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NATIONAL HEALTHCARE CORP - Quarter Report: 2015 September (Form 10-Q)

Converted by EDGARwiz

  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549



FORM 10-Q



  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

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    00113489       

[nhcseptember2015form10q001.jpg]

(Exact name of registrant as specified in its Charter)



Delaware

522057472

(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) 8902020

Registrant's telephone number, including area code



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  [x] No  [  ]


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation ST (§232.405 of this chapter) during the preceding 12 months (or for such period that the registrant was required to submit and post such files).

Yes [x]      No  [  ]


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer or a smaller reporting company.  See the definitions of "large accelerated file," "accelerated filer" and "smaller reporting company" in Rule 12b2 of the Exchange Act.  (Check one):  

Large Accelerated filer  [  ]

Accelerated filer   [x]



Nonaccelerated filer (Do not check if a smaller reporting company)  [  ]

Smaller reporting company  [  ]


Indicate by check mark whether the registrant is a shell company (as is defined in Rule 12b2 of the Exchange

Act).  Yes  [  ]   No [x]


14,906,032 shares of common stock of the registrant were outstanding as of November 3, 2015.






1

  


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

25




Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35




Item 4.

Controls and Procedures

36


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 5.

Other Information

36




Item 6.

Exhibits

36







2



PART I.  FINANCIAL INFORMATION


Item 1.  Financial Statements.


NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Income

 (in thousands, except share and per share amounts)

(unaudited)








Three Months Ended

September 30



Nine Months Ended

September 30






2015



2014



2015



2014

Revenues:














Net patient revenues


$

215,351


$

207,772


$

641,845


$

613,173


Other revenues



10,035



10,451



30,850



32,136



Net operating revenues



225,386



218,223



672,695



645,309
















Cost and Expenses:














Salaries, wages and benefits



135,136



128,938



392,766



374,277


Other operating



56,616



55,365



173,830



166,803


Facility rent



10,006



9,913



29,972



29,712


Depreciation and amortization



9,273



8,639



27,442



25,144


Interest



594



632



1,782



1,566



Total costs and expenses



211,625



203,487



625,792



597,502
















Income Before NonOperating Income



13,761



14,736



46,903



47,807

NonOperating Income



4,550



3,937



12,902



12,790














Income Before Income Taxes



18,311



18,673



59,805



60,597

Income Tax Provision



(5,744)



(5,844)



(21,638)



(22,028)

Net Income



12,567



12,829



38,167



38,569
















Dividends to Preferred Stockholders



(2,152)



(2,167)



(6,487)



(6,502)
















Net Income Available to Common Stockholders

$

10,415


$

10,662


$

31,680


$

32,067
















Earnings Per Common Share:














Basic


$

0.75


$

0.77


$

2.30


$

2.32


Diluted


$

0.72


$

0.75


$

2.21


$

2.25
















Weighted Average Common Shares Outstanding:












Basic



13,801,245



13,805,430



13,778,705



13,838,891


Diluted



14,422,660



14,236,512



14,365,251



14,230,031















Dividends Declared Per Common Share


$

0.40


$

0.34


$

1.14


$

1.00




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



3

  


NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Comprehensive Income

(unaudited in thousands)








Three Months Ended

September 30



Nine Months Ended

September 30




2015



2014



2015



2014














Net Income


$

12,567


$

12,829


$

38,167


$

38,569














Other Comprehensive Income (Loss):














Unrealized (losses) gains on investments in marketable securities



(6,724)



(9,707)



(21,809)



5,584


Reclassification adjustment for realized gains on sale of securities



(28)



-



(449)



(172)


Income tax benefit (expense) related to items of other comprehensive income



2,657



3,761



8,670



(2,035)

Other comprehensive income (loss), net of tax



(4,095)



(5,946)



(13,588)



3,377















Comprehensive Income


$

8,472


$

6,883


$

24,579


$

41,946
























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



4



NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Balance Sheets

 (in thousands)







September 30, 2015


December 31,

2014



unaudited



Assets








Current Assets:









Cash and cash equivalents


$

70,781


$

69,767 



Restricted cash and cash equivalents



8,494



7,020 



Marketable securities



110,567



132,535 



Restricted marketable securities



18,260



19,805 



Accounts receivable, less allowance for doubtful accounts of $7,142 and $5,738, respectively



81,854



78,843 



Inventories



7,566



7,127 



Prepaid expenses and other assets



2,488



2,260 



Notes receivable, current portion



4,970



441 



Federal income tax receivable



613



4,727 




Total current assets



305,593



322,525 












Property and Equipment:









Property and equipment, at cost



856,078



821,792 



Accumulated depreciation and amortization



(329,823)



(307,048)




Net property and equipment



526,255



514,744 












Other Assets:









Restricted cash and cash equivalents



3,631



3,631 



Restricted marketable securities



150,564



138,468 



Deposits and other assets



8,392



8,791 



Goodwill



17,600



17,600 



Notes receivable, less current portion



13,163



12,548 



Deferred income taxes



22,168



18,700 



Investments in limited liability companies



34,925



37,116 




Total other assets



250,443



236,854 




Total assets


$

1,082,291


$

1,074,123 






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




5

  


NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Balance Sheets (continued)

(in thousands, except share and per share amounts)






September 30, 2015



December 31,

2014




unaudited




Liabilities and Stockholders Equity








Current Liabilities:









Trade accounts payable


$

16,107


$

15,877



Capital lease obligations, current portion



3,230



3,088



Accrued payroll



59,284



59,859



Amounts due to third party payors



26,411



22,931



Accrued risk reserves, current portion



26,754



26,825



Deferred income taxes



25,510



35,506



Other current liabilities



15,517



12,472



Dividends payable



7,874



7,000




Total current liabilities



180,687



183,558












Longterm debt



10,000



10,000


Capital lease obligations, less current portion



31,067



33,508


Accrued risk reserves, less current portion



79,179



79,393


Refundable entrance fees



10,208



10,219


Obligation to provide future services



3,927



3,927


Other noncurrent liabilities



16,737



16,011


Deferred revenue



4,129



3,359










Stockholders Equity:









Series A Convertible Preferred Stock; $.01 par value; 25,000,000 shares authorized; 10,761,692 and 10,836,659 shares, respectively, issued and outstanding; stated at liquidation value of $15.75 per share



169,305



170,494



Common stock, $.01 par value; 30,000,000 shares authorized; 14,305,185 and 14,110,859 shares, respectively, issued and outstanding



143



140



Capital in excess of par value



166,524



154,965



Retained earnings



359,365



343,941



Accumulated other comprehensive income



51,020



64,608




Total stockholders equity



746,357



734,148




Total liabilities and stockholders equity


$

1,082,291


$

1,074,123





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






6



NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Cash Flows

(unaudited in thousands)




Nine Months Ended

September 30




2015



2014

Cash Flows From Operating Activities:








Net income


$

38,167


$

38,569


Adjustments to reconcile net income to net cash provided by operating activities:









Depreciation and amortization



27,442



25,144



Provision for doubtful accounts receivable



5,474



5,001



Equity in earnings of unconsolidated investments



(3,924)



(5,069)



Distributions from unconsolidated investments



6,488



10,272



Gains on sale of restricted marketable securities



(449)



(172)



Deferred income taxes



(4,795)



(4,517)



Stockbased compensation



1,557



1,547



Changes in operating assets and liabilities, net of the effect of acquisitions:










Restricted cash and cash equivalents



(8,897)



(6,033)




Accounts receivable



(8,485)



1,438




Income tax receivable



4,114



(5,953)




Inventories



(439)



(216)




Prepaid expenses and other assets



(228)



(705)




Trade accounts payable



230



557




Accrued payroll



(575)



(9,039)




Amounts due to third party payors



3,480



2,493




Other current liabilities and accrued risk reserves



2,674



2,764




Other noncurrent liabilities



726



1,106




Deferred revenue



770



759





Net cash provided by operating activities



63,330



57,946

Cash Flows From Investing Activities:









Additions to property and equipment



(38,953)



(36,727)



Investments in unconsolidated limited liability companies



(373)



(1,675)



Acquisition of non-controlling interest



-



(768)



Investments in notes receivable



(5,477)



(767)



Collections of notes receivable



333



3,046



Change in restricted cash and cash equivalents



7,423



6,256



Purchase of restricted marketable securities



(49,993)



(36,947)



Sale of restricted marketable securities



39,601



27,641





Net cash used in investing activities



(47,439)



(39,941)

Cash Flows From Financing Activities:









Tax benefit from stockbased compensation



585



201



Principal payments under capital lease obligations



(2,299)



(1,693)



Dividends paid to preferred stockholders



(6,502)



(6,502)



Dividends paid to common stockholders



(15,367)



(13,913)



Issuance of common shares



8,231



6,757



Repurchase of common shares



-



(6,995)



Entrance fee deposits



(11)



(400)



Change in deposits



486



(248)





Net cash used in financing activities



(14,877)



(22,793)

Net Increase (Decrease) in Cash and Cash Equivalents



1,014



(4,788)

Cash and Cash Equivalents, Beginning of Period



69,767



81,705

Cash and Cash Equivalents, End of Period


$

70,781


$

76,917








Supplemental disclosure of non-cash investing and financing activities:







Buildings, personal property, and obligations recorded under capital lease agreements


$

-


$

39,032

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




7

  



NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Stockholders Equity

(in thousands, except share and per share amounts)

(unaudited)



Preferred Stock


Common Stock


Capital in

Excess of

Par Value


Retained

Earnings


Accumulated Other Comprehensive Income (Loss)


Total

Stockholders

Equity


Shares


Amount


Shares


Amount









Balance at January 1, 2014

10,837,665

$

170,510


14,078,028

$

140

$

153,061

$

318,216

$

46,185

$

688,112


Net income

 


 


 


 


 


38,569


 


38,569


Other comprehensive income

 


 


 


 


 


 


3,377


3,377


Stockbased compensation

 


 


 


 


1,547


 


 


1,547


Tax benefit from exercise of stock options

 


 


 


 


201


 


 


201


Shares sold options exercised

 


 


145,074


1


6,756


 


 


6,756


Repurchase of common stock



(125,000)


(1)


(6,994)




(6,995)


Shares issued in conversion of preferred stock to common stock

(1,006)


(16)


241



16





Acquisition of non-controlling interest





(768)




(768)


Dividends declared to preferred stockholders ($0.60 per share)

 


 


 


 


 


(6,502)


 


(6,502)


Dividends declared to common stockholders ($1.00 per share)

 


 


 


 


 


(14,181)


 


(14,181)

Balance at September 30, 2014

10,836,659

$

170,494


14,098,343

$

140

$

153,819

$

336,102

$

49,562

$

710,117


















Balance at January 1, 2015

10,836,659

$

170,494


14,110,859

$

140

$

154,965

$

343,941

$

64,608

$

734,148


Net income

 


 


 


 


 


38,167


 


38,167


Other comprehensive loss

 


 


 


 


 


 


(13,588)


(13,588)


Stockbased compensation

 


 


 


 


1,557


 


 


1,557


Tax benefit from exercise of stock options

 


 


 


 


585


 


 


585


Shares sold options exercised

 


 


176,184


3


8,228


 


 


8,231


Shares issued in conversion of preferred stock to common stock

(74,967)


(1,189)


18,142


 


1,189





Dividends declared to preferred stockholders ($0.60 per share)

 


 


 


 


 


(6,487)


 


(6,487)


Dividends declared to common stockholders ($1.14 per share)

 


 


 


 


 


(16,256)


 


(16,256)

Balance at September 30, 2015

10,761,692

$

169,305


14,305,185

$

143

$

166,524

$

359,365

$

51,020

$

746,357


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




8




NATIONAL HEALTHCARE CORPORATION

Notes to Interim Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)




Note 1 Description of Business


National HealthCare Corporation (NHC or the Company) is a leading provider of senior health care services.  We operate or manage, through certain affiliates, 74 long-term care centers with a total of 9,403 licensed beds, 19 assisted living facilities, five independent living facilities, and 36 homecare programs.  We operate specialized care units within certain of our healthcare centers such as Alzheimer's disease care units and sub-acute nursing units.  We also have a non-controlling ownership interest in a hospice care business that services NHC owned health care centers and others.  In addition, we provide insurance services, management and accounting services, and we lease properties to operators of skilled nursing centers.  We operate in 10 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 of our significant accounting policies.  In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with limited need for managements judgment in their application.  There are also areas in which managements judgment in selecting any available alternative would not produce a materially different result.  See our audited December 31, 2014 consolidated financial statements and notes thereto which contain accounting policies and other disclosures required by generally accepted accounting principles.  Our audited December 31, 2014 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.  We assume that users of these interim financial statements have read or have access to the audited December 31, 2014 consolidated financial statements and Managements Discussion and Analysis of Financial Condition and Results of Operations 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 accounting principles generally accepted in the United States 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.


Revenue Recognition Third Party Payors


Approximately 65% of our net patient revenues are derived from Medicare, Medicaid, and other government programs.  Amounts earned under these programs are subject to review by the Medicare and Medicaid intermediaries or their agents.  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.  We have recorded liabilities of approximately $26,411,000 and




9




$22,931,000 as of September 30, 2015 and December 31, 2014, respectively, for various Medicare and Medicaid current and prior year cost reports and claims reviews.  


Revenue Recognition Private Pay


For private pay patients in skilled nursing or assisted living facilities, we bill room and board in advance with payment being due in the month the services are performed.  Charges for ancillary, pharmacy, therapy and other services to private patients are billed in the month following the performance of services; however, all billings are recognized as revenue when the services are performed.  


Revenue Recognition Subordination of Fees and Uncertain Collections


We provide management services to certain senior care facilities and to others we provide accounting and financial services.  We generally charge 6% to 7% of net operating revenues for our management services and a predetermined fixed rate per bed for the accounting and financial services.  Our policy is to recognize revenues associated with both management services and accounting and financial services on an accrual basis as the services are provided.  However, under the terms of our management contracts, payments for our management services are subject to subordination to other expenditures of the longterm care center being managed.  Furthermore, for certain of the third parties with whom we have contracted to provide services and which we have determined that collection is not reasonably assured, our policy is to recognize income only in the period in which the amounts are realized.  We may receive payment for the unpaid and unrecognized management fees in whole or in part in the future only if cash flows from the operating and investing activities of the centers or proceeds from the sale of the centers are sufficient to pay the fees.  There can be no assurance that such future cash flows will occur.  The realization of such previously unrecognized revenue could cause our reported net income to vary significantly from period to period.


We agree to subordinate our fees to the other expenses of a managed center because we believe we know how to improve the quality of patient services and finances of a senior healthcare center.  We believe subordinating our fees demonstrates to the owner and employees of the managed center how confident we are of the impact we can have in making the center operations successful.  We may continue to provide services to certain managed centers despite not being fully paid currently so that we may be able to collect unpaid fees in the future from improved operating results and because the incremental savings from discontinuing services to a center may be small compared to the potential benefit.  Also, we may benefit from providing other ancillary services to the managed center.  


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, which were $23,356,000 and $24,234,000 for the nine months ended September 30, 2015 and 2014, respectively.


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.







10




Capital leases are recorded at the lower of fair market value or the present value of future minimum lease payments.  Capital leases are amortized in accordance with the provision codified within Accounting Standards Codification (ASC) Subtopic 840-30, Leases Capital Leases.  Amortization of capital lease assets is included in depreciation and amortization expense.  


Accrued Risk Reserves  


We are selfinsured for risks related to health insurance and have whollyowned 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.  As of September 30, 2015, we and/or our managed centers are defendants in 33 such claims inclusive of years 2005 through September 30, 2015.  It remains possible that those pending matters plus potential unasserted claims could exceed our reserves, which 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.


Continuing Care Contracts and Refundable Entrance Fee


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 exceeds the original residents entry fee. In each case, we amortize the non-refundable part of these fees into revenue over the actuarially 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 classified as non-current liabilities and non-refundable entrance fees are classified as deferred revenue in the Company's consolidated balance sheets.  The balances of refundable entrance fees as of September 30, 2015 and December 31, 2014 were $10,208,000 and $10,219,000, respectively.


Obligation to Provide Future Services


We 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 (obligation to provide future services) with a corresponding charge to income.  As of September 30, 2015 and December 31, 2014, we have recorded a future service obligation in the amount of $3,927,000.


Other Noncurrent Liabilities


Other noncurrent liabilities include reserves primarily related to various uncertain income tax positions (See Note 12).   

 





11




Deferred Revenue


Deferred revenue includes the deferred gain on the sale of assets to National Health Corporation (National), the non-refundable portion (10%) of CCRC entrance fees being amortized over the remaining life expectancies of the residents, and premiums received within our workers compensation and professional liability companies that are not yet earned.


New Accounting Pronouncements


In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-03, "Imputation of Interest (Sub-Topic 835.30):  Simplifying the Presentation of Debt Issuance Costs".  ASU 2015-03 requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  In August 2015, the FASB issued ASU 2015-15 clarifying the application of this guidance to line of credit arrangements.  The amendments in the ASUs are effective retrospectively for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015.  Early adoption is permitted for financial statements not previously issued.  The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.  


In February 2015, the FASB issued ASU No. 2015-02 Amendments to the Consolidation Analysis. This update is in response to stakeholders that have expressed concerns that current generally accepted accounting principles (GAAP) might require a reporting entity to consolidate another legal entity in situations in which the reporting entitys contractual rights do not give it the ability to act primarily on its own behalf, the reporting entity does not hold a majority of the legal entitys voting rights, or the reporting entity is not exposed to a majority of the legal entitys economic benefits or obligations. Thus, the update modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities. It eliminates the presumption that a general partner should consolidate a limited partnership, for limited partnerships and similar legal entities that qualify as voting interest entities; a limited partner with a controlling financial interest should consolidate a limited partnership. A controlling financial interest may be achieved through holding a limited partner interest that provides substantive kick-out rights. Finally, it requires consideration of the effects of fee arrangements and related parties on the primary beneficiary determination.  The amendments in this update are effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period.  The Company is currently evaluating the impact of this guidance on our consolidated financial statements.


In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers. This update is the result of a collaborative effort by the FASB and the International Accounting Standards Board to simplify revenue recognition guidance, remove inconsistencies in the application of revenue recognition, and to improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. The FASB is amending the Accounting Standards Codification and creating a new Topic 606, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For a public entity, the amendments in this update are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is not permitted. The Company is currently evaluating the impact of this guidance on our consolidated financial statements and control framework.


In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.  This standard changes the requirements for reporting discontinued operations by raising the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation.  The standard limits discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entitys operations and financial results.  The standard is effective on a prospective basis for annual periods beginning on January 1, 2015.   This standard did not have a material impact on our interim condensed consolidated financial statements.







12




Note 3 Other Revenues


Other revenues are outlined in the table below.  Revenues from management and accounting services include management and accounting fees provided to managed and other health care centers.  Revenues from rental income include health care real estate properties owned by us and leased to third party operators.  Revenues from insurance services include premiums for workers compensation and professional liability insurance policies that our whollyowned limited purpose insurance subsidiaries have written for certain health care centers to which we provide management or accounting services.  "Other" revenues include miscellaneous health care related earnings.


Other revenues include the following:





Three Months Ended

September 30



Nine Months Ended

September 30

(in thousands)



2015



2014



2015



2014

Management and accounting services fees


$

3,384


$

3,822


$

10,420


$

11,825

Rental income



4,807



4,748



14,385



14,266

Insurance services



1,674



1,787



5,281



5,437

Other



170



94



764



608



$

10,035


$

10,451


$

30,850


$

32,136


Management Fees from National


We manage five skilled nursing facilities owned by National.  For the three months ended September 30, 2015 and 2014, we recognized management fees and interest on management fees of $885,000 and $884,000, respectively, from these centers.  For the nine months ended September 30, 2015 and 2014, we recognized management fees and interest on management fees of $2,709,000 and $2,679,000, respectively, from these centers.  


Because the amount collectable cannot be reasonably determined when the management services are provided, and because we cannot estimate the timing or amount of expected future collections, the unpaid fees from the five centers owned by National will be recognized as revenues only when the collectability of these fees can be reasonably assured.  Under the terms of our management agreement with National, the payment of these fees to us may be subordinated to other expenditures of the five longterm care centers.  We continue to manage these centers so that we may be able to collect our fees in the future and because the incremental savings from discontinuing services to a center may be small compared to the potential benefit.  We may receive payment for the unrecognized management fees in whole or in part in the future only if cash flows from the operating and investing activities of the five centers or the proceeds from the sale of the centers are sufficient to pay the fees.  There can be no assurance that such future improved cash flows will occur.  


Insurance Services


For workers compensation insurance services, the premium revenues reflected in the interim condensed consolidated statements of income for the three months ended September 30, 2015 and 2014 were $977,000 and $1,082,000, respectively.  For the nine months ended September 30, 2015 and 2014, the workers' compensation premium revenues reflected in the interim condensed consolidated statements of income were $3,190,000 and $3,362,000, respectively.  Associated losses and expenses are reflected in the interim condensed consolidated statements of income as "Salaries, wages and benefits."


For professional liability insurance services, the premium revenues reflected in the interim condensed consolidated statements of income for the three months ended September 30, 2015 and 2014 were $697,000 and $705,000, respectively.  For the nine months ended September 30, 2015 and 2014, the professional liability insurance premium revenues reflected in the interim condensed consolidated statements of income were $2,091,000 and $2,075,000, respectively.  Associated losses and expenses including those for selfinsurance are included in the interim condensed consolidated statements of income as "Other operating costs and expenses".







13




Note 4 NonOperating Income


Nonoperating income is outlined in the table below.  Nonoperating income includes equity in earnings of unconsolidated investments, dividends and other realized gains and losses on marketable securities, and interest income.  Our most significant equity method investment is a 75.1% noncontrolling ownership interest in Caris HealthCare L.P. (Caris), a business that specializes in hospice care services.






Three Months Ended

September 30



Nine Months Ended

September 30

(in thousands)



2015



2014



2015



2014

Equity in earnings of unconsolidated investments


$

1,538


$

1,414


$

3,924


$

5,069

Dividends and other net realized gains and losses on sales of securities



1,588



1,392



5,093



4,350

Interest income



1,424



1,131



3,885



3,371



$

4,550


$

3,937


$

12,902


$

12,790



Note 5 Long-Term Leases


Capital Leases


Fixed assets recorded under the capital leases, which are included in property and equipment in the interim condensed consolidated balance sheets, are as follows:




September 30, 2015



December 31, 2014



(in thousands)

Buildings and personal property

$

39,032


$

39,032 

Accumulated amortization


(6,214)



(3,271)


$

32,818


$

35,761 


Operating Leases


At September 30, 2015, NHC leases from National Health Investors, Inc. (NHI) the real property of 35 skilled nursing facilities, seven assisted living facilities and three independent living facilities under two separate lease agreements.  Base rent expense under both lease agreements totals $34,200,000 annually with rent thereafter escalating by 4% of the increase in facility revenue over the base year.  Total facility rent expense to NHI was $27,533,000 and $27,400,000 for the nine months ended September 30, 2015 and 2014, respectively.  






14




Minimum Lease Payments


The approximate future minimum lease payments required under all leases that have remaining non-cancelable lease terms at September 30, 2015 are as follows:





Operating Leases



Capital Leases



(in thousands)

2016

$

34,200


$

 5,200 

2017


34,200



 5,200 

2018


34,200



 5,200 

2019


34,200



 5,200 

2020


34,200



 5,200 

Thereafter


219,500



 17,767 

     Total minimum lease payments

$

390,500


$

 43,767 

     Less:  Amounts representing interest





 (9,470)

     Present value of minimum lease payments





 34,297 

     Less:  Current portion





 (3,230)

     Long-term capital lease obligations




$

 31,067 



Note 6 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.



Three Months Ended September 30



Nine Months Ended September 30

(in thousands, except for share and per share amounts)

2015



2014



2015



2014

Basic:













   Weighted average common shares outstanding



13,801,245



13,805,430



13,778,705



13,838,891

   Net income


$

12,567


$

12,829


$

38,167


$

38,569

   Dividends to preferred stockholders



(2,152)



(2,167)



(6,487)



(6,502)

   Net income available to common stockholders


$

10,415


$

10,662


$

31,680


$

32,067

   Earnings per common share, basic


$

0.75


$

0.77


$

2.30


$

2.32














Diluted:













   Weighted average common shares outstanding



13,801,245



13,805,430



13,778,705



13,838,891

   Dilutive effect of stock options



150,395



82,764



154,113



63,944

   Dilutive effect of restricted stock



-



2,814



1,577



3,657

   Dilutive effect of contingent issuable stock



471,020



345,504



430,856



323,539

   Assumed average common shares outstanding



14,422,660



14,236,512



14,365,251



14,230,031














   Net income available to common stockholders


$

10,415


$

10,662


$

31,680


$

32,067

   Earnings per common share, diluted


$

0.72


$

0.75


$

2.21


$

2.25

 

In the above table, options to purchase 11,592 and 12,890 shares of our common stock have been excluded for both the three months and nine months ended September 30, 2015 and 2014, respectively, due to their antidilutive impact.  We have also excluded 2,604,825 and 2,622,905 of common shares issuable upon the conversion of preferred stock for both the three months and nine months ended September 30, 2015 and 2014, respectively, due to their anti-dilutive impact.  






15




Note 7 Investments in Marketable Securities


Our investments in marketable securities are classified as available for sale securities.  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 8 for a description of the Company's methodology for determining the fair value of marketable securities.


Marketable securities and restricted marketable securities consist of the following:





September 30, 2015



December 31, 2014

(in thousands)



Amortized

Cost



Fair

Value



Amortized

Cost



Fair

Value

Investments available for sale:














Marketable equity securities


$

30,176


$

110,567


$

30,176


$

132,535

Restricted investments available for sale:












Corporate debt securities



69,347



69,052



68,594



68,916


Commercial mortgagebacked securities



62,689



62,735



63,351



63,252


U.S. Treasury securities



19,939



20,107



14,623



14,728


State and municipal securities



16,508



16,930



11,074



11,377




$

198,659


$

279,391


$

187,818


$

290,808



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




September 30, 2015


December 31, 2014



Shares



Cost



Fair

Value


Shares



Cost



Fair

Value

NHI Common Stock


1,630,642


$

24,734


$

93,746


1,630,642


$

24,734


$

114,080


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





September 30, 2015



December 31, 2014

(in thousands)



  Cost  



Fair Value



  Cost  



Fair

Value

Maturities:













Within 1 year


$

16,840


$

16,882


$

11,161


$

11,190

1 to 5 years



79,240



79,940



83,542



84,028

6 to 10 years



69,815



69,409



58,863



58,872

Over 10 years



2,588



2,593



4,076



4,183



$

168,483


$

168,824


$

157,642


$

158,273


Gross unrealized gains related to available for sale securities are $81,966,000 and $103,814,000 as of September 30, 2015 and December 31, 2014, respectively.  Gross unrealized losses related to available for sale securities are $1,234,000 and $824,000 as of September 30, 2015 and December 31, 2014, respectively.  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.  As a result, the Company recognized no other-than-temporary impairment during the nine months ended September 30, 2015 or for the year ended December 31, 2014.


Proceeds from the sale of securities during the nine months ended September 30, 2015 and 2014 were $39,601,000 and $27,641,000, respectively.  Investment gains of $449,000 and $172,000 were realized on these sales during the nine months ended September 30, 2015 and 2014, respectively.  






16




Note 8 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 modelbased 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 managements own estimates of assumptions that market participants would use in pricing the instrument, or valuations that require significant management judgment or estimation.


A financial instruments level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.  


Valuation of Marketable Securities


The Company determines fair value for marketable securities with Level 1 inputs through quoted market prices.  The Company determines fair value for marketable securities with Level 2 inputs through broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency.  Our Level 2 marketable securities have been initially valued at the transaction price and subsequently valued, at the end of each month, typically utilizing third party pricing services or other market observable data.  The pricing services utilize industry standard valuation models, including both income and market based approaches and observable market inputs to determine value.  These observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, and other industry and economic events.  


We validated the prices provided by our broker by reviewing their pricing methods, obtaining market values from other pricing sources, analyzing pricing data in certain instances and confirming that the relevant markets are active.  After completing our validation procedures, we did not adjust or override any fair value measurements provided by our broker as of September 30, 2015.  We did not have any transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy during the nine months ended September 30, 2015.  


Other


The carrying amounts of cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their shortterm nature.  The estimated fair value of notes receivable approximates the carrying value based principally on their underlying interest rates and terms, maturities, collateral and credit status of the receivables.  Our longterm debt approximates fair value due to variable interest rates, but fair value is also determined using Level 2 inputs through alternative pricing sources.  At September 30, 2015, there were no material differences between the carrying amounts and fair values of NHCs financial instruments.







17




The following table summarizes fair value measurements by level at September 30, 2015 and December 31, 2014 for assets and liabilities measured at fair value on a recurring basis (in thousands):




Fair Value Measurements Using

September 30, 2015


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

$

70,781

$

70,781

$

$

Restricted cash and cash equivalents


12,125


12,125



Marketable equity securities


110,567


110,567



Corporate debt securities


69,052


42,550


26,502


Commercial mortgagebacked securities


62,735



62,735


U.S. Treasury securities


20,107


20,107



State and municipal securities


16,930


7,574


9,356


Total financial assets

$

362,297

$

263,704

$

98,593

$




Fair Value Measurements Using

December 31, 2014


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

$

69,767

$

69,767

$

 

$

 

Restricted cash and cash equivalents


10,651


10,651


 


 

Marketable equity securities


132,535


132,535


 


 

Corporate debt securities


68,916


39,909


29,007


 

Commercial mortgagebacked securities


63,252



63,252


 

U.S. Treasury securities


14,728


14,728



 

State and municipal securities


11,377


2,216


9,161


 

Total financial assets

$

371,226

$

269,806

$

101,420

$

 



Note 9 LongTerm Debt


Longterm debt consists of the following:




Weighted

Average

Interest Rate


Maturities



September 30, 2015



December 31, 2014



Variable





(dollars in thousands)

Credit Facility, interest payable monthly


0.9%


2015


$

 


$

 












Unsecured term note payable to National, interest payable quarterly, principal payable at maturity


2.8%


2018



10,000 



10,000 








10,000 



10,000 

Less current portion







 



 







$

10,000 


$

10,000 






18




Credit Facility


Effective October 22, 2014, we extended the maturity of our $75,000,000 Credit Agreement with Bank of America, N.A. (Bank of America), as lender.  The Credit Agreement provided for a $75,000,000 revolving credit facility and the borrowings had an interest rate at either, (i) LIBOR plus 0.70% or (ii) the prime rate.  


On October 7, 2015, we entered into a $175,000,000 Credit Agreement with Bank of America that replaces the $75 million credit facility disclosed in the preceding paragraph.  The maturity date of the new credit facility is October 7, 2020.  Loans bear interest at either (i) LIBOR plus 1.40% or (ii) the base rate plus 0.40%.  The base rate is defined as the highest of (a) the Federal Funds Rate plus ½ of 1%, (b) the Bank of America prime rate, and (c) LIBOR plus 1.00%.  The credit facility is available for general corporate purposes, including working capital and acquisitions.  NHC is permitted, upon required notice to the lender, to prepay the loans outstanding under the credit facility at any time, without penalty.  Subsequent to September 30, 2015 and as disclosed in Note 14 "Subsequent Event", the Company has borrowed approximately $110,000,000 on the credit facility to fund the redemption of the Company's outstanding Preferred Stock.  


NHC's obligations under the Credit Agreement are guaranteed by certain NHC subsidiaries and are secured by pledges by NHC and the guarantors of certain equity interests.


The Credit Agreement contains customary representations and warranties, financial covenants, and covenants that restrict, among other things, asset dispositions, mergers and acquisitions, dividends, restricted payments, debt, liens, investments and affiliate transactions.  The Credit Agreement contains customary events of default.



Note 10 - Stock Repurchase Program


On May 7, 2015, the Board of Directors authorized two new stock repurchase programs, one that will allow for repurchase of up to $25 million of its common stock and one that allowed for the repurchase of up to $25 million of its preferred stock.  As of November 3, 2015, all of the Companys preferred stock has been redeemed.  Therefore, no future repurchases of the preferred stock will be performed.  The common stock repurchase plan expires on August 31, 2016.  The current repurchase plan replaces the plan previously approved by the Board of Directors on August 5, 2014.  


Under the common stock repurchase program, the Company may repurchase its common stock from time to time, in amounts and at prices the Company deems appropriate, subject to market conditions and other considerations.  The Companys repurchases may be executed using open market purchases, privately negotiated agreements or other transactions.  The Company intends to fund repurchases under the new stock repurchase programs from cash on hand, available borrowings or proceeds from potential debt or other capital market sources. The stock repurchase programs may be suspended or discontinued at any time without prior notice.  The Company will provide an update regarding any purchases made pursuant to the stock repurchase programs each time it reports its results of operations.


On August 11, 2014, under the previous stock purchase plan, the Company repurchased 125,000 shares of its common stock for a total cost of $6,995,000.  The shares were funded from cash on hand and were cancelled and returned to the status of authorized but unissued.  



Note 11 StockBased Compensation


NHC recognizes stockbased compensation expense for all stock options and restricted stock granted over the requisite service period using the fair value for these grants as estimated at the date of grant either using the BlackScholes pricing model for stock options or the quoted market price for restricted stock.


The 2005 and 2010 StockBased Compensation Plans


The Compensation Committee of the Board of Directors (the Committee) has the authority to select the participants to be granted options; to designate whether the option granted is an incentive stock option (ISO), a




19




nonqualified option, or a stock appreciation right; to establish the number of shares of common stock that may be issued upon exercise of the option; to establish the vesting provision for any award; and to establish the term any award may be outstanding.  The exercise price of any ISOs granted will not be less than the fair market value of the shares of common stock on the date granted and the term of an ISO may not be any more than ten years.  The exercise price of any nonqualified options granted will not be less than the fair market value of the shares of common stock on the date granted unless so determined by the Committee.


In May 2005, our stockholders approved the 2005 Stock Option, Employee Stock Purchase, Physician Stock Purchase and Stock Appreciation Rights Plan (the 2005 Plan) pursuant to which 1,200,000 shares of our common stock were available to grant as stockbased payments to key employees, directors, and nonemployee consultants.  The shares granted during the nine months ended September 30, 2015 consisted of 45,000 shares to the Directors of the Company.  At September 30, 2015, 175,620 shares were available for future grants under the 2005 Plan.


In May 2010, our stockholders approved the 2010 Omnibus Equity Incentive Plan (the 2010 Plan) pursuant to which 1,200,000 shares of our common stock were available to grant as stockbased payments to key employees, directors, and nonemployee consultants.  In May 2015, our stockholders voted to amend the 2010 Plan to increase the number of shares of our common stock authorized under the Plan from the original 1,200,000 shares to 2,575,000 shares.  The shares granted during the nine months ended September 30, 2015 consisted of 11,592 shares through the Employee Stock Purchase Plan.  At September 30, 2015, 1,762,152 shares were available for future grants under the amended 2010 Plan.


Compensation expense is recognized only for the awards that ultimately vest.  Stockbased compensation totaled $425,000 and $377,000 for the three months ended September 30, 2015 and 2014, respectively. Stockbased compensation totaled $1,557,000 and $1,547,000 for the nine months ended September 30, 2015 and 2014, respectively.  At September 30, 2015, we had $699,000 of unrecognized compensation cost related to unvested stock option awards.  This expense will be recognized over the remaining weighted average vesting period, which is approximately 0.4 years.  Stockbased compensation is included in Salaries, wages and benefits in the interim condensed consolidated statements of income.


Stock Options


The following table summarizes the significant assumptions used to value the options granted for the nine months ended September 30, 2015 and for the year ended December 31, 2014.




2015


2014

Riskfree interest rate


0.71%


0.52%

Expected volatility


16.5%


17.3%

Expected life, in years


2.2 years


2.2 years

Expected dividend yield


2.73%


2.68%


The following table summarizes our outstanding stock options for the nine months ended September 30, 2015 and for the year ended December 31, 2014.





Number of

Shares



Weighted

Average

Exercise Price



Aggregate

Intrinsic

Value

Options outstanding at January 1, 2014


1,074,552 


$

46.44


$

Options granted


57,716 



53.10



Options exercised


(157,590)



45.97



Options cancelled


(20,000)



46.69



Options outstanding at December 31, 2014


954,678 



46.92



Options granted


56,792 



61.47



Options exercised


(176,184)



46.68



Options outstanding at September 30, 2015


835,286


$

47.95


$

10,839,000










Options exercisable at September 30, 2015


187,263


$

51.36


$

1,802,000


Options

Outstanding

September 30, 2015


Exercise Prices


Weighted Average

Exercise Price


Weighted Average

Remaining Contractual

Life in Years

778,694


$44.80 - $52.93

$

46.97


0.8

56,592


$61.25 - $62.34


61.47


3.7

835,286



$

47.95


0.96


Restricted Stock


The following table summarizes our restricted stock activity for the nine months ended September 30, 2015 and for the year ended December 31, 2014.





Number of

Shares



Weighted

Average Grant Date Fair Value



Aggregate Intrinsic Value

Nonvested restricted shares at January 1, 2014


12,000


$

34.46

$

Award shares granted





Award shares vested


6,000



34.46


Nonvested restricted shares at December 31, 2014


6,000



34.46


Award shares granted





Award shares vested


6,000



34.46


Nonvested restricted shares at September 30, 2015



$

$



Note 12 Income Taxes


The income tax provision for the three months ended September 30, 2015 is $5,744,000 (an effective income tax rate of 31.4%).  The income tax provision and effective tax rate for the three months ended September 30, 2015 were unfavorably impacted by adjustments to unrecognized tax benefits of $183,000, excluding statute of limitation expirations, and unfavorably impacted by permanent differences including nondeductible expenses of $522,000 resulting in an increase in the provision.  The income tax provision and effective tax rate for the three months ended September 30, 2015 were favorably impacted by statute of limitation expirations resulting in a benefit to the provision of $1,715,000 or 9.4% of income before taxes in 2015.  


The income tax provision for the three months ended September 30, 2014 was $5,844,000 (an effective income tax rate of 31.3%).  The income tax provision and effective tax rate for the three months ended September 30, 2014 were favorably impacted by adjustments to unrecognized tax benefits of $16,000, excluding statute of limitation expirations and unfavorably impacted by permanent differences including nondeductible expenses of $460,000 resulting in an increase in the provision.  The income tax provision and effective tax rate for the three months ended September 30, 2014 were favorably impacted by statute of limitation expirations resulting in a benefit to the provision of $1,542,000 or 8.3% of income before taxes in 2014.  


The income tax provision for the nine months ended September 30, 2015 is $21,638,000 (an effective income tax rate of 36.2%).  The income tax provision and effective tax rate for the nine months ended September 30, 2015 were unfavorably impacted by adjustments to unrecognized tax benefits of $513,000, excluding statute of limitation expirations, and unfavorably impacted by permanent differences including nondeductible expenses of $560,000 resulting in an increase in the provision.  The income tax provision and effective tax rate for the nine months ended September 30, 2015 were favorably impacted by statute of limitation expirations resulting in a benefit to the provision of $1,715,000 or 2.9% of income before taxes in 2015.  


The income tax provision for the nine months ended September 30, 2014 was $22,028,000 (an effective income tax rate of 36.4%).  The income tax provision and effective tax rate for the nine months ended September 30, 2014 were unfavorably impacted by adjustments to unrecognized tax benefits of $290,000 and permanent differences including nondeductible expenses of $557,000 resulting in an increase in the provision.  The income tax




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provision and effective tax rate for the nine months ended September 30, 2014 were favorably impacted by statute of limitation expirations resulting in a benefit to the provision of $1,542,000 or 2.5% of income before taxes in 2014.  


Our deferred tax assets have been evaluated for realization based on historical taxable income, tax planning strategies, the expected timing of reversals of existing temporary differences and future taxable income anticipated.  Our deferred tax assets are more likely than not to be realized in full due to the existence of sufficient taxable income of the appropriate character under the tax law.  As such, there is no need for a valuation allowance.


Uncertain tax positions may arise where tax laws may allow for alternative interpretations or where the timing of recognition of income is subject to judgment.  We believe we have made adequate provision for unrecognized tax benefits related to uncertain tax positions.  However, because of uncertainty of interpretation by various tax authorities and the possibility that there are issues that have not been recognized by management, we cannot guarantee we have accurately estimated our tax liabilities.  We believe that our liabilities reflect the anticipated outcome of known uncertain tax positions in conformity with ASC Topic 740, Income Taxes.  Our liabilities for unrecognized tax benefits are presented in the consolidated balance sheets within Other Noncurrent Liabilities.


At September 30, 2015, we had $14,292,000 of unrecognized tax benefits, composed of $9,053,000 of deferred tax assets and $5,239,000 of permanent differences.  Accrued interest and penalties of $2,444,000 relate to unrecognized tax benefits at September 30, 2015.  Unrecognized tax benefits of $5,239,000 net of federal benefit, at September 30, 2015, attributable to permanent differences, would favorably impact our effective tax rate if recognized.  Accrued interest and penalties of $2,203,000 relate to these permanent differences at September 30, 2015.  We do not expect to recognize significant increases or decreases in unrecognized tax benefits within the twelve months beginning October 1, 2015, except for the effect of decreases related to the lapse of statute of limitations estimated at $2,705,000, composed of temporary differences of $1,487,000, and permanent tax differences of $1,218,000.  Interest and penalties of $644,000 relate to these temporary and permanent difference changes within 12 months beginning September 30, 2015.  


Interest and penalties expense related to U.S. federal and state income tax returns are included within income tax expense.  


The Company is no longer subject to U.S. federal and state examinations by tax authorities for years before 2012 (with certain state exceptions). Currently, the 2012 U.S. federal return and one state return are under examination.   



Note 13 Contingencies and Commitments


Accrued Risk Reserves


We are selfinsured for risks related to health insurance and have whollyowned limited purpose insurance companies that insure risks related to workers compensation and general and professional liability insurance claims both for our owned or 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 $105,933,000 and $106,218,000 at September 30, 2015 and December 31, 2014, 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 whollyowned 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.  






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Workers Compensation


For workers compensation, we utilize a whollyowned Tennessee domiciled property/casualty insurance company to write coverage for NHC affiliates and for thirdparty 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.  Direct business coverage is written for statutory limits and the insurance companys losses in excess of $1,000,000 per claim are covered by reinsurance.  


General and Professional Liability Lawsuits and Insurance


The senior care industry has experienced increases in both the number of personal injury/wrongful death claims and in the severity of awards based upon alleged negligence by nursing facilities and their employees in providing care to residents.  As of September 30, 2015, we and/or our managed centers are currently defendants in 33 such claims.


In 2002, due to the unavailability and/or prohibitive cost of thirdparty professional liability insurance coverage, we established and capitalized a whollyowned licensed liability insurance company incorporated in the Cayman Islands, for the purpose of managing our losses related to these risks.  Thus, since 2002, insurance coverage for incidents occurring at all NHC owned providers, and most providers managed by us, is provided through this whollyowned insurance company.  


Insurance coverage for all years includes both primary policies and excess policies.  Beginning in 2003, both primary and excess coverage is provided through our whollyowned insurance company.  The primary coverage is in the amount of $1.0 million per incident, $3.0 million per location with an annual primary policy aggregate limit that is adjusted on an annual basis.  The excess coverage is $7.5 million annual excess in the aggregate applicable to years 20052007, $9.0 million annual excess in the aggregate for years 20082010, $4.0 million excess per occurrence for 20112013 and $9.0 million excess per occurrence for 2014-2015.  


Beginning in 2008 and continuing through September 30, 2015, additional insurance is purchased through third party providers that serve to supplement the coverage provided through our whollyowned captive insurance company.  


Civil Investigative Demand


On December 19, 2013, the Company was served with a civil investigative demand (CID) from the U.S. Department of Justice and the Office of the U.S. Attorney for the Eastern District of Tennessee (DOJ Investigation) requesting the production of documents and interrogatory responses regarding the billing for and medical necessity of certain rehabilitative therapy services. Based upon our review, the CID appears to relate to services provided at our facilities based in Knoxville, Tennessee.

 

On October 7, 2014, the Company received a subpoena from the Office of Inspector General of the United Department of Health and Human Services (OIG Subpoena) related to the current DOJ Investigation.  The OIG Subpoena requests certain financial and organizational documents from the Company and certain of its subsidiaries and SNFs and medical records from certain of the Companys Tennessee-based SNFs. 

 

The Company is cooperating fully with these requests. We are unable to evaluate the outcome of this investigation at this time.  It is possible that this claim could have a material adverse effect on our consolidated financial position, results of operations and cash flows.

 

Caris HealthCare, L.P. Investigation


On December 9, 2014, Caris, a business that specializes in hospice care services in Company-owned health care centers and in other settings, received notice from the U.S. Attorneys Office for the Eastern District of Tennessee and the Attorney Generals Offices for the State of Tennessee and State of Virginia that those government entities were conducting an investigation regarding patient eligibility for hospice services provided by Caris.  We have a 75.1% non-controlling ownership interest in Caris.  





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Caris is cooperating with these government entities in connection with this investigation.  We are unable to evaluate the outcome of this investigation at this time.  It is possible that this claim could have a material adverse effect on our consolidated financial position, results of operations and cash flows.


There is certain additional litigation incidental to our business, none of which, in the opinion of management, 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.


South Carolina Medicaid Audits


The South Carolina Office of State Auditor (State Auditor) conducted Medicaid cost report audits for eleven of the Companys South Carolina skilled nursing facilities.  The State Auditor has issued audit findings for the fiscal years ending September 30, 2013 and September 30, 2014.  


The Company cooperated fully with these audits and has filed administrative appeals with the South Carolina Department of Health and Human Services.  We are unable to reasonably estimate the outcome of the appeals at this time, and accordingly have not recorded a provision or charge to earnings in the consolidated financial statements.  It is possible these audits could have a material adverse effect on our consolidated financial position, results of operations and cash flows.


Financing Commitment


On May 7, 2015, the Board of Directors amended the line of credit agreement the Company has with National.  Under the previous line of credit agreement, the maximum loan commitment was $2,000,000.  Effective May 7, 2015, the maximum loan commitment has been increased to $7,000,000.  The increased commitment amount will remain in effect until December 31, 2015.  On January 1, 2016, the maximum loan commitment amount will revert back to $2,000,000.  The final maturity of the line of credit agreement remains January 20, 2018 and the interest rate on the outstanding balance remains 85% of the prime rate, or 2.76% at September 30, 2015.  As of September 30, 2015 and December 31, 2014, National had an outstanding balance on the line of credit of $4,500,000 and $0, respectively.  This outstanding balance is presented in notes receivable in the interim condensed consolidated balance sheets.


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 in compliance with all applicable laws and regulations in all material respects.  However, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusions from the Medicare, Medicaid and other federal healthcare programs.  



Note 14 Subsequent Event


On November 3, 2015, the Series A Convertible Preferred Stock was redeemed for cash at a redemption price of $15.75 per share, plus an accrued dividend of $0.04 per share, for a total of $15.79 per share.  There were 8,290,775 shares of Preferred Stock redeemed under the mandatory redemption for approximately $130,580,000.  As of November 3, 2015, the Preferred Stock is no longer deemed outstanding, and all rights with respect to such stock ceased and terminated, except for the right of the holders to receive payment of the redemption price, without interest. The funding of the Preferred Stock redemption was provided by the Company's cash on hand and borrowings under the credit facility of approximately $110,000,000.


In lieu of redemption, at any time prior to 5:00 p.m. (EDT) on November 2, 2015, the holders of the Preferred Stock could have converted any or all of their shares into shares of the Company's common stock.  The holders electing to convert their Preferred Shares received 0.24204 shares of common stock for each Preferred Share, together with the cash payable with respect to fractional shares.  There were 2,470,917 shares of preferred stock that were converted into 597,968 shares of the Company's common stock subsequent to September 30, 2015, but prior to the redemption.





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Item 2.

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


Overview


National HealthCare Corporation (NHC or the Company) is a leading provider of senior health care services.  We operate or manage, through certain affiliates, 74 long-term care centers with a total of 9,403 licensed beds, 19 assisted living facilities, five independent living facilities, and 36 homecare programs.  We operate specialized care units within certain of our healthcare centers such as Alzheimer's disease care units and sub-acute nursing units.  We also have a non-controlling ownership interest in a hospice care business that services NHC owned health care centers and others.  In addition, we provide insurance services, management and accounting services, and we lease properties to operators of skilled nursing centers.  We operate in 10 states and are located primarily in the southeastern United States.



Summary of Goals and Areas of Focus


Earnings


To monitor our earnings, we have developed budgets and management reports to monitor labor, census, and the composition of revenues.  


Occupancy


Occupancy, or census, in our skilled nursing facilities is a primary area of management focus.  For the nine months ended September 30, 2015, the total census at our owned and leased skilled nursing facilities averaged 90.0%, compared to an average of 88.9% for the same period a year ago.  


The number of skilled nursing facilities in the United States has been declining for several years.  Despite this decline in inventory, occupancy levels for skilled nursing facilities have also seen a steady decline during this period.  We believe the steady decline of occupancy has been caused by the following factors:  (1) a combination of Federal and State initiatives have led to government programs aggressively shifting more patients to home and community-based services; (2) an increased availability of continuing care retirement communities, assisted living and memory care facilities and other senior living options; and (3) a shorter average length of stay for skilled nursing patients.  To monitor our census, we have developed budgets and created programs to assess facility availabilities within certain regions.  We also continue to develop and enhance our relationships with the various payor sources and local referral sources in the communities in which we operate.       


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

SNF/AL


Leased


120 beds / 52 units


Independence, MO


March, 2014

SNF


Leased


70 beds


Independence, MO


March, 2014

SNF/AL


Leased


130 beds / 52 units


St. Peters, MO


March, 2014

AL


Partnership


83 units


Augusta, GA


June, 2014

Psychiatric Hospital


Partnership


14 beds


Osage Beach, MO


June, 2014

SNF


New Facility


52 beds


Kingsport, TN


December,2014

SNF/AL


New Facility


92 beds/60 Units


Gallatin, TN


April, 2015

Memory Care


Partnership


60 beds


St. Peters, MO


Under construction

SNF/AL


New Facility


90 beds / 80 Units


Nashville, TN


Under construction

AL


New Facility


76 units


Bluffton, SC


Under construction

AL


New Facility


80 units


Garden City, SC


Under construction

SNF


New Facility


112 beds


Columbia, TN


Under construction


For the projects under construction at September 30, 2015, the 60-bed memory care facility located in St. Peters, Missouri is expected to begin operations during the fourth quarter of 2015 (we have a 25% ownership




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interest in this partnership and a management agreement to manage the operations of the facility); the 90-bed skilled nursing facility and 80-unit assisted living facility located in Nashville, Tennessee is expected to begin operations in the second or third quarter of 2016; the 76-unit assisted living facility in Bluffton, SC is expected to begin operations in the second quarter of 2016; the 80-unit assisted living facility in Garden City, SC is expected to begin operations in the third quarter of 2016; and the 112 bed replacement center that will combine the 92 beds of NHC Hillview in Columbia, Tennessee with 20 beds form the existing skilled nursing unit at Maury Regional Medical Center is expected to being operations in the third quarter of 2016.    


During 2015, we plan to apply for Certificates of Need for additional beds in certain of our markets.  We also will evaluate the feasibility of expansion into new markets by building private pay health care centers or assisted living communities.


Accrued Risk Reserves


Our accrued professional liability reserves, workers compensation reserves and health insurance reserves totaled $105,933,000 at September 30, 2015 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 inhouse 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.  



Application of Critical Accounting Policies


There were no significant changes during the nine month period ended September 30, 2015 to the items we disclosed as our critical accounting policies and estimates in our discussion and analysis of financial condition and results of operations in our December 31, 2014 Annual Report on Form 10K filed with the SEC.



Government Program Financial Changes


Federal Health Care Reform


In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act ("PPACA" or, commonly, ACA) and the Health Care and Education Reconciliation Act of 2010 ("HCERA"), which represents significant changes to the current U.S. health care system (collectively the "Acts"). The primary goals of the Acts are to: (1) expand coverage to Americans without health insurance, (2) reform the delivery system to improve quality and drive efficiency, (3) and to lower the overall costs of providing health care.  The timeline of the enacted provisions span over several years some of the provisions were effective immediately in 2010 and others will be phased in through 2020.  


The U.S. Supreme Court has since issued its ruling on the constitutionality of a key provision in the ACA, which is the requirement that every American maintain a minimum level of health coverage or pay a penalty beginning in 2014.  The Supreme Court upheld the constitutionality of the individual mandate, holding that the penalty for not doing so could reasonably be interpreted as a tax, which the Constitution permits.  The ruling also permitted the federal government to pursue a broad expansion of the Medicaid program, but the ruling gives the states the maximum flexibility on whether to do so.  With Medicaid coverage expansion, the current Administration could release a host of regulations and an array of new taxes and fees. It is uncertain at this time the effect the Acts, their modifications, or Medicaid expansion will have on our future results of operations or cash flows.  


Medicare Skilled Nursing Facilities


In August 2014, CMS released its skilled nursing facility PPS update for the fiscal year 2015, which began October 1, 2014.  The final rule provided for a 2.0% rate update, which reflected a 2.5% market basket increase less




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a 0.5% multifactor productivity adjustment as required by the ACA.  CMS estimated the update would increase overall payments to skilled nursing facilities in fiscal year 2015 by $750 million compared to fiscal year 2014 levels.  The 2015 final rule also included wage index updates, revisions to the change of therapy (COT) other Medicare required assessment (OMRA) policy, and comments pertaining to CMS observations on therapy utilization trends.  The effect of the 2015 PPS rate update on our revenues will be dependent upon our census and the mix of our patients at the PPS payment rates.


For the first nine months of 2015, our average Medicare per diem rate for skilled nursing facilities increased 0.7% compared to the same period in 2014.  


On July 30, 2015, CMS released its final rule outlining the fiscal year 2016 Medicare payments for skilled nursing facilities, which began October 1, 2015.  The 2016 final rule provides for an approximate 1.2% rate update.  This estimated increase consists of a 2.3% market basket increase, reduced by a 0.6% forecast error adjustment and further reduced 0.5% for a multifactor productivity adjustment required by the ACA.  CMS estimates the update will increase overall payments to skilled nursing facilities in fiscal year 2016 by $430 million compared to fiscal year 2015 levels.  The effect of the 2016 PPS rate update on our revenues will be dependent upon our census and the mix of our patients at the various PPS pay rates.


Medicaid Skilled Nursing Facilities


Effective July 1, 2014 and for the fiscal year 2015, the state of Tennessee implemented individual skilled nursing facility rate changes.  With new state legislation being passed for the 2015 fiscal year, there are four components that impact Tennessee Medicaid reimbursement for skilled nursing facilities:  a Level I or Level II per diem, a quarterly acuity payment, a quarterly Quality Improvement in Long-Term Services and Supports ("QuILTSS") payment (which are incentives based on qualifying criteria in several categories), and an assessment fee (expense).  Effective July 1, 2014, each facility will now be charged an assessment fee based on 4.5% of net patient revenues.  The assessment fee is replacing the former bed tax fee.  In summary and for the 2015 fiscal year, Tennessee Medicaid reimbursement changes increased income before income taxes by approximately $1,500,000 annually, or $375,000 per quarter.  


Effective July 1, 2015 and for the fiscal year 2016, the state of Tennessee implemented specific individual nursing facility rate increases.  We estimate the resulting increase in revenue beginning July 1, 2015 will be approximately $2,300,000 annually, or $575,000 per quarter.  


Effective October 1, 2014 and for the fiscal year 2015, South Carolina implemented specific individual nursing facility rate increases.  We estimate the resulting increase in revenue beginning October 1, 2014 will be approximately $1,800,000 annually, or $450,000 per quarter.


For the first nine months of 2015, our average Medicaid per diem increased 1.2% compared to the same period in 2014. We face challenges with respect to states Medicaid payments, because many currently do not cover the total costs incurred in providing care to those patients. States will continue to control Medicaid expenditures and also look for adequate funding sources, including provider assessments.  There are several pieces of legislation that include provisions designed to reduce Medicaid spending. These provisions include, among others, provisions strengthening the Medicaid asset transfer restrictions for persons seeking to qualify for Medicaid long-term care coverage, which could, due to the timing of the penalty period, increase facilities exposure to uncompensated care. Other provisions could increase state funding for home and community-based services, potentially having an impact on funding for nursing facilities.


Medicare Homecare Programs


On October 30, 2014 and effective January 1, 2015, CMS released its final rule for the 2015 home health prospective payment system.  The final rule reduces home health payments overall by 0.3 percent from 2014 payment levels.  The payment decrease reflects the impact of the 2.1% home health payment update ($390 million increase) and the second year of the four-year phase-in of the rebasing adjustments to the national, standardized 60-day episode payment rate, the national per-visit payment rates, and the non-routine medical supplies conversion factor (2.4% or $450 million decrease).  The final rule also makes adjustments to the new home health face-to-face requirements, updates the Home Health Quality Reporting Program, and discusses a potential value-based purchasing model to begin testing in 2016.  





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Results of Operations


Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014


Results for the quarter ended September 30, 2015 include a 3.3% increase in net operating revenues and a 1.9% decrease in income before income taxes compared to the same period in 2014.  Excluding the operating losses from the two newly constructed skilled nursing facilities and one assisted living facility placed in service less than twelve months ago, income before income taxes for the quarter ended September 30, 2015 would have increased 6.6% compared to the same period in 2014.

 

The total census at owned and leased skilled nursing facilities for the quarter averaged 89.7% compared to an average of 88.8% for the same quarter a year ago.


Medicare and managed care per diem rates at our owned and leased skilled nursing facilities increased 1.1% and 1.2%, respectively, compared to the same quarter a year ago.  Medicaid and private pay per diem rates at our owned and leased skilled nursing facilities increased 1.5% and 2.2%, respectively, compared to the same quarter a year ago.  Overall, the composite skilled nursing per diem at our owned and leased skilled nursing facilities increased 2.0% compared to the same quarter a year ago.


Net patient revenues increased $7,579,000, or 3.6%, compared to the same quarter last year.  The majority of the increase consisted of the increase in our same facility skilled nursing centers along with the three newly constructed healthcare facilities (two SNFs and one ALF) compared to the same quarter a year ago.  The net patient revenues from our same facility skilled nursing centers increased $3,754,000 compared to the same quarter a year ago. The same facility revenue increase was driven by the census increase and also having a higher percentage of skilled patients (Medicare and managed care patients) compared to the same quarter a year ago.  The three newly operated facilities helped increase net patient revenues $2,128,000.  


Other revenues decreased $416,000, or 4.0%, compared to the same quarter last year, as further detailed in Note 3 to our interim condensed consolidated financial statements.  The decrease in other revenues is primarily due to a decrease in accounting services fees.  As of October 1, 2014, the Company no longer provided accounting and financial services to seven healthcare facilities.  The discontinuation of these accounting and financial services caused other revenues in the consolidated statements of income to decrease by approximately $400,000 per quarter.  At September 30, 2015 and December 31, 2014, we provided accounting and financial services to 20 healthcare facilities.


Total costs and expenses for the third quarter of 2015 compared to the third quarter of 2014 increased $8,138,000, or 4.0%, to $211,625,000 from $203,487,000.  Salaries, wages and benefits, the largest operating costs of our company, increased $6,198,000, or 4.8%, to $135,136,000 from $128,938,000.  Other operating expenses increased $1,251,000, or 2.3%, to $56,616,000 for the 2015 period compared to $55,365,000 for the 2014 period.  Facility rent expense increased $93,000 to $10,006,000.  Depreciation and amortization increased $634,000 to $9,273,000.  Interest expense decreased $38,000 to $594,000.


Salaries, wages and benefits as a percentage of net operating revenue was 60.0% compared to 59.1% for the three months ended September 30, 2015 and 2014, respectively.  The increase in salaries, wages and benefits is primarily due to the increased costs for therapist services ($2,746,000) and the operations of the three newly constructed healthcare facilities ($1,571,000) compared to the quarter a year ago.  We also incurred inflationary wage increases for our partners.  


Other operating expenses as a percentage of net operating revenue was 25.1% compared to 25.4% for the three months ended September 30, 2015 and 2014, respectively.  The increase in other operating expenses for the current quarter was due to the operations of the three newly constructed healthcare facilities compared to the quarter a year ago ($1,718,000).  

 

Nonoperating income increased by $613,000 compared to the same period last year, as further detailed in Note 4 to our interim condensed consolidated financial statements.  The increase in non-operating income is primarily from the increase in our dividend and interest income from our marketable securities.






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The income tax provision for the three months ended September 30, 2015 is $5,744,000 (an effective income tax rate of 31.4%).  The income tax provision and effective tax rate for the three months ended September 30, 2015 were unfavorably impacted by adjustments to unrecognized tax benefits of $183,000 excluding statute of limitation expirations, and unfavorably impacted by permanent differences including nondeductible expenses of $522,000 resulting in an increase in the provision.  The income tax provision and effective tax rate for the three months ended September 30, 2015 were favorably impacted by statute of limitation expirations resulting in a benefit to the provision of $1,715,000 or 9.4% of income before taxes in 2015.  


The income tax provision for the three months ended September 30, 2014 was $5,844,000 (an effective income tax rate of 31.3%).  The income tax provision and effective tax rate for the three months ended September 30, 2014 were favorably impacted by adjustments to unrecognized tax benefits of $16,000, excluding statute of limitation expirations and unfavorably impacted by permanent differences including nondeductible expenses of $460,000 resulting in an increase in the provision.  The income tax provision and effective tax rate for the three months ended September 30, 2014 were favorably impacted by statute of limitation expirations resulting in a benefit to the provisions of $1,542,000 or 8.3% of income before taxes in 2014.  


Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014


Results for the nine month period ended September 30, 2015 include a 4.2% increase in net operating revenues and a 1.3% decrease in income before income taxes compared to the same period in 2014.  Excluding the operating losses from the five newly constructed or leased skilled nursing facilities and three assisted living facilities placed in service less than twelve months ago, income before income taxes for the nine months ended September 30, 2015 would have increased 7.1% compared to the same period in 2014.


The total census at owned and leased skilled nursing facilities for the nine months averaged 90.0% compared to an average of 88.9% for the same period a year ago.


Medicare and managed care per diem rates at our owned and leased skilled nursing facilities each increased 0.7% compared to the nine months a year ago.  Medicaid and private pay per diem rates at our owned and leased skilled nursing facilities increased 1.2% and 2.6%, respectively, compared to the period a year ago.  Overall, the composite skilled nursing per diem at our owned and leased skilled nursing facilities increased 2.5% compared to the nine months a year ago.


Net patient revenues increased $28,672,000, or 4.7%, compared to the same period last year.  The majority of the increase consisted of the increase in our same facility skilled nursing centers along with the eight newly constructed or leased healthcare facilities (five SNFs and three ALFs) compared to the same nine month period a year ago.  The net patient revenues from our same facility skilled nursing centers increased $14,769,000 compared to the nine month period a year ago. The same facility revenue increase was driven by the census increase and also having a higher percentage of skilled patients (Medicare and managed care patients) compared to the nine month period a year ago.  The eight newly operated facilities helped increase net patient revenues $10,433,000.


Other revenues decreased $1,286,000, or 4.0%, compared to the same period last year, as further detailed in Note 3 to our interim condensed consolidated financial statements.  The decrease in other revenues is primarily due to a decrease in accounting services fees.  As of October 1, 2014, the Company no longer provided accounting and financial services to seven healthcare facilities.  The discontinuation of these accounting and financial services caused other revenues in the consolidated statements of income to decrease by approximately $400,000 per quarter.  At September 30, 2015 and December 31, 2014, we provide accounting and financial services to 20 healthcare facilities.


Total costs and expenses for the 2015 nine months compared to the same period in 2014 increased $28,290,000, or 4.7%, to $625,792,000 from $597,502,000.  Salaries, wages and benefits, the largest operating costs of our company, increased $18,489,000, or 4.9%, to $392,766,000 from $374,277,000.  Other operating expenses increased $7,027,000, or 4.2%, to $173,830,000 for the 2015 period compared to $166,803,000 for the 2014 period.  Facility rent expense increased $260,000 to $29,972,000.  Depreciation and amortization increased $2,298,000 to $27,442,000.  Interest expense increased $216,000 to $1,782,000.


Salaries, wages and benefits as a percentage of net operating revenue was 58.4% compared to 58.0% for the nine months ended September 30, 2015 and 2014, respectively.  The increase in salaries, wages and benefits is




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primarily due to the increased costs for therapist services ($8,093,000) and the new operations of the eight healthcare facilities ($6,983,000) compared to the same nine month period a year ago.  We also incurred inflationary wage increases for our partners.  


Other operating expenses as a percentage of net operating revenue were 25.8% for both the nine months ended September 30, 2015 and 2014.  The increase in other operating expenses for the current period was due to the new operations of the eight healthcare facilities compared to the same period a year ago ($6,554,000).  


The increase in depreciation expense is due to the new healthcare facilities placed in service and the increase in interest expense is due to the capital leases recorded for the three Missouri healthcare facilities we began operating on March 1, 2014.   


Nonoperating income increased by $112,000 compared to the same nine month period last year, as further detailed in Note 4 to our interim condensed consolidated financial statements.  The increase in non-operating income is primarily from the increase in our dividend and interest income from our marketable securities.


The income tax provision for the nine months ended September 30, 2015 is $21,638,000 (an effective income tax rate of 36.2%).  The income tax provision and effective tax rate for the nine months ended September 30, 2015 were unfavorably impacted by adjustments to unrecognized tax benefits of $513,000, excluding statute of limitation expirations, and unfavorably impacted by permanent differences including nondeductible expenses of $560,000 resulting in an increase in the provision.  The income tax provision and effective tax rate for the nine months ended September 30, 2015 were favorably impacted by statute of limitation expirations resulting in a benefit to the provision of $1,715,000 or 2.9% of income before taxes in 2015.  


The income tax provision for the nine months ended September 30, 2014 was $22,028,000 (an effective income tax rate of 36.4%).  The income tax provision and effective tax rate for the nine months ended September 30, 2014 were unfavorably impacted by adjustments to unrecognized tax benefits of $290,000 and permanent differences including nondeductible expenses of $557,000 resulting in an increase in the provision.  The income tax provision and effective tax rate for the nine months ended September 30, 2014 were favorably impacted by statute of limitation expirations resulting in a benefit to the provision of $1,542,000 or 2.5% of income before taxes in 2014.  



Liquidity, Capital Resources, and Financial Condition


Our primary sources of cash include revenues from the operations of our healthcare and senior living facilities, insurance services, management and accounting services, and rental 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):






Nine Months Ended

September 30



Nine Month Change




2015



2014



$


%

Cash and cash equivalents at beginning of period


$

69,767


$

81,705 


$

(11,938)


(14.6)













Cash provided by operating activities



63,330



57,946 



5,384


9.3













Cash used in investing activities



(47,439)



(39,941)



(7,498)


(18.8)













Cash used in financing activities



(14,877)



(22,793)



7,916


34.7













Cash and cash equivalents at end of period


$

70,781


$

76,917 


$

(6,136)


(8.0)






30




Operating Activities


Net cash provided by operating activities for the nine months ended September 30, 2015 was $63,330,000, as compared to $57,946,000 in the same period last year.  Cash provided by operating activities consisted of net income of $38,167,000, adjustments for noncash items of $29,678,000, and cash distributions in excess of earnings from equity method investments of $2,564,000.  There was cash used for working capital in the amount of $6,630,000 and also gains on the sale of restricted marketable securities ($449,000) that offset against the positive operating cash flow items stated above.


Cash used for working capital primarily consisted of an increase in restricted cash and cash equivalents and an increase in accounts receivable. The increase in restricted cash and cash equivalents is due to NHC healthcare entities paying insurance premiums to our wholly-owned insurance companies, which restrict the cash payment.  The increase in accounts receivable is due to the timing and collection of operational activity within our skilled nursing facilities.


Investing Activities


Cash used in investing activities totaled $47,439,000 and $39,941,000 for the nine months ended September 30, 2015 and 2014, respectively.  Cash used for property and equipment additions was $38,953,000 for the nine months ended September 30, 2015 and $36,727,000 in the comparable period in 2014.  The Company made investments in unconsolidated partnerships in the amount of $373,000 and $1,675,000 for the nine months ended September 30, 2015 and 2014, respectively.  The Company made investments in notes receivable of $5,477,000 and $767,000 for the nine months ended September 30, 2015 and 2014, respectively.  The largest notes receivable investment for the 2015 nine month period was a $4,500,000 advance to National.  Purchases and sales of restricted marketable securities (including the use of restricted cash and cash equivalents) resulted in a net use of cash of $2,969,000 for the 2015 period compared to $3,050,000 for the 2014 period.


In 2015, construction costs included in additions to property and equipment include $4,124,000 for the final construction and furnishings of the 92-bed skilled nursing facility and 60-unit assisted living facility in Gallatin, Tennessee, $16,735,000 for continued construction on the 90-bed skilled nursing facility and 80-unit assisted living facility located in Nashville, Tennessee, and $1,043,000 for the acquisition of land in Hermitage, Tennessee.


Financing Activities


Net cash used in financing activities totaled $14,877,000 and $22,793,000 for the nine months ended September 30, 2015 and 2014, respectively.  Cash used for dividend payments to common and preferred stockholders totaled $21,869,000 in the current year period compared to $20,415,000 for the same period a year ago.  In the current period, $8,231,000 was provided by the issuance of common stock compared to $6,757,000 in the prior year period.  There have been no stock repurchases in the current nine month period.  In the prior year period, the Company used $6,995,000 of cash to repurchase 125,000 shares of our common stock.  Principal payment under our capital lease obligations were $2,299,000 in the current period compared to $1,693,000 for the prior year period.  The capital lease obligations began on March 1, 2014.  



Table of Contractual Obligations


Our contractual obligations as of September 30, 2015 are as follows (in thousands):





Total


1 year


23

Years


45

Years


After

5 Years

Longterm debt principal

$

10,000

$

 

$

10,000

$

$

 

Longterm debt interest


621


276


345



Operating leases


390,500


34,200


68,400


68,400


219,500

Construction obligations


39,815


39,815




Capital lease obligations


43,767


5,200


10,400


10,400


17,767

Preferred stock redemption


169,305


169,305




Total contractual cash obligations

$

654,008

$

248,796

$

89,145

$

78,800

$

237,267






31




Other noncurrent liabilities for uncertain tax positions of $5,239,000, attributable to permanent differences, at September 30, 2015 have not been included in the above table because of the inability to estimate the period in which the tax payment is expected to occur.  See Note 12 of the interim condensed consolidated financial statements for a discussion on income taxes.


We started paying quarterly dividends on our common shares outstanding in 2004.  We anticipate the continuation of the common dividend payments as approved quarterly by the Board of Directors.


Shortterm liquidity


We expect to meet our shortterm liquidity requirements primarily from our cash flows from operating activities, our current cash on hand of $70,781,000 at September 30, 2015, marketable securities of $110,567,000 at September 30, 2015, and our borrowing capacity on the credit facility.  This liquidity is expected to be adequate to meet our contractual obligations and to finance our growth and development plans in the next twelve months.  

 

On October 7, 2015, we entered into a $175,000,000 credit facility with Bank of America.  As of November 5, 2015, we had borrowings of approximately $110,000,000 on the credit facility.  The borrowings on the credit facility were used to redeem the Companys outstanding Preferred Stock.  

 

Longterm liquidity


We expect to meet our long-term liquidity requirements primarily from our cash flows from operating activities, our current cash on hand of $70,781,000 at September 30, 2015, marketable securities of $110,567,000 at September 30, 2015, and our borrowing capacity on the credit facility.  The maturity date on the $175,000,000 credit facility is October 7, 2020.  


Our ability to refinance the credit agreement, to meet our longterm contractual obligations and to finance our operating requirements, and 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 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.



Commitment and Contingencies


Civil Investigative Demand


On December 19, 2013, the Company was served with a civil investigative demand (CID) from the U.S. Department of Justice and the Office of the U.S. Attorney for the Eastern District of Tennessee (DOJ Investigation) requesting the production of documents and interrogatory responses regarding the billing for and medical necessity of certain rehabilitative therapy services. Based upon our review, the CID appears to relate to services provided at our facilities based in Knoxville, Tennessee.

 

On October 7, 2014, the Company received a subpoena from the Office of Inspector General of the United Department of Health and Human Services (OIG Subpoena) related to the current DOJ Investigation.  The OIG Subpoena requests certain financial and organizational documents from the Company and certain of its subsidiaries and SNFs and medical records from certain of the Companys Tennessee-based SNFs. 


The Company is cooperating fully with these requests. We are unable to evaluate the outcome of this investigation at this time.  It is possible that this claim could have a material adverse effect on our consolidated financial position, results of operations and cash flows.


Caris HealthCare, L.P. Investigation


On December 9, 2014, Caris Healthcare, L.P. (Caris), a business that specializes in hospice care services in Company-owned health care centers and in other settings in Missouri, Tennessee, South Carolina and Virginia, received notice from the U.S. Attorneys Office for the Eastern District of Tennessee and the Attorney Generals Offices for the State of Tennessee and State of Virginia that those government entities were conducting an




32




investigation regarding patient eligibility for hospice services provided by Caris.  We have a 75.1% non-controlling ownership interest in Caris.  


Caris is cooperating with these government entities in connection with this investigation.  We are unable to evaluate the outcome of this investigation at this time.   It is possible that this claim could have a material adverse effect on our consolidated financial position, results of operations and cash flows.


There is certain additional litigation incidental to our business, none of which, in the opinion of management, 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.


South Carolina Medicaid Audits


The South Carolina Office of State Auditor (State Auditor) conducted Medicaid cost report audits for eleven of the Companys South Carolina skilled nursing facilities.  The State Auditor has issued audit findings for the fiscal years ending September 30, 2013 and September 30, 2014.  


The Company cooperated fully with these audits and has filed administrative appeals with the South Carolina Department of Health and Human Services.  We are unable to reasonably estimate the outcome of the appeals at this time, and accordingly have not recorded a provision or charge to earnings in the consolidated financial statements.  It is possible these audits could have a material adverse effect on our consolidated financial position, results of operations and cash flows.


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 in compliance with 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.  


Acquisitions


We have acquired and will continue to acquire businesses with prior operating histories.  Acquired companies may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, such as billing and reimbursement, antikickback and physician selfreferral laws. Although we institute policies designed to conform practices to our standards following completion of acquisitions and attempts to structure our acquisitions as asset acquisitions in which we do not assume liability for seller wrongful actions, there can be no assurance that we will not become liable for past activities that may later be alleged to be improper by private plaintiffs or government agencies.  Although we obtain general indemnifications from sellers covering such matters, there can be no assurance that any specific matter will be covered by such indemnifications, or if covered, that such indemnifications will be adequate to cover potential losses and fines.  


Inflation


We have historically derived a substantial portion of our revenue from the Medicare and Medicaid programs, along with similar reimbursement programs.  Payments under these programs generally provide for reimbursement levels that are adjusted for inflation annually based upon the states fiscal year for the Medicaid programs and in each October for the Medicare program.  The adjustments may not continue in the future, and even if received, such adjustments may not reflect the actual increase in our costs for providing healthcare services.



New Accounting Pronouncements


See Note 2 to the Interim Condensed Consolidated Financial Statements for the impact of new accounting standards.  





33




ForwardLooking Statements


References throughout this document to the Company include National HealthCare Corporation and its whollyowned subsidiaries.  In accordance with the Securities and Exchange Commissions Plain English guidelines, this Quarterly Report on Form 10Q 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 whollyowned subsidiaries and not any other person.


This Quarterly Report on Form 10Q and other information we provide from time to time, contains certain forwardlooking 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 threeyear strategic plan, and similar statements including, without limitations, those containing words such as believes, anticipates, expects, intends, estimates, plans, and other similar expressions are forwardlooking statements.


Forwardlooking 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 forwardlooking statements as a result of, but not limited to, the following factors:


·

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


·

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


·

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


·

liabilities and other claims asserted against us, including patient care liabilities, as well as the resolution of current litigation (see Note 15:  Guarantees and Contingencies);


·

the ability of third parties for whom we have guaranteed debt, if any, to refinance certain short term debt obligations;


·

the ability to attract and retain qualified personnel;


·

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


·

the ability to refinance existing debt on favorable terms;


·

the competitive environment in which we operate;


·

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 2014 Annual Report on Form 10K 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 actually 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




34




these forwardlooking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them.



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 fixedincome 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, notes receivable, revolving credit facility, and longterm debt.  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 fixedincome 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 September 30, 2015, we have available for sale debt securities in the amount of $168,824,000.  The fixed maturity portfolio is comprised of investments with primarily shortterm and intermediateterm maturities.  The portfolio composition allows flexibility in reacting to fluctuations of interest rates.  The fixed maturity portfolio allows our insurance company subsidiaries to achieve an adequate riskadjusted return while maintaining sufficient liquidity to meet obligations.  


As of September 30, 2015, both our longterm debt and credit facility bear interest at variable interest rates.  Based on a hypothetical credit facility borrowing of $175.0 million and our outstanding longterm debt, a 1% change in interest rates would change our annual interest cost by approximately $1,850,000.


Approximately $9.7 million of our notes receivable bear interest at variable rates.  Because the interest rates of these instruments are variable, a hypothetical 1% change in interest rates would result in a related increase or decrease in interest income of approximately $97,000.  


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 shortterm 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.


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 available for sale 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 September 30, 2015, the fair value of our equity marketable securities is approximately $110,567,000.  Of the $110.6 million equity securities portfolio, our investment in National Health Investors, Inc. (NHI) comprises approximately $93.7 million, or 85%, 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 $11.1 million.  At September 30, 2015, our equity securities had unrealized gains of $80.4 million.  Of the $80.4 million of unrealized gains, $69.0 million is related to our investment in NHI.






35




Item 4.  Controls and Procedures.


As of September 30, 2015, an evaluation was performed under the supervision and with the participation of the Companys management, including the Chief Executive Officer (CEO) and Principal Accounting Officer (PAO), of the effectiveness of the design and operation of the Companys disclosure controls and procedures.  Based on that evaluation, the Companys management, including the CEO and PAO, concluded that the Companys disclosure controls and procedures were effective as of September 30, 2015.  There have been no changes in the Companys internal control over financial reporting during the quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.  



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 13 of this Form 10Q.



Item 1A.  Risk Factors.


During the nine months ended September 30, 2015, there were no material changes to the risk factors that were disclosed in Item 1A of National HealthCare Corporations Annual Report on Form 10K for the year ended December 31, 2014.



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


Not applicable



Item 3.  Defaults Upon Senior Securities.  


None



Item 5.  Other Information.


None



Item 6.  Exhibits.


(a)

List of exhibits


EXHIBIT INDEX






Exhibit No.


Description


Page No. or Location






3.1


Certificate of Incorporation of National HealthCare Corporation


Incorporated by reference to Exhibit 3.1 to the Registrants 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 3.2 to the Registrants registration statement on Form 8-A, dated October 31, 2007)






3.3


Certificate of Designations of Series A Convertible Preferred Stock of National HealthCare Corporation


Incorporated by reference to Exhibit 2.1 to the current report on Form 8-K filed on December 20, 2006






3.4


Certificate of Designation Series B Junior Participating Preferred Stock


Incorporated by reference to Exhibit 3.1 to the Registrants registration statement on Form 8-A, dated August 3, 2007






3.5


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 A attached to Form S-4, (Proxy Statement-

Prospectus), amended, Registration No. 333-

37185, (December 5, 1997)






4.2


Form of Series A Convertible Preferred Stock Certificate


Incorporated by reference to Exhibit A to Exhibit 3.5 to the Registrants registration statement on Form 8-A, dated October 31, 2007)






4.3


Rights Agreement, dated as of August 2, 2007, between National HealthCare Corporation and Computershare Trust Company, N.A.


Incorporated by reference to Exhibit 4.1 to the Registrants registration statement on Form 8-A, dated August 3, 2007






4.4


Notice of Redemption of Series A Convertible Preferred Stock


Incorporated by reference to Exhibit 99.1 to the current report on Form 8-K filed on October 2, 2015






10.1


Credit Agreement dated as of October 7, 2015 among National HealthCare Corporation and Bank of America


Filed Here with






10.2


Pledge and Security Agreement dated as of October 7, 2015 between National HealthCare Corporation and Bank of America


Filed Herewith






10.3


Note dated October 7, 2015 between National HealthCare Corporation and Bank of America


Filed Herewith






31.1


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


Filed Herewith






31.2


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


Filed Herewith






32


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


Filed Herewith






*101.INS


XBRL Instance Document








*101.SCH


XBRL Taxonomy Extension Schema Document








*101.CAL


XBRL Taxonomy Extension Calculation Linkbase Document








*101.DEF


XBRL Taxonomy Extension Definition Linkbase Document








*101.LAB


XBRL Taxonomy Extension Label Linkbase Document








*101.PRE


XBRL Taxonomy Extension Presentation Linkbase Document








* As provided in Rule 406T of Regulation S-T, this information shall not be deemed filed for purposes of Sections 11 and 12 of the Securities Act and Section 18 of the Securities Exchange Act or otherwise subject to liability under those sections.




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: November 5, 2015

 /s/ Robert G. Adams                                    


Robert G. Adams


Chief Executive Officer





Date: November 5, 2015

/s/ Donald K. Daniel                                       


Donald K. Daniel


Senior Vice President and Controller


(Principal Accounting Officer)





38