NATIONAL HEALTHCARE CORP - Quarter Report: 2019 September (Form 10-Q)

nhc20190930_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ____________

Commission file number 001-13489



(Exact name of registrant as specified in its Charter)

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

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

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

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

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

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

Large Accelerated filer ☒	Accelerated filer ☐

Non–accelerated filer ☐	Smaller reporting company ☐

	Emerging growth company ☐

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

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

15,318,890 shares of common stock of the registrant were outstanding as of November 1, 2019.

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common, $0.01 par value	NHC	NYSE American

Table of Contents

TABLE OF CONTENTS

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

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	33

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	34

Item 1A	Risk Factors	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 3.	Defaults Upon Senior Securities	34

Item 4.	Mine Safety Disclosures	34

Item 5.	Other Information	34

Item 6.	Exhibits	35

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PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements.

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Operations

(in thousands, except share and per share amounts)

(unaudited)

	Three Months Ended September 30						Nine Months Ended September 30
	2019			2018			2019			2018

Revenues:
Net patient revenues	$	235,090		$	234,827		$	706,465		$	697,173
Other revenues		11,977			11,499			36,038			34,256
Net operating revenues		247,067			246,326			742,503			731,429

Cost and expenses:
Salaries, wages and benefits		152,175			149,188			441,441			434,749
Other operating		66,730			64,507			203,760			192,268
Facility rent		10,167			10,190			30,602			30,691
Depreciation and amortization		10,663			10,437			31,515			31,176
Interest		764			1,170			2,644			3,663
Total costs and expenses		240,499			235,492			709,962			692,547

Income from operations		6,568			10,834			32,541			38,882

Other income:
Non–operating income		6,663			8,467			20,936			11,056
Unrealized gains on marketable equity securities		9,312			3,486			16,096			417

Income before income taxes		22,543			22,787			69,573			50,355
Income tax provision		(3,167	)		(1,700	)		(15,284	)		(9,792	)
Net income		19,376			21,087			54,289			40,563
Net loss attributable to noncontrolling interest		85			55			152			249

Net income attributable to National HealthCare Corporation	$	19,461		$	21,142		$	54,441		$	40,812

Earnings per share attributable to National HealthCare Corporation stockholders:
Basic	$	1.27		$	1.39		$	3.57		$	2.68
Diluted	$	1.27		$	1.39		$	3.55		$	2.68

Basic		15,275,709			15,225,654			15,267,250			15,221,217
Diluted		15,373,617			15,242,086			15,350,308			15,230,692

Dividends declared per common share	$	0.52		$	0.50		$	1.54		$	1.48

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

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NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Comprehensive Income

(unaudited – in thousands)

	Three Months Ended September 30						Nine Months Ended September 30
	2019			2018			2019			2018

Net income	$	19,376		$	21,087		$	54,289		$	40,563

Other comprehensive income (loss):
Unrealized gains (losses) on investments in restricted marketable debt securities		855			(180	)		7,049			(3,772	)
Reclassification adjustment for realized (gains) losses on sale of securities		(117	)		7			(117	)		(18	)
Income tax benefit (expense) related to items of other comprehensive income		(155	)		36			(1,456	)		795
Other comprehensive income (loss), net of tax		583			(137	)		5,476			(2,995	)

Net loss attributable to noncontrolling interest		85			55			152			249

Comprehensive income attributable to National HealthCare Corporation	$	20,044		$	21,005		$	59,917		$	37,817

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

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NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Balance Sheets

(in thousands)

	September 30, 2019			December 31, 2018
	unaudited
Assets
Current Assets:
Cash and cash equivalents	$	59,261		$	43,247
Restricted cash and cash equivalents, current portion		7,114			9,967
Marketable equity securities		156,319			140,223
Restricted marketable debt securities, current portion		21,222			18,676
Accounts receivable		92,040			97,274
Inventories		7,774			7,470
Prepaid expenses and other assets		3,674			3,863
Notes receivable, current portion		1,456			1,289
Federal income tax receivable		2,330			-
Total current assets		351,190			322,009

Property and Equipment:
Property and equipment, at cost		1,010,629			979,088
Accumulated depreciation and amortization		(471,025	)		(444,438	)
Net property and equipment		539,604			534,650

Other Assets:
Restricted cash and cash equivalents, less current portion		1,707			1,706
Restricted marketable securities, less current portion		128,335			153,917
Deposits and other assets		5,636			5,602
Operating lease right-of-use assets		208,785			-
Goodwill		20,995			20,995
Notes receivable, less current portion		13,992			9,707
Investments in unconsolidated companies		36,987			32,362
Total other assets		416,437			224,289
Total assets	$	1,307,231		$	1,080,948

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

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NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Balance Sheets (continued)

(in thousands, except share and per share amounts)

	September 30, 2019		December 31, 2018
	unaudited
Liabilities and Stockholders’ Equity
Current Liabilities:
Trade accounts payable	$	18,693	$	19,759
Finance lease obligations, current portion		4,104		3,924
Operating lease liabilities, current portion		23,988		-
Accrued payroll		59,497		67,618
Amounts due to third party payors		15,911		16,108
Accrued risk reserves, current portion		28,335		28,643
Other current liabilities		22,594		14,249
Dividends payable		7,966		7,623
Total current liabilities		181,088		157,924

Long–term debt		30,000		55,000
Finance lease obligations, less current portion		16,028		19,128
Operating lease liabilities, less current portion		184,797		-
Accrued risk reserves, less current portion		69,944		67,381
Refundable entrance fees		7,394		8,078
Obligation to provide future services		2,172		2,172
Deferred income taxes		26,193		18,550
Other noncurrent liabilities		13,765		15,204
Deferred revenue		3,819		3,054
Total liabilities		535,200		346,491

Equity:
Common stock, $.01 par value; 45,000,000 shares authorized; 15,318,790 and 15,255,002 shares, respectively, issued and outstanding		153		153
Capital in excess of par value		221,394		219,435
Retained earnings		547,292		516,435
Accumulated other comprehensive income (loss)		2,731		(2,745	)
Total National HealthCare Corporation stockholders’ equity		771,570		733,278
Noncontrolling interest		461		1,179
Total equity		772,031		734,457
Total liabilities and equity	$	1,307,231	$	1,080,948

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

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NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Cash Flows

(unaudited – in thousands)

	Nine Months Ended September 30
	2019			2018
Cash Flows From Operating Activities:
Net income	$	54,289		$	40,563
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		31,515			31,176
Equity in (earnings) losses of unconsolidated investments		(7,548	)		1,860
Distributions from unconsolidated investments		3,884			3,830
Unrealized gains on marketable equity securities		(16,096	)		(417	)
Gains on sale of restricted marketable debt securities		(117	)		(18	)
Gain on acquisition of equity method investment		(1,975	)		(2,050	)
Deferred income taxes		6,187			1,067
Stock–based compensation		1,448			1,538
Changes in operating assets and liabilities:
Accounts receivable		5,234			613
Income tax receivable		(2,330	)		3,262
Inventories		(304	)		(437	)
Prepaid expenses and other assets		169			(1,336	)
Trade accounts payable		(1,066	)		3,319
Accrued payroll		(8,121	)		(8,615	)
Amounts due to third party payors		(197	)		207
Accrued risk reserves		2,241			2,668
Other current liabilities		8,345			262
Other noncurrent liabilities		(1,439	)		(1,092	)
Deferred revenue		765			666
Net cash provided by operating activities		74,884			77,066
Cash Flows From Investing Activities:
Additions to property and equipment		(19,670	)		(22,708	)
Acquisition of equity method investment		(15,589	)		(527	)
(Investments in)/distributions from unconsolidated investments		(197	)		376
Investments in notes receivable		(5,462	)		-
Collections of notes receivable		1,010			1,180
Purchases of restricted marketable debt securities		(11,187	)		(9,950	)
Sales of restricted marketable debt securities		41,272			4,539
Net cash used in investing activities		(9,823	)		(27,090	)
Cash Flows From Financing Activities:
Principal payments on debt		(25,000	)		(25,000	)
Principal payments under finance lease obligations		(2,920	)		(2,751	)
Dividends paid to common stockholders		(23,240	)		(22,214	)
Distributions attributable to noncontrolling interest		(566	)		-
Issuance of common shares		1,383			1,327
Repurchase of common shares		(872	)		(867	)
Entrance fee refunds		(684	)		(159	)
Net cash used in financing activities		(51,899	)		(49,664	)
Net Increase in Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents		13,162			312
Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents, Beginning of Period		54,920			67,421
Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents, End of Period	$	68,082		$	67,733

Balance Sheet Classifications:
Cash and cash equivalents	$	59,261		$	55,599
Restricted cash and cash equivalents		8,821			12,134
Total Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents	$	68,082		$	67,733

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

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NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share and per share amounts)

(unaudited)

	Common Stock					Capital in Excess of Par			Retained			Accumulated Other Comprehensive			Non- controlling			Total Stockholders’
	Shares			Amount		Value			Earnings			Income			Interest			Equity
Balance at January 1, 2019		15,255,002		$	153	$	219,435		$	516,435		$	(2,745	)	$	1,179		$	734,457
Net income attributable to National HealthCare Corporation		–			–		–			21,269			–			–			21,269
Net loss attributable to noncontrolling interest		–			–		–			–			–			(38	)		(38	)
Other comprehensive income		–			–		–			–			2,548			–			2,548
Stock–based compensation		–			–		424			–			–			–			424
Shares sold – options exercised		59,384			–		579			–			–			–			579
Repurchase of common shares		(10,396	)		–		(872	)		–			–			–			(872	)
Dividends declared to common stockholders ($0.50 per share)		–			–		–			(7,652	)		–			–			(7,652	)
Balance at March 31, 2019		15,303,990		$	153	$	219,566		$	530,052		$	(197	)	$	1,141			750,715

Net income attributable to National HealthCare Corporation		–			–		–			13,711			–			–			13,711
Net loss attributable to noncontrolling interest		–			–		–			–			–			(29	)		(29	)
Distributions attributable to noncontrolling interest		–			–		–			–			–			(17	)		(17	)
Other comprehensive income		–			–		–			–			2,345			–			2,345
Stock–based compensation		–			–		684			–			–			–			684
Shares sold – options exercised		14,800			–		804			–			–			–			804
Dividends declared to common stockholders ($0.52 per share)		–			–		–			(7,966	)		–			–			(7,966	)
Balance at June 30, 2019		15,318,790		$	153	$	221,054		$	535,797		$	2,148		$	1,095		$	760,247

Net income attributable to National HealthCare Corporation		–			–		–			19,461			–			–			19,461
Net loss attributable to noncontrolling interest		–			–		–			–			–			(85	)		(85	)
Distributions attributable to noncontrolling interest		–			–		–			–			–			(549	)		(549	)
Other comprehensive income		–			–		–			–			583			–			583
Stock–based compensation		–			–		340			–			–			–			340
Dividends declared to common stockholders ($0.52 per share)		–			–		–			(7,966	)		–			–			(7,966	)
Balance at September 30, 2019		15,318,790		$	153	$	221,394		$	547,292		$	2,731		$	461		$	772,031

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NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Stockholders’ Equity, continued

(in thousands, except share and per share amounts)

(unaudited)

	Common Stock					Capital in Excess of Par			Retained			Accumulated Other Comprehensive			Non- controlling			Total Stockholders’
	Shares			Amount		Value			Earnings			Income			Interest			Equity
Balance at January 1, 2018		15,212,133		$	152	$	215,659		$	419,423		$	67,504		$	694		$	703,432
Reclassification due to new accounting standards		–			–		–			68,201			(68,201	)		–			–
Net loss attributable to National HealthCare Corporation		–			–		–			(2,791	)		–			–			(2,791	)
Net loss attributable to noncontrolling interest		–			–		–			–			–			(108	)		(108	)
Other comprehensive loss		–			–		–			–			(2,219	)		–			(2,219	)
Stock–based compensation		–			–		428			–			–			–			428
Shares sold – options exercised		21,906			–		1,067			–			–			–			1,067
Repurchase of common shares		(14,506	)		–		(867	)		–			–			–			(867	)
Dividends declared to common stockholders ($0.48 per share)		–			–		–			(7,305	)		–			–			(7,305	)
Balance at March 31, 2018		15,219,533		$	152	$	216,287		$	477,528		$	(2,916	)	$	586			691,637

Net income attributable to National HealthCare Corporation		–			–		–			22,461			–			–			22,461
Net loss attributable to noncontrolling interest		–			–		–			–			–			(86	)		(86	)
Other comprehensive loss		–			–		–			–			(639	)		–			(639	)
Stock–based compensation		–			–		749			–			–			–			749
Shares sold – options exercised		6,121			–		260			–			–			–			260
Dividends declared to common stockholders ($0.50 per share)		–			–		–			(7,612	)		–			–			(7,612	)
Balance at June 30, 2018		15,225,654		$	152	$	217,296		$	492,377		$	(3,555	)	$	500		$	706,770

Net income attributable to National HealthCare Corporation		–			–		–			21,142			–			–			21,142
Net loss attributable to noncontrolling interest		–			–		–			–			–			(55	)		(55	)
Equity contributed by noncontrolling interest																750			750
Other comprehensive loss		–			–		–			–			(137	)		–			(137	)
Stock–based compensation		–			–		361			–			–			–			361
Dividends declared to common stockholders ($0.50 per share)		–			–		–			(7,613	)		–			–			(7,613	)
Balance at September 30, 2018		15,225,654		$	152	$	217,657		$	505,906		$	(3,692	)	$	1,195		$	721,218

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

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NATIONAL HEALTHCARE CORPORATION

Notes to Interim Condensed Consolidated Financial Statements

September 30, 2019

(unaudited)

Note 1 – Description of Business

National HealthCare Corporation (“NHC” or the “Company”) is a leading provider of senior health care services. As of September 30, 2019, we operate or manage, through certain affiliates, 75 skilled nursing facilities with a total of 9,510 licensed beds, 26 assisted living facilities, five independent living facilities, one behavioral health hospital, 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 noncontrolling ownership interest in a hospice care business that services NHC owned skilled nursing facilities and others. In addition, we provide insurance services, management and accounting services, and we lease properties to operators of skilled nursing and assisted living facilities. We operate in 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 (“GAAP”), with limited need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. See our audited December 31, 2018 consolidated financial statements and notes thereto which contain accounting policies and other disclosures required by GAAP. Our audited December 31, 2018 consolidated financial statements are available at our web site: www.nhccare.com.

Basis of Presentation

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

We assume that users of these interim financial statements have read or have access to the audited December 31, 2018 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 U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and could cause our reported net income to vary significantly from period to period.

Recently Adopted Accounting Guidance

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 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 either retrospectively to each prior reporting period presented in the financial statements or retrospectively at the beginning of the period of adoption.

The Company adopted the standard as of January 1, 2019, electing the transition method that allows us to apply the standard as of the adoption date and record a cumulative adjustment in retained earnings, if applicable. We did not have a cumulative adjustment to retained earnings. The interim condensed consolidated financial statements for the period ending September 30, 2019, are presented under the new standard, while comparative years presented are not adjusted and continue to be reported in accordance with our historical accounting policy.

On June 20, 2018, the FASB issued ASU No. 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-based Payment Accounting.” ASU No. 2018-07 simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees is aligned with the requirements for share-based payments granted to employees. On January 1, 2019, the Company early adopted the provisions of ASU No. 2018-07 and this standard did not have an impact on our consolidated financial statements.

On August 28, 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” ASU No. 2018-13 changes the fair value measurement disclosure requirements of Accounting Standards Codification (“ASC”) 820. Entities are no longer required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but they will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. On January 1, 2019, the Company early adopted the provisions of ASU No. 2018-13 and this standard did not have a material impact on our consolidated financial statements as we do not have any Level 3 investments.

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Recent Accounting Guidance Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments.” ASU No. 2016-13 adds to U.S GAAP an impairment model that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The ASU is also intended to reduce the complexity of U.S. GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted for fiscal years beginning after December 15, 2018. We are currently evaluating the impact this standard will have on our consolidated financial statements, policies and procedures, and internal control framework.

Net Patient Revenues and Accounts Receivable

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

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

The Company determines the transaction price based on established billing rates reduced by contractual adjustments provided to third party payors. Contractual adjustments are based on contractual agreements and historical experience. The Company considers the patient's ability and intent to pay the amount of consideration upon admission. Subsequent changes resulting from a patient’s ability to pay are recorded as bad debt expense, which is included as a component of other operating expenses in the interim condensed consolidated statements of operations. For the three months and nine months ended September 30, 2019, bad debt expense was $827,000 and $2,866,000, respectively. For the three months and nine months ended September 30, 2018, bad debt expense was $1,098,000 and $3,121,000, respectively. As of September 30, 2019, and December 31, 2018, the Company has recorded allowance for doubtful accounts of $5,727,000 and $4,610,000, respectively, as our best estimate of probable losses inherent in the accounts receivable balance.

Other Revenues

Other revenues include revenues from the provision of insurance services, management and accounting services to other long–term care providers, and rental income. Our insurance revenues consist of premiums that are generally paid in advance and then amortized into income over the policy period. We charge for management services based on a percentage of net revenues. We charge for accounting services based on a monthly fee or a fixed fee per bed of the healthcare facility under contract. We record other revenues as the performance obligations are satisfied based on the terms of our contractual arrangements.

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. The Company has two reportable operating segments: (1) inpatient services, which includes the operation of skilled nursing facilities, assisted and independent living facilities, and one behavioral health hospital, 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 6 for further disclosure of the Company’s operating segments.

Other Operating Expenses

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

General and Administrative Costs

With the Company being a healthcare provider, the majority of our expenses are "cost of revenue" items. Costs that could be classified as "general and administrative" by the Company would include its corporate office costs, excluding stock-based compensation, which were $7,170,000 and $18,991,000 for the three months and nine months ended September 30, 2019, respectively. General and administrative costs were $7,805,000 and $21,056,000 for the three months and nine months ended September 30, 2018, 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.

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

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Accrued Risk Reserves

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

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

We are principally self-insured for incidents occurring in all centers owned or leased by us. The coverages include both primary policies and excess policies. In all years, settlements, if any, in excess of available insurance policy limits and our own reserves would be expensed by us.

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.

Non-refundable fees are included as a component of the transaction price and are amortized into revenue over the actuarily determined remaining life of the resident, which is the expected period of occupancy by the resident. We pay the refundable portion of our entry fees to residents when they relocate from our community and the apartment is re-occupied. Refundable entrance fees are not included as part of the transaction price and are classified as non-current liabilities in our consolidated balance sheets. As of September 30, 2019, and December 31, 2018, we have recorded a refundable entrance fee in the amount of $7,394,000 and $8,078,000, respectively.

Obligation to Provide Future Services

We annually estimate the present value of the cost of future services and the use of facilities to be provided to the current CCRC residents and compare that amount with the balance of non-refundable deferred revenue from entrance fees received. If the present value of the cost of future services exceeds the related anticipated revenues, a liability is recorded (obligation to provide future services) with a corresponding charge to income. As of September 30, 2019, and December 31, 2018, we have recorded a future service obligation in the amount of $2,172,000.

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 in which the performance obligations have not been satisfied.

Noncontrolling Interest

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

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Note 3 – Net Patient Revenues

The Company disaggregates revenue from contracts with customers by service type and by payor.

Revenue by Service Type

The Company’s net patient services can generally be classified into the following two categories: (1) inpatient services, which includes the operation of skilled nursing facilities, assisted and independent living facilities, and a behavioral health hospital, and (2) homecare services.

	Three Months Ended September 30				Nine Months Ended September 30
(in thousands)	2019		2018		2019		2018
Net patient revenues:
Inpatient services	$	222,246	$	220,099	$	664,768	$	652,066
Homecare		12,844		14,728		41,697		45,107
Total net patient revenue	$	235,090	$	234,827	$	706,465	$	697,173

For inpatient services, revenue is recognized on a daily basis as each day represents a separate contract and performance obligation. For homecare, revenue is recognized when services are provided based on the number of days of service rendered in the episode or on a per-visit basis. Typically, patients and third-party payors are billed monthly after services are performed or the patient is discharged, and payments are due based on contract terms.

As our performance obligations relate to contracts with a duration of one year or less, the Company is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The Company has minimal unsatisfied performance obligations at the end of the reporting period as our patients are typically under no obligation to remain admitted in our facilities or under our care. As the period between the time of service and time of payment is typically one year or less, the Company did not adjust for the effects of a significant financing component.

Revenue by Payor

Certain groups of patients receive funds to pay the cost of their care from a common source. The following table sets forth sources of net patient revenues for the periods indicated:

	Three Months Ended September 30						Nine Months Ended September 30
Source	2019			2018			2019			2018
Medicare		32	%		34	%		33	%		35	%
Managed Care		12	%		12	%		12	%		12	%
Medicaid		28	%		27	%		27	%		26	%
Private Pay and Other		28	%		27	%		28	%		27	%
Total		100	%		100	%		100	%		100	%

Medicare covers skilled nursing services for beneficiaries who require nursing care and/or rehabilitation services following a hospitalization of at least three consecutive days. For each eligible day a Medicare beneficiary is in a skilled nursing facility, Medicare pays the facility a daily payment, subject to adjustment for certain factors such as a wage index in the geographic area. The payment covers all services provided by the skilled nursing facility for the beneficiary that day, including room and board, nursing, therapy and drugs, as well as an estimate of capital–related costs to deliver those services.

For homecare services, Medicare pays based on the acuity level of the patient for each episode of care. An episode of care is defined as a length of care up to 60 days with multiple continuous episodes allowed. The services covered by the episode payment include all disciplines of care, in addition to medical supplies, within the scope of the home health benefit. We are allowed to make a request for anticipated payment at the start of care equal to 60% of the expected payment for the initial episode. The remaining balance due is paid following the submission of the final claim at the end of the episode. Deferred revenue is recorded for payments received for which the related services have not yet been provided.

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

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

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

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Third Party Payors

Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Noncompliance with such laws and regulations can be subject to regulatory actions including fines, penalties, and exclusion from the Medicare and Medicaid programs. We believe that we are following all applicable laws and regulations.

Medicare and Medicaid program revenues, as well as certain Managed Care program revenues, are subject to audit and retroactive adjustment by government representatives or their agents. Settlements with third-party payors for retroactive adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient care. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and the Company’s historical settlement activity, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustment is subsequently resolved. Estimated settlements are adjusted in future periods as adjustments become known, or as years are settled or are no longer subject to such audits, reviews, and investigations. We believe that any differences between the net revenues recorded and final determination will not materially affect the consolidated financial statements. We have made provisions of approximately $15,911,000 and $16,108,000 as of September 30, 2019 and December 31, 2018, respectively, for various Medicare, Medicaid, and Managed Care claims reviews and current and prior year cost reports.

Note 4 – Other Revenues

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

	Three Months Ended September 30				Nine Months Ended September 30
(in thousands)	2019		2018		2019		2018
Rental income	$	5,678	$	5,548	$	16,963	$	16,633
Management and accounting services fees		4,520		3,818		13,567		11,265
Insurance services		1,528		1,716		4,667		5,362
Other		251		417		841		996
Total other revenues	$	11,977	$	11,499	$	36,038	$	34,256

Rental Income

The Company leases real estate assets consisting of skilled nursing facilities and assisted living facilities to third party operators. Additionally, we sublease four Florida skilled nursing facilities included in our lease from National Health Investors (“NHI”) as noted in Note 7 – Long Term Leases.

The following table sets forth the undiscounted cash flows for future minimum lease payments receivable for leases in effect at September 30, 2019 (in thousands):

2020	$	22,002
2021		22,774
2022		22,931
2023		22,774
2024		22,730
Thereafter		28,633
Total future minimum lease payments	$	141,844

Management Fees from National

We manage five skilled nursing facilities owned by National. For the three months and nine months ended September 30, 2019, we recognized management fees and interest on management fees of $1,543,000 and $4,748,000 from these centers, respectively. For the three months and nine months ended September 30, 2018, we recognized management fees and interest on management fees of $1,087,000 and $3,140,000 from these centers, respectively.

Insurance Services

For workers’ compensation insurance services, the premium revenues reflected in the interim condensed consolidated statements of operations for the three and nine months ended September 30, 2019 were $866,000 and $2,656,000, respectively. For the three and nine months ended September 30, 2018, the workers’ compensation premium revenues reflected in the interim condensed consolidated statements of operations were $1,043,000 and $3,342,000, respectively. Associated losses and expenses are reflected in the interim condensed consolidated statements of operations as "Salaries, wages and benefits."

For professional liability insurance services, the premium revenues reflected in the interim condensed consolidated statements of operations for the three and nine months ended September 30, 2019 were $662,000 and $2,011,000, respectively. For professional liability insurance services, the premium revenues reflected in the interim condensed consolidated statements of operations for the three months and nine months ended September 30, 2018 were $673,000 and $2,020,000, respectively. Associated losses and expenses including those for self–insurance claims are included in the interim condensed consolidated statements of operations as "Other operating costs and expenses".

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Note 5 – Non–Operating Income

Non–operating income includes equity in earnings of unconsolidated investments, dividends and other realized gains and losses on sales of marketable securities, and interest income.

Our most significant equity method investment is a 75.1% non–controlling ownership interest in Caris HealthCare L.P. (“Caris”), a business that specializes in hospice care services. For the nine months ended September 30, 2018, Caris recorded expenses of $8,364,000 for the settlement of their Qui Tam legal matter, all of which were incurred during the first two quarters of the year.

	Three Months Ended September 30				Nine Months Ended September 30
(in thousands)	2019		2018		2019		2018
Equity in earnings (losses) of unconsolidated investments	$	2,747	$	2,724	$	7,548	$	(1,860	)
Dividends and net realized gains on sales of securities		2,049		1,777		5,911		5,374
Interest income		1,867		1,916		5,502		5,492
Gain on acquisition of equity method investment		-		2,050		1,975		2,050
Total non-operating income	$	6,663	$	8,467	$	20,936	$	11,056

Gain on Acquisition of Equity Method Investments

Effective June 1, 2019, the Company expanded its controlled operations through an acquisition of the remaining ownership interest of a 60-bed memory care facility in St. Peters, Missouri. We previously held a noncontrolling interest in the facility and accounted for the investment as an equity method investment. The operating results of the business have been included in the accompanying interim condensed consolidated financial statements since the remaining ownership interest acquisition date.

Upon acquiring the remaining ownership interest, the Company recorded and increased its previously held equity interest up to fair value as of the acquisition date. This remeasurement of our equity interest at fair value resulted in a gain of $1,975,000 during the second quarter of 2019. The gain was recorded in "Non-operating income" in the interim condensed consolidated statement of operations.

In July 2018, the Company expanded its operations through an acquisition of additional ownership resulting in a controlling financial interest of a 14-bed geriatric psychiatric hospital in Osage Beach, Missouri. We previously held a noncontrolling interest and accounted for the hospital as an equity method investment. Upon acquiring a controlling financial interest, the Company fair valued its previously held equity interest as of the acquisition date. This remeasurement of our equity interest at fair value resulted in a gain of $2,050,000 during the third quarter of 2018.

Note 6 – Business Segments

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

The Company also reports an “all other” category that includes revenues from rental income, management and accounting services fees, insurance services, and costs of the corporate office. For additional information on these reportable segments see Note 2 – Summary of Significant Accounting Policies.

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

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

	Three Months Ended September 30, 2019
	Inpatient Services		Homecare			All Other			Total
Revenues:
Net patient revenues	$	222,246	$	12,844		$	-		$	235,090
Other revenues		199		-			11,778			11,977
Net operating revenues		222,445		12,844			11,778			247,067

Costs and expenses:
Salaries, wages and benefits		133,949		8,630			9,596			152,175
Other operating		60,800		4,267			1,663			66,730
Rent		8,234		450			1,483			10,167
Depreciation and amortization		9,666		61			936			10,663
Interest		312		-			452			764
Total costs and expenses		212,961		13,408			14,130			240,499

Income (loss) from operations		9,484		(564	)		(2,352	)		6,568
Non-operating income		-		-			6,663			6,663
Unrealized gains on marketable equity securities		-		-			9,312			9,312

Income (loss) before income taxes	$	9,484	$	(564	)	$	13,623		$	22,543

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	Three Months Ended September 30, 2018
	Inpatient Services		Homecare		All Other			Total
Revenues:
Net patient revenues	$	220,099	$	14,728	$	-		$	234,827
Other revenues		136		-		11,363			11,499
Net operating revenues		220,235		14,728		11,363			246,326

Costs and expenses:
Salaries, wages and benefits		131,418		8,367		9,403			149,188
Other operating		57,371		4,797		2,339			64,507
Rent		8,255		488		1,447			10,190
Depreciation and amortization		9,570		55		812			10,437
Interest		369		-		801			1,170
Total costs and expenses		206,983		13,707		14,802			235,492

Income (loss) from operations		13,252		1,021		(3,439	)		10,834
Non-operating income		-		-		8,467			8,467
Unrealized gains on marketable equity securities		-		-		3,486			3,486

Income before income taxes	$	13,252	$	1,021	$	8,514		$	22,787

	Nine Months Ended September 30, 2019
	Inpatient Services		Homecare		All Other			Total
Revenues:
Net patient revenues	$	664,768	$	41,697	$	-		$	706,465
Other revenues		672		-		35,366			36,038
Net operating revenues		665,440		41,697		35,366			742,503

Costs and expenses:
Salaries, wages and benefits		390,770		25,136		25,535			441,441
Other operating		183,602		13,193		6,965			203,760
Rent		24,754		1,400		4,448			30,602
Depreciation and amortization		28,790		183		2,542			31,515
Interest		979		-		1,665			2,644
Total costs and expenses		628,895		39,912		41,155			709,962

Income (loss) from operations		36,545		1,785		(5,789	)		32,541
Non-operating income		-		-		20,936			20,936
Unrealized gains on marketable equity securities		-		-		16,096			16,096

Income before income taxes	$	36,545	$	1,785	$	31,243		$	69,573

	Nine Months Ended September 30, 2018
	Inpatient Services		Homecare		All Other			Total
Revenues:
Net patient revenues	$	652,066	$	45,107	$	-		$	697,173
Other revenues		588		-		33,668			34,256
Net operating revenues		652,654		45,107		33,668			731,429

Costs and expenses:
Salaries, wages and benefits		382,913		25,009		26,827			434,749
Other operating		171,275		14,816		6,177			192,268
Rent		24,780		1,460		4,451			30,691
Depreciation and amortization		28,602		137		2,437			31,176
Interest		1,149		-		2,514			3,663
Total costs and expenses		608,719		41,422		42,406			692,547

Income (loss) from operations		43,935		3,685		(8,738	)		38,882
Non-operating income		-		-		11,056			11,056
Unrealized gains on marketable equity securities		-		-		417			417

Income before income taxes	$	43,935	$	3,685	$	2,735		$	50,355

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Note 7 – Long-Term Leases

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

On January 1, 2019, the Company recorded right-of-use assets and liabilities on the condensed consolidated balance sheets for non-cancelable real estate operating leases with original or remaining lease terms in excess of one year. Leases with a lease term of 12 months or less at inception are not recorded on our condensed consolidated balance sheets and are expensed on a straight-line basis over the lease term in our condensed consolidated statement of operations. Finance leases remain on the condensed consolidated balance sheets as required by previous accounting guidance.

Operating lease right-of-use assets and liabilities are recorded at the present value of the lease payments over the lease term. The present values of the lease payments are discounted using the incremental borrowing rate associated with each lease. As most of our leases do not provide implicit rates, we have used incremental borrowing rates that were calculated based on information available at the later of the lease commencement date or the adoption date, January 1, 2019. The variable components of the lease payment that fluctuate with the operations of a healthcare facility are not included in determining the right-of-use assets and lease liabilities. Rather, these variable components are expensed as incurred.

Accounting Policy Elections

The Company has elected the package of practical expedients offered in the transition guidance which allows management not to reassess lease identification, lease classification, and initial direct costs. The Company has elected the accounting policy practical expedient to exclude recording short-term leases, for all asset classes, as right-of-use assets and lease liabilities on the condensed consolidated balance sheets. Finally, the Company has elected the accounting policy practical expedient to recognize lease components and non-lease components together and not as separate parts of a lease for real estate leases.

Operating Leases with NHI

At September 30, 2019, we leased from NHI the real property of 35 skilled nursing facilities, seven assisted living centers and three independent living centers under two separate lease agreements. As part of the first lease agreement, we sublease four Florida skilled nursing facilities to a third-party operator.

On January 1, 2007, a 15–year lease extension began which included three additional five–year renewal options. In December 2012, NHC extended the lease agreement through the first of the three additional five–year renewal options, which extended the lease date through 2026. The two additional five–year renewal options on the lease still remain. Under the terms of the lease, base rent totals $30,750,000 annually with rent thereafter escalating by 4% of the increase in facility revenue over a 2007 base year.

In September 2013 and under the second lease agreement, NHC began operating seven skilled nursing facilities in New Hampshire and Massachusetts. The 15-year lease term consists of base rent of $3,450,000 annually with rent escalating by 4% of the increase in facility revenue over a 2014 base year. Additionally, NHC has the option to purchase the seven facilities from NHI in the 13th year of the lease for a purchase price of $49,000,000.

Base rent expense under both NHI lease agreements totals $34,200,000 annually. Percentage rent under the leases is based on a quarterly calculation of revenue increases and is payable on a quarterly basis. Percentage rent expense under both leases was $965,000 and $928,000 for the three months ended September 30, 2019 and 2018, respectively. Percentage rent expense under both leases was $2,895,000 and $2,784,000 for the nine months ended September 30, 2019 and 2018, respectively.

We have a right of first refusal with NHI to purchase any of the properties should NHI receive an offer from an unrelated party during the term of the lease or up to 180 days after termination of the related lease.

Finance Leases

Effective June 1, 2014, NHC began leasing and operating three senior healthcare facilities in the state of Missouri under three separate lease agreements. Two of the healthcare facilities are skilled nursing facilities that also include assisted living facilities and the third healthcare facility is a memory care facility. Each of the leases is a ten-year lease with two five–year renewal options. Under the terms of the leases, base rent totals $5,200,000 annually with rent thereafter escalating by 4% of the increase in facility revenue over the 2014 base year.

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Lease Classification

At September 30, 2019, the Company recorded the following on the condensed consolidated balance sheets (in thousands):

Right-of-Use Assets	Balance Sheet Classification	September 30, 2019
Finance lease assets	Net property and equipment	$	17,143
Operating lease right-of-use assets	Operating lease right-of-use assets		208,785
Total		$	225,928

Lease Liabilities	Balance Sheet Classification	September 30, 2019
Current:
Finance lease liabilities	Finance lease obligations, current portion	$	4,104
Operating lease liabilities	Operating lease liabilities, current portion		23,988
Noncurrent:
Finance lease liabilities	Finance lease obligations, less current portion		16,028
Operating lease liabilities	Operating lease liabilities, less current portion		184,797
Total		$	228,917

Weighted-average remaining lease terms and discount rates at September 30, 2019 were as follows:

Weighted-average remaining lease terms (in years)
Finance	4.4
Operating	7.4

Weighted-average discount rate
Finance	6.0	%
Operating	6.0	%

Lease Costs

For the three and nine months ended September 30, 2019, the lease costs recorded in the condensed consolidated statement of operations are as follows (in thousands):

	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Finance lease costs:
Depreciation of leased assets	$	962	$	2,911
Interest of lease liabilities		319		1,001
Total finance lease costs		1,281		3,912

Operating lease costs:
Operating lease costs		8,944		27,034
Variable lease costs		965		2,895
Short-term lease costs		258		673
Total operating lease costs		10,167		30,602

Total lease costs	$	11,448	$	34,514

Minimum Lease Payments

The following table summarizes the maturity of our finance and operating lease liabilities as of September 30, 2019 (in thousands):

	Finance Leases			Operating Leases
2020	$	5,200		$	35,674
2021		5,200			35,326
2022		5,200			35,015
2023		5,200			34,489
2024		2,167			34,345
Thereafter		-			82,711
Total minimum lease payments	$	22,967		$	257,560
Less: amounts representing interest		(2,835	)		(48,775	)
Present value of future minimum lease payments		20,132			208,785
Less: current portion		(4,104	)		(23,988	)
Noncurrent lease liabilities	$	16,028		$	184,797

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Other

Supplemental cash flow data for the nine months ended September 30, 2019 was as follows (in thousands):

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	27,034
Operating cash flows for finance leases		1,001
Financing cash flows for finance leases		2,920

Note 8 – Earnings per Share

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

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

	Three Months Ended September 30				Nine Months Ended September 30
	2019		2018		2019		2018
Basic:
Weighted average common shares outstanding		15,275,709		15,225,654		15,267,250		15,221,217
Net income attributable to National HealthCare Corporation	$	19,461	$	21,142	$	54,441	$	40,812
Earnings per common share, basic	$	1.27	$	1.39	$	3.57	$	2.68

Diluted:
Weighted average common shares outstanding		15,275,709		15,225,654		15,267,250		15,221,217
Effects of dilutive instruments		97,908		16,432		83,058		9,475
Weighted average common shares outstanding		15,373,617		15,242,086		15,350,308		15,230,692

Net income attributable to National HealthCare Corporation	$	19,461	$	21,142	$	54,441	$	40,812
Earnings per common share, diluted	$	1.27	$	1.39	$	3.55	$	2.68

In the above table, options to purchase 1,048,275 shares of our common stock have been excluded for the nine months ended September 30, 2018 due to their anti–dilutive impact.

Note 9 – Investments in Marketable Securities

Our investments in marketable equity securities are carried at fair value with the changes in unrealized gains and losses recognized in our results of operations at each measurement date. Our investments in marketable debt securities are classified as available for sale securities and carried at fair value with the unrealized gains and losses recognized through accumulated other comprehensive income at each measurement date. 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 10 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 (in thousands):

	September 30, 2019				December 31, 2018
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Investments available for sale:
Marketable equity securities	$	30,176	$	156,319	$	30,176	$	140,223
Restricted investments available for sale:
Corporate debt securities		62,584		64,683		69,439		67,632
Asset-based securities		57,451		58,454		62,772		62,068
U.S. Treasury securities		13,088		13,211		22,038		21,457
State and municipal securities		12,976		13,209		21,818		21,436
	$	176,275	$	305,876	$	206,243	$	312,816

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

September 30, 2019

December 31, 2018

Cost

Fair

Value

Cost

Fair

Value

NHI Common Stock

1,630,642

24,734

134,349

1,630,642

24,734

123,179

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

	September 30, 2019				December 31, 2018
	Cost		Fair Value		Cost		Fair Value
Maturities:
Within 1 year	$	11,139	$	11,153	$	11,448	$	11,401
1 to 5 years		90,140		92,120		98,487		97,430
6 to 10 years		44,820		46,284		64,932		62,527
Over 10 years		-		-		1,200		1,235
	$	146,099	$	149,557	$	176,067	$	172,593

Gross unrealized gains related to marketable equity securities are $126,149,000 and $110,081,000 as of September 30, 2019 and December 31, 2018, respectively. Gross unrealized losses related to marketable equity securities are $6,000 and $34,000 as of September 30, 2019 and December 31, 2018, respectively. For the three months and nine months ended September 30, 2019, the Company recognized net unrealized gains of $9,312,000 and $16,096,000, respectively, for the changes in fair market value of the marketable equity securities in the interim condensed consolidated statement of operations. For the three and nine months ended September 30, 2018, the Company recognized net unrealized gains of $3,486,000 and $417,000, respectively, for the change in market value of the marketable equity securities in the interim condensed consolidated statements of operations.

Gross unrealized gains related to available for sale debt securities are $3,568,000 and $335,000 as of September 30, 2019 and December 31, 2018, respectively. Gross unrealized losses related to available for sale debt securities are $110,000 and $3,809,000 as of September 30, 2019 and December 31, 2018, respectively.

For the marketable securities in gross unrealized loss positions, (a) it is more likely than not that the Company will not be required to sell the investment securities before recovery of the unrealized losses, and (b) the Company expects that the contractual principal and interest will be received on the investment securities. As a result, the Company recognized no other-than-temporary impairment during the nine months ended September 30, 2019 or for the year ended December 31, 2018.

Proceeds from the sale of available for sale debt securities during the nine months ended September 30, 2019 and 2018 were $41,272,000 and $4,539,000, respectively. Investment gains of $117,000 and $18,000 were realized on these sales during the nine months ended September 30, 2019 and 2018, respectively. No sales were reported for marketable equity securities for the nine months ended September 30, 2019 and 2018, respectively.

Note 10 – 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.

The following table summarizes fair value measurements by level at September 30, 2019 and December 31, 2018 for assets and liabilities measured at fair value on a recurring basis (in thousands):

	Fair Value Measurements Using
September 30, 2019	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	$	59,261	$	59,261	$	–	$	–
Restricted cash and cash equivalents		8,821		8,821		–		–
Marketable equity securities		156,319		156,319		–		–
Corporate debt securities		64,683		48,941		15,742		–
Mortgage–backed securities		58,454		–		58,454		–
U.S. Treasury securities		13,211		13,211		–		–
State and municipal securities		13,209		–		13,209		–
Total financial assets	$	373,958	$	286,553	$	87,405	$	–

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	Fair Value Measurements Using
December 31, 2018	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	$	43,247	$	43,247	$	–	$	–
Restricted cash and cash equivalents		11,673		11,673		–		–
Marketable equity securities		140,223		140,223		–		–
Corporate debt securities		67,632		47,921		19,711		–
Asset - backed securities		62,068		–		62,068		–
U.S. Treasury securities		21,457		21,457		–		–
State and municipal securities		21,436		–		21,436		–
Total financial assets	$	367,736	$	264,521	$	103,215	$	–

Note 11 – Long–Term Debt

Long–term debt consists of the following:

	Weighted Average Interest Rate		Maturity		September 30, 2019		December 31, 2018
	Variable				(dollars in thousands)
Credit facility, interest payable monthly		3.5%		2020	$	30,000	$	55,000
Less current portion						–		–
Total long-term debt					$	30,000	$	55,000

During the third quarter of 2019, the Company lowered the available borrowing capacity of the credit facility from $110,000,000 to $60,000,000. The credit facility has a maturity date of October 2020. Loans bear interest at either (i) LIBOR plus 1.40% or (ii) the base rate plus 0.40%.

Note 12 - Stock Repurchase Program

In August 2019, the Board of Directors authorized a common stock purchase program. The program will allow for repurchases of up to $25 million of its common stock. No repurchases have been made under this plan. Under the previous plan which expired on August 31, 2018, the Company repurchased 10,396 shares of its common stock for a total cost of $872,000.

Note 13 – Stock–Based Compensation

NHC recognizes stock–based compensation expense for all stock options granted over the requisite service period using the fair value at the date of grant using the Black–Scholes pricing model. Stock–based compensation totaled $340,000 and $361,000 for the three months ended September 30, 2019 and 2018, respectively. Stock-based compensation totaled $1,448,000 and $1,538,000 for the nine months ended September 30, 2019 and 2018, respectively. Stock–based compensation is included in “Salaries, wages and benefits” in the interim condensed consolidated statements of operations.

At September 30, 2019, the Company had $3,981,000 of unrecognized compensation cost related to unvested stock–based compensation awards. This unrecognized compensation cost will be amortized over an approximate three-year period.

Stock Options

The following table summarizes the significant assumptions used to value the options granted for the nine months ended September 30, 2019 and for the year ended December 31, 2018.

	September 30, 2019		December 31, 2018
Risk–free interest rate		2.30%		2.46%
Expected volatility		17.4%		16.1%
Expected life, in years		2.3		3.0
Expected dividend yield		2.73%		3.29%

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The following table summarizes our outstanding stock options for the nine months ended September 30, 2019 and for the year ended December 31, 2018.

	Number of Shares			Weighted Average Exercise Price		Aggregate Intrinsic Value
Options outstanding at January 1, 2018		1,239,407		$	71.19	$	–
Options granted		110,265			61.39		–
Options exercised		(68,291	)		54.31		–
Options cancelled		(118,000	)		72.11		–
Options outstanding at December 31, 2018		1,163,381			71.16		–
Options granted		53,628			77.89		–
Options exercised		(332,852	)		71.56		–
Options cancelled		(85,000	)		72.94		--
Options outstanding at September 30, 2019		799,157		$	71.25	$	8,468,000

Options exercisable at September 30, 2019		209,029		$	68.05	$	2,885,000

Options Outstanding September 30, 2019	Exercise Prices			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life in Years
144,968	60.73	-	62.78		61.81		2.3
654,189	72.94	-	77.92		73.35		2.6
799,157					71.25		2.5

Note 14 – Income Taxes

The income tax provision for the three months ended September 30, 2019 is $3,167,000 (an effective income tax rate of 14.0%). The income tax provision and effective tax rate for the three months ended September 30, 3019 were favorably impacted by the following: (1) a tax benefit of $2,064,000 related to statute of limitation expirations; and (2) a tax benefit of $793,000 related to a provision to return adjustment on the Company’s 2018 federal and state income tax returns. The income tax provision for the three months ended September 30, 2018 was $1,700,000 (an effective income tax rate of 7.5%). The income tax provision and effective tax rate for the three months ended September 30, 2018 were favorably impacted by the following: (1) a tax benefit of $547,000 related to the gain on acquisition of equity method investment; (2) a tax benefit of $2,222,000 related to statute of limitation expirations; and (3) a tax benefit of $1,434,000 related to a provision to return adjustment on the Company’s 2017 federal and state tax returns, resulting in a net decrease in the provision.

The income tax provision for the nine months ended September 30, 2019 is $15,284,000 (an effective tax rate of 22.0%). The income tax provision and effective tax rate for the nine months ended September 30, 2019 were favorably impacted by a tax benefit of $2,064,000 related to statute of limitation expirations and $793,000 related to a provision to return adjustment on the Company’s 2018 federal and state income tax returns. The income tax provision for the nine months ended September 30, 2018 was $9,792,000 (an effective tax rate of 19.5%). The income tax provision and effective tax rate for the nine months ended September 30, 2018 were unfavorably impacted by nondeductible expenses of $945,000 (primarily the non-deductible portion of the estimated potential settlement of the Caris HealthCare, L.P. Qui Tam legal matter) or 1.9% of income before taxes for the nine months. The income tax provision for the nine months ended September 30, 2018 was favorably impacted by the following: (1) a tax benefit of $547,000 related to the gain on acquisition of equity method investment; (2) a tax benefit of $2,222,000 related to statute of limitation expirations; and (3) a tax benefit of $1,434,000 related to a provision to return adjustment on the Company’s 2017 federal and state income tax returns.

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 2016 (with certain state exceptions).

Note 15 – Contingencies and Commitments

Accrued Risk Reserves

We are self–insured for risks related to health insurance and have wholly–owned limited purpose insurance companies that insure risks related to workers’ compensation and general and professional liability insurance claims both for our owned and leased entities and certain of the entities to which we provide management or accounting services. The liability we have recognized for reported claims and estimates for incurred but unreported claims totals $98,279,000 and $96,024,000 at September 30, 2019 and December 31, 2018, 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.

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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. The Company has been, and continues to be, subject to claims and legal actions that arise in the ordinary course of business, including potential claims related to patient care and treatment. The defense of these lawsuits may result in significant legal costs, regardless of the outcome, and can result in large settlement amounts or damage awards.

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 2018 and 2019, 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.

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 September 30, 2019, National did not have an outstanding balance on the line of credit.

Nutritional Support Services, L.P., Qui Tam Litigation

On June 19, 2018, a First Amended Complaint was filed naming Nutritional Support Services, L.P. (“NSS”), a wholly owned subsidiary of the Company, as a defendant in the action captioned U.S. ex rel. McClain v. Nutritional Support Services, L.P., No. 6:17-cv-2608-AMQ (D.S.C.), which was filed in the United States District Court for the District of South Carolina. The action alleges that NSS violated the False Claims Act by reporting a National Drug Code (“NDC”) number that did not correspond to the NDC for dispensed prescriptions. On April 16, 2018, the United States filed a Notice of Election to Decline Intervention with respect to the allegations asserted in this action. NSS intends to vigorously defend itself with respect to this action.

Governmental Regulations

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

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Item 2.

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

Forward–Looking Statements

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

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

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 15: 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 2018 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.

Overview

National HealthCare Corporation (“NHC” or the “Company”) is a leading provider of senior health care services. We operate or manage, through certain affiliates, 75 skilled nursing facilities with a total of 9,510 licensed beds, 26 assisted living facilities, five independent living facilities, one behavioral health hospital 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 and assisted living facilities. We operate in 10 states and are located primarily in the southeastern United States.

Summary of Goals and Areas of Focus

Occupancy

A primary area of management focus continues to be the rates of occupancy within our skilled nursing facilities. The overall census in owned and leased skilled nursing facilities for the nine months ending September 30, 2019 was 90.3% compared to 89.7% for the same period a year ago. With the average length of stay decreasing for a skilled nursing patient across the industry, 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 to better position ourselves so we are an active participant in the delivery of post-acute healthcare services.

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Quality of Patient Care

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

On April 24, 2019, CMS announced several changes to the Five-Star Quality Rating System which included updating thresholds for both the staffing and quality components of the system. The new changes include separate ratings for short-stay and long-stay quality of resident care in addition to an overall quality of resident care rating. The measures of long-stay hospitalizations and long-stay emergency department visits were added to the quality component of the rating, and the long-stay physical restraints measure was dropped from the quality component of the rating. The scoring rules for the quality measures changed to give more weight to measures with greater opportunity for improvement. Further, the staffing rating thresholds were changed with CMS placing a strong emphasis on registered nurse (“RN”) staffing.

CMS estimated the changes will cause 47% of all nursing centers to lose stars in their "Quality" ratings and 33% are expected to lose stars in their "Staffing" ratings. Therefore, approximately 36% of all nursing centers are expected to lose stars in their "Overall" ratings. As anticipated, the implementation of these changes impacted our overall ratings, as well as everyone in the industry.

The tables below summarize NHC's overall performance in these Five-Star ratings versus the skilled nursing industry as of September 30, 2019:

	NHC Ratings		Industry Ratings
Total number of skilled nursing facilities, end of period		75
Number of 4 and 5-star rated skilled nursing facilities		54
Percentage of 4 and 5-star rated skilled nursing facilities		72%		44%
Average rating for all skilled nursing facilities, end of period		3.97		3.09

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	30 beds	Springfield, MO	April, 2018
Behavioral Health Hospital	Acquisition	14 beds	Osage Beach, MO	August, 2018
Memory Care	New Facility	60 beds	Farragut, TN	January, 2019
Memory Care	Acquisition	60 beds	St. Peters, MO	June 2019

Accrued Risk Reserves

Our accrued professional liability and workers’ compensation reserves totaled $98,279,000 at September 30, 2019 and are a primary area of management focus. We have set aside restricted cash and cash equivalents and marketable securities to fund our estimated professional liability and workers’ compensation liabilities.

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

Government Program Financial Changes

Medicare – Skilled Nursing Facilities

In August 2018, CMS issued a final rule outlining fiscal year 2019 Medicare payments and quality changes for skilled nursing facilities. The 2019 final rule, which began October 1, 2018, provided for an approximate 2.4% market basket update that was included in the Bipartisan Budget Act of 2018. The market basket increase is expected to increase overall payments to skilled nursing facilities in fiscal year 2019 by $820 million compared to fiscal year 2018 levels.

For the first nine months of 2019, our average Medicare per diem rate for skilled nursing facilities decreased 0.2% as compared to the same period in 2018.

Effective October 1, 2019, CMS is using a new case-mix model, called the Patient-Driven Payment Model (“PDPM”), which focuses on a resident’s condition and care needs, rather than the amount of care provided to determine reimbursement levels. The PDPM utilizes clinically relevant factors for determining Medicare payment by using ICD-10 diagnosis codes and other patient characteristics as the basis for patient classification. PDPM utilizes five case-mix adjusted payment components: physical therapy (“PT”), occupational therapy (“OT”), speech language pathology (“SLP”), nursing and social services and non-therapy ancillary services (“NTA”). It also uses a sixth non-case mix component to cover utilization of skilled nursing facility (“SNF”) resources that do not vary depending on resident characteristics.

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PDPM replaces the existing case-mix classification methodology, Resource Utilization Groups, Version IV. The structure of the PDPM moves Medicare towards a more value-based, unified post-acute care payment system. PDPM also removes therapy minutes as the basis for therapy payment and adjusts the SNF per diem payments to reflect varying costs throughout the stay, through the PT, OT and NTA components. In addition, PDPM is intended to reduce paperwork requirements for performing patient assessments. Under the new PDPM system, the payment to skilled nursing facilities is based heavily on the patient’s condition rather than the specific services provided by each skilled nursing facility.

In July 2019, CMS released its final rule outlining fiscal year 2020 Medicare payment rates and policy changes for skilled nursing facilities, which began October 1, 2019. The fiscal year 2020 final rule provided for an approximate net 2.4% increase, or $851 million, compared to fiscal year 2019 levels. This included a 2.8% market-basket update, offset by a statutorily required 0.4% productivity reduction.

The fiscal year 2020 final rule also included new guidance on the components of PDPM. The rule instituted an expected sub-regulatory process for classification of diseases and corresponding ICD-10 codes, such as when a prior code is split into two new codes. Also, group therapy was defined and covers therapy sessions with groups of two to six patients. The rule also instituted two new quality reporting measures designed to improve interoperability. Those require providers to document the transfer of health information to other healthcare providers and to document the transfer of health information to the patient. The agency’s goal is to improve medication management among subsequent providers and discharged patients, especially through the use of electronic medication records.

Medicaid – Skilled Nursing Facilities

Effective July 1, 2019 and for the fiscal year 2020, the state of Tennessee implemented specific individual nursing facility rate increases. We estimate the resulting increase in revenue for the 2020 fiscal year will be approximately $1,680,000 annually, or $420,000 per quarter.

Effective October 1, 2019 and for the fiscal year 2020, South Carolina implemented specific individual nursing facility rate changes. We estimate the resulting increase in revenue for the 2020 fiscal year will be approximately $2,012,000 annually, or $503,000 per quarter.

For the first nine months of 2019, our average Medicaid per diem increased 3.6% compared to the same period in 2018.

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 November 2018, CMS published a final rule which updated the Medicare HH PPS rates, including the conversion factor and case-mix weights for calendar years 2019 and 2020. Effective January 1, 2019, CMS estimates the net impact of the PPS rule results in a 2.2% increase ($420 million) in Medicare payments for agencies in 2019. The increase reflects the effects of a 2.2% home health payment update percentage; a 0.1% increase in payments due to decreasing the fixed-dollar-loss ratio in order to pay no more than 2.5% of total payments as outlier payments; and a 0.1% decrease in payments due to the new rural add-on policy mandated by the Bipartisan Budget Act of 2018.

Also published in the final rule and effective January 1, 2020, there will be an elimination of therapy thresholds for payment, implementation of the Patient-Driven Group Model (“PDGM”) case-mix methodology refinements and a change in the unit of payment from a sixty (60) day episode to a thirty (30) day episode period. These changes focus on providing value over volume of services to patients. Once the changes are implemented, home health payments will no longer be based on the number of visits provided, but rather the patient’s medical condition and care needs.

In November 2019, CMS released a final rule that sets forth the implementation of the PDGM and a 30-day unit of payment as mandated by the Bipartisan Budget Act of 2018 (“BBA”). The new rule ends request for anticipated payments ("RAP"), or prepayments, and these will be completely phased out by 2021. CMS projects payments to home health agencies in fiscal year 2020 will increase in aggregate by 1.3%, or $250 million, based on proposed policies. The increase reflects the effects of the 1.5% home health payment update percentage as mandated by the BBA and a 0.2% decrease in aggregate payments due to reductions made by the new rural add-on policy, also mandated by the BBA.

Segment Reporting

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

Table of Contents

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

	Three Months Ended September 30, 2019
	Inpatient Services		Homecare			All Other			Total
Revenues:
Net patient revenues	$	222,246	$	12,844		$	-		$	235,090
Other revenues		199		-			11,778			11,977
Net operating revenues		222,445		12,844			11,778			247,067

Costs and expenses:
Salaries, wages and benefits		133,949		8,630			9,596			152,175
Other operating		60,800		4,267			1,663			66,730
Rent		8,234		450			1,483			10,167
Depreciation and amortization		9,666		61			936			10,663
Interest		312		-			452			764
Total costs and expenses		212,961		13,408			14,130			240,499

Income (loss) from operations		9,484		(564	)		(2,352	)		6,568
Non-operating income		-		-			6,663			6,663
Unrealized gains on marketable equity securities		-		-			9,312			9,312

Income (loss) before income taxes	$	9,484	$	(564	)	$	13,623		$	22,543

	Three Months Ended September 30, 2018
	Inpatient Services		Homecare		All Other			Total
Revenues:
Net patient revenues	$	220,099	$	14,728	$	-		$	234,827
Other revenues		136		-		11,363			11,499
Net operating revenues		220,235		14,728		11,363			246,326

Costs and expenses:
Salaries, wages and benefits		131,418		8,367		9,403			149,188
Other operating		57,371		4,797		2,339			64,507
Rent		8,255		488		1,447			10,190
Depreciation and amortization		9,570		55		812			10,437
Interest		369		-		801			1,170
Total costs and expenses		206,983		13,707		14,802			235,492

Income (loss) from operations		13,252		1,021		(3,439	)		10,834
Non-operating income		-		-		8,467			8,467
Unrealized gains on marketable equity securities		-		-		3,486			3,486

Income before income taxes	$	13,252	$	1,021	$	8,514		$	22,787

	Nine Months Ended September 30, 2019
	Inpatient Services		Homecare		All Other			Total
Revenues:
Net patient revenues	$	664,768	$	41,697	$	-		$	706,465
Other revenues		672		-		35,366			36,038
Net operating revenues		665,440		41,697		35,366			742,503

Costs and expenses:
Salaries, wages and benefits		390,770		25,136		25,535			441,441
Other operating		183,602		13,193		6,965			203,760
Rent		24,754		1,400		4,448			30,602
Depreciation and amortization		28,790		183		2,542			31,515
Interest		979		-		1,665			2,644
Total costs and expenses		628,895		39,912		41,155			709,962

Income (loss) from operations		36,545		1,785		(5,789	)		32,541
Non-operating income		-		-		20,936			20,936
Unrealized gains on marketable equity securities		-		-		16,096			16,096

Income before income taxes	$	36,545	$	1,785	$	31,243		$	69,573

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	Nine Months Ended September 30, 2018
	Inpatient Services		Homecare		All Other			Total
Revenues:
Net patient revenues	$	652,066	$	45,107	$	-		$	697,173
Other revenues		588		-		33,668			34,256
Net operating revenues		652,654		45,107		33,668			731,429

Costs and expenses:
Salaries, wages and benefits		382,913		25,009		26,827			434,749
Other operating		171,275		14,816		6,177			192,268
Rent		24,780		1,460		4,451			30,691
Depreciation and amortization		28,602		137		2,437			31,176
Interest		1,149		-		2,514			3,663
Total costs and expenses		608,719		41,422		42,406			692,547

Income (loss) from operations		43,935		3,685		(8,738	)		38,882
Non-operating income		-		-		11,056			11,056
Unrealized gains on marketable equity securities		-		-		417			417

Income before income taxes	$	43,935	$	3,685	$	2,735		$	50,355

Non-GAAP Financial Presentation

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

Specifically, the Company believes the presentation of non-GAAP financial information that excludes the unrealized gains or losses on our marketable equity securities, operating results for the newly constructed healthcare facilities not at full capacity, share-based compensation expense, any gains on the acquisition of equity method investments, and the legal costs and charges related to the settlement of a Qui Tam investigation within our Caris hospice partnership is helpful in allowing investors to more accurately access the Company’s operations.

The operating results for the newly constructed healthcare facilities not at full capacity for the nine months ended September 30, 2019 include facilities that began operations from 2017 to 2019 (one skilled nursing facility, two assisted living facilities, and one memory care facility). For the nine months ended September 30, 2018, included are facilities that began operations from 2016 to 2018 (two skilled nursing facilities and three assisted living facilities).

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

	Three Months Ended September 30						Nine Months Ended September 30
	2019			2018			2019			2018

Net income attributable to National Healthcare Corporation	$	19,461		$	21,142		$	54,441		$	40,812
Non-GAAP adjustments
Unrealized gains on marketable equity securities		(9,312	)		(3,486	)		(16,096	)		(417	)
Gain on acquisition of equity method investment		-			(2,050	)		(1,975	)		(2,050	)
Operating results for newly opened facilities not at full capacity		152			917			884			1,972
Share-based compensation expense		340			361			1,448			1,538
Legal costs and charges related to Caris’ legal investigation		-			-			-			8,364
Tax Cuts and Jobs Act of 2017 adjustment		-			(1,434	)		-			(1,434	)
Provision of income taxes on non-GAAP adjustments		2,293			574			4,092			(2,150	)
Non-GAAP Net income	$	12,934		$	16,024		$	42,794		$	46,635


GAAP diluted earnings per share	$	1.27		$	1.39		$	3.55		$	2.68
Non-GAAP adjustments
Unrealized gains on marketable equity securities		(0.45	)		(0.17	)		(0.78	)		(0.02	)
Gain on acquisition of equity method investment		-			(0.13	)		(0.09	)		(0.13	)
Operating results for newly opened facilities not at full capacity		-			0.04			0.04			0.10
Share-based compensation expense		0.02			0.02			0.07			0.07
Legal costs and charges related to Caris’ legal investigation		-			-			-			0.46
Tax Cuts and Jobs Act of 2017 adjustment		-			(0.10	)		-			(0.10	)
Non-GAAP diluted earnings per share	$	0.84		$	1.05		$	2.79		$	3.06

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Results of Operations

The following table and discussion set forth items from the interim condensed consolidated statements of income as a percentage of net operating revenues for the three months and nine months ended September 30, 2019 and 2018.

Percentage of Net Operating Revenues

	Three Months Ended September 30						Nine Months Ended September 30
	2019			2018			2019			2018
Net operating revenues:		100.0	%		100.0	%		100.0	%		100.0	%
Costs and expenses:
Salaries, wages and benefits		61.6			60.6			59.5			59.4
Other operating		27.0			26.2			27.4			26.3
Facility rent		4.1			4.1			4.1			4.2
Depreciation and amortization		4.3			4.2			4.2			4.3
Interest		0.3			0.5			0.4			0.5
Total costs and expenses		97.3			95.6			95.6			94.7
Income from operations		2.7			4.4			4.4			5.3
Non–operating income		2.7			3.4			2.8			1.6
Unrealized gains on marketable equity securities		3.8			1.4			2.2			0.1
Income before income taxes		9.2			9.2			9.4			7.0
Income tax provision		(1.3	)		(0.7	)		(2.1	)		(1.3	)
Net income		7.9			8.5			7.3			5.7
Net loss attributable to noncontrolling interest		-			-			-			-
Net income attributable to stockholders of NHC		7.9			8.5			7.3			5.7

Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018

Results for the quarter ended September 30, 2019 compared to the third quarter of 2018 include a 0.3% increase in net operating revenues and net income attributable to NHC of $19,461,000 compared to $21,142,000, which is an 8.0% decrease. Also, non-GAAP net income for the three months ended September 30, 2019 was $12,934,000 compared to $16,024,000 for the third quarter of 2018.

Net operating revenues

Net patient revenues increased $263,000, or 0.1%, compared to the same period last year.

The total census at owned and leased skilled nursing facilities for the quarter averaged 90.1% compared to an average of 90.1% for the same quarter a year ago. Medicare per diem rates increased 0.8% and managed care per diem rates decreased 1.5% compared to the same quarter a year ago. Medicaid and private pay per diem rates increased 3.6% and 1.8%, respectively, compared to the same quarter a year ago. Overall, the composite skilled nursing facility per diem at our owned and leased skilled nursing facilities increased 0.3% compared to the same quarter a year ago. Our skilled patient mix (Medicare and managed care patients) declined approximately 1.4% in the third quarter of 2019 compared to the third quarter of 2018 (24.6% vs 26.0%), which resulted in our composite skilled nursing facility per diem being flat despite some of the inflationary per diem increases when comparing the two periods.

Beginning January 1, 2019, the Company’s Institutional Special Needs Plan (“I-SNP”) began offering and providing insurance and healthcare services in the state of Tennessee. Our I-SNP, which is called NHC Advantage, is a managed care insurance company that enrolls Medicare Advantage eligible individuals who are patients in our skilled nursing facilities. We believe the I-SNP will benefit our patients by providing nurse practitioners and care-coordination teams that will continue to enhance the patient-centered experience and our quality of care. We also believe our progressive improvement to patient care will continue to drive positive financial results for the Company. For the three months ended September 30, 2019, the I-SNP increased net patient revenues approximately $2,423,000 compared to the same quarter a year ago.

The Company has opened four assisted living facilities and a memory care facility from the years 2016 to 2019. These four assisted living facilities and the memory care facility continue to stabilize and increased net patient revenues approximately $1,994,000 for the three months ended September 30, 2019 compared to the same quarter a year ago. Our homecare operations had a decline in net patient revenues of approximately $1,884,000 in the third quarter of 2019 compared to the third quarter of 2018. Our homecare net patient revenue decline was primarily due to volume declines, as well as an unfavorable payor mix change with less Medicare patients and more managed care patients. In October 2018, we sold a skilled nursing facility in Madisonville, Kentucky. The sale of this facility decreased net patient revenues for the third quarter of 2019 by $1,670,000 compared to the same quarter of 2018.

Other revenues increased $478,000, or 4.2%, compared to the same quarter last year, as further detailed in Note 4 to our interim condensed consolidated financial statements. The increase in management fee revenue for the three months ended September 30, 2019 compared to the same quarter of 2018 is the primary reason for the increase in other revenues.

Total costs and expenses

Total costs and expenses for the three months ended September 30, 2019 compared to the same quarter of 2018 increased $5,007,000 or 2.1%, to $240,499,000 from $235,492,000.

Salaries, wages and benefits increased $2,987,000, or 2.0%, to $152,175,000 from $149,188,000. Salaries, wages and benefits as a percentage of net operating revenues was 61.6% compared to 60.6% for the three months ended September 30, 2019 and 2018, respectively. The primary reason for salaries, wages and benefits increasing as a percentage of net operating revenues is due to our existing skilled nursing facilities and the continued wage pressure in most of the markets in which we operate. The four assisted living facilities and a memory care facility that opened from the years 2016 to 2019 increased salaries, wages and benefits by approximately $1,097,000 for the third quarter of 2019 compared to the third quarter of 2018. These salaries and wage increases have been offset by the Madisonville, Kentucky skilled nursing facility disposition in October 2018.

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Other operating expenses increased $2,223,000, or 3.4%, to $66,730,000 for the 2019 period compared to $64,507,000 for the 2018 period. Other operating expenses as a percentage of net operating revenue was 27.0% and 26.2% for the three months ended September 30, 2019 and 2018, respectively. The majority of the increase in other operating expenses for the third quarter of 2019 compared to the third quarter of 2018 is due to the January 1, 2019 start of our I-SNP insurance plan, NHC Advantage. For the three months ended September 30, 2019, the I-SNP increased other operating expenses approximately $2,637,000 compared to the third quarter a year ago.

The decrease in interest expense is due from our long-term debt continuing to be paid down. During the third quarter of 2019, we paid down $25,000,000 of our long-term debt. At September 30, 2019, we have $30 million outstanding on our credit facility.

Other income (expense)

Non–operating income decreased by $1,804,000 compared to the same period last year, as further detailed in Note 5 to our interim condensed consolidated financial statements. The decrease in non-operating income is primarily due to the 2018 third quarter gain of $2,050,000 recorded on the acquisition of a controlling financial interest in a 14-bed geriatric psychiatric hospital in Osage Beach, Missouri. We previously held a noncontrolling ownership interest and an equity method investment in this hospital.

Income taxes

The income tax provision for the three months ended September 30, 2019 is $3,167,000 (an effective income tax rate of 14.0%). Excluding nondeductible expenses, we expect our corporate income tax rate for 2019 to be approximately 26.0%.

Noncontrolling interest

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

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Results for the nine months ended September 30, 2019 compared to the first nine month of 2018 include a 1.5% increase in net operating revenues and a 7.3% increase in net income attributable to NHC. Excluding the unrealized gains in our marketable equity securities portfolio and the 2018 Caris Qui Tam settlement, income before income taxes for the nine months ended September 30, 2019 decreased 8.3% compared to the same nine-month period in 2018. Also, non-GAAP net income for the nine months ended September 30, 2019 was $42,794,000 compared to $46,635,000 for the nine months of 2018.

Net operating revenues

Net patient revenues increased $9,292,000, or 1.3%, compared to the same period last year.

The total census at owned and leased skilled nursing facilities for the nine months ended September 30, 2019 averaged 90.3% compared to an average of 89.7% for the same period a year ago. Medicare per diem rates decreased 0.2%, and managed care per diem rates decreased 1.8% compared to the same nine-month period a year ago. Medicaid and private pay per diem rates increased 3.6% and 2.7%, respectively, compared to the same period a year ago. Overall, the composite skilled nursing facility per diem at our owned and leased skilled nursing facilities increased 7 basis points, or 0.07%, compared to the nine months a year ago. Our skilled patient mix (Medicare and managed care patients) declined approximately 1.4% for the nine months ended September 30, 2019 compared to the same period in 2018 (25.4% vs 26.8%), which resulted in our composite skilled nursing facility per diem being flat despite some of the inflationary per diem increases when comparing the two periods.

Beginning January 1, 2019, the Company’s Institutional Special Needs Plan (“I-SNP”) began offering and providing insurance and healthcare services in the state of Tennessee. Our I-SNP, which is called NHC Advantage, is a managed care insurance company that enrolls Medicare Advantage eligible individuals who are patients in our skilled nursing facilities. We believe the I-SNP will benefit our patients by providing nurse practitioners and care-coordination teams that will continue to enhance the patient-centered experience and our quality of care. We also believe our progressive improvement to patient care will continue to drive positive financial results for the Company. For the nine months ended September 30, 2019, the I-SNP increased net patient revenues approximately $8,633,000 compared to the same period a year ago.

In August 2018, the Company acquired a controlling ownership interest in a 14-bed behavioral health hospital. For the nine months ending September 30, 2019, this hospital increased net patient revenues approximately $3,404,000 compared to the same period a year ago (since we acquired the operations in August 2018, we only had two months of revenue at September 30, 2018). The Company has opened four assisted living facilities and a memory care facility from the years 2016 to 2019. These four assisted living facilities and the memory care facility continue to stabilize and increased net patient revenues by approximately $4,394,000 for the nine months ended September 30, 2019 compared to the same period a year ago. Our homecare operations had a decline in net patient revenues of approximately $3,409,000 for the nine months ended September 30, 2019 compared to the same nine-month period in 2018. Our homecare net patient revenue decline has been primarily due to volume declines, as well as an unfavorable payor mix change with less Medicare patients and more managed care patients. In October 2018, we sold a skilled nursing facility in Madisonville, Kentucky. The sale of this facility decreased net patient revenues for the first nine months of 2019 by $4,865,000 compared to the same period of 2018.

Other revenues increased $1,782,000, or 5.2%, compared to the first nine months last year, as further detailed in Note 4 to our interim condensed consolidated financial statements. The increase in management fee revenue for the nine months ended September 30, 2019 compared to the same period of 2018 is the primary reason for the increase in other revenues.

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Total costs and expenses

Total costs and expenses for the first nine months of 2019 compared to the first nine months of 2018 increased $17,415,000 or 2.5%, to $709,962,000 from $692,547,000.

Salaries, wages and benefits increased $6,692,000, or 1.5%, to $441,441,000 from $434,749,000. Salaries, wages and benefits as a percentage of net operating revenues was 59.5% compared to 59.4% for the nine months ended September 30, 2019 and 2018, respectively. The increase in salaries, wages and benefits is primarily due to our existing skilled nursing facilities and the continued wage pressure in most of the markets in which we operate. The four assisted living facilities and a memory care facility that opened from the years 2016 to 2019 increased salaries, wages and benefits by approximately $2,405,000 for the nine months ended September 30, 2019 compared to the same nine-month period in 2018. These salaries and wage increases have been offset by the Madisonville, Kentucky skilled nursing facility disposition in October 2018.

Other operating expenses increased $11,492,000, or 6.0%, to $203,760,000 for the 2019 period compared to $192,268,000 for the 2018 period. Other operating expenses as a percentage of net operating revenue was 27.4% compared to 26.3% for the nine months ended September 30, 2019 and 2018, respectively. The increase in other operating expenses for the first nine months of 2019 compared to the first nine months of 2018 is primarily due to the January 1, 2019 start of our I-SNP insurance plan, NHC Advantage. For the nine months ended September 30, 2019, the I-SNP increased other operating expenses approximately $8,912,000 compared to the same period a year ago. We also experienced unfavorable results within our self-insured accrued risk reserve programs for the nine months ended September 30, 2019. Our self-insured accrued risk reserve programs increased other operating expenses by approximately $1,104,000 for the nine months ended September 30, 2019 compared to the same period a year ago.

The decrease in interest expense is due from our long-term debt continuing to be paid down. For the nine months ended September 30, 2019, we have paid down $25,000,000 of our long-term debt. At September 30, 2019, we have $30 million outstanding on our credit facility.

Other income (expense)

Non–operating income increased by $9,880,000 compared to the same period last year, as further detailed in Note 5 to our interim condensed consolidated financial statements. The increase in non-operating income is due from our equity in earnings investment in our Caris hospice operations. During the first quarter of 2018, Caris recorded a charge to earnings of $8,500,000 for the settlement of a Qui Tam investigation, of which 75.1% is included in the Company’s earnings. In total, with the $8,500,000 million settlement and legal expenses, Caris’ earnings negatively impacted NHC’s non-operating income by $8,364,000 for the first nine months of 2018.

Income taxes

The income tax provision for the nine months ended September 30, 2019 is $15,284,000 (an effective income tax rate of 22.0%). Excluding nondeductible expenses, we expect our corporate income tax rate for 2019 to be approximately 26.0%.

Noncontrolling interest

Liquidity, Capital Resources, and Financial Condition

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

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

	Nine Months Ended September 30						Nine Month Change
	2019			2018						%
Cash, cash equivalents, restricted cash and restricted cash equivalents, at beginning of period	$	54,920		$	67,421		$	(12,501	)		(18.5	)

Cash provided by operating activities		74,884			77,066			(2,182	)		(2.8	)

Cash used in investing activities		(9,823	)		(27,090	)		17,267			63.7

Cash used in financing activities		(51,899	)		(49,664	)		(2,235	)		(4.5	)

Cash, cash equivalents, restricted cash and restricted cash equivalents, at end of period	$	68,082		$	67,733		$	349			0.5

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Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2019 was $74,884,000 as compared to $77,066,000 for the same period last year. Cash provided by operating activities consisted of net income of $54,289,000 and adjustments for non–cash items of $13,531,000. There was cash provided by working capital in the amount of $3,297,000 for the nine months ended September 30, 2019 compared to cash used by working capital needs of $483,000 for the same nine-month period a year ago. We also received cash distributions from our unconsolidated investments of $3,884,000 during the nine months ended September 30, 2019 compared to $3,830,000 for the same period a year ago. There were also gains on sales of restricted marketable debt securities of $117,000 for the nine months ended September 30, 2019 compared to $18,000 for the same period in 2018.

Investing Activities

Net cash used in investing activities totaled $9,823,000 for the nine months ended September 30, 2019 compared to $27,090,000 for the nine months ended September 30, 2018. Cash used for property and equipment additions was $19,670,000 and $22,708,000 for the nine months ended September 30, 2019 and 2018, respectively. Cash was also used in the acquisition of an equity method investment (St. Peters Memory Care) for the nine months ended September 30, 2019 of $15,589,000. Investments in notes receivable were $5,462,000 for the nine months ended September 30, 2019. The Company collected notes receivable of $1,010,000 and $1,180,000 for the nine months ended September 30, 2019 and 2018, respectively. Sales of restricted marketable securities, net of purchases, resulted in providing cash of $30,085,000 for the nine months ended September 30, 2019, compared to purchases of restricted marketable securities, net of sales, resulted in using cash of $5,411,000 for the nine months ended September 30, 2018.

Financing Activities

Net cash used in financing activities totaled $51,899,000 and $49,664,000 for the nine months ending September 30, 2019 and 2018, respectively. Cash was used for principal payments on the Company’s long-term debt of $25,000,000 for each of the nine-month periods ending September 30, 2019 and 2018. Cash used for dividend payments to common stockholders totaled $23,240,000 in the current year period compared to $22,214,000 for the same period a year ago. In the current period, $1,383,000 was provided by the issuance of common stock compared to $1,327,000 in the prior year period. In the current period, repurchases of common stock totaled $872,000 compared to $867,000 in the prior period.

Short–term liquidity

We expect to meet our short-term liquidity requirements primarily from our cash flows from operating activities. In addition to cash flows from operations, our current cash on hand of $59,261,000, marketable equity securities of $156,319,000, 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.

Long–term liquidity

We expect to meet our long-term liquidity requirements primarily from our cash flows from operating activities, our current cash on hand of $59,261,000, marketable equity securities of $156,319,000 and our borrowing capacity on the credit facility. At September 30, 2019, the outstanding balance on the credit facility is $30,000,000; therefore, leaving $30,000,000 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

Nutritional Support Services, L.P., Qui Tam Litigation

On June 19, 2018, a First Amended Complaint was filed naming Nutritional Support Services, L.P. (“NSS”), a wholly owned subsidiary of the Company, as a defendant in the action captioned U.S. ex rel. McClain v. Nutritional Support Services, L.P., No. 6:17-cv-2608-AMQ (D.S.C.), which was filed in the United States District Court for the District of South Carolina. The action alleges that NSS violated the False Claims Act by reporting a National Drug Code (“NDC”) number that did not correspond to the NDC for dispensed prescriptions. The plaintiffs are seeking unspecified damages. On April 16, 2018, the United States filed a Notice of Election to Decline Intervention with respect to the allegations asserted in this action. NSS intends to vigorously defend itself with respect to this action.

Governmental Regulations

New Accounting Pronouncements

See Note 2 to the interim condensed consolidated financial statements for the impact of new accounting standards.

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Market risk represents the potential economic loss arising from adverse changes in the fair value of financial instruments. Currently, our exposure to market risk relates primarily to our fixed–income and equity portfolios. These investment portfolios are exposed primarily to, but not limited to, interest rate risk, credit risk, equity price risk, and concentration risk. We also have exposure to market risk that includes our cash and cash equivalents, 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 September 30, 2019, we have available for sale restricted marketable debt securities in the amount of $149,557,000. 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 September 30, 2019, the Company has $30,000,000 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 $300,000.

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 of Directors.

Credit Risk

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

Equity Price and Concentration Risk

Our marketable equity securities are recorded at their fair market value based on quoted market prices. Thus, there is exposure to equity price risk, which is the potential change in fair value due to a change in quoted market prices. At September 30, 2019, the fair value of our marketable equity securities is approximately $156,319,000. Of the $156.0 million equity securities portfolio, our investment in NHI comprises approximately $134.3 million, or 86%, 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 $15.6 million. At September 30, 2019, our equity securities had unrealized gains of $126.1 million. Of the $126.1 million of unrealized gains, $109.6 million is related to our investment in NHI.

Item 4.

Controls and Procedures.

As of September 30, 2019, 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 September 30, 2019. There have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.

Legal Proceedings.

For a discussion of prior, current and pending litigation of material significance to NHC, please see Note 15 of this Form 10–Q.

Item 1A.

Risk Factors.

During the nine months ended September 30, 2019, 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, 2018.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable

Item 3.

Defaults Upon Senior Securities.

None

Item 4.

Mine Safety Disclosures.

Not applicable

Item 5.

Other Information.

None

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Item 6.

Exhibits.

(a)

List of exhibits

EXHIBIT INDEX

Exhibit No.		Description

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

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

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

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

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

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

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

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

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

101.SCH		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

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

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SIGNATURES

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

	NATIONAL HEALTHCARE CORPORATION
	(Registrant)

Date: November 5, 2019	/s/ Stephen F. Flatt
	Stephen F. Flatt
	Chief Executive Officer


Date: November 5, 2019	/s/ Brian F. Kidd
	Brian F. Kidd
	Senior Vice President and Controller
	(Principal Accounting Officer)