nhc20230331_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission file number 001-13489



(Exact name of registrant as specified in its Charter)

Delaware	52-2057472
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization	Identification No.)

100 E. Vine Street
Murfreesboro, TN 37130
(Address of principal executive offices)
(Zip Code)

(615) 890–2020
Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class

Trading

Symbols(s)

Name of each exchange on which

registered

Common, $0.01 par value

NHC

NYSE American

Indicate by check mark whether the registrant: (1) Has filed all reports required to be filed by Section 13 or 15(d), of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S–T (§ 232.405 of this chapter) during the preceding 12 months (or for such period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer ☒	Accelerated filer ☐

Non–accelerated filer ☐	Smaller reporting company ☐

	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as is defined in Rule 12b–2 of the Exchange Act). Yes ☐ No ☒

15,320,443 shares of common stock of the registrant were outstanding as of May 1, 2023.

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TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements	3

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35

Item 4.	Controls and Procedures	35

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	36

Item 1A	Risk Factors	36

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 3.	Defaults Upon Senior Securities	36

Item 4.	Mine Safety Disclosures	36

Item 5.	Other Information	36

Item 6.	Exhibits	37

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PART I. FINANCIAL INFORMATION

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 March 31
	2023			2022

Revenues and grant income:
Net patient revenues	$	258,007		$	256,337
Other revenues		11,556			12,026
Government stimulus income		-			10,620
Net operating revenues and grant income		269,563			278,983

Cost and expenses:
Salaries, wages, and benefits		167,824			170,694
Other operating		71,489			74,085
Facility rent		10,092			10,065
Depreciation and amortization		10,048			9,757
Interest		98			165
Total costs and expenses		259,551			264,766

Income from operations		10,012			14,217

Other income:
Non–operating income		4,323			3,199
Unrealized gains on marketable equity securities		1,386			3,126

Income before income taxes		15,721			20,542
Income tax provision		(4,436	)		(5,193	)
Net income		11,285			15,349
Net loss/(income) attributable to noncontrolling interest		438			(31	)

Net income attributable to National HealthCare Corporation	$	11,723		$	15,318

Earnings per share attributable to National HealthCare Corporation stockholders:
Basic	$	0.76		$	0.99
Diluted	$	0.76		$	0.99

Weighted average common shares outstanding:
Basic		15,337,423			15,416,836
Diluted		15,356,335			15,463,855

Dividends declared per common share	$	0.57		$	0.55

The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.

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NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Comprehensive Income/(Loss)

(unaudited – in thousands)

	Three Months Ended March 31
	2023			2022

Net income	$	11,285		$	15,349

Other comprehensive income/(loss):
Unrealized gains/(losses) on investments in marketable debt securities		1,958			(6,327	)
Reclassification adjustment for realized gains on sales of marketable debt securities		-			(107	)
Income tax (expense)/benefit related to items of other comprehensive income		(279	)		1,374
Other comprehensive income/(loss), net of tax		1,679			(5,060	)

Net loss/(income) attributable to noncontrolling interest		438			(31	)

Comprehensive income attributable to National HealthCare Corporation	$	13,402		$	10,258

The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.

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NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Balance Sheets

(in thousands)

	March 31, 2023			December 31, 2022
	unaudited
Assets
Current Assets:
Cash and cash equivalents	$	46,144		$	58,667
Restricted cash and cash equivalents, current portion		27,485			15,121
Marketable equity securities		100,825			100,786
Marketable debt securities		17,822			23,136
Restricted marketable equity securities		23,385			22,358
Restricted marketable debt securities, current portion		3,950			16,244
Accounts receivable		103,134			99,986
Inventories		6,946			7,088
Prepaid expenses and other assets		8,212			10,546
Total current assets		337,903			353,932

Property and Equipment:
Property and equipment, at cost		1,087,834			1,081,219
Accumulated depreciation and amortization		(584,710	)		(574,687	)
Net property and equipment		503,124			506,532

Other Assets:
Restricted cash and cash equivalents, less current portion		1,047			1,077
Restricted marketable debt securities, less current portion		117,450			103,267
Deposits and other assets		13,103			12,728
Operating lease right-of-use assets		113,799			120,521
Goodwill		168,295			168,295
Intangible assets		7,038			7,038
Investments in unconsolidated companies		3,594			2,060
Total other assets		424,326			414,986
Total assets	$	1,265,353		$	1,275,450

The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.

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NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Balance Sheets (continued)

(in thousands, except share and per share amounts)

	March 31, 2023			December 31, 2022
	unaudited
Liabilities and Stockholders’ Equity
Current Liabilities:
Trade accounts payable	$	12,940		$	16,958
Finance lease obligations, current portion		4,627			4,985
Operating lease liabilities, current portion		29,065			29,075
Accrued payroll		56,710			72,510
Amounts due to third party payors		16,679			16,631
Accrued risk reserves, current portion		31,435			31,365
Other current liabilities		23,021			17,615
Dividends payable		8,733			8,748
Total current liabilities		183,210			197,887

Finance lease obligations, less current portion		-			860
Operating lease liabilities, less current portion		83,988			91,016
Accrued risk reserves, less current portion		74,191			71,104
Refundable entrance fees		6,036			6,207
Deferred income taxes		11,519			10,909
Other noncurrent liabilities		26,507			19,953
Total liabilities		385,451			397,936

Equity:
Common stock, $.01 par value; 45,000,000 shares authorized; 15,320,443 and 15,357,746 shares, respectively, issued and outstanding		153			153
Capital in excess of par value		225,148			226,991
Retained earnings		659,654			656,664
Accumulated other comprehensive loss		(7,853	)		(9,532	)
Total National HealthCare Corporation stockholders’ equity		877,102			874,276
Noncontrolling interest		2,800			3,238
Total equity		879,902			877,514
Total liabilities and equity	$	1,265,353		$	1,275,450

The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.

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NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Cash Flows

(unaudited – in thousands)

	Three Months Ended March 31
	2023			2022
Cash Flows From Operating Activities:
Net income	$	11,285		$	15,349
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		10,048			9,757
Equity in earnings of unconsolidated investments		(1,535	)		(454	)
Unrealized gains on marketable equity securities		(1,386	)		(3,126	)
(Gains)/losses on sale of marketable securities		492			(45	)
Deferred income taxes		331			2,600
Stock–based compensation		639			712
Changes in operating assets and liabilities:
Accounts receivable		(3,148	)		(5,624	)
Inventories		142			(4	)
Prepaid expenses and other assets		1,957			(4,385	)
Operating lease obligations		(316	)		-
Trade accounts payable		(4,018	)		3,354
Accrued payroll		(15,800	)		(32,821	)
Amounts due to third party payors		48			(276	)
Accrued risk reserves		3,157			3,365
Provider relief funds		-			(8,927	)
Contract liabilities		-			(10,019	)
Other current liabilities		5,407			1,701
Other noncurrent liabilities		6,554			1,386
Net cash provided by/(used in) operating activities		13,857			(27,457	)
Cash Flows From Investing Activities:
Purchases of property and equipment		(6,640	)		(8,962	)
Collections of notes receivable		2			224
Purchases of marketable securities		(10,281	)		(14,128	)
Proceeds from sale of marketable securities		15,492			16,946
Net cash used in investing activities		(1,427	)		(5,920	)
Cash Flows From Financing Activities:
Principal payments under finance lease obligations		(1,218	)		(1,147	)
Dividends paid to common stockholders		(8,748	)		(8,493	)
Noncontrolling interest contributions		-			250
Repurchase of common shares		(2,482	)		(146	)
Entrance fee refunds		(171	)		(914	)
Net cash used in financing activities		(12,619	)		(10,450	)
Net Decrease in Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents		(189	)		(43,827	)
Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents, Beginning of Period		74,865			119,743
Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents, End of Period	$	74,676		$	75,916

Balance Sheet Classifications:
Cash and cash equivalents	$	46,144		$	56,993
Restricted cash and cash equivalents		28,532			18,923
Total Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents	$	74,676		$	75,916

The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.

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NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share and per share amounts)

(unaudited)

For the three months ended March 31, 2023:

	Common Stock					Capital in Excess of			Retained			Accumulated Other Comprehensive			Non- controlling			Total Stockholders’
	Shares			Amount		Par Value			Earnings			Income (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

For the three months ended March 31, 2022:

	Common Stock					Capital in Excess of			Retained			Accumulated Other Comprehensive			Non- controlling		Total Stockholders’
	Shares			Amount		Par Value			Earnings			Income (Loss)			Interest		Equity
Balance at January 1, 2022		15,452,033		$	154	$	232,167		$	669,078		$	1,605		$	5,456	$	908,460
Net income		–			–		–			15,318			–			31		15,349
Equity contributed by noncontrolling interest		–			–		–			–			–			250		250
Other comprehensive loss		–			–		–			–			(5,060	)		–		(5,060	)
Stock–based compensation		–			–		712			–			–			–		712
Shares sold – options exercised		21,463			–		–			–			–			–		–
Repurchase of common shares		(2,165	)		–		(146	)		–			–			–		(146	)
Dividends declared to common stockholders ($0.55 per share)		–			–		–			(8,509	)		–			–		(8,509	)
Balance at March 31, 2022		15,471,331		$	154	$	232,733		$	675,887		$	(3,455	)	$	5,737		911,056

The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.

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NATIONAL HEALTHCARE CORPORATION

Notes to Interim Condensed Consolidated Financial Statements

September 30, 2022

(unaudited)

Note 1 – Description of Business

National HealthCare Corporation (“NHC” or the “Company”) is a leading provider of senior health care services. As of March 31, 2023, we operate or manage, through certain affiliates, 68 skilled nursing facilities with a total of 8,732 licensed beds, 23 assisted living facilities with 1,181 units, five independent living facilities, three behavioral health hospitals, 34 homecare agencies, and 30 hospice agencies. We operate specialized care units within certain of our healthcare centers such as Alzheimer's disease care units and sub-acute nursing units. In addition, we provide insurance services, management and accounting services, and we lease properties to operators of skilled nursing and assisted living facilities. We operate in 8 states and are located primarily in the southeastern United States.

Note 2 – Summary of Significant Accounting Policies

The listing below is not intended to be a comprehensive list of all our significant accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. generally accepted accounting principles (“GAAP”), with limited need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. See our audited December 31, 2022 consolidated financial statements and notes thereto which contain accounting policies and other disclosures required by U.S. GAAP. Our audited December 31, 2022 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, 2022 consolidated financial statements and that the adequacy of additional disclosure needed for a fair presentation, except in regard to material contingencies, may be determined in that context. Accordingly, footnotes and other disclosures which would substantially duplicate the disclosure contained in our most recent annual report to stockholders have been omitted. This interim financial information is not necessarily indicative of the results that may be expected for a full year for a variety of reasons.

Estimates and Assumptions

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and could cause our reported net income to vary significantly from period to period.

Net Patient Revenues and Accounts Receivable

Net patient revenues are derived from services rendered to patients for skilled and intermediate nursing, rehabilitation therapy, assisted living and independent living, home health care services, hospice services, and behavioral health services. Net patient revenue is reported at the amount that reflects the consideration to which the Company expects to be entitled in exchange for providing patient services. These amounts are due from patients, governmental programs, and other third-party payors, and include variable consideration for retroactive revenue adjustments due to settlement of audits, reviews, and investigations.

The Company recognizes revenue as its performance obligations are completed. Routine services are treated as a single performance obligation satisfied over time as services are rendered. These routine services represent a bundle of services that are not capable of being distinct. The performance obligations are satisfied over time as the patient simultaneously receives and consumes the benefits of the healthcare services provided. Additionally, there may be ancillary services which are not included in the daily rates for routine services, but instead are treated as separate performance obligations satisfied at a point in time when those services are rendered. Contract liabilities are recorded for payments the Company receives in which performance obligations have not been completed.

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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 $1,811,000 and $2,536,000 for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, and December 31, 2022, the Company has recorded allowance for doubtful accounts of $7,005,000 and $6,246,000, 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, management and accounting services to other long–term care 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 Standard (“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.

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, which were $5,653,000 and $5,787,000 for the three months ended March 31, 2023 and 2022, respectively.

Long-Term Leases

The Company’s lease portfolio primarily consists of finance and operating real estate leases for certain skilled nursing facilities, assisted and independent living facilities, homecare and hospice offices, and pharmacy warehouses. The original terms of the leases typically range from two to fifteen years. Several of the real estate leases include renewal options which vary in length and may not include specific rent renewal amounts. We determine if an arrangement is a lease at inception of a contract. We determine the lease term by assuming exercise of renewal options that are reasonably certain.

The Company records right-of-use assets and liabilities for non-cancelable real estate operating leases with original or remaining lease terms in excess of one year. Leases with a lease term of 12 months or less at inception are not recorded and are expensed on a straight-line basis over the lease term. We recognize lease components and non-lease components together and not as separate parts of a lease for real estate leases.

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Operating lease right-of-use assets and liabilities are recorded at the present value of the lease payments over the lease term. The present value of the lease payments are discounted using the incremental borrowing rate associated with each lease. The variable components of the lease payment that fluctuate with the operations of a health facility are not included in determining the right-of-use assets and lease liabilities. Rather, these variable components are expensed as incurred.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is provided by the straight-line method over the expected useful lives of the assets estimated as follows: buildings and improvements, 20-40 years and equipment and furniture, 3-15 years. Leasehold improvements are amortized over periods that do not exceed the non-cancelable respective lease terms using the straight-line method.

Finance leases are recorded at cost. Finance leases are amortized in accordance with the provision codified within ASC 842, Leases. Amortization of finance lease assets is included in depreciation and amortization expense.

Business Combinations

We account for acquisitions using the acquisition method of accounting in accordance with ASC 805, Business Combinations. Acquisitions are accounted for as purchases and are included in our consolidated financial statements from their respective acquisition dates. Assets acquired and liabilities assumed, if any, are measured at fair value on the acquisition date using the appropriate valuation method. Goodwill generated from acquisitions is recognized for the excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired and liabilities assumed. In determining the fair value of identifiable assets, we use various valuation techniques. These valuation methods require us to make estimates and assumptions surrounding projected revenues and costs, future growth, and discount rates.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill is not amortized but is subject to an annual impairment test. We perform our annual goodwill impairment assessment on the first day of the fourth quarter. Tests are performed more frequently if events occur, or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.

The Company’s indefinite-lived intangible assets consist of trade names and certificates of need and licenses. The Company reviews indefinite-lived intangible assets for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable.

Accrued Risk Reserves

We are self–insured for risks related to health insurance and have wholly–owned limited purpose insurance companies that insure risks related to workers’ compensation and general and professional liability insurance claims. The accrued risk reserves include a liability for reported claims and estimates for incurred but unreported claims. Our policy is to engage an external, independent actuary to assist in estimating our exposure for claims obligations (for both asserted and unasserted claims). We reassess our accrued risk reserves on a quarterly basis.

Professional liability remains an area of particular concern to us. The long-term care industry has seen an increase in personal injury/wrongful death claims based on alleged negligence by skilled nursing facilities and their employees in providing care to residents. The Company has been, and continues to be, subject to claims and legal actions that arise in the ordinary course of business, including potential claims related to patient care and treatment. A significant increase in the number of these claims, or an increase in the amounts due as a result of these claims could have a material adverse effect on our consolidated financial position, results of operations and cash flows. It is also possible that future events could cause us to make significant adjustments or revisions to these reserve estimates and cause our reported net income to vary significantly from period to period.

We are principally self-insured for incidents occurring in all centers owned or leased by us. The coverages include 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.

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Continuing Care Contracts

We have one continuing care retirement center (“CCRC”) within our operations. Residents at this retirement center may enter into continuing care contracts with us. The contracts provide that 10% of the resident entry fee becomes non-refundable upon occupancy, and the remaining refundable portion of the entry fee is calculated using the lessor 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 March 31, 2023, and December 31, 2022, we have recorded a future service obligation liability in the amount of $2,218,000. 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.

Other noncurrent liabilities also include funds received related to the Employee Retention Credit ("ERC"), a refundable tax credit for businesses that sustained a partial suspension of operations limiting commerce due to COVID-19 or had significant declines in gross receipts during 2020 and 2021.

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.

Note 3 – Coronavirus Pandemic

In early March 2020, COVID-19, a disease caused by the novel strain of the coronavirus, was characterized as a pandemic by the World Health Organization. The U.S. government enacted several laws beginning in March 2020 designed to help the nation respond to the COVID-19 pandemic. The laws impacted healthcare providers in a variety of ways, but the largest legislation from a monetary relief perspective was the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). Through the CARES Act, as well as the Paycheck Protection Program and Health Care Enhancement Act ("PPPCHE"), the federal government allocated $178 billion to the Public Health and Social Services Emergency Fund, which is referred to as the Provider Relief Fund. The Provider Relief Fund is administered through grants and other mechanisms to skilled nursing providers, home health providers, hospitals, and other Medicare and Medicaid enrolled providers to cover unreimbursed health care related expenses or lost revenue attributable to the public health emergency resulting from COVID-19.

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The Provider Relief Fund grants come with terms and condition certifications in which all providers are required to submit documents to ensure the funds are used for healthcare-related expenses or lost revenue attributable to COVID-19. The Company recorded $0 and $10,620,000 of government stimulus income from the Provider Relief Funds for the three months ended March 31, 2023 and 2022, respectively. The grant income was determined on a systematic basis in line with the recognition of specific expenses and lost revenues for which the grants are intended to compensate. The Company’s assessment of whether the terms and conditions for amounts received have been met for income recognition and the Company’s related income calculation considered all frequently asked questions and other interpretive guidance issued to date by the U.S. Department of Health and Human Services (“HHS”).

We have also received supplemental Medicaid payments from many of the states in which we operate to help mitigate the incremental costs resulting from the COVID-19 public health emergency. We have recorded $4,883,000 and $5,538,000 in net patient revenues for these supplemental Medicaid payments for the three months ended March 31, 2023 and 2022, respectively.

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 March 31
	2023		2022
Net patient revenues:
Inpatient services	$	226,169	$	224,842
Homecare and hospice		31,838		31,495
Total net patient revenues	$	258,007	$	256,337

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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 March 31
Source	2023		2022
Medicare		36%		37%
Managed Care		11%		10%
Medicaid		27%		28%
Private Pay and Other		26%		25%
Total		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. Although, there has been temporary relief from the three-day hospital stay through the COVID-19 public health emergency, which is set to end on May 11, 2023. For each eligible day a Medicare beneficiary is in a skilled nursing facility, Medicare pays the facility a daily payment, subject to adjustment for certain factors such as a wage index in the geographic area. The payment covers all services provided by the skilled nursing facility for the beneficiary that day, including room and board, nursing, therapy and drugs, as well as an estimate of capital–related costs to deliver those services.

For homecare services, Medicare pays based on the acuity level of the patient and based on periods of care. A period of care is defined as a length of care up to 30 days with multiple continuous periods allowed. The services covered by the payment include all disciplines of care, in addition to medical supplies, within the scope of the home health benefit.

For hospice services, Medicare pays a daily rate to cover the hospice’s costs for providing services included in the patient care plan. Medicare makes daily payments based on 1 of 4 levels of hospice care. All hospice care and services offered to patients and their families must follow an individualized written plan of care that meets the patient’s needs.

Our hospice service revenue is subject to certain limitations on payments from Medicare. We are subject to an inpatient cap limit and an overall Medicare payment cap for each provider number. We monitor these caps on a provider-by-provider basis and estimate amounts due back to Medicare if we estimate a cap has been exceeded. If applicable, we record these cap adjustments as a reduction to revenue.

Medicaid is operated by individual states with the financial participation of the federal government. The states in which we operate currently use prospective cost–based reimbursement systems. Under cost–based reimbursement systems, the skilled nursing facility is reimbursed for the reasonable direct and indirect allowable costs it incurred in a base year in providing routine resident care services as defined by the program.

Private pay, managed care, and other payment sources include commercial insurance, individual patient funds, managed care plans and the Veterans Administration. Private paying patients, private insurance carriers and the Veterans Administration generally pay based on the healthcare center's charges or specifically negotiated contracts. For private pay patients in skilled nursing, assisted living and independent living facilities, the Company bills for room and board charges, with the remittance being due on receipt of the statement and generally by the 10th day of the month the services are performed.

Certain managed care payors for homecare services pay on a per-visit basis. This revenue is recorded on an accrual basis based upon the date of services at amounts equal to its established or estimated per-visit rates.

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Third Party Payors

Laws and regulations governing the 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 $16,679,000 and $16,631,000 as of March 31, 2023 and December 31, 2022, 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 March 31
	2023		2022
Rental income	$	6,043	$	5,982
Management and accounting services fees		4,097		4,304
Insurance services		1,048		1,247
Other		368		493
Total other revenues	$	11,556	$	12,026

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”). For the three months ended March 31, 2023 and 2022, we recognized management fees and interest on management fees of $1,190,000 and $981,000, respectively, for these centers.

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Insurance Services

For workers’ compensation insurance services, the premium revenues reflected in the interim condensed consolidated statements of operations for the three months ended March 31, 2023 and 2022 were $736,000 and $728,000, 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 March 31, 2023 and 2022 were $312,000 and $519,000, 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 includes equity in earnings of unconsolidated investments, dividends and other realized gains and losses on sales of marketable securities, and interest income (in thousands).

	Three Months Ended March 31
	2023		2022
Dividends and net realized gains and losses on sales of securities	$	1,233	$	1,753
Interest income		1,555		992
Equity in earnings of unconsolidated investments		1,535		454
Total non-operating income	$	4,323	$	3,199

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.

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.

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The following table sets forth the Company’s unaudited interim condensed consolidated statements of operations by business segment (in thousands):

	Three Months Ended March 31, 2023
	Inpatient Services		Homecare and Hospice		All Other			Total
Revenues and grant income:
Net patient revenues	$	226,169	$	31,838	$	-		$	258,007
Other revenues		271		-		11,285			11,556
Net operating revenues and grant income		226,440		31,838		11,285			269,563

Costs and expenses:
Salaries, wages, and benefits		138,939		20,244		8,641			167,824
Other operating		62,264		5,499		3,726			71,489
Rent		8,168		558		1,366			10,092
Depreciation and amortization		9,117		185		746			10,048
Interest		98		-		-			98
Total costs and expenses		218,586		26,486		14,479			259,551

Income/(loss) from operations		7,854		5,352		(3,194	)		10,012
Non-operating income		-		-		4,323			4,323
Unrealized gains on marketable equity securities		-		-		1,386			1,386

Income before income taxes	$	7,854	$	5,352	$	2,515		$	15,721

	Three Months Ended March 31, 2022
	Inpatient Services		Homecare and Hospice		All Other			Total
Revenues:
Net patient revenues	$	224,842	$	31,495	$	-		$	256,337
Other revenues		114		-		11,912			12,026
Government stimulus income		10,620		-		-			10,620
Net operating revenues and grant income		235,576		31,495		11,912			278,983

Costs and expenses:
Salaries, wages, and benefits		142,185		19,401		9,108			170,694
Other operating		64,383		7,095		2,607			74,085
Rent		8,347		592		1,126			10,065
Depreciation and amortization		8,838		113		806			9,757
Interest		165		-		-			165
Total costs and expenses		223,918		27,201		13,647			264,766

Income/(loss) from operations		11,658		4,294		(1,735	)		14,217
Non-operating income		-		-		3,199			3,199
Unrealized gains on marketable equity securities		-		-		3,126			3,126

Income before income taxes	$	11,658	$	4,294	$	4,590		$	20,542

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Note 8 – Long-Term Leases

Operating Leases

At March 31, 2023, 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 $34,075,000 in 2023, $32,625,000 in 2024, $32,225,000 in 2025, and $31,975,000 in 2026 with the lease term expiring in 2026. The percentage rent is based on a quarterly calculation of revenue increases and is payable on a quarterly basis. Total facility rent expense to NHI was $9,295,000 and $9,252,000 for the three months ended March 31, 2023 and 2022, respectively.

Finance Leases

At March 31, 2023, we leased and operated three senior healthcare facilities in the state of Missouri under three separate lease agreements. Two of the healthcare facilities are skilled nursing facilities that also include assisted living facilities and the third healthcare facility is a memory care facility. Each of the leases is a ten-year lease with two five–year renewal options with the original lease expiring in 2024. Under the terms of the leases, base rent totals $5,200,000 annually with rent thereafter escalating by 4% of the increase in facility revenue over the 2014 base year.

Minimum Lease Payments

The following table summarizes the maturity of our finance and operating lease liabilities as of March 31, 2023 (in thousands):

	Finance Leases			Operating Leases
2024	$	4,767		$	35,514
2025		-			33,855
2026		-			33,104
2027		-			24,499
2028		-			133
Thereafter		-			-
Total minimum lease payments		4,767			127,105
Less: amounts representing interest		(140	)		(14,052	)
Present value of future minimum lease payments		4,627			113,053
Less: current portion		(4,627	)		(29,065	)
Noncurrent lease liabilities	$	-		$	83,988

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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 March 31
	2023		2022
Basic:
Weighted average common shares outstanding		15,337,423		15,416,836
Net income attributable to National HealthCare Corporation	$	11,723	$	15,318
Earnings per common share, basic	$	0.76	$	0.99

Diluted:
Weighted average common shares outstanding		15,337,423		15,416,836
Effects of dilutive instruments		18,912		47,019
Weighted average common shares outstanding		15,356,335		15,463,855

Net income attributable to National HealthCare Corporation	$	11,723	$	15,318
Earnings per common share, diluted	$	0.76	$	0.99

In the above table, options to purchase 0 and 5,783 shares of our common stock have been excluded for the three months ended March 31, 2023 and 2022, respectively, due to their anti-dilutive impact.

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 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):

	March 31, 2023				December 31, 2022
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Investments available for sale:
Marketable equity securities	$	30,176	$	100,825	$	30,176	$	100,786
Corporate debt securities		10,836		10,539		14,317		13,885
Asset-backed securities		500		499		500		494
U.S. Treasury securities		6,936		6,784		9,009		8,757
Restricted investments available for sale:
Marketable equity securities		24,006		23,385		24,326		22,358
Corporate debt securities		53,670		50,880		54,412		51,009
Asset-based securities		23,790		21,849		24,605		22,437
U.S. Treasury securities		47,745		43,895		45,989		41,294
State and municipal securities		4,844		4,776		4,877		4,771
	$	202,503	$	263,432	$	208,211		265,791

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Included in the marketable equity securities are the following (in thousands, except share amounts):

March 31, 2023

December 31, 2022

Cost

Fair

Value

Cost

Fair

Value

NHI Common Stock

1,630,642

24,734

84,109

1,630,642

24,734

85,152

The amortized cost and estimated fair value of debt securities classified as available for sale, by contractual maturity, are as follows (in thousands):

	March 31, 2023				December 31, 2022
	Cost		Fair Value		Cost		Fair Value
Maturities:
Within 1 year	$	28,078	$	27,485	$	33,662	$	33,037
1 to 5 years		82,037		77,903		81,500		76,394
6 to 10 years		37,607		33,231		38,547		33,216
Over 10 years		599		603		-		-
	$	148,321	$	139,222	$	153,709	$	142,647

Gross unrealized gains related to marketable equity securities are $72,266,000 and $71,869,000 as of March 31, 2023 and December 31, 2022, respectively. Gross unrealized losses related to marketable equity securities are $2,238,000 and $3,227,000 as of March 31, 2023 and December 31, 2022, respectively. For the three months ended March 31, 2023 and 2022, the Company recognized net unrealized gains of $1,386,000 and $3,126,000, 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 $80,000 and $9,000 as of March 31, 2023 and December 31, 2022, respectively. Gross unrealized losses related to available for sale marketable debt securities are $9,179,000 and $11,071,000 as of March 31, 2023 and December 31, 2022, 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 three months ended March 31, 2023 and 2022.

For the marketable 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 three months ended March 31, 2023 and 2022 were $15,492,000 and $16,946,000, respectively. Investment losses of $492,000 and investment gains of $45,000 were realized on these sales during the three months ended March 31, 2023 and 2022, 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.

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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 March 31, 2023 and December 31, 2022 for assets and liabilities measured at fair value on a recurring basis (in thousands):

	Fair Value Measurements Using
March 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	$	46,144	$	46,144	$	–	$	–
Restricted cash and cash equivalents		28,532		28,532		–		–
Marketable equity securities		124,210		124,210		–		–
Corporate debt securities		61,419		43,132		18,287		–
Asset–backed securities		22,348		–		22,348		–
U.S. Treasury securities		50,679		50,679		–		–
State and municipal securities		4,776		1,340		3,436		–
Total financial assets	$	338,108	$	294,037	$	44,071	$	–

	Fair Value Measurements Using
December 31, 2022	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	$	58,667	$	58,667	$	–	$	–
Restricted cash and cash equivalents		16,198		16,198		–		–
Marketable equity securities		123,144		123,144		–		–
Corporate debt securities		64,894		48,525		16,369		–
Asset–backed securities		22,931		–		22,931		–
U.S. Treasury securities		50,051		50,051		–		–
State and municipal securities		4,771		1,337		3,434		–
Total financial assets	$	340,656	$	297,922	$	42,734	$	–

Note 12 – Goodwill and Other Intangible Assets

At March 31, 2023, the Company reviewed the carrying value of goodwill for impairment indicators. As a result of the review, there were no impairment indicators regarding the Company’s goodwill that required a quantitative test to be performed. However, our accounting estimates could materially change from period to period due to changing market factors. We will continue to monitor future events, changes in circumstances, and the potential impact thereof. If actual results are not consistent with our assumptions and estimates, we may be exposed to future goodwill impairment losses.

At March 31, 2023, the following table represents the activity related to our goodwill by segment (in thousands):

	Inpatient Services		Homecare and Hospice		All Other		Total
January 1, 2023	$	3,741	$	164,554	$	–	$	168,295
Additions		–		–		–		–
March 31, 2023	$	3,741	$	164,554	$	–	$	168,295

We also have recorded indefinite-lived intangible assets that consist of trade names ($4,340,000) and certificates of need and licenses ($2,698,000).

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Note 13 - Stock Repurchase Program

During the three months ended March 31, 2023, the Company repurchased 44,349 shares of its common stock for a total cost of $2,482,000. During the three months ended March 31, 2022, the Company repurchased 2,165 shares of its common stock for a total cost of $146,000. 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 $639,000 and $712,000 for the three months ended March 31, 2023 and 2022, respectively. Stock–based compensation is included in “Salaries, wages and benefits” in the interim condensed consolidated statements of operations.

At March 31, 2023, the Company had $5,347,000 of unrecognized compensation cost related to unvested stock–based compensation awards. This unrecognized compensation cost will be amortized over an approximate three-year period.

Stock Options

The following table summarizes the significant assumptions used to value the options granted for the three months ended March 31, 2023 and for the year ended December 31, 2022.

	March 31, 2023		December 31, 2022
Risk–free interest rate		4.71%		1.83%
Expected volatility		30.27%		31.40%
Expected life, in years		2.9		2.9
Expected dividend yield		4.43%		3.57%

The following table summarizes our outstanding stock options for the three months ended March 31, 2023 and for the year ended December 31, 2022.

	Number of Shares			Weighted Average Exercise Price		Aggregate Intrinsic Value
Options outstanding at January 1, 2022		374,926		$	72.95	$	–
Options granted		302,266			64.72		–
Options exercised		(32,597	)		64.49		–
Options cancelled		(199,451	)		75.98		–
Options outstanding at December 31, 2022		445,144			66.62		–
Options granted		246,436			54.15		–
Options outstanding at March 31, 2023		691,580		$	62.18	$	979,843

Options exercisable at March 31, 2023		157,901		$	69.78	$	–

Options Outstanding March 31, 2023	Exercise Prices			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life in Years
603,185	53.94	-	69.19		60.34		4.0
88,395	71.64	-	77.92		74.72		2.1
691,580					62.18		3.7

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Note 15 – Income Taxes

The Company's income tax provision as a percentage of our income before income taxes was 28.2% and 25.3% for the three months ended March 31, 2023 and 2022, 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 ended March 31, 2023 and 2022, the accrual of state income tax was the most significant reconciling item.

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 2019 (with certain state exceptions).

Note 16 – Contingencies and Commitments

Accrued Risk Reserves

We are self–insured for risks related to health insurance and 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 $105,626,000 and $102,469,000 at March 31, 2023 and December 31, 2022, 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.

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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 11th Circuit Court of Appeals.

Governmental Regulations

Laws and regulations governing the Medicare, Medicaid and other federal healthcare programs are complex and subject to interpretation. Management believes that it is following all applicable laws and regulations in all material respects. However, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusions from the Medicare, Medicaid and other federal healthcare programs.

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward–Looking Statements

References throughout this document to the Company include National HealthCare Corporation and its wholly owned subsidiaries. In accordance with the Securities and Exchange Commissions “Plain English” guidelines, this Quarterly Report on Form 10–Q has been written in the first person. In this document, the words “we”, “our”, “ours” and “us” refer only to National HealthCare Corporation and its wholly–owned subsidiaries and not any other person.

This Quarterly Report on Form 10–Q and other information we provide from time to time, contains certain “forward–looking” statements as that term is defined by the Private Securities Litigation Reform Act of 1995. All statements regarding our expected future financial position, results of operations or cash flows, continued performance improvements, ability to service and refinance our debt obligations, ability to finance growth opportunities, ability to control our patient care liability costs, ability to respond to changes in government regulations, ability to execute our three–year strategic plan, and similar statements including, without limitations, those containing words such as “believes”, “anticipates”, “expects”, “intends”, “estimates”, “plans”, and other similar expressions are forward–looking statements.

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Forward–looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected or contemplated in the forward–looking statements as a result of, but not limited to, the following factors:

●	national and local economic conditions, including their effect on the availability and cost of labor, utilities and materials;

●	the effect of government regulations and changes in regulations governing the healthcare industry, including our compliance with such regulations;

●	changes in Medicare and Medicaid payment levels and methodologies and the application of such methodologies by the government and its fiscal intermediaries;

●	liabilities and other claims asserted against us, including patient care liabilities, as well as the resolution of current litigation (see Note 16: Contingencies and Commitments);

●	the ability to attract and retain qualified personnel;

●	the availability and terms of capital to fund acquisitions and capital improvements;

●	the competitive environment in which we operate;

●	our need to make investments continually in our processes and information systems to protect the privacy of patients, partners and other persons and reduce the risk of successful cybersecurity attacks;

●	damage to our reputation, regulatory penalties, legal claims and liability under state and federal laws that we could suffer upon any cybersecurity or privacy breaches;

●	the ability to maintain and increase census levels; and

●	demographic changes.

See the notes to the quarterly financial statements, and “Item 1. Business” in our 2022 Annual Report on Form 10–K for a discussion of various governmental regulations and other operating factors relating to the healthcare industry and the risk factors inherent in them. This may be found on our web site at www.nhccare.com. You should carefully consider these risks before making any investment in the Company. These risks and uncertainties are not the only ones facing us. There may be additional risks that we do not presently know of or that we currently deem immaterial. If any of the risks occur, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our shares of stock could decline, and you may lose all or part of your investment. Given these risks and uncertainties, we can give no assurances that these forward–looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them.

Overview

National HealthCare Corporation (“NHC” or the “Company”) is a leading provider of senior health care services. As of March 31, 2023, we operate or manage, through certain affiliates, 68 skilled nursing facilities with a total of 8,732 licensed beds, 23 assisted living facilities with 1,181 units, five independent living facilities, three behavioral health hospitals, 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.

Impact of COVID-19

In early March 2020, COVID-19, a disease caused by the novel strain of the coronavirus, was characterized as a pandemic by the World Health Organization. As a provider of healthcare services, we were significantly exposed to the public health and economic effects of the COVID-19 pandemic. NHC’s primary objective was and has remained the same throughout the COVID-19 pandemic: that is to protect the health and safety of our patients, residents, and partners (employees). We continue to follow all guidance from the Centers for Medicare and Medicaid Services (“CMS”), the Centers for Disease Control and Prevention (“CDC”), and state and local health departments to prevent the spread of the disease within our operations.

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We began our first vaccination clinics in our skilled nursing facilities in December 2020. As the vaccination clinics progressed and as the vaccine became more accessible, we began to see a significant decline in COVID-19 cases among our operations, as well as a significant decrease in the adverse health events related to COVID. Despite the COVID-19 cases and adverse health events from COVID declining, our operating expenses remained elevated with incentive compensation being paid to attract and retain frontline partners, as well as increased costs of personal protective equipment (“PPE”), sanitizers and cleaning supplies, and COVID-19 testing of our patients and partners. Despite the continued disruption of COVID-19 to our operations, our capital and financial resources, including our overall liquidity, remain strong. Our liquidity provides us with significant flexibility to maintain the strength of our balance sheet in periods of uncertainty or stress.

Legislation and Government Stimulus Due to COVID-19

The U.S. government enacted several laws beginning in March 2020 designed to help the nation respond to the COVID-19 pandemic. The new laws impacted healthcare providers in a variety of ways, but the largest legislation from a monetary relief perspective was the CARES Act. Through the CARES Act, as well as the PPPCHE, the federal government allocated $178 billion to the Public Health and Social Services Emergency Fund, which is referred to as the Provider Relief Fund. The Provider Relief Fund is administered through grants and other mechanisms to skilled nursing providers, home health providers, hospitals, and other Medicare and Medicaid enrolled providers to cover unreimbursed health care related expenses or lost revenue attributable to the public health emergency resulting from COVID-19.

The Provider Relief Fund grants come with terms and condition certifications in which all providers are required to submit documents to ensure the funds are used for healthcare-related expenses or lost revenue attributable to COVID-19. The Company recorded $0 and $10,620,000 of government stimulus income from the Provider Relief Funds for the three months ended March 31, 2023 and 2022, respectively. The grant income was determined on a systematic basis in line with the recognition of specific expenses and lost revenues for which the grants are intended to compensate. The Company’s assessment of whether the terms and conditions for amounts received have been met for income recognition and the Company’s related income calculation considered all frequently asked questions and other interpretive guidance issued to date by the U.S. Department of Health and Human Services (“HHS”).

We have also received supplemental Medicaid payments from many of the states in which we operate to help mitigate the incremental costs resulting from the COVID-19 public health emergency. We have recorded $4,883,000 and $5,538,000 in net patient revenues for these supplemental Medicaid payments for the three months ended March 31, 2023 and 2022, respectively.

Summary of Goals and Areas of Focus

Occupancy

A primary area of management focus continues to be the rates of occupancy within our skilled nursing facilities. The overall census in owned and leased skilled nursing facilities for the three months ending March 31, 2023 was 87.4% compared to 82.7% for the same period a year ago.

Due to America’s healthcare labor shortage, the challenge of maintaining desirable patient census levels has been amplified. Management has undertaken a number of steps in order to best position our current and future health care facilities. This includes working internally to examine and improve systems to be most responsive to referral sources and payors, as well as find creative initiatives to retain and attract qualified healthcare professionals. Additionally, NHC is in various stages of partnerships with hospital systems, payors, and other post–acute alliances to better position ourselves so we are an active participant in the delivery of post-acute healthcare services.

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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 March 31, 2023:

	NHC Ratings		Industry Ratings
Total number of skilled nursing facilities, end of period		68
Number of 4 and 5-star rated skilled nursing facilities		40
Percentage of 4 and 5-star rated skilled nursing facilities		59%		37%
Average rating for all skilled nursing facilities, end of period		3.6		2.9

Development and Growth

We are undertaking to expand our senior care operations while protecting our existing operations and markets. The following table lists our recent development activities.

Type of

Operation

Description

Size

Location

Placed in Service

Homecare

New Office

1 office

Anderson, SC

January 2022

Hospice

New Office

1 office

Tullahoma, TN

March 2022

Behavioral Health Hospital

New Facility

64 beds

Knoxville, TN

April 2022

Behavioral Health Hospital

New Facility

16 beds

St. Louis, MO

June 2022

Hospice

New Office

1 office

Cedar Bluff, VA

March 2023

Accrued Risk Reserves

Our accrued professional liability and workers’ compensation reserves totaled $105,626,000 at March 31, 2023 and are a primary area of management focus. We have set aside restricted cash and cash equivalents and marketable securities to fund our estimated professional liability and workers’ compensation liabilities.

As to exposure for professional liability claims, we have developed performance certification criteria to measure and bring focus to the patient care issues most likely to produce professional liability exposure, including in–house acquired pressure ulcers, significant weight loss and numbers of falls. These programs for certification, which we regularly modify and improve, have produced measurable improvements in reducing these incidents. Our experience is that achieving goals in these patient care areas improves both patient and employee satisfaction.

Government Reimbursement Programs

Medicare – Skilled Nursing Facilities

In July 2022, CMS released its final rule outlining fiscal year 2023 Medicare payment rates and policy changes for skilled nursing facilities, which began on October 1, 2022. The fiscal year 2023 rule provided for an approximate 2.7% increase, or $904 million, compared to 2022 levels. The net increase includes a 3.9% market-basket increase plus a 1.5% market basket forecast error adjustment, less a 0.3% productivity adjustment and a 2.3% decrease in the FY 2023 SNF PPS rates as a result of the recalibrated parity adjustment. The recalibrated parity adjustment is a total of 4.6% and is being phased in over the next two years (2.3% annually).

In April 2023, CMS released its proposed rule outlining fiscal year 2024 Medicare payment rates and policy changes for skilled nursing facilities, which will begin on October 1, 2023. The fiscal year 2024 proposed rule equates to a net increase of 3.7%, or approximately $1.2 billion, in Medicare Part A payments to SNFs in fiscal year 2024 compared to 2023 levels. The proposed rule includes a 2.7% 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 $745 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.

For the first three months of 2023, our average Medicare per diem rate for skilled nursing facilities increased 2.1% as compared to the same period in 2022.

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Medicaid – Skilled Nursing Facilities

Effective July 1, 2022 and for the fiscal year 2023, the state of Tennessee implemented specific individual nursing facility increases. We estimate the resulting increase in revenue for the 2023 fiscal year will be approximately $3,200,000 annually, or $800,000 per quarter.

Effective October 1, 2022 and for the fiscal year 2023, the state of South Carolina implemented specific individual nursing facility increases. We estimate the resulting increase in revenue for the 2023 fiscal year will be approximately $3,735,000 annually, or $934,000 per quarter.

We have also received from many of the states in which we operate supplemental Medicaid payments to help mitigate the incremental costs resulting from the COVID-19 public health emergency. We have recorded $4,883,000 and $5,538,000 in net patient revenues for these supplemental Medicaid payments for the three months ended March 31, 2023 and 2022, respectively.

For the first three months of 2023, our average Medicaid per diem increased 3.6% compared to the same period in 2022.

State Medicaid plans subject to budget constraints are of particular concern to us. Changes in federal funding coupled with state budget problems and Medicaid expansion under the Affordable Care Act have produced an uncertain environment. Some states will not keep pace with post-acute healthcare inflation. States are currently under pressure to pursue other alternatives to skilled nursing care such as community and home–based services. Medicaid programs are funded jointly by the federal government and the states and are administered by states under approved plans. Most state Medicaid payments are made under a prospective payment system or under programs which negotiate payment levels with individual providers. Some states use, or have applied to use, waivers granted by CMS to implement expansion, impose different eligibility or enrollment restrictions, or otherwise implement programs that vary from federal standards.

Medicare – Homecare Programs

In October 2022, CMS released its final rule outlining fiscal year 2023 Medicare payment rates. CMS projects payments to home health agencies in fiscal year 2023 will increase in aggregate by 0.7%, or $125 million. The increase reflects the effects of the home health payment update percentage of 4.0%, a permanent behavioral assumption adjustment resulting in a decrease of 3.5%, and an estimated 0.2% increase that reflects the effects of an update to the fixed-dollar loss ratio used in determining outlier payments.

Medicare – Hospice

In July 2022, CMS released its final rule outlining fiscal year 2023 Medicare payment rates. CMS issued a rate increase of 3.8%, or $825 million, effective October 1, 2022. The increase is the result of a 4.1% inpatient hospital market basket increase reduced by a 0.3% productivity adjustment. The FY2023 hospice payment update also includes an update to the statutory aggregate cap amount, which limits the overall payments per patient that are made annually. The cap amount for FY2023 would be $32,487.

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Segment Reporting

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 March 31, 2023
	Inpatient Services		Homecare and Hospice		All Other			Total
Revenues and grant income:
Net patient revenues	$	226,169	$	31,838	$	-		$	258,007
Other revenues		271		-		11,285			11,556
Net operating revenues and grant income		226,440		31,838		11,285			269,563

Costs and expenses:
Salaries, wages, and benefits		138,939		20,244		8,641			167,824
Other operating		62,264		5,499		3,726			71,489
Rent		8,168		558		1,366			10,092
Depreciation and amortization		9,117		185		746			10,048
Interest		98		-		-			98
Total costs and expenses		218,586		26,486		14,479			259,551

Income/(loss) from operations		7,854		5,352		(3,194	)		10,012
Non-operating income		-		-		4,323			4,323
Unrealized gains on marketable equity securities		-		-		1,386			1,386

Income before income taxes	$	7,854	$	5,352	$	2,515		$	15,721

	Three Months Ended March 31, 2022
	Inpatient Services		Homecare and Hospice		All Other			Total
Revenues:
Net patient revenues	$	224,842	$	31,495	$	-		$	256,337
Other revenues		114		-		11,912			12,026
Government stimulus income		10,620		-		-			10,620
Net operating revenues and grant income		235,576		31,495		11,912			278,983

Costs and expenses:
Salaries, wages, and benefits		142,185		19,401		9,108			170,694
Other operating		64,383		7,095		2,607			74,085
Rent		8,347		592		1,126			10,065
Depreciation and amortization		8,838		113		806			9,757
Interest		165		-		-			165
Total costs and expenses		223,918		27,201		13,647			264,766

Income/(loss) from operations		11,658		4,294		(1,735	)		14,217
Non-operating income		-		-		3,199			3,199
Unrealized gains on marketable equity securities		-		-		3,126			3,126

Income before income taxes	$	11,658	$	4,294	$	4,590		$	20,542

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Non-GAAP Financial Presentation

The Company is providing certain non-GAAP financial measures as the Company believes that these figures are helpful in allowing investors to more accurately assess the ongoing nature of the Company’s operations and measure the Company’s performance more consistently across periods. Therefore, the Company believes this information is meaningful in addition to the information contained in the GAAP presentation of financial information. The presentation of this additional non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.

Specifically, the Company believes the presentation of non-GAAP financial information that excludes the unrealized gains or losses on our marketable equity securities, operating results for the newly constructed healthcare facilities or start-up operations not at full capacity, and share-based compensation expense is helpful in allowing investors to assess the Company’s operations more accurately.

The operating results for the newly constructed healthcare facilities not at full capacity for the three months ended March 31, 2023 include facilities that began operations from 2021 to 2023, which is two behavioral health hospitals, one homecare agency, and two hospice agencies. For the three months ended March 31, 2022, included are facilities that began operations from 2020 to 2022, which is two behavioral health hospitals.

The tables below provide reconciliations of GAAP to non-GAAP items (dollars in thousands, except per share data):

	Three Months Ended March 31
	2023			2022

Net income attributable to National Healthcare Corporation	$	11,723		$	15,318
Non-GAAP adjustments
Unrealized gains on marketable equity securities		(1,386	)		(3,126	)
Operating results for newly opened facilities or agencies not at full capacity		1,217			743
Share-based compensation expense		639			712
Income tax (benefit)/provision on non-GAAP adjustments		(122	)		434
Non-GAAP Net income	$	12,071		$	14,081


GAAP diluted earnings per share	$	0.76		$	0.99
Non-GAAP adjustments
Unrealized gains on marketable equity securities		(0.06	)		(0.15	)
Operating results for newly opened facilities or agencies not at full capacity		0.06			0.04
Share-based compensation expense		0.03			0.03
Non-GAAP diluted earnings per share	$	0.79		$	0.91

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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 months ended March 31, 2023 and 2022.

Percentage of Net Operating Revenues and Grant Income

	Three Months Ended March 31
	2023			2022
Net operating revenues and grant income		100.0	%		100.0	%
Costs and expenses:
Salaries, wages, and benefits		62.3			61.2
Other operating		26.5			26.6
Facility rent		3.7			3.5
Depreciation and amortization		3.7			3.5
Interest		0.1			0.1
Total costs and expenses		96.3			94.9
Income from operations		3.7			5.1
Non–operating income		1.6			1.2
Unrealized gains on marketable equity securities		0.5			1.1
Income before income taxes		5.8			7.4
Income tax provision		(1.6	)		(1.9	)
Net income		4.2			5.5
Net loss/(income) attributable to noncontrolling interest		0.1			0.0
Net income attributable to stockholders of NHC		4.3	%		5.5	%

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

Results for the quarter ended March 31, 2023 compared to the first quarter of 2022 include a 3.4% decrease in net operating revenues and grant income. The net operating revenues and grant income decrease was primarily driven by the reduction in government stimulus income of $10,620,000 during the first quarter of 2023 compared to the same period a year ago, as well as us exiting the seven skilled nursing facilities in Massachusetts and New Hampshire during the third quarter of 2022. Excluding the government stimulus income and the seven skilled nursing facilities in Massachusetts and New Hampshire, same-facility net operating revenues increased 7.1% during the first quarter of 2023 compared to the same period a year ago.

For the quarter ended March 31, 2023, GAAP net income attributable to NHC was $11,723,000 compared to net income of $15,318,000 for the same period in 2022. Excluding the unrealized gains in our marketable equity securities portfolio and other non-GAAP adjustments, adjusted net income for the quarter ended March 31, 2023 was $12,071,000 compared to $14,081,000 for the same period in 2022. The decrease in adjusted net income for the first quarter of 2023 compared to the first quarter of 2022 was primarily due to the $10,620,000 less in government stimulus income recorded during the current quarter.

Net operating revenues and grant income

Net patient revenues increased $1,670,000, or 0.7%, compared to the same period last year.

The total census at owned and leased skilled nursing facilities for the quarter averaged 87.4%, compared to an average of 82.7% for the same quarter a year ago. Overall, the composite skilled nursing facility per diem increased 3.3% compared to the same quarter a year ago. Our Medicare per diem rates increased 2.1% and managed care per diem rates increased 2.7% compared to the same quarter a year ago. Medicaid and private pay per diem rates increased 3.6% and 3.1%, respectively, compared to the same quarter a year ago. For the three months ended March 31, 2023 and 2022, respectively, $4,883,000 and $5,538,000 have been included in our net patient revenues for supplemental COVID-19 Medicaid payments.

In September 2022, the Company transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire resulting in net patient revenues decreasing $16,603,000 for the three months ended March 31, 2023 compared to the same quarter last year.

Other revenues decreased $470,000, or 3.9%, compared to the same quarter last year, as further detailed in Note 5 to our interim condensed consolidated financial statements.

During the three months ended March 31, 2023 and 2022, respectively, we recorded $0 and $10,620,000 in government stimulus income related to funds received from the CARES Act Provider Relief Fund. See Note 3 - Coronavirus Pandemic for additional information.

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Total costs and expenses

Total costs and expenses for the three months ended March 31, 2023 compared to the same period of 2022 decreased $5,215,000, or 2.0% to $259,551,000 from $264,766,000.

Salaries, wages, and benefits decreased $2,870,000, or 1.7%, to $167,824,000 from $170,694,000. Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 62.3% compared to 61.2% for the three months ended March 31, 2023 and 2022, respectively. We continue to face workforce and labor shortages within all of our operations, which increases wage pressure in regards to retaining and attracting qualified healthcare partners (employees). The labor and workforce shortages have resulted in us contracting with agency nurse staffing companies. The agency nurse staffing companies charge inflated hourly rates; therefore, we are working diligently to find solutions to reduce and eliminate the agency nurse staffing within our healthcare operations. For the quarter ended March 31, 2023, our agency nurse staffing expense decreased $4,941,000, or approximately 34%, compared to the same period a year ago.

In September 2022, the Company transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire resulting in salaries, wages, and benefits decreasing $11,884,000 for the three months ended March 31, 2023 compared to the same quarter last year.

Other operating expenses decreased $2,596,000, or 3.5%, to $71,489,000 for the 2023 period compared to $74,085,000 for the 2022 period. Other operating expenses as a percentage of net operating revenues and grant income was 26.5% and 26.6% for the three months ended March 31, 2023 and 2022, respectively. The transfer of the operations of the seven skilled nursing facilities located in Massachusetts and New Hampshire, as noted above, resulted in other operating expenses decreasing $5,206,000 for the three months ended March 31, 2023 compared to the same quarter last year. We continue to face inflationary pressures in certain categories within other operating expenses as well, such as food/dietary supplies and drugs/pharmaceutical supplies.

Other income

Non–operating income increased by $1,124,000 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 March 31, 2023 is $4,436,000 (an effective income tax rate of 28.2%).

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.

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

Results for the quarter ended March 31, 2022 compared to the first quarter of 2021 include an 11.2% increase in net operating revenues and grant income. Despite the decrease in Provider Relief Funds, the net operating revenues increase was primarily due to the census increase in our skilled nursing facilities and the June 2021 acquisition of Caris Healthcare, a hospice provider.

For the quarter ended March 31, 2022, GAAP net income attributable to NHC was $15,318,000 compared to net income of $21,267,000 for the same period in 2021. Excluding the unrealized gains in our marketable equity securities portfolio and other non-GAAP adjustments, adjusted net income for the quarter ended March 31, 2022 was $14,081,000 compared to $16,592,000 for the same period in 2021. The decrease in adjusted net income for the first quarter of 2022 compared to the first quarter of 2021 was primarily due to less government stimulus income recorded during the current quarter, as well as higher inflationary pressures on labor costs.

Net operating revenues and grant income

Net patient revenues increased $39,482,000, or 18.2%, compared to the same period last year.

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The total census at owned and leased skilled nursing facilities for the quarter averaged 82.7%, compared to an average of 76.8% for the same quarter a year ago. Overall, the composite skilled nursing facility per diem increased 2.9% compared to the same quarter a year ago. Our Medicare per diem rates increased 1.2% and managed care per diem rates increased 6.9% compared to the same quarter a year ago. Medicaid and private pay per diem rates increased 4.8% and 9.2%, respectively, compared to the same quarter a year ago. For the three months ended March 31, 2022 and 2021, respectively, $5,538,000 and $3,955,000 have been included in our net patient revenues for these supplemental COVID-19 Medicaid payments.

In June 2021, the Company acquired the remaining ownership interest in Caris, which resulted in net patient revenues increasing $17,785,000 for the three months ended March 31, 2022 compared to the first quarter of 2021.

Other revenues increased $657,000, or 5.8%, compared to the same quarter last year, as further detailed in Note 5 to our interim condensed consolidated financial statements.

During the three months ended March 31, 2022 and 2021, respectively, we recorded $10,620,000 and $22,749,000 in government stimulus income related to funds received from the CARES Act Provider Relief Fund. See Note 3 - Coronavirus Pandemic for additional information.

Total costs and expenses

Total costs and expenses for the three months ended March 31, 2022 compared to the same period of 2021 increased $29,015,000, or 12.3% to $264,766,000 from $235,751,000.

Salaries, wages, and benefits increased $21,535,000, or 14.4%, to $170,694,000 from $149,159,000. Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 61.2% compared to 59.4% for the three months ended March 31, 2022 and 2021, respectively. Our Caris acquisition increased salaries, wages, and benefits $10,224,000 in the first quarter of 2022 compared to the same quarter a year ago. We continue to face tremendous workforce and labor shortages within all of our operations, which increases wage pressure and inflation in regard to retaining and attracting qualified healthcare partners (employees). With the workforce environment being so challenging, the largest expense increase from a labor standpoint is in our agency nurse staffing. Our agency nurse staffing expense increased $12,435,000 for the first quarter of 2022 compared to the same quarter a year ago.

Other operating expenses increased $7,961,000, or 12.0%, to $74,085,000 for the 2022 period compared to $66,124,000 for the 2021 period. Other operating expenses as a percentage of net operating revenues and grant income was 26.6% and 26.3% for the three months ended March 31, 2022 and 2021, respectively. Our Caris acquisition increased other operating expenses $5,104,000 in the first quarter of 2022 compared to the same quarter a year ago. We continue to face inflationary pressures in certain categories within other operating expenses as well, such as food/dietary supplies and drugs/pharmaceutical supplies.

Other income

Non–operating income decreased by $3,061,000 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 March 31, 2022 is $5,193,000 (an effective income tax rate of 25.3%).

Noncontrolling interest

The noncontrolling interest in subsidiaries is presented within total equity of the Company’s consolidated balance sheets. The company presents the noncontrolling interest and the amount of consolidated net income attributable to NHC in its consolidated statements of operations. The Company’s earnings per share is calculated based on net income attributable to NHC’s stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest.

Liquidity, Capital Resources, and Financial Condition

Our primary sources of cash include revenues from the operations of our healthcare and senior living facilities, management and accounting services, rental income, and investment income. Our primary uses of cash include salaries, wages and other operating costs of our healthcare and senior living facilities, the cost of additions to and acquisitions of real property, facility rent expenses, and dividend distributions. These sources and uses of cash are reflected in our interim condensed consolidated statements of cash flows and are discussed in further detail below.

The following is a summary of our sources and uses of cash flows (dollars in thousands):

	Three Months Ended March 31						Three Month Change
	2023			2022				$		%
Cash, cash equivalents, restricted cash, and restricted cash equivalents, at beginning of period	$	74,865		$	119,743		$	(44,878	)		(37.5	)

Cash provided by/(used in) operating activities		13,857			(27,457	)		41,314			150.5

Cash used in investing activities		(1,427	)		(5,920	)		4,493			75.9

Cash used in financing activities		(12,619	)		(10,450	)		(2,169	)		(20.8	)

Cash, cash equivalents, restricted cash, and restricted cash equivalents, at end of period	$	74,676		$	75,916		$	(1,240	)		(1.6	)

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Operating Activities

Net cash provided by operating activities for the three months ended March 31, 2023 was $13,857,000 as compared to cash used in operating activities of $27,457,000 in the same period last year. Cash provided by operating activities consisted of net income of $11,285,000 and adjustments for non–cash items of $8,097,000. There was cash used for working capital needs in the amount of $6,017,000 for the three months ended March 31, 2023 compared to $52,250,000 for the same period a year ago.

Included in the adjustments for non-cash items are depreciation expense, equity in earnings of unconsolidated investments, unrealized gains on our marketable equity securities, deferred taxes, and stock compensation.

Investing Activities

Net cash used in investing activities totaled $1,427,000 for the three months ended March 31, 2023, compared to $5,920,000 for the three months ended March 31, 2022. Cash used for property and equipment additions was $6,640,000 and $8,962,000 for the three months ended March 31, 2023, and 2022, respectively. Proceeds from the sale of marketable securities, net of purchases, resulted in cash provided by investing activity of $5,211,000 and $2,818,000 for the three months ended March 31, 2023 and 2022, respectively.

Financing Activities

Net cash used in financing activities totaled $12,619,000 for the three months ended March 31, 2023 compared to $10,450,000 for the three months ended March 31, 2022. We made principal payments under our finance lease obligations in the amount of $1,218,000 and $1,147,000 for the three months ended March 31, 2023 and 2022, respectively. Cash used for dividend payments to common stockholders totaled $8,748,000 in the current year period compared to $8,493,000 for the same period a year ago. We repurchased common shares outstanding in the amount of $2,482,000 in the current year period compared to $146,000 for the same period a year ago.

Short–term liquidity

We expect to meet our short-term liquidity requirements primarily from our cash flows from operating activities. In addition to cash flows from operations, our current cash on hand of $46,144,000 and our marketable equity and debt securities of $118,647,000 are expected to be adequate to meet our contractual obligations, operating liquidity, and our growth and development plans in the next twelve months.

Long–term liquidity

We expect to meet our long-term liquidity requirements primarily from our cash flows from operating activities, our current cash on hand of $46,144,000 and our marketable equity and debt securities of $118,647,000. We also have substantial value in our unencumbered real estate assets which could potentially be used as collateral in future borrowing opportunities. At March 31, 2023, we do not have any long-term debt.

Our ability to meet our long–term contractual obligations, and to finance our operating requirements and growth plans will depend upon our future performance. Our future performance will be affected by business, economic, financial and other factors, including potential changes in state and federal government payment rates for healthcare, customer demand, success of our marketing efforts, pressures from competitors, and the state of the economy, including the state of financial and credit markets, as well as many unforeseen factors.

Commitment and Contingencies

Governmental Regulations

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Market risk represents the potential economic loss arising from adverse changes in the fair value of financial instruments. Currently, our exposure to market risk relates primarily to our fixed–income and equity portfolios. These investment portfolios are exposed primarily to, but not limited to, interest rate risk, credit risk, equity price risk, and concentration risk. We also have exposure to market risk that includes our cash and cash equivalents. The Company's senior management has established comprehensive risk management policies and procedures to manage these market risks.

Interest Rate Risk

The fair values of our fixed–income investments fluctuate in response to changes in market interest rates. Increases and decreases in prevailing interest rates generally translate into decreases and increases, respectively, in the fair values of those instruments. Additionally, the fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, the liquidity of the instrument and other general market conditions. At March 31, 2023, we have available for sale marketable debt securities in the amount of $139,222,000. The fixed maturity portfolio is comprised of investments with primarily short–term and intermediate–term maturities. The fixed maturity portfolio allows our insurance company subsidiaries to achieve an adequate risk–adjusted return while maintaining sufficient liquidity to meet obligations.

Our cash and cash equivalents consist of highly liquid investments with a maturity of less than three months when purchased. As a result of the short–term nature of our cash instruments, a hypothetical 1% change in interest rates would have minimal impact on our future earnings and cash flows related to these instruments.

We do not currently use any derivative instruments to hedge our interest rate exposure. We have not used derivative instruments for trading purposes and the use of such instruments in the future would be subject to approvals by the Investment Committee of the Board of Directors.

Credit Risk

Credit risk is managed by diversifying the fixed maturity portfolio to avoid concentrations in any single industry group or issuer and by limiting investments in securities with lower credit ratings.

Equity Price and Concentration Risk

Our marketable equity securities are recorded at their fair market value based on quoted market prices. Thus, there is exposure to equity price risk, which is the potential change in fair value due to a change in quoted market prices. At March 31, 2023, the fair value of our marketable equity securities is approximately $124,210,000. Of the $124.2 million equity securities portfolio, our investment in NHI comprises approximately $84.1 million, or 67.7%, of the total fair value. We manage our exposure to NHI by closely monitoring the financial condition, performance, and outlook of the company. Hypothetically, a 10% change in quoted market prices would result in a related increase or decrease in the fair value of our equity investments of approximately $12.4 million. At March 31, 2023, our equity securities had net unrealized gains of $70.0 million. Of the $70.0 million of unrealized gains, $59.4 million is related to our investment in NHI.

Item 4.

Controls and Procedures.

As of March 31, 2023, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Principal Accounting Officer (“PAO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and PAO, concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2023.

During the period covered by this report, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.

Legal Proceedings.

For a discussion of prior, current, and pending litigation of material significance to NHC, please see Note 16 of this Form 10–Q.

Item 1A.

Risk Factors.

During the three months ended March 31, 2023, there were no material changes to the risk factors that were disclosed in Item 1A of National HealthCare Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable

Item 3.

Defaults Upon Senior Securities.

None

Item 4.

Mine Safety Disclosures.

Not applicable

Item 5.

Other Information.

None

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Item 6.

Exhibits.

(a) List of exhibits

EXHIBIT INDEX

Exhibit No.		Description

3.1		Certificate of Incorporation of National HealthCare Corporation (Incorporated by reference to Exhibit 3.1 to the Registrant’s registration statement on Form S-4 (File No. 333-37185) dated October 3, 1997.)

3.2		Certificate of Amendment to the Certificate of Incorporation of National HealthCare Corporation (Incorporated by reference to Exhibit 3.5 to the quarterly report on Form 10-Q filed on August 3, 2017.)

3.3		Certificate of Designation Series B Junior Participating Preferred Stock (Incorporated by reference to Exhibit 3.1 to the Registrant’s registration statement on Form 8-A, dated August 3, 2007.)

3.4		Restated Bylaws as amended February 14, 2013 (Incorporated by reference to Exhibit 3.5 to the quarterly report on Form 10-Q filed on May 8, 2013.)

4.1		Form of Common Stock (Incorporated by reference to Exhibit 4.1 to the quarterly report on Form 10-Q filed on August 3, 2017.)

10.1		Amendment No. 9 to Master Agreement to Lease between National Health Investors, Inc. and National HealthCare Corporation (Incorporated by reference to Exhibit 10.1 to the quarterly report on Form 10-Q filed on November 3, 2022.)

10.2		Amendment No. 10 to Master Agreement to Lease between National Health Investors, Inc. and National HealthCare Corporation (Incorporated by reference to Exhibit 10.2 to the quarterly report on Form 10-Q filed on November 3, 2022.)

31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2		Rule 13a-14(a)/15d-14(a) Certification of Principal Accounting Officer

32		Certification pursuant to 18 U.S.C. Section 1350 by Chief Executive Officer and Principal Accounting Officer

101.INS		Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive File (embedded within the Inline XBRL document and include in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	NATIONAL HEALTHCARE CORPORATION
	(Registrant)

Date: May 4, 2023	/s/ Stephen F. Flatt
	Stephen F. Flatt
	Chief Executive Officer


Date: May 4, 2023	/s/ Brian F. Kidd
	Brian F. Kidd
	Senior Vice President and Controller
	(Principal Accounting Officer)