NATIONAL HEALTHCARE CORP

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

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

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

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

Beginning January 1, 2019, the Company’s Institutional Special Needs Plan (“I-SNP”) began offering and providing insurance and healthcare services in the state of Tennessee. Our I-SNP, which is called NHC Advantage, is a managed care insurance company that enrolls Medicare Advantage eligible individuals who are patients in our skilled nursing facilities. We believe the I-SNP will benefit our patients by providing nurse practitioners and care-coordination teams that will continue to enhance the patient-centered experience and our quality of care. We also believe our progressive improvement to patient care will continue to drive positive financial results for the Company. For the three months ended March 31, 2019, the I-SNP increased net patient revenues approximately $3,635,000 compared to the first quarter a year ago.