NATIONAL HEALTHCARE CORP - FORM 10-Q

Attached files

file	filename
EX-32 - EXHIBIT 32 - NATIONAL HEALTHCARE CORP	ex32.htm
EX-31.2 - EXHIBIT 31.2 - BRIAN F. KIDD - NATIONAL HEALTHCARE CORP	ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - STEPHEN F. FLATT - NATIONAL HEALTHCARE CORP	ex31-1.htm
EX-4.1 - EXHIBIT 4.1 - NATIONAL HEALTHCARE CORP	ex4-1.htm
EX-3.5 - EXHIBIT 3.5 - NATIONAL HEALTHCARE CORP	ex3-5.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ____________

Commission file number 001–13489


(Exact name of registrant as specified in its Charter)

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

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

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

Indicate by check mark whether the registrant: (1) Has filed all reports required to be filed by Section 13 or 15(d), of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S–T (§232.405 of this chapter) during the preceding 12 months (or for such period that the registrant was required to submit and post such files). Yes [x] No [ ]

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

Large accelerated filer [ ]	Accelerated filer [x]

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

	Emerging growth company [ ]

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

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

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

TABLE OF CONTENTS

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

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 4.	Controls and Procedures	39

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	39

Item 1A	Risk Factors	39

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

Item 3.	Defaults Upon Senior Securities	39

Item 5.	Other Information	39

Item 6.	Exhibits	40

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Income

(in thousands, except share and per share amounts)

(unaudited)

	Three Months Ended June 30						Six Months Ended June 30
	2017			2016			2017			2016
Revenues:
Net patient revenues	$	227,847		$	216,487		$	455,806		$	434,593
Other revenues		11,610			11,281			22,894			22,763
Net operating revenues		239,457			227,768			478,700			457,356

Cost and Expenses:
Salaries, wages and benefits		142,684			135,068			280,739			265,088
Other operating		62,856			57,306			126,739			118,615
Facility rent		10,079			10,319			20,167			20,646
Depreciation and amortization		10,481			9,495			20,776			18,849
Interest		1,219			939			2,277			1,893
Total costs and expenses		227,319			213,127			450,698			425,091

Income Before Non–Operating Income		12,138			14,641			28,002			32,265
Non–Operating Income		5,189			4,925			9,957			9,698

Income Before Income Taxes		17,327			19,566			37,959			41,963
Income Tax Provision		(6,758	)		(7,700	)		(14,757	)		(16,398	)
Net Income		10,569			11,866			23,202			25,565
Loss Attributable To Noncontrolling Interest		86			-			181			-

Net Income Attributable to National HealthCare Corporation	$	10,655		$	11,866		$	23,383		$	25,565

Earnings Per Share Attributable to National HealthCare Corporation Stockholders:
Basic	$	0.70		$	0.78		$	1.54		$	1.69
Diluted	$	0.70		$	0.78		$	1.54		$	1.68

Weighted Average Common Shares Outstanding:
Basic		15,189,818			15,266,559			15,181,700			15,091,732
Diluted		15,220,448			15,289,104			15,216,336			15,212,275

Dividends Declared Per Common Share	$	0.48		$	0.45		$	0.93		$	0.85

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

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Comprehensive Income

(unaudited – in thousands)

	Three Months Ended June 30						Six Months Ended June 30
	2017			2016			2017			2016

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

Other Comprehensive Income:
Unrealized gains on investments in marketable securities		13,297			18,123			12,356			30,627
Reclassification adjustment for realized gains on sale of securities		(204	)		(261	)		(238	)		(540	)
Income tax expense related to items of other comprehensive income		(5,054	)		(6,887	)		(4,646	)		(11,554	)
Other Comprehensive Income, net of tax		8,039			10,975			7,472			18,533

Loss Attributable To Noncontrolling Interest		86			-			181			-

Comprehensive Income Attributable to National HealthCare Corporation	$	18,694		$	22,841		$	30,855		$	44,098

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

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Balance Sheets

(in thousands)

	June 30, 2017			December 31, 2016
	unaudited
Assets
Current Assets:
Cash and cash equivalents	$	60,848		$	26,335
Restricted cash and cash equivalents		3,582			3,125
Marketable securities		148,137			138,013
Restricted marketable securities		21,963			22,773
Accounts receivable, less allowance for doubtful accounts of $7,408 and $5,743, respectively		79,640			82,531
Inventories		7,198			7,508
Prepaid expenses and other assets		3,617			2,648
Notes receivable, current portion		1,299			3,259
Federal income tax receivable		2,447			4,665
Total current assets		328,731			290,857

Property and Equipment:
Property and equipment, at cost		949,753			933,140
Accumulated depreciation and amortization		(394,224	)		(373,516	)
Net property and equipment		555,529			559,624

Other Assets:
Restricted cash and cash equivalents		2,166			2,129
Restricted marketable securities		141,991			160,931
Deposits and other assets		5,639			5,244
Goodwill		17,600			17,600
Notes receivable, less current portion		12,245			13,820
Investments in limited liability companies		36,345			37,242
Total other assets		215,986			236,966
Total assets	$	1,100,246		$	1,087,447

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

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Balance Sheets (continued)

(in thousands, except share and per share amounts)

	June 30, 2017		December 31, 2016
	unaudited
Liabilities and Stockholders’ Equity
Current Liabilities:
Trade accounts payable	$	14,738	$	18,593
Capital lease obligations, current portion		3,587		3,481
Accrued payroll		53,311		65,912
Amounts due to third party payors		17,950		17,019
Accrued risk reserves, current portion		25,545		25,898
Other current liabilities		14,623		13,207
Dividends payable		7,294		6,818
Total current liabilities		137,048		150,928

Long–term debt		120,000		120,000
Capital lease obligations, less current portion		24,927		26,748
Accrued risk reserves, less current portion		68,996		65,264
Refundable entrance fees		9,167		9,924
Obligation to provide future services		3,236		3,236
Deferred income taxes		25,178		22,072
Other noncurrent liabilities		17,350		16,302
Deferred revenue		4,886		3,362
Total liabilities		410,788		417,836

Stockholders’ Equity:
Common stock, $.01 par value; 45,000,000 and 30,000,000 shares authorized, respectively; 15,195,030 and 15,162,938 shares, respectively, issued and outstanding		152		152
Capital in excess of par value		213,785		211,457
Retained earnings		401,192		391,934
Accumulated other comprehensive income		73,540		66,068
Total National HealthCare Corporation stockholders’ equity		688,669		669,611
Noncontrolling interest		789		-
Total stockholders' equity		689,458		669,611
Total liabilities and stockholders’ equity	$	1,100,246	$	1,087,447

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

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Cash Flows

(unaudited – in thousands)

	Six Months Ended June 30
	2017			2016
				(as adjusted)
Cash Flows From Operating Activities:
Net income	$	23,202		$	25,565
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		20,776			18,849
Provision for doubtful accounts receivable		3,795			3,795
Equity in earnings of unconsolidated investments		(3,380	)		(3,120	)
Distributions from unconsolidated investments		4,337			5,635
Gains on sale of restricted marketable securities		(238	)		(540	)
Deferred income taxes		(1,540	)		(244	)
Stock–based compensation		832			494
Changes in operating assets and liabilities, net of the effect of acquisitions:
Accounts receivable		(904	)		3,072
Income tax receivable		2,218			2,288
Inventories		310			431
Prepaid expenses and other assets		(969	)		(967	)
Trade accounts payable		(3.855	)		1,675
Accrued payroll		(12,601	)		(15,333	)
Amounts due to third party payors		931			1,756
Other current liabilities and accrued risk reserves		4,819			609
Other noncurrent liabilities		1,048			1,073
Deferred revenue		1,524			1,390
Net cash provided by operating activities		40,305			46,428
Cash Flows From Investing Activities:
Additions to property and equipment		(16,681	)		(36,127	)
Investments in unconsolidated companies		(176	)		(904	)
Investments in notes receivable		-			(2,144	)
Collections of notes receivable		3,651			428
Purchase of restricted marketable securities		(22,775	)		(23,852	)
Sale of restricted marketable securities		44,756			25,697
Net cash provided by (used in) investing activities		8,775			(36,902	)
Cash Flows From Financing Activities:
Tax expense from stock–based compensation		-			(1,134	)
Principal payments under capital lease obligations		(1,715	)		(1,614	)
Dividends paid to common stockholders		(13,649	)		(12,101	)
Issuance of common shares		1,496			10,070
Equity attributable to noncontrolling interest		970			-
Entrance fee refunds		(757	)		(34	)
Change in deposits		(418	)		216
Net cash used in financing activities		(14,073	)		(4,597	)
Net Increase in Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents		35,007			4,929
Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents, Beginning of Period		31,589			49,314
Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents, End of Period	$	66,596		$	54,243

Balance Sheet Classifications:
Cash and cash equivalents	$	60,848		$	37,543
Restricted cash and cash equivalents		5,748			16,700
Total Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents	$	66,596		$	54,243

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

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share and per share amounts)

(unaudited)

	Common Stock				Capital in Excess of			Retained			Accumulated Other Comprehensive		Non- controlling			Total Stockholders’
	Shares		Amount		Par Value			Earnings			Income		Interest			Equity
Balance at January 1, 2016		15,000,616	$	150	$	209,469		$	368,013		$	53,364	$	–		$	630,996
Net income		–		–		–			25,565			–		–			25,565
Other comprehensive income		–		–		–			–			18,533		–			18,533
Stock–based compensation		–		–		494			–			–		–			494
Tax expense from exercise of stock options		–		–		(1,134	)		–			–		–			(1,134	)
Shares sold – options exercised		278,623		3		10,067			–			–		–			10,070
Dividends declared to common stockholders ($0.85 per share)		–		–		–			(12,981	)		–		–			(12,981	)
Balance at June 30, 2016		15,279,239	$	153	$	218,896		$	380,597		$	71,897	$	–		$	671,543

Balance at January 1, 2017		15,162,938	$	152	$	211,457		$	391,934		$	66,068	$	–		$	669,611
Net income attributable to National HealthCare Corporation		–		–		–			23,383			–		–			23,383
Net loss attributable to noncontrolling interest		–		–		–			–			–		(181	)		(181	)
Equity contributed by noncontrolling interest		–		–		–			–			–		970			970
Other comprehensive income		–		–		–			–			7,472		–			7,472
Stock–based compensation		–		–		832			–			–		–			832
Shares sold – options exercised		32,092		–		1,496			–			–		–			1,496
Dividends declared to common stockholders ($0.93 per share)		–		–		–			(14,125	)		–		–			(14,125	)
Balance at June 30, 2017		15,195,030	$	152	$	213,785		$	401,192		$	73,540	$	789		$	689,458

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

NATIONAL HEALTHCARE CORPORATION

Notes to Interim Condensed Consolidated Financial Statements

June 30, 2017

(unaudited)

Note 1 – Description of Business

National HealthCare Corporation (“NHC” or the “Company”) is a leading provider of senior health care services. As of June 30, 2017, we operate or manage, through certain affiliates, 76 skilled nursing facilities with a total of 9,597 licensed beds, 25 assisted living facilities, five independent living facilities, and 36 homecare programs. We operate specialized care units within certain of our healthcare centers such as Alzheimer's disease care units and sub-acute nursing units. We also have a non-controlling ownership interest in a hospice care business that services NHC owned health care centers and others. In addition, we provide insurance services, management and accounting services, and we lease properties to operators of skilled nursing facilities. We operate in 10 states and are located primarily in the southeastern United States.

Note 2 – Summary of Significant Accounting Policies

The listing below is not intended to be a comprehensive list of all our significant accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with limited need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. See our audited December 31, 2016 consolidated financial statements and notes thereto which contain accounting policies and other disclosures required by generally accepted accounting principles. Our audited December 31, 2016 consolidated financial statements are available at our web site: www.nhccare.com.

Basis of Presentation

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

We assume that users of these interim financial statements have read or have access to the audited December 31, 2016 consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations and that the adequacy of additional disclosure needed for a fair presentation, except in regard to material contingencies, may be determined in that context. Accordingly, footnotes and other disclosures which would substantially duplicate the disclosure contained in our most recent annual report to stockholders have been omitted. This interim financial information is not necessarily indicative of the results that may be expected for a full year for a variety of reasons.

Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and could cause our reported net income to vary significantly from period to period.

Change in Accounting Principle

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

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

Consolidated Statement of Cash Flows

(in thousands)

	Six Months Ended June 30, 2016
	As Previously Reported			Effect of Accounting Change			As Adjusted

Cash Flows from Operating Activities:
Restricted cash and cash equivalents	$	(10,342	)	$	10,342		$	–
Net cash provided by operating activities		36,086			10,342			46,428

Cash Flows from Investing Activities:
Change in restricted cash and cash equivalents		4,748			(4,748	)		–
Net cash used in investing activities		(32,154	)		(4,748	)		(36,902	)

Net (Decrease) Increase in Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents		(665	)		5,594			4,929
Cash, Cash Equivalents, Restricted Cash, and Restricted Cash, Equivalents, Beginning of Period		38,208			11,106			49,314
Cash, Cash Equivalents, Restricted Cash, and Restricted Cash, Equivalents, End of Period	$	37,543		$	16,700		$	54,243

Recently Adopted Accounting Guidance

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

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

Recent Accounting Guidance Not Yet Adopted

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

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

In May 2014, the FASB issued ASU No. 2014–09 “Revenue from Contracts with Customers”, also known as the “New Revenue Standard”. This update is the result of a collaborative effort by the FASB and the International Accounting Standards Board to simplify revenue recognition guidance, remove inconsistencies in the application of revenue recognition, and to improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to receive for those goods or services. The New Revenue Standard is applied through the following five-step process:

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

2. Identify the performance obligation in the contract.

3. Determine the transaction price.

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

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

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

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

Revenue Recognition – Third Party Payors

Approximately 65% of our net patient revenues are derived from Medicare, Medicaid, and other government programs. Amounts earned under these programs are subject to review by the Medicare and Medicaid intermediaries or their agents. In our opinion, adequate provision has been made for any adjustments that may result from these reviews. Any differences between our original estimates of reimbursements and subsequent revisions are reflected in operations in the period in which the revisions are made often due to final determination or the period of payment no longer being subject to audit or review. We have recorded liabilities of approximately $17,950,000 and $17,019,000 as of June 30, 2017 and December 31, 2016, respectively, for various Medicare and Medicaid current and prior year cost reports and claims reviews.

Revenue Recognition – Private Pay

For private pay patients in skilled nursing or assisted living facilities, we bill room and board in advance with payment being due in the month the services are performed. Charges for ancillary, pharmacy, therapy and other services to private patients are billed in the month following the performance of services; however, all billings are recognized as revenue when the services are performed.

Revenue Recognition – Subordination of Fees and Uncertain Collections

We provide management services to certain senior care facilities and to others we provide accounting and financial services. We generally charge 6% to 7% of net operating revenues for our management services and a predetermined fixed rate per bed for the accounting and financial services. Our policy is to recognize revenues associated with both management services and accounting and financial services on an accrual basis as the services are provided. However, under the terms of our management contracts, payments for our management services are subject to subordination to other expenditures of the long–term care center being managed. Furthermore, for certain of the third parties with whom we have contracted to provide services and which we have determined that collection is not reasonably assured; our policy is to recognize income only in the period in which the amounts are realized. We may receive payment for the unpaid and unrecognized management fees in whole or in part in the future only if cash flows from the operating and investing activities of the centers or proceeds from the sale of the centers are sufficient to pay the fees. There can be no assurance that such future cash flows will occur. The realization of such previously unrecognized revenue could cause our reported net income to vary significantly from period to period.

We agree to subordinate our fees to the other expenses of a managed center because we believe we know how to improve the quality of patient services and finances of a senior healthcare center. We believe subordinating our fees demonstrates to the owner and employees of the managed center how confident we are of the impact we can have in making the center operations successful. We may continue to provide services to certain managed centers despite not being fully paid currently so that we may be able to collect unpaid fees in the future from improved operating results and because the incremental savings from discontinuing services to a center may be small compared to the potential benefit. Also, we may benefit from providing other ancillary services to the managed center.

Segment Reporting

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

Other Operating Expenses

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

General and Administrative Costs

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

Property and Equipment

Property and equipment are recorded at cost. Depreciation is provided by the straight-line method over the expected useful lives of the assets estimated as follows: buildings and improvements, 20-40 years and equipment and furniture, 3-15 years. Leasehold improvements are amortized over periods that do not exceed the non-cancelable respective lease terms using the straight-line method.

Capital leases are recorded at the lower of fair market value or the present value of future minimum lease payments. Capital leases are amortized in accordance with the provision codified within Accounting Standards Codification (“ASC”) Subtopic 840-30, Leases – Capital Leases. Amortization of capital lease assets is included in depreciation and amortization expense.

Accrued Risk Reserves

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

Professional liability remains an area of particular concern to us. The long-term care industry has seen an increase in personal injury/wrongful death claims based on alleged negligence by skilled nursing facilities and their employees in providing care to residents. As of June 30, 2017, we and/or our managed centers are defendants in 61 such claims inclusive of years 2005 through June 30, 2017. It remains possible that those pending matters plus potential unasserted claims could exceed our reserves, which could have a material adverse effect on our consolidated financial position, results of operations and cash flows. It is also possible that future events could cause us to make significant adjustments or revisions to these reserve estimates and cause our reported net income to vary significantly from period to period.

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

Continuing Care Contracts and Refundable Entrance Fee

We have one continuing care retirement center (“CCRC”) within our operations. Residents at this retirement center may enter into continuing care contracts with us. The contracts provide that 10% of the resident entry fee becomes non-refundable upon occupancy, and the remaining refundable portion of the entry fee is calculated using the lessor of the price at which the apartment is re-assigned or 90% of the original entry fee, plus 40% of any appreciation if the apartment exceeds the original resident’s entry fee. In each case, we amortize the non-refundable part of these fees into revenue over the actuarially determined remaining life of the resident, which is the expected period of occupancy by the resident. We pay the refundable portion of our entry fees to residents when they relocate from our community and the apartment is re-occupied. Refundable entrance fees are classified as non-current liabilities and non-refundable entrance fees are classified as deferred revenue in the Company's consolidated balance sheets. The balances of refundable entrance fees as of June 30, 2017 and December 31, 2016 were $9,167,000 and $9,924,000, respectively.

Obligation to Provide Future Services

We annually estimate the present value of the cost of future services and the use of facilities to be provided to the current CCRC residents and compare that amount with the balance of non-refundable deferred revenue from entrance fees received. If the present value of the cost of future services exceeds the related anticipated revenues, a liability is recorded (obligation to provide future services) with a corresponding charge to income. As of June 30, 2017, and December 31, 2016, we have recorded a future service obligation in the amount of $3,236,000.

Other Noncurrent Liabilities

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

Deferred Revenue

Deferred revenue includes the deferred gain on the sale of assets to National Health Corporation (“National”), the non-refundable portion (10%) of CCRC entrance fees being amortized over the remaining life expectancies of the residents, and premiums received within our workers’ compensation and professional liability companies that are not yet earned.

Noncontrolling Interest

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

Variable Interest Entities

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

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

Note 3 – Other Revenues

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

Other revenues include the following:

	Three Months Ended June 30				Six Months Ended June 30
(in thousands)	2017		2016		2017		2016
Rental Income	$	5,515	$	5,435	$	11,001	$	11,005
Management and accounting services fees		3,752		3,506		7,611		7,255
Insurance services		2,087		1,815		3,644		3,739
Other		256		525		638		764
	$	11,610	$	11,281		22,894		22,763

Management Fees from National

We manage five skilled nursing facilities owned by National. For the three months and six months ended June 30, 2017, we recognized management fees and interest on management fees of $989,000 and $1,925,000 from these centers, respectively. For the three months and six months ended June 30, 2016, we recognized management fees and interest on management fees of $926,000 and $1,895,000 from these centers.

Because the amount collectable cannot be reasonably determined when the management services are provided, and because we cannot estimate the timing or amount of expected future collections, the unpaid fees from the five centers owned by National will be recognized as revenues only when the collectability of these fees can be reasonably assured. Under the terms of our management agreement with National, the payment of these fees to us may be subordinated to other expenditures of the five long–term care centers. We continue to manage these centers so that we may be able to collect our fees in the future and because the incremental savings from discontinuing services to a center may be small compared to the potential benefit. We may receive payment for the unrecognized management fees in whole or in part in the future only if cash flows from the operating and investing activities of the five centers or the proceeds from the sale of the centers are sufficient to pay the fees. There can be no assurance that such future improved cash flows will occur.

Insurance Services

For workers’ compensation insurance services, the premium revenues reflected in the interim condensed consolidated statements of income for the three months and six months ended June 30, 2017 were $1,409,000 and $2,688,000. For the three months and six months ended June 30, 2016, the workers' compensation premium revenues reflected in the interim condensed consolidated statements of income were $1,150,000 and $2,383,000, respectively. Associated losses and expenses are reflected in the interim condensed consolidated statements of income as "Salaries, wages and benefits."

For professional liability insurance services, the premium revenues reflected in the interim condensed consolidated statements of income for the three months and six months ended June 30, 2017 were $678,000 and $956,000, respectively. For the three months and six months ended June 30, 2016, the professional liability insurance premium revenues reflected in the interim condensed consolidated statements of income were $665,000 and $1,356,000, respectively. Associated losses and expenses including those for self–insurance are included in the interim condensed consolidated statements of income as "Other operating costs and expenses".

Note 4 – Non–Operating Income

Non–operating income is outlined in the table below. Non–operating income includes equity in earnings of unconsolidated investments, dividends and other realized gains and losses on marketable securities, and interest income. Our most significant equity method investment is a 75.1% noncontrolling ownership interest in Caris HealthCare L.P. (“Caris”), a business that specializes in hospice care services.

	Three Months Ended June 30				Six Months Ended June 30
(in thousands)	2017		2016		2017		2016
Equity in earnings of unconsolidated investments	$	1,854	$	1,615	$	3,380	$	3,120
Dividends and other net realized gains and losses on sales of securities		1,899		1,901		3,623		3,762
Interest income		1,436		1,409		2,954		2,816
	$	5,189	$	4,925	$	9,957	$	9,698

Note 5 – Business Segments

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

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

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

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

	Three Months Ended June 30, 2017
	Inpatient Services		Homecare		All Other			Total
Revenues:
Net patient revenues	$	211,888	$	15,959	$	-		$	227,847
Other revenues		225		-		11,385			11,610
Net operating revenues		212,113		15,959		11,385			239,457

Costs and Expenses:
Salaries, wages and benefits		124,287		8,615		9,782			142,684
Other operating		55,989		5,058		1,809			62,856
Rent		8,257		499		1,323			10,079
Depreciation and amortization		9,396		39		1,046			10,481
Interest		436		-		783			1,219
Total costs and expenses		198,365		14,211		14,743			227,319

Income (Loss) Before Non-Operating Income		13,748		1,748		(3,358	)		12,138

Non-Operating Income		-		-		5,189			5,189

Income Before Income Taxes	$	13,748	$	1,748	$	1,831		$	17,327

	Three Months Ended June 30, 2016
	Inpatient Services		Homecare		All Other			Total
Revenues:
Net patient revenues	$	200,617	$	15,870	$	-		$	216,487
Other revenues		198		-		11,083			11,281
Net operating revenues		200,815		15,870		11,083			227,768

Costs and Expenses:
Salaries, wages and benefits		117,106		8,216		9,746			135,068
Other operating		50,472		5,092		1,742			57,306
Rent		8,449		481		1,389			10,319
Depreciation and amortization		8,359		46		1,090			9,495
Interest		487		-		452			939
Total costs and expenses		184,873		13,835		14,419			213,127

Income (Loss) Before Non-Operating Income		15,942		2,035		(3,336	)		14,641

Non-Operating Income		-		-		4,925			4,925

Income Before Income Taxes	$	15,942	$	2,035	$	1,589		$	19,566

	Six Months Ended June 30, 2017
	Inpatient Services		Homecare		All Other			Total
Revenues:
Net patient revenues	$	424,190	$	31,616	$	-		$	455,806
Other revenues		451		-		22,443			22,894
Net operating revenues		424,641		31,616		22,443			478,700

Costs and Expenses:
Salaries, wages and benefits		242,535		16,442		21,762			280,739
Other operating		112,859		10,193		3,687			126,739
Rent		16,424		987		2,756			20,167
Depreciation and amortization		18,605		80		2,091			20,776
Interest		886		-		1,391			2,277
Total costs and expenses		391,309		27,702		31,687			450,698

Income (Loss) Before Non-Operating Income		33,332		3,914		(9,244	)		28,002

Non-Operating Income		-		-		9,957			9,957

Income Before Income Taxes	$	33,332	$	3,914	$	713		$	37,959

	Six Months Ended June 30, 2016
	Inpatient Services		Homecare		All Other			Total
Revenues:
Net patient revenues	$	402,700	$	31,893	$	-		$	434,593
Other revenues		367		-		22,396			22,763
Net operating revenues		403,067		31,893		22,396			457,356

Costs and Expenses:
Salaries, wages and benefits		227,670		16,197		21,221			265,088
Other operating		104,351		10,386		3,878			118,615
Rent		16,809		968		2,869			20,646
Depreciation and amortization		16,573		92		2,184			18,849
Interest		985		-		908			1,893
Total costs and expenses		366,388		27,643		31,060			425,091

Income (Loss) Before Non-Operating Income		36,679		4,250		(8,664	)		32,265

Non-Operating Income		-		-		9,698			9,698

Income Before Income Taxes	$	36,679	$	4,250	$	1,034		$	41,963

Note 6 – Long-Term Leases

Capital Leases

Fixed assets recorded under the capital leases, which are included in property and equipment in the interim condensed consolidated balance sheets, are as follows:

	June 30, 2017			December 31, 2016
	(in thousands)
Buildings and personal property	$	39,032		$	39,032
Accumulated amortization		(13,083	)		(11,120	)
	$	25,949		$	27,912

Operating Leases

At June 30, 2017, NHC leases from National Health Investors, Inc. (“NHI”) the real property of 35 skilled nursing facilities, seven assisted living facilities and three independent living facilities under two separate lease agreements. Base rent expense under both lease agreements totals $34,200,000 annually with rent thereafter escalating by 4% of the increase in facility revenue over the base year. Total facility rent expense to NHI was $9,314,000 and $9,480,000 for the three months ended June 30, 2017 and 2016, respectively. Total facility rent expense to NHI was $18,628,000 and $18,960,000 for the six months ended June 30, 2017 and 2016, respectively.

Minimum Lease Payments

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

	Operating Leases		Capital Leases
	(in thousands)
2018	$	34,200	$	5,200
2019		34,200		5,200
2020		34,200		5,200
2021		34,200		5,200
2022		34,200		5,200
Thereafter		159,650		8,667
Total minimum lease payments	$	330,650	$	34,667
Less: Amounts representing interest				(6,153	)
Present value of minimum lease payments				28,514
Less: Current portion				(3,587	)
Long-term capital lease obligations			$	24,927

Note 7 – Earnings per Share

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

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

	Three Months Ended June 30				Six Months Ended June 30
	2017		2016		2017		2016
Basic:
Weighted average common shares outstanding		15,189,818		15,266,559		15,181,700		15,091,732
Net income attributable to National HealthCare Corporation	$	10,655	$	11,866	$	23,383	$	25,565
Earnings per common share, basic	$	0.70	$	0.78	$	1.54	$	1.69

Diluted:
Weighted average common shares outstanding		15,189,818		15,266,559		15,181,700		15,091,732
Dilutive effect of stock options		30,630		22,545		34,636		23,406
Dilutive effect of contingent issuable stock		-		-		-		97,137
Weighted average common shares outstanding		15,220,448		15,289,104		15,216,336		15,212,275

Net income attributable to National HealthCare Corporation	$	10,655	$	11,866	$	23,383	$	25,565
Earnings per common share, diluted	$	0.70	$	0.78	$	1.54	$	1.68

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

Note 8 – Investments in Marketable Securities

Our investments in marketable securities are classified as available for sale securities. Realized gains and losses from securities sales are recognized in results of operations upon disposition of the securities using the specific identification method on a trade date basis. Refer to Note 9 for a description of the Company's methodology for determining the fair value of marketable securities.

Marketable securities and restricted marketable securities consist of the following:

	June 30, 2017				December 31, 2016
(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Investments available for sale:
Marketable equity securities	$	30,176	$	148,137	$	30,176	$	138,013
Restricted investments available for sale:
Corporate debt securities		67,997		68,496		71,311		71,100
Commercial mortgage–backed securities		51,188		50,905		56,889		56,168
U.S. Treasury securities		20,899		20,533		25,748		25,181
State and municipal securities		24,141		24,020		32,020		31,255
	$	194,401	$	312,091	$	216,144	$	321,717

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

June 30, 2017

December 31, 2016

Cost

Fair

Value

Cost

Fair

Value

NHI Common Stock

1,630,642

24,734

129,147

1,630,642

24,734

120,945

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

	June 30, 2017				December 31, 2016
(in thousands)	Cost		Fair Value		Cost		Fair Value
Maturities:
Within 1 year	$	14,628	$	14,628	$	14,181	$	14,216
1 to 5 years		66,519		66,747		79,827		79,502
6 to 10 years		81,923		81,424		91,211		89,269
Over 10 years		1,155		1,155		749		717
	$	164,225	$	163,954	$	185,968	$	183,704

Gross unrealized gains related to available for sale securities are $119,086,000 and $108,730,000 as of June 30, 2017 and December 31, 2016, respectively. Gross unrealized losses related to available for sale securities are $1,396,000 and $3,157,000 as of June 30, 2017 and December 31, 2016, respectively. For the marketable securities in gross unrealized loss positions, (a) it is more likely than not that the Company will not be required to sell the investment securities before recovery of the unrealized losses, and (b) the Company expects that the contractual principal and interest will be received on the investment securities. As a result, the Company recognized no other-than-temporary impairment during the six months ended June 30, 2017 or for the year ended December 31, 2016.

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

Note 9 – Fair Value Measurements

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

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

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

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

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

Valuation of Marketable Securities

The Company determines fair value for marketable securities with Level 1 inputs through quoted market prices. The Company determines fair value for marketable securities with Level 2 inputs through broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. Our Level 2 marketable securities have been initially valued at the transaction price and subsequently valued, at the end of each month, typically utilizing third party pricing services or other market observable data. The pricing services utilize industry standard valuation models, including both income and market based approaches and observable market inputs to determine value. These observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, and other industry and economic events.

We validated the prices provided by our broker by reviewing their pricing methods, obtaining market values from other pricing sources, analyzing pricing data in certain instances and confirming that the relevant markets are active. After completing our validation procedures, we did not adjust or override any fair value measurements provided by our broker as of June 30, 2017. We did not have any transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy during the six months ended June 30, 2017.

Other

The carrying amounts of cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short–term nature. The estimated fair value of notes receivable approximates the carrying value based principally on their underlying interest rates and terms, maturities, collateral and credit status of the receivables. Our long–term debt approximates fair value due to variable interest rates, but fair value is also determined using Level 2 inputs through alternative pricing sources. At June 30, 2017, there were no material differences between the carrying amounts and fair values of NHC’s financial instruments.

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

	Fair Value Measurements Using
June 30, 2017	Fair Value		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	60,848	$	60,848	$	–	$	–
Restricted cash and cash equivalents		5,748		5,748		–		–
Marketable equity securities		148,137		148,137		–		–
Corporate debt securities		68,496		47,900		20,596		–
Mortgage–backed securities		50,905		–		50,905		–
U.S. Treasury securities		20,533		20,533		–		–
State and municipal securities		24,020		–		24,020		–
Total financial assets	$	378,687	$	283,166	$	95,521	$	–

	Fair Value Measurements Using
December 31, 2016	Fair Value		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	26,335	$	26,335	$	–	$	–
Restricted cash and cash equivalents		5,254		5,254		–		–
Marketable equity securities		138,013		138,013		–		–
Corporate debt securities		71,100		42,323		28,777		–
Mortgage-backed securities		56,168		–		56,168		–
U.S. Treasury securities		25,181		25,181		–		–
State and municipal securities		31,255		–		31,255		–
Total financial assets	$	353,306	$	237,106	$	116,200	$	–

Note 10 – Long–Term Debt

Long–term debt consists of the following:

	Weighted Average Interest Rate		Maturities		June 30, 2017		December 31, 2016
	Variable				(dollars in thousands)
Revolving Credit Facility, interest payable monthly		2.6%		2020	$	110,000	$	110,000

Unsecured term note payable to National, interest payable quarterly, principal payable at maturity		3.6%		2018		10,000		10,000
						120,000		120,000
Less current portion						–		–
					$	120,000	$	120,000

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

$175,000,000 Credit Facility

In October 2015, we entered into a $175 million credit facility that has a five year maturity date (October 2020). Loans bear interest at either (i) LIBOR plus 1.40% or (ii) the base rate plus 0.40%. The base rate is defined as the highest of (a) the Federal Funds Rate plus ½ of 1%, (b) the Bank of America prime rate, and (c) LIBOR plus 1.00%. The credit facility is available for general corporate purposes, including working capital and acquisitions. NHC is permitted, upon required notice to the lender, to prepay the loans outstanding under the credit facility at any time, without penalty.

The Credit Agreement contains customary representations and financial covenants, including covenants that restrict, among other things, asset dispositions, mergers and acquisitions, dividends, restricted payments, debt, liens, investments and affiliate transactions. The Credit Agreement contains customary events of default.

Note 11 - Stock Repurchase Program

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

Note 12 – Stock–Based Compensation

NHC recognizes stock–based compensation expense for all stock options and restricted stock granted over the requisite service period using the fair value for these grants as estimated at the date of grant either using the Black–Scholes pricing model for stock options or the quoted market price for restricted stock.

The Compensation Committee of the Board of Directors (“the Committee”) has the authority to select the participants to be granted options; to designate whether the option granted is an incentive stock option (“ISO”), a non–qualified option, or a stock appreciation right; to establish the number of shares of common stock that may be issued upon exercise of the option; to establish the vesting provision for any award; and to establish the term any award may be outstanding. The exercise price of any ISO’s granted will not be less than the fair market value of the shares of common stock on the date granted and the term of an ISO may not be any more than ten years. The exercise price of any non–qualified options granted will not be less than the fair market value of the shares of common stock on the date granted unless so determined by the Committee.

In May 2015, our stockholders voted to amend the 2010 Omnibus Equity Incentive Plan (“the 2010 Plan”) to increase the number of shares of our common stock authorized under the Plan from the original 1,200,000 shares to 2,575,000 shares. The shares granted during the six months ended June 30, 2017 consisted of 1,062,500 shares to employees of the Company, 52,500 shares to the Directors of the Company, and 9,689 shares for the Employee Stock Purchase Plan. At June 30, 2017, 568,744 shares were available for future grants under the amended 2010 Plan.

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

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

Stock Options

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

	2017			2016
Risk–free interest rate		2.08	%		0.89	%
Expected volatility		16.6	%		15.8	%
Expected life, in years		4.8			2.2
Expected dividend yield		3.10	%		3.09	%

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

	Number of Shares			Weighted Average Exercise Price		Aggregate Intrinsic Value
Options outstanding at January 1, 2016		621,390		$	48.15	$	–
Options granted		56,291			62.54		–
Options exercised		(499,066	)		47.16		–
Options cancelled		(656	)		46.69		–
Options outstanding at December 31, 2016		177,959			55.48		–
Options granted		1,124,689			72.96		–
Options exercised		(31,992	)		46.54		–
Options cancelled		–			–		–
Options outstanding at June 30, 2017		1,270,656		$	71.18	$	1,854,000

Options exercisable at June 30, 2017		198,467		$	61.54	$	1,854,000

Options Outstanding June 30, 2017	Exercise Prices				Weighted Average Exercise Price		Weighted Average Remaining Contractual Life in Years
60,000		$47.45	-	$52.93	$	50.88		1.5
1,210,656		$61.25	-	$75.45		72.18		4.5
1,270,656					$	71.18		4.4

Note 13 – Income Taxes

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

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

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

The Company is no longer subject to U.S. federal and state examinations by tax authorities for years before 2013 (with certain state exceptions).

Note 14 – Contingencies and Commitments

Accrued Risk Reserves

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

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

Workers’ Compensation

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

General and Professional Liability Lawsuits and Insurance

The senior care industry has experienced increases in both the number of personal injury/wrongful death claims and in the severity of awards based upon alleged negligence by nursing facilities and their employees in providing care to residents. As of June 30, 2017, we and/or our managed centers are currently defendants in 61 such claims.

Insurance coverage for both periods includes both primary policies and excess policies. The primary coverage is in the amount of $1.0 million per incident, $3.0 million per location with an annual primary policy aggregate limit that is adjusted on an annual basis. For 2016 and 2017, the excess coverage is $9.0 million per occurrence. Additional insurance is purchased through third party providers that serve to supplement the coverage provided through our wholly–owned captive insurance company.

Civil Investigative Demand

On December 19, 2013, the Company was served with a civil investigative demand (“CID”) from the U.S. Department of Justice and the Office of the U.S. Attorney for the Eastern District of Tennessee (“DOJ Investigation”) requesting the production of documents and interrogatory responses regarding the billing for and medical necessity of certain rehabilitative therapy services. Based upon our review, the CID appears to relate to services provided at our facilities based in Knoxville, Tennessee.

On October 7, 2014, the Company received a subpoena from the Office of Inspector General of the United Department of Health and Human Services (“OIG Subpoena”) related to the current DOJ Investigation. The OIG Subpoena requests certain financial and organizational documents from the Company and certain of its subsidiaries and SNFs and medical records from certain of the Company’s Tennessee–based SNFs.

The Company is cooperating fully with these requests. We are unable to evaluate the outcome of this investigation at this time. It is possible that this investigation could lead to a claim that could have a material adverse effect on our consolidated financial position, results of operations and cash flows.

Caris HealthCare, L.P. Investigation

On December 9, 2014, Caris Healthcare, L.P., a business that specializes in hospice care services in Company–owned health care centers and in other settings, received notice from the U.S. Attorney’s Office for the Eastern District of Tennessee and the Attorney Generals’ Offices for the State of Tennessee and State of Virginia that those government entities were conducting an investigation regarding patient eligibility for hospice services provided by Caris precipitated by a qui tam lawsuit. We have a 75.1% non–controlling ownership interest in Caris.

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

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

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

Financing Commitments

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

Governmental Regulations

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

Note 15 – Common Stock Authorized

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

Item 2.

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

Overview

National HealthCare Corporation (“NHC” or the “Company”) is a leading provider of senior health care services. We operate or manage, through certain affiliates, 76 skilled nursing facilities with a total of 9,597 licensed beds, 25 assisted living facilities, five independent living facilities, and 36 homecare programs. We operate specialized care units within certain of our healthcare centers such as Alzheimer's disease care units and sub-acute nursing units. We also have a non-controlling ownership interest in a hospice care business that services NHC owned health care centers and others. In addition, we provide insurance services, management and accounting services, and we lease properties to operators of skilled nursing facilities. We operate in 10 states and are located primarily in the southeastern United States.

Summary of Goals and Areas of Focus

Earnings

To monitor our earnings, we have developed budgets and management reports to monitor labor, census, and the composition of revenues.

Occupancy

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

Development and Growth

We are undertaking to expand our senior care operations while protecting our existing operations and markets. The following table lists our recent development activities.

Type of Operation	Description	Size	Location	Placed in Service
SNF	Bed Addition	44 beds	Charleston, SC	May, 2016
SNF/ALF	New Facility	90 beds / 80 units	Nashville, TN	June, 2016
SNF	Bed Addition	8 beds	Kingsport, TN	September, 2016
SNF	New Facility	112 beds	Columbia, TN	January, 2017
ALF	New Facility	78 units	Bluffton, SC	March, 2017
ALF	New Facility	80 units	Garden City, SC	June, 2017
Memory Care	Bed Addition	23 units	Murfreesboro, TN	July, 2017
SNF	Bed Addition	30 beds	Springfield, MO	Under construction

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

During 2017, we plan to apply for Certificates of Need for additional beds in certain of our markets. We also will evaluate the feasibility of expansion into new markets by building private pay health care centers or assisted living communities.

Accrued Risk Reserves

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

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

Application of Critical Accounting Policies

There were no significant changes during the six-month period ended June 30, 2017 to the items we disclosed as our critical accounting policies and estimates in our discussion and analysis of financial condition and results of operations in our December 31, 2016 Annual Report on Form 10–K filed with the SEC.

Government Program Financial Changes

Federal Health Care Reform

In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act ("PPACA" or, commonly, “ACA”) and the Health Care and Education Reconciliation Act of 2010 ("HCERA"), which represents significant changes to the current U.S. health care system (collectively the "Acts"). The primary goals of the Acts are to: (1) expand coverage to Americans without health insurance, (2) reform the delivery system to improve quality and drive efficiency, (3) and to lower the overall costs of providing health care. The timeline of the enacted provisions spans over several years – some of the provisions were effective immediately in 2010 and others may be phased in through 2020.

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

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

Medicare – Skilled Nursing Facilities

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

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

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

Medicaid – Skilled Nursing Facilities

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

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

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

For the first six months of 2017, our average Medicaid per diem increased 1.6% compared to the same period in 2016. We face challenges with respect to states’ Medicaid payments, because many currently do not cover the total costs incurred in providing care to those patients. States will continue to control Medicaid expenditures and also look for adequate funding sources, including provider assessments. There are several pieces of legislation that include provisions designed to reduce Medicaid spending. These provisions include, among others, provisions strengthening the Medicaid asset transfer restrictions for persons seeking to qualify for Medicaid long-term care coverage, which could, due to the timing of the penalty period, increase facilities’ exposure to uncompensated care. Other provisions could increase state funding for home and community-based services, potentially having an impact on funding for nursing facilities.

Medicare – Homecare Programs

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

Segment Reporting

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

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

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

	Three Months Ended June 30, 2017
	Inpatient Services		Homecare		All Other			Total
Revenues:
Net patient revenues	$	211,888	$	15,959	$	-		$	227,847
Other revenues		225		-		11,385			11,610
Net operating revenues		212,113		15,959		11,385			239,457

Costs and Expenses:
Salaries, wages and benefits		124,287		8,615		9,782			142,684
Other operating		55,989		5,058		1,809			62,856
Rent		8,257		499		1,323			10,079
Depreciation and amortization		9,396		39		1,046			10,481
Interest		436		-		783			1,219
Total costs and expenses		198,365		14,211		14,743			227,319

Income (Loss) Before Non-Operating Income		13,748		1,748		(3,358	)		12,138

Non-Operating Income		-		-		5,189			5,189

Income Before Income Taxes	$	13,748	$	1,748	$	1,831		$	17,327

	Three Months Ended June 30, 2016
	Inpatient Services		Homecare		All Other			Total
Revenues:
Net patient revenues	$	200,617	$	15,870	$	-		$	216,487
Other revenues		198		-		11,083			11,281
Net operating revenues		200,815		15,870		11,083			227,768

Costs and Expenses:
Salaries, wages and benefits		117,106		8,216		9,746			135,068
Other operating		50,472		5,092		1,742			57,306
Rent		8,449		481		1,389			10,319
Depreciation and amortization		8,359		46		1,090			9,495
Interest		487		-		452			939
Total costs and expenses		184,873		13,835		14,419			213,127

Income (Loss) Before Non-Operating Income		15,942		2,035		(3,336	)		14,641

Non-Operating Income		-		-		4,925			4,925

Income Before Income Taxes	$	15,942	$	2,035	$	1,589		$	19,566

	Six Months Ended June 30, 2017
	Inpatient Services		Homecare		All Other			Total
Revenues:
Net patient revenues	$	424,190	$	31,616	$	-		$	455,806
Other revenues		451		-		22,443			22,894
Net operating revenues		424,641		31,616		22,443			478,700

Costs and Expenses:
Salaries, wages and benefits		242,535		16,442		21,762			280,739
Other operating		112,859		10,193		3,687			126,739
Rent		16,424		987		2,756			20,167
Depreciation and amortization		18,605		80		2,091			20,776
Interest		886		-		1,391			2,277
Total costs and expenses		391,309		27,702		31,687			450,698

Income (Loss) Before Non-Operating Income		33,332		3,914		(9,244	)		28,002

Non-Operating Income		-		-		9,957			9,957

Income Before Income Taxes	$	33,332	$	3,914	$	713		$	37,959

	Six Months Ended June 30, 2016
	Inpatient Services		Homecare		All Other			Total
Revenues:
Net patient revenues	$	402,700	$	31,893	$	-		$	434,593
Other revenues		367		-		22,396			22,763
Net operating revenues		403,067		31,893		22,396			457,356

Costs and Expenses:
Salaries, wages and benefits		227,670		16,197		21,221			265,088
Other operating		104,351		10,386		3,878			118,615
Rent		16,809		968		2,869			20,646
Depreciation and amortization		16,573		92		2,184			18,849
Interest		985		-		908			1,893
Total costs and expenses		366,388		27,643		31,060			425,091

Income (Loss) Before Non-Operating Income		36,679		4,250		(8,664	)		32,265

Non-Operating Income		-		-		9,698			9,698

Income Before Income Taxes	$	36,679	$	4,250	$	1,034		$	41,963

Results of Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Liquidity, Capital Resources, and Financial Condition

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

	Six Months Ended June 30						Six Month Change
	2017			2016			$			%
Cash, cash equivalents, restricted cash and restricted cash equivalents, at beginning of period	$	31,589		$	49,314		$	(17,725	)		(35.9	)%

Cash provided by operating activities		40,305			46,428			(6,123	)		(13.2	)%

Cash provided by (used in) investing activities		8,775			(36,902	)		45,677			123.8	%

Cash used in financing activities		(14,073	)		(4,597	)		(9,476	)		(206.1	)%

Cash, cash equivalents, restricted cash and restricted cash equivalents, at end of period	$	66,596		$	54,243		$	12,353			22.8	%

Operating Activities

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

Investing Activities

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

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

Financing Activities

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

Table of Contractual Obligations

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

	Total		1 year		2–3 Years		4–5 Years		After 5 Years
Long–term debt – principal	$	120,000	$	10,000	$	110,000	$	−	$	−
Long–term debt – interest		9,580		3,051		5,740		789		−
Operating leases		330,650		34,200		68,400		68,400		159,650
Construction obligations		5,143		5,143		−		−		−
Capital lease obligations		34,667		5,200		10,400		10,400		8,667
Total contractual cash obligations	$	500,040	$	57,594	$	194,540	$	79,589	$	168,317

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

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 $60,848,000, marketable securities of $148,137,000 and as needed, our borrowing capacity on the credit facility, are expected to be adequate to meet our contractual obligations, operating liquidity, and our growth and development plans in the next twelve months.

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

Our ability to refinance the credit agreement, to meet our long–term contractual obligations and to finance our operating requirements, and growth and development plans will depend upon our future performance, which will be affected by business, economic, financial and other factors, including potential changes in state and federal government payment rates for healthcare, customer demand, success of our marketing efforts, pressures from competitors, and the state of the economy, including the state of financial and credit markets.

Commitment and Contingencies

Civil Investigative Demand

Caris HealthCare, L.P. Investigation

New Accounting Pronouncements

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

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 14: Contingencies and Commitments);

●

the ability of third parties for whom we have guaranteed debt, if any, to refinance certain short term debt obligations;

●

the ability to attract and retain qualified personnel;

●

the availability and terms of capital to fund acquisitions and capital improvements;

●

the ability to refinance existing debt on favorable terms;

●

the competitive environment in which we operate;

●

the ability to maintain and increase census levels; and

●

demographic changes.

See the notes to the quarterly financial statements, and “Item 1. Business” in our 2016 Annual Report on Form 10–K for a discussion of various governmental regulations and other operating factors relating to the healthcare industry and the risk factors inherent in them. This may be found on our web site at www.nhccare.com. You should carefully consider these risks before making any investment in the Company. These risks and uncertainties are not the only ones facing us. There may be additional risks that we do not presently know of or that we currently deem immaterial. If any of the risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our shares of stock could decline, and you may lose all or part of your investment. Given these risks and uncertainties, we can give no assurances that these forward–looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market risk represents the potential economic loss arising from adverse changes in the fair value of financial instruments. Currently, our exposure to market risk relates primarily to our fixed–income and equity portfolios. These investment portfolios are exposed primarily to, but not limited to, interest rate risk, credit risk, equity price risk, and concentration risk. We also have exposure to market risk that includes our cash and cash equivalents, notes receivable, revolving credit facility, and long–term debt. The Company's senior management has established comprehensive risk management policies and procedures to manage these market risks.

Interest Rate Risk

The fair values of our fixed–income investments fluctuate in response to changes in market interest rates. Increases and decreases in prevailing interest rates generally translate into decreases and increases, respectively, in the fair values of those instruments. Additionally, the fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, the liquidity of the instrument and other general market conditions. At June 30, 2017, we have available for sale debt securities in the amount of $163,954,000. The fixed maturity portfolio is comprised of investments with primarily short–term and intermediate–term maturities. The portfolio composition allows flexibility in reacting to fluctuations of interest rates. The fixed maturity portfolio allows our insurance company subsidiaries to achieve an adequate risk–adjusted return while maintaining sufficient liquidity to meet obligations.

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

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

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

Credit Risk

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

Equity Price and Concentration Risk

Our available for sale marketable equity securities are recorded at their fair market value based on quoted market prices. Thus, there is exposure to equity price risk, which is the potential change in fair value due to a change in quoted market prices. At June 30, 2017, the fair value of our marketable equity securities is approximately $148,137,000. Of the $148.1 million equity securities portfolio, our investment in National Health Investors, Inc. (“NHI”) comprises approximately $129.1 million, or 87.2%, of the total fair value. We manage our exposure to NHI by closely monitoring the financial condition, performance, and outlook of the company. Hypothetically, a 10% change in quoted market prices would result in a related increase or decrease in the fair value of our equity investments of approximately $14.8 million. At June 30, 2017, our equity securities had unrealized gains of $118.0 million. Of the $118.0 million of unrealized gains, $104.4 million is related to our investment in NHI.

Item 4. Controls and Procedures.

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

For a discussion of prior, current and pending litigation of material significance to NHC, please see Note 14 of this Form 10–Q.

Item 1A. Risk Factors.

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

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

Not applicable

Item 3. Defaults Upon Senior Securities.

None

Item 5. Other Information.

None

Item 6. Exhibits.

(a) List of exhibits

EXHIBIT INDEX

Exhibit No.	Description	Page No. or Location

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

3.2	Certificate of Amendment to the Certificate of Incorporation of National HealthCare Corporation	Incorporated by reference to Exhibit 3.2 to the Registrant’s registration statement on Form 8-A, dated October 31, 2007)

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

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

3.5	Certificate of Amendment to the Certificate of Incorporation of National HealthCare Corporation	Filed Herewith

4.1	Form of Common Stock	Filed Herewith

4.2	Rights Agreement, dated as of August 2, 2007, between National HealthCare Corporation and Computershare Trust Company, N.A.	Incorporated by reference to Exhibit 4.1 to the Registrant’s registration statement on Form 8-A, dated August 3, 2007

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

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

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

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

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

	NATIONAL HEALTHCARE CORPORATION
	(Registrant)

Date: August 3, 2017	/s/ Stephen F. Flatt
	Stephen F. Flatt
	Chief Executive Officer


Date: August 3, 2017	/s/ Brian F. Kidd
	Brian F. Kidd
	Senior Vice President and Controller
	(Principal Accounting Officer)

Attached files

NATIONAL HEALTHCARE CORP Reports

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