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 September 30 Nine Months Ended September 30 2024 2023 2024 2023 Revenues: Net patient revenues $ 328,674 $ 277,005 $ 894,415 $ 804,617 Other revenues 11,524 11,480 34,172 36,013 Government stimulus income - - 9,445 - Net operating revenues and grant income 340,198 288,485 938,032 840,630 Cost and expenses: Salaries, wages, and benefits 213,395 182,664 576,609 525,782 Other operating 82,509 72,490 238,092 217,213 Facility rent 10,886 10,094 31,804 30,087 Depreciation and amortization 10,619 10,135 30,543 30,266 Interest 1,742 77 1,788 268 Total costs and expenses 319,151 275,460 878,836 803,616 Income from operations 21,047 13,025 59,196 37,014 Other income: Non–operating income 4,224 4,097 14,865 12,116 Unrealized gains/(losses) on marketable equity securities 32,767 ( 3,093 ) 56,290 2,943 Income before income taxes 58,038 14,029 130,351 52,073 Income tax provision ( 15,338 ) ( 3,908 ) ( 34,294 ) ( 14,750 ) Net income 42,700 10,121 96,057 37,323 Net (income)/loss attributable to noncontrolling interest 89 267 ( 211 ) 1,069 Net income attributable to National HealthCare Corporation $ 42,789 $ 10,388 $ 95,846 $ 38,392 Earnings per share attributable to National HealthCare Corporation stockholders: Basic $ 2.78 $ 0.68 $ 6.23 $ 2.51 Diluted $ 2.73 $ 0.68 $ 6.15 $ 2.50 Weighted average common shares outstanding: Basic 15,411,680 15,299,913 15,384,758 15,311,453 Diluted 15,667,321 15,324,511 15,576,294 15,334,269 Dividends declared per common share $ 0.61 $ 0.59 $ 1.81 $ 1.75 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 September 30 Nine Months Ended September 30 2024 2023 2024 2023 Net income $ 42,700 $ 10,121 $ 96,057 $ 37,323 Other comprehensive income/(loss): Unrealized gains/(losses) on investments in marketable debt securities 3,516 ( 1,185 ) 3,074 ( 605 ) Reclassification adjustment for realized losses on sales of marketable debt securities - - 1,388 20 Income tax (expense)/benefit related to items of other comprehensive income ( 460 ) 124 ( 711 ) 3 Other comprehensive income/(loss), net of tax 3,056 ( 1,061 ) 3,751 ( 582 ) Net (income)/loss attributable to noncontrolling interest 89 267 ( 211 ) 1,069 Comprehensive income attributable to National HealthCare Corporation $ 45,845 $ 9,327 $ 99,597 $ 37,810 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) September 30, 2024 December 31, 2023 unaudited Assets Current Assets: Cash and cash equivalents $ 84,807 $ 107,076 Restricted cash and cash equivalents, current portion 29,032 17,725 Marketable equity securities 164,754 111,117 Marketable debt securities - 5,427 Restricted marketable equity securities 23,001 26,779 Restricted marketable debt securities, current portion 2,045 12,822 Accounts receivable 128,782 108,545 Inventories 7,840 7,386 Prepaid expenses and other assets 4,887 8,855 Notes receivable 578 503 Total current assets 445,726 406,235 Property and Equipment: Property and equipment, at cost 1,283,184 1,101,681 Accumulated depreciation and amortization ( 596,759 ) ( 608,352 ) Net property and equipment 686,425 493,329 Other Assets: Restricted cash and cash equivalents, less current portion 1,235 1,167 Restricted marketable debt securities, less current portion 121,866 109,478 Deposits and other assets 10,084 14,786 Operating lease right-of-use assets 85,926 94,201 Goodwill 169,690 168,295 Intangible assets 19,805 7,038 Investments in unconsolidated companies 21,950 16,267 Total other assets 430,556 411,232 Total assets $ 1,562,707 $ 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) September 30, 2024 December 31, 2023 unaudited Liabilities and Stockholders ’ Equity Current Liabilities: Trade accounts payable $ 22,724 $ 19,194 Finance lease obligations, current portion - 860 Operating lease liabilities, current portion 31,366 29,352 Accrued payroll 89,757 84,110 Amounts due to third party payors 18,815 18,369 Accrued risk reserves, current portion 31,076 30,549 Other current liabilities 37,289 22,991 Dividends payable 9,419 9,051 Long-term debt due within one year 7,500 - Total current liabilities 247,946 214,476 Long-term debt 139,500 - Operating lease liabilities, less current portion 53,079 63,175 Accrued risk reserves, less current portion 79,128 72,710 Refundable entrance fees 6,063 6,376 Deferred income taxes 30,842 17,200 Other noncurrent liabilities 19,353 26,379 Total liabilities 575,911 400,316 Equity: Common stock, $ .01 par value; 45,000,000 shares authorized; 15,440,970 and 15,350,661 shares, respectively, issued and outstanding 154 153 Capital in excess of par value 230,635 227,604 Retained earnings 755,532 687,599 Accumulated other comprehensive loss ( 2,853 ) ( 6,604 ) Total National HealthCare Corporation stockholders’ equity 983,468 908,752 Noncontrolling interest 3,328 1,728 Total equity 986,796 910,480 Total liabilities and equity $ 1,562,707 $ 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) Nine Months Ended September 30 2024 2023 Cash Flows From Operating Activities: Net income $ 96,057 $ 37,323 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 30,543 30,266 Equity in earnings of unconsolidated investments ( 589 ) ( 1,941 ) Distributions from unconsolidated investments 512 470 Unrealized gains on marketable equity securities ( 56,290 ) ( 2,943 ) Realized (gains)/losses on sale of marketable securities ( 331 ) 603 Gain on sale of unconsolidated company ( 1,024 ) - Deferred income taxes 15,559 ( 1,059 ) Stock–based compensation 3,062 2,119 Changes in operating assets and liabilities: Accounts receivable ( 19,898 ) ( 2,617 ) Inventories 598 ( 285 ) Prepaid expenses and other assets 8,809 2,444 Operating lease obligations 193 ( 936 ) Trade accounts payable 3,530 ( 487 ) Accrued payroll 1,989 ( 2,791 ) Amounts due to third party payors 446 ( 1,043 ) Accrued risk reserves 6,945 5,656 Other current liabilities 12,434 14,035 Other noncurrent liabilities ( 8,031 ) 6,669 Net cash provided by operating activities 94,514 85,483 Cash Flows From Investing Activities: Purchases of property and equipment ( 19,444 ) ( 19,300 ) Acquisition of White Oak Senior Living, net of cash acquired ( 215,896 ) - Acquisition of other businesses, net of cash acquired 2,097 ( 2,700 ) Proceeds from the sale of unconsolidated company 2,100 - Investments in notes receivable ( 75 ) ( 197 ) Investments in unconsolidated companies ( 8,370 ) - Purchases of marketable securities ( 24,736 ) ( 21,763 ) Proceeds from sale of marketable securities 39,776 36,578 Net cash used in investing activities ( 225,048 ) ( 7,382 ) Cash Flows From Financing Activities: Borrowings under credit facility 150,000 - Repayments under credit facility ( 3,000 ) - Principal payments under finance lease obligations ( 860 ) ( 3,711 ) Dividends paid to common stockholders ( 27,545 ) ( 26,520 ) Noncontrolling interest contributions 1,389 - Issuance of common shares 13,471 260 Repurchase of common shares ( 13,502 ) ( 2,482 ) Entrance fee refunds ( 313 ) ( 258 ) Net cash provided by/(used in) financing activities 119,640 ( 32,711 ) Net Increase/(Decrease) in Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents ( 10,894 ) 45,390 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 $ 115,074 $ 120,255 Balance Sheet Classifications: Cash and cash equivalents $ 84,807 $ 100,308 Restricted cash and cash equivalents 30,267 19,947 Total Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents $ 115,074 $ 120,255 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 nine months ended September 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 Net income/(loss) – – – 42,789 – ( 89 ) 42,700 Contributions attributable to noncontrolling interest 1,389 1,389 Other comprehensive income – – – – 3,056 – 3,056 Stock–based compensation – – 1,093 – – – 1,093 Shares sold – options exercised 34,417 2,232 – – – 2,232 Repurchase of common shares ( 16,384 ) – ( 2,100 ) – – – ( 2,100 ) Dividends declared to common stockholders ($ 0.61 per share) – – – ( 9,419 ) – – ( 9,419 ) Balance at September 30, 2024 15,440,970 $ 154 $ 230,635 $ 755,532 $ ( 2,853 ) $ 3,328 986,796 8 Table of Contents For the nine months ended September 30, 2023 : Common Stock Capital in Excess of Retained Accumulated Other Comprehensive Non- controlling Total Stockholders’ Shares Amount Par Value Earnings Loss Interest Equity Balance at January 1, 2023 15,357,746 $ 153 $ 226,991 $ 656,664 $ ( 9,532 ) $ 3,238 $ 877,514 Net income/(loss) – – – 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/(loss) – – – 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 Net income/(loss) – – – 10,388 – ( 267 ) 10,121 Other comprehensive loss – – – – ( 1,061 ) – ( 1,061 ) Stock–based compensation – – 708 – – – 708 Shares sold – options exercised 4,017 – 254 – – – 254 Dividends declared to common stockholders ($ 0.59 per share) – – – ( 9,040 ) – – ( 9,040 ) Balance at September 30, 2023 15,324,560 153 226,888 668,244 ( 10,114 ) 2,169 887,340 T he accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements. 9 Table of Contents NATIONAL HEALTHCARE CORPORATION Notes to Interim Condensed Consolidated Financial Statements September 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 September 30, 2024, we operate or manage, through certain affiliates, 80 skilled nursing facilities with a total of 10,349 licensed beds, 26 assisted living facilities with 1,413 units, nine independent living facilities, three behavioral health hospitals, 34 homecare agencies, and 32 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 9 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. 10 Table of Contents 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. 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 $ 2,574,000 and $ 7,098,000 for the three and nine months ended September 30, 2024, respectively. For the three and nine months ended September 30, 2023, bad debt expense was $ 1,668,000 and $ 5,331,000 , respectively. As of September 30, 2024 and December 31, 2023, the Company has recorded allowance for doubtful accounts of $ 10,859,000 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. For the nine months ended September 30, 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 7 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 $ 6,288,000 and $ 19,678,000 for the three and nine months ended September 30, 2024, respectively. General and administrative costs were $ 5,661,000 and $ 16,309,000 for the three and nine months ended September 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 3 - Acquisition of White Oak Senior Living for additional detail regarding the acquisition. 11 Table of Contents 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, regional 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. 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 or fair value, if acquired. 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 transactions that represent business combinations using the acquisition method of accounting in accordance with FASB ASC Topic 805, Business Combinations (Topic 805 ). 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. Such fair values that are not finalized for reporting periods following the acquisition date are estimated and recorded as provisional amounts during the measurement period. The measurement period is defined as the date through which all information required to identify and measure the consideration transferred, the assets acquired, the liabilities assumed and any noncontrolling interests has been obtained, limited to one year from the acquisition date. Goodwill generated from business combinations 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. 12 Table of Contents 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. Continuing Care Contracts We have continuing care retirement centers (“CCRC”) within our operations. Residents at these retirement centers 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 September 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. 13 Table of Contents Note 3 – Acquisition of White Oak Senior Living On August 1, 2024, the Company purchased certain assets and assumed certain liabilities of the White Oak Senior Living (“White Oak”) portfolio for a purchase price of $ 221,400,000 . The White Oak portfolio consists of 22 healthcare operations, which includes 15 skilled nursing facilities, two assisted living facilities, four independent living facilities, and a long-term care pharmacy. The operations have 1,928 licensed skilled nursing beds, 48 assisted living units, and 302 independent living units in the states of South Carolina and North Carolina ( 2,278 total beds/units). The acquisition represents both an expansion of NHC’s operations into a new state (North Carolina) and a strategic advancement of its growth in its existing operational footprint. The Company utilized widely accepted income-based, market-based, and cost-based valuation approaches to perform the preliminary purchase price allocation. The Company has performed a preliminary valuation analysis of the fair market value of White Oak’s assets acquired and liabilities assumed. The final valuation of the assets acquired and liabilities assumed was not complete as of September 30, 2024, but will be finalized within the allowable measurement period. The following table summarizes the allocation of the preliminary purchase price as of the transaction’s closing date ( in thousands ): Amount Cash and cash equivalents $ 9 Inventories 1,054 Prepaid expenses and other assets 137 Property and equipment 203,695 Deferred tax asset 2,499 Operating lease right-of-use assets 11,380 Intangible assets 12,765 Total assets acquired 231,539 Operating lease liabilities, current portion 424 Accrued payroll 3,559 Other current liabilities 1,085 Operating lease liabilities, less current portion 10,956 Other noncurrent liabilities 1,005 Total liabilities assumed 17,029 Net identifiable assets acquired 214,510 Goodwill 1,395 Total estimated fair value of the acquisition $ 215,905 The indefinite-lived intangible assets acquired include the trade name of White Oak and the skilled nursing certificates of need and licenses. The goodwill is recorded in the inpatient services segment and is attributed to the workforce acquired and reputation of the business as part of the transaction. We expect the goodwill to be deductible for income tax purposes. For the three and nine months ended September 30, 2024, White Oak contributed net operating revenues of $ 37,305,000 and income before income taxes of $ 1,557,000 that are included in the Company’s interim condensed consolidated statements of operations. The Company recognized $ 637,000 and $ 2,831,000 in acquisition-related expenses for the three and nine months ended September 30, 2024, respectively, in connection with the White Oak acquisition. These costs related to legal and other professional fees, which were included as a component of other operating expenses in the interim condensed consolidated statements of operations. The following table contains unaudited pro forma interim condensed consolidated statements of operations information for the three months and nine months ended September 30, 2024 and 2023, assuming that the White Oak acquisition closed on January 1, 2023. The pro forma financial information includes various assumptions, including those related to the preliminary purchase price allocation of assets acquired and liabilities assumed. The pro forma financial information may vary in future quarters based on the final valuations and analysis of the fair value of the assets acquired and liabilities assumed (in thousands) . Three Months Ended September 30 Nine Months Ended September 30 2024 2023 2024 2023 Net operating revenues and grant income $ 358,334 $ 337,817 $ 1,065,418 $ 987,186 Income before income taxes 58,881 14,087 134,777 49,113 Net income attributable to NHC $ 43,413 $ 10,431 $ 99,121 $ 34,064 14 Table of Contents Note 4 – 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 September 30 Nine Months Ended September 30 2024 2023 2024 2023 Net patient revenues: Inpatient services $ 293,026 $ 243,865 $ 790,664 $ 706,795 Homecare and hospice 35,648 33,140 103,751 97,822 Total net patient revenue $ 328,674 $ 277,005 $ 894,415 $ 804,617 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 September 30 Nine Months Ended September 30 Source 2024 2023 2024 2023 Medicare 30 % 33 % 32 % 35 % Managed Care 9 % 10 % 10 % 10 % Medicaid 33 % 32 % 30 % 30 % Private Pay and Other 28 % 25 % 28 % 25 % 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. 15 Table of Contents 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. 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 $ 5,267,000 and $ 4,232,000 in net patient revenues for these supplemental Medicaid payments for the three months ended September 30, 2024 and 2023, respectively. We have recorded $ 11,314,000 and $ 15,362,000 in net patient revenues for these supplemental Medicaid payments for the nine months ended September 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 $ 18,815,000 and $ 18,369,000 as of September 30, 2024 and December 31, 2023, respectively, for various Medicare, Medicaid, and Managed Care claims reviews and current and prior year cost reports. Note 5 – 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 September 30 Nine Months Ended September 30 2024 2023 2024 2023 Rental income $ 6,028 $ 5,958 $ 18,015 $ 17,966 Management and accounting services fees 4,226 4,185 12,744 14,045 Insurance services 818 989 2,506 2,920 Other 452 348 907 1,082 Total other revenues $ 11,524 $ 11,480 $ 34,172 $ 36,013 16 Table of Contents 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 8 – 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 $ 1,348,000 and $ 1,243,000 for the three months ended September 30, 2024 and 2023, respectively. We recognized management fees and interest on management fees of $ 4,014,000 and $ 3,968,000 from these facilities for the nine months ended September 30, 2024 and 2023, respectively. Insurance Services For workers’ compensation insurance services, the premium revenues reflected in the interim condensed consolidated statements of operations for the three months ended September 30, 2024 and 2023 were $ 529,000 and $ 678,000 , respectively. The premium revenues reflected in the interim condensed consolidated statements of operations for the nine months ended September 30, 2024 and 2023 were $ 1,638,000 and $ 1,985,000 , 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 September 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 nine months ended September 30, 2024 and 2023 were $ 868,000 and $ 935,000 , 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 6 – Non – Operating Income Non–operating income is comprised of the following (in thousands) : Three Months Ended September 30 Nine Months Ended September 30 2024 2023 2024 2023 Dividends and net realized gains and losses on sales of securities $ 1,683 $ 1,690 $ 5,462 $ 4,604 Interest income 2,603 2,222 7,790 5,571 Equity in earnings of unconsolidated investments (62 ) 185 589 1,941 Gain on sale of unconsolidated company - - 1,024 - Total non-operating income $ 4,224 $ 4,097 $ 14,865 $ 12,116 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 7 – 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. 17 Table of Contents The Company’s CODM evaluates performance and allocates capital resources to each segment based on an operating model that is designed to improve the quality of patient care and profitability of the Company while enhancing long-term shareholder value. The CODM does not review assets by segment in his resource allocation and therefore, assets by segment are not disclosed below. The following table sets forth the Company’s unaudited interim condensed consolidated statements of operations by business segment (in thousands ): Three Months Ended September 30, 2024 Inpatient Services Homecare and Hospice All Other Total Revenues: Net patient revenues $ 293,026 $ 35,648 $ - $ 328,674 Other revenues 370 - 11,154 11,524 Net operating revenues 293,396 35,648 11,154 340,198 Costs and expenses: Salaries, wages, and benefits 175,241 21,456 16,698 213,395 Other operating 72,384 6,612 3,513 82,509 Rent 8,422 602 1,862 10,886 Depreciation and amortization 9,632 172 815 10,619 Interest 1,742 - - 1,742 Total costs and expenses 267,421 28,842 22,888 319,151 Income/(loss) from operations 25,975 6,806 ( 11,734 ) 21,047 Non-operating income - - 4,224 4,224 Unrealized gains on marketable equity securities - - 32,767 32,767 Income before income taxes $ 25,975 $ 6,806 $ 25,257 $ 58,038 Three Months Ended September 30, 2023 Inpatient Services Homecare and Hospice All Other Total Revenues: Net patient revenues $ 243,865 $ 33,140 $ - $ 277,005 Other revenues 297 - 11,183 11,480 Net operating revenues 244,162 33,140 11,183 288,485 Costs and expenses: Salaries, wages, and benefits 151,912 20,066 10,686 182,664 Other operating 64,228 5,868 2,394 72,490 Rent 8,186 538 1,370 10,094 Depreciation and amortization 9,203 185 747 10,135 Interest 77 - - 77 Total costs and expenses 233,606 26,657 15,197 275,460 Income/(loss) from operations 10,556 6,483 ( 4,014 ) 13,025 Non-operating income - - 4,097 4,097 Unrealized losses on marketable equity securities - - ( 3,093 ) ( 3,093 ) Income/(loss) before income taxes $ 10,556 $ 6,483 $ ( 3,010 ) $ 14,029 18 Table of Contents Nine Months Ended September 30, 2024 Inpatient Services Homecare and Hospice All Other Total Revenues: Net patient revenues $ 790,664 $ 103,751 $ - $ 894,415 Other revenues 710 - 33,462 34,172 Government stimulus income - - 9,445 9,445 Net operating revenues and grant income 791,374 103,751 42,907 938,032 Costs and expenses: Salaries, wages, and benefits 474,190 63,761 38,658 576,609 Other operating 207,883 18,977 11,232 238,092 Rent 24,795 1,736 5,273 31,804 Depreciation and amortization 27,646 545 2,352 30,543 Interest 1,788 - - 1,788 Total costs and expenses 736,302 85,019 57,515 878,836 Income/(loss) from operations 55,072 18,732 ( 14,608 ) 59,196 Non-operating income - - 14,865 14,865 Unrealized gains on marketable equity securities - - 56,290 56,290 Income before income taxes $ 55,072 $ 18,732 $ 56,547 $ 130,351 Nine Months Ended September 30, 2023 Inpatient Services Homecare and Hospice All Other Total Revenues: Net patient revenues $ 706,795 $ 97,822 $ - $ 804,617 Other revenues 894 - 35,119 36,013 Net operating revenues 707,689 97,822 35,119 840,630 Costs and expenses: Salaries, wages, and benefits 435,517 60,804 29,461 525,782 Other operating 192,473 17,356 7,384 217,213 Rent 24,520 1,639 3,928 30,087 Depreciation and amortization 27,474 555 2,237 30,266 Interest 268 - - 268 Total costs and expenses 680,252 80,354 43,010 803,616 Income/(loss) from operations 27,437 17,468 ( 7,891 ) 37,014 Non-operating income - - 12,116 12,116 Unrealized gains on marketable equity securities - - 2,943 2,943 Income before income taxes $ 27,437 $ 17,468 $ 7,168 $ 52,073 Note 8 – Long-Term Leases Operating Leases At September 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 $ 10,085,000 and $ 9,300,000 for the three months ended September 30, 2024 and 2023, respectively. Total facility rent expense to NHI was $ 29,371,000 and $ 27,719,000 for the nine months ended September 30, 2024 and 2023, respectively. 19 Table of Contents Minimum Lease Payments The following table summarizes the maturity of our operating lease liabilities as of September 30, 2024 ( in thousands ): Operating Leases 2025 $ 35,858 2026 35,183 2027 10,471 2028 1,702 2029 1,424 Thereafter 11,768 Total minimum lease payments 96,406 Less: amounts representing interest ( 11,961 ) Present value of future minimum lease payments 84,445 Less: current portion ( 31,366 ) Noncurrent lease liabilities $ 53,079 20 Table of Contents Note 9 – 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 September 30 Nine Months Ended September 30 2024 2023 2024 2023 Basic: Weighted average common shares outstanding 15,411,680 15,299,913 15,384,758 15,311,453 Net income attributable to National HealthCare Corporation $ 42,789 $ 10,388 $ 95,846 $ 38,392 Earnings per common share, basic $ 2.78 $ 0.68 $ 6.23 $ 2.51 Diluted: Weighted average common shares outstanding 15,411,680 15,299,913 15,384,758 15,311,453 Effects of dilutive instruments 255,641 24,598 191,536 22,816 Weighted average common shares outstanding 15,667,321 15,324,511 15,576,294 15,334,269 Net income attributable to National HealthCare Corporation $ 42,789 $ 10,388 $ 95,846 $ 38,392 Earnings per common share, diluted $ 2.73 $ 0.68 $ 6.15 $ 2.50 For the three and nine months ending September 30, 2024, we did not exclude any stock options from the calculation of diluted weighted average shares of common stock outstanding. For the three and nine months ending September 30, 2023, 637,409 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 10 – 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 11 for a description of the Company's methodology for determining the fair value of marketable securities. Marketable securities consist of the following (in thousands) : September 30, 2024 December 31, 2023 Amortized Cost Fair Value Amortized Cost Fair Value Investments available for sale: Marketable equity securities $ 30,176 $ 164,754 $ 30,176 $ 111,117 Corporate debt securities – – 2,497 2,441 U.S. Treasury securities – – 2,990 2,986 Restricted investments available for sale: Marketable equity securities 17,702 23,001 24,134 26,779 Corporate debt securities 59,267 58,812 59,586 57,731 Asset-based securities 17,756 16,646 19,388 17,659 U.S. Treasury securities 46,224 44,671 46,771 42,863 State and municipal securities 3,813 3,782 4,106 4,047 $ 174,938 $ 311,666 $ 189,648 265,623 21 Table of Contents Included in the marketable equity securities are the following (in thousands, except share amounts): September 30, 2024 December 31, 2023 Shares Cost Fair Value Shares Cost Fair Value NHI Common Stock 1,630,642 $ 24,734 $ 137,072 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) : September 30, 2024 December 31, 2023 Cost Fair Value Cost Fair Value Maturities: Within 1 year $ 24,509 $ 24,023 $ 19,664 $ 19,328 1 to 5 years 71,047 69,082 81,517 77,118 6 to 10 years 31,197 30,499 33,515 30,802 Over 10 years 307 307 642 479 $ 127,060 $ 123,911 $ 135,338 $ 127,727 Gross unrealized gains related to marketable equity securities are $ 140,177,000 and $ 84,514,000 as of September 30, 2024 and December 31, 2023, respectively. Gross unrealized losses related to marketable equity securities are $ 300,000 and $ 928,000 as of September 30, 2024 and December 31, 2023, respectively. For the three months ended September 30, 2024 and 2023, the Company recognized net unrealized gains of $ 32,767,000 and net unrealized losses of $ 3,093,000 , respectively, for the changes in fair market value of the marketable equity securities in the interim condensed consolidated statements of operations. For the nine months ended September 30, 2024 and 2023, the Company recognized net unrealized gains of $ 56,290,000 and 2,943,000 , 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 $ 1,104,000 and $ 326,000 as of September 30, 2024 and December 31, 2023, respectively. Gross unrealized losses related to available for sale marketable debt securities are $ 4,253,000 and $ 7,937,000 as of September 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 nine months ended September 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 nine months ended September 30, 2024 and 2023 were $ 39,776,000 and $ 36,578,000 , respectively. Investment gains of $ 331,000 and investment losses of $ 603,000 were realized on these sales during the nine months ended September 30, 2024 and 2023, respectively. Note 11 – 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. 22 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 September 30, 2024 and December 31, 2023 for assets and liabilities measured at fair value on a recurring basis (in thousands) : Fair Value Measurements Using September 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 $ 84,807 $ 84,807 $ – $ – Restricted cash and cash equivalents 30,267 30,267 – – Marketable equity securities 187,755 187,755 – – Corporate debt securities 58,812 39,475 19,337 – Asset–backed securities 16,646 – 16,186 460 U.S. Treasury securities 44,671 44,671 – – State and municipal securities 3,782 – 3,782 – Total financial assets $ 426,740 $ 386,975 $ 39,305 $ 460 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 $ 449 Note 12 – Goodwill and Other Intangible Assets At September 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 23 Table of Contents See Note 3 – Acquisition of White Oak Senior Living for further detail describing the goodwill and indefinite-lived intangible asset additions in 2024. At September 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 1,395 – – 1,395 September 30, 2024 $ 5,136 $ 164,554 $ – $ 169,690 Indefinite-lived intangible assets consist of the following (in thousands) : September 30, 2024 December 31, 2023 Trade names $ 15,836 $ 4,340 Certificates of need 1,757 532 Licenses 2,212 2,166 Total $ 19,805 $ 7,038 As part of the White Oak Senior Living acquisition, we recorded indefinite-lived intangible assets that consisted of the trade name ($11,496,000) and certificates of need and licenses ($1,271,000). Note 13 - Stock Repurchase Program During the nine months ended September 30, 2024, the Company repurchased 133,151 shares of its common stock for a total cost of $ 13,502,000 . During the nine months ended September 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 14 – 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 $ 1,093,000 and $ 708,000 for the three months ended September 30, 2024 and 2023, respectively. Stock-based compensation totaled $ 3,062,000 and $ 2,119,000 for the nine months ended September 30, 2024 and 2023, respectively. Stock–based compensation is included in “Salaries, wages and benefits” in the interim condensed consolidated statements of operations. At September 30, 2024, the Company had $ 5,752,000 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 nine months ended September 30, 2024 and for the year ended December 31, 2023. September 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 nine months ended September 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 298,097 94.42 – Options exercised ( 211,040 ) 63.75 – Options cancelled ( 33,202 ) 79.34 – Options outstanding at September 30, 2024 642,389 74.93 $ 32,658,000 Options exercisable at September 30, 2024 153,439 63.87 $ 9,498,000 24 Table of Contents Options Outstanding September 30, 2024 Exercise Prices Weighted Average Exercise Price Weighted Average Remaining Contractual Life in Years 331,037 53.94 - 69.19 58.88 3.0 311,352 71.64 - 96.03 92.00 4.1 642,389 74.93 3.5 Note 15 – Long-Term Debt Long–term debt consists of the following ( dollars in thousands ): Interest rate at September 30, 2024 Maturity September 30, 2024 December 31, 2023 Credit facility, interest payable monthly Variable, 6.8% 2029 $ 147,000 $ – Less current portion ( 7,500 ) – Total long-term debt $ 139,500 $ – On August 1, 2024, the Company entered into a $ 200,000,000 senior credit facility with a five -year term consisting of a $ 150,000,000 term facility and a $ 50,000,000 revolving line of credit (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. The revolving line of credit contains a commitment fee equal to 0.25 % of the unused borrowing capacity. There are no amounts outstanding on the revolving line of credit at September 30, 2024. 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. As of September 30, 2024, the Company is compliant with all financial covenants. Based on level 2 inputs, the carrying value of the Company's long-term debt is considered to approximate the fair value of such debt based upon the interest rates that the Company believes it can currently obtain for similar debt. The aggregate maturities of long–term debt for the five years subsequent to September 30, 2024 are as follows (in thousands) : Long–Term Debt 2025 $ 7,500 2026 7,500 2027 7,500 2028 7,500 2029 117,000 Total $ 147,000 Note 16 – Income Taxes The Company's income tax provision as a percentage of our income before income taxes was 26.4 % and 27.9 % for the three months ended September 30, 2024 and 2023, respectively. The Company's income tax provision as a percentage of our income before income taxes was 26.3 % and 28.3 % for the nine months ended September 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 nine months ended September 30, 2024, the accrual of state income tax was the most significant reconciling item. For the three and nine months ended September 30, 2023, the accrual of state income tax was the only significant reconciling items. 25 Table of Contents 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 17 – 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 $ 110,204,000 and $ 103,259,000 at September 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. 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. 26 Table of Contents 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.