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

nhc20200630_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 June 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 ☒

15,357,488 shares of common stock of the registrant were outstanding as of August 4, 2020.

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TABLE OF CONTENTS

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

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37

Item 4.	Controls and Procedures	38

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	38

Item 1A	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	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 June 30						Six Months Ended June 30
	2020			2019			2020			2019

Revenues and grant income:
Net patient revenues	$	225,671		$	235,264		$	469,766		$	471,375
Other revenues		11,323			11,887			23,352			24,061
Government stimulus income		24,648			-			24,648			-
Net operating revenues and grant income		261,642			247,151			517,766			495,436

Cost and expenses:
Salaries, wages, and benefits		156,914			147,878			304,383			289,266
Other operating		70,861			67,598			142,529			137,030
Facility rent		10,320			10,197			20,652			20,435
Depreciation and amortization		10,545			10,335			20,983			20,852
Interest		453			954			865			1,880
Total costs and expenses		249,093			236,962			489,412			469,463

Income from operations		12,549			10,189			28,354			25,973

Other income:
Non–operating income		5,954			8,272			14,100			14,273
Unrealized gains/(losses) on marketable equity securities		20,053			(54	)		(40,339	)		6,784

Income before income taxes		38,556			18,407			2,115			47,030
Income tax provision		(10,034	)		(4,725	)		(409	)		(12,117	)
Net income		28,522			13,682			1,706			34,913
Net (income)/loss attributable to noncontrolling interest		(198	)		29			(234	)		67

Net income attributable to National HealthCare Corporation	$	28,324		$	13,711		$	1,472		$	34,980

Earnings per share attributable to National HealthCare Corporation stockholders:
Basic	$	1.85		$	0.90		$	0.10		$	2.29
Diluted	$	1.84		$	0.89		$	0.10		$	2.28

Weighted average common shares outstanding:
Basic		15,307,105			15,269,637			15,300,941			15,262,950
Diluted		15,372,430			15,352,702			15,367,464			15,338,520

Dividends declared per common share	$	0.52		$	0.52		$	1.04		$	1.02

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 June 30						Six Months Ended June 30
	2020			2019			2020			2019

Net income	$	28,522		$	13,682		$	1,706		$	34,913

Other comprehensive income:
Unrealized gains on investments in restricted marketable debt securities		4,796			2,969			2,251			6,194
Reclassification adjustment for realized gains on sales of marketable debt securities		(11	)		-			(13	)		-
Income tax expense related to items of other comprehensive income		(1,005	)		(624	)		(470	)		(1,301	)
Other comprehensive income, net of tax		3,780			2,345			1,768			4,893

Net (income)/loss attributable to noncontrolling interest		(198	)		29			(234	)		67

Comprehensive income attributable to National HealthCare Corporation	$	32,104		$	16,056		$	3,240		$	39,873

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)

	June 30, 2020			December 31, 2019
	unaudited
Assets
Current Assets:
Cash and cash equivalents	$	149,471		$	50,334
Restricted cash and cash equivalents, current portion		19,561			8,944
Marketable equity securities		112,114			152,453
Restricted marketable debt securities, current portion		10,265			20,576
Accounts receivable		85,849			92,975
Inventories		7,200			7,441
Prepaid expenses and other assets		4,345			6,635
Notes receivable, current portion		1,399			1,695
Total current assets		390,204			341,053

Property and Equipment:
Property and equipment, at cost		1,038,586			1,017,204
Accumulated depreciation and amortization		(502,622	)		(481,774	)
Net property and equipment		535,964			535,430

Other Assets:
Restricted cash and cash equivalents, less current portion		1,747			1,732
Restricted marketable debt securities, less current portion		139,323			126,830
Deposits and other assets		5,767			5,124
Operating lease right-of-use assets		191,029			202,909
Goodwill		21,341			20,995
Notes receivable, less current portion		12,966			13,384
Investments in unconsolidated companies		36,897			39,191
Total other assets		409,070			410,165
Total assets	$	1,335,238		$	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)

	June 30, 2020		December 31, 2019
	unaudited
Liabilities and Stockholders’ Equity
Current Liabilities:
Trade accounts payable	$	18,442	$	18,903
Finance lease obligations, current portion		4,292		4,166
Operating lease liabilities, current portion		24,850		24,243
Accrued payroll		61,210		69,826
Amounts due to third party payors		17,824		15,108
Accrued risk reserves, current portion		29,827		29,520
Other current liabilities		27,425		15,029
Provider relief funds		19,294		-
Contract liabilities		50,992		-
Dividends payable		7,986		7,968
Current maturities of long-term debt		-		10,000
Total current liabilities		262,142		194,763

Finance lease obligations, less current portion		12,785		14,963
Operating lease liabilities, less current portion		166,179		178,666
Accrued risk reserves, less current portion		75,181		66,491
Refundable entrance fees		7,643		7,455
Deferred income taxes		12,953		24,012
Other noncurrent liabilities		29,068		21,229
Total liabilities		565,951		507,579

Equity:
Common stock, $.01 par value; 45,000,000 shares authorized; 15,357,488 and 15,332,206 shares, respectively, issued and outstanding		153		153
Capital in excess of par value		224,972		222,787
Retained earnings		538,599		553,093
Accumulated other comprehensive income		4,328		2,560
Total National HealthCare Corporation stockholders’ equity		768,052		778,593
Noncontrolling interest		1,235		476
Total equity		769,287		779,069
Total liabilities and equity	$	1,335,238	$	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)

	Six Months Ended June 30
	2020			2019
Cash Flows From Operating Activities:
Net income	$	1,706		$	34,913
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		20,983			20,852
Equity in earnings of unconsolidated investments		(5,429	)		(4,801	)
Distributions from unconsolidated investments		6,901			2,609
Unrealized (gains)/losses on marketable equity securities		40,339			(6,784	)
Gains on sale of restricted marketable debt securities		(13	)		-
Gains on acquisitions of equity method investments		(1,707	)		(1,975	)
Deferred income taxes		(11,529	)		1,294
Stock–based compensation		1,289			1,108
Changes in operating assets and liabilities:
Accounts receivable		8,350			(174	)
Inventories		332			153
Prepaid expenses and other assets		2,237			(590	)
Trade accounts payable		(1,241	)		(4,022	)
Accrued payroll		(9,025	)		(10,927	)
Amounts due to third party payors		2,570			691
Accrued risk reserves		8,860			1,227
Provider relief funds		19,294			-
Contract liabilities		50,992			-
Other current liabilities		11,979			4,081
Other noncurrent liabilities		7,839			1,517
Net cash provided by operating activities		154,727			39,172
Cash Flows From Investing Activities:
Purchases of property and equipment		(12,517	)		(13,989	)
Acquisition of equity method investment, net of cash acquired		(6,648	)		(15,589	)
Investments in unconsolidated companies		(185	)		(356	)
Investments in notes receivable		(425	)		(5,312	)
Collections of notes receivable		1,139			660
Purchases of restricted marketable debt securities		(19,754	)		(6,887	)
Proceeds from sale of restricted marketable debt securities		19,823			30,103
Net cash used in investing activities		(18,567	)		(11,370	)
Cash Flows From Financing Activities:
Borrowings under credit facility		40,000			-
Repayments under credit facility		(50,000	)		-
Principal payments under finance lease obligations		(2,052	)		(1,932	)
Dividends paid to common stockholders		(15,948	)		(15,275	)
Noncontrolling interest contributions/(distributions)		525			(17	)
Issuance of common shares		949			1,383
Repurchase of common shares		(53	)		(872	)
Entrance fee deposits/(refunds)		188			(103	)
Net cash used in financing activities		(26,391	)		(16,816	)
Net Increase in Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents		109,769			10,986
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	$	170,779		$	65,906

Balance Sheet Classifications:
Cash and cash equivalents	$	149,471		$	29,746
Restricted cash and cash equivalents		21,308			36,160
Total Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents	$	170,779		$	65,906

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

	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

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

June 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 June 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 $1,245,000 and $2,075,000 for the three months and six months ended June 30, 2020. For the three months and six months ended June 30, 2019, bad debt expense was $992,000 and $2,039,000, respectively. As of June 30, 2020, and December 31, 2019, the Company has recorded allowance for doubtful accounts of $5,294,000 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.

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.

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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 $10,555,000 and $13,614,000 for the three months and six months ended June 30, 2020, respectively. General and administrative costs were $6,677,000 and $11,821,000 for the three months and six months ended June 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 June 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 June 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.

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.

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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 June 30, 2020, and December 31, 2019, we have recorded refundable entrance fees in the amount of $7,643,000 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 June 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.

Prior Period Classifications

Certain amounts in prior periods have been reclassified to conform with current period presentation.

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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, and are expected to continue to have, an adverse impact on the Company's results of operations. The financial results for the three months ended June 30, 2020 were significantly impacted by COVID-19 with census in our skilled nursing facilities dropping to 84.3%, while we also incurred significantly increased operating expenses.

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 quarter of 2020, we received three disbursements from the Provider Relief Fund which totaled $43,942,000. These funds came 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 and lost revenue attributable to COVID-19. Of the $43,942,000 of funds received, the Company recorded $24,648,000 of income related to these funds as we have reasonable assurance that the applicable terms and conditions to retain the funds has been met during the three months ended June 30, 2020. This $24,648,000 is reflected within government stimulus income in the interim condensed consolidated statements of operations. As of June 30, 2020, amounts not recognized as income are approximately $19,294,000 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 and lost revenues in the future; therefore, at this time, we believe that we will fully utilize the remaining $19,294,000 of provider relief funds before the end of the pandemic.

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 $50,992,000 as part of this program. These funds will begin to be applied against claims for services provided to Medicare patients after approximately 120 days from the date we received the funds. The payback period will be for approximately 90 days; therefore, any remaining unapplied accelerated payment proceeds will be repaid within 210 days. Application to claims of the accelerated payments received by the Company is currently expected to begin in August 2020. As of June 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 June 30, 2020, we have deferred $7.7 million of 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 June 30				Six Months Ended June 30
(in thousands)	2020		2019		2020		2019
Net patient revenues:
Inpatient services	$	214,387	$	220,887	$	445,374	$	442,521
Homecare		11,284		14,377		24,392		28,854
Total net patient revenue	$	225,671	$	235,264	$	469,766	$	471,375

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.

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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 June 30				Six Months Ended June 30
Source	2020		2019		2020		2019
Medicare		32%		33%		33%		34%
Managed Care		10%		11%		11%		11%
Medicaid		32%		29%		30%		28%
Private Pay and Other		26%		27%		26%		27%
Total		100%		100%		100%		100%

Medicare covers skilled nursing services for beneficiaries who require nursing care and/or rehabilitation services following a hospitalization of at least three consecutive days (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. An 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.

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 June 30, 2020, the Company has recorded $50,992,000 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 120 days from the date we received the funds. The payback period will be for approximately 90 days; therefore, any remaining unapplied accelerated payment proceeds will be repaid within 210 days. Recoupment of the accelerated payments received by the Company is currently expected to begin in August 2020.

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

Balance at December 31, 2019	$	-
Payments received		50,992
Payments recognized		-
Balance at June 30, 2020	$	50,992

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Third Party Payors

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

Medicare and Medicaid program revenues, as well as certain Managed Care program revenues, are subject to audit and retroactive adjustment by government representatives or their agents. Settlements with third-party payors for retroactive adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient care. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and the Company’s historical settlement activity, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustment is subsequently resolved. Estimated settlements are adjusted in future periods as adjustments become known, or as years are settled or are no longer subject to such audits, reviews, and investigations. We believe that any differences between the net revenues recorded and final determination will not materially affect the consolidated financial statements. We have made provisions of approximately $17,824,000 and $15,108,000 as of June 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 June 30				Six Months Ended June 30
(in thousands)	2020		2019		2020		2019
Rental income	$	5,646	$	5,677	$	11,325	$	11,285
Management and accounting services fees		4,121		4,297		8,600		9,047
Insurance services		1,398		1,615		2,780		3,139
Other		158		298		647		590
Total other revenues	$	11,323	$	11,887	$	23,352	$	24,061

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 June 30				Six Months Ended June 30
(in thousands)	2020		2019		2020		2019
Operating lease payments	$	5,505	$	5,486	$	11,008	$	10,963
Variable lease payments		141		191		317		322
Total rental income	$	5,646	$	5,677	$	11,325	$	11,285

Management Fees from National

We manage five skilled nursing facilities owned by National. For the three and six months ended June 30, 2020, we recognized management fees and interest on management fees of $941,000 and $2,478,000 from these centers, respectively. For the three months and six months ended June 30, 2019, we recognized management fees and interest on management fees of $1,351,000 and $3,206,000 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 six months ended June 30, 2020 were $883,000 and $1,662,000, respectively. For the three and six months ended June 30, 2019, the workers’ compensation premium revenues reflected in the interim condensed consolidated statements of operations were $943,000 and $1,791,000. Associated losses and expenses are reflected in the interim condensed consolidated statements of operations as "Salaries, wages and benefits."

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For professional liability insurance services, the premium revenues reflected in the interim condensed consolidated statements of operations for the three months and six months ended June 30, 2020 were $515,000 and $1,118,000, respectively. For professional liability insurance services, the premium revenues reflected in the interim condensed consolidated statements of operations for the three months and six months ended June 30, 2019 were $672,000 and $1,348,000, 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 June 30				Six Months Ended June 30
(in thousands)	2020		2019		2020		2019
Equity in earnings of unconsolidated investments	$	2,618	$	2,480	$	5,429	$	4,801
Dividends and net realized gains on sales of securities		1,891		1,931		3,913		3,862
Interest income		1,445		1,886		3,051		3,635
Gains on acquisitions of equity method investments		–		1,975		1,707		1,975
Total non-operating income	$	5,954	$	8,272	$	14,100	$	14,273

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 $35,206,000 and $36,673,000 at June 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 six months ended June 30, 2020 and 2019 is provided below (in thousands):

		Six Months Ended June 30
		2020		2019
Net revenue	$	31,784	$	29,895
Expenses		24,817		23,439
Net income	$	6,967	$	6,456

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.

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.

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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 June 30, 2020
	Inpatient Services		Homecare		All Other			Total
Revenues and grant income:
Net patient revenues	$	214,387	$	11,284	$	-		$	225,671
Other revenues		127		-		11,196			11,323
Government stimulus income		22,622		2,026		-			24,648
Net operating revenues and grant income		237,136		13,310		11,196			261,642

Costs and expenses:
Salaries, wages, and benefits		136,380		7,963		12,571			156,914
Other operating		63,999		4,342		2,520			70,861
Rent		8,380		446		1,494			10,320
Depreciation and amortization		9,626		106		813			10,545
Interest		366		-		87			453
Total costs and expenses		218,751		12,857		17,485			249,093

Income (loss) from operations		18,385		453		(6,289	)		12,549
Non-operating income		-		-		5,954			5,954
Unrealized gains on marketable equity securities		-		-		20,053			20,053

Income before income taxes	$	18,385	$	453	$	19,718		$	38,556

	Three Months Ended June 30, 2019
	Inpatient Services		Homecare		All Other			Total
Revenues:
Net patient revenues	$	220,887	$	14,377	$	-		$	235,264
Other revenues		242		-		11,645			11,887
Net operating revenues		221,129		14,377		11,645			247,151

Costs and expenses:
Salaries, wages, and benefits		130,720		8,480		8,678			147,878
Other operating		60,172		4,674		2,752			67,598
Rent		8,229		489		1,479			10,197
Depreciation and amortization		9,471		61		803			10,335
Interest		319		-		635			954
Total costs and expenses		208,911		13,704		14,347			236,962

Income (loss) from operations		12,218		673		(2,702	)		10,189
Non-operating income		-		-		8,272			8,272
Unrealized losses on marketable equity securities		-		-		(54	)		(54	)

Income before income taxes	$	12,218	$	673	$	5,516		$	18,407

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	Six Months Ended June 30, 2020
	Inpatient Services		Homecare		All Other			Total
Revenues and grant income:
Net patient revenues	$	445,374	$	24,392	$	-		$	469,766
Other revenues		561		-		22,791			23,352
Government stimulus income		22,622		2,026		-			24,648
Net operating revenues and grant income		468,557		26,418		22,791			517,766

Costs and expenses:
Salaries, wages, and benefits		271,595		16,279		16,509			304,383
Other operating		129,104		8,161		5,264			142,529
Rent		16,757		903		2,992			20,652
Depreciation and amortization		19,197		160		1,626			20,983
Interest		748		-		117			865
Total costs and expenses		437,401		25,503		26,508			489,412

Income (loss) from operations		31,156		915		(3,717	)		28,354
Non-operating income		-		-		14,100			14,100
Unrealized losses on marketable equity securities		-		-		(40,339	)		(40,339	)

Income (loss) before income taxes	$	31,156	$	915	$	(29,956	)	$	2,115

	Six Months Ended June 30, 2019
(As Adjusted)	Inpatient Services		Homecare		All Other			Total
Revenues:
Net patient revenues	$	442,521	$	28,854	$	-		$	471,375
Other revenues		473		-		23,588			24,061
Net operating revenues		442,994		28,854		23,588			495,436

Costs and expenses:
Salaries, wages, and benefits		259,778		16,880		12,608			289,266
Other operating		122,801		8,926		5,303			137,030
Rent		16,520		951		2,964			20,435
Depreciation and amortization		19,124		122		1,606			20,852
Interest		668		-		1,212			1,880
Total costs and expenses		418,891		26,879		23,693			469,463

Income (loss) from operations		24,103		1,975		(105	)		25,973
Non-operating income		-		-		14,273			14,273
Unrealized gains on marketable equity securities		-		-		6,784			6,784

Income before income taxes	$	24,103	$	1,975	$	20,952		$	47,030

Note 8 – Long-Term Leases

Operating Leases

At June 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 $19,310,000 for the three months and six months ended June 30, 2020. Total facility rent expense to NHI was $9,515,000 and $19,030,000 for the three months and six months ended June 30, 2019.

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Finance Leases

At June 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 June 30, 2020 (in thousands):

	Finance Leases			Operating Leases
2020	$	5,200		$	35,429
2021		5,200			35,141
2022		5,200			34,636
2023		3,467			34,420
2024		-			34,269
Thereafter		-			57,050
Total minimum lease payments		19,067			230,945
Less: amounts representing interest		(1,990	)		(39,916	)
Present value of future minimum lease payments		17,077			191,029
Less: current portion		(4,292	)		(24,850	)
Noncurrent lease liabilities	$	12,785		$	166,179

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.

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

	Three Months Ended June 30				Six Months Ended June 30
	2020		2019		2020		2019
Basic:
Weighted average common shares outstanding		15,307,105		15,269,637		15,300,941		15,262,950
Net income attributable to National HealthCare Corporation	$	28,324	$	13,711	$	1,472	$	34,980
Earnings per common share, basic	$	1.85	$	0.90	$	0.10	$	2.29

Diluted:
Weighted average common shares outstanding		15,307,105		15,269,637		15,300,941		15,262,950
Effects of dilutive instruments		65,325		83,065		66,523		75,570
Weighted average common shares outstanding		15,372,430		15,352,702		15,367,464		15,338,520

Net income attributable to National HealthCare Corporation	$	28,324	$	13,711	$	1,472	$	34,980
Earnings per common share, diluted	$	1.84	$	0.89	$	0.10	$	2.28

In the above table, options to purchase 698,421 and 8,796 shares of our common stock have been excluded for the six months ended June 30, 2020 and 2019, respectively, 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.

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

	June 30, 2020				December 31, 2019
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Investments available for sale:
Marketable equity securities	$	30,176	$	112,114	$	30,176	$	152,453
Restricted investments available for sale:
Corporate debt securities		65,554		69,452		63,414		65,653
Asset-based securities		52,370		52,846		54,451		55,185
U.S. Treasury securities		13,366		14,134		13,379		13,410
State and municipal securities		12,819		13,156		12,922		13,158
	$	174,285	$	261,702	$	174,342	$	299,859

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

June 30, 2020

December 31, 2019

Cost

Fair

Value

Cost

Fair

Value

NHI Common Stock

1,630,642

24,734

99,013

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):

	June 30, 2020				December 31, 2019
	Cost		Fair Value		Cost		Fair Value
Maturities:
Within 1 year	$	21,229	$	21,249	$	15,726	$	15,767
1 to 5 years		89,640		92,620		88,314		90,408
6 to 10 years		32,965		35,444		40,126		41,231
Over 10 years		275		275		-		-
	$	144,109	$	149,588	$	144,166	$	147,406

Gross unrealized gains related to marketable equity securities are $82,126,000 and $122,290,000 as of June 30, 2020 and December 31, 2019, respectively. Gross unrealized losses related to marketable equity securities are $188,000 and $13,000 as of June 30, 2020 and December 31, 2019, respectively. For the three months and six months ended June 30, 2020, the Company recognized net unrealized gains of $20,053,000 and net unrealized losses of $40,339,000, 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 six months ended June 30, 2019, the Company recognized net unrealized losses of $54,000 and net unrealized gains of $6,784,000, 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 $6,418,000 and $3,407,000 as of June 30, 2020 and December 31, 2019, respectively. Gross unrealized losses related to available for sale marketable debt securities are $939,000 and $167,000 as of June 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 six months ending June 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 six months ended June 30, 2020 and 2019 were $19,823,000 and $30,103,000, respectively. Investment gains of $13,000 and $-0- were realized on these sales during the six months ended June 30, 2020 and 2019, respectively. No sales were reported for marketable equity securities for the six months ended June 30, 2020 and 2019, respectively.

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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 June 30, 2020 and December 31, 2019 for assets and liabilities measured at fair value on a recurring basis (in thousands):

	Fair Value Measurements Using
June 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	$	149,471	$	149,471	$	–	$	–
Restricted cash and cash equivalents		21,308		21,308		–		–
Marketable equity securities		112,114		112,114		–		–
Corporate debt securities		69,452		48,562		20,890		–
Mortgage–backed securities		52,846		–		52,846		–
U.S. Treasury securities		14,134		14,134		–		–
State and municipal securities		13,156		1,978		11,178		–
Total financial assets	$	432,481	$	347,567	$	84,914	$	–

	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	$	–

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Note 12 – Long–Term Debt

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

	Weighted Average Interest Rate		Maturity		June 30, 2020		December 31, 2019
	Variable
Credit facility, interest payable monthly		2.4%		2020	$	-	$	10,000
Less current portion						-		(10,000	)
Total long-term debt					$	-	$	-

As of June 30, 2020, the available borrowing capacity for the credit facility is $60 million. The credit facility has a maturity date of October 2020. Loans bear interest at either (i) LIBOR plus 1.40% or (ii) the base rate plus 0.40%.

Note 13 - Stock Repurchase Program

In August 2019, the Board of Directors authorized a common stock purchase program. The program will allow for repurchases of up to $25 million of its common stock. During the six months ended June 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.

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 $823,000 and $684,000 for the three months ended June 30, 2020 and 2019, respectively. Stock-based compensation totaled $1,289,000 and $1,108,000 for the six months ended June 30, 2020 and 2019, respectively. Stock–based compensation is included in “Salaries, wages and benefits” in the interim condensed consolidated statements of operations.

At June 30, 2020, the Company had $3,544,000 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 six months ended June 30, 2020 and for the year ended December 31, 2019.

	June 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%

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The following table summarizes our outstanding stock options for the six months ended June 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		102,465			75.76		–
Options exercised		(31,573	)		62.44		–
Options cancelled		(3,000	)		72.94
Options outstanding at June 30, 2020		853,421		$	72.10	$	174,000

Options exercisable at June 30, 2020		217,456		$	68.30	$	92,000

Options Outstanding June 30, 2020	Exercise Prices			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life in Years
155,000	$60.73	-	$64.64		62.67		2.76
698,421	$72.94	-	$86.48		74.20		1.80
853,421					72.10		1.72

Note 15 – Income Taxes

The income tax provision for the three months ended June 30, 2020 is $10,034,000 (an effective income tax rate of 26.0%). The income tax provision and effective tax rate for the three months ended June 30, 2020 were unfavorably impacted by adjustments to unrecognized tax benefits of $78,000. The income tax provision for the three months ended June 30, 2019 was $4,725,000 (an effective income tax rate of 25.7%). The income tax provision and effective tax rate for the three months ended June 30, 2019 were unfavorably impacted by adjustments to unrecognized tax benefits of $95,000.

The income tax provision for the six months ended June 30, 2020 was $409,000 (an effective tax rate of 19.4%). The income tax provision and effective tax rate for the six months ended June 30, 2020 were unfavorably impacted by nondeductible expenses of $108,000 and adjustments to unrecognized tax benefits of $283,000 but were favorably impacted by a tax benefit of $60,000 relating to the exercise of stock options. The income tax provision for the six months ended June 30, 2020 resulted in a lower effective tax rate due to the lower pre-tax book income resulting from the unrealized loss of $40,339,000 for the market value decrease in our marketable equity securities portfolio. The income tax provision for the six months ended June 30, 2019 was $12,117,000 (an effective tax rate of 25.8%). The income tax provision and effective tax rate for the six months ended June 30, 2019 were unfavorably impacted by nondeductible expenses of $105,000 and adjustments to unrecognized tax benefits of $295,000 but were favorably impacted by a tax benefit of $275,000 relating to the exercise of stock options.

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

The Company is no longer subject to U.S. federal and state examinations by tax authorities for years before 2016 (with certain state exceptions).

Note 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 $105,008,000 and $96,011,000 at June 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.

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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.

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.

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Item 2.

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

Forward–Looking Statements

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

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

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

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

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

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

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

	●	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.

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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 three months ended June 30, 2020 were significantly impacted by COVID-19 with census in our skilled nursing facilities dropping to 84.3%, 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 financial results during 2020 and beyond, but we expect the developments related to COVID-19 to adversely affect our financial performance in 2020. 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 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 quarter of 2020, we received three disbursements from the Provider Relief Fund which totaled $43,942,000. These funds came 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 $43,942,000 of funds received, the Company recorded $24,648,000 of income related to these funds during the three months ended June 30, 2020. This $24,648,000 is reflected within government stimulus income in the interim condensed consolidated statements of operations. As of June 30, 2020, amounts not recognized as income are approximately $19,294,000 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 and lost revenues in the future; therefore, at this time, we believe that we will fully utilize the remaining $19,294,000 million of provider relief funds before the end of the pandemic.

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 million as part of this program. These funds will begin to be applied against claims for services provided to Medicare patients after approximately 120 days from the date we received the funds. The payback period will be for approximately 90 days; therefore, any remaining unapplied accelerated payment proceeds will be repaid within 210 days. Application to claims of the accelerated payments received by the Company is currently expected to begin in August 2020. As of June 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.

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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 $26 million, or $7 million to $8.5 million per quarter (2nd, 3rd, and 4th quarter impact). At June 30, 2020, we have deferred $7.7 million of social security taxes.

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 $11,000,000 in 2020 due to these supplemental Medicaid payments. For the three months and six months ended June 30, 2020, we have recorded $3,859,000 and $5,532,000, respectively, in net patient revenues in our interim condensed consolidated statements of operations for these supplemental Medicaid payments.

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 six months ending June 30, 2020 was 87.9% compared to 90.4% 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 June 30, 2020, overall census in our owned and leased skilled nursing facilities was 84.3% compared to 90.5% in the second 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.

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.

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The tables below summarize NHC's overall performance in these Five-Star ratings versus the skilled nursing industry as of June 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		53
Percentage of 4 and 5-star rated skilled nursing facilities		70%		45%
Average rating for all skilled nursing facilities, end of period		4.00		3.16

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 $105,008,000 at June 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.

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For the first six months of 2020, our average Medicare per diem rate for skilled nursing facilities increased 10.9% as compared to the same period in 2019.

On July 31, 2020, CMS released its final rule outlining fiscal year 2021 Medicare payment rates and policy changes for skilled nursing facilities, which will begin 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. This included a 2.2% market-basket update, adjusted by a 0.0% productivity adjustment. 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.

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 July 1, 2019 and for the fiscal year 2020, the state of Tennessee implemented specific individual nursing facility rate increases. The resulting increase in revenue for the 2020 fiscal year was approximately $1,280,000 annually, or $320,000 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 six months of 2020, our average Medicaid per diem increased 4.6% 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 projects payments to home health agencies in fiscal year 2020 will increase in aggregate by 1.3%, or $250 million, based on proposed policies. The increase reflects the 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 June 30, 2020
	Inpatient Services		Homecare		All Other			Total
Revenues and grant income:
Net patient revenues	$	214,387	$	11,284	$	-		$	225,671
Other revenues		127		-		11,196			11,323
Government stimulus income		22,622		2,026		-			24,648
Net operating revenues and grant income		237,136		13,310		11,196			261,642

Costs and expenses:
Salaries, wages, and benefits		136,380		7,963		12,571			156,914
Other operating		63,999		4,342		2,520			70,861
Rent		8,380		446		1,494			10,320
Depreciation and amortization		9,626		106		813			10,545
Interest		366		-		87			453
Total costs and expenses		218,751		12,857		17,485			249,093

Income (loss) from operations		18,385		453		(6,289	)		12,549
Non-operating income		-		-		5,954			5,954
Unrealized gains on marketable equity securities		-		-		20,053			20,053

Income before income taxes	$	18,385	$	453	$	19,718		$	38,556

	Three Months Ended June 30, 2019
	Inpatient Services		Homecare		All Other			Total
Revenues:
Net patient revenues	$	220,887	$	14,377	$	-		$	235,264
Other revenues		242		-		11,645			11,887
Net operating revenues		221,129		14,377		11,645			247,151

Costs and expenses:
Salaries, wages, and benefits		130,720		8,480		8,678			147,878
Other operating		60,172		4,674		2,752			67,598
Rent		8,229		489		1,479			10,197
Depreciation and amortization		9,471		61		803			10,335
Interest		319		-		635			954
Total costs and expenses		208,911		13,704		14,347			236,962

Income (loss) from operations		12,218		673		(2,702	)		10,189
Non-operating income		-		-		8,272			8,272
Unrealized losses on marketable equity securities		-		-		(54	)		(54	)

Income before income taxes	$	12,218	$	673	$	5,516		$	18,407

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	Six Months Ended June 30, 2020
	Inpatient Services		Homecare		All Other			Total
Revenues and grant income:
Net patient revenues	$	445,374	$	24,392	$	-		$	469,766
Other revenues		561		-		22,791			23,352
Government stimulus income		22,622		2,026		-			24,648
Net operating revenues and grant income		468,557		26,418		22,791			517,766

Costs and expenses:
Salaries, wages, and benefits		271,595		16,279		16,509			304,383
Other operating		129,104		8,161		5,264			142,529
Rent		16,757		903		2,992			20,652
Depreciation and amortization		19,197		160		1,626			20,983
Interest		748		-		117			865
Total costs and expenses		437,401		25,503		26,508			489,412

Income (loss) from operations		31,156		915		(3,717	)		28,354
Non-operating income		-		-		14,100			14,100
Unrealized losses on marketable equity securities		-		-		(40,339	)		(40,339	)

Income (loss) before income taxes	$	31,156	$	915	$	(29,956	)	$	2,115

	Six Months Ended June 30, 2019
(As Adjusted)	Inpatient Services		Homecare		All Other			Total
Revenues:
Net patient revenues	$	442,521	$	28,854	$	-		$	471,375
Other revenues		473		-		23,588			24,061
Net operating revenues		442,994		28,854		23,588			495,436

Costs and expenses:
Salaries, wages, and benefits		259,778		16,880		12,608			289,266
Other operating		122,801		8,926		5,303			137,030
Rent		16,520		951		2,964			20,435
Depreciation and amortization		19,124		122		1,606			20,852
Interest		668		-		1,212			1,880
Total costs and expenses		418,891		26,879		23,693			469,463

Income (loss) from operations		24,103		1,975		(105	)		25,973
Non-operating income		-		-		14,273			14,273
Unrealized gains on marketable equity securities		-		-		6,784			6,784

Income before income taxes	$	24,103	$	1,975	$	20,952		$	47,030

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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 six months ended June 30, 2020 include facilities that began operations from 2018 to 2020, which is one memory care facility. For the six months ended June 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.

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

	Three Months Ended June 30						Six Months Ended June 30
	2020			2019			2020			2019

Net income attributable to National Healthcare Corporation	$	28,324		$	13,711		$	1,472		$	34,980
Non-GAAP adjustments
Unrealized (gains)/losses on marketable equity securities		(20,053	)		54			40,339			(6,784	)
Gain on acquisition of equity method investment		-			(1,975	)		(1,708	)		(1,975	)
Operating results for newly opened facilities not at full capacity		112			137			314			731
Share-based compensation expense		823			684			1,289			1,108
Provision (benefit) of income taxes on non-GAAP adjustments		4,971			284			(10,461	)		1,785
Non-GAAP Net income	$	14,177		$	12,895		$	31,245		$	29,845


GAAP diluted earnings per share	$	1.84		$	0.89		$	0.10		$	2.28
Non-GAAP adjustments
Unrealized (gains)/losses on marketable equity securities		(0.97	)		-			1.94			(0.34	)
Gain on acquisition of equity method investment		-			(0.09	)		(0.08	)		(0.09	)
Operating results for newly opened facilities not at full capacity		0.01			0.01			0.02			0.04
Share-based compensation expense		0.04			0.03			0.05			0.05
Non-GAAP diluted earnings per share	$	0.92		$	0.84		$	2.03		$	1.94

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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 six months ended June 30, 2020 and 2019.

Percentage of Net Operating Revenues and Grant Income

	Three Months Ended June 30						Six Months Ended June 30
	2020			2019			2020			2019
Net operating revenues and grant income:		100.0	%		100.0	%		100	%		100	%
Costs and expenses:
Salaries, wages, and benefits		60.0			59.8			58.8			58.4
Other operating		27.1			27.4			27.5			27.7
Facility rent		3.9			4.1			4.0			4.1
Depreciation and amortization		4.0			4.2			4.0			4.2
Interest		0.2			0.4			0.2			0.4
Total costs and expenses		95.2			95.9			94.5			94.8
Income from operations		4.8			4.1			5.5			5.2
Non–operating income		2.2			3.3			2.7			2.9
Unrealized gains/(losses) on marketable equity securities		7.7			0.0			(7.8	)		1.4
Income before income taxes		14.7			7.4			0.4			9.5
Income tax provision		(3.8	)		(1.9	)		(0.1	)		(2.4	)
Net income		10.9			5.5			0.3			7.1
Net (income)/loss attributable to noncontrolling interest		(0.1	)		0.0			0.0			0.0
Net income attributable to stockholders of NHC		10.8			5.5			0.3			7.1

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

Results for the quarter ended June 30, 2020 compared to the second quarter of 2019 include a 5.9% increase in net operating revenues and grant income and a 23.2% increase in income from operations. Excluding the grant income recorded during the second quarter of 2020, net operating revenues decreased 4.1% compared to the second 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 June 30, 2020 was $14,177,000 compared to $12,895,000 for the second quarter of 2019, which is an increase of 9.9%.

Net operating revenues and grant income

Net patient revenues decreased $9,593,000, or 4.1%, compared to the same period last year.

The total census at owned and leased skilled nursing facilities for the quarter averaged 84.3%, compared to an average of 90.5% 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 12.3% and managed care per diem rates increased 3.0% compared to the same quarter a year ago. Medicaid and private pay per diem rates increased 6.6% and 0.8%, respectively, compared to the same quarter a year ago. Overall, the composite skilled nursing facility per diem at our owned and leased skilled nursing facilities increased 3.1% 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 June 30, 2020, we have recorded $3,859,000 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 June 30, 2020, this skilled nursing facility increased net patient revenues approximately $2,958,000 compared to the second quarter of 2019.

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Our homecare operations had a decline in net patient revenues of approximately $3,093,000 in the second quarter of 2020 compared to the second quarter of 2019. Our homecare net patient revenue decline was primarily due to volume declines related to COVID-19.

Other revenues decreased $564,000, or 4.7%, 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 June 30, 2020, we recorded $24.6 million 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 June 30, 2020 compared to the same period of 2019 increased $12,131,000, or 5.1%, to $249,093,000 from $236,962,000.

Salaries, wages, and benefits increased $9,036,000, or 6.1%, to $156,914,000 from $147,878,000. Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 60.0% compared to 59.8% for the three months ended June 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 $5,895,000 in incentive compensation related to COVID-19 for the three months ended June 30, 2020 compared to the second quarter of 2019. For the three months ended June 30, 2020, we also incurred approximately $1,882,000 in salaries and wages from the skilled nursing facility that we acquired in February 2020, compared to the second quarter of 2019.

Other operating expenses increased $3,263,000, or 4.8%, to $70,861,000 for the 2020 period compared to $67,598,000 for the 2019 period. Other operating expenses as a percentage of net operating revenues and grant income was 27.1% and 27.4% for the three months ended June 30, 2020 and 2019, respectively. During the second quarter of 2020, we incurred approximately $5,682,000 in COVID-19 related expenses in purchasing personal protective equipment, nursing supplies, lab and testing supplies, food, and dietary supplies. Due to the impact of COVID-19 and our census declining, we have implemented, and continue to implement, a plan to minimize and control expenses within every department of our operations. These expense controlling efforts have helped mitigate the increase in other operating expenses due to COVID-19.

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

Other income

Non–operating income decreased by $2,318,000 compared to the same period last year, as further detailed in Note 6 to our interim condensed consolidated financial statements. The decrease in non-operating income is primarily due from the gain on the acquisition of an equity method investment made in the second quarter of 2019. In the prior year period, a gain of $1,975,000 was recorded on the acquisition of the remaining financial interest in a 60-bed memory care facility in St. Peters, Missouri. We previously held a 25% noncontrolling ownership interest and equity method investment in the facility. Upon acquiring the remaining 75% financial interest, we fair valued the business and our previously held equity position based upon the facility’s fair value.

Income taxes

The income tax provision for the three months ended June 30, 2020 is $10,034,000 (an effective income tax rate of 26.0%). Excluding nondeductible expenses, we expect our corporate income tax rate for 2020 to be approximately 26.0%.

Noncontrolling interest

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

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Results for the six months ended June 30, 2020 compared to the first six months of 2019 include a 4.5% increase in net operating revenues and grant income and a 9.2% increase in income from operations. Excluding the grant income recorded for the six months ended June 30,2020, net operating revenues would have decreased 0.5% compared to the same six-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 six months ended June 30, 2020 was $31,245,000 compared to $29,845,000 for the same period of 2019, which is an increase of 5.2%.

Net operating revenues and grant income

Net patient revenues decreased $1,609,000, or 0.3%, compared to the same period last year.

The total census at owned and leased skilled nursing facilities for the first six months of 2020 averaged 87.9% compared to an average of 90.4% 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 10.9% and managed care per diem rates increased 2.4% compared to the same period a year ago. Medicaid and private pay per diem rates increased 4.6% and 1.6%, 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 2.8% compared to the same period a year ago.

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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 six months ended June 30, 2020, we have recorded $5,532,000 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 six months ended June 30, 2020, this skilled nursing facility increased net patient revenues approximately $4,393,000 compared to the same period in the prior year.

Our homecare operations had a decline in net patient revenues of approximately $4,462,000 in the first six months of 2020 compared to the same period of 2019. Our homecare net patient revenue decline was primarily due to volume declines due to COVID-19.

Other revenues decreased $709,000, or 2.9%, compared to the same period last year, as further detailed in Note 5 to our interim condensed consolidated financial statements.

During the six months ended June 30, 2020, we recorded $24.6 million 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 six months ended June 30, 2020 compared to the same period of 2019 increased $19,949,000 or 4.2%, to $489,412,000 from $469,463,000.

Salaries, wages, and benefits increased $15,117,000, or 5.2%, to $304,383,000 from $289,266,000. Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 58.8% compared to 58.4% for the six months ended June 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 $6,714,000 in incentive compensation related to COVID-19 for the six months ended June 30, 2020 compared to the same period of 2019. For the six months ended June 30, 2020, we also incurred approximately $2,396,000 in salaries and wages from the skilled nursing facility that we acquired in February 2020, compared to the same period of 2019.

Other operating expenses increased $5,499,000, or 4.0%, to $142,529,000 for the 2020 period compared to $137,030,000 for the 2019 period. Other operating expenses as a percentage of net operating revenue was 27.5% and 27.7% for the six months ended June 30, 2020 and 2019. During the first six months of 2020, we incurred $6,630,000 in COVID-19 related expenses in purchasing personal protective equipment, nursing supplies, lab and testing supplies, food, and dietary supplies. Due to the impact of COVID-19 and our census declining since March 2020, we have implemented, and continue to implement, a plan to minimize and control expenses within every department of our operations. These expense controlling efforts have helped mitigate the increase in other operating expenses due to COVID-19.

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

Other income

Non–operating income decreased by $173,000 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 six months ended June 30, 2020 is $409,000 (an effective income tax rate of 19.3%). Excluding nondeductible expenses, we expect our corporate income tax rate for 2020 to be approximately 26.0%.

Noncontrolling interest

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

Liquidity, Capital Resources, and Financial Condition

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

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

	Six Months Ended June 30						Six 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		154,727			39,172			115,555			295.0

Cash used in investing activities		(18,567	)		(11,370	)		(7,197	)		(63.3	)

Cash used in financing activities		(26,391	)		(16,816	)		(9,575	)		(56.9	)

Cash, cash equivalents, restricted cash, and restricted cash equivalents, at end of period	$	170,779		$	65,906		$	104,873			159.1

Operating Activities

Net cash provided by operating activities for the six months ended June 30, 2020 was $154,727,000 as compared to $39,172,000 in the same period last year. Cash provided by operating activities consisted of net income of $1,706,000 and adjustments for non–cash items of $43,933,000. There was cash provided by working capital in the amount of $102,187,000 for the six months ended June 30, 2020 compared to cash used for working capital needs in the amount of $8,044,000 for the same period a year ago. We also received cash distributions from our unconsolidated investments of $6,901,000 during the six months ended June 30, 2020, compared to $2,609,000 for the same period a year ago.

Included in cash provided by working capital is $50,992,000 of receipts from the Medicare Accelerated Payment Program, $19,294,000 of receipts related to the Provider Relief Fund that have not been recognized as income, and $7,705,000 of deferred 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 $18,567,000 for the six months ended June 30, 2020 compared to $11,370,000 for the six months ended June 30, 2019. Cash used for property and equipment additions was $12,517,000 and $13,989,000 for the six months ended June 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 six months ended June 30, 2020. The Company collected notes receivable of $1,139,000 and $660,000 for the six months ended June 30, 2020 and 2019, respectively. Sales of restricted marketable debt securities, net of purchases, resulted in positive cash flow of $69,000 and $23,216,000 for the six months ended June 30, 2020 and 2019, respectively.

Financing Activities

Net cash used in financing activities totaled $26,391,000 and $16,816,000 for the six months ending June 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 six months ended June 30, 2020. We made repayments under our finance lease obligations in the amount of $2,052,000 and $1,932,000 for the six months ended June 30, 2020 and 2019, respectively. Cash used for dividend payments to common stockholders totaled $15,948,000 in the current year period compared to $15,275,000 for the same period a year ago. In the current period, $949,000 was provided by the issuance of common stock compared to $1,383,000 in the prior year period.

Short–term liquidity

We expect to meet our short-term liquidity requirements primarily from our cash flows from operating activities. In addition to cash flows from operations, our current cash on hand of $149,471,000, marketable equity securities of $112,114,000, and as needed, our borrowing capacity on the credit facility, are expected to be adequate to meet our contractual obligations, operating liquidity, and our growth and development plans in the next twelve months. We are currently evaluating various options regarding the upcoming maturity date of our credit facility. At this time, we believe we have sufficient liquidity to meet our short-term liquidity needs with or without an extension of the credit facility.

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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 $149,471,000, marketable equity securities of $112,114,000 and our borrowing capacity on the credit facility. We also have substantial value in our unencumbered real estate assets which could potentially be used as collateral in future borrowing opportunities.

At June 30, 2020, we do not have an outstanding balance on our credit facility; therefore, leaving $60,000,000 available for future borrowings. The maturity date on the credit facility is October 7, 2020. The credit facility is available for general corporate purposes, including working capital and acquisitions. We are currently evaluating various options regarding the upcoming maturity date of our credit facility.

Our ability to refinance the credit agreement, 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.

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

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Interest Rate Risk

The fair values of our fixed–income investments fluctuate in response to changes in market interest rates. Increases and decreases in prevailing interest rates generally translate into decreases and increases, respectively, in the fair values of those instruments. Additionally, the fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, the liquidity of the instrument and other general market conditions. At June 30, 2020, we have available for sale marketable debt securities in the amount of $149,588,000. The fixed maturity portfolio is comprised of investments with primarily short–term and intermediate–term maturities. The portfolio composition allows flexibility in reacting to fluctuations of interest rates. The fixed maturity portfolio allows our insurance company subsidiaries to achieve an adequate risk–adjusted return while maintaining sufficient liquidity to meet obligations.

As of June 30, 2020, we have no outstanding balance on our credit facility.

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 June 30, 2020, the fair value of our marketable equity securities is approximately $112,114,000. Of the $112.1 million equity securities portfolio, our investment in NHI comprises approximately $99.0 million, or 88.3%, 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 June 30, 2020, our equity securities had unrealized gains of $81.9 million. Of the $81.9 million of unrealized gains, $74.3 million is related to our investment in NHI.

Item 4.

Controls and Procedures.

As of June 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 June 30, 2020.

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.

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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: August 7, 2020	/s/ Stephen F. Flatt
	Stephen F. Flatt
	Chief Executive Officer


Date: August 7, 2020	/s/ Brian F. Kidd
	Brian F. Kidd
	Senior Vice President and Controller
	(Principal Accounting Officer)