Overview




National HealthCare Corporation, which we also refer to as NHC or the Company,
is a leading provider of post-acute care and senior health care services. At
December 31, 2022, we operate or manage 68 skilled nursing facilities with 8,726
1icensed beds, 23 assisted living facilities with 1,181 units, five independent
living facilities, three behavioral health hospitals, 35 homecare agencies, and
29 hospice agencies located in 8 states. In addition, we provide management
services, accounting and financial services, and insurance services to third
party operators of healthcare properties. We also own the real estate of 13
healthcare properties and lease these properties to third party operators.



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 are significantly exposed to the public
health and economic effects of the COVID-19 pandemic. NHC's primary objective
has remained the same throughout the COVID-19 pandemic: that is to protect the
health and safety of our patients, residents, and partners (employees). We
continue to follow all guidance from the Centers for Medicare and Medicaid
Services ("CMS"), the Centers for Disease Control and Prevention ("CDC"), and
state and local health departments to prevent the spread of the disease within
our operations.



We began our first vaccination clinics in our skilled nursing facilities in
December 2020. As the vaccination clinics progressed and as the vaccine became
more accessible, we began to see a significant decline in COVID-19 cases among
our operations, as well as a significant decrease in the adverse health events
related to COVID. Despite the COVID-19 cases and adverse health events from
COVID declining, our operating expenses have 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.



At this time, we are not able to quantify the impact that the COVID-19 pandemic
will have on our future financial results. We have received and may continue to
receive payments and advances from the various federal and state initiatives.
These legislative initiatives have been beneficial to partially mitigate the
impact of the COVID-19 pandemic on our results of operations and financial
position to date.



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 is 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 $11,457,000, $63,360,000 and $47,505,000 of government
stimulus income from the Provider Relief Funds for the years ended December 31,
2022, 2021 and 2020, respectively.  The grant income was determined on a
systemic 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 HHS.



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Additionally, as part of the CARES Act, the legislation included an expansion of
the Medicare Accelerated and Advance Payment Program. In the second quarter of
2020, we received approximately $51,253,000 as part of this program. These funds
began to be applied against claims for services provided to Medicare patients
after approximately one year from the date we received the funds. The Company
repaid $36,231,000 of the funds in 2021 and the remaining $15,022,000 of the
funds in 2022.



The CARES Act and subsequent related legislation temporarily suspended Medicare
sequestration beginning May 1, 2020 through March 31, 2022. The Medicare
sequestration policy reduces fee-for-service Medicare payments by 2 percent.
Beginning April 1, 2022, the sequestration reductions were 1% from April 1, 2022
through June 30, 2022. The full 2% reduction went back into effect July 1, 2022.
The CARES Act extends the sequestration policy through 2030 in exchange for this
temporary suspension, which the sequestration reduction for 2030 has been
increased up to 3%.



The CARES Act also temporarily permitted employers to defer the deposit and
payment of the employer's portion of the social security taxes (6.2% of employee
wages) that otherwise would have been due between March 27, 2020 and December
31, 2020. The provision requires that the deferred taxes be paid over a two-year
period with half the amount required to be paid by December 31, 2021, and the
other half by December 31, 2022. The Company paid $10,613,000 during the year
ended December 31, 2021 and the remaining $10,545,000 during the year ended
December 31, 2022.



Executive Summary



Earnings



To monitor our earnings, we have developed budgets and management reports to
monitor labor, census, and the composition of revenues. Inflationary increases
in our costs may cause net earnings from patient services to decline.



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 2022 was 83.8% compared to 80.6% in 2021 and 83.6% in
2020.



Due to the pandemic, as well as the increased strain the pandemic has caused on
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 operations. This includes
working internally to examine and improve systems to be most responsive to
referral sources and payors, as well as find creative initiatives to retain and
attract qualified healthcare professionals. Additionally, NHC is in various
stages of partnerships with hospital systems, payors, and other post-acute
alliances to better position ourselves so we are an active participant in the
delivery of post-acute healthcare services.



Quality of Patient Care



CMS introduced the Five-Star Quality Rating System to help consumers, their
families and caregivers compare skilled nursing facilities more easily. The
Five-Star Quality Rating System gives each skilled nursing operation a rating
ranging between one and five stars in various categories (five stars being the
best). The Company has always strived for patient-centered care and quality
outcomes as precursors to outstanding financial performance.



In July 2022, CMS launched its enhanced Five-Star Quality Rating System which
integrated weekend staffing rates for nurses and information on annual turnover
among nurses and administrators. The tables below summarize NHC's overall
performance in these Five-Star ratings versus the skilled nursing industry as of
December 31, 2022:



                                                            NHC Ratings    

Industry Ratings
Total number of skilled nursing facilities, end of
period

                                                            68
Number of 4 and 5-star rated skilled nursing facilities           42
Percentage of 4 and 5-star rated skilled nursing
facilities                                                        62%       

37%

Average rating for all skilled nursing facilities, end
of period                                                         3.8                 2.9




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Development and Growth



We are undertaking to expand our post-acute and senior health care operations
while protecting our existing operations and markets. The following table lists
our recent construction and purchase activities.



 Type of
Operation    Description       Size         Location      Placed in Service
 Skilled
 Nursing     Acquisition     166 beds     Knoxville, TN     February 2020
 Assisted
  Living     Bed Addition     20 beds     Gallatin, TN     September 2020
 Skilled
 Nursing     Bed Addition     30 beds     Kingsport, TN     December 2020
 Hospice     Acquisition    28 agencies      Various          June 2021
 Homecare     New Agency     1 agency     Anderson, SC      January 2022
 Hospice      New Agency     1 agency     Tullahoma, TN      March 2022
Behavioral
  Health
 Hospital    New Facility     64 beds     Knoxville, TN      April 2022
Behavioral
  Health
 Hospital    New Facility     16 beds     St. Louis, MO       June 2022




Accrued Risk Reserves



Our accrued professional liability and workers' compensation reserves totaled
$102,469,000 and $98,048,000 at December 31, 2022 and 2021, respectively, and
are a primary area of management focus. We have set aside restricted cash and
restricted marketable securities to fund our professional liability and workers'
compensation reserves.



As to exposure for professional liability claims, we have developed performance
measures to 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.



Segment Reporting



The Company has two reportable operating segments: (1) inpatient services, which
includes the operation of skilled nursing facilities, assisted and independent
living facilities, and behavioral health hospitals; and (2) homecare and hospice
services. These reportable operating segments are consistent with information
used by the Company's Chief Executive Officer, as chief operating decision maker
("CODM"), to assess performance and allocate resources. The Company also reports
an "all other" category that includes revenues from rental income, management
and accounting services fees, insurance services, and costs of the corporate
office.



The Company's CODM evaluates performance and allocates capital resources to each
segment based on an operating model that is designed to improve the quality of
patient care and profitability of the Company while enhancing long-term
shareholder value. The CODM does not review assets by segment in his resource
allocation and therefore, assets by segment are not disclosed below.



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The following tables set forth the Company’s consolidated statements of
operations by business segment (in thousands):



                                                          Year Ended December 31, 2022
                                           Inpatient        Homecare
                                            Services       and Hospice      All Other         Total
Revenues:
Net patient revenues                       $  900,231     $     128,854     $        -     $ 1,029,085
Other revenues                                    136                 -         45,060          45,196
Government stimulus income                     11,457                 -              -          11,457
Net operating revenues and grant income       911,824           128,854         45,060       1,085,738

Costs and Expenses:
Salaries, wages and benefits                  580,707            77,688         27,774         686,169
Other operating                               251,355            26,319         11,698         289,372
Facility rent                                  32,956             2,327          5,694          40,977
Depreciation and amortization                  36,522               691          3,276          40,489
Interest                                          563                 -              -             563
Recovery of assets                                  -                 -         (3,728 )        (3,728 )
Total costs and expenses                      902,103           107,025         44,714       1,053,842

Income before non-operating income              9,721            21,829            346          31,896
Non-operating income                                -                 -         11,141          11,141
Unrealized losses on marketable equity
securities                                          -                 -     

(15,806 ) (15,806 )


Income (loss) before income taxes          $    9,721     $      21,829     $   (4,319 )   $    27,231






                                                          Year Ended December 31, 2021
                                           Inpatient        Homecare
                                            Services       and Hospice      All Other         Total
Revenues:
Net patient revenues                       $  868,687     $      96,855     $        -     $   965,542
Other revenues                                    386                 -         45,014          45,400
Government stimulus income                     63,360                 -              -          63,360
Net operating revenues and grant income       932,433            96,855         45,014       1,074,302

Costs and Expenses:
Salaries, wages and benefits                  557,604            59,226         49,233         666,063
Other operating                               238,354            16,053         12,347         266,754
Facility rent                                  32,819             2,064          5,935          40,818
Depreciation and amortization                  36,890               443          3,339          40,672
Interest                                          845                 -              -             845
Impairment of assets                            4,497                 -          3,728           8,225
Total costs and expenses                      871,009            77,786         74,582       1,023,377

Income (loss) before non-operating
income                                         61,424            19,069        (29,568 )        50,925
Non-operating income                                -                 -         17,774          17,774
Gain on acquisition of equity method
investment                                          -                 -         95,202          95,202
Unrealized losses on marketable equity
securities                                          -                 -        (13,863 )       (13,863 )

Income before income taxes                 $   61,424     $      19,069     $   69,545     $   150,038




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                                                          Year Ended December 31, 2020
                                           Inpatient        Homecare
                                            Services       and Hospice      All Other         Total
Revenues:
Net patient revenues                       $  879,693     $      52,102     $        -     $   931,795
Other revenues                                  3,403                 -         45,514          48,917
Government stimulus income                     47,505                 -              -          47,505
Net operating revenues and grant income       930,601            52,102         45,514       1,028,217

Costs and Expenses:
Salaries, wages and benefits                  546,188            37,377         37,427         620,992
Other operating                               254,230            10,416         10,513         275,159
Facility rent                                  33,090             1,802          5,602          40,494
Depreciation and amortization                  38,217               377          3,424          42,018
Interest                                        1,374                 -             25           1,399
Total costs and expenses                      873,099            49,972         56,991         980,062

Income (loss) before non-operating
income                                         57,502             2,130        (11,477 )        48,155
Non-operating income                                -                 -         26,527          26,527
Gain on acquisition of equity method
investment                                          -                 -          1,707           1,707
Unrealized losses on marketable equity
securities                                          -                 -     

(23,966 ) (23,966 )

Income (loss) before income taxes $ 57,502 $ 2,130 $ (7,209 ) $ 52,423

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 should exclude the following items: the unrealized gains or losses
on our marketable equity securities, operating results for the newly constructed
healthcare facilities not at full capacity, any gains on the acquisition of
equity method investments, gains on the sale of healthcare facilities,
stock-based compensation expense, and impairments or recoveries of long-lived
assets and notes receivable.



The operating results for the start-up operations not at full capacity include
the following: for the year ended December 31, 2022, included are operations
that began from 2020 to 2022, which is two behavioral health hospitals,
one hospice agency, and one homecare agency. For the year ended December 31,
2021, included are facilities that began operations from 2019 to 2021, which is
one memory care facility and two behavioral health hospitals. For the year ended
December 31, 2020, included are facilities that began operations from 2018 to
2020, which is one memory care facility.



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



                                                         Year Ended December 31,
                                                  2022            2021            2020
Net income attributable to National
HealthCare Corporation                         $    22,445     $   138,590     $    41,871
Non-GAAP adjustments:
Unrealized losses on marketable equity
securities                                          15,806          13,863  

23,966

Gain on sale of real estate/healthcare
facilities                                               -               -          (2,784 )
Gain on acquisition of equity method
investment                                               -         (95,202 )        (1,707 )
Stock-based compensation expense                     2,612           2,620  

2,453

Operating results for newly-opened
operations not at full capacity                      5,416             922             602
Impairment (recovery) of assets                     (3,728 )         8,225               -

Income tax benefit on non-GAAP adjustments (5,228 ) (6,373 ) (5,858 )
Non-GAAP Net Income

                            $    37,323     $    62,645  

$ 58,543


GAAP diluted earnings per share                $      1.45     $      8.99     $      2.72
Non-GAAP adjustments:
Unrealized losses on marketable equity
securities                                            0.76            0.67  

1.15

Gain on sale of real estate/healthcare
facilities                                               -               -           (0.13 )
Gain on acquisition of equity method
investment                                               -           (6.16 )         (0.08 )
Stock-based compensation expense                      0.13            0.13  

0.12

Operating results for newly-opened
operations not at full capacity                       0.26            0.04  

0.03

Impairment (recovery) of assets                      (0.18 )          0.39               -
Non-GAAP diluted earnings per share            $      2.42     $      4.06     $      3.81




Results of Operations


The following table and discussion set forth items from the consolidated
statements of operations as a percentage of net operating revenues and grant
income for the years ended December 31, 2022, 2021 and 2020.




                      Percentage of Net Operating Revenues



                                                            Year Ended December 31,
                                                          2022        2021        2020
Revenues:
Net patient revenues                                        94.8 %      89.9 %      90.6 %
Other revenues                                               4.2         4.2         4.8
Government stimulus income                                   1.0         5.9         4.6
Net operating revenues and grant income                    100.0       100.0       100.0
Costs and Expenses:
Salaries, wages and benefits                                63.2        62.0        60.4
Other operating                                             26.6        24.8        26.8
Facility rent                                                3.8         3.8         3.9
Depreciation and amortization                                3.7         3.8         4.1
Interest                                                     0.1         0.1         0.1
Impairment (recovery) of assets                             (0.3 )       0.8           -
Total costs and expenses                                    97.1        95.3        95.3
Income from operations                                       2.9         4.7         4.7
Non-operating income                                         1.0         1.7         2.6
Gain on acquisition of equity method investments               -         8.8         0.1
Unrealized losses on marketable equity securities           (1.4 )      (1.3 )      (2.3 )
Income before income taxes                                   2.5        13.9         5.1
Income tax provision                                        (0.7 )      (1.0 )      (1.0 )
Net income                                                   1.8        12.9         4.1
Net loss attributable to noncontrolling interest             0.3         

0.0 0.0
Net income attributable to common stockholders of NHC 2.1 % 12.9 % 4.1 %





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The following table sets forth the increase or (decrease) in certain items from
the consolidated statements of operations as compared to the prior period
(dollars in thousands).




                      Period to Period Increase (Decrease)



                                                2022 vs. 2021                 2021 vs. 2020
                                             Amount        Percent        Amount        Percent
Revenues:
Net patient revenues                       $   63,543           6.6 %    $  33,747           3.6 %
Other revenues                                   (204 )        (0.4 )       (3,517 )        (7.2 )
Government stimulus income                    (51,903 )       (81.9 )       15,855          33.4
Net operating revenues and grant income        11,436           1.1         46,085           4.5
Costs and Expenses:
Salaries, wages and benefits                   20,106           3.0         45,071           7.3
Other operating                                22,618           8.5         (8,405 )        (3.1 )
Facility rent                                     159           0.4            324           0.8
Depreciation and amortization                    (183 )        (0.4 )       (1,346 )        (3.2 )
Interest                                         (282 )       (33.4 )         (554 )       (39.6 )
Impairment (recovery) of assets               (11,953 )      (145.3 )        8,225         100.0
Total costs and expenses                       30,465           3.0         43,315           4.4
Income from operations                        (19,029 )       (37.4 )        2,770           5.8
Non-operating income                           (6,633 )       (37.3 )       (8,753 )       (33.0 )
Gain on acquisition of equity method
investment                                    (95,202 )      (100.0 )       93,495       5,477.2
Unrealized losses on marketable equity
securities                                     (1,943 )       (14.0 )       10,103          42.2
Income before income taxes                   (122,807 )       (81.9 )       97,615         186.2
Income tax provision                            3,697          33.8           (518 )        (5.0 )
Net income                                   (119,110 )       (85.6 )       97,097         231.2
Net income attributable to
noncontrolling interest                         2,965         596.6           (378 )      (317.6 )
Net income attributable to common
stockholders of NHC                        $ (116,145 )       (83.8 )%   $  96,719         231.0 %




2022 Compared to 2021



Results for the year ended December 31, 2022 compared to 2021 include a 1.1%
increase in net operating revenues and grant income. The net operating revenues
and grant income increase is primarily driven by the June 2021 acquisition of
Caris hospice and the continued occupancy increase in our skilled nursing
facilities. These increases were offset by the reduction in government stimulus
income of $51.9 million for the year ended December 31, 2022 compared to 2021.



For the year ended December 31, 2022, GAAP net income attributable to NHC was
$22,445,000 compared to net income of $138,590,000 for the same period in 2021.
The large decrease in our reported GAAP net income for 2022 was primarily due
to the $95.2 million gain recorded in 2021 from the acquisition of Caris.
Excluding the gain on the Caris acquisition, as well as the unrealized losses in
our marketable equity securities portfolio and the other non-GAAP adjustments,
non-GAAP net income for the year ended December 31, 2022 was $37,323,000
compared to $62,645,000 for the year ended December 31, 2021. The decrease in
adjusted net income for the year ended December 31, 2022 compared to 2021 is
primarily due to the $51.9 million less government stimulus income recorded
during the 2022 period. We also continue to incur inflationary wage pressures
within all areas of our operations.



Net operating revenues and grant income




Net patient revenues totaled $1,029,085,000, an increase of $63,543,000, or
6.6%, compared to the prior year. Included in net patient revenues for the year
ended December 31, 2022 and 2021, respectively, is $19,442,000 and $20,482,000
of COVID-19 supplemental Medicaid payments that were received to help mitigate
the incremental costs in fighting the public health emergency.



The overall average census in owned and leased skilled nursing facilities for
2022 was 83.8% compared to 80.6% in 2021. The composite skilled nursing facility
per diem increased 2.3% in 2022 compared to 2021. Medicare and managed care per
diem rates increased 2.3% and 6.0%, respectively, in 2022 compared to 2021.
Medicaid and private pay per diem rates increased 3.0% and 4.7%, respectively,
in 2022 compared to 2021.



In June 2021, the Company acquired the remaining ownership interest in Caris,
which resulted in net patient revenues increasing $31,566,000 for the year ended
December 31, 2022 compared to the prior year. 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
$18,732,000 for the year ended December 31, 2022 compared to the prior year.



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Other revenues in 2022 were $45,196,000, a decrease of $204,000, or 0.4%, as
further detailed in Note 4 to our consolidated financial statements.

For the years ended December 31, 2022 and 2021, respectively, we recorded
$11,457,000 and $63,360,000 in government stimulus income related to funds
received from the CARES Act Provider Relief Fund.



Total costs and expenses


Total costs and expenses for 2022 increased $30,465,000, or 3.0%, to
$1,053,842,000 from $1,023,377,000 in 2021.




Salaries, wages, and benefits increased $20,106,000, or 3.0%, to $686,169,000
from $666,063,000. Salaries, wages, and benefits as a percentage of net
operating revenues and grant income was 63.2% compared to 62.0% for the years
ended December 31, 2022 and 2021, respectively. Our Caris acquisition in June
2021 increased salaries, wages, and benefits $19,040,000 for the year ended
December 31, 2022 compared to 2021. 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 challenges 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
year ended December 31, 2022, our agency nurse staffing expenses were
$68,875,000 compared to $36,391,000 for the 2021 year. 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 $18,053,000 for the year ended December 31, 2022 compared to the
prior year.



Other operating expenses increased $22,618,000, or 8.5%, to $289,372,000 for the
year ended December 31, 2022 compared to $266,754,000 for the prior year. Other
operating expenses as a percentage of net operating revenues and grant income
was 26.7% and 24.8% for the years ended December 31, 2022 and 2021,
respectively. Our Caris acquisition increased other operating expenses
$10,190,000 for the year ended December 31, 2022 compared to the prior year. 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 $6,859,000 for the year ended December 31, 2022 compared to
the prior year. We incurred increased expenses from our professional liability
actuarial report in the fourth quarter of 2022 compared to the prior year of
$3,284,000. We also continue to face inflationary pressures in certain
categories within other operating expenses as well, such as food/dietary
supplies and drugs/pharmaceutical supplies.



Facility rent expense increased $159,000, or 0.4%, to $40,977,000. Depreciation
and amortization decreased 0.4% to $40,489,000. Interest expense decreased
$282,000 to $563,000 in 2022 from $845,000 in 2021. At December 31, 2022, we
have no outstanding long-term debt.



During 2022, we had a note receivable recovery of $3,728,000.



Other income



Non-operating income decreased by $6,633,000, or 37.3% to $11,141,000 compared
to the prior year, as further detailed in Note 5 to our consolidated financial
statements. The decrease in our non-operating income is due to the June 2021
acquisition of Caris. Prior to the June 2021 acquisition date, Caris was our
most significant equity method investment with a 75.1% non-controlling ownership
interest. From the respective acquisition date, Caris' financial information is
now included in the Company's consolidated financial statements and is no longer
accounted for as an equity method investment.



In June 2021, a gain of $95,202,000 was recorded on the acquisition of the
remaining ownership interest of Caris. We previously held a noncontrolling
interest in the partnership. Upon acquiring the remaining ownership interest in
Caris, we valued the business and our previously held equity position (75.1%)
based upon Caris' fair value at the acquisition date.



We recorded unrealized losses in the amount of $15,806,000 for the decrease in
fair value of our marketable equity securities portfolio for the year ended
December 31, 2022. The marketable equity securities portfolio consists mainly of
publicly-traded healthcare REIT's and other blue-chip public companies held
within our insurance companies.



Income taxes


The income tax provision for 2022 is $7,254,000 (an effective income tax rate of
26.6%).




2021 Compared to 2020



Results for the year ended December 31, 2021 compared to 2020 include a 4.5%
increase in net operating revenues and grant income and a 231.2% increase in net
income attributable to NHC.  For the year ended December 31, 2021, GAAP net
income attributable to NHC was $138,590,000 compared to net income of
$41,871,000 for the same period in 2020.  The large increase in our reported
GAAP 2021 net income compared to 2020 is primarily due to the $95.2 million gain
recorded from the acquisition of Caris, a hospice provider. Excluding the gain
on the Caris acquisition, as well as the unrealized losses in our marketable
equity securities portfolio and the other non-GAAP adjustments, non-GAAP net
income for the year ended December 31, 2021 was $62,645,000 compared to
$58,543,000 for the year ended December 31, 2020.



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Net operating revenues and grant income




Net patient revenues totaled $965,542,000, an increase of $33,747,000, or 3.6%,
compared to the prior year. Included in net patient revenues for the year end
December 31, 2021 and 2020, respectively, is $20,482,000 and $26,179,000 of
COVID-19 supplemental Medicaid payments that were received to help mitigate the
incremental costs in fighting the public health emergency.



The overall average census in owned and leased skilled nursing facilities for
2021 was 80.6% compared to 83.6% in 2020. The decline in census is due to
COVID-19 and the lack of new admissions from our acute care providers and
referral partners, and the difficult workforce and labor environment that has
limited our admissions during phases of 2021. The composite skilled nursing
facility per diem increased 2.4% in 2021 compared to 2020. Medicare and managed
care per diem rates increased 2.0% and 1.3%, respectively, in 2021 compared to
2020. Medicaid and private pay per diem rates increased 2.2% and 2.4%,
respectively, in 2021 compared to 2020.



In June 2021, the Company acquired the remaining ownership interest in Caris,
which resulted in net patient revenues increasing $39,746,000 for the year ended
December 31, 2021 compared to 2020. Our homecare operations had an increase in
net patient revenues of approximately $5,007,000 for the year ended December 31,
2021 compared to 2020. In November 2020, the Company sold a skilled nursing
facility located in Town & Country, Missouri. For the year ended December 31,
2021, the sale of this facility decreased net patient revenue by $7,323,000
compared to 2020.



Other revenues in 2021 were $45,400,000, a decrease of $3,517,000, or 7.2%, as
further detailed in Note 4 of the consolidated financial statements.




For the years ended December 31, 2021 and 2020, respectively, we recorded
$63,360,000 and $47,505,000 in government stimulus income related to funds
received from the Provider Relief Fund. At December 31, 2021, we have not
recognized as income $9,443,000 of Provider Relief Funds that are reflected in
the current liability section of our consolidated balance sheet (provider relief
funds) and used these funds in 2022. See Note 2 for additional information.



Total costs and expenses



Total costs and expenses for 2021 increased $43,315,000, or 4.4%, to
$1,023,377,000 from $980,062,000 in 2020. In total, we incurred $21,555,000 and
$47,674,000 of COVID-19 related expenses for the years ended December 31, 2021
and 2020, respectively. The COVID-19 related expenses primarily consisted of:
(1) personal protective equipment and sanitizers/infection control supplies; (2)
incentive compensation paid to our frontline partners/employees; and (3)
COVID-19 testing of our patients and partners/employees. In 2021, we also
incurred asset impairment expenses of $8,225,000 for the impairment and
write-down of long-lived assets (leasehold improvements) and a credit impairment
on a note receivable. Both of these impairment of assets items are due to the
operating environment caused by COVID-19.



Salaries, wages and benefits, the largest operating costs of the company,
increased $45,071,000, or 7.3%, to $666,063,000 from $620,992,000. Our salaries
and wages were 62.0% and 60.4% of net operating revenues and grant income for
2021 and 2020, respectively. Our Caris acquisition in June 2021 increased
salaries, wages, and benefits $20,754,000 for the year ended December 31, 2021
compared to 2020. We incurred COVID-related incentive pay (or combat pay) in the
amount of $11,010,000 for the year ended December 31, 2021 compared to
$15,224,000 for 2020. We continue to face tremendous workforce and labor
shortages within all of our operations, which increases wage pressure and
inflation in regards 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. For
the year ended December 31, 2021, our agency nurse staffing expenses were
$36,391,000 compared to $11,686,000 for the 2020 year.



Other operating expenses decreased $8,405,000, or 3.1%, to $266,754,000 for 2021
compared to $275,159,000 in 2020. These costs were 24.8% and 26.8% of net
operating revenues and grant income for 2021 and 2020, respectively. For the
years ended December 31, 2021 and 2020, respectively, we incurred $10,545,000
and $32,450,000 in COVID-19 related expenses in purchasing personal protective
equipment, sanitizers and infection control supplies, and lab and testing
supplies. Our Caris acquisition increased other operating expenses $8,368,000
for the year ended December 31, 2021 compared to 2020.



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Facility rent expense decreased $324,000, or 0.8%, to $40,818,000. Depreciation
and amortization decreased 3.2% to $40,672,000.

Interest expense decreased $554,000 to $845,000 in 2021 from $1,399,000 in 2020.
At December 31, 2021, we have no outstanding long-term debt.



Other income



Non-operating income in 2021 decreased $8,753,000, or 33.0% to $17,744,000, as
further detailed in Note 5 of the consolidated financial statements. The
decrease is due to our June 2021 acquisition of Caris. From the respective
acquisition date, we no longer record any equity in earnings from our Caris
investment. Caris' financial information (revenues and expenses) is now included
in the Company's consolidated financial statements.



In June 2021, a gain of $95,202,000 was recorded on the acquisition of the
remaining ownership interest of Caris. We previously held a noncontrolling
interest in the partnership. Upon acquiring the remaining ownership interest in
Caris, we valued the business and our previously held equity position (75.1%)
based upon Caris' fair value at the acquisition date. In February 2020, a gain
of $1,707,000 was recorded on the acquisition of the remaining ownership
interest of a 166-bed skilled nursing facility in Knoxville, Tennessee. We
previously held a noncontrolling interest (25%) in the facility. Upon acquiring
the remaining ownership interest, we valued our previously held equity position
based upon the facility's fair value.



We recorded unrealized losses in the amount of $13,863,000 for the decrease in
fair value of our marketable equity securities portfolio for the year ended
December 31, 2021.



Income taxes



The income tax provision for 2021 is $10,951,000 (an effective income tax rate
of 7.3%). The income tax provision and effective tax rate for 2021 were
favorably impacted by the nontaxable revaluation gain related to the Caris
acquisition resulting in a benefit to the provision of $19,758,000 or 13.2% of
income before income taxes. The income tax provision and effective tax rate for
2021 were also favorably impacted by the statute of limitation expirations
resulting in a benefit to the provision of $1,901,000 or 1.3% of income before
taxes in 2021.




Liquidity, Capital Resources and Financial Condition



Sources and Uses of Funds



Our primary sources of cash include revenues from the operations of our
healthcare operations, management and accounting services, rental income, and
investment income. Our primary uses of cash include salaries, wages and other
operating costs of our healthcare operations, 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):



                          Year Ended               One Year Change               Year Ended                One Year Change
                    12/31/22      12/31/21          $            %         12/31/21      12/31/20          $             %
Cash, cash
equivalents,
restricted cash,
and restricted
cash equivalents
at beginning of
period              $ 119,743     $ 158,502     $ (38,759 )      (24.5 )  

$ 158,502 $ 61,010 $ 97,492 159.8


Cash provided by
operating
activities              8,742        62,394       (53,652 )      (86.0 )    

62,394 203,259 (140,865 ) (69.3 )


Cash used in
investing
activities             (5,978 )     (65,889 )      59,911         90.9      

(65,889 ) (63,878 ) (2,011 ) (3.1 )


Cash used in
financing
activities            (47,642 )     (35,264 )     (12,378 )      (35.1 )     (35,264 )     (41,889 )        6,625         15.8

Cash, cash
equivalents,
restricted cash,
and restricted
cash equivalents
at end of period    $  74,865     $ 119,743     $ (44,878 )      (37.5 )  
$ 119,743     $ 158,502     $  (38,759 )      (24.5 )




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Operating Activities



Net cash provided by operating activities for the year ended December 31, 2022
was $8,742,000 as compared to $62,394,000 and $203,259,000 for the years ended
December 31, 2021 and 2020, respectively. Cash provided by operating activities
consisted of net income of $19,977,000 and adjustments for non-cash items of
$60,697,000. There was cash used for working capital in the amount of
$73,697,000 for the year ended December 31, 2022 compared to 40,738,000 in 2021.
We received cash distributions from our unconsolidated investments of $439,000
during the year ended December 31, 2022, compared to $6,314,000 in the prior
year.



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



Investing Activities



Net cash used in investing activities totaled $5,978,000 for the year ended
December 31, 2022, as compared to $65,889,000 and $63,878,000 for the years
ended December 31, 2021 and 2020, respectively. Cash used for property and
equipment additions was $30,200,000, $39,399,000, and $21,873,000 for the years
ended December 31, 2022, 2021 and 2020, respectively. Proceeds from the sale of
marketable securities, net of purchases, resulted in cash proceeds of
$16,168,000 in 2022. In 2021, we had purchases of marketable securities, net of
sales, that resulted in a net use of cash of $6,267,000. The Company collected
notes receivable of $3,879,000 and $8,840,000 for the years ended December 31,
2022 and 2021, respectively. Additionally, the Company received proceeds from
the sale of property and equipment of $4,175,000 for the year ended December 31,
2022. The acquisition of Caris hospice resulted in cash used of $28,713,000 in
2021.



Financing Activities



Net cash used in financing activities totaled $47,642,000, $35,264,000, and
$41,889,000 for the years ended December 31, 2022, 2021, and 2020, respectively.
Principal payments made under finance lease obligations was $4,695,000,
$4,423,000, and $4,166,000 for the years ended December 31, 2022, 2021, and
2020, respectively. Dividends paid to common stockholders was $34,604,000,
$32,030,000, and $31,921,000 for the years ended December 31, 2022, 2021 and
2020, respectively. Proceeds from the issuance of common stock totaled
$2,114,000, $3,441,000, and $1,756,000 for 2022, 2021 and 2020, respectively. We
repurchased common shares outstanding in the amount of $9,903,000, $836,000, and
$53,000 for the years ended December 31, 2022, 2021, and 2020, respectively.



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 $58,667,000 and unrestricted marketable securities of
$123,922,000 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 $58,667,000, and
unrestricted marketable securities of $123,922,000. We also have substantial
value in our unencumbered real estate assets which could potentially be used as
collateral in future borrowing opportunities. At December 31, 2022, we do not
have any long-term debt.



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



Given the uncertainty in the rapidly changing market and economic conditions
related to COVID-19, we will continue to evaluate the nature and extent of the
impact to our business and financial position.



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Contingencies


See Note 16 to the consolidated financial statements for additional information
on pending litigation and other contingencies.



Guarantees


At December 31, 2022, we have no agreements to guarantee the debt obligations of
other parties.




We have no outstanding letters of credit. We may or may not in the future elect
to use financial derivative instruments to hedge interest rate exposure in the
future. At December 31, 2022, we did not participate in any such financial
instruments.



New Accounting Pronouncements

The Company did not adopt any new accounting standards during 2022.

Application of Critical Accounting Policies




The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 cause our
reported net income to vary significantly from period to period.



Our critical accounting policies that are both important to the portrayal of our
financial condition and results and require our most difficult, subjective or
complex judgments are as follows:



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 and hospice 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.



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



Revenue Recognition – Third Party Payors




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.



In our opinion, adequate provision has been made for any adjustments that may
result from these reviews. Any differences between our original estimates of
reimbursements and subsequent revisions are reflected in operations in the
period in which the revisions are made often due to final determination or the
period of payment no longer being subject to audit or review.



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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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