in aggregate by 0.8%, or $140 million. The increase is the result of a 3.3% market basket update, reduced by a 0.3% productivity adjustment. The increase is offset by a behavioral adjustment that will cut payments by a net 2.6%. The behavioral adjustment was designed to achieve budget-neutral implementation of the PDPM. Finally, CMS also adjusted the fixed-dollar loss ratio for outlier payments, which will increase payments by 0.4%. In June 2024, CMS released its proposed rule outlining fiscal year 2025 Medicare payment rates. CMS projects payments to home health agencies in fiscal year 2025 will decrease by 1.7% or $280 million, relative to the prior year. This decrease reflects a 2.5% home health payment update, reduced by a 3.6% decrease related to the Patient-Driven Groupings Model (“PDGM”) rebalancing and an estimated 0.6% decrease that reflects a proposed fixed dollar loss for outlier payments. As required by the Bipartisan Budget Act of 2018, this rule proposes a permanent prospective adjustment to the CY2025 home health payment rate to account for the impact of implementing the PDGM. This adjustment accounts for differences between assumed behavior changes and actual behavior changes on estimated aggregate expenditures due to the CY2020 implementation of PDGM and the change to a 30-day unit of payment. Medicare – Hospice 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. In July 2024, CMS released its final rule outlining fiscal year 2025 Medicare payment rates. CMS issued a rate increase of 2.9%, or $790 million, effective October 1, 2024. This increase is the result of a 3.4% market basket increase reduced by a 0.5% productivity adjustment. The FY2025 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 FY2025 is $34,465. 27 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, 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 28 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 29 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 newly opened facilities or agencies not at full capacity, gains on sale of unconsolidated companies, share-based compensation expense, acquisition-related expenses, and the recognition of the employee retention credit is helpful in allowing investors to assess the Company’s operations more accurately. The operating results for newly opened facilities or agencies not at full capacity include newly constructed healthcare facilities or agencies that are still considered in the start-up phase, which are two hospice agencies for the three and six months ended June 30, 3024. For the three and six months ended June 30, 2023, included are two behavioral health hospitals, two homecare agencies, and two hospice agencies. The acquisition-related expenses represent expenses incurred to acquire the White Oak portfolio that are not capitalizable. 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 2024 2023 2024 2023 Net income attributable to National Healthcare Corporation $ 26,844 $ 16,281 $ 53,057 $ 28,004 Non-GAAP adjustments: Unrealized gains on marketable equity securities (9,124 ) (4,650 ) (23,523 ) (6,036 ) Operating results for newly opened facilities or agencies not at full capacity 20 333 20 1,550 Share-based compensation expense 1,176 772 1,969 1,411 Gain on sale of unconsolidated company - - (1,024 ) - Acquisition-related expenses 2,194 - 2,194 - Employee retention credit (9,445 ) - (9,445 ) - Income tax provision on non-GAAP adjustments 3,947 922 7,750 800 Non-GAAP Net income $ 15,612 $ 13,658 $ 30,998 $ 25,729 GAAP diluted earnings per share $ 1.73 $ 1.06 $ 3.42 $ 1.83 Non-GAAP adjustments: Unrealized gains on marketable equity securities (0.43 ) (0.23 ) (1.12 ) (0.29 ) Operating results for newly opened facilities or agencies not at full capacity - 0.02 - 0.07 Share-based compensation expense 0.05 0.04 0.10 0.07 Gain on sale of unconsolidated company - - (0.05 ) - Acquisition-related expenses 0.10 - 0.10 - Employee retention credit (0.45 ) - (0.45 ) - Non-GAAP diluted earnings per share $ 1.00 $ 0.89 $ 2.00 $ 1.68 30 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, 2024 and 2023. Percentage of Net Operating Revenues Three Months Ended June 30 Six Months Ended June 30 2024 2023 2024 2023 Net operating revenues 100.0 % 100.0 % 100 % 100 % Costs and expenses: Salaries, wages, and benefits 59.9 62.0 60.8 62.2 Other operating 26.0 25.9 26.0 26.2 Facility rent 3.5 3.5 3.5 3.6 Depreciation and amortization 3.0 3.6 3.2 3.6 Interest 0.1 0.1 0.1 0.1 Total costs and expenses 92.5 95.1 93.6 95.7 Income from operations 7.5 4.9 6.4 4.3 Non–operating income 1.6 1.4 1.8 1.5 Unrealized gains on marketable equity securities 3.1 1.6 3.9 1.1 Income before income taxes 12.2 7.9 12.1 6.9 Income tax provision (3.2 ) (2.3 ) (3.1 ) (2.0 ) Net income 9.0 5.6 9.0 4.9 Net (income)/loss attributable to noncontrolling interest (0.1 ) 0.2 (0.1 ) 0.2 Net income attributable to stockholders of NHC 8.9 5.8 8.9 5.1 Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023 Results for the quarter ended June 30, 2024 compared to the second quarter of 2023 include a 6.4% increase in net operating revenues and grant income. For the quarter ended June 30, 2024, GAAP net income attributable to NHC was $26,844,000 compared to $16,281,000 for the same period in 2023. Excluding the unrealized gains in our marketable equity securities portfolio and other non-GAAP adjustments, adjusted net income for the quarter ended June 30, 2024 was $15,612,000 compared to $13,658,000 for the same period in 2023. The increase in adjusted net income for the three months ended June 30, 2024 compared to the same period of 2023 was primarily due to the per diem increases in our skilled nursing and assisted living facilities and the continued reduction of nurse agency staffing expense within our operations. During the three months ended June 30, 2024, the Company recognized $9,445,000 related to the Employee Retention Credit (“ERC”) that 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. During the second quarter of 2024, all conditions related to the assistance were met and the credit was recognized as government stimulus income. Net operating revenues Net patient revenues increased $10,313,000, or 3.8%, compared to the same period last year. The total census at owned and leased skilled nursing facilities for the quarter averaged 89.0%, compared to an average of 87.9% for the same quarter a year ago. Overall, the composite skilled nursing facility per diem increased 6.3% compared to the same quarter a year ago. Our Medicare per diem rates increased 5.3% and managed care per diem rates increased 0.7% compared to the same quarter a year ago. Medicaid and private pay per diem rates increased 4.5% and 13.7%, respectively, compared to the same quarter a year ago. For the three months ended June 30, 2024 and 2023, respectively, $2,585,000 and $6,247,000 have been included in our net patient revenues for supplemental Medicaid payments that are in addition to our Medicaid skilled nursing per diems. New operations, which include one skilled nursing facility acquired May 1, 2023, three assisted living facilities that we began operating on July 1, 2023, three hospice agencies and one homecare agency, have attributed to an increase of $5,241,000 in net patient revenues for the quarter ended June 30, 2024 compared to the same quarter in the prior year. On March 1, 2024, the Company exited a lease and transferred the operations of two skilled nursing facilities (included assisted living units) and one memory care facility located in Missouri. The exiting of these operations resulted in net patient revenues decreasing $8,974,000 for the quarter ended June 30, 2024 compared to the same quarter in the prior year. Other revenues decreased $1,682,000, or 13.0%, compared to the same quarter last year, as further detailed in Note 4 to our interim condensed consolidated financial statements. 31 Table of Contents Total costs and expenses Total costs and expenses for the three months ended June 30, 2024 compared to the same period of 2023 increased $9,533,000, or 3.5%, to $278,138,000 from $268,605,000. Salaries, wages, and benefits as a percentage of net operating revenues was 59.9% compared to 62.0% for the three months ended June 30, 2024 and 2023, respectively. We continue to work diligently to find solutions to reduce and eliminate the agency nurse staffing within our healthcare operations. Our agency staffing expense decreased approximately 57% for the three months ended June 30, 2024 compared to the same period of 2023. New operations, which include one skilled nursing facility acquired May 1, 2023, three assisted living facilities that we began operating on July 1, 2023, three hospice agencies and one homecare agency, have attributed to an increase of $2,728,000 in salaries, wages, and benefits for the quarter ended June 30, 2024 compared to the same quarter in the prior year. On March 1, 2024, the Company exited the lease and transferred the operations of two skilled nursing facilities (included assisted living units) and one memory care facility located in Missouri. The exiting of these operations resulted in salaries, wages, and benefits decreasing $6,174,000 for the quarter ended June 30, 2024 compared to the same quarter in the prior year. Other operating expenses as a percentage of net operating revenues was 26.0% and 25.9% for the three months ended June 30, 2024 and 2023, respectively. New operations, which include one skilled nursing facility acquired May 1, 2023, three assisted living facilities that we began operating on July 1, 2023, three hospice agencies and one homecare agency, have attributed to an increase of $2,084,000 in other operating expenses for the quarter ended June 30, 2024 compared to the same quarter in the prior year. For the second quarter of 2024, we also incurred acquisition-related expenses of $2,194,000 related to the August 1, 2024 acquisition of the White Oak portfolio. On March 1, 2024, the Company exited the lease and transferred the operations of two skilled nursing facilities (included assisted living units) and one memory care facility located in Missouri. The exiting of these operations resulted in other operating expenses decreasing $2,299,000 for the quarter ended June 30, 2024 compared to the same quarter in the prior year. Other income Non–operating income increased by $1,260,000 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, 2024 is $9,494,000 (an effective income tax rate of 25.9%). 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, 2024 Compared to Six Months Ended June 30, 2023 Results for the six months ended June 30, 2024 compared to the same period of 2023 include an 8.3% increase in net operating revenues and grant income. For the six months ended June 30, 2024, GAAP net income attributable to NHC was $53,057,000 compared to $28,004,000 for the same period in 2023. Excluding the unrealized gains in our marketable equity securities portfolio and other non-GAAP adjustments, adjusted net income for the quarter ended June 30, 2024 was $30,998,000 compared to $25,729,000 for the same period in 2023. The increase in adjusted net income for the six months ended June 30, 2024 compared to the same period of 2023 was primarily due to the per diem increases in our skilled nursing and assisted living facilities and the continued reduction of nurse agency staffing expense within our operations. During the six months ended June 30, 2024, the Company recognized $9,445,000 related to the ERC that 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. During the second quarter of 2024, all conditions related to the assistance were met and the credit was recognized as government stimulus income. Net operating revenues Net patient revenues increased $38,129,000, or 7.2%, compared to the same period last year. The total census at owned and leased skilled nursing facilities for the six months ended June 30, 2024 averaged 88.7%, compared to an average of 87.7% for the same period a year ago. Overall, the composite skilled nursing facility per diem increased 7.5% compared to the same period a year ago. Our Medicare per diem rates increased 5.0% and managed care per diem rates increased 3.3% compared to the same period a year ago. Medicaid and private pay per diem rates increased 8.1% and 12.1%, respectively, compared to the same period a year ago. For the six months ended June 30, 2024 and 2023, respectively, $6,047,000 and $11,130,000 have been included in our net patient revenues for supplemental Medicaid payments that are in addition to our Medicaid skilled nursing per diems. New operations, which include one skilled nursing facility acquired May 1, 2023, three assisted living facilities that we began operating on July 1, 2023, three hospice agencies and one homecare agency, have attributed to an increase of $9,803,000 in net patient revenues for the six months ended June 30, 2024 compared to the same period in the prior year. 32 Table of Contents On March 1, 2024, the Company exited a lease and transferred the operations of two skilled nursing facilities (included assisted living units) and one memory care facility located in Missouri. The exiting of these operations resulted in net patient revenues decreasing $10,869,000 for the six months ended June 30, 2024 compared to the same period in the prior year. Other revenues decreased $1,885,000, or 7.7%, compared to the same period last year, as further detailed in Note 4 to our interim condensed consolidated financial statements. Total costs and expenses Total costs and expenses for the six months ended June 30, 2024 compared to the same period of 2023 increased $31,529,000, or 6.0%, to $559,685,000 from $528,156,000. Salaries, wages, and benefits as a percentage of net operating revenues was 60.8% compared to 62.1% for the six months ended June 30, 2024 and 2023, respectively. We continue to work diligently to find solutions to reduce and eliminate the agency nurse staffing within our healthcare operations. Our agency staffing expense decreased approximately 54% for the six months ended June 30, 2024 compared to the same period of 2023. New operations, which include one skilled nursing facility acquired May 1, 2023, three assisted living facilities that we began operating on July 1, 2023, three hospice agencies and one homecare agency, have attributed to an increase of $5,487,000 in salaries, wages, and benefits for the six months ended June 30, 2024 compared to the same period in the prior year. On March 1, 2024, the Company exited the lease and transferred the operations of two skilled nursing facilities (included assisted living units) and one memory care facility located in Missouri. The exiting of these operations resulted in salaries, wages, and benefits decreasing $7,973,000 for the six months ended June 30, 2024 compared to the same period in the prior year. Other operating expenses as a percentage of net operating revenues was 26.0% and 26.2% for the six months ended June 30, 2024 and 2023, respectively. New operations, which include one skilled nursing facility acquired May 1, 2023, three assisted living facilities that we began operating on July 1, 2023, three hospice agencies and one homecare agency, have attributed to an increase of $4,018,000 in other operating expenses for the six months ended June 30, 2024 compared to the same quarter in the prior year. For the six months ended June 30, 2024, we also incurred acquisition-related expenses of $2,194,000 related to the August 1, 2024 acquisition of the White Oak portfolio. On March 1, 2024, the Company exited the lease and transferred the operations of two skilled nursing facilities (included assisted living units) and one memory care facility located in Missouri. The exiting of these operations resulted in other operating expenses decreasing $2,145,000 for the six months ended June 30, 2024 compared to the same quarter in the prior year. Other income Non–operating income increased by $2,622,000 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, 2024 is $18,956,000 (an effective income tax rate of 26.2%). 33 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 2024 2023 $ % Cash, cash equivalents, restricted cash, and restricted cash equivalents, at beginning of period $ 125,968 $ 74,865 $ 51,103 68.3 % Cash provided by operating activities 60,307 53,178 7,129 13.4 Cash used in investing activities (990 ) (2,247 ) 1,257 55.9 Cash used in financing activities (19,680 ) (22,891 ) 3,211 14.0 Cash, cash equivalents, restricted cash, and restricted cash equivalents, at end of period $ 165,605 $ 102,905 $ 62,700 60.9 % 34 Table of Contents Operating Activities Net cash provided by operating activities for the six months ended June 30, 2024 was $60,307,000 as compared to $53,178,000 in the same period last year. Cash provided by operating activities consisted of net income of $53,357,000 and adjustments for non–cash items of $2,736,000. There was cash provided by working capital in the amount of $4,052,000 for the six months ended June 30, 2024 compared to $9,999,000 for the same period a year ago. Included in the adjustments for non-cash items are depreciation and amortization expense, equity in earnings of unconsolidated investments, unrealized gains on our marketable equity securities, gain on sale of an unconsolidated company, deferred taxes, and stock compensation. Investing Activities Net cash used in investing activities totaled $990,000 for the six months ended June 30, 2024, compared to $2,247,000 for the six months ended June 30, 2023. Cash used for property and equipment additions was $13,788,000 and $12,789,000 for the six months ended June 30, 2024, and 2023, respectively. Proceeds from the sale of marketable securities, net of purchases, resulted in cash provided by investing activity of $15,764,000 and $13,645,000 for the six months ended June 30, 2024 and 2023, respectively. In January 2024, the Company sold its 50% joint venture ownership interest in a homecare agency resulting in proceeds from the sale of $2,100,000. For the six months ended June 30, 2024, we contributed capital of $4,856,000 to a joint venture, multi-family development that is under construction in Franklin, Tennessee. Financing Activities Net cash used in financing activities totaled $19,680,000 for the six months ended June 30, 2024 compared to $22,891,000 for the six months ended June 30, 2023. We made principal payments under our finance lease obligations in the amount of $860,000 and $2,455,000 for the six months ended June 30, 2024 and 2023, respectively. Cash used for dividend payments to common stockholders totaled $18,137,000 in the current year period compared to $17,481,000 for the same period a year ago. Cash provided by the issuance of common stock totaled $11,239,000 for the six months ended June 30, 2024. We repurchased common shares outstanding in the amount of $11,402,000 and $2,482,000 for the six months ended June 30, 2024 and 2023, respectively. Short – term liquidity We expect to meet our short-term liquidity requirements primarily from our cash flows from operating activities and our new $200 million credit facility, which was effective August 1, 2024. In addition to cash flows from operations, our current cash on hand of $136,214,000, our marketable equity and debt securities of $133,805,000, and our borrowing capacity on the $200 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. We also have substantial value in our unencumbered real estate assets, which could potentially be used as collateral in future borrowing opportunities. 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 $136,214,000, our marketable equity and debt securities of $133,805,000, and our borrowing capacity on the new $200 million credit facility. 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. 35 Table of Contents