Annual Statements Open main menu

NATIONAL HEALTHCARE CORP - Quarter Report: 2017 June (Form 10-Q)

nhc20170630_10q.htm

 

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 June 30, 2017

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   

 

 

(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 S–T (§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 non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ]

Accelerated filer [x]

   

Non-accelerated filer (Do not check if a smaller reporting company) [  ]

Smaller reporting company [  ]

 

 

 

Emerging growth company [  ]

 

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

 

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

 

15,195,030 shares of common stock of the registrant were outstanding as of August 1, 2017.

 



 

 

 

 

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

27

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

38

     

Item 4.

Controls and Procedures

39

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

39

     

Item 1A

Risk Factors

39

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

     

Item 3.

Defaults Upon Senior Securities

39

     

Item 5.

Other Information

39

     

Item 6.

Exhibits

40

 

 

 

 

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

June 30

   

Six Months Ended

June 30

 
   

2017

   

2016

   

2017

   

2016

 

Revenues:

                               

Net patient revenues

  $ 227,847     $ 216,487     $ 455,806     $ 434,593  

Other revenues

    11,610       11,281       22,894       22,763  

Net operating revenues

    239,457       227,768       478,700       457,356  
                                 

Cost and Expenses:

                               

Salaries, wages and benefits

    142,684       135,068       280,739       265,088  

Other operating

    62,856       57,306       126,739       118,615  

Facility rent

    10,079       10,319       20,167       20,646  

Depreciation and amortization

    10,481       9,495       20,776       18,849  

Interest

    1,219       939       2,277       1,893  

Total costs and expenses

    227,319       213,127       450,698       425,091  
                                 

Income Before Non–Operating Income

    12,138       14,641       28,002       32,265  

Non–Operating Income

    5,189       4,925       9,957       9,698  
                                 

Income Before Income Taxes

    17,327       19,566       37,959       41,963  

Income Tax Provision

    (6,758 )     (7,700 )     (14,757 )     (16,398 )

Net Income

    10,569       11,866       23,202       25,565  

Loss Attributable To Noncontrolling Interest

    86       -       181       -  
                                 

Net Income Attributable to National HealthCare Corporation

  $ 10,655     $ 11,866     $ 23,383     $ 25,565  
                                 

Earnings Per Share Attributable to National HealthCare Corporation Stockholders:

                               

Basic

  $ 0.70     $ 0.78     $ 1.54     $ 1.69  

Diluted

  $ 0.70     $ 0.78     $ 1.54     $ 1.68  
                                 

Weighted Average Common Shares Outstanding:

                               

Basic

    15,189,818       15,266,559       15,181,700       15,091,732  

Diluted

    15,220,448       15,289,104       15,216,336       15,212,275  
                                 

Dividends Declared Per Common Share

  $ 0.48     $ 0.45     $ 0.93     $ 0.85  

 

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

June 30

   

Six Months Ended

June 30

 
   

2017

   

2016

   

2017

   

2016

 
                                 

Net Income

  $ 10,569     $ 11,866     $ 23,202     $ 25,565  
                                 

Other Comprehensive Income:

                               

Unrealized gains on investments in marketable securities

    13,297       18,123       12,356       30,627  

Reclassification adjustment for realized gains on sale of securities

    (204 )     (261 )     (238 )     (540 )

Income tax expense related to items of other comprehensive income

    (5,054 )     (6,887 )     (4,646 )     (11,554 )

Other Comprehensive Income, net of tax

    8,039       10,975       7,472       18,533  
                                 

Loss Attributable To Noncontrolling Interest

    86       -       181       -  
                                 

Comprehensive Income Attributable to National HealthCare Corporation

  $ 18,694     $ 22,841     $ 30,855     $ 44,098  

 

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)

 

   

June 30,

2017

   

December 31,

2016

 
   

unaudited

         

Assets

               

Current Assets:

               

Cash and cash equivalents

  $ 60,848     $ 26,335  

Restricted cash and cash equivalents

    3,582       3,125  

Marketable securities

    148,137       138,013  

Restricted marketable securities

    21,963       22,773  

Accounts receivable, less allowance for doubtful accounts of $7,408 and $5,743, respectively

    79,640       82,531  

Inventories

    7,198       7,508  

Prepaid expenses and other assets

    3,617       2,648  

Notes receivable, current portion

    1,299       3,259  

Federal income tax receivable

    2,447       4,665  

Total current assets

    328,731       290,857  
                 

Property and Equipment:

               

Property and equipment, at cost

    949,753       933,140  

Accumulated depreciation and amortization

    (394,224 )     (373,516 )

Net property and equipment

    555,529       559,624  
                 

Other Assets:

               

Restricted cash and cash equivalents

    2,166       2,129  

Restricted marketable securities

    141,991       160,931  

Deposits and other assets

    5,639       5,244  

Goodwill

    17,600       17,600  

Notes receivable, less current portion

    12,245       13,820  

Investments in limited liability companies

    36,345       37,242  

Total other assets

    215,986       236,966  

Total assets

  $ 1,100,246     $ 1,087,447  

 

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)

 

   

June 30,

2017

   

December 31,

2016

 
   

unaudited

         

Liabilities and Stockholders’ Equity

               

Current Liabilities:

               

Trade accounts payable

  $ 14,738     $ 18,593  

Capital lease obligations, current portion

    3,587       3,481  

Accrued payroll

    53,311       65,912  

Amounts due to third party payors

    17,950       17,019  

Accrued risk reserves, current portion

    25,545       25,898  

Other current liabilities

    14,623       13,207  

Dividends payable

    7,294       6,818  

Total current liabilities

    137,048       150,928  
                 

Long–term debt

    120,000       120,000  

Capital lease obligations, less current portion

    24,927       26,748  

Accrued risk reserves, less current portion

    68,996       65,264  

Refundable entrance fees

    9,167       9,924  

Obligation to provide future services

    3,236       3,236  

Deferred income taxes

    25,178       22,072  

Other noncurrent liabilities

    17,350       16,302  

Deferred revenue

    4,886       3,362  

Total liabilities

    410,788       417,836  
                 

Stockholders’ Equity:

               

Common stock, $.01 par value; 45,000,000 and 30,000,000 shares authorized, respectively; 15,195,030 and 15,162,938 shares, respectively, issued and outstanding

    152       152  

Capital in excess of par value

    213,785       211,457  

Retained earnings

    401,192       391,934  

Accumulated other comprehensive income

    73,540       66,068  

Total National HealthCare Corporation stockholders’ equity

    688,669       669,611  

Noncontrolling interest

    789       -  

Total stockholders' equity

    689,458       669,611  

Total liabilities and stockholders’ equity

  $ 1,100,246     $ 1,087,447  

 

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)

 

   

Six Months Ended

June 30

 
   

2017

   

2016

 
           

(as adjusted)

 

Cash Flows From Operating Activities:

               

Net income

  $ 23,202     $ 25,565  

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

               

Depreciation and amortization

    20,776       18,849  

Provision for doubtful accounts receivable

    3,795       3,795  

Equity in earnings of unconsolidated investments

    (3,380 )     (3,120 )

Distributions from unconsolidated investments

    4,337       5,635  

Gains on sale of restricted marketable securities

    (238 )     (540 )

Deferred income taxes

    (1,540 )     (244 )

Stock–based compensation

    832       494  

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

               

Accounts receivable

    (904 )     3,072  

Income tax receivable

    2,218       2,288  

Inventories

    310       431  

Prepaid expenses and other assets

    (969 )     (967 )

Trade accounts payable

    (3.855 )     1,675  

Accrued payroll

    (12,601 )     (15,333 )

Amounts due to third party payors

    931       1,756  

Other current liabilities and accrued risk reserves

    4,819       609  

Other noncurrent liabilities

    1,048       1,073  

Deferred revenue

    1,524       1,390  

Net cash provided by operating activities

    40,305       46,428  

Cash Flows From Investing Activities:

               

Additions to property and equipment

    (16,681 )     (36,127 )

Investments in unconsolidated companies

    (176 )     (904 )

Investments in notes receivable

    -       (2,144 )

Collections of notes receivable

    3,651       428  

Purchase of restricted marketable securities

    (22,775 )     (23,852 )

Sale of restricted marketable securities

    44,756       25,697  

Net cash provided by (used in) investing activities

    8,775       (36,902 )

Cash Flows From Financing Activities:

               

Tax expense from stock–based compensation

    -       (1,134 )

Principal payments under capital lease obligations

    (1,715 )     (1,614 )

Dividends paid to common stockholders

    (13,649 )     (12,101 )

Issuance of common shares

    1,496       10,070  

Equity attributable to noncontrolling interest

    970       -  

Entrance fee refunds

    (757 )     (34 )

Change in deposits

    (418 )     216  

Net cash used in financing activities

    (14,073 )     (4,597 )

Net Increase in Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents

    35,007       4,929  

Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents, Beginning of Period

    31,589       49,314  

Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents, End of Period

  $ 66,596     $ 54,243  
                 

Balance Sheet Classifications:

               

Cash and cash equivalents

  $ 60,848     $ 37,543  

Restricted cash and cash equivalents

    5,748       16,700  

Total Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents

  $ 66,596     $ 54,243  

 

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)

 

   

Common Stock

   

Capital in

Excess of

   

Retained

   

Accumulated

Other

Comprehensive

   

Non-

controlling

   

Total

Stockholders

 
   

Shares

   

Amount

    Par Value     Earnings     Income     Interest     Equity  

Balance at January 1, 2016

    15,000,616     $ 150     $ 209,469     $ 368,013     $ 53,364     $     $ 630,996  

Net income

                      25,565                   25,565  

Other comprehensive income

                            18,533             18,533  

Stock–based compensation

                494                         494  

Tax expense from exercise of stock options

                (1,134 )                       (1,134 )

Shares sold – options exercised

    278,623       3       10,067                         10,070  

Dividends declared to common stockholders ($0.85 per share)

                      (12,981 )                 (12,981 )

Balance at June 30, 2016

    15,279,239     $ 153     $ 218,896     $ 380,597     $ 71,897     $     $ 671,543  
                                                         

Balance at January 1, 2017

    15,162,938     $ 152     $ 211,457     $ 391,934     $ 66,068     $     $ 669,611  

Net income attributable to National HealthCare Corporation

                      23,383                   23,383  

Net loss attributable to noncontrolling interest

                                  (181 )     (181 )

Equity contributed by noncontrolling interest

                                  970       970  

Other comprehensive income

                            7,472             7,472  

Stock–based compensation

                832                         832  

Shares sold – options exercised

    32,092             1,496                         1,496  

Dividends declared to common stockholders ($0.93 per share)

                      (14,125 )                 (14,125 )

Balance at June 30, 2017

    15,195,030     $ 152     $ 213,785     $ 401,192     $ 73,540     $ 789     $ 689,458  

 

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

June 30, 2017

(unaudited)

 

 

Note 1 Description of Business

 

National HealthCare Corporation (“NHC” or the “Company”) is a leading provider of senior health care services. As of June 30, 2017, we operate or manage, through certain affiliates, 76 skilled nursing facilities with a total of 9,597 licensed beds, 25 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 facilities. 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 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 management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. See our audited December 31, 2016 consolidated financial statements and notes thereto which contain accounting policies and other disclosures required by generally accepted accounting principles. Our audited December 31, 2016 consolidated financial statements are available at our web site: www.nhccare.com.

 

Basis of Presentation

 

The unaudited interim condensed consolidated financial statements to which these notes are attached include all normal, recurring adjustments which are necessary to fairly present the financial position, results of operations and cash flows of NHC. All significant intercompany transactions and balances have been eliminated in consolidation. The consolidated financial statements include the accounts of all entities controlled by NHC. The Company presents noncontrolling interest within the equity section of its consolidated balance sheets. The Company presents the amount of consolidated net income (loss) that is attributable to NHC and the noncontrolling interest in its consolidated statements of income and comprehensive income.

 

We assume that users of these interim financial statements have read or have access to the audited December 31, 2016 consolidated financial statements and Management’s 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.

 

9

 

 

Change in Accounting Principle

 

Effective December 31, 2016, the Company retrospectively adopted a change in accounting principle related to the early adoption of Accounting Standards Update (“ASU”) No. 2016–18, Statement of Cash Flows (Topic 230)—Restricted Cash—a consensus of the FASB Emerging Issues Task Force. The updated guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. As such, amounts generally described as restricted cash and restricted cash equivalents should be included in the “beginning–of–period” and “end–of–period” total amounts shown on the statements of cash flows.

 

As described in the guidance for accounting changes under ASC Topic 250, the comparative consolidated statement of cash flows of prior periods are adjusted to apply the new accounting method retrospectively. The following table presents the effect on the interim condensed consolidated statement of cash flows for the six months ending June 30, 2016 for the accounting change that was retrospectively adopted on December 31, 2016:

 

Consolidated Statement of Cash Flows

(in thousands)

 

   

Six Months Ended June 30, 2016

 
   

As

Previously

Reported

   

Effect of

Accounting

Change

   

As

Adjusted

 
                         
Cash Flows from Operating Activities:                        

Restricted cash and cash equivalents

  $ (10,342 )   $ 10,342     $  

Net cash provided by operating activities

    36,086       10,342       46,428  
                         
Cash Flows from Investing Activities:                        

Change in restricted cash and cash equivalents

    4,748       (4,748 )      

Net cash used in investing activities

    (32,154 )     (4,748 )     (36,902 )
                         

Net (Decrease) Increase in Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents

    (665 )     5,594       4,929  

Cash, Cash Equivalents, Restricted Cash, and Restricted Cash, Equivalents, Beginning of Period

    38,208       11,106       49,314  

Cash, Cash Equivalents, Restricted Cash, and Restricted Cash, Equivalents, End of Period

  $ 37,543     $ 16,700     $ 54,243  

 

Recently Adopted Accounting Guidance

 

In November 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016–18, “Statement of Cash Flows (Topic 230)—Restricted Cash—a consensus of the FASB Emerging Issues Task Force”. This revised standard is an effort by the FASB to reduce diversification in practice by providing specific guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. The updated guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. As such, amounts generally described as restricted cash and restricted cash equivalents should be included in the “beginning–of–period” and “end–of–period” total amounts shown on the statement of cash flows. The effective date for this standard is for years beginning after December 15, 2017, with early adoption permitted. Effective December 31, 2016, the Company elected to early adopt this standard. The adoption of this standard represented a change in accounting principle which was applied retrospectively; see the paragraphs above under “Change in Accounting Principle” for further discussion on the adoption of ASU No. 2016–18.

 

10

 

 

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies the accounting for share-based payment award transactions including: income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. On January 1, 2017, the Company adopted the provisions of ASU 2016-09. As a result of the adoption, the Company has recognized $123,000 and $244,000 of excess tax benefits related to share-based payments in our provision for income taxes for the three and six months ended June 30, 2017, respectively. These items were historically recorded in additional paid-in capital. In addition, cash flows related to excess tax benefits are now classified as an operating activity along with other income tax related cash flows. The Company elected to apply the change in presentation of excess tax benefits in the statements of cash flows on a prospective basis.

 

Recent Accounting Guidance Not Yet Adopted      

 

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." The objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods and is to be applied utilizing a modified retrospective approach. We anticipate this standard will have a material impact on our consolidated financial statements. Additionally, we are currently evaluating the impact this standard will have on our policies and procedures and internal control framework.

 

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825)”. ASU No. 2016-01 revises the classification and measurement of investments in certain equity investments and the presentation of certain fair value changes for certain financial liabilities measured at fair value. ASU No. 2016-01 requires the change in fair value of many equity investments to be recognized in net income.  ASU No. 2016-01 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted.   Adopting ASU No. 2016-01 may result in a cumulative effect adjustment to the Company’s retained earnings as of the beginning of the year of adoption. We are currently evaluating the potential effects of adopting the provisions of ASU No. 2016-01.

 

In May 2014, the FASB issued ASU No. 2014–09 “Revenue from Contracts with Customers”, also known as the “New Revenue Standard”. 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 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 receive for those goods or services. The New Revenue Standard is applied through the following five-step process:

 

1. Identify the contract(s) with a customer.

2. Identify the performance obligation in the contract.

3. Determine the transaction price.

4. Allocate the transaction price to the performance obligations in the contract.

5. Recognize revenue when (or as) the entity satisfies a performance obligation.

 

For a public entity, this update is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.

 

As we progress with our implementation efforts to adopt the New Revenue Standard, management continues to evaluate and refine its estimates of the anticipated impacts it will have on our revenue recognition policies, procedures, financial position, results of operations, cash flows, financial disclosures and control framework.  Specifically, the Company is continuing to evaluate its population of revenue sources to determine the potential effects the New Revenue Standard will have on the amount or timing of certain industry-specific healthcare revenue sources, which, at this time, includes revenue recorded from our CCRC, settlements with third party payors, and our bundled and risk-sharing payments. 

 

11

 

 

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 $17,950,000 and $17,019,000 as of June 30, 2017 and December 31, 2016, 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 long–term 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.

 

Segment Reporting

 

In accordance with the provisions of ASC 280, “Segment Reporting”, the Company is required to report financial and descriptive information about its reportable operating segments. Beginning in the first quarter of 2017 with the leadership change of the Company’s Chief Executive Officer, we reassessed and realigned our reportable operating segments to coincide with the way our new leadership and chief operating decision maker ("CODM") measures Company performance and allocates resources. The Company now has two reportable operating segments: (1) inpatient services, which includes the operation of skilled nursing facilities and assisted and independent living facilities, and (2) homecare services. The Company also reports an “all other” category that includes revenues from rental income, management and accounting services fees, insurance services, and costs of the corporate office. See Note 5 for further disclosure of the Company’s operating segments.

 

12

 

 

Other Operating Expenses

 

Other operating expenses include the costs of care and services that we provide to the residents of our facilities and the costs of maintaining our facilities. Our primary patient care costs include drugs, medical supplies, purchased professional services, food, and professional liability insurance and licensing fees. The primary facility costs include utilities and property insurance.

 

General and Administrative Costs

 

With the Company being a healthcare provider, the majority of our expenses are "cost of revenue" items. Costs that could be classified as "general and administrative" by the Company would include its corporate office costs, excluding stock-based compensation, which were $15,262,000 and $14,364,000 for the six months ended June 30, 2017 and 2016, 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.

 

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

 

Professional liability remains an area of particular concern to us. The long-term care industry has seen an increase in personal injury/wrongful death claims based on alleged negligence by skilled nursing facilities and their employees in providing care to residents. As of June 30, 2017, we and/or our managed centers are defendants in 61 such claims inclusive of years 2005 through June 30, 2017. 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 resident’s 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 June 30, 2017 and December 31, 2016 were $9,167,000 and $9,924,000, respectively.

 

13

 

 

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 June 30, 2017, and December 31, 2016, we have recorded a future service obligation in the amount of $3,236,000.

 

Other Noncurrent Liabilities

 

Other noncurrent liabilities include reserves primarily related to various uncertain income tax positions.

 

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.

 

Noncontrolling Interest

 

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

 

Variable Interest Entities

 

We have equity interests in unconsolidated limited liability companies that operate various post-acute and senior healthcare businesses. We analyze our investments in these limited liability companies to determine if the company is considered a VIE and would require consolidation. To the extent that we own interests in a VIE and we (i) are the sole entity that has the power to direct the activities of the VIE and (ii) have the obligation or rights to absorb the VIE's losses or receive its benefits, then we would be determined to be the primary beneficiary and would consolidate the VIE. To the extent we own interests in a VIE, then at each reporting period, we re-assess our conclusions as to which, if any, party within the VIE is considered the primary beneficiary.

 

The Company's maximum exposure to losses in its investments in unconsolidated VIEs cannot be quantified and may or may not be limited to its investment in the unconsolidated VIE. The investments in unconsolidated VIEs are classified as “investments in limited liability companies” in the consolidated balance sheets.

 

 

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 healthcare facilities. 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 wholly–owned 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.

 

14

 

 

Other revenues include the following:

 

   

Three Months Ended

June 30

   

Six Months Ended

June 30

 

(in thousands)

 

2017

   

2016

   

2017

   

2016

 

Rental Income

  $ 5,515     $ 5,435     $ 11,001     $ 11,005  

Management and accounting services fees

    3,752       3,506       7,611       7,255  

Insurance services

    2,087       1,815       3,644       3,739  

Other

    256       525       638       764  
    $ 11,610     $ 11,281       22,894       22,763  

 

Management Fees from National

 

We manage five skilled nursing facilities owned by National. For the three months and six months ended June 30, 2017, we recognized management fees and interest on management fees of $989,000 and $1,925,000 from these centers, respectively. For the three months and six months ended June 30, 2016, we recognized management fees and interest on management fees of $926,000 and $1,895,000 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 long–term 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 and six months ended June 30, 2017 were $1,409,000 and $2,688,000. For the three months and six months ended June 30, 2016, the workers' compensation premium revenues reflected in the interim condensed consolidated statements of income were $1,150,000 and $2,383,000, 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 and six months ended June 30, 2017 were $678,000 and $956,000, respectively. For the three months and six months ended June 30, 2016, the professional liability insurance premium revenues reflected in the interim condensed consolidated statements of income were $665,000 and $1,356,000, respectively. Associated losses and expenses including those for self–insurance are included in the interim condensed consolidated statements of income as "Other operating costs and expenses".

 

 

Note 4 NonOperating Income

 

Non–operating income is outlined in the table below. Non–operating 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.

 

15

 

 

 

 

   

Three Months Ended

June 30

   

Six Months Ended

June 30

 

(in thousands)

 

2017

   

2016

   

2017

   

2016

 

Equity in earnings of unconsolidated investments

  $ 1,854     $ 1,615     $ 3,380     $ 3,120  

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

    1,899       1,901       3,623       3,762  

Interest income

    1,436       1,409       2,954       2,816  
    $ 5,189     $ 4,925     $ 9,957     $ 9,698  

 

 

Note 5 – Business Segments

 

The Company has two reportable operating segments: (1) inpatient services, which includes the operation of skilled nursing facilities and assisted and independent living facilities, and (2) homecare services. These reportable operating segments are consistent with information used by the Company’s Chief Executive Officer, as CODM, to assess performance and allocate resources.

 

The Company also reports an “all other” category that includes revenues from rental income, management and accounting services fees, insurance services, and costs of the corporate office. The Company has presented the financial information for the three months and six months ended June 30, 2016 on a comparative basis to conform with the current year segment presentation. During the three and six months ended June 30, 2017, the Company made changes to the way it discloses its business segment information. The primary effect of the change was to allocate certain expenses within the Inpatient Services and Homecare business segments to the All Other category to accurately reflect the allocation of certain corporate office expenses. For additional information on these reportable segments see Note 1 - “Description of Business”.

 

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

 

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

 

   

Three Months Ended June 30, 2017

 
   

Inpatient

Services

   

Homecare

   

All Other

   

Total

 

Revenues:

                               

Net patient revenues

  $ 211,888     $ 15,959     $ -     $ 227,847  

Other revenues

    225       -       11,385       11,610  

Net operating revenues

    212,113       15,959       11,385       239,457  
                                 

Costs and Expenses:

                               

Salaries, wages and benefits

    124,287       8,615       9,782       142,684  

Other operating

    55,989       5,058       1,809       62,856  

Rent

    8,257       499       1,323       10,079  

Depreciation and amortization

    9,396       39       1,046       10,481  

Interest

    436       -       783       1,219  

Total costs and expenses

    198,365       14,211       14,743       227,319  
                                 

Income (Loss) Before Non-Operating Income

    13,748       1,748       (3,358 )     12,138  
                                 

Non-Operating Income

    -       -       5,189       5,189  
                                 

Income Before Income Taxes

  $ 13,748     $ 1,748     $ 1,831     $ 17,327  

 

16

 

 

   

Three Months Ended June 30, 2016

 
   

Inpatient

Services

   

Homecare

   

All Other

   

Total

 

Revenues:

                               

Net patient revenues

  $ 200,617     $ 15,870     $ -     $ 216,487  

Other revenues

    198       -       11,083       11,281  

Net operating revenues

    200,815       15,870       11,083       227,768  
                                 

Costs and Expenses:

                               

Salaries, wages and benefits

    117,106       8,216       9,746       135,068  

Other operating

    50,472       5,092       1,742       57,306  

Rent

    8,449       481       1,389       10,319  

Depreciation and amortization

    8,359       46       1,090       9,495  

Interest

    487       -       452       939  

Total costs and expenses

    184,873       13,835       14,419       213,127  
                                 

Income (Loss) Before Non-Operating Income

    15,942       2,035       (3,336 )     14,641  
                                 

Non-Operating Income

    -       -       4,925       4,925  
                                 

Income Before Income Taxes

  $ 15,942     $ 2,035     $ 1,589     $ 19,566  

 

 

   

Six Months Ended June 30, 2017

 
   

Inpatient

Services

   

Homecare

   

All Other

   

Total

 

Revenues:

                               

Net patient revenues

  $ 424,190     $ 31,616     $ -     $ 455,806  

Other revenues

    451       -       22,443       22,894  

Net operating revenues

    424,641       31,616       22,443       478,700  
                                 

Costs and Expenses:

                               

Salaries, wages and benefits

    242,535       16,442       21,762       280,739  

Other operating

    112,859       10,193       3,687       126,739  

Rent

    16,424       987       2,756       20,167  

Depreciation and amortization

    18,605       80       2,091       20,776  

Interest

    886       -       1,391       2,277  

Total costs and expenses

    391,309       27,702       31,687       450,698  
                                 

Income (Loss) Before Non-Operating Income

    33,332       3,914       (9,244 )     28,002  
                                 

Non-Operating Income

    -       -       9,957       9,957  
                                 

Income Before Income Taxes

  $ 33,332     $ 3,914     $ 713     $ 37,959  

 

17

 

 

   

Six Months Ended June 30, 2016

 
   

Inpatient

Services

   

Homecare

   

All Other

   

Total

 

Revenues:

                               

Net patient revenues

  $ 402,700     $ 31,893     $ -     $ 434,593  

Other revenues

    367       -       22,396       22,763  

Net operating revenues

    403,067       31,893       22,396       457,356  
                                 

Costs and Expenses:

                               

Salaries, wages and benefits

    227,670       16,197       21,221       265,088  

Other operating

    104,351       10,386       3,878       118,615  

Rent

    16,809       968       2,869       20,646  

Depreciation and amortization

    16,573       92       2,184       18,849  

Interest

    985       -       908       1,893  

Total costs and expenses

    366,388       27,643       31,060       425,091  
                                 

Income (Loss) Before Non-Operating Income

    36,679       4,250       (8,664 )     32,265  
                                 

Non-Operating Income

    -       -       9,698       9,698  
                                 

Income Before Income Taxes

  $ 36,679     $ 4,250     $ 1,034     $ 41,963  

 

 

Note 6 – 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:

 

   

June 30,

2017

   

December 31,

2016

 
   

(in thousands)

 

Buildings and personal property

  $ 39,032     $ 39,032  

Accumulated amortization

    (13,083 )     (11,120 )
    $ 25,949     $ 27,912  

 

Operating Leases

 

At June 30, 2017, 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 $9,314,000 and $9,480,000 for the three months ended June 30, 2017 and 2016, respectively. Total facility rent expense to NHI was $18,628,000 and $18,960,000 for the six months ended June 30, 2017 and 2016, respectively.

 

18

 

 

Minimum Lease Payments

 

The approximate future minimum lease payments required under all leases that have remaining non-cancelable lease terms at June 30, 2017 are as follows:

 

   

Operating

Leases

   

Capital

Leases

 
   

(in thousands)

 

2018

  $ 34,200     $ 5,200  

2019

    34,200       5,200  

2020

    34,200       5,200  

2021

    34,200       5,200  

2022

    34,200       5,200  

Thereafter

    159,650       8,667  

Total minimum lease payments

  $ 330,650     $ 34,667  

Less: Amounts representing interest

            (6,153 )

Present value of minimum lease payments

            28,514  

Less: Current portion

            (3,587 )

Long-term capital lease obligations

          $ 24,927  

 

 

Note 7 Earnings per Share

 

Basic net income per share is computed based on the weighted average number of common shares outstanding for each period presented. Diluted net income per share reflects the potential dilution that would have occurred if securities to issue common stock were exercised, converted, or resulted in the issuance of common stock that would have then shared in our earnings.

 

The following table summarizes the earnings and the weighted average number of common shares used in the calculation of basic and diluted earnings per share (in thousands, except for share and per share amounts):

 

   

Three Months Ended June 30

   

Six Months Ended June 30

 

 

 

2017

   

2016

   

2017

   

2016

 

Basic:

                               

Weighted average common shares outstanding

    15,189,818       15,266,559       15,181,700       15,091,732  

Net income attributable to National HealthCare Corporation

  $ 10,655     $ 11,866     $ 23,383     $ 25,565  

Earnings per common share, basic

  $ 0.70     $ 0.78     $ 1.54     $ 1.69  
                                 

Diluted:

                               

Weighted average common shares outstanding

    15,189,818       15,266,559       15,181,700       15,091,732  

Dilutive effect of stock options

    30,630       22,545       34,636       23,406  

Dilutive effect of contingent issuable stock

    -       -       -       97,137  

Weighted average common shares outstanding

    15,220,448       15,289,104       15,216,336       15,212,275  
                                 

Net income attributable to National HealthCare Corporation

  $ 10,655     $ 11,866     $ 23,383     $ 25,565  

Earnings per common share, diluted

  $ 0.70     $ 0.78     $ 1.54     $ 1.68  

 

In the above table, options to purchase 1,124,689 and 12,120 shares of our common stock have been excluded for the three and six months ended June 30, 2017 and 2016, respectively, due to their anti–dilutive impact.

 

19

 

 

 

Note 8 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 9 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:

 

   

June 30, 2017

   

December 31, 2016

 

(in thousands)

 

Amortized

Cost

   

Fair

Value

   

Amortized

Cost

   

Fair

Value

 

Investments available for sale:

                               

Marketable equity securities

  $ 30,176     $ 148,137     $ 30,176     $ 138,013  
Restricted investments available for sale:                                

Corporate debt securities

    67,997       68,496       71,311       71,100  

Commercial mortgage–backed securities

    51,188       50,905       56,889       56,168  

U.S. Treasury securities

    20,899       20,533       25,748       25,181  

State and municipal securities

    24,141       24,020       32,020       31,255  
    $ 194,401     $ 312,091     $ 216,144     $ 321,717  

 

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

 

   

June 30, 2017

   

December 31, 2016

 
   

Shares

   

Cost

   

Fair

Value

   

Shares

   

Cost

   

Fair

Value

 

NHI Common Stock

    1,630,642     $ 24,734     $ 129,147       1,630,642     $ 24,734     $ 120,945  

 

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

 

   

June 30, 2017

   

December 31, 2016

 

(in thousands)

 

Cost

   

Fair

Value

   

Cost

   

Fair

Value

 

Maturities:

                               

Within 1 year

  $ 14,628     $ 14,628     $ 14,181     $ 14,216  

1 to 5 years

    66,519       66,747       79,827       79,502  

6 to 10 years

    81,923       81,424       91,211       89,269  

Over 10 years

    1,155       1,155       749       717  
    $ 164,225     $ 163,954     $ 185,968     $ 183,704  

 

Gross unrealized gains related to available for sale securities are $119,086,000 and $108,730,000 as of June 30, 2017 and December 31, 2016, respectively. Gross unrealized losses related to available for sale securities are $1,396,000 and $3,157,000 as of June 30, 2017 and December 31, 2016, 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 six months ended June 30, 2017 or for the year ended December 31, 2016.

 

Proceeds from the sale of securities during the six months ended June 30, 2017 and 2016 were $44,756,000 and $25,697,000, respectively. Investment gains of $238,000 and $540,000 were realized on these sales during the six months ended June 30, 2017 and 2016, respectively.

 

20

 

 

Note 9 Fair Value Measurements

 

The accounting standard for fair value measurements provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. This accounting standard establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs that may be used to measure fair value:

 

Level 1 – The valuation is based on quoted prices in active markets for identical instruments.

Level 2 – The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model–based valuation techniques for which all significant assumptions are observable in the market.

Level 3 – The valuation is based on unobservable inputs that are supported by minimal or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar techniques that incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument, or valuations that require significant management judgment or estimation.

 

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

 

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 June 30, 2017. We did not have any transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy during the six months ended June 30, 2017.

 

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 short–term 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 long–term debt approximates fair value due to variable interest rates, but fair value is also determined using Level 2 inputs through alternative pricing sources. At June 30, 2017, there were no material differences between the carrying amounts and fair values of NHC’s financial instruments.

 

21

 

 

The following table summarizes fair value measurements by level at June 30, 2017 and December 31, 2016 for assets and liabilities measured at fair value on a recurring basis (in thousands):

 

   

Fair Value Measurements Using

 

June 30, 2017

 

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

  $ 60,848     $ 60,848     $     $  

Restricted cash and cash equivalents

    5,748       5,748              

Marketable equity securities

    148,137       148,137              

Corporate debt securities

    68,496       47,900       20,596        

Mortgage–backed securities

    50,905             50,905        

U.S. Treasury securities

    20,533       20,533              

State and municipal securities

    24,020             24,020        

Total financial assets

  $ 378,687     $ 283,166     $ 95,521     $  

 

 

   

Fair Value Measurements Using

 

December 31, 2016

 

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

  $ 26,335     $ 26,335     $     $  

Restricted cash and cash equivalents

    5,254       5,254              

Marketable equity securities

    138,013       138,013              

Corporate debt securities

    71,100       42,323       28,777        

Mortgage-backed securities

    56,168             56,168        

U.S. Treasury securities

    25,181       25,181              

State and municipal securities

    31,255             31,255        

Total financial assets

  $ 353,306     $ 237,106     $ 116,200     $  

 

 

Note 10 LongTerm Debt

 

Long–term debt consists of the following:

 

   

Weighted

Average

Interest Rate

   

Maturities

   

June 30,

2017

   

December 31,

2016

 
   

Variable

           

(dollars in thousands)

 

Revolving Credit Facility, interest payable monthly

    2.6%       2020     $ 110,000     $ 110,000  
                                 

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

    3.6%       2018       10,000       10,000  
                      120,000       120,000  

Less current portion

                           
                    $ 120,000     $ 120,000  

 

22

 

 

The $10 million unsecured term note payable to National is due January 1, 2018. The Company intends to extend the note payable beyond the current due date. If the Company is not able to extend the note payable with National, the $175 million credit facility is available to provide financing.

 

$175,000,000 Credit Facility

 

In October 2015, we entered into a $175 million credit facility that has a five year maturity date (October 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.

 

The Credit Agreement contains customary representations and financial covenants, including 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 11 - Stock Repurchase Program

 

In August 2016, the Board of Directors authorized a new common stock purchase program. The program will allow for repurchases of up to $25 million of its common stock. The new stock repurchase plan began on September 1, 2016 and will expire on August 31, 2017. No repurchases of common stock have been executed under this current program.

 

 

Note 12StockBased Compensation

 

NHC recognizes stock–based 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 Black–Scholes pricing model for stock options or the quoted market price for restricted stock.

 

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 non–qualified 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 ISO’s 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 non–qualified 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 2015, our stockholders voted to amend the 2010 Omnibus Equity Incentive Plan (“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 six months ended June 30, 2017 consisted of 1,062,500 shares to employees of the Company, 52,500 shares to the Directors of the Company, and 9,689 shares for the Employee Stock Purchase Plan.  At June 30, 2017, 568,744 shares were available for future grants under the amended 2010 Plan.

 

Compensation expense is recognized only for the awards that ultimately vest. Stock–based compensation totaled $740,000 and $208,000 for the three months ended June 30, 2017 and 2016, respectively. Stock–based compensation totaled $832,000 and $494,000 for the six months ended June 30, 2017 and 2016, respectively. Stock–based compensation is included in “Salaries, wages and benefits” in the interim condensed consolidated statements of income.

 

At June 30, 2017, the Company had $7,951,000 of unrecognized compensation cost related to unvested stock–based compensation awards. This unrecognized compensation cost will be amortized over an approximate five year period.

 

23

 

 

Stock Options

 

The following table summarizes the significant assumptions used to value the options granted for the six months ended June 30, 2017 and for the year ended December 31, 2016.

 

   

2017

   

2016

 

Risk–free interest rate

    2.08 %     0.89 %

Expected volatility

    16.6 %     15.8 %

Expected life, in years

    4.8       2.2  

Expected dividend yield

    3.10 %     3.09 %

 

The following table summarizes our outstanding stock options for the six months ended June 30, 2017 and for the year ended December 31, 2016.

 

   

Number of

Shares

   

Weighted

Average

Exercise Price

   

Aggregate

Intrinsic

Value

 

Options outstanding at January 1, 2016

    621,390     $ 48.15     $  

Options granted

    56,291       62.54        

Options exercised

    (499,066 )     47.16        

Options cancelled

    (656 )     46.69        

Options outstanding at December 31, 2016

    177,959       55.48        

Options granted

    1,124,689       72.96        

Options exercised

    (31,992 )     46.54        

Options cancelled

                 

Options outstanding at June 30, 2017

    1,270,656     $ 71.18     $ 1,854,000  
                         

Options exercisable at June 30, 2017

    198,467     $ 61.54     $ 1,854,000  

 

Options

Outstanding

June 30, 2017

 

Exercise Prices

   

Weighted Average

Exercise Price

   

Weighted Average

Remaining Contractual

Life in Years

 

60,000

    $47.45 - $52.93     $ 50.88       1.5  

1,210,656

    $61.25 - $75.45       72.18       4.5  

1,270,656

              $ 71.18       4.4  

 

 

Note 13 – Income Taxes

 

The income tax provision for the three months ended June 30, 2017 is $6,758,000 (an effective income tax rate of 39.0%). The income tax provision and effective tax rate for the three months ended June 30, 2017 were unfavorably impacted by adjustments to unrecognized tax benefits of $146,200 and nondeductible expenses of $84,000, but was favorably impacted by a tax benefit of $123,000 relating to the exercise of stock options, resulting in a net increase in the provision. The income tax provision for the three months ended June 30, 2016 was $7,700,000 (an effective income tax rate of 39.4%). The income tax provision and effective tax rate for the three months ended June 30, 2016 were unfavorably impacted by adjustments to unrecognized tax benefits of $190,000 and permanent differences including nondeductible expenses of $143,000 resulting in an increase in the provision.

 

The income tax provision for the six months ended June 30, 2017 is $14,757,000 (an effective income tax rate of 38.9%). The income tax provision and effective tax rate for the six months ended June 30, 2017 were unfavorably impacted by adjustments to unrecognized tax benefits of $321,000 and nondeductible expenses of $133,400 but was favorably impacted by a tax benefit of $244,000 relating to the exercise of stock options, resulting in a net increase in the provision. The income tax provision for the six months ended June 30, 2016 is $16,398,000 (an effective income tax rate of 39.1%). The income tax provision and effective tax rate for the six months ended June 30, 2016 were unfavorably impacted by adjustments to unrecognized tax benefits of $365,000 and permanent differences including nondeductible expenses of $229,000 resulting in an increase in the provision.

 

24

 

 

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 2013 (with certain state exceptions).

 

 

Note 14 – Contingencies and Commitments

 

Accrued Risk Reserves

 

We are self–insured for risks related to health insurance and have wholly–owned limited purpose insurance companies that insure risks related to workers’ compensation and general and professional liability insurance claims both for our owned 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 $94,541,000 and $91,162,000 at June 30, 2017 and December 31, 2016, respectively. The liability is included in accrued risk reserves in the interim condensed consolidated balance sheets and is subject to adjustment for actual claims incurred. It is possible that these claims plus unasserted claims could exceed our insurance coverages and our reserves, which could have a material adverse effect on our consolidated financial position, results of operations and cash flows.

 

As a result of the terms of our insurance policies and our use of wholly–owned limited purpose insurance companies, we have retained significant insurance risk with respect to workers’ compensation and general and professional liability. We consider the professional services of independent actuaries to assist us in estimating our exposures for claims obligations (for both asserted and unasserted claims) related to deductibles and exposures in excess of coverage limits, and we maintain reserves for these obligations. Such estimates are based on many variables including historical and statistical information and other factors.

 

Workers Compensation

 

For workers’ compensation, we utilize a wholly–owned Tennessee domiciled property/casualty insurance company to write coverage for NHC affiliates and for third–party customers. Policies are written for a duration of twelve months and cover only risks related to workers’ compensation losses. All customers are companies which operate in the senior care industry. Business is written on a direct basis. Direct business coverage is written for statutory limits and the insurance company’s 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 June 30, 2017, we and/or our managed centers are currently defendants in 61 such claims.

 

Insurance coverage for both periods includes both primary policies and excess policies. 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. For 2016 and 2017, the excess coverage is $9.0 million per occurrence. Additional insurance is purchased through third party providers that serve to supplement the coverage provided through our wholly–owned 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.

 

25

 

 

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 Company’s 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 investigation could lead to a claim that 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., a business that specializes in hospice care services in Company–owned health care centers and in other settings, received notice from the U.S. Attorney’s 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 precipitated by a qui tam lawsuit.  We have a 75.1% non–controlling ownership interest in Caris.

 

A qui tam lawsuit was filed on May 22, 2014, in the U.S. District Court for the Eastern District of Tennessee by a former Caris employee, Barbara Hinkle, and is captioned United States of America, State of Tennessee, and State of Virginia ex rel. Barbara Hinkle v. Caris Healthcare, L.P., No. 3:14–cv–212 (E.D. Tenn.).

 

On June 16, 2016, the State of Tennessee and the State of Virginia declined to intervene in the qui tam lawsuit.  On June 20, 2016, the Court ordered that the complaint be unsealed.  On October 11, 2016, the United States filed a Complaint in Intervention against Caris Healthcare, L.P. and Caris Healthcare, LLC, a wholly owned subsidiary of Caris Healthcare, L.P. The United States' complaint alleges that Caris billed the government for ineligible hospice patients between June 2013 and December 2013 and retained overpayments regarding ineligible hospice patients from April 2010 through June 2013. It seeks treble damages and civil penalties under the Federal False Claims Act and asserts claims for payment under mistake of fact, unjust enrichment, and conversion. The relator has filed a notice of voluntary dismissal without prejudice of the non–intervened claims asserted in her qui tam complaint. On May 30, 2017, the district court denied Caris’ motion to dismiss, and the parties are engaged in discovery. This matter is set for trial in March 2019.

 

Caris denies the allegations in the United States' complaint and intends to defend itself vigorously. Given the early stage of this action, we are unable to assess the probable outcome or potential liability, if any, arising from this action.  It is possible that this claim could have a material adverse effect on our consolidated financial position, results of operations and cash flows.

 

Financing Commitments

 

In conjunction with our management contract with National, we have entered into a line of credit arrangement whereby we may have amounts due from National from time to time. The maximum loan commitment under the line of credit is $2,000,000. At June 30, 2017, National did not have an outstanding balance on the line of credit.

 

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 15 – Common Stock Authorized

 

On May 9, 2017, our Board of Directors and shareholders approved to increase our authorized common stock by 15,000,000 shares, from 30,000,000 shares to 45,000,000 shares, par value $0.01. The additional shares of common stock available for issue are part of the existing class of common stock. These shares have the same rights and privileges as the shares of common stock previously outstanding.

 

26

 

 

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, 76 skilled nursing facilities with a total of 9,597 licensed beds, 25 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 facilities. 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

 

A primary area of management focus continues to be the rates of occupancy within our skilled nursing facilities. The overall census in owned and leased skilled nursing facilities for the six months ending June 30, 2017 was 90.4% compared to 89.6% for the same period a year ago. With the average length of stay decreasing for a skilled nursing patient, as well as the increased availability of assisted living facilities and home and community based services, the challenge of maintaining desirable patient census levels has been amplified. Management has undertaken a number of steps in order to best position our current and future health care facilities. This includes working internally to examine and improve systems to be most responsive to referral sources and payors. Additionally, NHC is in various stages of partnerships with hospital systems, payors, and other post–acute alliances in positioning ourselves to be an active participant in the health delivery systems as they develop.

 

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

 

Bed Addition

 

44 beds

 

Charleston, SC

 

May, 2016

SNF/ALF

 

New Facility

 

90 beds / 80 units

 

Nashville, TN

 

June, 2016

SNF

 

Bed Addition

 

8 beds

 

Kingsport, TN

 

September, 2016

SNF

 

New Facility

 

112 beds

 

Columbia, TN

 

January, 2017

ALF

 

New Facility

 

78 units

 

Bluffton, SC

 

March, 2017

ALF

 

New Facility

 

80 units

 

Garden City, SC

 

June, 2017

Memory Care

 

Bed Addition

 

23 units

 

Murfreesboro, TN

 

July, 2017

SNF

 

Bed Addition

 

30 beds

 

Springfield, MO

 

Under construction

 

For the project under construction at June 30, 2017, the 30-bed addition in Springfield, Missouri is expected to open in the fourth quarter of 2017.

 

During 2017, 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.

 

27

 

 

Accrued Risk Reserves

 

Our accrued professional liability and workers’ compensation reserves totaled $94,541,000 at June 30, 2017 and are a primary area of management focus. We have set aside restricted cash and cash equivalents and marketable securities to fund our estimated professional liability and workers’ compensation liabilities.

 

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

 

 

Application of Critical Accounting Policies

 

There were no significant changes during the six-month period ended June 30, 2017 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, 2016 Annual Report on Form 10–K 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 spans over several years – some of the provisions were effective immediately in 2010 and others may be phased in through 2020.

 

Since a significant goal of the ACA is to transform the delivery of health care by holding providers accountable for the cost and quality of care provided, Medicare and many commercial third-party payors are implementing Accountable Care Organization ("ACO") models in which groups of providers share in the benefit and risk of providing care to an assigned group of individuals. Other reimbursement methodology reforms in which we are participating or expect to participate in include value–based purchasing, in which a portion of provider reimbursement is redistributed based on relative performance on designated economic, clinical quality, and patient satisfaction metrics. Also, CMS is implementing demonstration programs to bundle acute care and post–acute care reimbursement to hold providers accountable for costs across a broader continuum of care. These reimbursement methodologies and similar programs are likely to continue and expand, both in public and commercial health plans. In 2015, CMS announced its goal by 2018 to have 50% of Medicare payments through alternative payment models such as ACOs or bundled payments. CMS also intends to tie 85% of fee-for-service Medicare reimbursements to quality or value by the end of 2017. Providers who respond successfully to these trends and are able to deliver quality care at lower costs are likely to benefit financially.

 

If the ACA is repealed, replaced, or modified, we cannot predict what the replacement plan or modifications would be or whether any of the existing provisions will remain in place. The potential repeal, replace or modification of the ACA on our business is subject to numerous variables and the potential impact on the Company’s financial condition or results of operations is currently unknown.

 

Medicare – Skilled Nursing Facilities

 

In July 2017, CMS released its final rule outlining the fiscal year 2018 Medicare payments and policy changes for skilled nursing facilities. The 2018 final rule provided for an approximate 1.0% rate update, which will begin October 1, 2017. CMS estimated a 2.7% market basket increase reduced by 0.4% for a multifactor productivity adjustment required by the ACA; however, the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) mandated that all post-acute care providers receive a maximum market basket update of 1% in fiscal year 2018 to offset part of the cost of the legislation. CMS estimates the update will increase overall payments to skilled nursing facilities in fiscal year 2018 by $370 million compared to fiscal year 2017 levels. CMS also revised and rebased the market basket index by updating the base year from fiscal year 2010 to fiscal year 2014. 

 

In July 2016, CMS released its final rule outlining the fiscal year 2017 Medicare payments and policy changes for skilled nursing facilities. The 2017 final rule provided for an approximate 2.4% rate update, which began October 1, 2016. This estimated increase consists of a 2.7% market basket increase reduced by 0.3% for a multifactor productivity adjustment required by the ACA. CMS estimates the update will increase overall payments to skilled nursing facilities in fiscal year 2017 by $920 million compared to fiscal year 2016 levels. The policy changes in the 2017 final rule continue to shift skilled nursing facility Medicare payments from volume to value. The final rule makes changes to the SNF Quality Reporting Program and Value-Based Purchasing Program with some of these changes effective for the fiscal year beginning October 1, 2017.

 

28

 

 

For the first six months of 2017, our average Medicare per diem rate for skilled nursing facilities increased 3.3% compared to the same period in 2016.

 

Medicaid – Skilled Nursing Facilities

 

Effective July 1, 2016 and for the fiscal year 2017, the state of Tennessee implemented specific individual nursing facility rate increases. The resulting increase in revenue beginning July 1, 2016 was approximately $1,700,000 annually, or $425,000 per quarter.  

 

Effective October 1, 2016 and for the fiscal year 2017, South Carolina implemented specific individual nursing facility rate changes. We estimate the resulting increase in revenue for the 2017 fiscal year will be approximately $1,000,000 annually, or $250,000 per quarter.      

 

Effective July 1, 2016, the state of Missouri approved a Medicaid rate increase of $2.83 per patient day to Missouri skilled nursing providers. The resulting increase in revenue was approximately $800,000 annually, or $200,000 per quarter. Effective August 1, 2017, the state of Missouri approved a Medicaid rate decrease of $5.37 per patient day, or an approximate 3.5% decrease, to Missouri skilled nursing providers. We estimate the resulting decrease in revenue will be approximately $1,400,000 annually, or $350,000 per quarter.

 

For the first six months of 2017, our average Medicaid per diem increased 1.6% compared to the same period in 2016. 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

 

In October 2016 and effective January 1, 2017, CMS released its final rule for 2017 home health prospective payment system rates. CMS estimated the net impact of the PPS rule resulted in a 0.7% decrease ($130 million) in Medicare payments for agencies in 2017. The estimated decrease reflects the effects of a 2.5% home health payment update; rebasing adjustments to the national standardized 60-day episode payment rate, the national per-visit payment rate, and the non-routine medical supplies conversion factor (expected impact of -2.3%), and the effects of an adjustment to the national standardized 60-day episode payment rate to account for nominal case-mix growth (expected impact of -0.9%). However, the freestanding home health agencies are expected to have an overall reduction of 0.8%, and agencies in eight states including the states of South Carolina and Florida are expected to average a reimbursement decrease of 1.9%. NHC estimates the overall effect on its agencies will be a reduction of approximately 1.0%.

 

 

Segment Reporting

 

Beginning in the first quarter of 2017 with the leadership change of the Company’s Chief Executive Officer, we reassessed and realigned our reportable operating segments to coincide with the way our new leadership and CODM measures Company performance and allocates resources. The Company has two reportable operating segments: (1) inpatient services, which includes the operation of skilled nursing facilities and assisted and independent living facilities, and (2) homecare services. These reportable operating segments are consistent with information used by the Company’s Chief Executive Officer, as CODM, to assess performance and allocate resources.

 

The Company also reports an “all other” category that includes revenues from rental income, management and accounting services fees, insurance services, and costs of the corporate office. The Company has presented the financial information for the three months and six months ended June 30, 2016 on a comparative basis to conform with the current year segment presentation. During the three and six months ended June 30, 2017, the Company made changes to the way it discloses its business segment information. The primary effect of the change was to allocate certain expenses within the Inpatient Services and Homecare business segments to the All Other category to accurately reflect the allocation of certain corporate office expenses. For additional information on these reportable segments see Note 1 - “Description of Business”.

 

29

 

 

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

 

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

 

   

Three Months Ended June 30, 2017

 
   

Inpatient

Services

   

Homecare

   

All Other

   

Total

 

Revenues:

                               

Net patient revenues

  $ 211,888     $ 15,959     $ -     $ 227,847  

Other revenues

    225       -       11,385       11,610  

Net operating revenues

    212,113       15,959       11,385       239,457  
                                 

Costs and Expenses:

                               

Salaries, wages and benefits

    124,287       8,615       9,782       142,684  

Other operating

    55,989       5,058       1,809       62,856  

Rent

    8,257       499       1,323       10,079  

Depreciation and amortization

    9,396       39       1,046       10,481  

Interest

    436       -       783       1,219  

Total costs and expenses

    198,365       14,211       14,743       227,319  
                                 

Income (Loss) Before Non-Operating Income

    13,748       1,748       (3,358 )     12,138  
                                 

Non-Operating Income

    -       -       5,189       5,189  
                                 

Income Before Income Taxes

  $ 13,748     $ 1,748     $ 1,831     $ 17,327  

 

 

   

Three Months Ended June 30, 2016

 
   

Inpatient

Services

   

Homecare

   

All Other

   

Total

 

Revenues:

                               

Net patient revenues

  $ 200,617     $ 15,870     $ -     $ 216,487  

Other revenues

    198       -       11,083       11,281  

Net operating revenues

    200,815       15,870       11,083       227,768  
                                 

Costs and Expenses:

                               

Salaries, wages and benefits

    117,106       8,216       9,746       135,068  

Other operating

    50,472       5,092       1,742       57,306  

Rent

    8,449       481       1,389       10,319  

Depreciation and amortization

    8,359       46       1,090       9,495  

Interest

    487       -       452       939  

Total costs and expenses

    184,873       13,835       14,419       213,127  
                                 

Income (Loss) Before Non-Operating Income

    15,942       2,035       (3,336 )     14,641  
                                 

Non-Operating Income

    -       -       4,925       4,925  
                                 

Income Before Income Taxes

  $ 15,942     $ 2,035     $ 1,589     $ 19,566  

 

30

 

 

   

Six Months Ended June 30, 2017

 
   

Inpatient

Services

   

Homecare

   

All Other

   

Total

 

Revenues:

                               

Net patient revenues

  $ 424,190     $ 31,616     $ -     $ 455,806  

Other revenues

    451       -       22,443       22,894  

Net operating revenues

    424,641       31,616       22,443       478,700  
                                 

Costs and Expenses:

                               

Salaries, wages and benefits

    242,535       16,442       21,762       280,739  

Other operating

    112,859       10,193       3,687       126,739  

Rent

    16,424       987       2,756       20,167  

Depreciation and amortization

    18,605       80       2,091       20,776  

Interest

    886       -       1,391       2,277  

Total costs and expenses

    391,309       27,702       31,687       450,698  
                                 

Income (Loss) Before Non-Operating Income

    33,332       3,914       (9,244 )     28,002  
                                 

Non-Operating Income

    -       -       9,957       9,957  
                                 

Income Before Income Taxes

  $ 33,332     $ 3,914     $ 713     $ 37,959  

 

 

   

Six Months Ended June 30, 2016

 
   

Inpatient

Services

   

Homecare

   

All Other

   

Total

 

Revenues:

                               

Net patient revenues

  $ 402,700     $ 31,893     $ -     $ 434,593  

Other revenues

    367       -       22,396       22,763  

Net operating revenues

    403,067       31,893       22,396       457,356  
                                 

Costs and Expenses:

                               

Salaries, wages and benefits

    227,670       16,197       21,221       265,088  

Other operating

    104,351       10,386       3,878       118,615  

Rent

    16,809       968       2,869       20,646  

Depreciation and amortization

    16,573       92       2,184       18,849  

Interest

    985       -       908       1,893  

Total costs and expenses

    366,388       27,643       31,060       425,091  
                                 

Income (Loss) Before Non-Operating Income

    36,679       4,250       (8,664 )     32,265  
                                 

Non-Operating Income

    -       -       9,698       9,698  
                                 

Income Before Income Taxes

  $ 36,679     $ 4,250     $ 1,034     $ 41,963  

 

 

Results of Operations

 

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

 

Results for the quarter ended June 30, 2017 include a 5.1% increase in net operating revenues and a 10.2% decrease in net income attributable to NHC compared to the same period in 2016. There have been five newly constructed healthcare facilities placed in service during the last twelve months (two skilled nursing facilities and three assisted living facilities). The operating losses before income taxes for these entities were approximately $1,966,000 and $560,000 for the three months ended June 30, 2017 and 2016, respectively. Therefore, excluding the operating losses from these five newly constructed facilities, net income attributable to NHC would have been $11,467,000 and $12,208,000 for the three months ended June 30, 2017 and 2016, respectively.

 

31

 

 

The total census at owned and leased skilled nursing facilities for the quarter averaged 90.3% compared to an average of 89.3% for the same quarter a year ago. Medicare per diem rates increased 2.7% and Managed Care per diem rates increased 2.0% compared to the quarter a year ago. Medicaid and private pay per diem rates increased 1.4% and 3.6%, respectively, compared to the quarter a year ago. Overall, the composite skilled nursing facility per diem at our owned and leased skilled nursing facilities increased 3.0% compared to the quarter a year ago.

 

Net patient revenues increased $11,360,000, or 5.2%, compared to the same period last year. The newly constructed healthcare facilities placed in service during 2016 and 2017 helped increase net patient revenues $4,884,000 compared to the same period a year ago. The remaining increase in our net patient revenues is primarily due to the census increase and per diem increases in our existing skilled nursing facility operations.

 

Other revenues increased $329,000, or 2.9%, compared to the same quarter last year, as further detailed in Note 3 to our interim condensed consolidated financial statements. During the first quarter of 2017, we began management contract services for a third-party owner of two skilled nursing facilities in the middle Tennessee area. These two contracts helped increase management fee revenues for the three months ended June 30, 2017 compared to the quarter a year ago.

 

Total costs and expenses for the second quarter of 2017 compared to the second quarter of 2016 increased $14,192,000 or 6.7%, to $227,319,000 from $213,127,000. Salaries, wages and benefits, the largest operating costs of our company, increased $7,616,000, or 5.6%, to $142,684,000 from $135,068,000. Other operating expenses increased $5,550,000, or 9.7%, to $62,856,000 for the 2017 period compared to $57,306,000 for the 2016 period. Facility rent expense decreased $240,000 to $10,079,000. Depreciation and amortization increased $986,000 to $10,481,000. Interest expense increased $280,000 to $1,219,000.

 

Salaries, wages and benefits as a percentage of net operating revenue was 59.6% compared to 59.3% for the three months ended June 30, 2017 and 2016, respectively. The newly constructed healthcare facilities placed in service during 2016 and 2017 increased salaries, wages and benefits by $2,596,000 compared to the same period a year ago. The majority of the remaining increase in salaries, wages and benefits is due to the increase in our existing skilled nursing facilities and the continued wage pressure in certain markets in which we operate ($4,834,000).

 

Other operating expenses as a percentage of net operating revenue was 26.2% compared to 25.2% for the three months ended June 30, 2017 and 2016, respectively. The increase in other operating expenses for the current quarter was primarily due to the operations of the newly constructed healthcare facilities compared to the quarter a year ago ($2,862,000). We also had unfavorable results within our self-insurance accrued risk reserve programs compared to the quarter a year ago ($993,000).

 

The increase in depreciation expense is due to the newly constructed healthcare facilities compared to the quarter a year ago. The increase in interest expense is due to the increased interest rate on the line of credit borrowings compared to the same period a year ago. At June 30, 2017, we have $110 million outstanding on our credit facility.

 

The noncontrolling interest in a subsidiary is the joint venture operations of a skilled nursing facility in Columbia, Tennessee. This facility opened and began operating in January 2017 in which NHC owns 80% of the operating entity and Maury Regional Medical Center owns 20% of the entity.

 

The income tax provision for the three months ended June 30, 2017 is $6,758,000 (an effective income tax rate of 39.0%). The income tax provision and effective tax rate for the three months ended June 30, 2017 were unfavorably impacted by adjustments to unrecognized tax benefits of $146,200 and nondeductible expenses of $84,000, but was favorably impacted by a tax benefit of $123,000 relating to the exercise of stock options, resulting in a net increase in the provision.

 

32

 

 

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

 

Results for the six months ended June 30, 2017 include a 4.7% increase in net operating revenues and an 8.5% decrease in net income attributable to NHC compared to the same period in 2016. There have been five newly constructed healthcare facilities placed in service during the last twelve months (two skilled nursing facilities and three assisted living facilities). The operating losses before income taxes for these entities were approximately $3,759,000 and $304,000 for the six months ended June 30, 2017 and 2016, respectively. Therefore, excluding the operating losses from these five newly constructed facilities, net income attributable to NHC would have been $25,356,000, and $25,750,000 for the six months ended June 30, 2017 and 2016, respectively.  

 

The total census at owned and leased skilled nursing facilities for the six months averaged 90.4% compared to an average of 89.6% for the same period a year ago. Medicare per diem rates increased 3.3% and Managed Care per diem rates increased 2.0% compared to the six months a year ago. Medicaid and private pay per diem rates increased 1.6% and 3.8%, respectively, compared to the six months a year ago. Overall, the composite skilled nursing facility per diem at our owned and leased skilled nursing facilities increased 3.2% compared to the same period a year ago.

 

Net patient revenues increased $21,213,000, or 4.9%, compared to the same period last year. The newly constructed healthcare facilities placed in service during 2016 and 2017 helped increase net patient revenues $8,820,000 compared to the same period a year ago. The remaining increase in our net patient revenues is primarily due to the census increase and per diem increases in our existing skilled nursing facility operations.

 

Other revenues increased $131,000, or 0.6%, compared to the six months last year, as further detailed in Note 3 to our interim condensed consolidated financial statements.

 

Total costs and expenses for the 2017 six-month period compared to the same period in 2016 increased $25,607,000 or 6.0%, to $450,698,000 from $425,091,000. Salaries, wages and benefits, the largest operating costs of our company, increased $15,651,000, or 5.9%, to $280,739,000 from $265,088,000. Other operating expenses increased $8,124,000, or 6.8%, to $126,739,000 for the 2017 period compared to $118,615,000 for the 2016 period. Facility rent expense decreased $479,000 to $20,167,000. Depreciation and amortization increased $1,927,000 to $20,776,000. Interest expense increased $384,000 to $2,277,000.

 

Salaries, wages and benefits as a percentage of net operating revenue was 58.6% compared to 58.0% for the six months ended June 30, 2017 and 2016, respectively. The newly constructed healthcare facilities placed in service during 2016 and 2017 increased salaries, wages and benefits by $5,050,000 compared to the same period a year ago. The majority of the remaining increase in salaries, wages and benefits is due to the increase in our existing skilled nursing facilities and the continued wage pressure in certain markets in which we operate ($10,064,000).

 

Other operating expenses as a percentage of net operating revenue was 26.5% compared to 25.9% for the six months ended June 30, 2017 and 2016, respectively. The increase in other operating expenses for the current six-month period was primarily due to the operations of the newly constructed healthcare facilities compared to the same period a year ago ($5,579,000). We also had unfavorable results within our self-insurance accrued risk reserve programs compared to the same six-month period a year ago ($1,030,000). 

 

The increase in depreciation expense is due to the newly constructed healthcare facilities compared to the six months a year ago. The increase in interest expense is due to the increased interest rate on the line of credit borrowings compared to the same period a year ago. At June 30, 2017, we have $110 million outstanding on our credit facility.

 

The noncontrolling interest in a subsidiary is the joint venture operations of a skilled nursing facility in Columbia, Tennessee. This facility opened and began operating in January 2017 in which NHC owns 80% of the operating entity and Maury Regional Medical Center owns 20% of the entity.

 

The income tax provision for the six months ended June 30, 2017 is $14,757,000 (an effective income tax rate of 38.9%). The income tax provision and effective tax rate for the six months ended June 30, 2017 were unfavorably impacted by adjustments to unrecognized tax benefits of $321,000 and nondeductible expenses of $133,000, but was favorably impacted by a tax benefit of $244,000 relating to the exercise of stock options, resulting in a net increase in the provision.

 

33

 

 

 

Liquidity, Capital Resources, and Financial Condition

 

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

 

   

Six Months Ended

June 30

   

Six Month Change

 
   

2017

   

2016

   

$

   

%

 

Cash, cash equivalents, restricted cash and restricted cash equivalents, at beginning of period

  $ 31,589     $ 49,314     $ (17,725 )     (35.9 )%
                                 

Cash provided by operating activities

    40,305       46,428       (6,123 )     (13.2 )%
                                 

Cash provided by (used in) investing activities

    8,775       (36,902 )     45,677       123.8 %
                                 

Cash used in financing activities

    (14,073 )     (4,597 )     (9,476 )     (206.1 )%
                                 

Cash, cash equivalents, restricted cash and restricted cash equivalents, at end of period

  $ 66,596     $ 54,243     $ 12,353       22.8 %

 

Operating Activities

 

Net cash provided by operating activities for the six months ended June 30, 2017 was $40,305,000, as compared to $46,428,000 in the same period last year. Cash provided by operating activities consisted of net income of $23,202,000, adjustments for non–cash items of $23,863,000, and cash distributions in excess of earnings from equity method investments of $957,000. There was cash used for working capital needs in the amount of $7,479,000 for the six months ended June 30, 2017 compared to $4,006,000 for the same period a year ago. The newly constructed healthcare facilities placed in service during 2016 and 2017 were the primary cause of the increased cash used for working capital.

 

Investing Activities

 

Cash provided by investing activities totaled $8,775,000 for the six months ended June 30, 2017 compared to cash used in investing activities of $36,902,000 for the six months ended June 30, 2016. Cash used for property and equipment additions was $16,681,000 and $36,127,000 for the six months ended June 30, 2017 and 2016, respectively. The Company made investments in unconsolidated partnerships in the amount of $176,000 and $904,000 for the six months ended June 30, 2017 and 2016, respectively. The Company collected notes receivable of $3,651,000 and $428,000 for the six months ended June 30, 2017 and 2016, respectively. Sales of restricted marketable securities, net of purchases, resulted in cash of $21,981,000 and $1,845,000 for the six months ended June 30, 2017 and 2016, respectively. During the six months ended June 30, 2017, $30 million of the proceeds from the sales of restricted marketable securities were transferred out of our insurance companies to our unrestricted cash position.

 

In 2017, construction and development costs included in additions to property and equipment include $1,860,000 for the final construction and furnishings of the 112-bed skilled nursing facility in Columbia, Tennessee; $2,762,000 for the construction and furnishings of the two assisted living facilities in Bluffton, South Carolina and Garden City, South Carolina; and $2,739,000 for the construction of the 23-unit memory care addition located in Murfreesboro, Tennessee.

 

34

 

 

Financing Activities 

 

Net cash used in financing activities totaled $14,073,000 and $4,597,000 for the six months ending June 30, 2017 and 2016, respectively. Cash used for dividend payments to common stockholders totaled $13,649,000 in the current year period compared to $12,101,000 for the same period a year ago. In the current period, $1,496,000 was provided by the issuance of common stock compared to $10,070,000 in the prior year period.

 

 

Table of Contractual Obligations

 

Our contractual obligations as of June 30, 2017 are as follows (in thousands):

 

   

Total

   

1 year

   

2–3

Years

   

4–5

Years

   

After

5 Years

 

Long–term debt – principal

  $ 120,000     $ 10,000     $ 110,000     $     $  

Long–term debt – interest

    9,580       3,051       5,740       789        

Operating leases

    330,650       34,200       68,400       68,400       159,650  

Construction obligations

    5,143       5,143                    

Capital lease obligations

    34,667       5,200       10,400       10,400       8,667  

Total contractual cash obligations

  $ 500,040     $ 57,594     $ 194,540     $ 79,589     $ 168,317  

 

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

 

Shortterm liquidity

 

We expect to meet our short-term liquidity requirements primarily from our cash flows from operating activities. In addition to cash flows from operations, our current cash on hand of $60,848,000, marketable securities of $148,137,000 and as needed, our borrowing capacity on the credit facility, are expected to be adequate to meet our contractual obligations, operating liquidity, and our growth and development plans in the next twelve months.

 

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 $60,848,000, marketable securities of $148,137,000, and our borrowing capacity on the credit facility. At June 30, 2017, the outstanding balance on the credit facility is $110,000,000; therefore, leaving $65,000,000 available for future borrowings. The maturity date on the credit facility is October 7, 2020. The credit facility is available for general corporate purposes, including working capital and acquisitions.

 

Our ability to refinance the credit agreement, to meet our long–term 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.

 

35

 

 

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 Company’s 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 investigation could lead to a claim that 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., a business that specializes in hospice care services in Company–owned health care centers and in other settings, received notice from the U.S. Attorney’s 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 precipitated by a qui tam lawsuit.  We have a 75.1% non–controlling ownership interest in Caris.

 

A qui tam lawsuit was filed on May 22, 2014, in the U.S. District Court for the Eastern District of Tennessee by a former Caris employee, Barbara Hinkle, and is captioned United States of America, State of Tennessee, and State of Virginia ex rel. Barbara Hinkle v. Caris Healthcare, L.P., No. 3:14–cv–212 (E.D. Tenn.).

 

On June 16, 2016, the State of Tennessee and the State of Virginia declined to intervene in the qui tam lawsuit.  On June 20, 2016, the Court ordered that the complaint be unsealed.  On October 11, 2016, the United States filed a Complaint in Intervention against Caris Healthcare, L.P. and Caris Healthcare, LLC, a wholly owned subsidiary of Caris Healthcare, L.P. The United States' complaint alleges that Caris billed the government for ineligible hospice patients between June 2013 and December 2013 and retained overpayments regarding ineligible hospice patients from April 2010 through June 2013. It seeks treble damages and civil penalties under the Federal False Claims Act and asserts claims for payment under mistake of fact, unjust enrichment, and conversion. The relator has filed a notice of voluntary dismissal without prejudice of the non–intervened claims asserted in her qui tam complaint. On May 30, 2017, the district court denied Caris’ motion to dismiss, and the parties are engaged in discovery. This matter is set for trial in March 2019.

 

Caris denies the allegations in the United States' complaint and intends to defend itself vigorously. Given the early stage of this action, we are unable to assess the probable outcome or potential liability, if any, arising from this action.  It is possible that this claim could have a material adverse effect on our consolidated financial position, results of operations and cash flows.

 

 

New Accounting Pronouncements

 

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

 

 

ForwardLooking Statements

 

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

 

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

 

36

 

 

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

 

 

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

 

 

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

 

 

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

 

 

liabilities and other claims asserted against us, including patient care liabilities, as well as the resolution of current litigation (see Note 14: Contingencies and Commitments);

 

 

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 2016 Annual Report on Form 10–K for a discussion of various governmental regulations and other operating factors relating to the healthcare industry and the risk factors inherent in them. This may be found on our web site at www.nhccare.com. You should carefully consider these risks before making any investment in the Company. These risks and uncertainties are not the only ones facing us. There may be additional risks that we do not presently know of or that we currently deem immaterial. If any of the risks 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 these forward–looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them.

 

37

 

 

Item 3.     Quantitative and Qualitative Disclosures About Market Risk.

 

Market risk represents the potential economic loss arising from adverse changes in the fair value of financial instruments. Currently, our exposure to market risk relates primarily to our fixed–income and equity portfolios. These investment portfolios are exposed primarily to, but not limited to, interest rate risk, credit risk, equity price risk, and concentration risk. We also have exposure to market risk that includes our cash and cash equivalents, notes receivable, revolving credit facility, and long–term 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 fixed–income investments fluctuate in response to changes in market interest rates. Increases and decreases in prevailing interest rates generally translate into decreases and increases, respectively, in the fair values of those instruments. Additionally, the fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, the liquidity of the instrument and other general market conditions. At June 30, 2017, we have available for sale debt securities in the amount of $163,954,000. The fixed maturity portfolio is comprised of investments with primarily short–term and intermediate–term 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 risk–adjusted return while maintaining sufficient liquidity to meet obligations.

 

As of June 30, 2017, the Company has $120 million of long–term debt that bears interest at variable interest rates. Based on our outstanding long–term debt, a 1% change in interest rates would change our annual interest cost by approximately $1,200,000.

 

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 short–term nature of our cash instruments, a hypothetical 1% change in interest rates would have minimal impact on our future earnings and cash flows related to these instruments.

 

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

 

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 marketable equity securities are recorded at their fair market value based on quoted market prices. Thus, there is exposure to equity price risk, which is the potential change in fair value due to a change in quoted market prices. At June 30, 2017, the fair value of our marketable equity securities is approximately $148,137,000. Of the $148.1 million equity securities portfolio, our investment in National Health Investors, Inc. (“NHI”) comprises approximately $129.1 million, or 87.2%, 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 $14.8 million. At June 30, 2017, our equity securities had unrealized gains of $118.0 million. Of the $118.0 million of unrealized gains, $104.4 million is related to our investment in NHI.

 

38

 

 

Item 4. Controls and Procedures.

 

As of June 30, 2017, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Principal Accounting Officer (“PAO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and PAO, concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2017. There have been no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s 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 14 of this Form 10–Q.

 

 

Item 1A. Risk Factors.

 

During the six months ended June 30, 2017, there were no material changes to the risk factors that were disclosed in Item 1A of National HealthCare Corporation’s Annual Report on Form 10–K for the year ended December 31, 2016.

 

 

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

 

39

 

 

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 Registrant’s registration statement on Form S-4 (File No. 333-37185) dated October 3, 1997) 

         

3.2

 

Certificate of Amendment to the Certificate of Incorporation of National HealthCare Corporation

 

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

         

3.3

 

Certificate of Designation Series B Junior Participating Preferred Stock

 

Incorporated by reference to Exhibit 3.1 to the Registrant’s registration statement on Form 8-A, dated August 3, 2007. 

         

3.4

 

Restated Bylaws as amended February 14, 2013

 

Incorporated by reference to Exhibit 3.5 to the quarterly report on Form 10-Q filed on May 8, 2013.

         

3.5

 

Certificate of Amendment to the Certificate of Incorporation of National HealthCare Corporation

 

Filed Herewith

         

4.1

 

Form of Common Stock

 

Filed Herewith

         

4.2

 

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 Registrant’s registration statement on Form 8-A, dated August 3, 2007  

         

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

   

 

40

 

 

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: August 3, 2017

/s/ Stephen F. Flatt                    

 

Stephen F. Flatt

 

Chief Executive Officer

   
   

Date: August 3, 2017

/s/ Brian F. Kidd                        

 

Brian F. Kidd

 

Senior Vice President and Controller

 

(Principal Accounting Officer)

 

 

41