NATIONAL HEALTHCARE CORP - Quarter Report: 2020 September (Form 10-Q)

nhc20200930_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ____________

Commission file number 001-13489



(Exact name of registrant as specified in its Charter)

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

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

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

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

Title of each class

Trading

Symbols(s)

Name of each exchange on which registered

Common, $0.01 par value

NHC

NYSE American

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

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

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

Large Accelerated filer ☒	Accelerated filer ☐

Non–accelerated filer ☐	Smaller reporting company ☐

	Emerging growth company ☐

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

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

15,359,488 shares of common stock of the registrant were outstanding as of November 1, 2020.

Table of Contents

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	26

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 4.	Controls and Procedures	38

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	39

Item 1A	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3.	Defaults Upon Senior Securities	39

Item 4.	Mine Safety Disclosures	39

Item 5.	Other Information	39

Item 6.	Exhibits	40

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Operations

(in thousands, except share and per share amounts)

(unaudited)

	Three Months Ended September 30						Nine Months Ended September 30
	2020			2019			2020			2019

Revenues and grant income:
Net patient revenues	$	227,383		$	235,090		$	697,149		$	706,465
Other revenues		11,111			11,977			34,463			36,038
Government stimulus income		12,132			-			36,780			-
Net operating revenues and grant income		250,626			247,067			768,392			742,503

Cost and expenses:
Salaries, wages, and benefits		151,564			152,175			455,947			441,441
Other operating		70,887			66,730			213,416			203,760
Facility rent		10,320			10,167			30,972			30,602
Depreciation and amortization		10,548			10,663			31,531			31,515
Interest		285			764			1,150			2,644
Total costs and expenses		243,604			240,499			733,016			709,962

Income from operations		7,022			6,568			35,376			32,541

Other income:
Non–operating income		6,478			6,663			20,578			20,936
Unrealized gains/(losses) on marketable equity securities		(241	)		9,312			(40,580	)		16,096

Income before income taxes		13,259			22,543			15,374			69,573
Income tax provision		(391	)		(3,167	)		(800	)		(15,284	)
Net income		12,868			19,376			14,574			54,289
Net (income)/loss attributable to noncontrolling interest		(19	)		85			(253	)		152

Net income attributable to National HealthCare Corporation	$	12,849		$	19,461		$	14,321		$	54,441

Earnings per share attributable to National HealthCare Corporation stockholders:
Basic	$	0.84		$	1.27		$	0.94		$	3.57
Diluted	$	0.84		$	1.27		$	0.93		$	3.55

Weighted average common shares outstanding:
Basic		15,310,754			15,275,709			15,304,235			15,267,250
Diluted		15,371,311			15,373,617			15,368,775			15,350,308

Dividends declared per common share	$	0.52		$	0.52		$	1.56		$	1.54

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

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NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Comprehensive Income

(unaudited – in thousands)

	Three Months Ended September 30						Nine Months Ended September 30
	2020			2019			2020			2019

Net income	$	12,868		$	19,376		$	14,574		$	54,289

Other comprehensive income:
Unrealized gains on investments in restricted marketable debt securities		632			855			2,883			7,049
Reclassification adjustment for realized gains on sales of restricted marketable debt securities		(122	)		(117	)		(135	)		(117	)
Income tax expense related to items of other comprehensive income		(107	)		(155	)		(577	)		(1,456	)
Other comprehensive income, net of tax		403			583			2,171			5,476

Net (income)/loss attributable to noncontrolling interest		(19	)		85			(253	)		152

Comprehensive income attributable to National HealthCare Corporation	$	13,252		$	20,044		$	16,492		$	59,917

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

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NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Balance Sheets

(in thousands)

	September 30, 2020			December 31, 2019
	unaudited
Assets
Current Assets:
Cash and cash equivalents	$	183,765		$	50,334
Restricted cash and cash equivalents, current portion		10,623			8,944
Marketable equity securities		111,873			152,453
Restricted marketable debt securities, current portion		19,249			20,576
Accounts receivable		84,595			92,975
Inventories		7,188			7,441
Prepaid expenses and other assets		3,682			6,635
Notes receivable, current portion		1,253			1,695
Total current assets		422,228			341,053

Property and Equipment:
Property and equipment, at cost		1,041,832			1,017,204
Accumulated depreciation and amortization		(511,216	)		(481,774	)
Net property and equipment		530,616			535,430

Other Assets:
Restricted cash and cash equivalents, less current portion		1,730			1,732
Restricted marketable debt securities, less current portion		122,791			126,830
Deposits and other assets		5,503			5,124
Operating lease right-of-use assets		185,003			202,909
Goodwill		21,341			20,995
Notes receivable, less current portion		12,679			13,384
Investments in unconsolidated companies		36,888			39,191
Total other assets		385,935			410,165
Total assets	$	1,338,779		$	1,286,648

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

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NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Balance Sheets (continued)

(in thousands, except share and per share amounts)

	September 30, 2020		December 31, 2019
	unaudited
Liabilities and Stockholders’ Equity
Current Liabilities:
Trade accounts payable	$	19,890	$	18,903
Finance lease obligations, current portion		4,357		4,166
Operating lease liabilities, current portion		25,146		24,243
Accrued payroll		60,690		69,826
Amounts due to third party payors		15,642		15,108
Accrued risk reserves, current portion		29,873		29,520
Other current liabilities		23,431		15,029
Provider relief funds		21,404		-
Contract liabilities		51,253		-
Dividends payable		7,987		7,968
Current maturities of long-term debt		-		10,000
Total current liabilities		259,673		194,763

Finance lease obligations, less current portion		11,671		14,963
Operating lease liabilities, less current portion		159,857		178,666
Accrued risk reserves, less current portion		76,080		66,491
Refundable entrance fees		7,462		7,455
Deferred income taxes		14,185		24,012
Other noncurrent liabilities		32,674		21,229
Total liabilities		561,602		507,579

Equity:
Common stock, $.01 par value; 45,000,000 shares authorized; 15,359,488 and 15,332,206 shares, respectively, issued and outstanding		153		153
Capital in excess of par value		225,616		222,787
Retained earnings		543,460		553,093
Accumulated other comprehensive income		4,731		2,560
Total National HealthCare Corporation stockholders’ equity		773,960		778,593
Noncontrolling interest		3,217		476
Total equity		777,177		779,069
Total liabilities and equity	$	1,338,779	$	1,286,648

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

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NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Cash Flows

(unaudited – in thousands)

	Nine Months Ended September 30
	2020			2019
Cash Flows From Operating Activities:
Net income	$	14,574		$	54,289
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		31,531			31,515
Equity in earnings of unconsolidated investments		(8,448	)		(7,548	)
Distributions from unconsolidated investments		10,050			3,884
Unrealized (gains)/losses on marketable equity securities		40,580			(16,096	)
Gains on sale of restricted marketable debt securities		(135	)		(117	)
Gains on acquisitions of equity method investments		(1,707	)		(1,975	)
Deferred income taxes		(10,405	)		6,187
Stock–based compensation		1,807			1,448
Changes in operating assets and liabilities:
Accounts receivable		9,604			5,234
Income tax receivable		-			(2,330	)
Inventories		344			(304	)
Prepaid expenses and other assets		2,992			169
Trade accounts payable		207			(1,066	)
Accrued payroll		(9,545	)		(8,121	)
Amounts due to third party payors		388			(197	)
Accrued risk reserves		9,977			2,241
Provider relief funds		21,404			-
Contract liabilities		51,253			-
Other current liabilities		7,984			8,345
Other noncurrent liabilities		11,445			(674	)
Net cash provided by operating activities		183,900			74,884
Cash Flows From Investing Activities:
Purchases of property and equipment		(17,717	)		(19,670	)
Acquisition of equity method investment, net of cash acquired		(6,648	)		(15,589	)
Investments in unconsolidated companies		(305	)		(197	)
Investments in notes receivable		(425	)		(5,462	)
Collections of notes receivable		1,572			1,010
Purchases of restricted marketable debt securities		(19,754	)		(11,187	)
Proceeds from sale of restricted marketable debt securities		28,004			41,272
Net cash used in investing activities		(15,273	)		(9,823	)
Cash Flows From Financing Activities:
Borrowings under credit facility		40,000			-
Repayments under credit facility		(50,000	)		(25,000	)
Principal payments under finance lease obligations		(3,101	)		(2,920	)
Dividends paid to common stockholders		(23,935	)		(23,240	)
Noncontrolling interest contributions/(distributions)		2,488			(566	)
Issuance of common shares		1,075			1,383
Repurchase of common shares		(53	)		(872	)
Entrance fee deposits/(refunds)		7			(684	)
Net cash used in financing activities		(33,519	)		(51,899	)
Net Increase in Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents		135,108			13,162
Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents, Beginning of Period		61,010			54,920
Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents, End of Period	$	196,118		$	68,082

Balance Sheet Classifications:
Cash and cash equivalents	$	183,765		$	59,261
Restricted cash and cash equivalents		12,353			8,821
Total Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents	$	196,118		$	68,082

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

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NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share and per share amounts)

(unaudited)

	Common Stock					Capital in Excess of			Retained Earnings			Accumulated Other Comprehensive			Non- controlling		Total Stockholders’
	Shares			Amount		Par Value			Earnings			Income (Loss)			Interest		Equity
Balance at January 1, 2020		15,332,206		$	153	$	222,787		$	553,093		$	2,560		$	476	$	779,069
Net income/(loss)		–			–		–			(26,852	)		–			36		(26,816	)
Noncontrolling interest contributions		–			–		–			–			–			281		281
Other comprehensive loss		–			–		–			–			(2,012	)		–		(2,012	)
Stock–based compensation		–			–		466			–			–			–		466
Shares sold – options exercised		15,006			–		400			–			–			–		400
Repurchase of common shares		(611	)		–		(53	)		–			–			–		(53	)
Dividends declared to common stockholders ($0.52 per share)		–			–		–			(7,980	)		–			–		(7,980	)
Balance at March 31, 2020		15,346,601		$	153	$	223,600		$	518,261		$	548		$	793		743,355

Net income		–			–		–			28,324			–			198		28,522
Noncontrolling interest contributions		–			–		–			–			–			244		244
Other comprehensive income		–			–		–			–			3,780			–		3,780
Stock–based compensation		–			–		823			–			–			–		823
Shares sold – options exercised		11,073			–		549			–			–			–		549
Repurchase of common shares		(186	)		–		-			–			–			–		-
Dividends declared to common stockholders ($0.52 per share)		-			–		-			(7,986	)		–			–		(7,986	)
Balance at June 30, 2020		15,357,488		$	153	$	224,972		$	538,599		$	4,328		$	1,235	$	769,287

Net income		–			–		–			12,849			–			19		12,868
Noncontrolling interest contributions		–			–		–			–			–			1,963		1,963
Other comprehensive income		–			–		–			–			403			–		403
Stock–based compensation		–			–		518			–			–			–		518
Shares sold – options exercised		2,000			–		126			–			–			–		126
Dividends declared to common stockholders ($0.52 per share)		–			–		–			(7,988	)		–			–		(7,988	)
Balance at September 30, 2020		15,359,488		$	153	$	225,616		$	543,460		$	4,731		$	3,217	$	777,177

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NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Stockholders’ Equity (con’t)

(in thousands, except share and per share amounts)

(unaudited)

	Common Stock					Capital in Excess of			Retained			Accumulated Other Comprehensive			Non- controlling			Total Stockholders’
	Shares			Amount		Par Value			Earnings			Income (Loss)			Interest			Equity
Balance at January 1, 2019		15,255,002		$	153	$	219,435		$	516,435		$	(2,745	)	$	1,179		$	734,457
Net income/(loss)		–			–		–			21,269			–			(38	)		21,231
Other comprehensive income		–			–		–			–			2,548			–			2,548
Stock–based compensation		–			–		424			–			–			–			424
Shares sold – options exercised		59,384			–		579			–			–			–			579
Repurchase of common shares		(10,396	)		–		(872	)		–			–			–			(872	)
Dividends declared to common stockholders ($0.50 per share)		–			–		–			(7,652	)		–			–			(7,652	)
Balance at March 31, 2019		15,303,990		$	153	$	219,566		$	530,052		$	(197	)	$	1,141			750,715

Net income/(loss)		–			–		–			13,711			–			(29	)		13,682
Noncontrolling interest distributions		–			–		–			–			–			(17	)		(17	)
Other comprehensive income		–			–		–			–			2,345			–			2,345
Stock–based compensation		–			–		684			–			–			–			684
Shares sold – options exercised		14,800			–		804			–			–			–			804
Dividends declared to common stockholders ($0.52 per share)		–			–		–			(7,966	)		–			–			(7,966	)
Balance at June 30, 2019		15,318,790		$	153	$	221,054		$	535,797		$	2,148		$	1,095		$	760,247

Net income/(loss)		–			–					19,461			–			(85	)		19,376
Noncontrolling interest distributions		–			–		–			–			–			(549	)		(549	)
Other comprehensive income		–			–		–			–			583			–			583
Stock–based compensation		–			–		340			–			–			–			340
Dividends declared to common stockholders ($0.52 per share)		–			–		–			(7,966	)		–			–			(7,966	)
Balance at September 30, 2019		15,318,790		$	153	$	221,394		$	547,292		$	2,731		$	461		$	772,031

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

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NATIONAL HEALTHCARE CORPORATION

Notes to Interim Condensed Consolidated Financial Statements

September 30, 2020

(unaudited)

Note 1 – Description of Business

National HealthCare Corporation (“NHC” or the “Company”) is a leading provider of senior health care services. As of September 30, 2020, we operate or manage, through certain affiliates, 76 skilled nursing facilities with a total of 9,633 licensed beds, 24 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 U.S. 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, 2019 consolidated financial statements and notes thereto which contain accounting policies and other disclosures required by U.S. GAAP. Our audited December 31, 2019 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, 2019 consolidated financial statements 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, including but not limited to, the potential future effects of the novel coronavirus (“COVID-19”).

Recently Adopted Accounting Guidance

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. The Company adopted the standard as of January 1, 2020. This standard did not have a material impact on our interim condensed consolidated financial statements; however, we did update our processes specifically in how we monitor credit related declines in market value for our available for sale marketable debt securities.

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On December 18, 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU is part of the FASB’s overall simplification initiative to reduce the costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. This ASU removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation, and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU No. 2019-12 is effective for reporting periods beginning after December 15, 2020, with early adoption permitted. On January 1, 2020, the Company early adopted the provisions of ASU No. 2019-12. This standard did not have a material impact on our interim condensed consolidated financial statements.

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. Contract liabilities are recorded for payments the Company receives in which performance obligations have not been completed.

The Company determines the transaction price based on established billing rates reduced by 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. Credit losses are recorded as bad debt expense, which is included as a component of other operating expenses in the interim condensed consolidated statements of operations. Bad debt expense was $1,463,000 and $3,538,000 for the three months and nine months ended September 30, 2020. For the three months and nine months ended September 30, 2019, bad debt expense was $827,000 and $2,866,000, respectively. As of September 30, 2020, and December 31, 2019, the Company has recorded allowance for doubtful accounts of $6,295,000 and $4,451,000, respectively, as our best estimate of expected 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.

Government Grants

In the absence of specific guidance to account for government grants under U.S. GAAP, we have concluded to account for government grants in accordance with International Accounting Standard (“IAS”) 20, Accounting for Government Grants and Disclosure of Government Assistance, and as such, we recognize grant income on a systematic basis in line with the recognition of specific expenses and lost revenues for which the grants are intended to compensate.

Segment Reporting

In accordance with the provisions of Accounting Standards Codification ("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 7 for further disclosure of the Company’s operating segments.

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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 $10,921,000 and $24,535,000 for the three months and nine months ended September 30, 2020, respectively. General and administrative costs were $7,170,000 and $18,991,000 for the three months and nine months ended September 30, 2019, respectively.

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.

The Company records right-of-use assets and liabilities on the interim 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 interim condensed consolidated balance sheets and are expensed on a straight-line basis over the lease term in our interim condensed consolidated statements of operations.

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. 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.

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.

Goodwill

We perform our annual goodwill impairment assessment on the first day of the fourth quarter. At September 30, 2020, the Company reviewed the carrying value of goodwill for impairment indicators due to the events and circumstances surrounding the COVID-19 pandemic. As a result of the review, there were no impairment indicators regarding the Company’s goodwill during the three months ended September 30, 2020 that required a quantitative test to be performed. However, our accounting estimates could materially change from period to period due to changing market factors, including those driven by COVID-19. We will continue to monitor future events, changes in circumstances, and the potential impact thereof. If actual results are not consistent with our assumptions and estimates, we may be exposed to future goodwill impairment losses.

Accrued Risk Reserves

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

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

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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

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 noncurrent liabilities section of our consolidated balance sheets. As of September 30, 2020, and December 31, 2019, we have recorded refundable entrance fees in the amount of $7,462,000 and $7,455,000, respectively.

We also 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 with a corresponding charge to income. As of September 30, 2020, and December 31, 2019, we have recorded a future service obligation liability in the amount of $2,035,000. This obligation is reflected within other noncurrent liabilities in the interim condensed consolidated balance sheets.

Other Noncurrent Liabilities

Other noncurrent liabilities include reserves primarily related to various uncertain income tax positions, deferred revenue, and obligations to provide future services to our CCRC residents. Deferred revenue includes the deferred gain on the sale of assets to National Health Corporation (“National”) and the non-refundable portion (10%) of CCRC entrance fees being amortized over the remaining life expectancies of the residents.

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 – Coronavirus Pandemic ("COVID-19")

In early March 2020, COVID-19, a disease caused by the novel strain of the coronavirus, was characterized as a pandemic by the World Health Organization. The COVID-19 virus has spread rapidly, with every state in the United States (“U.S.”) having confirmed cases. The rapid spread has resulted in authorities around the U.S. implementing various measures to contain the virus, such as quarantines, shelter-in-place orders and business shutdowns. The pandemic and these containment measures have had an adverse impact on the Company's results of operations in 2020. The financial results for the second and third quarters of 2020 have been significantly impacted by COVID-19 with census in our skilled nursing facilities dropping to 81.3% during the third quarter of 2020, while we also incurred significantly increased operating expenses.

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The U.S. government enacted several laws beginning in March 2020 designed to help the nation respond to the COVID-19 pandemic. The new laws impact healthcare providers in a variety of ways, but the largest legislation from a monetary relief perspective is the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The CARES Act provided $2.2 trillion of economy-wide financial stimulus in the form of financial aid to individuals, businesses, nonprofits, states and municipalities. The CARES Act originally appropriated $100 billion to establish the Public Health and Social Services Emergency Fund, which is referred to as the Provider Relief Fund. The Provider Relief Fund is administered through grants and other mechanisms to skilled nursing providers, home health providers, hospitals, and other Medicare and Medicaid enrolled providers to cover any unreimbursed health care related expenses or lost revenue attributable to the public health emergency resulting from COVID-19. On April 24, 2020, another $75 billion was added to the Provider Relief Fund by the Paycheck Protection Program and Health Care Enactment Act, bringing the total amount appropriated in the fund to $175 billion.

During the second and third quarters of 2020, we received four disbursements from the Provider Relief Fund which totaled $58,184,000. These funds come with terms and condition certifications in which all providers are required to submit documents to ensure the funds will be used for healthcare-related expenses or lost revenue attributable to COVID-19. Of the $58,184,000 of funds received, the Company recorded $12,132,000 and $36,780,000 of government stimulus income for the three and nine months ended September 30, 2020, respectively. As of September 30, 2020, amounts not recognized as income are $21,404,000 and are reflected in the current liability section of our interim condensed consolidated balance sheet (provider relief funds). We anticipate incurring additional COVID-19 related expenses or lost revenues in the future; therefore, at this time, we believe that we will fully utilize the remaining $21,404,000 of provider relief funds before the reporting requirement deadlines outlined by the U.S. Department of Health and Human Services (“HHS”).

The government stimulus income estimates we recorded at September 30, 2020 may change as our ability to utilize and retain the funds will depend on the magnitude and impact of the pandemic, as well as HHS' reporting requirements as they continue to change and evolve. On October 22, 2020, HHS issued an updated Post-Payment Notice of Reporting Requirements ( "October 22, 2020 Notice") which, among other changes, materially revises the definition of lost revenues that was the basis for the grant income we recognized during the three and nine months ended September 30, 2020. As a non-recognizable subsequent event, the Company's estimate as of September 30, 2020, as set forth above, has not been updated for the October 22, 2020 Notice; additional information is included in Note 17.

Additionally, as part of the CARES Act, the legislation included an expansion of the Medicare Accelerated and Advance Payment Program. The expanded Medicare Accelerated and Advance Payment Program is a streamlined version of existing policy that allows the Medicare Administrative Contractors (“MAC’s”) to issue up to three months of advance Medicare payments to help increase cash flow and liquidity to Medicare Part A and Part B providers in certain circumstances that include national emergencies. We received approximately $51,253,000 as part of this program. On October 8, 2020 as part of the Continuing Appropriations Act, 2021 and Other Extensions Act, the Centers for Medicare & Medicaid Services’ (“CMS”) amended the repayment terms for the accelerated and advance payments. These funds will begin to be applied against claims for services provided to Medicare patients after approximately one year from the date we received the funds. During the first eleven months after repayment begins, repayment will occur through an automatic recoupment of twenty-five percent of Medicare payments. During the succeeding six months, repayment will occur through an automatic recoupment of fifty percent of Medicare payments. Any remaining balance that was not paid through the recoupment process within twenty-nine months of receipt of the funds will be required to be paid on-demand, subject to an interest rate of four percent. As of September 30, 2020, the accelerated payments are reflected within contract liabilities in the interim condensed consolidated balance sheets as the related performance obligations have not been completed.

The CARES Act also provided for the temporary suspension of the automatic 2% reduction of Medicare claim reimbursement for the period of May 1, 2020 through December 31, 2020 and the deferral of the employer share of social security taxes (6.2%), effective for payments due after the March 2020 enactment date. The provision requires that the deferred taxes be paid over a two-year period with half the amount required to be paid by December 31, 2021, and the other half by December 31, 2022. As of September 30, 2020, we have deferred $14,854,000 of the Company’s share of the social security taxes. This deferral is included in other noncurrent liabilities within our interim condensed consolidated balance sheets.

Note 4 – Net Patient Revenues

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

Revenue by Service Type

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

	Three Months Ended September 30				Nine Months Ended September 30
(in thousands)	2020		2019		2020		2019
Net patient revenues:
Inpatient services	$	214,211	$	222,246	$	659,585	$	664,768
Homecare		13,172		12,844		37,564		41,697
Total net patient revenue	$	227,383	$	235,090	$	697,149	$	706,465

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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 period of care or on a per-visit basis. Typically, patients and third-party payors are billed monthly after services are performed or the patient is discharged, and payments are due based on contract terms.

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

Revenue by Payor

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

	Three Months Ended September 30						Nine Months Ended September 30
Source	2020			2019			2020			2019
Medicare		35	%		32	%		34	%		33	%
Managed Care		11	%		12	%		11	%		12	%
Medicaid		28	%		28	%		29	%		27	%
Private Pay and Other		26	%		28	%		26	%		28	%
Total		100	%		100	%		100	%		100	%

Medicare covers skilled nursing services for beneficiaries who require nursing care and/or rehabilitation services following a hospitalization of at least three consecutive days (there is temporary relief from the three-day hospital stay during the COVID-19 emergency). 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 periods of care. A period of care is defined as a length of care up to 30 days with multiple continuous periods allowed. The services covered by the payment include all disciplines of care, in addition to medical supplies, within the scope of the home health benefit.

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 revenue is recorded on an accrual basis based upon the date of services at amounts equal to its established or estimated per-visit rates.

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Contract Liabilities

Included in the Company’s condensed consolidated balance sheets are contract liabilities, which represent payments the Company receives in advance of services provided. As of September 30, 2020, the Company has recorded $51,253,000 in contract liabilities related to receipts from the Medicare Accelerated and Advance Payment Program. These funds will begin to be applied against claims for services provided to Medicare patients after approximately one year from the date we received the funds. During the first eleven months after repayment begins, repayment will occur through an automatic recoupment of twenty-five percent of Medicare payments. During the succeeding six months, repayment will occur through an automatic recoupment of fifty percent of Medicare payments. Any remaining balance that was not paid through the recoupment process within twenty-nine months of receipt of the funds will be required to be paid on-demand, subject to an interest rate of four percent. Recoupment of the accelerated payments is currently expected to begin in April 2021.

A summary of the contract liabilities are follows (in thousands):

Balance at December 31, 2019	$	-
Payments received		51,253
Payments recognized		-
Balance at September 30, 2020	$	51,253

Third Party Payors

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

Medicare and Medicaid program revenues, as well as certain Managed Care program revenues, are subject to audit and retroactive adjustment by government representatives or their agents. Settlements with third-party payors for retroactive adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient care. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and the Company’s historical settlement activity, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustment is subsequently resolved. Estimated settlements are adjusted in future periods as adjustments become known, or as years are settled or are no longer subject to such audits, reviews, and investigations. We believe that any differences between the net revenues recorded and final determination will not materially affect the consolidated financial statements. We have made provisions of approximately $15,642,000 and $15,108,000 as of September 30, 2020 and December 31, 2019, respectively, for various Medicare, Medicaid, and Managed Care claims reviews and current and prior year cost reports.

Note 5 – Other Revenues

Other revenues are outlined in the table below. Revenues from rental income include health care real estate properties owned by us and leased to third party operators. Revenues from management and accounting services include fees provided to manage and provide accounting services to other healthcare operators. 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. "Other" revenues include miscellaneous health care related earnings.

	Three Months Ended September 30				Nine Months Ended September 30
(in thousands)	2020		2019		2020		2019
Rental income	$	5,646	$	5,678	$	16,972	$	16,963
Management and accounting services fees		4,052		4,520		12,651		13,567
Insurance services		1,294		1,528		4,074		4,667
Other		119		251		766		841
Total other revenues	$	11,111	$	11,977	$	34,463	$	36,038

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 8 – Long Term Leases. Rental income reflected in the interim condensed consolidated statements of operations consisted of the following:

	Three Months Ended September 30				Nine Months Ended September 30
(in thousands)	2020		2019		2020		2019
Operating lease payments	$	5,505	$	5,482	$	16,514	$	16,450
Variable lease payments		141		196		458		513
Total rental income	$	5,646	$	5,678	$	16,972	$	16,963

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Management Fees from National

We manage five skilled nursing facilities owned by National. For the three and nine months ended September 30, 2020, we recognized management fees and interest on management fees of $920,000 and $3,399,000 from these centers, respectively. For the three months and nine months ended September 30, 2019, we recognized management fees and interest on management fees of $1,543,000 and $4,748,000 for these centers, respectively.

Insurance Services

For workers’ compensation insurance services, the premium revenues reflected in the interim condensed consolidated statements of operations for the three months and nine months ended September 30, 2020 were $779,000 and $2,441,000, respectively. For the three and nine months ended September 30, 2019, the workers’ compensation premium revenues reflected in the interim condensed consolidated statements of operations were $866,000 and $2,656,000. 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 and nine months ended September 30, 2020 were $515,000 and $1,633,000, respectively. For professional liability insurance services, the premium revenues reflected in the interim condensed consolidated statements of operations for the three months and nine months ended September 30, 2019 were $662,000 and $2,011,000, 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".

Note 6 – Non–Operating Income

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

	Three Months Ended September 30				Nine Months Ended September 30
(in thousands)	2020		2019		2020		2019
Equity in earnings of unconsolidated investments	$	3,019	$	2,747	$	8,448	$	7,548
Dividends and net realized gains on sales of securities		2,084		2,049		5,997		5,911
Interest income		1,375		1,867		4,426		5,502
Gains on acquisitions of equity method investments		-		-		1,707		1,975
Total non-operating income	$	6,478	$	6,663	$	20,578	$	20,936

Caris HealthCare, L.P. ("Caris")

Our most significant equity method investment is a 75.1% non–controlling ownership interest in Caris, a business that specializes in hospice care services. The carrying value of our investment is $35,035,000 and $36,673,000 at September 30, 2020 and December 31, 2019, respectively. The carrying amounts are included in investments in unconsolidated companies in the consolidated balance sheets. Summarized financial information of Caris for the nine months ended September 30, 2020 and 2019 is provided below (in thousands):

	Nine Months Ended September 30
	2020		2019
Net revenue	$	48,690	$	45,554
Expenses		37,753		35,410
Net income	$	10,937	$	10,144

Gains on Acquisitions of Equity Method Investments

Effective February 27, 2020, the Company expanded its controlled operations through an acquisition of the remaining ownership interest of a 166-bed skilled nursing facility in Knoxville, Tennessee. We previously held a 25% noncontrolling interest in the facility and accounted for the investment as an equity method investment. The operating results of the business have been included in the accompanying interim condensed consolidated financial statements since the remaining ownership interest acquisition date.

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Upon acquiring the remaining ownership interest, the Company recorded and increased its previously held equity interest up to fair value as of the acquisition date. This remeasurement of our equity interest at fair value resulted in a gain of $1,707,000. The gain was recorded in "Non-operating income" in the interim condensed consolidated statements of operations. Additionally, the excess of the fair value over the amounts assigned to the assets and liabilities of the investee resulted in recording goodwill in the amount of $346,000 on the acquisition date.

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

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

Note 7 – Business Segments

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

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

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

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

	Three Months Ended September 30, 2020
	Inpatient Services		Homecare		All Other			Total
Revenues and grant income:
Net patient revenues	$	214,211	$	13,172	$	-		$	227,383
Other revenues		84		-		11,027			11,111
Government stimulus income		12,132		-		-			12,132
Net operating revenues and grant income		226,427		13,172		11,027			250,626

Costs and expenses:
Salaries, wages, and benefits		132,245		8,210		11,109			151,564
Other operating		65,066		3,311		2,510			70,887
Rent		8,377		448		1,495			10,320
Depreciation and amortization		9,629		106		813			10,548
Interest		325		-		(40	)		285
Total costs and expenses		215,642		12,075		15,887			243,604

Income (loss) from operations		10,785		1,097		(4,860	)		7,022
Non-operating income		-		-		6,478			6,478
Unrealized losses on marketable equity securities		-		-		(241	)		(241	)

Income before income taxes	$	10,785	$	1,097	$	1,377		$	13,259

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

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

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

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

	Nine Months Ended September 30, 2020
	Inpatient Services		Homecare		All Other			Total
Revenues and grant income:
Net patient revenues	$	659,585	$	37,564	$	-		$	697,149
Other revenues		645		-		33,818			34,463
Government stimulus income		34,754		2,026		-			36,780
Net operating revenues and grant income		694,984		39,590		33,818			768,392

Costs and expenses:
Salaries, wages, and benefits		403,840		24,490		27,617			455,947
Other operating		194,170		11,471		7,775			213,416
Rent		25,134		1,351		4,487			30,972
Depreciation and amortization		28,826		266		2,439			31,531
Interest		1,073		-		77			1,150
Total costs and expenses		653,043		37,578		42,395			733,016

Income (loss) from operations		41,941		2,012		(8,577	)		35,376
Non-operating income		-		-		20,578			20,578
Unrealized losses on marketable equity securities		-		-		(40,580	)		(40,580	)

Income (loss) before income taxes	$	41,941	$	2,012	$	(28,579	)	$	15,374

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

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

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

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

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Note 8 – Long-Term Leases

Operating Leases

At September 30, 2020, 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. Base rent expense under both NHI lease agreements totals $34,200,000 annually with rent thereafter escalating by 4% of the increase in facility revenue over a base year. Total facility rent expense to NHI was $9,655,000 and $28,965,000 for the three months and nine months ended September 30, 2020. Total facility rent expense to NHI was $9,515,000 and $28,545,000 for the three months and nine months ended September 30, 2019.

Finance Leases

At September 30, 2020, we leased and operated 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.

Minimum Lease Payments

The following table summarizes the maturity of our finance and operating lease liabilities as of September 30, 2020 (in thousands):

	Finance Leases			Operating Leases
2021	$	5,200		$	35,354
2022		5,200			35,074
2023		5,200			34,573
2024		2,167			34,390
2025		-			34,228
Thereafter		-			48,500
Total minimum lease payments		17,767			222,119
Less: amounts representing interest		(1,739	)		(37,116	)
Present value of future minimum lease payments		16,028			185,003
Less: current portion		(4,357	)		(25,146	)
Noncurrent lease liabilities	$	11,671		$	159,857

Note 9 – Earnings per Share

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

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

	Three Months Ended September 30				Nine Months Ended September 30
	2020		2019		2020		2019
Basic:
Weighted average common shares outstanding		15,310,754		15,275,709		15,304,235		15,267,250
Net income attributable to National HealthCare Corporation	$	12,849	$	19,461	$	14,321	$	54,441
Earnings per common share, basic	$	0.84	$	1.27	$	0.94	$	3.57

Diluted:
Weighted average common shares outstanding		15,310,754		15,275,709		15,304,235		15,267,250
Effects of dilutive instruments		60,557		97,908		64,540		83,058
Weighted average common shares outstanding		15,371,311		15,373,617		15,368,775		15,350,308

Net income attributable to National HealthCare Corporation	$	12,849	$	19,461	$	14,321	$	54,441
Earnings per common share, diluted	$	0.84	$	1.27	$	0.93	$	3.55

In the above table, options to purchase 698,080 shares of our common stock have been excluded for the nine months ended September 30, 2020 due to their anti-dilutive impact.

Note 10 – 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. Any credit related decline in fair market values of our available for sale debt securities are recorded in our results of operations through an allowance for credit losses. 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 11 for a description of the Company's methodology for determining the fair value of marketable securities.

Marketable securities and restricted marketable securities consist of the following (in thousands):

	September 30, 2020				December 31, 2019
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Investments available for sale:
Marketable equity securities	$	30,176	$	111,873	$	30,176	$	152,453
Restricted investments available for sale:
Corporate debt securities		63,446		67,478		63,414		65,653
Asset-based securities		46,851		47,682		54,451		55,185
U.S. Treasury securities		13,208		13,937		13,379		13,410
State and municipal securities		12,546		12,943		12,922		13,158
	$	166,227	$	253,913	$	174,342	$	299,859

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

September 30, 2020

December 31, 2019

Cost

Fair

Value

Cost

Fair

Value

NHI Common Stock

1,630,642

24,734

98,279

1,630,642

24,734

132,865

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

	September 30, 2020				December 31, 2019
	Cost		Fair Value		Cost		Fair Value
Maturities:
Within 1 year	$	22,860	$	22,795	$	15,726	$	15,767
1 to 5 years		82,046		85,640		88,314		90,408
6 to 10 years		31,145		33,605		40,126		41,231

	$	136,051	$	142,040	$	144,166	$	147,406

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Gross unrealized gains related to marketable equity securities are $81,804,000 and $122,290,000 as of September 30, 2020 and December 31, 2019, respectively. Gross unrealized losses related to marketable equity securities are $107,000 and $13,000 as of September 30, 2020 and December 31, 2019, respectively. For the three months and nine months ended September 30, 2020, the Company recognized net unrealized losses of $241,000 and $40,580,000, respectively, for the changes in fair market value of the marketable equity securities in the interim condensed consolidated statements of operations. For the three months and nine months ended September 30, 2019, the Company recognized net unrealized gains of $9,312,000 and $16,096,000, respectively, for the changes in fair market value of the marketable equity securities in the interim condensed consolidated statements of operations.

Gross unrealized gains related to available for sale marketable debt securities are $6,727,000 and $3,407,000 as of September 30, 2020 and December 31, 2019, respectively. Gross unrealized losses related to available for sale marketable debt securities are $738,000 and $167,000 as of September 30, 2020 and December 31, 2019, respectively. The Company’s unrealized losses in our available for sale marketable debt securities were determined to be non-credit related.

The Company has not recognized any credit related impairments for the nine months ending September 30, 2020 and 2019.

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.

Proceeds from the sale of available for sale marketable debt securities during the nine months ended September 30, 2020 and 2019 were $28,004,000 and $41,272,000, respectively. Investment gains of $135,000 and $117,000 were realized on these sales during the nine months ended September 30, 2020 and 2019, respectively. No sales were reported for marketable equity securities for the nine months ended September 30, 2020 and 2019, respectively.

Note 11 – Fair Value Measurements

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

	Level 1 – The valuation is based on quoted prices in active markets for identical instruments.
	Level 2 – The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model–based valuation techniques for which all significant assumptions are observable in the market.
	Level 3 – The valuation is based on unobservable inputs that are supported by minimal or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar techniques that incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument, or valuations that require significant management judgment or estimation.

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

The following table summarizes fair value measurements by level at September 30, 2020 and December 31, 2019 for assets and liabilities measured at fair value on a recurring basis (in thousands):

	Fair Value Measurements Using
September 30, 2020	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	$	183,765	$	183,765	$	–	$	–
Restricted cash and cash equivalents		12,353		12,353		–		–
Marketable equity securities		111,873		111,873		–		–
Corporate debt securities		67,478		46,513		20,965		–
Mortgage–backed securities		47,682		–		47,682		–
U.S. Treasury securities		13,937		13,937		–		–
State and municipal securities		12,943		2,004		10,939		–
Total financial assets	$	450,031	$	370,445	$	79,586	$	–

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	Fair Value Measurements Using
December 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	$	50,334	$	50,334	$	–	$	–
Restricted cash and cash equivalents		10,676		10,676		–		–
Marketable equity securities		152,453		152,453		–		–
Corporate debt securities		65,653		48,584		17,069		–
Asset - backed securities		55,185		–		55,185		–
U.S. Treasury securities		13,410		13,410		–		–
State and municipal securities		13,158		1,975		11,183		–
Total financial assets	$	360,869	$	277,432	$	83,437	$	–

Note 12 – Long–Term Debt

Long–term debt consists of the following (dollars in thousands):

	Maturity	September 30, 2020		December 31, 2019

Credit facility, interest payable monthly	2020	$	-	$	10,000
Less current portion			-		(10,000	)
Total long-term debt		$	-	$	-

On August 13, 2020, NHC terminated the credit facility. At September 30, 2020, the Company does not have a credit facility in place.

Note 13 - Stock Repurchase Program

In August 2020, the Board of Directors authorized a common stock purchase program. The program allows for repurchases of up to $25 million of its common stock. During the nine months ended September 30, 2020, the Company repurchased 797 shares of its common stock for a total cost of $53,000. The shares were funded from cash on hand and were cancelled and returned to the status of authorized but unissued. The plan expires on August 31, 2021.

Note 14 – Stock–Based Compensation

NHC recognizes stock–based compensation expense for all stock options granted over the requisite service period using the fair value at the date of grant using the Black–Scholes pricing model. Stock–based compensation totaled $518,000 and $340,000 for the three months ended September 30, 2020 and 2019, respectively. Stock-based compensation totaled $1,807,000 and $1,448,000 for the nine months ended September 30, 2020 and 2019, respectively. Stock–based compensation is included in “Salaries, wages and benefits” in the interim condensed consolidated statements of operations.

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At September 30, 2020, the Company had $3,024,000 of unrecognized compensation cost related to unvested stock–based compensation awards. This unrecognized compensation cost will be amortized over an approximate two-year period.

Stock Options

The following table summarizes the significant assumptions used to value the options granted for the nine months ended September 30, 2020 and for the year ended December 31, 2019.

	September 30, 2020	December 31, 2019
Risk–free interest rate	0.85%	2.30%
Expected volatility	20.2%	17.4%
Expected life, in years	2.2	2.3
Expected dividend yield	2.92%	2.73%

The following table summarizes our outstanding stock options for the nine months ended September 30, 2020 and for the year ended December 31, 2019.

	Number of Shares			Weighted Average Exercise Price		Aggregate Intrinsic Value
Options outstanding at January 1, 2019		1,163,381		$	71.16	$	–
Options granted		53,316			77.89		–
Options exercised		(346,168	)		71.57		–
Options cancelled		(85,000	)		72.94		–
Options outstanding at December 31, 2019		785,529			71.24		–
Options granted		102,124			75.74		–
Options exercised		(33,573	)		62.46		–
Options cancelled		(3,000	)		72.94
Options outstanding at September 30, 2020		851,080		$	72.12	$	66,000

Options exercisable at September 30, 2020		215,456		$	68.35	$	18,000

Options Outstanding September 30, 2020	Exercise Prices			Weighted Average Exercise Price	Weighted Average Remaining Contractual Life in Years
153,000	$60.73	-	$64.64	62.67	2.53
698,080	$72.94	-	$86.48	74.19	1.55
851,080				72.12	1.48

Note 15 – Income Taxes

The Company's income tax provision as a percentage of our income before income taxes was 3.0% and 5.2% for the three and nine months ended September 30, 2020, respectively. The income tax provision as a percentage of income before income taxes was 14% and 22.0% for the three and nine months ended September 30, 2019, respectively.

Typically, these percentages vary from the U.S. federal statutory income tax rate of 21% primarily due to state income taxes, excess tax benefits from stock-based compensation, benefits resulting from the lapsing of statute of limitations of items in our tax contingency reserve, and non-deductible expenses. The tax benefit related to statute of limitation expirations was $2,234,000 for the three and nine months ended September 30, 2020. The tax benefit related to statute of limitation expirations was $2,064,000 for the three and nine months ended September 30, 2019.

Our quarterly income tax provision, and our estimate of our annual effective income tax rate, is subject to variation due to several factors, including volatility based on the amount of pre-tax income or loss.

The Company is no longer subject to U.S. federal and state examinations by tax authorities for years before 2017 (with certain state exceptions).

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Note 16 – 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 $105,953,000 and $96,011,000 at September 30, 2020 and December 31, 2019, 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.

General and Professional Liability Insurance and Lawsuits

The senior care industry has experienced significant increases in both the number of personal injury/wrongful death claims and in the severity of awards based upon alleged negligence by skilled nursing facilities and their employees in providing care to residents. The Company has been, and continues to be, subject to claims and legal actions that arise in the ordinary course of business, including potential claims related to patient care and treatment. The defense of these lawsuits may result in significant legal costs, regardless of the outcome, and can result in large settlement amounts or damage awards. Additional insurance is purchased through third party providers that serve to supplement the coverage provided through our wholly owned captive insurance company.

There is certain additional litigation incidental to our business, none of which, based upon information available to date, would be material to our financial position, results of operations, or cash flows. In addition, the long–term care industry is continuously subject to scrutiny by governmental regulators, which could result in litigation or claims related to regulatory compliance matters.

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 "Court"). 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 were 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. On March 14, 2020, the Court entered an Order granting the Defendant’s Motion to Dismiss. On May 6, 2020, the Court entered a Final Judgment dismissing the case.

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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. There have been several enacted and proposed federal and state relief measures as a result of COVID-19 which should provide support to us during this pandemic; however, the full benefit of any such programs would not be realized until these payments are fully implemented, government agencies issue applicable regulations, or guidance and such relief is provided.

Divestiture of Skilled Nursing Facility

On August 21, 2020, the Company entered into a definitive agreement for the sale of the real estate and operations of a skilled nursing facility in Town and Country, Missouri. This transaction is expected to be completed in the fourth quarter of 2020.

Note 17 – Subsequent Event

Provider Relief Funds Guidance

On September 19, 2020, HHS issued a six-page Post-Payment Notice of Reporting Requirements ( "September 19, 2020 Notice") pertaining to the guidance and reporting process for recipients of Provider Relief Funds. This September 19, 2020 Notice was used to estimate the government stimulus income recorded in the interim condensed consolidated statements of operations for the three and nine months ended September 30, 2020. On October 22, 2020, HHS issued a subsequent Post-Payment Notice of Reporting Requirements ( "October 22, 2020 Notice") document that materially revises the definition of lost revenues compared to the September 19, 2020 Notice. The definition of lost revenues has subsequently changed to refer to the negative year-over-year difference in 2019 and 2020 actual revenues from patient care related sources as opposed to the negative year-over-year change in net patient care operating income. As stated in Note 3, the Company's estimate for recording government stimulus income for the three and nine months ended September 30, 2020 has not been updated for the October 22, 2020 Notice. The Company's evaluation of the October 22, 2020 Notice is ongoing and its impact on our financial statements is not yet known. U.S. GAAP does not permit amounts recognized as of September 30, 2020 to be updated on the basis of new information in the October 22, 2020 Notice.

As evidenced by the October 22, 2020 Notice, HHS' interpretation of the underlying terms and conditions of these Provider Relief Fund payments, including auditing and reporting requirements, continues to change and evolve. Additional guidance or new and amended interpretations of existing guidance on the terms and conditions may result in changes in the Company's estimates, and such changes may be material. Additionally, any such changes may result in the Company's inability to recognize additional Provider Relief Fund payments or may result in derecognition of amounts previously recognized, which may be material.

Item 2.

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

Forward–Looking Statements

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

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

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

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

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

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

	●	liabilities and other claims asserted against us, including patient care liabilities, as well as the resolution of current litigation (see Note 16: Contingencies and Commitments);

	●	the uncertainty of the extent, duration and effects of the COVID-19 pandemic and the response of governments

	●	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;

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	●	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 2019 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 occur, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our shares of stock could decline, and you may lose all or part of your investment. Given these risks and uncertainties, we can give no assurances that these forward–looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them.

Overview

National HealthCare Corporation (“NHC” or the “Company”) is a leading provider of senior health care services. We operate or manage, through certain affiliates, 76 skilled nursing facilities with a total of 9,633 licensed beds, 24 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.

Impact of COVID-19

In early March 2020, COVID-19, a disease caused by the novel strain of the coronavirus, was characterized as a pandemic by the World Health Organization. The COVID-19 virus has spread rapidly, with every state in the United States (“U.S.”) having confirmed cases. The rapid spread has resulted in authorities around the U.S. implementing various measures to contain the virus, such as quarantines, shelter-in-place orders and business shutdowns. The pandemic and these containment measures have had, and are expected to continue to have, an adverse impact on the Company's results of operations.

As a provider of healthcare services, we are significantly exposed to the public health and economic effects of the COVID-19 pandemic. NHC’s primary objective has remained the same throughout the COVID-19 pandemic: that is to protect the health and safety of our patients, residents, and partners (employees). We continue to follow all guidance from Centers for Medicare and Medicaid Services (“CMS”), the Centers for Disease Control and Prevention (“CDC”), and state and local health departments to prevent the spread of the disease within our operations. The financial results for the second and third quarters of 2020 have been significantly impacted by COVID-19 with census in our skilled nursing facilities dropping to 81.3% during the third quarter of 2020, while we also incurred significantly increased operating expenses. Since the first week of March, our census has declined due to the lack of new admissions from our acute care providers and referral partners. Our operating expenses have also increased with incentive compensation being paid to our frontline partners, as well as increased costs of personal protective equipment (“PPE”), sanitizers and cleaning supplies, COVID-19 testing of our patients and partners, and food and dietary products. Besides the incentive compensation being paid to our tireless partners on the frontlines, we continue to take every possible action to support our partners with free meals on their shifts, a one-month health insurance premium holiday in April, as well as extended paid sick leave days. Despite COVID-19 disrupting operations, our capital and financial resources, including our overall liquidity, remain strong. Our liquidity and low debt levels provide us with significant flexibility to maintain the strength of our balance sheet in periods of uncertainty or stress.

At this time, we are not able to quantify the impact that the COVID-19 pandemic will have on our future financial results, but we expect the developments related to COVID-19 to adversely affect our financial performance in 2020 and 2021. The ultimate impact of the pandemic on our financial results will depend on, among other factors, the duration and severity of the pandemic, the volume of acute and post-acute healthcare patients cared for across the broader health care systems, the timing and availability of effective medical treatments and vaccines, and the impact of government actions and administrative regulations on our industry and broader economy, including future government stimulus efforts. We have received and may continue to receive payments and advances from the various federal and state initiatives. These legislative initiatives have been beneficial to partially mitigate the impact of the COVID-19 pandemic on our results of operations and financial position to date. The federal and state governments may consider additional stimulus and relief efforts, but we are unable to predict whether any of the additional stimulus measures will be enacted or their impact.

Legislation and Government Stimulus Due to COVID-19

The U.S. government enacted several laws beginning in March 2020 designed to help the nation respond to the COVID-19 pandemic. The new laws impact healthcare providers in a variety of ways, but the largest legislation from a monetary relief perspective is the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The CARES Act provided $2.2 trillion of economy-wide financial stimulus in the form of financial aid to individuals, businesses, nonprofits, states and municipalities. The CARES Act originally appropriated $100 billion to establish the Public Health and Social Services Emergency Fund, which is referred to as the Provider Relief Fund. The Provider Relief Fund is administered through grants and other mechanisms to skilled nursing providers, home health providers, hospitals, and other Medicare and Medicaid enrolled providers to cover any unreimbursed health care related expenses or lost revenue attributable to the public health emergency resulting from COVID-19. On April 24, 2020, another $75 billion was added to the Provider Relief Fund by the Paycheck Protection Program and Health Care Enactment Act, bringing the total amount appropriated in the fund to $175 billion.

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During the second and third quarters of 2020, we received four disbursements from the Provider Relief Fund which totaled $58,184,000. These funds come with terms and condition certifications in which all providers are required to submit documents to ensure the funds will be used for healthcare-related expenses or lost revenue attributable to COVID-19. Of the $58,184,000 of funds received, the Company recorded $12,132,000 and $36,780,000 of government stimulus income for the three and nine months ended September 30, 2020, respectively. As of September 30, 2020, amounts not recognized as income are $21,404,000 and are reflected in the current liability section of our interim condensed consolidated balance sheet (provider relief funds). We anticipate incurring additional COVID-19 related expenses or lost revenues in the future; therefore, at this time, we believe that we will fully utilize the remaining $21,404,000 of provider relief funds before the reporting requirement deadlines outlined by the U.S. Department of Health and Human Services (“HHS”).

Additionally, as part of the CARES Act, the legislation included an expansion of the Medicare Accelerated and Advance Payment Program. The expanded Medicare Accelerated and Advance Payment Program is a streamlined version of existing policy that allows the Medicare Administrative Contractors (“MAC’s”) to issue up to three months of advance Medicare payments to help increase cash flow and liquidity to Medicare Part A and Part B providers in certain circumstances that include national emergencies. We received approximately $51,253,000 as part of this program. On October 8, 2020 as part of the Continuing Appropriations Act, 2021 and Other Extensions Act, CMS amended the repayment terms for the accelerated and advance payments. These funds will begin to be applied against claims for services provided to Medicare patients after approximately one year from the date we received the funds. During the first eleven months after repayment begins, repayment will occur through an automatic recoupment of twenty-five percent of Medicare payments. During the succeeding six months, repayment will occur through an automatic recoupment of fifty percent of Medicare payments. Any remaining balance that was not paid through the recoupment process within twenty-nine months of receipt of the funds will be required to be paid on-demand, subject to an interest rate of four percent. As of September 30, 2020, the accelerated payments are reflected within contract liabilities in the interim condensed consolidated balance sheets as the related performance obligations have not been completed.

The CARES Act temporarily suspended Medicare sequestration beginning May 1, 2020 through December 31, 2020. The Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent. The CARES Act extends the sequestration policy through 2030 in exchange for this temporary suspension. We expect our net patient revenues to increase by approximately $2,600,000 in 2020 (2nd, 3rd, and 4th quarter impact) due to sequestration being temporarily suspended for the eight-month period.

The CARES Act also temporarily permits employers to defer the deposit and payment of the employer’s portion of the social security taxes (6.2% of employee wages) that otherwise would be due between March 27, 2020 and December 31, 2020. The provision requires that the deferred taxes be paid over a two-year period with half the amount required to be paid by December 31, 2021, and the other half by December 31, 2022. Currently, we expect the deferral of these payroll taxes to improve our liquidity and cash available for operations during 2020 by approximately $21 million to $24 million, or $7 million to $8 million per quarter (2nd, 3rd, and 4th quarter impact). As of September 30, 2020, we have deferred $14,854,000 of the Company’s share of the social security taxes. This deferral is included in other noncurrent liabilities within our interim condensed consolidated balance sheets.

We have also received from many of the states in which we operate a supplemental Medicaid payment to help mitigate the incremental costs resulting from the COVID-19 public health emergency. At this time, we expect our net patient revenues to increase by approximately $14,000,000 in 2020 due to these supplemental Medicaid payments. For the three months and nine months ended September 30, 2020, we have recorded $4,845,000 and $10,378,000, respectively, in net patient revenues in our interim condensed consolidated statements of operations for these supplemental Medicaid payments.

Provider Relief Funds Guidance

On September 19, 2020, HHS issued a six-page Post-Payment Notice of Reporting Requirements ("September 19, 2020 Notice") pertaining to the guidance and reporting process for recipients of Provider Relief Funds. This September 19, 2020 Notice was used to estimate the government stimulus income recorded in the interim condensed consolidated statements of operations for the three and nine months ended September 30, 2020. On October 22, 2020, HHS issued a subsequent Post-Payment Notice of Reporting Requirements ("October 22, 2020 Notice") document that materially revises the definition of lost revenues compared to the September 19, 2020 Notice. The definition of lost revenues has subsequently changed to refer to the negative year-over-year difference in 2019 and 2020 actual revenues from patient care related sources as opposed to the negative year-over-year change in net patient care operating income. As stated in Note 3, the Company's estimate for recording government stimulus income for the three and nine months ended September 30, 2020 has not been updated for the October 22, 2020 Notice. The Company's evaluation of the October 22, 2020 Notice is ongoing and its impact on our financial statements is not yet known. U.S. GAAP does not permit amounts recognized as of September 30, 2020 to be updated on the basis of new information in the October 22, 2020 Notice.

Summary of Goals and Areas of Focus

Occupancy

A primary area of management focus continues to be the rates of occupancy within our skilled nursing facilities. The overall census in owned and leased skilled nursing facilities for the nine months ending September 30, 2020 was 85.7% compared to 90.3% for the same period a year ago. Although our census was strong for most of the first quarter of 2020, during the second half of March, our census began to decline due to COVID-19 and the lack of new admissions from our acute care providers and referral partners. For the three months ended September 30, 2020, overall census in our owned and leased skilled nursing facilities was 81.3% compared to 90.1% in the third quarter of 2019.

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.

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Quality of Patient Care

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

The tables below summarize NHC's overall performance in these Five-Star ratings versus the skilled nursing industry as of September 30, 2020:

	NHC Ratings		Industry Ratings
Total number of skilled nursing facilities, end of period		76
Number of 4 and 5-star rated skilled nursing facilities		55
Percentage of 4 and 5-star rated skilled nursing facilities		72%		47%
Average rating for all skilled nursing facilities, end of period		4.00		3.22

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
Memory Care	New Facility	60 beds	Farragut, TN	January, 2019
Memory Care	Acquisition	60 beds	St. Peters, MO	June, 2019
Skilled Nursing	Acquisition	166 beds	Knoxville, TN	February, 2020
Assisted Living	Bed Addition	20 beds	Gallatin, TN	Under Construction
Skilled Nursing	Bed Addition	30 beds	Kingsport, TN	Under Construction

Accrued Risk Reserves

Our accrued professional liability and workers’ compensation reserves totaled $105,953,000 at September 30, 2020 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 Reimbursement Programs

Medicare – Skilled Nursing Facilities

On October 1, 2019, the new case-mix reimbursement model of Patient Driven Payment Model ("PDPM") became effective. Under PDPM, the payment to skilled nursing facilities is based heavily on the patient's condition rather than specific services provided by each skilled nursing facility. CMS' fiscal year 2020 final rule provided for an approximate net 2.4% increase, or $851 million, compared to the fiscal year 2019 levels.

On July 31, 2020, CMS released its final rule outlining fiscal year 2021 Medicare payment rates and policy changes for skilled nursing facilities, which began October 1, 2020. The fiscal year 2021 final rule provided for an approximate 2.2% increase, or $750 million, compared to fiscal year 2020 levels. The final rule continues to reflect the commitment to shifting Medicare payments from volume to value, with the continued implementation of PDPM and value-based purchasing to improve interoperability, operational quality, and safety.

For the first nine months of 2020, our average Medicare per diem rate for skilled nursing facilities increased 11.1% as compared to the same period in 2019.

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Medicaid – Skilled Nursing Facilities

Effective July 1, 2020 and for the fiscal year 2021, the state of Tennessee implemented specific individual nursing facility increases. We estimate the resulting increase in revenue for the 2021 fiscal year will be approximately $2,000,000, or $500,000 per quarter.

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

For the first nine months of 2020, our average Medicaid per diem increased 5.8% compared to the same period in 2019.

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

Medicare – Homecare Programs

In November 2019, CMS released a final rule that sets forth the implementation of the PDGM and a 30-day unit of payment as mandated by the Bipartisan Budget Act of 2018 (“BBA”). CMS projected payments to home health agencies in fiscal year 2020 would increase in aggregate by 1.3%, or $250 million. The increase reflects the 1.5% home health payment update percentage as mandated by the BBA and a 0.2% decrease in aggregate payments due to reductions made by the new rural add-on policy, also mandated by the BBA.

In June 2020, CMS released its proposed rule outlining fiscal year 2021 Medicare payment rates. CMS projects payments to home health agencies in fiscal year 2021 will increase in aggregate by 2.6%, or $540 million, based on proposed policies. The increase reflects the effects of the 2.7% home health payment update percentage and a 0.1% decrease due to reductions made by the rural add-on policy. This Rule also includes a provision to make permanent the regulatory changes related to telecommunication technologies in providing care under the Medicare home health benefit beyond the expiration of the COVID-19 public health emergency.

Segment Reporting

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

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

	Three Months Ended September 30, 2020
	Inpatient Services		Homecare		All Other			Total
Revenues and grant income:
Net patient revenues	$	214,211	$	13,172	$	-		$	227,383
Other revenues		84		-		11,027			11,111
Government stimulus income		12,132		-		-			12,132
Net operating revenues and grant income		226,427		13,172		11,027			250,626

Costs and expenses:
Salaries, wages, and benefits		132,245		8,210		11,109			151,564
Other operating		65,066		3,311		2,510			70,887
Rent		8,377		448		1,495			10,320
Depreciation and amortization		9,629		106		813			10,548
Interest		325		-		(40	)		285
Total costs and expenses		215,642		12,075		15,887			243,604

Income (loss) from operations		10,785		1,097		(4,860	)		7,022
Non-operating income		-		-		6,478			6,478
Unrealized losses on marketable equity securities		-		-		(241	)		(241	)

Income before income taxes	$	10,785	$	1,097	$	1,377		$	13,259

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

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

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

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

	Nine Months Ended September 30, 2020
	Inpatient Services		Homecare		All Other			Total
Revenues and grant income:
Net patient revenues	$	659,585	$	37,564	$	-		$	697,149
Other revenues		645		-		33,818			34,463
Government stimulus income		34,754		2,026		-			36,780
Net operating revenues and grant income		694,984		39,590		33,818			768,392

Costs and expenses:
Salaries, wages, and benefits		403,840		24,490		27,617			455,947
Other operating		194,170		11,471		7,775			213,416
Rent		25,134		1,351		4,487			30,972
Depreciation and amortization		28,826		266		2,439			31,531
Interest		1,073		-		77			1,150
Total costs and expenses		653,043		37,578		42,395			733,016

Income (loss) from operations		41,941		2,012		(8,577	)		35,376
Non-operating income		-		-		20,578			20,578
Unrealized losses on marketable equity securities		-		-		(40,580	)		(40,580	)

Income (loss) before income taxes	$	41,941	$	2,012	$	(28,579	)	$	15,374

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

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

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

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

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 any gains on the acquisitions of equity method investments is helpful in allowing investors to more accurately access the Company’s operations.

The operating results for the newly constructed healthcare facilities not at full capacity for the nine months ended September 30, 2020 include facilities that began operations from 2018 to 2020, which is one memory care facility. For the nine months ended September 30, 2019, included are facilities that began operations from 2017 to 2019, which is one skilled nursing facility, two assisted living facilities, and one memory care facility.

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

	Three Months Ended September 30						Nine Months Ended September 30
	2020			2019			2020			2019

Net income attributable to National Healthcare Corporation	$	12,849		$	19,461		$	14,321		$	54,441
Non-GAAP adjustments
Unrealized (gains)/losses on marketable equity securities		241			(9,312	)		40,580			(16,096	)
Gain on acquisitions of equity method investments		-			-			(1,707	)		(1,975	)
Operating results for newly opened facilities not at full capacity		87			152			401			884
Share-based compensation expense		518			340			1,807			1,448
Provision (benefit) of income taxes on non-GAAP adjustments		(220	)		2,293			(10,681	)		4,092
Non-GAAP Net income	$	13,475		$	12,934		$	44,721		$	42,794


GAAP diluted earnings per share	$	0.84		$	1.27		$	0.93		$	3.55
Non-GAAP adjustments
Unrealized (gains)/losses on marketable equity securities		0.01			(0.45	)		1.95			(0.78	)
Gain on acquisitions of equity method investments		-			-			(0.08	)		(0.09	)
Operating results for newly opened facilities not at full capacity		0.01			-			0.02			0.04
Share-based compensation expense		0.02			0.02			0.09			0.07
Non-GAAP diluted earnings per share	$	0.88		$	0.84		$	2.91		$	2.79

Results of Operations

The following table and discussion set forth items from the interim condensed consolidated statements of operations as a percentage of net operating revenues and grant income for the three months and nine months ended September 30, 2020 and 2019.

Percentage of Net Operating Revenues and Grant Income

	Three Months Ended September 30						Nine Months Ended September 30
	2020			2019			2020			2019
Net operating revenues and grant income:		100.0	%		100.0	%		100	%		100	%
Costs and expenses:
Salaries, wages, and benefits		60.5			61.6			59.3			59.5
Other operating		28.3			27.0			27.8			27.4
Facility rent		4.1			4.1			4.1			4.1
Depreciation and amortization		4.2			4.3			4.1			4.2
Interest		0.1			0.3			0.1			0.4
Total costs and expenses		97.2			97.3			95.4			95.6
Income from operations		2.8			2.7			4.6			4.4
Non–operating income		2.6			2.7			2.7			2.8
Unrealized gains/(losses) on marketable equity securities		(0.1	)		3.8			(5.3	)		2.2
Income before income taxes		5.3			9.2			2.0			9.4
Income tax provision		(0.2	)		(1.3	)		(0.1	)		(2.1	)
Net income		5.1			7.9			1.9			7.3
Net (income)/loss attributable to noncontrolling interest		0.0			0.0			0.0			0.0
Net income attributable to stockholders of NHC		5.1			7.9			1.9			7.3

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Results for the quarter ended September 30, 2020 compared to the third quarter of 2019 include a 1.4% increase in net operating revenues and grant income and a 6.9% increase in income from operations. Excluding the grant income recorded during the third quarter of 2020, net operating revenues decreased 3.5% compared to the third quarter of 2019. 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 September 30, 2020 was $13,475,000 compared to $12,934,000 for the third quarter of 2019, which is an increase of 4.2%.

Net operating revenues and grant income

Net patient revenues decreased $7,707,000, or 3.3%, compared to the same period last year.

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The total census at owned and leased skilled nursing facilities for the quarter averaged 81.3%, compared to an average of 90.1% for the same quarter a year ago. The decline in census is due to COVID-19 and the lack of new admissions from our acute care providers and referral partners. Our Medicare per diem rates increased 11.4% and managed care per diem rates increased 4.3% compared to the same quarter a year ago. Medicaid and private pay per diem rates increased 8.4% and 5.1%, respectively, compared to the same quarter a year ago. Overall, the composite skilled nursing facility per diem at our owned and leased skilled nursing facilities increased 7.3% compared to the same quarter a year ago.

Our Medicare per diem rates have benefited from the new case-mix reimbursement model of PDPM, which was implemented on October 1, 2019. The CARES Act also temporarily suspended Medicare sequestration beginning May 1, 2020 through December 31, 2020. The Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent. Our Medicaid per diem rates have benefited from many of the states paying a supplemental Medicaid payment to help mitigate the incremental costs resulting from the COVID-19 public health emergency. For the three months ended September 30, 2020, we have recorded $4,845,000 due to these supplemental Medicaid payments.

In February 2020, the Company acquired the remaining 75% ownership interest in a 166-bed skilled nursing facility in Knoxville, Tennessee. For the three months ended September 30, 2020, this skilled nursing facility increased net patient revenues approximately $3,503,000 compared to the third quarter of 2019.

Other revenues decreased $866,000, or 7.2%, compared to the same quarter last year, as further detailed in Note 5 to our interim condensed consolidated financial statements.

During the three months ended September 30, 2020, we recorded $12,132,000 in government stimulus income related to funds received from the CARES Act Provider Relief Fund. See Note 3 - Coronavirus Pandemic for additional information.

Total costs and expenses

Total costs and expenses for the three months ended September 30, 2020 compared to the same period of 2019 increased $3,105,000, or 1.3%, to $243,604,000 from $240,499,000.

Salaries, wages, and benefits decreased $611,000, or 0.4%, to $151,564,000 from $152,175,000. Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 60.5% compared to 61.6% for the three months ended September 30, 2020 and 2019, respectively. The primary reason for salaries and wages decreasing was the implementation of expense controlling measures among our all of operations to mitigate the decrease in our occupancy among our skilled nursing and assisted living facilities, which also includes temporary pay reductions for our corporate office personnel. The expense controlling measures were offset by the incentive compensation, or "combat pay", paid to our frontline partners in fighting the COVID-19 pandemic. We incurred approximately $2,506,000 in incentive compensation related to COVID-19 for the three months ended September 30, 2020. For the three months ended September 30, 2020, we also incurred approximately $1,863,000 in salaries and wages from the skilled nursing facility that we acquired in February 2020, compared to the third quarter of 2019.

Other operating expenses increased $4,157,000, or 6.2%, to $70,887,000 for the 2020 period compared to $66,730,000 for the 2019 period. Other operating expenses as a percentage of net operating revenues and grant income was 28.3% and 27.0% for the three months ended September 30, 2020 and 2019, respectively. During the third quarter of 2020, we incurred approximately $8,419,000 in COVID-19 related expenses in purchasing personal protective equipment, nursing supplies, and lab and testing supplies. The expense controlling efforts have helped mitigate the increase in other operating expenses due to COVID-19. Excluding the COVID-19 related expenses, other operating expenses have decreased $4,262,000, or 6.4%, for the three months ended September 30, 2020 compared to the third quarter of 2019.

The decrease in interest expense is due from our long-term debt being paid off in the second quarter of 2020. At September 30, 2020, we have no long-term debt outstanding.

Other income

Non–operating income decreased by $185,000 compared to the same period last year, as further detailed in Note 6 to our interim condensed consolidated financial statements.

Income taxes

The income tax provision for the three months ended September 30, 2020 is $391,000 (an effective income tax rate of 2.9%). Excluding certain items, we expect our corporate (federal and state) income tax rate for 2020 to be approximately 26.0%. For the three months ended September 30, 2020, our income tax provision benefitted primarily from the statute of limitation expirations of our income tax contingency reserves of $2,234,000.

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Noncontrolling interest

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

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Results for the nine months ended September 30, 2020 compared to the first nine months of 2019 include a 3.5% increase in net operating revenues and grant income and an 8.7% increase in income from operations. Excluding the grant income recorded for the nine months ended September 30,2020, net operating revenues would have decreased 1.5% compared to the same nine-month period in 2019. Excluding the unrealized gains in our marketable equity securities portfolio and the other non-GAAP adjustments, non-GAAP net income for the nine months ended September 30, 2020 was $44,721,000 compared to $42,794,000 for the same period of 2019, which is an increase of 4.5%.

Net operating revenues and grant income

Net patient revenues decreased $9,316,000, or 1.3%, compared to the same period last year.

The total census at owned and leased skilled nursing facilities for the first nine months of 2020 averaged 85.7% compared to an average of 90.3% for the same period a year ago. The decline in census is due to COVID-19 and the lack of new admissions from our acute care providers and referral partners. Our Medicare per diem rates increased 11.1% and managed care per diem rates increased 3.0% compared to the same period a year ago. Medicaid and private pay per diem rates increased 5.8% and 2.7%, respectively, compared to the same period a year ago. Overall, the composite skilled nursing facility per diem at our owned and leased skilled nursing facilities increased 4.2% compared to the same period a year ago.

Our Medicare per diem rates have benefited from the new case-mix reimbursement model of PDPM, which was implemented on October 1, 2019. The CARES Act also temporarily suspended Medicare sequestration beginning May 1, 2020 through December 31, 2020. The Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent. Since March 2020, our Medicaid per diem rates benefited from many of the states paying a supplemental Medicaid payment to help mitigate the incremental costs resulting from the COVID-19 public health emergency. For the nine months ended September 30, 2020, we have recorded $10,378,000 due to these supplemental Medicaid payments.

In February 2020, the Company acquired the remaining 75% ownership interest in a 166-bed skilled nursing facility in Knoxville, Tennessee. For the nine months ended September 30, 2020, this skilled nursing facility increased net patient revenues approximately $7,896,000 compared to the same period in the prior year.

Our homecare operations had a decline in net patient revenues of approximately $4,134,000 in the first nine months of 2020 compared to the same period of 2019. Our homecare net patient revenue decline was primarily due to volume declines in the first and second quarter due to COVID-19.

Other revenues decreased $1,575,000, or 4.4%, compared to the same period last year, as further detailed in Note 5 to our interim condensed consolidated financial statements.

During the nine months ended September 30, 2020, we recorded $36,780,000 in government stimulus income related to funds received from the Provider Relief Fund. See Note 3 - Coronavirus Pandemic for additional information.

Total costs and expenses

Total costs and expenses for the nine months ended September 30, 2020 compared to the same period of 2019 increased $23,054,000 or 3.2%, to $733,016,000 from $709,962,000.

Salaries, wages, and benefits increased $14,506,000, or 3.3%, to $455,947,000 from $441,441,000. Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 59.3% compared to 59.5% for the nine months ended September 30, 2020 and 2019, respectively. The primary reason for salaries and wages increasing is due to the incentive compensation, or "combat pay", paid to our frontline partners in fighting the COVID-19 pandemic. We incurred approximately $9,220,000 in incentive compensation related to COVID-19 for the nine months ended September 30, 2020. For the nine months ended September 30, 2020, we also incurred approximately $4,259,000 in salaries and wages from the skilled nursing facility that we acquired in February 2020, compared to the same period of 2019. Due to COVID-19, we have implemented expense controlling measures within all of our operations that have mitigated the increase in salaries and wages, including temporary pay reductions for our corporate office personnel.

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Other operating expenses increased $9,656,000, or 4.7%, to $213,416,000 for the 2020 period compared to $203,760,000 for the 2019 period. Other operating expenses as a percentage of net operating revenue was 27.8% and 27.4% for the nine months ended September 30, 2020 and 2019. During the first nine months of 2020, we incurred $15,048,000 in COVID-19 related expenses in purchasing personal protective equipment, nursing supplies, and lab and testing supplies. The expense controlling efforts have helped mitigate the increase in other operating expenses due to COVID-19. Excluding the COVID-19 related expenses, other operating expenses have decreased $5,392,000, or 2.6%, for the nine months ended September 30, 2020 compared to the same period in 2019.

The decrease in interest expense is due from our long-term debt being paid off in the second quarter of 2020. At September 30, 2020, we have no outstanding long-term debt.

Other income

Non–operating income decreased by $358,000 compared to the same period last year, as further detailed in Note 6 to our interim condensed consolidated financial statements.

Income taxes

The income tax provision for the nine months ended September 30, 2020 is $800,000 (an effective income tax rate of 5.2%). Excluding certain items, we expect our corporate (federal and state) income tax rate for 2020 to be approximately 26.0%. For the nine months ended September 30, 2020, our income tax provision benefitted primarily from the statute of limitation expirations of our income tax contingency reserves of $2,234,000.

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):

	Nine Months Ended September 30						Nine Month Change
	2020			2019						%
Cash, cash equivalents, restricted cash, and restricted cash equivalents, at beginning of period	$	61,010		$	54,920		$	6,090			11.1

Cash provided by operating activities		183,900			74,884			109,016			145.6

Cash used in investing activities		(15,273	)		(9,823	)		(5,450	)		(55.5	)

Cash used in financing activities		(33,519	)		(51,899	)		18,380			35.4

Cash, cash equivalents, restricted cash, and restricted cash equivalents, at end of period	$	196,118		$	68,082		$	128,036			188.1

Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2020 was $183,900,000 as compared to $74,884,000 in the same period last year. Cash provided by operating activities consisted of net income of $14,574,000 and adjustments for non–cash items of $53,358,000. There was cash provided by working capital in the amount of $106,053,000 for the nine months ended September 30, 2020 compared to cash provided by working capital needs in the amount of $3,297,000 for the same period a year ago. We also received cash distributions from our unconsolidated investments of $10,050,000 during the nine months ended September 30, 2020, compared to $3,884,000 for the same period a year ago.

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Included in cash provided by working capital is $51,253,000 from the Medicare Accelerated Payment Program, $21,404,000 provided from the Provider Relief Fund that has not been recognized as income, and $14,854,000 from the deferral of the Company’s employer social security taxes. All three of these working capital cash flow items were initiated by the CARES Act legislation.

Included in the adjustments for non-cash items are depreciation expense, equity in earnings of unconsolidated investments, unrealized gains/losses on our marketable equity securities, deferred taxes, stock compensation, and a gain on the acquisition of a 166-bed skilled nursing facility in Knoxville, Tennessee in which we previously held a noncontrolling ownership interest.

Investing Activities

Net cash used in investing activities totaled $15,273,000 for the nine months ended September 30, 2020 compared to $9,823,000 for the nine months ended September 30, 2019. Cash used for property and equipment additions was $17,717,000 and $19,670,000 for the nine months ended September 30, 2020 and 2019, respectively. The acquisition of the 166-bed skilled nursing facility in Knoxville, Tennessee resulted in cash used of $6,648,000 for the nine months ended September 30, 2020. The Company collected notes receivable of $1,572,000 and $1,010,000 for the nine months ended September 30, 2020 and 2019, respectively. Sales of restricted marketable debt securities, net of purchases, resulted in positive cash flow of $8,250,000 and $30,085,000 for the nine months ended September 30, 2020 and 2019, respectively.

Financing Activities

Net cash used in financing activities totaled $33,519,000 and $51,899,000 for the nine months ending September 30, 2020 and 2019, respectively. Cash used for repayments on the Company’s credit facility has been a net of $10,000,000 for the nine months ended September 30, 2020. We made principal payments under our finance lease obligations in the amount of $3,101,000 and $2,920,000 for the nine months ended September 30, 2020 and 2019, respectively. Cash used for dividend payments to common stockholders totaled $23,935,000 in the current year period compared to $23,240,000 for the same period a year ago.

Short–term liquidity

We expect to meet our short-term liquidity requirements primarily from our cash flows from operating activities. In addition to cash flows from operations, our current cash on hand of $183,765,000 and our marketable equity securities of $111,873,000 are expected to be adequate to meet our contractual obligations, operating liquidity, and our growth and development plans in the next twelve months.

Long–term liquidity

We expect to meet our long-term liquidity requirements primarily from our cash flows from operating activities, our current cash on hand of $183,765,000 and our marketable equity securities of $111,873,000. We also have substantial value in our unencumbered real estate assets which could potentially be used as collateral in future borrowing opportunities.

Our ability to meet our long–term contractual obligations, and to finance our operating requirements and growth plans will depend upon our future performance. Our future performance 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, as well as many unforeseen factors.

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. On March 14, 2020, the Court entered an Order granting the Defendant’s Motion to Dismiss. On May 6, 2020, the Court entered a Final Judgment dismissing the case.

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Divestiture of Skilled Nursing Facility

On August 21, 2020, the Company entered into a definitive agreement for the sale of the real estate and operations of a skilled nursing facility in Town and Country, Missouri. This transaction is expected to be completed in the fourth quarter of 2020.

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. There have been several enacted and proposed federal and state relief measures as a result of COVID-19 which should provide support to us during this pandemic; however, the full benefit of any such programs would not be realized until these payments are fully implemented, government agencies issue applicable regulations, or guidance and such relief is provided.

New Accounting Pronouncements

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

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, and long–term debt. The Company's senior management has established comprehensive risk management policies and procedures to manage these market risks.

Interest Rate Risk

The fair values of our fixed–income investments fluctuate in response to changes in market interest rates. Increases and decreases in prevailing interest rates generally translate into decreases and increases, respectively, in the fair values of those instruments. Additionally, the fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, the liquidity of the instrument and other general market conditions. At September 30, 2020, we have available for sale marketable debt securities in the amount of $142,040,000. 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.

Our cash and cash equivalents consist of highly liquid investments with a maturity of less than three months when purchased. As a result of the short–term nature of our cash instruments, a hypothetical 1% change in interest rates would have minimal impact on our future earnings and cash flows related to these instruments.

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

Credit Risk

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

Equity Price and Concentration Risk

Our marketable equity securities are recorded at their fair market value based on quoted market prices. Thus, there is exposure to equity price risk, which is the potential change in fair value due to a change in quoted market prices. At September 30, 2020, the fair value of our marketable equity securities is approximately $111,873,000. Of the $111.9 million equity securities portfolio, our investment in NHI comprises approximately $98.3 million, or 87.8%, of the total fair value. We manage our exposure to NHI by closely monitoring the financial condition, performance, and outlook of the company. Hypothetically, a 10% change in quoted market prices would result in a related increase or decrease in the fair value of our equity investments of approximately $11.2 million. At September 30, 2020, our equity securities had unrealized gains of $81,697,000 million. Of the $81.7 million of unrealized gains, $73.5 million is related to our investment in NHI.

Item 4.

Controls and Procedures.

As of September 30, 2020, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Principal Accounting Officer (“PAO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and PAO, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2020.

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PART II. OTHER INFORMATION

Item 1.

Legal Proceedings.

For a discussion of prior, current, and pending litigation of material significance to NHC, please see Note 16 of this Form 10–Q.

Item 1A.

Risk Factors.

We are providing the disclosure below and supplementing the risk factors disclosed in Item 1A of National HealthCare Corporation’s Annual Report on Form 10–K for the year ended December 31, 2019 based on information currently known to us and recent developments since the date of the 2019 Form 10-K filing. The additional risk factor identified should be read in conjunction with the risk factors described in the 2019 Annual Report.

COVID-19 and other pandemics, epidemics, or outbreaks of a contagious illness may adversely affect our operating results, cash flows and financial condition. COVID-19 coronavirus outbreak and other pandemics, epidemics, or outbreaks of a contagious illness, and similar events, may cause harm to us, our partners (employees), our patients, our vendors and supply chain partners, and financial institutions, which could have a material adverse effect on our results of operations, financial condition and cash flows. The impacts may include, but would not be limited to:

●	Disruption to operations due to the unavailability of partners due to illness, quarantines, risk of illness, travel restrictions or factors that limit our existing or potential workforce.

●

Decreased availability and increased cost of supplies due to increased demand around essential personal protective equipment (“PPE”), sanitizers and cleaning supplies including disinfecting agents, and food and food-related products due to increased global demand and disruptions along the global supply chains of these manufactures and distributors.

●	Decreased census across all our operations, which could negatively impact our operating cash flows and financial condition.

●	Elevated partner turnover which may increase payroll expense, increase third party agency nurse staffing, and recruiting-related expenses.

●	Significant disruption of the global financial markets, which could have a negative impact on our ability to access capital in the future.

The further spread of COVID-19, and the requirements to take action to help limit the spread of the virus, could impact the resources required to carry out our business as usual and may have a material adverse effect on our results of operations, financial condition and cash flows. The extent to which COVID-19 will impact our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted. Such developments may include the ongoing geographic spread of the virus, the severity of the virus, the duration of the outbreak and the type and duration of actions that may be taken by various governmental authorities in response to the outbreak. Any of these developments, individually or in aggregate, could materially impact our business and our financial results and condition.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable

Item 3.

Defaults Upon Senior Securities.

None

Item 4.

Mine Safety Disclosures.

Not applicable

Item 5.

Other Information.

None

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Item 6.

Exhibits.

(a) List of exhibits

EXHIBIT INDEX

Exhibit No.		Description

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

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

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

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

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

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

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

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

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

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

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

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SIGNATURES

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

	NATIONAL HEALTHCARE CORPORATION
	(Registrant)

Date: November 5, 2020	/s/ Stephen F. Flatt
	Stephen F. Flatt
	Chief Executive Officer


Date: November 5, 2020	/s/ Brian F. Kidd
	Brian F. Kidd
	Senior Vice President and Controller
	(Principal Accounting Officer)