Annual Statements Open main menu

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

nhc20190331_10q.htm
 

 

Table of Contents



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

   

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 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    00113489

 

 

(Exact name of registrant as specified in its Charter)

   

Delaware

522057472

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization

Identification No.)

   

100 E. Vine Street

Murfreesboro, TN

37130

(Address of principal executive offices)

(Zip Code)

   

(615) 8902020

Registrant's telephone number, including area code

   

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

 
Indicate by check mark whether the registrant 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 [X ]

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 [x]

 

15,306,290 shares of common stock of the registrant were outstanding as of May 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

NHC

NYSE American

 



 

 

 

TABLE OF CONTENTS

 

 

 

 

PART I. FINANCIAL INFORMATION

 

Page

Item 1.

Financial Statements

3

     

Item 2.

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

27

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36

     

Item 4.

Controls and Procedures

37

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

38

     

Item 1A

Risk Factors

38

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

     

Item 3.

Defaults Upon Senior Securities

38

     

Item 4.

Mine Safety Disclosures

38

     

Item 5.

Other Information

38

     

Item 6.

Exhibits

39

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Operations

(in thousands, except share and per share amounts)

(unaudited)

 

   

Three Months Ended

March 31

 
   

2019

   

2018

 

Revenues:

               

Net patient revenues

  $ 236,111     $ 231,692  

Other revenues

    12,174       11,269  

Net operating revenues

    248,285       242,961  
                 

Cost and expenses:

               

Salaries, wages and benefits

    141,388       140,095  

Other operating

    69,432       65,172  

Facility rent

    10,238       10,229  

Depreciation and amortization

    10,517       10,342  

Interest

    926       1,240  

Total costs and expenses

    232,501       227,078  
                 

Income from operations

    15,784       15,883  
                 

Other income (expense):

               

Non–operating income (expense)

    6,001       (3,065 )

Unrealized gains (losses) on marketable equity securities

    6,838       (15,517 )
                 

Income (loss) before income taxes

    28,623       (2,699 )

Income tax provision

    (7,392 )     (200 )

Net income (loss)

    21,231       (2,899 )

Net loss attributable to noncontrolling interest

    38       108  
                 

Net income (loss) attributable to National HealthCare Corporation

  $ 21,269     $ (2,791 )
                 

Earnings (loss) per share attributable to National HealthCare Corporation stockholders:

               

Basic

  $ 1.39     $ (0.18 )

Diluted

  $ 1.39     $ (0.18 )
                 

Weighted average common shares outstanding:

         

Basic

    15,256,189       15,216,635  

Diluted

    15,324,125       15,216,635  
                 

Dividends declared per common share

  $ 0.50     $ 0.48  

 

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

 

 

 

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Comprehensive Income

(unaudited – in thousands)

 

   

Three Months Ended

March 31

 
   

2019

   

2018

 
                 

Net income (loss)

  $ 21,231     $ (2,899 )
                 

Other comprehensive income (loss):

               

Unrealized gains (losses) on investments in restricted marketable debt securities

    3,225       (2,798 )

Reclassification adjustment for realized gains on sale of securities

    -       (11 )

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

    (677 )     590  

Other comprehensive gain (loss), net of tax

    2,548       (2,219 )
                 

Net loss attributable to noncontrolling interest

    38       108  
                 

Comprehensive income (loss) attributable to National HealthCare Corporation

  $ 23,817     $ (5,010 )

 

 

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

 

 

 

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Balance Sheets

(in thousands)

 

   

March 31,

2019

   

December 31,

2018

 
   

unaudited

         

Assets

               

Current Assets:

               

Cash and cash equivalents

  $ 38,194     $ 43,247  

Restricted cash and cash equivalents, current portion

    14,785       9,967  

Marketable equity securities

    147,061       140,223  

Restricted marketable debt securities, current portion

    13,486       18,676  

Accounts receivable

    100,619       97,274  

Inventories

    6,953       7,470  

Prepaid expenses and other assets

    4,598       3,863  

Notes receivable, current portion

    1,417       1,289  

Total current assets

    327,113       322,009  
                 

Property and Equipment:

               

Property and equipment, at cost

    987,763       979,088  

Accumulated depreciation and amortization

    (454,959 )     (444,438 )

Net property and equipment

    532,804       534,650  
                 

Other Assets:

               

Restricted cash and cash equivalents, less current portion

    1,720       1,706  

Restricted marketable securities, less current portion

    159,321       153,917  

Deposits and other assets

    5,895       5,602  

Operating lease right-of-use assets

    220,134       -  

Goodwill

    20,995       20,995  

Notes receivable, less current portion

    9,538       9,707  

Investments in unconsolidated companies

    34,777       32,362  

Total other assets

    452,380       224,289  

Total assets

  $ 1,312,297     $ 1,080,948  

 

 

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

 

 

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Balance Sheets (continued)

(in thousands, except share and per share amounts)

 

   

March 31,

2019

   

December 31,

2018

 
   

unaudited

         

Liabilities and Stockholders’ Equity

               

Current Liabilities:

               

Trade accounts payable

  $ 19,318     $ 19,759  

Finance lease obligations, current portion

    6,780       3,924  

Operating lease liabilities, current portion

    23,353       --  

Accrued payroll

    45,888       67,618  

Amounts due to third party payors

    16,293       16,108  

Accrued risk reserves, current portion

    28,271       28,643  

Other current liabilities

    22,407       14,249  

Dividends payable

    7,652       7,623  

Total current liabilities

    169,962       157,924  
                 

Long–term debt

    55,000       55,000  

Finance lease obligations, less current portion

    18,110       19,128  

Operating lease liabilities, less current portion

    196,781       --  

Accrued risk reserves, less current portion

    70,271       67,381  

Refundable entrance fees

    8,078       8,078  

Obligation to provide future services

    2,172       2,172  

Deferred income taxes

    20,830       18,550  

Other noncurrent liabilities

    15,306       15,204  

Deferred revenue

    5,072       3,054  

Total liabilities

    561,582       346,491  
                 

Equity:

               

Common stock, $.01 par value; 45,000,000 shares authorized; 15,303,990 and 15,255,002 shares, respectively, issued and outstanding

    153       153  

Capital in excess of par value

    219,566       219,435  

Retained earnings

    530,052       516,435  

Accumulated other comprehensive loss

    (197 )     (2,745 )

Total National HealthCare Corporation stockholders’ equity

    749,574       733,278  

Noncontrolling interest

    1,141       1,179  

Total equity

    750,715       734,457  

Total liabilities and equity

  $ 1,312,297     $ 1,080,948  

 

 

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

 

 

 

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Cash Flows

(unaudited – in thousands)

 

   

Three Months Ended

March 31

 
   

2019

   

2018

 

Cash Flows From Operating Activities:

               

Net income (loss)

  $ 21,231     $ (2,899 )

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

               

Depreciation and amortization

    10,517       10,342  

Equity in (earnings) losses of unconsolidated investments

    (2,321 )     6,586  

Distributions from unconsolidated investments

    31       2,254  

Unrealized (gains) losses on marketable equity securities

    (6,838 )     15,517  

Gains on sale of restricted marketable debt securities

    -       (11 )

Deferred income taxes

    1,603       (5,206 )

Stock–based compensation

    424       428  

Changes in operating assets and liabilities:

               

Accounts receivable

    (3,345 )     1,761  

Income tax receivable

    -       3,938  

Inventories

    517       (113 )

Prepaid expenses and other assets

    (1,008 )     (631 )

Trade accounts payable

    (441 )     737  

Accrued payroll

    (21,730 )     (22,619 )

Amounts due to third party payors

    185       (234 )

Accrued risk reserves

    2,498       2,971  

Other current liabilities

    8,158       (1,882 )

Other noncurrent liabilities

    102       337  

Deferred revenue

    2,018       2,030  

Net cash provided by operating activities

    11,601       13,306  

Cash Flows From Investing Activities:

               

Additions to property and equipment

    (5,874 )     (7,100 )

Investments in notes receivable

    (312 )     -  

Investments in unconsolidated companies

    (125 )     -  

Collections of notes receivable

    353       431  

Purchase of restricted marketable debt securities

    (3,565 )     (2,694 )

Sale of restricted marketable debt securities

    6,576       3,535  

Net cash used in investing activities

    (2,947 )     (5,828 )

Cash Flows From Financing Activities:

               

Principal payments under finance lease obligations

    (959 )     (903 )

Dividends paid to common stockholders

    (7,623 )     (7,297 )

Issuance of common shares

    579       1,067  

Repurchase of common shares

    (872 )     (867 )

Entrance fee refunds

    -       (159 )

Net cash used in financing activities

    (8,875 )     (8,159 )

Net Decrease in Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents

    (221 )     (681 )

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

  $ 54,699     $ 66,740  
                 

Balance Sheet Classifications:

               

Cash and cash equivalents

  $ 38,194     $ 54,962  

Restricted cash and cash equivalents

    16,505       11,778  

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

  $ 54,699     $ 66,740  

 

 

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

 

 

 

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share and per share amounts)

(unaudited)

 

   

Common Stock

   

Capital in

Excess of

   

Retained

Earnings

   

Accumulated

Other

Comprehensive 

   

Non-

controlling 

   

Total

Stockholders’

 
   

Shares

   

Amount

    Par 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  
                                                         

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  

 

 

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

 

 

NATIONAL HEALTHCARE CORPORATION

Notes to Interim Condensed Consolidated Financial Statements

March 31, 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 March 31, 2019, we operate or manage, through certain affiliates, 75 skilled nursing facilities with a total of 9,510 licensed beds, 25 assisted living facilities, five independent living facilities, one behavioral health hospital, and 35 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 it 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 March 31, 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.

 

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 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 living 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. Bad debt expense was $1,047,000 and $959,000 for the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, and December 31, 2018, the Company has recorded allowance for doubtful accounts of $5,169,000 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 center 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 $5,144,000 and $6,678,000 for the three months ended March 31, 2019 and 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 842, Leases. Amortization of finance lease assets is included in depreciation and amortization expense.

 

 

Accrued Risk Reserves  

 

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

 

Professional liability remains an area of particular concern to us. The long-term care industry has seen an increase in personal injury/wrongful death claims based on alleged negligence by skilled nursing facilities and their employees in providing care to residents. As of March 31, 2019, we and/or our managed centers are defendants in 63 such claims. It remains possible that those pending matters plus potential unasserted claims could exceed our reserves, which could have a material adverse effect on our consolidated financial position, results of operations and cash flows. It is also possible that future events could cause us to make significant adjustments or revisions to these reserve estimates and cause our reported net income to vary significantly from period to period.

 

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

 

Continuing Care Contracts and Refundable Entrance Fee

 

We have one continuing care retirement center (“CCRC”) within our operations. Residents at this retirement center may enter into continuing care contracts with us. The contracts provide that 10% of the resident entry fee becomes non-refundable upon occupancy, and the remaining refundable portion of the entry fee is calculated using the lessor of the price at which the apartment is re-assigned or 90% of the original entry fee, plus 40% of any appreciation if the apartment exceeds the original resident’s entry fee.

 

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 March 31, 2019, and December 31, 2018, we have recorded a refundable entrance fee in the amount of $8,078,000.

 

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 March 31, 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.

 

 

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 March 31

 
   

2019

   

2018

 

Net patient revenues:

               

Inpatient services

  $ 221,635     $ 216,351  

Homecare

    14,476       15,341  

Total net patient revenue

  $ 236,111     $ 231,692  

 

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

March 31

 

Source

 

2019

   

2018

 

Medicare

    36 %     36 %

Managed Care

    12 %     13 %

Medicaid

    26 %     25 %

Private Pay and Other

    26 %     26 %

Total

    100 %     100 %

 

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

 

For homecare services, Medicare pays based on the acuity level of the patient and based on episodes 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.     

 

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. The Medicare PPS methodology requires that patients be assigned to Resource Utilization Groups ("RUGs") based on the acuity level of the patient to determine the amount paid to us for patient services. The assignment of patients to the various RUG categories is subject to post–payment review by Medicare intermediaries or their agents. Settlements with third-party payors for retroactive adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient care. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and the Company’s historical settlement activity, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustment is subsequently resolved. Estimated settlements are adjusted in future periods as adjustments become known, or as years are settled or are no longer subject to such audits, reviews, and investigations. We believe that any differences between the net revenues recorded and final determination will not materially affect the consolidated financial statements. We have made provisions of approximately $16,293,000 and $16,108,000 as of March 31, 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

March 31

 

(in thousands)

 

2019

   

2018

 

Insurance services

  $ 1,524     $ 1,692  

Management and accounting services fees

    4,751       3,708  

Rental income

    5,608       5,532  

Other

    291       337  

Total other revenues

  $ 12,174     $ 11,269  

 

Insurance Services

 

For workers’ compensation insurance services, the premium revenues reflected in the interim condensed consolidated statements of operations for the three months ended March 31, 2019 and 2018 were $847,000 and $1,019,000, 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 months ended March 31, 2019 and 2018 were $677,000 and $673,000, respectively. Associated losses and expenses including those for self–insurance are included in the interim condensed consolidated statements of operations as "Other operating costs and expenses".

 

Management Fees from National

 

We manage five skilled nursing facilities owned by National. For the three months ended March 31, 2019 and 2018, we recognized management fees and interest on management fees of $1,854,000 and $1,014,000 from these centers, respectively.

 

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 March 31, 2019 (in thousands):

 

 

2020

  $ 21,891  

2021

    22,192  

2022

    22,927  

2023

    22,868  

2024

    22,730  

Thereafter

    40,614  

Total future minimum lease payments

  $ 153,222  

 

 

 

Note 5 NonOperating 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 three months ended March 31, 2018, Caris’ equity in earnings were negatively impacted by $8,228,000 for the settlement of a Qui Tam legal matter and legal fees related to the settlement.

 

   

Three Months Ended

March 31

 

(in thousands)

 

2019

   

2018

 

Equity in earnings of unconsolidated investments

  $ 2,321     $ (6,586 )

Dividends and net realized gains and losses on sales of securities

    1,931       1,803  

Interest income

    1,749       1,718  

Total non-operating income

  $ 6,001     $ (3,065 )

 

 

 

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 March 31, 2019

 
   

Inpatient

Services

   

Homecare

   

All Other

   

Total

 

Revenues:

                               

Net patient revenues

  $ 221,635     $ 14,476     $ -     $ 236,111  

Other revenues

    231       -       11,943       12,174  

Net operating revenues

    221,866       14,476       11,943       248,285  
                                 

Costs and expenses:

                               

Salaries, wages and benefits

    126,101       8,026       7,261       141,388  

Other operating

    62,629       4,252       2,551       69,432  

Rent

    8,291       462       1,485       10,238  

Depreciation and amortization

    9,653       61       803       10,517  

Interest

    348       -       578       926  

Total costs and expenses

    207,022       12,801       12,678       232,501  
                                 

Income (loss) from operations

    14,844       1,675       (735 )     15,784  
                                 

Non-operating income

    -       -       6,001       6,001  

Unrealized gains on marketable equity securities

    -       -       6,838       6,838  
                                 

Income before income taxes

  $ 14,844     $ 1,675     $ 12,104     $ 28,623  

 

 

   

Three Months Ended March 31, 2018

 
   

Inpatient

Services

   

Homecare

   

All Other

   

Total

 

Revenues:

                               

Net patient revenues

  $ 216,351     $ 15,341     $ -     $ 231,692  

Other revenues

    271       -       10,998       11,269  

Net operating revenues

    216,622       15,341       10,998       242,961  
                                 

Costs and expenses:

                               

Salaries, wages and benefits

    123,380       8,030       8,685       140,095  

Other operating

    57,835       5,279       2,058       65,172  

Rent

    8,258       487       1,484       10,229  

Depreciation and amortization

    9,461       38       843       10,342  

Interest

    396       -       844       1,240  

Total costs and expenses

    199,330       13,834       13,914       227,078  
                                 

Income (loss) from operations

    17,292       1,507       (2,916 )     15,883  

 

Non-operating loss

    -       -       (3,065 )     (3,065 )

Unrealized losses on marketable equity securities

    -       -       (15,517 )     (15,517 )
                                 

Income (loss) before income taxes

  $ 17,292     $ 1,507     $ (21,498 )   $ (2,699 )

 

 

 

 

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 inception of a contract. We determine the lease term by assuming exercise of renewal options that are reasonably certain.

 

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 value 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 health 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 March 31, 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 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. 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 for the periods ending March 31, 2019 and 2018 was $965,000 and $928,000, 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 March 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.

 

Lease Classification

 

At March 31, 2019, the Company recorded the following on the condensed consolidated balance sheets (in thousands):

 

 

Right-of-Use Assets

   

Balance Sheet Classification

 

March 31,

2019

 

Finance lease assets

   

Net property and equipment

  $ 21,881  

Operating lease right-of-use assets

   

Operating lease right-of-use assets

    220,134  
Total         $ 242,015  

 

 

 

Lease Liabilities

   

 

Balance Sheet Classification

 

March 31,

2019

 

Current:

             

Finance lease liabilities

   

Finance lease obligations, current portion

  $ 6,780  

Operating lease liabilities

   

Operating lease liabilities, current portion

    23,353  

Noncurrent:

             

Finance lease liabilities

   

Finance lease obligations, less current portion

    18,110  

Operating lease liabilities

   

Operating lease liabilities, less current portion

    196,781  
Total         $ 245,024  

 

 

Weighted-average remaining lease terms and discount rates at March 31, 2019 were as follows:

 

Weighted-average remaining lease terms (in years)

       

Finance

    4.9  

Operating

    7.9  
         

Weighted-average discount rate

       

Finance

    6.0 %

Operating

    6.0 %

 

 

Lease Costs

 

For the three months ended March 31, 2019, the lease costs recorded in the condensed consolidated statement of operations are as follows (in thousands):

 

Finance lease costs:

       

Depreciation of leased assets

  $ 981  

Interest of lease liabilities

    348  

Total finance lease costs

    1,329  
         

Operating lease costs:

       

Operating lease costs

    9,086  

Variable lease costs

    965  

Short-term lease costs

    187  

Total operating lease costs

    10,238  
         

Total lease costs

  $ 11,567  

 

 

Minimum Lease Payments

 

The following table summarizes the maturity of our finance and operating lease liabilities as of March 31, 2019 (in thousands):

 

   

Finance

Leases

   

Operating

Leases

 

2020

  $ 7,998     $ 35,733  

2021

    5,200       35,443  

2022

    5,200       35,112  

2023

    5,200       34,688  

2024

    4,767       34,403  

Thereafter

    --       99,877  

Total minimum lease payments

    28,365       275,256  

Less: amounts representing interest

    (3,475 )     (55,122 )

Present value of future minimum lease payments

    24,890       220,134  

Less: current portion

    (6,780 )     (23,353 )

Noncurrent lease liabilities

  $ 18,110     $ 196,781  

 

Other

 

Supplemental cash flow data for the three months ended March 31, 2019 was as follows (in thousands):

 

Cash paid for amounts included in the measurement of lease liabilities:

       

Operating cash flows for operating leases

  $ 9,086  

Operating cash flows for finance leases

    348  

Financing cash flows for finance leases

    959  

 

 

 

Note 8 Earnings per Share

 

Basic net income (loss) per share is computed based on the weighted average number of common shares outstanding for each period presented. Diluted net income (loss) 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 (losses) and the weighted average number of common shares used in the calculation of basic and diluted earnings (loss) per share (in thousands, except for share and per share amounts):

 

   

Three Months Ended March 31

 
   

2019

   

2018

 

Basic:

               

Weighted average common shares outstanding

    15,256,189       15,216,635  

Net income (loss) attributable to National HealthCare Corporation

  $ 21,269     $ (2,791 )

Earnings (loss) per common share, basic

  $ 1.39     $ (0.18 )
                 

Diluted:

               

Weighted average common shares outstanding

    15,256,189       15,216,635  

Effects of dilutive instruments

    67,936       -  

Weighted average common shares outstanding

    15,324,125       15,216,635  
                 

Net income (loss) attributable to National HealthCare Corporation

  $ 21,269     $ (2,791 )

Earnings (loss) per common share, diluted

  $ 1.39     $ (0.18 )

 

In the above table, options to purchase 8,475 shares of our common stock have been excluded for the quarter ended March 31, 2019, due to their anti–dilutive impact.  The impact of potentially dilutive securities (1,238,855) for the three months ended March 31, 2018, were not considered because the effect would be anti-dilutive in that period.

 

 

 

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):

 

   

March 31, 2019

   

December 31, 2018

 
   

Amortized

Cost

   

Fair

Value

   

Amortized

Cost

   

Fair

Value

 

Investments available for sale:

                               

Marketable equity securities

  $ 30,176     $ 147,061     $ 30,176     $ 140,223  
Restricted investments available for sale:                                

Corporate debt securities

    66,649       66,819       69,439       67,632  

Asset-based securities

    64,601       64,504       62,772       62,068  

U.S. Treasury securities

    20,091       19,748       22,038       21,457  

State and municipal securities

    21,715       21,736       21,818       21,436  
    $ 203,232     $ 319,868     $ 206,243     $ 312,816  

 

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

 

   

March 31, 2019

   

December 31, 2018

 
   

Shares

   

Cost

   

Fair

Value

   

Shares

   

Cost

   

Fair

Value

 

NHI Common Stock

    1,630,642     $ 24,734     $ 128,087       1,630,642     $ 24,734     $ 123,179  

 

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

 

   

March 31, 2019

   

December 31, 2018

 
   

Cost

   

Fair

Value

   

Cost

   

Fair

Value

 

Maturities:

                               

Within 1 year

  $ 11,081     $ 11,054     $ 11,448     $ 11,401  

1 to 5 years

    95,001       95,229       98,487       97,430  

6 to 10 years

    66,974       66,524       64,932       62,527  

Over 10 years

    --       --       1,200       1,235  
    $ 173,056     $ 172,807     $ 176,067     $ 172,593  

 

Gross unrealized gains related to marketable equity securities are $116,906,000 and $110,081,000 as of March 31, 2019 and December 31, 2018, respectively. Gross unrealized losses related to marketable equity securities are $21,000 and $34,000 as of March 31, 2019 and December 31, 2018, respectively. For the three months ended March 31, 2019 and 2018, the Company recognized net unrealized gains of $6,838,000 and net unrealized losses of $15,517,000, respectively, for the changes in fair market value of the marketable equity securities in the interim condensed consolidated statement of operations.

 

 

Gross unrealized gains related to available for sale debt securities are $1,089,000 and $335,000 as of March 31, 2019 and December 31, 2018, respectively. Gross unrealized losses related to available for sale debt securities are $1,338,000 and $3,809,000 as of March 31, 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 three months ended March 31, 2019 or for the year ended December 31, 2018.

 

Proceeds from the sale of available for sale debt securities during the three months ended March 31, 2019 and 2018 were $6,576,000 and $3,535,000, respectively. Investment gains of $0 and $11,000 were realized on these sales during the three months ended March 31, 2019 and 2018, respectively. No sales were reported for marketable equity securities for the three months ended March 31, 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 March 31, 2019 and December 31, 2018 for assets and liabilities measured at fair value on a recurring basis (in thousands):

 

   

Fair Value Measurements Using

 

March 31, 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

  $ 38,194     $ 38,194     $     $  

Restricted cash and cash equivalents

    16,505       16,505              

Marketable equity securities

    147,061       147,061              

Corporate debt securities

    66,819       49,600       17,219        

Mortgage–backed securities

    64,504             64,504        

U.S. Treasury securities

    19,748       19,748              

State and municipal securities

    21,736             21,736        

Total financial assets

  $ 374,567     $ 271,108     $ 103,459     $  

 

 

   

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 LongTerm Debt

 

Long–term debt consists of the following:

 

   

Weighted Average

Interest Rate

   

Maturity

   

March 31,

2019

   

December 31,

2018

 
   

Variable

           

(dollars in thousands)

 

Credit facility, interest payable monthly

    3.9%       2020     $ 55,000     $ 55,000  

Less current portion

                           

Total long-term debt

                  $ 55,000     $ 55,000  

 

The available borrowing capacity of the credit facility is $110,000,000. 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 2018, 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. During the quarter ended March 31, 2019, the Company repurchased 10,396 shares of its common stock for a total cost of $872,000. The shares were funded from cash on hand and were cancelled and returned to the status of authorized but unissued.

 

 

 

Note 13StockBased 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 $424,000 and $428,000 for the three months ended March 31, 2019 and 2018, respectively. Stock–based compensation is included in “Salaries, wages and benefits” in the interim condensed consolidated statements of operations.

 

At March 31, 2019, the Company had $5,343,000 of unrecognized compensation cost related to unvested stock–based compensation awards. This unrecognized compensation cost will be amortized over an approximate three-year period.

 

 

Stock Options

 

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

 

   

March 31, 2019

   

December 31, 2018

 

Risk–free interest rate

    2.60%       2.46%  

Expected volatility

    18.1%       16.1%  

Expected life, in years

    1.0       3.0  

Expected dividend yield

    2.65%       3.29%  

 

The following table summarizes our outstanding stock options for the three months ended March 31, 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

    8,475       77.72        

Options exercised

    (318,152 )     72.36        

Options outstanding at March 31, 2019

    853,704     $ 70.77     $ 4,374,000  
                         

Options exercisable at March 31, 2019

    178,729     $ 64.42     $ 2,048,000  

 

Options

Outstanding

March 31, 2019

     

Exercise Prices

 

Weighted Average

Exercise Price

   

Weighted Average

Remaining Contractual

Life in Years

 
159,668       $52.93 -

$62.78

    61.11       2.6  
694,036       $72.94 -

$77.72

    73.00       2.9  
853,704                 70.77       2.8  

 

 

 

Note 14 – Income Taxes

 

The income tax provision for the three months ended March 31, 2019 is $7,392,000 (an effective income tax rate of 25.8%). The income tax provision and effective tax rate for the three months ended March 31, 2019 were unfavorably impacted by adjustments to unrecognized tax benefits of $200,000 but was favorably impacted by a tax benefit of $228,000 relating to the exercise of stock options. The income tax provision for the three months ended March 31, 2019 was favorably impacted by the higher pre-tax book income resulting from the unrealized gain of $6,838,000 for the market value increase in our marketable equity securities portfolio.  The income tax provision for the three months ended March 31, 2018 was $200,000 (an effective income tax rate of -7.4%). The income tax provision and effective tax rate for the three months ended March 31, 2018 were unfavorably impacted by nondeductible expenses of $855,000 (primarily the non-deductible portion of the estimated potential settlement of the Caris HealthCare, L.P. Qui Tam legal matter) or -31.7% of income before taxes. The income tax provision for the three months ended March 31, 2018 was also unfavorably impacted by the lower pre-tax book income resulting from the unrealized loss of $15,517,000 for the market value decrease in our marketable equity securities portfolio. Prior to 2018, such market value changes ran through the balance sheet and did not impact our income statement.

 

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 2015 (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 $98,542,000 and $96,024,000 at March 31, 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.

 

Workers Compensation

 

For workers’ compensation, we utilize a wholly–owned Tennessee domiciled property/casualty insurance company to write coverage for NHC affiliates and for third–party customers. Policies are written for a duration of twelve months and cover only risks related to workers’ compensation losses. All customers are companies which operate in the senior care industry. Business is written on a direct basis. Direct business coverage is written for statutory limits and the insurance company’s losses in excess of $1,000,000 per claim are covered by reinsurance.

 

General and Professional Liability Lawsuits and Insurance

 

The senior care industry has experienced increases in both the number of personal injury/wrongful death claims and in the severity of awards based upon alleged negligence by nursing facilities and their employees in providing care to residents. As of March 31, 2019, we and/or our managed centers are currently defendants in 63 such claims.

 

Insurance coverage for both periods includes both primary policies and excess policies. The primary coverage is in the amount of $1.0 million per incident, $3.0 million per location with an annual primary policy aggregate limit that is adjusted on an annual basis. For 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 March 31, 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 captained 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.

 

 

 

Item 2.

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

 

Overview

 

National HealthCare Corporation (“NHC” or the “Company”) is a leading provider of senior health care services. We operate or manage, through certain affiliates, 75 skilled nursing facilities with a total of 9,510 licensed beds, 25 assisted living facilities, five independent living facilities, one behavioral health hospital and 35 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 three months ending March 31, 2019 was 90.2% compared to 89.6% for the same period a year ago. With the average length of stay decreasing for a skilled nursing patient, as well as the increased availability of assisted living facilities and home and community-based services, the challenge of maintaining desirable patient census levels has been amplified. Management has undertaken a number of steps in order to best position our current and future health care facilities. This includes working internally to examine and improve systems to be most responsive to referral sources and payors. Additionally, NHC is in various stages of partnerships with hospital systems, payors, and other post–acute alliances to better position ourselves so we are an active participant in the delivery of post-acute healthcare services.

 

Quality of Patient Care

 

CMS introduced the Five-Star Quality Rating System to help consumers, their families and caregivers compare skilled nursing facilities more easily. The Five-Star Quality Rating System gives each skilled nursing operation a rating ranging between one and five stars in various categories (five stars being the best). The Company has always strived for patient-centered care and quality outcomes as precursors to outstanding financial performance. In April 2019, CMS made significant changes to the Five-Star Quality Rating System.  The changes include revisions to the state survey inspection process, enhancements with staffing information and nurse staffing levels, and the implementation of new quality measures.  These changes will impact and potentially lower our overall quality ratings in future periods.  The table below summarizes our overall performance in these quality ratings:

 

   

As of

 
   

Mar. 31,

2019

   

Dec. 31,

2018

   

Dec. 31,

2017

 

Total number of skilled nursing facilities, end of period

    75       75       76  

Number of 4 and 5-star rated skilled nursing facilities

    64       63       62  

Percentage of 4 and 5-star rated skilled nursing facilities

    85%       84%       82%  

 

 

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

 

 

Accrued Risk Reserves

 

Our accrued professional liability and workers’ compensation reserves totaled $98,542,000 at March 31, 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

 

On August 8, 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 three months of 2019, our average Medicare per diem rate for skilled nursing facilities decreased 0.01% as compared to the same period in 2018.

 

As part of the final rule and effective October 1, 2019, CMS plans to start 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 (nursing) and non-therapy ancillary services (NTA). It also uses a sixth non-case mix component to cover utilization of SNF resources that do not vary depending on resident characteristics.

 

PDPM will replace 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 will be based heavily on the patient’s condition rather than the specific services provided by each skilled nursing facility.

 

Medicaid – Skilled Nursing Facilities

 

Effective July 1, 2018 and for the fiscal year 2019, the state of Tennessee implemented specific individual nursing facility rate increases. We estimate the resulting increase in revenue for the 2019 fiscal year will be approximately $2,100,000 annually, or $525,000 per quarter.

 

 

Effective October 1, 2018 and for the fiscal year 2019, South Carolina implemented specific individual nursing facility rate changes. The resulting increase in revenue beginning October 1, 2018 will be approximately $2,200,000 annually, or $550,000 per quarter.

 

Effective July 1, 2018 and for the fiscal year 2019, the state of Missouri approved a Medicaid rate increase of $7.76 per patient day to Missouri skilled nursing providers. We estimate the resulting increase in revenue for the 2019 fiscal year will be approximately $2,000,000 annually, or $500,000 per quarter. 

 

For the first three months of 2019, our average Medicaid per diem increased 3.16% 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

 

On November 13, 2018, CMS published a final rule which updates 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.

 

Segment Reporting

 

The Company has two reportable operating segments: (1) inpatient services, which includes the operation of skilled nursing facilities, assisted and independent living facilities, and 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 March 31, 2019

 
   

Inpatient

Services

   

Homecare

   

All Other

   

Total

 

Revenues:

                               

Net patient revenues

  $ 221,635     $ 14,476     $ -     $ 236,111  

Other revenues

    231       -       11,943       12,174  

Net operating revenues

    221,866       14,476       11,943       248,285  
                                 

Costs and expenses:

                               

Salaries, wages and benefits

    126,101       8,026       7,261       141,388  

Other operating

    62,629       4,252       2,551       69,432  

Rent

    8,291       462       1,485       10,238  

Depreciation and amortization

    9,653       61       803       10,517  

Interest

    348       -       578       926  

Total costs and expenses

    207,022       12,801       12,678       232,501  
                                 

Income (loss) from operations

    14,844       1,675       (735 )     15,784  

 

Non-operating income

    -       -       6,001       6,001  

Unrealized gains on marketable equity securities

    -       -       6,838       6,838  
                                 

Income before income taxes

  $ 14,844     $ 1,675     $ 12,104     $ 28,623  

 

 

   

Three Months Ended March 31, 2018

 
   

Inpatient

Services

   

Homecare

   

All Other

   

Total

 

Revenues:

                               

Net patient revenues

  $ 216,351     $ 15,341     $ -     $ 231,692  

Other revenues

    271       -       10,998       11,269  

Net operating revenues

    216,622       15,341       10,998       242,961  
                                 

Costs and expenses:

                               

Salaries, wages and benefits

    123,380       8,030       8,685       140,095  

Other operating

    57,835       5,279       2,058       65,172  

Rent

    8,258       487       1,484       10,229  

Depreciation and amortization

    9,461       38       843       10,342  

Interest

    396       -       844       1,240  

Total costs and expenses

    199,330       13,834       13,914       227,078  
                                 

Income (loss) from operations

    17,292       1,507       (2,916 )     15,883  

 

Non-operating loss

    -       -       (3,065 )     (3,065 )

Unrealized losses on marketable equity securities

    -       -       (15,517 )     (15,517 )
                                 

Income (loss) before income taxes

  $ 17,292     $ 1,507     $ (21,498 )   $ (2,699 )

 

 

 

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, 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 three months ended March 31, 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 three months ended March 31, 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

March 31

 
   

2019

   

2018

 
                 

Net income (loss) attributable to National Healthcare Corporation

  $ 21,269     $ (2,791 )

Non-GAAP adjustments

               

Unrealized (gains) losses on marketable equity securities

    (6,838 )     15,517  

Legal costs and charges related to Caris' legal investigation

    -       8,228  

Operating results for newly opened facilities not at full capacity

    595       555  

Share-based compensation expense

    424       428  

Provision of income taxes on non-GAAP adjustments

    1,501       (5,575 )

Non-GAAP Net income

  $ 16,951     $ 16,362  
                 

GAAP diluted earnings per share

  $ 1.39     $ (0.18 )

Non-GAAP adjustments

               

Unrealized (gains) losses on marketable equity securities

    (0.33 )     0.76  

Legal costs and charges related to Caris' legal investigation

    -       0.45  

Operating results for newly opened facilities not at full capacity

    0.03       0.03  

Share-based compensation expense

    0.02       0.02  

Non-GAAP diluted earnings per share

  $ 1.11     $ 1.08  

 

 

 

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 ended March 31, 2019 and 2018.

 

Percentage of Net Operating Revenues

 

   

Three Months Ended

March 31

 
   

2019

   

2018

 

Net operating revenues

    100.0 %     100.0 %

Costs and expenses:

               

Salaries, wages and benefits

    56.9       57.7  

Other operating

    28.0       26.8  

Facility rent

    4.1       4.2  

Depreciation and amortization

    4.2       4.3  

Interest

    0.4       0.5  

Total costs and expenses

    93.6       93.5  

Income from operations

    6.4       6.5  

Non–operating income (loss)

    2.4       (1.2 )

Unrealized gains (losses) on marketable equity securities

    2.8       (6.4 )

Income (loss) before income taxes

    11.6       (1.1 )

Income tax provision

    (3.0 )     (0.1 )

Net income (loss)

    8.6       (1.2 )

Net loss attributable to noncontrolling interest

    0.0       0.0  

Net income (loss) attributable to common stockholders of NHC

    8.6 %     (1.1 )%

 

 

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

 

Results for the quarter ended March 31, 2019 compared to the first quarter of 2018 include a 2.2% increase in net operating revenues and a 862.1% increase in net income attributable to NHC. Excluding the unrealized gains in our marketable equity securities portfolio and the other non-GAAP adjustments, non-GAAP net income for the three months ended March 31, 2019 was $16,951,000 compared to $16,362,000 for the first quarter of 2018, which is an increase of 3.6%.

 

Net operating revenues

 

Net patient revenues increased $4,419,000, or 1.9%, compared to the same period last year.

 

The total census at owned and leased skilled nursing facilities for the quarter averaged 90.2% compared to an average of 89.6% for the same quarter a year ago. Medicare per diem rates decreased 1 basis point, or 0.01%, and managed care per diem rates decreased 1.5% compared to the quarter a year ago. Medicaid and private pay per diem rates increased 3.2% and 2.9%, respectively, compared to the quarter a year ago. Overall, the composite skilled nursing facility per diem at our owned and leased skilled nursing facilities decreased 0.4% compared to the quarter a year ago.

 

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 March 31, 2019, the I-SNP increased net patient revenues approximately $3,635,000 compared to the first quarter a year ago.

 

 

In August 2018, the Company acquired a controlling ownership interest in a 14-bed behavioral health hospital. For the three months ending March 31, 2019, this hospital increased net patient revenues approximately $1,591,000 compared to the first quarter of a year ago. In October 2018, we sold a skilled nursing facility in Madisonville, Kentucky. The sale of this facility decreased net patient revenues for the first quarter of 2019 by $1,583,000 compared to the first quarter of 2018.

 

Other revenues increased $905,000, or 8.0%, 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 March 31, 2019 compared to the first quarter of 2018 is the primary reason for the increase in other revenues.

 

Total costs and expenses

 

Total costs and expenses for the first quarter of 2019 compared to the first quarter of 2018 increased $5,423,000 or 2.4%, to $232,501,000 from $227,078,000.

 

Salaries, wages and benefits increased $1,293,000, or 0.9%, to $141,388,000 from $140,095,000. Salaries, wages and benefits as a percentage of net operating revenues was 56.9% compared to 57.7% for the three months ended March 31, 2019 and 2018, respectively. The primary reason for salaries, wages and benefits being down as a percentage of net operating revenues is due to the October 2018 sale of the skilled nursing facility in Madisonville, Kentucky.

 

Other operating expenses increased $4,260,000, or 6.5%, to $69,432,000 for the 2019 period compared to $65,172,000 for the 2018 period. Other operating expenses as a percentage of net operating revenue was 28.0% compared to 26.8% for the three months ended March 31, 2019 and 2018, respectively. The increase in other operating expenses for the first quarter of 2019 compared to the first quarter of 2018 is due to the January 1, 2019 start of our I-SNP insurance plan, NHC Advantage. For the three months ended March 31, 2019, the I-SNP increased other operating expenses approximately $3,686,000 compared to the first quarter a year ago.

 

The decrease in interest expense is due from our long-term debt being paid down during 2018. At March 31, 2019, we have $55 million outstanding on our credit facility.

 

Other income (expense)

 

Non–operating income increased by $9,066,000 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 $8.5 million settlement and legal expenses, Caris’ earnings negatively impacted NHC’s non-operating income by $8,228,000 for the first quarter of 2018.

 

Income taxes

      

The income tax provision for the three months ended March 31, 2019 is $7,392,000 (an effective income tax rate of 25.8%). Excluding nondeductible expenses, we expect our corporate income tax rate for 2019 to be approximately 26.0%.

 

Noncontrolling interest

 

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

 

 

Liquidity, Capital Resources, and Financial Condition

 

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

 

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

 

   

Three Months Ended

March 31

   

Three Month Change

 
   

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

    11,601       13,306       (1,705 )     (12.8 )
                                 

Cash used in investing activities

    (2,947 )     (5,828 )     2,881       49.4  
                                 

Cash used in financing activities

    (8,875 )     (8,159 )     (716 )     (8.8 )
                                 

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

  $ 54,699     $ 66,740     $ (12,041 )     (18.0 )

 

Operating Activities

 

Net cash provided by operating activities for the three months ended March 31, 2019 was $11,601,000 as compared to $13,306,000 in the same period last year. Cash provided by operating activities consisted of net income of $21,231,000 and adjustments for non–cash items of $3,385,000. There was cash used for working capital needs in the amount of $13,046,000 for the three months ended March 31, 2019 compared to $13,705,000 for the same period a year ago. We also received cash distributions from our unconsolidated investments of $31,000 during the three months ended March 31, 2019 compared to $2,254,000 for the first quarter a year ago.

 

Investing Activities

 

Net cash used in investing activities totaled $2,947,000 for the three months ended March 31, 2019 compared to $5,828,000 for the three months ended March 31, 2018. Cash used for property and equipment additions was $5,874,000 and $7,100,000 for the three months ended March 31, 2019 and 2018, respectively. The Company collected notes receivable of $353,000 and $431,000 for the three months ended March 31, 2019 and 2018, respectively. Sales of restricted marketable securities, net of purchases, resulted in cash of $3,011,000 and $841,000 for the three months ended March 31, 2019 and 2018, respectively.

 

Financing Activities 

 

Net cash used in financing activities totaled $8,875,000 and $8,159,000 for the three months ending March 31, 2019 and 2018, respectively. Cash used for dividend payments to common stockholders totaled $7,623,000 in the current year period compared to $7,297,000 for the same period a year ago. In the current period, $579,000 was provided by the issuance of common stock compared to $1,067,000 in the prior year period. In the current period, repurchases of common stock totaled $872,000 compared to $867,000 in the prior period.

 

Shortterm liquidity

 

We expect to meet our short-term liquidity requirements primarily from our cash flows from operating activities. In addition to cash flows from operations, our current cash on hand of $38,194,000, marketable securities of $147,061,000, and as needed, our borrowing capacity on the credit facility, are expected to be adequate to meet our contractual obligations, operating liquidity, and our growth and development plans in the next twelve months.

 

 

Longterm liquidity

 

We expect to meet our long-term liquidity requirements primarily from our cash flows from operating activities, our current cash on hand of $38,194,000, marketable securities of $147,061,000 and our borrowing capacity on the credit facility. At March 31, 2019, the outstanding balance on the credit facility is $55,000,000; therefore, leaving $55,000,000 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

 

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.

 

 

New Accounting Pronouncements

 

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

 

 

ForwardLooking Statements

 

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

 

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

 

 

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.

 

 

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 March 31, 2019, we have available for sale marketable debt securities in the amount of $172,807,000. 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 March 31, 2019, the Company has $55,000,000 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 $550,000.

 

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 March 31, 2019, the fair value of our marketable equity securities is approximately $147,061,000. Of the $147.0 million equity securities portfolio, our investment in NHI comprises approximately $128.1 million, or 87%, of the total fair value. We manage our exposure to NHI by closely monitoring the financial condition, performance, and outlook of the company. Hypothetically, a 10% change in quoted market prices would result in a related increase or decrease in the fair value of our equity investments of approximately $14.7 million. At March 31, 2019, our equity securities had unrealized gains of $116.9 million. Of the $116.9 million of unrealized gains, $103.4 million is related to our investment in NHI.

 

 

Item 4.

Controls and Procedures.

 

As of March 31, 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 March 31, 2019.

 

The Company adopted the new lease accounting guidance in ASU 2016-02 on January 1, 2019 and began using new lease accounting software.  The implementation of the new lease accounting standard and lease accounting software included additions to our internal controls, policies and procedures.  There have been no other changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

 

 

Item 1.

Legal Proceedings.

 

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

 

 

Item 1A.

Risk Factors.

 

During the three months ended March 31, 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

 

 

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

         

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

  

 

SIGNATURES

 

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

 

 

NATIONAL HEALTHCARE CORPORATION

 

(Registrant)

   

Date: May 9, 2019

/s/ Stephen F. Flatt                   

 

Stephen F. Flatt

 

Chief Executive Officer

   
   

Date: May 9, 2019

/s/ Brian F. Kidd                     

 

Brian F. Kidd

 

Senior Vice President and Controller

 

(Principal Accounting Officer)

 

40