UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-K
(Mark One)Form 10-K
|
| | | |
| þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20172023
| | | | | | | | | | | |
| ☐ | | |
| ¨ | | 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: 0-12015
HEALTHCARE SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
| | | | | | | | |
| Pennsylvania | | 23-2018365 |
| | |
Pennsylvania | | 23-2018365 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer Identification No.) |
| |
| 3220 Tillman Drive, Suite 300, Bensalem, PA | | 19020 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code:
(215) 639-4274
Securities registered pursuant to Section 12(b) of the 1934 Act:
| | | | | | | | |
| | |
Common Stock ($.01 par value) | | The NASDAQ Global Select Market |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.01 par value | HCSG | NASDAQ Global Select Market |
| | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES Yes ¨ No þ NO ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES Yes ¨ NO No þ
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 Yes þ NO 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 shorter period that the registrant was required to submit and post such files). YES Yes þ NO No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 | þ | | | Accelerated filer | o☐ | |
| | | | | | |
| Non-accelerated filer | o☐ | | (Do not check if a smaller reporting company) | Smaller reporting company | o☐ | |
| | | | | | |
| | | | Emerging growth company | o☐ | |
| | | | | | |
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. | o | |
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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered accounting firm that prepared or issued its audit report.☑
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☑
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ¨ NO þYes ☐ No ☑
The aggregate market value of the voting stock (Common Stock, $.01$0.01 par value) held by non-affiliates of the Registrantregistrant as of the close of business on June 30, 20172023 was approximately $2.49 billion$907 million based on the closing sale price of the Common Stock on the NASDAQ Global Select Market on that date. The determination of affiliate status is not a determination for any other purpose. The Registrantregistrant does not have any non-voting common equity authorized or outstanding.
Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock (Common Stock, $.01$0.01 par value) as of the latest practicable date (February 21, 2018)14, 2024). 73,679,00073,583,055
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant’s Annual Meeting of Shareholders to be held on May 29, 201828, 2024 have been incorporated by reference into Parts II and III of this Annual Report on Form 10-K.
Healthcare Services Group, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 20172023
TABLE OF CONTENTS
| | | | | | | | |
| | |
| PART I | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| PART II | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
PART III | | |
| PART III | |
| | |
| | |
| | |
| | |
| | |
| PART IV | |
| | |
Item 16. | Form 10-K Summary | |
| | |
| |
| |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended,federal securities laws, which are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, and our beliefs and assumptions. Words such as “believes,” “anticipates,” “plans,” “expects,” “estimates,” “will,” “goal,” and similar expressions are intended to identify forward-looking statements. The inclusion of forward-looking statements should not be regarded as a representation by us that any of our plans will be achieved. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Such forward-looking information is also subject to various risks and uncertainties. Such risks and uncertainties include, but are not limited to, risks arising from our providing services exclusively to the healthcare industry and primarily providers of long-term care; the impact of and future effects of the COVID-19 pandemic or other potential pandemics; having several clients who individually contributed over 3%, with one as high as 17.6%,a significant portion of our total consolidated revenues forcontributed by one customer during the year ended December 31, 2017;2023; credit and collection risks associated with thisthe healthcare industry; the impact of bank failures; our claims experience related to workers’ compensation and general liability insurance;insurance (including any litigation claims, enforcement actions, regulatory actions and investigations arising from personal injury and loss of life related to COVID-19); the effects of changes in, or interpretations of laws and regulations governing the healthcare industry, our workforce and services provided, including state and local regulations pertaining to the taxability of our services and other labor-related matters such as minimum wage increases; continued realization of tax benefits arising from our corporate reorganizationthe Company’s expectations with respect to selling, general and self-funded health insurance program; risks associated withadministrative expense; the reorganization of our corporate structure; realization of our expectations regarding the impact of the Tax Cuts and Jobs Act on ourCompany’s ability to remediate a material weakness in its internal control over financial results;reporting; global events including ongoing international conflicts; and the risk factors described in Part I inof this report under “Government Regulation of Clients,Customers,” “Service Agreements and Collections” and “Competition;Collections,” and “Competition” and under Item IA “Risk“Item 1A. Risk Factors.”
These factors, in addition to delays in payments from clientscustomers and/or clientscustomers in bankruptcy, or clients with which we are in litigation to collect payment, have resulted in, and could continue to result in, significant additional bad debts in the near future. Additionally, our operating results have been, and would continue to be, adversely affected by continued inflation particularly if unexpected increases in the costs of labor and labor-related costs, materials, supplies and equipment used in performing services could not(including the impact of potential tariffs and COVID-19) cannot be passed on to our clients.customers.
In addition, we believe that to improve our financial performance we must continue to obtain service agreements with new clients,customers, retain and provide new services to existing clients,customers, achieve modest price increases on current service agreements with existing clients andcustomers and/or maintain internal cost reduction strategies at our various operational levels. Furthermore, we believe that our ability to sustain the internal development of managerial personnel is an important factor impacting future operating results and the successful execution of our projected growth strategies.
There can be no assurance that we will be successful in that regard.
PART I
In this Annual Report on Form 10-K for the year ended December 31, 2017,2023, Healthcare Services Group, Inc. (together with its wholly-owned subsidiaries listed in Exhibit 21, which has been filed as part of this Report) is referred to using terms such as the “Company,” “we,” “us” or “our.”
Item I. Business.
General
Healthcare ServiceServices Group, Inc. (the “Company”) is a Pennsylvania corporation, incorporated on November 22, 1976. We provide management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary service departments of healthcare facilities, including nursing homes, retirement complexes, rehabilitation centers and hospitals located throughout the United States. We provide such services to approximately 2,700 facilities throughout the continental United States as of December 31, 2023. We believe that we are the largest provider of housekeeping and laundry management services to the long-term care industry in the nation, rendering such services to over 3,500 facilities throughout the continental United States as of December 31, 2017.States.
Segment Information
The information called for herein is discussed below in Description of Services, and within Item 8of this Annual Report on Form 10-K under Note 1413 — Segment Information in the Notes to Consolidated Financial Statements for the years ended December 31, 2017, 20162023, 2022 and 2015.2021.
Description of Services
We are organized into two reportable segments: housekeeping, laundry, linen and other services (“Housekeeping”) and dietary department services (“Dietary”). Our corporate headquarters provides centralized financial management and support, legal services, human resources management and other administrative services to the Housekeeping and Dietary business segments.
We provide Housekeeping services to essentially all of our clientapproximately 2,300 customer facilities and provide Dietary services to over 1,500approximately 1,700 facilities. Although we do not directly participate in any government reimbursement programs, our clientscustomers receive government reimbursements related to Medicare and Medicaid and are directly affected by any legislation and regulations relating to those programs.
We provide services primarily pursuant to full service agreements with our clients.customers. Under such agreements, we are responsible for the day-to-day management of the employees located at our clients’customers’ facilities, as well as for the provision of certain supplies. We also provide services on the basis of management-only agreements for a limited number of clients.customers. Under a management-only agreement, we provide management and supervisory services while the clientcustomer facility retains payroll responsibility for the non-supervisory staff. In certain management-only arrangements, the Company maintains responsibility for purchasing supplies. Our agreements with clientscustomers typically provide for a renewable one year service term, cancelablecancellable by either party upon 30 to 90 days’ notice after an initial period of 60 to 120 days.
We typically adopt and follow our clients’ employee wage structures, including policies of wage rate increases, and pass through to the client any labor cost increases associated with wage rate adjustments.
Our labor force is interchangeable with respect to the services within Housekeeping, while the Dietary labor force is specific to Dietary operations. In addition, there are some differences in the expertise of the professional management personnel responsible for the services of the respective segments. We believe that the services of each segment provide opportunities for growth.
Housekeeping
Housekeeping accounted for approximately 52.5%45.9%, or $979.6$766.7 million, of our consolidated revenues in 2017.2023. The services provided under this segment include managing our clients’customers’ housekeeping departments, which are principally responsible for the cleaning, disinfecting and sanitizing of resident rooms and common areas of the clients’customers’ facilities, as well as the laundering and processing of the bed linens, uniforms, resident personal clothing and other assorted linen items utilized at the clients’customers’ facilities. Upon beginning service with a clientcustomer facility, we typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise and train the front-line personnel and coordinate housekeeping services with other facility support functions in accordance with clientcustomer requests. Such management personnel also oversee the execution of various cost-cost and quality-controlquality control procedures including continuous training and employee evaluation and on-site testing for infection control.control, with regular support provided by a District Manager specializing in such services.
Housekeeping’s operating performance is significantly impacted by our management of labor costs. Management reviews costs as a percentage of revenues, inIn order to normalize and evaluate such costs in the context of the Company’s growth.financial performance, management reviews labor costs as a percentage of Housekeeping segment revenues. Housekeeping labor costs represented approximately 80.1%82.2% of Housekeeping revenues for 2017.2023. Changes in employee compensation resulting from legislative or other governmental actions, market factors, adjustments to staffing levels and the composition of our labor force may adversely impact these costs. Similarly, an increase in the costs of supplies consumed in performing Housekeeping services may impact Housekeeping’s operating performance. In 2017,2023, the cost of Housekeeping supplies as a percentage of Housekeeping revenues was 8.0%7.0%. Generally, the cost of such supplies is dictated by specific product market conditions, which are subject to price fluctuations influenced by factors outside of our control. Where possible, we negotiate fixed pricing from vendors for an extended period of time on certain supplies to mitigate such price fluctuations.
Dietary
Dietary services represented approximately 47.5%54.1%, or $886.5$904.7 million, of our consolidated revenues in 2017.2023. Dietary services consist of managing our clients’customers’ dietary departments, which are principally responsible for food purchasing, meal preparation and professional dietitian services, which include the development of menus that meet the dietary needs of residents. On-site management is responsible for all daily dietary department activities, with regular support being provided by a District Manager specializing in Dietary services, as well as a registered dietitian.dietary services. We also offer clinical consulting services to facilities.our dietary customers which may be provided as a stand-alone service or bundled with other dietary department services. Upon beginning service with a customer facility, we typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise the front-line personnel and coordinate dietitian services with other facility support functions in accordance with customer requests. Such management personnel also oversee the execution of various cost and quality control procedures including continuous training, employee evaluation, management of food supplies, minimizing food waste and managing supply deliveries.
Dietary operating performance is also impacted by price fluctuations in labor and supply costs resulting from similar factors discussed above for Housekeeping. In 2017,2023, the costs of laborlabor- and food-related supplies represented approximately 56.6%59.3% and 36.1%34.2% of Dietary segment revenues, respectively.
Significant Customers
For the yearyears ended December 31, 2017,2023, 2022 and 2021, both the Housekeeping and Dietary segments earned revenue from several significant customers, including Genesis Healthcare, Inc. (“Genesis”). For the years ended December 31, 2023, 2022 and 2021, Genesis accounted for $181.4 million or 10.9%, $169.1 million or 10.0% and $177.1 million or 10.8% of the Company’s consolidated revenues, respectively. Revenues generated from Genesis were included in both operating segments mentioned above. Any extended discontinuance of revenues, or significant reduction of revenues, from this customer could, if not replaced, have a material impact on our operations. No other single customer or customer group represented more than 10% of consolidated revenues for the years ended December 31, 2023, 2022 and 2021.
Operational Management Structure
By applying our professional management techniques, we offer our clientscustomers the ability to manage certain housekeeping, laundry, linen, facility maintenance and dietary services and costs. We manage and provide our services through a network of management personnel, as illustrated below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | Vice President of Operations | | | | | | |
| | | | | | ↓ | | | | | | | ↓ | | | | | |
| | | | | | Director of Operations | | | | | | |
| | | | | | ↓ | | | | | | | ↓ | | | | | |
| | | | | | District Manager | | | | | | |
| | | | | | ↓ | | | | | | | ↓ | | | | | |
| | | | | | Facility Manager | | | | | | |
Facilities are managed by an on-site Facility Manager, and if necessary, additional supervisory personnel. Such facility-level management personnel are responsible for the management of staff, scheduling, procurement, customer service,customer-service, quality control and overall day-to-day management of the Housekeeping or Dietary function.
District Managers oversee the operations of the facilities within their districts. Their responsibilities include oversight of Facility Managers and management of personnel, operational performance, quality control and customer satisfaction while ensuring adherence to the Company’s systems and budgets.
Directors of Operations oversee District Managers and provide management support, training and personnel management while ensuring operational performance is consistent with the Company’s systems and budgets.
Vice Presidents of Operations are ultimately responsible for all aspects of the operations, including the compliance and financial performance of the Directors of Operations who they oversee.
We believe that our organizational structure facilitates our ability to best serve and expand our service offerings to existing clients,customers while also securing new clients.customers.
Market
The market for our services consists of a large number of facilities involved in various aspects of the healthcare industry, including long-term and post-acute care facilities (skilled(e.g., skilled nursing facilities, residential care and assisted living facilities, etc.)facilities) and hospitals (acute(e.g., acute care, critical access psychiatric, etc.)and psychiatric). Such facilities may be specialized or general, privately owned or public, for-profit or not-for-profit, and may serve residents on a long-term or short-term basis. We market our services to facilities after consideration of a variety of factors including facility type, size, location and service opportunities (Housekeeping or Dietary). TheAlthough there can be no assurance, the market for our services, particularly in long-term and post-acute care, is expected to continue to grow as the population of the United States ages and as government reimbursement policies require increased cost control or containment by the constituents that comprise our target market.
Marketing and Sales
Our services are primarily marketed and sold by our Chief Revenue Officer, Vice Presidents of Salesmarketing and our Directors of Sales.sales teams. These marketing and sales efforts are supported by all levels of our corporate and operational management team. We provide incentive compensation to our sales and operational personnel based on achieving financial and non-financial goals and objectives, which are aligned with the key elements we believe are necessary for us to achieve overall improvement in our financial results, along with continued business development.
Our services are marketed and sold primarily through referrals and in-person solicitation of target facilities. We also participate in industry trade shows as well as federal and state healthcare tradeadvocacy associations and healthcare support service seminars that are offered in conjunction with state or local health authorities in many of the states in which we conduct our business.related events. Such programs are typically attended by facility owners, administrators and supervisory personnel, thus presenting marketing opportunities for us. Indications of interest in our services arising from initial marketing efforts are followed up with a presentation regarding our services and an assessment of the service requirements of the facility. Thereafter, a formal proposal, including operational recommendations and proposed costs, is submitted to the prospective client.customer. Once the prospective clientcustomer accepts the proposal and executes our service agreement, we are structured to timely and efficiently establish our operations and systems at the clientcustomer facilities.
Government Regulation of ClientsCustomers
We do not directly participate in any government reimbursement programs and our contractual relationships with our clientscustomers determine their payment obligations to us. However, our clientscustomers are subject to government regulation and laws and rulings which directly affect how they are paid for certain services they provide. Therefore, because our clients’customers’ revenues are generally highly reliant on Medicare and Medicaid reimbursement funding rates, the overall effect of laws and trends in the long-term care industry have affected and could adversely affect our clients’customers’ cash flows resulting inand their inabilityability to make payments to us in accordance with agreed upon payment terms (see “Liquidity and Capital Resources” included in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations”).
The prospects for legislative action, both on the federal and state level, regarding funding for nursing homes and the long-term care industry are uncertain. We are unable to predict or to estimate the ultimate impact of any further changes in reimbursement programs affecting our clients’customers’ future results of operations and/or their impact on our cash flows and operations.
Environmental Regulation
Our operations are subject to various federal, state and/or local laws concerning emissions into the air, discharges into waterways and the generation, handling and disposal of waste and hazardous substances. Our past expenditures relating to environmental compliance have not had a material effect on our cash flows or results of operations and are included in normal operating expenses. These laws and regulations are constantly evolving, and it is impossible to predict accurately the effect they may have upon the capital expenditures, earnings and our competitive position in the future. Based upon information currently available, we believe that expenditures relating to environmental compliance will not have a material impact on the financial position of the Company.
Service Agreements and Collections
We have historically had a favorable clientcustomer retention rate and, although there can be no assurance, we expect to continue to maintain satisfactory relationships with our clients,customers despite many of our service agreements being cancelablecancellable on short notice.
We have had varying collections experiences with respect to our accounts and notes receivable. We have sometimes extended the period of payment for certain clientscustomers beyond contractual terms. Such clientscustomers include those who have terminated service agreements and slow payers experiencing financial difficulties. RelatedIn order to theseprovide for such collection matters,issues and the general risk associated with the granting of credit terms, we have recorded bad debt provisions (in an Allowance for Doubtful Accounts) of $6.3$35.6 million, $4.6$32.0 million and $4.3$10.5 million in the years ended December 31, 2017, 20162023, 2022 and 2015,2021, respectively (see Schedule II - Valuation and Qualifying Accounts and Reserves for year-end balances). As a percentage of total revenues, these provisions represented approximately 0.3%2.1%, 1.9% and 0.6% for each of the years ended December 31, 2017, 20162023, 2022 and 2015.2021, respectively. In making our credit evaluations, in addition to analyzing and anticipating, where possible, the specific cases described above, we consider customer-specific risks as well as the general collection risk associated with trends in the long-term care industry. We establish credit limits through our payment terms, perform ongoing credit evaluations and monitor accounts to minimize the risk of credit loss. Despite our efforts to minimize credit risk exposure, our clientscustomers could be adversely affected if future industry trends change in such a way thatmanner as to negatively impactsimpact their cash flows, as discussed in “Government Regulation of Clients” and “Risk Factors” in this report.flows. If our clientscustomers experience a negative impact on their cash flows, it could have a material adverse effect on our consolidated results of operations and financial condition.
Competition
We compete primarily with the in-house service departments of our potential clients. Most healthcare facilities perform their own support service functions without relying upon outside management firms.customers. In addition, a number of local firms compete with us in the regional and national markets in which we conduct business. Several national service firms are larger
Human Capital Resources
Ensuring a positive social impact is inherent in our mission to deliver exceptional services to an ever-changing healthcare industry. In delivering upon this goal, we strive for operational excellence while creating a safe working environment, promoting environmental and have greater financialemployee health and marketing resources thansafety awareness and seeking to continuously create professional and career development opportunities for our employees. In order to continue to deliver on our strategic focus and Company Vision - To Be THE Choice For Our Customers - and result in retention of and growth in relationships through good customer-service, expansion of our services, effective execution in all that we do although historically such firmsand cost management, it is crucial that we attract and retain talent in the markets that we serve. To facilitate talent attraction and retention, we strive to make Healthcare Services Group, Inc. an inclusive, safe and healthy workplace, with opportunities for our employees to grow and develop in their careers, supported by competitive compensation, benefits and health and welfare programs.
Supporting our diverse team of individuals drives us to continuously improve and provide developmental opportunities for our team members, encouraging all of our employees to reach their full potential. To support this we have concentrated their marketing efforts primarilylaunched a formal Employee Engagement and Recognition Program. We devise career development and promotional pathways for our employees, and our Manager-In-Training Program is accessible to all qualified and motivated employees, regardless of formal education level achieved. When appropriate, we advertise all on-demand opportunities to our employees in an effort to cultivate talent throughout the Company. We also focus on hospitals, rather thanunderstanding our diversity and inclusion strengths and opportunities. We continue to focus on building a pipeline for talent to create more opportunities for workplace diversity and to support greater representation within the long-term care facilities typically serviced by us.Company. Some highlights:
Employees•Documented annual and ongoing training for employees at all levels on diversity and inclusion;
•Celebrating and creating diversity among our teams;
•Our workforce consists of 69% women and 62% BIPOC;
•Among field-based management positions, 60% are women and 50% are BIPOC; and
•Among our top quartile of compensation for employees, 69% are women and 62% are BIPOC.
Employee Profile
At December 31, 2017,2023, we employed over 55,000approximately 33,400 people, of whichwhom approximately 6,7004,100 were corporate and field management personnel. Approximately 10%The Company’s employment of oursome of its employees are unionized. The majority of these union employees areis subject to collective bargaining agreements that are negotiated by individual clientcustomer facilities and are assented by us, so as to bind us as an “employer” under the agreements. In other cases, we are direct parties to the agreements. We may be adversely affected by relations between our clientcustomer facilities and their employee unions, or between us and such unions. We consider our relationship with our employees to be good.
Health and Safety
Our ability to meet the day-to-day needs and expectations of our customers and to fulfill our common goal to ensure the well-being of America’s most vulnerable is organically connected to the well-being of our people. As such, we are committed to the health, safety and wellness of our employees. We provide our employees and their families access to a variety of flexible and convenient health and welfare programs, including benefits that support their physical and mental health by providing tools and resources to help them improve or maintain their health status and that offer choices where possible so they can customize their benefits to meet their needs and the needs of their families. In response to the COVID-19 pandemic, we implemented significant operating environment changes that we determined were in the best interest of our employees, as well as the communities in which we operate, and which comply with government regulations. All employees receive documented, annual training on our Environmental, Health and Safety Policy and are responsible for upholding and operating within the guidelines of this policy to ensure our business complies with all environmental and health and safety laws and regulations applicable to our operations.
Available Information
Healthcare Services Group, Inc. is a reporting company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and files reports, proxy statements and other information with the Securities and Exchange Commission (the “Commission” or “SEC”). The public may readReports and copy any of our filings at the Commissioner’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtainother information on the operation of the Public Reference Room by callingwe file with the Commission at 1-800-SEC-0330. Additionally, because we make filings to the Commission electronically, you may access this informationbe accessed at the Commission’s internet site: www.sec.gov. This site contains reports, proxies and information statements and other information regarding issuers that file electronically with the Commission.
Website Access
Our website address is www.hcsg.com. Our filings with the Commission, as well as other pertinent financial and Company information, are available at no cost on our website as soon as reasonably practicable after the filing of such reports with the Commission.
Item 1A. Risk Factors.Factors
You should carefully consider the risk factors we have described below, as well as other related information contained within this annual report on Form 10-K as these factors could materially and adversely affect our business, results of operations, financial condition and cash flows. We believe that the risks described below are our most significant risk factors but there may be risks and uncertainties that are not currently known to us or that we currently deem to be immaterial.
Risks Related to Macroeconomic Conditions
War, terrorism, other acts of violence or natural or man-made disasters may affect the markets in which the Company operates, the Company’s customers, and could have a material adverse impact on our business, results of operations or financial condition.
The Company’s business may be adversely affected by instability, disruption or destruction in a geographic region in which it operates, regardless of cause, including war, terrorism, riot, civil insurrection or social unrest, and natural or man-made disasters, including famine, flood, fire, earthquake, storm or pandemic events and spread of disease. Such events may cause customers to suspend their decisions on using the Company’s services, make it impossible for us to render our services, cause restrictions and give rise to sudden significant changes in regional and global economic conditions and cycles. These events also pose significant risks to the Company’s personnel and to physical facilities and operations which could materially adversely affect the Company’s financial results.
Further, current international conflicts have created extreme volatility in the global financial markets and are expected to have further global economic consequences, including disruptions of the global supply chain and energy markets and heightened volatility of commodity food prices. Any such volatility or disruptions may have adverse consequences on us or the third parties on whom we rely. If the equity and credit markets deteriorate, including as a result of political unrest or war, it may make any necessary debt or equity financing more difficult to obtain in a timely manner or on favorable terms, more costly or more dilutive. Our business, financial condition and results of operations may be materially and adversely affected by any negative impact on the global economy, capital markets or commodity food prices resulting from these conflicts or any other geopolitical tensions.
Pandemics, epidemics or outbreaks of a contagious illness may adversely affect our operating results, cash flows and financial condition.
COVID-19, additional coronavirus outbreaks, or other pandemics, epidemics, or outbreaks of a contagious illness, and similar events, may cause harm to us, our employees, customers, vendors, supply chain partners and financial institutions, which could have a material adverse effect on our results of operations, financial condition and cash flows. The impacts may include, but would not be limited to:
•Decreased availability and/or increased cost of supplies due to increased demand around essential cleaning supplies including disinfecting agents, personal protective equipment (“PPE”) and food and food-related products due to increased global demand and disruptions along the global supply chains of these manufactures and distributors;
•Disruption to operations due to the unavailability of employees due to illness, quarantines, risk of illness, travel restrictions, vaccination mandates, or other factors that limit the availability of our existing or potential workforce;
•Limitations to the availability of our key personnel due to travel restrictions and access restrictions to our customers’ facilities;
•Our ability to meet more stringent, medically-required procedures, and infection control requirements at customer facilities;
•Elevated employee turnover which may impact our facility level performance and/or increase payroll expense and recruiting-related expenses;
•New or additional measures required by national, state or local governments may impact the availability of our employees and/or increase operating costs.
•Decreased census in the nursing home and long-term care industry, which could impact the financial health of our customers and thereby increase our associated credit risk with customers and increase pressures to modify our contractual terms; and
•Significant disruption of global financial markets, which could negatively impact us or our customers’ ability to access capital in the future.
We have been, and may continue to be, adversely affected by inflationary or market fluctuations, including impact of tariffs, in the cost of products consumed in providing our services or our cost of labor. Additionally, we rely on certain vendors for a substantial portion of housekeeping, laundry and dietary supplies.
The prices we pay for the principal items we consume in performing our services are dependent primarily on current market prices. We have consolidated certain supply purchases with national vendors through agreements containing negotiated prospective pricing. In the event such vendors are not able to comply with their obligations under the agreements and we are required to seek alternative suppliers, we may incur increased costs of supplies.
Dietary supplies, to a much greater extent than Housekeeping supplies, are impacted by commodity pricing factors, including the impact of tariffs, which in many cases are unpredictable and outside of our control. We seek to pass on to customers such increased costs but sometimes we are unable to do so. Even when we are able to pass on such costs to our customers, from time to time, sporadic unanticipated increases in the costs of certain supply items due to market or economic conditions may result in a timing delay in passing on such increases to our customers. This type of spike and unanticipated increase in Dietary supplies costs could adversely affect Dietary’s operating performance, and the adverse effect could be greater if we are delayed in passing on such additional costs to our customers (e.g., where we may not be able to pass such increase on to our customers until the time of our next scheduled service billing review). We seek to mitigate the impact of an unanticipated increase in such supplies’ costs through consolidation of vendors, which increases our ability to obtain more favorable pricing.
A substantial number of our employees are hourly employees whose wage rates are affected by increases in the federal or state minimum wage rates, wage inflation or local job market adjustments. Also, our cost of labor may be influenced by changes in the respective collective bargaining agreements to which we are a party. As collective bargaining agreements are renegotiated, we may need to increase the wages paid to bargaining unit employees covered by such collective bargaining agreements. Although we have contractual rights to pass union and minimum wage increases through to our customers, we do not have a contractual right to automatically pass through all wage rate increases resulting from wage rate inflation or local job market adjustments, and we may be delayed in doing so. Our delay in, or inability to pass such wage increases through to our customers could have a material adverse effect on our financial condition, results of operations, and cash flows.
Changes in interest rates and changes in financial market conditions may result in fluctuating and even negative returns in our investments and could increase the cost of the borrowings under our borrowing agreements.
Although management believes we have a prudent investment policy, we are exposed to fluctuations in interest rates and in the market value of our investment portfolio which could adversely impact our financial condition and results of operations. Our marketable securities consist of municipal bonds. Although there can be no assurance, we believe that our investment criteria requirements, which include diversification among issuers of bonds, regarding credit ratings and monitoring of our investments’ duration periods, reduce our exposure to investment losses. Increases in market interest rates could adversely affect our payment obligations with respect to our variable-rate line of credit and adversely affect our liquidity and earnings. In addition, the Company relies on its portfolio of marketable securities for balance sheet support, and the value of the portfolio can be materially affected by declines in market prices.
Investor and market expectations regarding our financial performance rely greatly on execution of our growthstrategy and related increases in financial performance.
The historical performance of our common stock, $0.01 par value (the “Common Stock”), reflects market expectations for our future operating results. Our business strategy focuses on growth and improving profitability through obtaining service agreements with new customers, providing new services to existing customers, obtaining modest price increases on service agreements with customers and maintaining internal cost reduction strategies at our various operational levels. If we are unable to continue either historical customer revenue and profitability growth rates or projected improvement, our operating performance may be adversely affected and the expectations for our market performance may not be met. Any failure to meet the market’s expectations for our revenue and operating results may have an adverse effect on the market price of our Common Stock.
Risks Related to Customers and Distributors
We provide services to several clientscustomers which contribute significantly, on an individual as well as an aggregate basis, to our total revenues.
We have several clients who individuallyGenesis contributed over 3%10.9%, with one as high as 17.6%,10.0% and 10.8% of our total consolidated revenues for the yearyears ended December 31, 2017.2023, 2022 and 2021, respectively. As of December 31, 2023, the Genesis outstanding accounts receivable and notes receivable were $61.8 million and $20.4 million, respectively. Although we expect to continue the relationship with these clients,Genesis, there can be no assurance thereof. The loss, individuallyRevenues generated from Genesis were included in both operating segments. Any extended discontinuance of revenues, or in aggregate, of such clients, or a significant reduction, in the revenues we receive from such clients,this customer could, if not replaced, have a material adverse effectimpact on the results of operations of our two operating segments and the Company.operations. In addition, if any of these clients change or alterGenesis fails to abide by current payment terms it could increase our accounts receivable balance and have a material adverse effect on our financial condition, results of operations, and cash flows. No other single customer or customer group represented more than 10% of consolidated revenues for the years ended December 31, 2023, 2022, and 2021.
Our clientscustomers are concentrated in the healthcare industry, which is subject to changes in government regulation. Many of our clientscustomers rely on reimbursement from Medicare, Medicaid and other third-party payors. Rates from such payors may be altered or reduced, thus affecting our clients’customers’ results of operations and cash flows.
We provide our services primarily to providers of long-term and post-acute care. We cannot predict what efforts, and to what extent, legislation and proposals to contain healthcare costs will ultimately impact our clients’customers’ revenues through reimbursement rate modifications. Congress has enacted a number of laws during the past decade that have significantly altered, and may continue to alter, overall government reimbursement for nursing home services.services and the long-term care industry. Because many of our clients’customers’ revenues are generally highly reliant on Medicare, Medicaid and other third-party payors’ reimbursement funding rates and mechanisms, the overall effect of these laws and trends in the long-term care industry have affected and could adversely affect our clients’customers’ cash flows, resulting inand their inabilityability to make payments to us on agreed upon payment terms. These factors, in addition to delays in payments from clientscustomers have resulted in, and could continue to result in, significant additional bad debts in the future.debts.
Changes to federal healthcare legislation may adversely affect our operating costs and results of operations.
Continued changes to the healthcare structure and regulations related to the health insurance industry in the United States could impact our operating costs. Any requirements to provide additional benefits to our employees or the payment of penalties if such benefits are not provided, would increase our expenses. If we are unable to pass-through these charges to our clients to cover these expenses, such increases could adversely impact our operating costs and our results of operations.
In addition, often new regulations result in additional reporting requirements for businesses. These and other requirements could result in increased costs, expanded liability exposure, and other changes in the way we provide healthcare insurance and other benefits to our employees.
We have clients located in many states which have had and may continue toexperience significant budget deficits and such deficits may result in reduction ofreimbursements to nursing homes.
Many states in which our clients are located have significant budget deficits as a result of lower than projected revenue collections and increased demand for the funding of entitlements. As a result of these and other adverse economic factors, state Medicaid programs have and may continue to revise reimbursement structures for nursing home services. Any disruption or delay in the distribution of Medicaid and related payments to our clients will adversely affect their cash flows and impact their ability to pay us as agreed upon for the services provided.
The Company has substantial investment in the creditworthiness and financial condition of our customers.
The largest current asset on our balance sheet is the accounts and notes receivable balance from our customers. We grant credit to substantially all of our customers. Deterioration in the financial condition of a significant component of our customer base could hinder our ability to collect amounts due from our customers. Potential causes of such declines include national or local economic downturns, reduced census, increased operating costs, customers’ dependence on continued Medicare and Medicaid funding and the impact of additional regulatory actions. actions and/or insufficient funding.
We have sometimes been required to extendextended the period of payment for certain clientscustomers beyond contractual terms. Such clientscustomers include those who have terminated service agreements and slow payers experiencing financial difficulties. In order to provide for such collection issues and the general risk associated with the granting of credit terms, we have recorded bad debt provisions (in an Allowance for Doubtful Accounts) of $35.6 million for the year ended December 31, 2023 as compared to $32.0 million and $10.5 million for the years ended December 31, 2022 and 2021, respectively. In making our credit evaluations, in addition to analyzing and anticipating, where possible, the specific cases described above, we consider the general collection risk associated with trends in the long-term care industry. We also establish credit limits through our payment terms, perform ongoing credit evaluations and monitor accounts to minimize the risk of credit loss. Despite our efforts to minimize credit risk exposure, our clientscustomers could be adversely affected if future industry trends change in such a manner as to negatively impact their cash flows. If our clientscustomers experience a negative impact inon their cash flows, it could have a material adverse effect on our consolidatedfinancial condition, results of operations financial condition and cash flows.
A significant majority of our customer base are multi-facility management groups and independent facility operators who lease the buildings in which they operate and may experience risks relating to their leases including termination, escalators, extensions and special charges.
The creditworthiness of our existing customers, and potential customers, is impacted by their ability to maintain positive relationships with their respective landlords. Any loss or deterioration in the relationship between our customers and their respective landlords may adversely affect their financial condition and ability to make payments on their service agreement with us on agreed upon terms. Any failure by our customers to make rent payments or comply with the provisions of their lease terms could result in the termination of such lease agreements. In such cases, our customers may lose their ability to continue conducting operations and as a result terminate their service agreements with us.
For the year ended December 31, 2023, one distributor distributed more than 50% of our food and non-food dining supplies, and if our relationship or their business were to be disrupted, we could experience disruptions to our operations and cost structure.
Although we negotiate the pricing and other terms for the majority of our purchases of food and dining supplies directly with national manufacturers, we procure these products and other items through Sysco Corporation (“Sysco”). Sysco is responsible for tracking our orders and delivering products to our specific locations. If our relationship with, or the business of, Sysco were to be disrupted, we would have to arrange alternative distributors and our operations and cost structure could be adversely affected.
Risks Related to Operating Our Business
We have a Paid Loss Retrospective Insurance Plan for general liability andworkers’ compensation insurance.
We carry a high deductible general liability and workers’ compensation program and therefore retain a substantial portion of the risk associated with the possible losses under such programs. Under our insurance plans for general liability and workers’ compensation, predetermined loss limits are arranged with our insurance company to limit both our per occurrence cash outlay and annual insurance plan cost. We regularly evaluate our claims pay-out experience and other factors related to the nature of specific claims in arriving at the basis for our accrued insurance claims estimate. Our evaluation is based primarily on current information derived from reviewing our claims experience and industry trends. In the event that our known claims experience and/or industry trends result in an unfavorable change in initial estimates of costs to settle such claims resulting from, among other factors, the severity levels of reported claims and medical cost inflation, it would have an adverse effect on our consolidated results of operations, financial condition and cash flows. Although we engage third-party experts to assist us in estimating appropriate reserves, the determination of the required reserves is dependent upon significant actuarial judgments. Changes in our insurance reserves as a result of our periodic evaluation of the related liabilities may cause significant fluctuations in our operating results.
Federal, state and local tax rules can adversely impact ourconsolidated results of operations and financial position.operations.
We are subject to federal, state and local taxes in the United States. Significant judgment is required in determining the provision for income taxes. We believe our income tax estimates are reasonable. Although, if the Internal Revenue Service or other taxing authority disagrees a tax position we’ve taken and upon final adjudication we are unsuccessful, we could incur additional tax liability, including interest and penalties. Such costs and expenses could have a material adverse impact on our results of operations and financial position. Additionally, the taxability of our services is subject to various interpretations within the taxing jurisdictions in which we operate. Consequently, in the ordinary course of business, a jurisdiction may contest our reporting positions with respect to the application of its tax code to our services. A conflicting position taken by a state or local taxation authority on the taxability of our services could result in additional tax liabilities and could negatively impact our competitive position in that jurisdiction. Additionally, if we fail to comply with applicable tax laws and regulations, we could suffer civil or criminal penalties in addition to the delinquent tax assessment. In the taxing jurisdictions where our services have been determined to be subject to tax, the jurisdiction may increase the tax rate assessed on such services. We seek to pass-through to our clients such tax increases. In the event we are not able to pass-through any portion of the tax increase, our results of operations, financial condition and cash flows could be adversely impacted.
Our business and financial results could be adversely affected by unfavorableresults of material litigation or governmental inquiries.
We are currently involved in civil litigation and government inquiries which arise in the ordinary course of business. These matters relate to, among other things, general liability, payroll or employee-related matters. Legal actions could result in substantial monetary damages and expenses and may adversely affect our reputation and business status with our clients, whether or not we are ultimately determined to be liable. The outcome of litigation, particularly class action and collective action lawsuits and regulatory actions, is difficult to assess or quantify. The plaintiffs in these types of actions may seek recovery of very large or indeterminate amounts, and estimates may remain unknown for substantial periods of time.
We assess contingencies to determine the degree of probability and range of possible loss for potential accrual in our financial statements. We would accrue an estimated loss contingency in our financial statements if it were probable that a liability had been incurred and the amount of the loss could be reasonably estimated. Due to the unpredictable nature of litigation, assessing contingencies is highly subjective and requires judgments about future events. The amount of actual losses may differ from our current assessment. As a result of the costs and expenses of defending ourselves against lawsuits or claims, and risks and consequences of legal actions, regardless of merit, our results of operations and financial position could be adversely affected or cause variability in our results compared to expectations.
We primarily provide our services pursuant to agreements which have a one year serviceterm, cancelablecancellable by either party upon 30 to 90 days’ notice after an initial 60 to 120 day service agreement period.
We typically do not enter into long-term contractual agreements with our clientscustomers for the rendering of our services. Our agreements with customers typically provide for a renewable one year service term, cancellable by either party upon 30 to 90 days’ notice after an initial period of 60 to 120 days. Consequently, our clientscustomers can often unilaterally decrease the amount of services we provide or terminate all services pursuant to the terms of our service agreements. Any loss ofAlthough we have historically had a favorable customer retention rate and expect to continue to maintain satisfactory relationships with our customers, in the event the Company were to lose a significant number of clients during the first year of providing services, for which we have incurred significant start-up costs or have invested in equipment installations,customers, such loss could in the aggregate materially adversely affect our consolidated results of operations and financial position.
The Company’s business success depends on the management experience of our key personnel.
We manage and provide our services through a network of management personnel, from on-site facility managers to our executive officers. Therefore, we believe that our ability to recruit and sustain the internal development of managerial personnel is an important factor impacting future operating results and our ability to successfully execute projected growth strategies. Our professional management personnel are the key personnel in maintaining current and selling additional services to existing clientscustomers and obtaining new clients.customers.
Governmental regulations related to labor, employment, immigration and health and safety could adversely impact our results of operations and financial condition.
Our business is subject to various federal, state, and local laws and regulations in areas such as labor, employment, immigration, and health and safety. These laws frequently evolve through case law, legislative changes and changes in regulatory interpretation, implementation and enforcement. Our policies and procedures and compliance programs are subject to adjustments in response to these changing regulatory and enforcement environments, which could increase our cost of services provided. Although we have contractual rights to pass cost increases we incur to our clients due to regulatory changes, our delay in, or inability to pass such costs through to our clients, could have a material adverse effect on our financial condition, results of operations and cash flows.
In addition, if we fail to comply with applicable laws, we may be subject to lawsuits, investigations, criminal sanctions or civil remedies, including fines, penalties, damages, reimbursement, or injunctions. Also, our clients’ facilities are subject to periodic inspection by federal, state, and local authorities for compliance with state and local departments of health requirements. Expenses resulting from failed inspections of the departments that we service could result in our clients being fined and seeking recovery from us, which could also adversely impact our financial condition, results of operations and cash flows.
We may be adversely affected by inflationary or market fluctuations in the cost of products consumed in providing our services or our cost of labor. Additionally, we rely on certain vendors for housekeeping, laundry and dietary supplies.
The prices we pay for the principal items we consume in performing our services are dependent primarily on current market prices. We have consolidated certain supply purchases with national vendors through agreements containing negotiated prospective pricing. In the event such vendors are not able to comply with their obligations under the agreements and we are required to seek alternative suppliers, we may incur increased costs of supplies.
Dietary supplies, to a much greater extent than Housekeeping supplies, are impacted by commodity pricing factors, which in many cases are unpredictable and outside of our control. We seek to pass on to clients such increased costs but sometimes we are unable to do so. Even when we are able to pass on such costs to our clients, from time to time, sporadic unanticipated increases in the costs of certain supply items due to market or economic conditions may result in a timing delay in passing on such increases to our clients. It is this type of spike in Dietary supplies costs that could most adversely affect Dietary’s operating performance. The adverse effect would be realized if we delay in passing on such costs to our clients or in instances where we may not be able to pass such increase on to our clients until the time of our next scheduled service billing review. We seek to mitigate the impact of an unanticipated increase in such supplies’ costs through consolidation of vendors, which increases our ability to obtain more favorable pricing.
Our cost of labor may be influenced by factors in certain market areas or changes in the respective collective bargaining agreements to which we are a party. A substantial number of our employees are hourly employees whose wage rates are affected by increases in the federal or state minimum wage rates, wage inflation or local job market adjustments. As collective bargaining agreements are renegotiated, we may need to increase the wages paid to bargaining unit employees covered by such collective bargaining agreements. Although we have contractual rights to pass such union and minimum wage increases through to our clients, our delay in, or inability to pass such wage increases through to our clients could have a material adverse effect on our financial condition, results of operations and cash flows.
Any perceived or real health risks related to the food industry could adversely affect our Dietary segment.
We are subject to risks affecting the food industry generally including food spoilage and food contamination. Our productsProducts we purchase and utilize in production are susceptible to contamination by disease-producing organisms, or pathogens, such as listeria monocytogenes, salmonella, campylobacter, hepatitis A, trichinosis and generic E. coli. Because these pathogens are generally found in the environment, there is a risk that these pathogens could be introduced to our products as a result of improper handling at the manufacturing, processing or food service level. Our suppliers’ manufacturing facilities and products are subject to extensive laws and regulations relating to health, food preparation, sanitation and safety standards. Difficulties or failures by these companies in obtaining any required licenses or approvals or otherwise complying with such laws and regulations could disrupt their operations which could adversely affect our operations. Furthermore, there can be no assurance that compliance with governmental regulations by our suppliers will eliminate the risks related to food safety. To the extent there is an outbreak of food related illness in any of our clientcustomer facilities, it could materially harm our business, consolidated results of operations and financial condition.
Additionally, the Company may be subject to liability if the consumption of our food products causes injury, illness or death. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused injury or illness could adversely affect the our reputation.
Changes in interest rates and changes in financial market conditions may result in fluctuating and even negative returnsWe have identified a material weakness in our investments, and could increase the cost of the borrowings under our borrowing agreements.
Although management believes we have a prudent investment policy, we are exposed to fluctuations in interest rates and in the market value of our investment portfolio which could adversely impact our financial condition and results of operations. Our marketable securities consist of municipal bonds. We believe that our investment criteria, which include diversification among issuers of bonds, requirements regarding credit ratings and monitoring of our investments’ duration periods, reduce our exposure related to the financial distress and budget shortfalls that many state and local governments currently face. Increases in market interest rates could adversely affect our payment obligations with respect to our variable-rate borrowing agreements and adversely affect our liquidity and earnings.
Investor and market expectations regarding our financial performance are high and rely greatly on execution of our growthstrategy and related increases in financial performance.
Management believes the historical performance of our Common Stock reflect high market expectations for our future operating results. Our ability to attract new clients through organic growth or acquisitions, and retain existing clients, has enabled us to execute our growth strategy and increase market share historically, however this cannot be guaranteed in the future. Our business strategy focuses on growth and improving profitability through obtaining service agreements with new clients, providing new services to existing clients, obtaining modest price increases on service agreements with clients and maintaining internal cost reduction strategies at our various operational levels. With respect to providing new services to new or existing clients, our strategy is to achieve corresponding profit margins in each of our segments. If we are unable to continue either historical client revenue and profitability growth rates or projected improvement, our operating performance may be adversely affected and the high expectations for our market performance may not be met. Any failure to meet the market’s high expectations for our revenue and operating results may have an adverse effect on the market price of our Common Stock.
Failure to maintain effective internal control over financial reporting, could have aand if our remediation of such material adverse effect onweakness is not effective, or if we fail to develop and maintain an effective system of disclosure controls and internal control over financial reporting, our ability to report ourproduce timely and accurate financial resultsstatements or comply with applicable laws and regulations could be impaired.
During 2023, the Company identified a material weakness related to the design and operation of internal controls over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. In the course of preparing our consolidated financial statements as of and accurate basis.for the year ended December 31, 2023, we identified a material weakness related to accrued payroll liabilities from employee vested vacation. Our controls over accrued payroll liabilities were not sufficiently designed to consider all accounting and disclosure ramifications of such accrued payroll liabilities. This material weakness resulted in immaterial misstatements in our 2022 and 2021 financial statements related to the accounting for accrued vacation, which was corrected prior to issuance of the Company’s 2023 financial statements. Furthermore, there is a possibility that material misstatements to the Company’s future annual or interim financial statements will not be prevented or detected in a timely basis as a result of the identified material weakness.
To address our material weakness, we have made changes to our controls as set forth in Part II, Item 9A “Controls and Procedures.” Unless otherwise described in Part II, Item 9A “Controls and Procedures”, we will not be able to fully remediate the material weakness until these steps have been completed and have been operating effectively for a sufficient period of time.
Failure to maintain appropriate and effective internal controls over our financial reporting could result in misstatements in our financial statements and potentially subject us to sanctions or investigations by the SEC or other regulatory authorities and could cause us to delay the filing of required reports with the SEC and our reporting of financial results. Any of these events could result in a decline in the market price of our Common Stock. Although we have taken steps to maintain our internal control structure as required, including steps to remediate our material weakness, we cannot guarantee that a control deficienciesdeficiency will not result in a misstatement in the future.
Any decrease in or suspension
Our business could be negatively affected as a result of actions of activist shareholders, and such activism could impact the trading value of our dividendsecurities.
Shareholders may, from time to time, engage in proxy solicitations or advance shareholder proposals, or otherwise attempt to effect changes and assert influence on our Board of Directors and management. Activist campaigns that contest or conflict with our strategic direction or seek changes in the composition of our Board of Directors could causehave an adverse effect on our stock priceoperating results and financial condition. A proxy contest would require us to decline.
We expect to continue to pay a regular quarterly cash dividend. However, our dividend policyincur significant legal and the payment of future cash dividends under the policy are subject to the final determination each quarteradvisory fees, proxy solicitation expenses and administrative and associated costs and require significant time and attention by our Board of Directors that (i)and management, diverting their attention from the dividend will be made in compliance with laws applicablepursuit of our business strategy. Any perceived uncertainties as to our future direction and control, our ability to execute on our strategy, or changes to the declarationcomposition of our Board of Directors or senior management team arising from a proxy contest could lead to the perception of a change in the direction of our business or instability which may result in the loss of potential business opportunities, make it more difficult to pursue our strategic initiatives, or limit our ability to attract and retain qualified personnel and business partners, any of which could adversely affect our business and operating results. If individuals are ultimately elected to our Board of Directors with a specific agenda, it may adversely affect our ability to effectively implement our business strategy and create additional value for our shareholders. We may choose to initiate, or may become subject to, litigation as a result of a proxy contest or matters arising from a proxy contest, which would serve as a further distraction to our Board of Directors and management and would require us to incur significant additional costs. In addition, actions such as those described above could cause significant fluctuations in our stock price based upon temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
Risks Related to Governmental and Regulatory Changes
Changes to federal healthcare legislation may adversely affect our operating costs and results of operations.
Continued changes to the health insurance industry and its obligations on employers could impact our operating costs. Any requirements to provide additional benefits to our employees, or the payment of penalties if such benefits are not provided, would increase our expenses. If we are unable to pass-through these charges to our customers to cover these expenses, such increases could adversely impact our operating costs and our consolidated results of operations.
In addition, often new regulations result in additional reporting requirements for businesses. These and other requirements could result in increased costs, expanded liability exposure and other changes in the way we provide healthcare insurance and other benefits to our employees.
States in which our customers are located could experience significant budget deficits and such deficits may result in reduction ofreimbursements to nursing homes.
States in which our customers are located could have budget deficits as a result of lower than projected revenue collections and increased demand for the funding of entitlements. As a result of these and other adverse economic factors, state Medicaid programs have and may revise reimbursement structures for nursing home services. Any disruption or delay in the distribution of Medicaid and related payments to our customers will adversely affect their cash dividends, including Section 1551(b) offlows and impact their ability to pay us as agreed upon for the Pennsylvania Business Corporation Law,services provided.
Governmental regulations related to labor, employment, immigration and (ii) the policy remains in our best interests, which determination will be based on a number of factors, including thehealth and safety could adversely impact of changing laws and regulations, economic conditions, our results of operations and/and financial condition.
Our business is subject to various federal, state, and local laws and regulations in areas such as labor, employment, immigration, and health and safety. These laws frequently evolve through case law, legislative changes and changes in regulatory interpretation, implementation and enforcement. Our policies and procedures and compliance programs are subject to adjustments in response to these changing regulatory and enforcement environments, which could increase our costs of services provided. Although we have contractual rights to pass through cost increases we incur to our customers due to regulatory changes, our delay in, or inability to pass such costs through to our customers, could have a material adverse effect on our financial condition, capital resources,consolidated results of operations and cash flows.
In addition, if we fail to comply with applicable laws, we may be subject to lawsuits, investigations, criminal sanctions or civil remedies, including fines, penalties, damages, reimbursements or injunctions. Also, our customers’ facilities are subject to periodic inspection by federal, state and local authorities for compliance with state and local departments of health requirements. Expenses resulting from failed inspections of the abilitydepartments that we service could result in our customers being fined and seeking recovery from us, which could also adversely impact our financial condition, consolidated results of operations and cash flows.
Federal, state and local tax rules can adversely impact our results of operations and financial position.
We are subject to satisfy financial covenantsfederal, state and local taxes in the United States. Significant judgment is required in determining the provision for income taxes. We believe our income tax estimates are reasonable, but such estimates assume no changes in current tax rates. In addition, if the Internal Revenue Service or other factors considered relevant by the Board of Directors. Whiletaxing authority disagrees on a tax position we have continually increasedtaken and upon final adjudication we are required to change such position, we could incur additional tax liability, including interest and penalties. Such costs and expenses could have a material adverse impact on our financial condition, consolidated results of operations and cash flows. Additionally, the amounttaxability of our dividends, given these considerations, there canservices is subject to various interpretations within the taxing jurisdictions in which we operate. Consequently, in the ordinary course of business, a jurisdiction may contest our reporting positions with respect to the application of its tax code to our services. A conflicting position taken by a state or local taxation authority on the taxability of our services could result in additional tax liabilities and could negatively impact our competitive position in that jurisdiction. If we fail to comply with applicable tax laws and regulations, we could suffer civil or criminal penalties in addition to the delinquent tax assessment. In the taxing jurisdictions where our services have been determined to be no assurance these increases will continue and our Board of Directorssubject to tax, the jurisdiction may increase the tax rate assessed on such services. We seek to pass through to our customers such tax increases. In the event we are not able to pass through any portion of the tax increase, our financial condition, consolidated results of operations and cash flows could be adversely impacted.
Our business and financial results could be adversely affected by unfavorableresults of material litigation or decreasegovernmental inquiries.
We are currently involved in pending civil litigation and government inquiries which arise in the ordinary course of business. These matters relate to, among other things, general liability, payroll or employee-related matters. Legal actions could result in substantial monetary damages and expenses and may adversely affect our reputation and business status with our customers, whether or not we are ultimately determined to be liable. The outcome of litigation, particularly class action and collective action lawsuits and regulatory actions, is difficult to assess or quantify. The plaintiffs in these types of actions may seek recovery of very large or indeterminate amounts, and estimates may remain unknown for substantial periods of time.
While the Company is vigorously defending against all litigation claims asserted, litigation could result in substantial costs to the Company and a diversion of the Company’s management’s attention and resources, which could harm its business. In addition, the uncertainty of pending lawsuits or potential filing of additional lawsuits could lead to more volatility and a reduction in the Company’s stock price.
We assess contingencies to determine the degree of probability and range of possible loss for potential accrual in our financial statements. We would accrue an estimated loss contingency in our financial statements if it were probable that a liability had been incurred and the amount of the dividend at any timeloss could be reasonably estimated. Due to the unpredictable nature of litigation, assessing contingencies is highly subjective and may also decide to suspend or discontinue the payment of cash dividends in the future. Any decrease in therequires judgments about future events. The amount of actual losses may differ from our current assessment. As a result of the dividend,costs and expenses of defending ourselves against lawsuits or suspensionclaims, and risks and consequences of legal actions, regardless of merit, our consolidated results of operations and financial position could be adversely affected or discontinuancecause variability in our results compared to expectations.
Risks Related to decline.Cybersecurity and Data Privacy
Cyber attacksCyber-attacks and breaches could cause operational disruptions, fraud or theft of sensitive information.
Aspects of our operations are reliant upon internet-based activities, such as ordering supplies and back-office functions such as accounting and transaction processing, making and accepting payments, processing payroll and other administrative functions, etc.functions. A significant disruption or failure of our information technology systems may have a significant impact on our operations, potentially resulting in service interruptions, security violations, regulatory compliance failures and other operational difficulties. In addition, any attack perpetrated against our information systems including through a system failure, security breach or disruption by malware or other damage, could similarly impact our operations and result in loss or misuse of information, litigation and potential liability. Although we have taken measuressteps intended to mitigate the risks presented by potential cyber incidents, it is not possible to protect our technology systemsagainst every potential power loss, telecommunications failure, cybersecurity attack or similar event that may arise. Moreover, the safeguards we use are subject to human implementation and infrastructure, including employee education programs regarding cybersecurity, a breachmaintenance and to other uncertainties. Any of the security surrounding these functions couldcyber incidents may result in operational disruptions, thefta violation of applicable laws or fraud, or exposureregulations (including privacy and other laws), damage our reputation, cause a loss of sensitive informationcustomers and give rise to unauthorized parties. Such eventsmonetary fines and other penalties, which all could result in additional costs related to operational inefficiencies, or damages, claims or fines.have an adverse effect on our financial condition, results of operations, and liquidity.
Item 1B. Unresolved Staff Comments.
None.
Item 1C. Cybersecurity.
Cybersecurity Risk Management and Strategy
The Company adopted an Information Security Policy which governs the Company’s management of information technology (“IT”) systems, network, information, data and assets. HCSG’s Information Security Policy is periodically reviewed based on the NIST Cybersecurity Framework.HCSG regularly monitors and measures the performance of its IT System and Assets and its Information Security Policy. HCSG has procedures to ensure that any of its vendors and suppliers that create, utilize, or process HCSG’s data take a similar, risk-based approach to information security.
Management maintains the cybersecurity risk prevention program which includes ongoing employee education and procedures for cybersecurity incident prevention, detection and response. The Company retains third parties, including IT professionals and legal counsel, specializing in cybersecurity risk management to assist in implementing cybersecurity controls. The Company oversees and identifies material risks from cybersecurity threats associated with its use of third-party service providers by reviewing SOC 1 or SOC 2 reports (whichever is more applicable) for key outsourced systems, including all systems which house protected health information or personally identifiable information. The cybersecurity risk prevention program is part of the Company's overall risk management program.
Please refer to the risk factor titled “Cyber-attacks and breaches could cause operational disruptions, fraud or theft of sensitive information” in “Risk Factors” in Part I, Item 1A of this Form 10-K for more information on risks posed by cybersecurity threats to the Company.
Management's Role in Assessing and Managing Materials Risks from Cybersecurity Threats
The Company’s day-to-day risk management is under the direction of Jason J. Bundick, the Company’s Executive Vice President, Chief Compliance Officer, General Counsel and Secretary. Jason Osbeck, the Company's Senior Vice President of Information and Technology, is responsible for day-to-day cybersecurity risk management under the direction of Mr. Bundick. Mr. Osbeck has served in this role at the Company since 2012.
The Company has a Cyber Incident Response Plan (“IRP”) which details the Company’s policies and procedures in the event of a cyber incident. The Company’s IT department, led by Mr. Osbeck, logs all potential cybersecurity incidents reported which are then reviewed by an Incident Response Team (“IRT”), a cross-functional internal team including IT, risk management, legal and other departmental representation as necessary to identify the potential impact of the cybersecurity incident. As needed, the IRT will consult with third party legal counsel and IT advisory firms to appropriately respond to existing cyber threats. In the event a material incident is identified, the Company will report such incidents in compliance with applicable law. Material cyber events, if any, are reported to the Board of Directors as they occur. Additionally, the Chief Compliance Officer provides quarterly updates to the Audit Committee on all cybersecurity matters during the quarter.
Board of Directors' Oversight of Cybersecurity Risks
Our Board is responsible for overseeing the Company’s risk management process. The Board focuses on the Company’s general risk management strategy, including the most significant risks facing the Company, and ensures that appropriate risk mitigation strategies are implemented by management. The Audit Committee oversees the Company's cybersecurity risk mitigation efforts.The Audit Committee reports to the full Board as appropriate, including when a matter rises to the level of a material risk.
Item 2. Properties.
We lease our corporate offices, located at 3220 Tillman Drive, Suite 300, Bensalem, Pennsylvania 19020.We19020. We also lease office space at other locations in Pennsylvania, Colorado, South Carolina, Connecticut, Georgia, CaliforniaFlorida, New Jersey, Texas and New Jersey.Virginia. The New Jersey office is the headquarters of our subsidiaries, including HCSG Insurance Corp.Corp, our captive insurance company, as well as HCSG East, LLC, HCSG West, LLC, HCSG Central, LLC, HCSG Staff Leasing Solutions, LLC, HCSG Labor Supply, LLC, HCSG East Labor Supply, LLC, and HCSG Clinical Services, LLC. The other locations serve as divisional or regional offices providing management and administrative services to both of our operating segments in their respective geographical areas. No individual parcel of real estate owned or leased is of material significance to our total assets.
We are also provided with office and storage space at each of our clients’ facilities.
Management does not foresee any difficulties with regard to the continued utilization of these premises. We also believe that such properties are sufficient to support our current operations.
We own office furniture and equipment, housekeeping and laundry equipment, and vehicles. The office furniture and equipment and vehicles are primarily located at the corporate office, divisional and regional offices. We have housekeeping equipment at all client facilities where we provide services under a full service housekeeping agreement. Generally, the aggregate cost of housekeeping equipment located at each client facility is approximately $3,000. Additionally, we have laundry installations at certain client facilities. The cost of such laundry installations ranges between $5,000 and $100,000. We believe that such laundry equipment, office furniture and equipment, housekeeping equipment and vehicles are sufficient to support our current operations.
Item 3. Legal Proceedings.
In the normal course of business, the Company is involved in various administrative and legal proceedings, including labor and employment, contractual,contracts, personal injury workers compensation and insurance matters. We believe
At this time, the Company is notunable to reasonably estimate possible losses or form a partyjudgment that an unfavorable outcome is either probable, reasonably possible or remote with respect to nor are any of its properties the subject of, anycertain pending legal proceeding or governmental examination that would have a material adverse effect on our consolidated financial condition or liquidity. However, inlitigation claims asserted.
In light of the uncertainties involved in such proceedings, the ultimate outcome of a particular matter could become material to ourthe Company’s results of operations for a particular period depending on, among other factors, the size of the loss or liability imposed and the level of ourthe Company’s operating income for that period.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity,Related Stockholder Matters and IssuerPurchases of Equity Securities.
Market Information
The Company’s Common Stock $.01 par value (the “Common Stock”), is traded under the symbol “HCSG” on the NASDAQNasdaq Global Select Market. As of February 21, 2018,14, 2024, there were approximately 73.773.6 million shares of our Common Stock outstanding.
The high and low sales price quotations for our Common Stock and the cash dividends declared during the years ended December 31, 2017 and 2016 were as follows:
|
| | | | | | | | | | | | |
| Quarter Ended | | High | | Low | | Cash Dividends Declared |
| March 31, 2017 | | $ | 43.91 |
| | $ | 37.54 |
| | $ | 0.18750 |
|
| June 30, 2017 | | $ | 50.00 |
| | $ | 41.05 |
| | $ | 0.18875 |
|
| September 30, 2017 | | $ | 55.68 |
| | $ | 45.10 |
| | $ | 0.19000 |
|
| December 31, 2017 | | $ | 55.29 |
| | $ | 49.09 |
| | $ | 0.19125 |
|
|
| | | | | | | | | | | | |
| Quarter Ended | | High | | Low | | Cash Dividends Declared |
| March 31, 2016 | | $ | 36.99 |
| | $ | 31.50 |
| | $ | 0.18250 |
|
| June 30, 2016 | | $ | 41.40 |
| | $ | 36.47 |
| | $ | 0.18375 |
|
| September 30, 2016 | | $ | 42.18 |
| | $ | 36.58 |
| | $ | 0.18500 |
|
| December 31, 2016 | | $ | 40.88 |
| | $ | 34.83 |
| | $ | 0.18625 |
|
Dividends
On January 30, 2018, our Board of Directors declared a regular quarterly cash dividend of $0.19125 per common share, which will be paid on March 23, 2018 to shareholders of record as of the close of business on February 16, 2018.
Our Board of Directors reviews the dividend policy on a quarterly basis. Although there can be no assurance that the Company will continue to pay dividends or the amount of the dividend, we expect to continue to pay a regular quarterly cash dividend. In connection with the establishment of the Company’s dividend policy, the Company adopted a Dividend Reinvestment Plan in 2003.
Holders
As of February 21, 2018,14, 2024, we had approximately 500400 holders of record of our Common Stock. Based on reports of security position listings compiled for the 2017 annual meeting of shareholders, we believe we may have approximately 7,000 beneficial owners ofThis does not include persons who hold our Common Stock.Stock in nominee or “street name” accounts through brokers or banks.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth for the Company’s equity compensation plans, on an aggregated basis, the number of shares of our Common Stock subject to outstanding stock awards, the weighted-average exercise price of stock awards, and the number of shares remaining available for future award grants as of December 31, 2017.2023.
| | | | | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) |
| Plan Category | | (a) | | (b) | | (c) |
| | | (in thousands, except per share amounts) | |
| | (in thousands, except per share amounts) | |
| | (in thousands, except per share amounts) | |
| | (in thousands, except per share amounts) | |
| Equity compensation plans approved by security holders | | 2,374 |
| (1) | | $ | 29.22 |
| | 3,422 |
| (2) |
| Equity compensation plans not approved by security holders | | — |
| | — |
| | — |
| |
| Equity compensation plans approved by security holders | |
| Equity compensation plans approved by security holders | | | 3,715 | | 1 | $ | 30.43 | | | 5,204 | | 2 |
| Total | | 2,374 |
| | $ | 29.22 |
| | 3,422 |
| |
(1)1.Represents shares of Common Stock issuable upon exercise of outstanding stock awards granted under the 2012 Equity2020 Amended Omnibus Incentive Plan (the “Amended 2020 Plan”) and carryover shares from pre-existing Plans.equity plans.
(2)2.Includes stock awards to purchase 0.83.2 million shares available for future grant under the Company’s 2012 Equity IncentiveAmended 2020 Plan, 2.31.8 million shares available for issuance under the Company’s 1999 Employee Stock Purchase Plan as amended (the “1999 Plan”) as amended and 0.40.2 million shares available for issuance under the Company’s Amended and Restated Deferred Compensation Plan.Plan (the “Deferred Compensation Plan”). Treasury shares may be issued under the 1999 Plan and the Company’s Amended and Restated Deferred Compensation Plan.
Performance Graph
The following graph matches Healthcare Services Group, Inc.’sthe Company’s cumulative five-year total shareholder return on Common Stock with the cumulative total returns of the S&P 500NASDAQ Composite index, the NASDAQ Composite indexS&P Midcap 400 Index, and the Russell 2000 index. The graph tracks the performance of a $100 investment in our Common Stock and in each index (with the reinvestment of all dividends) from December 31, 20122018 to December 31, 2017.2023. The stock price performance included in this graph is not necessarily indicative of future stock price performance.
We have not defined a peer group based on either industry classification or financial characteristics. We believe the Company is unique in its service offerings and clientcustomer base, and among its closest industry peers, it is unique in size and financial profile. As such, we do not believe that we can reasonably identify a peer group for the purposes of Regulation S-K Item 201(e)(1)(ii)(B) and have instead opted to utilize the Russell 2000 index to compare the Company performance to issuers with similar market capitalization. The Company has also included the S&P Midcap 400 Index due to certain equity awards granted by the Company being benchmarked against this index.
Comparison of 5 Year Cumulative Total Return*
Among Healthcare Services Group, Inc., the S&P 500Russell 2000 Index, the NASDAQ Composite Index, and the Russell 2000 IndexS&P Midcap 400 Index.
*$100 invested on December 31, 20122018 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 20172024 Standard & Poor’s,Poor's, a division of S&P Global. All rights reserved.
Copyright© 20172024 Russell Investment Group. All rights reserved. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | December 31, |
| Company / Index | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 |
| Healthcare Services Group, Inc. | | $ | 100.00 | | | $ | 62.26 | | | $ | 74.42 | | | $ | 48.72 | | | $ | 34.75 | | | $ | 30.03 | |
| Russell 2000 | | $ | 100.00 | | | $ | 125.52 | | | $ | 150.58 | | | $ | 172.90 | | | $ | 137.56 | | | $ | 160.85 | |
| NASDAQ Composite | | $ | 100.00 | | | $ | 136.69 | | | $ | 198.10 | | | $ | 242.03 | | | $ | 163.28 | | | $ | 236.17 | |
| S&P Midcap 400 | | $ | 100.00 | | | $ | 126.20 | | | $ | 143.44 | | | $ | 178.95 | | | $ | 155.58 | | | $ | 181.15 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | December 31, |
| Company/Index | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
| Healthcare Services Group, Inc. | | $ | 100.00 |
| | $ | 125.52 |
| | $ | 140.22 |
| | $ | 161.47 |
| | $ | 185.00 |
| | $ | 253.03 |
|
| S&P 500 | �� | $ | 100.00 |
| | $ | 132.39 |
| | $ | 150.51 |
| | $ | 152.59 |
| | $ | 170.84 |
| | $ | 208.14 |
|
| Russell 2000 | | $ | 100.00 |
| | $ | 138.82 |
| | $ | 145.62 |
| | $ | 139.19 |
| | $ | 168.85 |
| | $ | 193.58 |
|
| NASDAQ Composite | | $ | 100.00 |
| | $ | 141.63 |
| | $ | 162.09 |
| | $ | 173.33 |
| | $ | 187.19 |
| | $ | 242.29 |
|
Unregistered Sales of Equity Securities and Use of Proceeds
DuringNone.
Repurchases of Equity Securities
On February 14, 2023, our Board of Directors authorized the second quarter 2017, the Company issued 59,000repurchase of up to 7.5 million outstanding shares of common stock (the “Repurchase Plan”). We remain authorized to a qualified offeree in accordance withpurchase 6.5 million shares of common stock under the exemption provided by Section 4(a)(2)Repurchase Plan.
Shares repurchased pursuant to the Repurchase Plan during the three months ended December 31, 2023, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended December 31, 2023 | | Total number of shares of Common Stock repurchased | | Average price paid per share of Common Stock | | Aggregate purchase price of Common Stock repurchases1 | | Number of remaining shares authorized for repurchase |
| | | | | | (in thousands) |
| October 1, 2023 - October 31, 2023 | | 102,200 | | | $ | 9.75 | | | $ | 996 | | | 6,883 | |
| November 1, 2023 - November 30, 2023 | | 406,200 | | | $ | 9.81 | | | $ | 3,983 | | | 6,477 | |
| December 1, 2023 - December 31, 2023 | | — | | | $ | — | | | $ | — | | | 6,477 | |
| Fourth quarter | | 508,400 | | | $ | 9.80 | | | $ | 4,979 | | | 6,477 | |
1.Excludes commissions and other costs of the Securities Act of 1933, as amended.less than $$0.1 million.
Item 6. Selected Financial Data.Reserved.
The following selected condensed consolidated financial data has been derived from, and should be read in conjunction with “Management’s
Item 7. Management’s Discussion and Analysisof Financial Condition and Results of Operations” and our Consolidated Financial Statements and Notes thereto, included elsewhere in this report on Form 10-K and incorporated herein by reference.Operations.
|
| | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| (in thousands, except per share amounts) |
| Selected Operating Results | | | | | | | | | |
| Revenues | $ | 1,866,131 |
| | $ | 1,562,662 |
| | $ | 1,436,849 |
| | $ | 1,293,183 |
| | $ | 1,149,890 |
|
| Net income | $ | 88,226 |
| | $ | 77,396 |
| | $ | 58,024 |
| | $ | 21,850 |
| | $ | 47,129 |
|
| Basic earnings per common share | $ | 1.20 |
| | $ | 1.06 |
| | $ | 0.81 |
| | $ | 0.31 |
| | $ | 0.68 |
|
| Diluted earnings per common share | $ | 1.19 |
| | $ | 1.05 |
| | $ | 0.80 |
| | $ | 0.31 |
| | $ | 0.67 |
|
| Selected Balance Sheet Data |
| |
| |
| |
| |
|
| Total assets | $ | 676,003 |
| | $ | 528,446 |
| | $ | 480,949 |
| | $ | 469,579 |
| | $ | 425,342 |
|
| Stockholders’ equity | $ | 399,952 |
| | $ | 338,842 |
| | $ | 296,456 |
| | $ | 275,830 |
| | $ | 285,143 |
|
| Selected Other Financial Data |
| |
| |
| |
| |
|
| Working capital | $ | 343,238 |
| | $ | 313,753 |
| | $ | 269,277 |
| | $ | 213,414 |
| | $ | 207,750 |
|
| Cash dividends declared per common share | $ | 0.75750 |
| | $ | 0.73750 |
| | $ | 0.71750 |
| | $ | 0.69750 |
| | $ | 0.67750 |
|
| Weighted average number of common shares outstanding - basic | 73,355 |
| | 72,754 |
| | 71,826 |
| | 70,616 |
| | 69,206 |
|
| Weighted average number of common shares outstanding - diluted | 74,348 |
| | 73,474 |
| | 72,512 |
| | 71,341 |
| | 70,045 |
|
Item 7. Management’s Discussion and Analysisof Financial Condition and Results ofOperation.
You should read the following discussion and analysis of our financial condition and results of our operations in conjunction with our Consolidated Financial Statements and the related notes to those statements included elsewhere in this report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Our actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors,” and elsewhere in this report on Form 10-K. We are on a calendar year end, and except where otherwise indicated, “2017”“2023” refers to the year ended December 31, 2017, “2016”2023, and “2022” refers to the year ended December 31, 20162022. Discussions of 2021 items and “2015” refers toyear-to-year comparisons between 2022 and 2021 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.2022.
Results of Operations
The following discussion is intended to provide the reader with information that will be helpful in understanding our financial statements, including the changes in certain key items inwhen comparing financial statements period to period. We also intend to provide the primary factors that accounted for those changes as well as a summary of how certain accounting principles affect our financial statements. In addition, we are providing information about the financial results of our two operating segments to further assist in understanding how these segments and their results affect our consolidated results of operations. This discussion should be read in conjunction with our consolidated financial statements as of December 31, 20172023 and for the year then ended and the notes accompanying those financial statements.
Overview
We provide management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary service departments of healthcare facilities, including nursing homes, retirement complexes, rehabilitation centers and hospitals located throughout the United States. We provide such services to approximately 2,700 facilities throughout the continental United States as of December 31, 2023. We believe that we are the largest provider of housekeeping and laundry management services to the long-term care industry in the nation, rendering such services to over 3,500 facilities throughout the continental United States as of December 31, 2017.States.
We provide services primarily pursuant to full service agreements with our clients.customers. Under such agreements, we are responsible for the day-to-day management of the employees located at our clients’customers’ facilities as well as for the provision of certain supplies. We also provide services on the basis of management-only agreements for a limited number of clients.customers. Under a management-only agreement, we provide management and supervisory services while the clientcustomer facility retains payroll responsibility for the non-supervisory staff. In certain management-only agreements, the Company maintains responsibility for purchasing supplies. Our agreements with clientscustomers typically provide for a renewable one year service term, cancelablecancellable by either party upon 30 to 90 days’ notice after an initial period of 60 to 120 days.
We are organized into two reportable segments: housekeeping, laundry, linen and other services (“Housekeeping”), and dietary department services (“Dietary”).
Housekeeping consists of managing our clients’customers’ housekeeping departments, which are principally responsible for the cleaning, disinfecting and sanitizing of resident rooms and common areas of the clients’customers’ facilities, as well as the laundering and processing of the bed linens, uniforms, resident personal clothing and other assorted linen items utilized at the clients’customers’ facilities. Upon beginning service with a customer facility, we typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise the front-line personnel and coordinate housekeeping services with other facility support functions in accordance with customer requests. Such management personnel also oversee the execution of various cost and quality control procedures including continuous training and employee evaluation. On-site management is responsible for all daily housekeeping department activities, with regular support provided by a District Manager specializing in such services.
Dietary consists of managing our clients’customers’ dietary departments, which are principally responsible for food purchasing, meal preparation and professional dietitian services, which include the development of menus that meet the dietary needs of residents. On-site management is responsible for all daily dietary department activities, with regular support provided by a District Manager specializing in dietary services. We also offer clinical consulting services to our dietary customers, which may be provided as a stand-alone service or be bundled with other dietary department services. Upon beginning service with a customer facility, we typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise the front-line personnel and coordinate dietitian services with other facility support functions in accordance with customer requests. Such management personnel also oversee the execution of various cost and quality control procedures including continuous training and employee evaluation.
At December 31, 2017,2023, Housekeeping services were provided at essentially all of our more than 3,500 clientto approximately 2,300 customer facilities, generating approximately 52.5%,45.9% or $979.6$766.7 million of 2017 total revenues.our consolidated revenues for the year ended December 31, 2023. Dietary services were provided to over 1,500 clientapproximately 1,700 customer facilities at December 31, 20172023 and contributed approximately 47.5%,54.1% or $886.5$904.7 million of 2017 total revenues.our consolidated revenues for the year ended December 31, 2023.
Our workers’ compensation, general liability and certain employee health and welfare insurance programs are provided by HCSG Insurance Corp. (“HCSG Insurance” or the “Captive”), our wholly ownedwholly-owned captive insurance subsidiary. HCSG Insurance provides the Company with greater flexibility and cost efficiency in meeting our insurance needs. In 2015, we completed a corporate restructuring by capitalizing three new operating entities and transitioning our facility-based employees to such entities based on the geography served. As a result, (i) HCSG Insurance provides workers’ compensation, general liability and other insurance coverages to such entities with respect to such transitioned workforce, (ii) such entities provide housekeeping, laundry and dietary services as a subcontracted provider to the Company, and (iii) the Company provides strategic client-servicecustomer-service management and administrative support services to such entities.
Our ability to acquire new clients,customers, retain existing clientscustomers and increase revenues are affected by many factors. Competitive factors consist primarily of competing with potential clients’customers’ use of in-house support staff, as well as local ora number of firms which compete with us in the regional companies providing services similar to ours. We are unaware of any other companies, on aand national regional or local level,markets in which have a significant presence or will impact our ability to secure new clients in our market.we conduct business. We believe the primary revenue drivers of our business are our ability to obtain new clientscustomers and to provide additional services to existing clients.customers. In addition, although there can be no assurance, we seek to pass through, by means of service billing increases, increases in our cost of providing the services, while also aiming to obtain modest annual revenue increases from our existing clientscustomers to attain desired profit margins at the facility level. The primary economic factor in acquiring new clientscustomers is our ability to demonstrate the cost-effectiveness of our services because many of our clients’customers’ revenues are generally highly reliant on Medicare and Medicaid reimbursements. Therefore, our clients’customers’ economic decision-making is driven significantly by their reimbursement funding rate structure and the financial impact on their reimbursement as a result of engaging us for the respective services. The primary operational factor is our ability to demonstrate to potential clientscustomers the benefits of being relieved of the administrative and operational challenges related to the day-to-day management of their housekeeping and dietary operations. In addition, we must be able to assure new clientscustomers that we can improve the quality of service that they are providing to their residents. We believe the factors discussed above are equally applicable to each of our segments with respect to acquiring new clientscustomers and increasing revenues.
When evaluating financial performance, we consider the ratio of certain financial items to consolidated revenues. The table below summarizes those metrics for 2017, 20162023, 2022 and 2015:2021:
| | | | | | | | | | | | | | | | | |
| Relation to Consolidated Revenues |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| Revenues | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Operating costs and expenses: | | | | | |
| Costs of services provided | 87.2 | % | | 88.6 | % | | 86.2 | % |
| Selling, general and administrative expense excluding change in deferred compensation liability | 9.6 | % | | 8.8 | % | | 10.1 | % |
| Gain (loss) on deferred compensation plan | 0.4 | % | | (0.5) | % | | 0.4 | % |
| Selling, general and administrative expense | 10.0 | % | | 8.3 | % | | 10.5 | % |
| Other income (expense): | | | | | |
| Investment and other income (loss), net | 0.8 | % | | (0.3) | % | | 0.6 | % |
| Interest expense | (0.5) | % | | (0.2) | % | | (0.1) | % |
| Income before income taxes | 3.1 | % | | 2.6 | % | | 3.8 | % |
| Income tax | 0.9 | % | | 0.6 | % | | 1.0 | % |
| Net income | 2.2 | % | | 2.0 | % | | 2.8 | % |
|
| | | | | | | | |
| | Relation to Consolidated Revenues
Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Revenues | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Operating costs and expenses: | | | | | |
| Costs of services provided | 86.4 | % | | 85.7 | % | | 86.0 | % |
| Selling, general and administrative | 6.8 | % | | 6.7 | % | | 7.8 | % |
| Net investment and interest income | 0.3 | % | | 0.2 | % | | 0.0 | % |
| Income before income taxes | 7.1 | % | | 7.8 | % | | 6.2 | % |
| Income taxes | 2.4 | % | | 2.8 | % | | 2.2 | % |
| Net income | 4.7 | % | | 5.0 | % | | 4.0 | % |
Subject to the factors noted in the Cautionary Statement Regarding Forward Looking Statements included in this report on Form 10-K, we expect that our consolidated financial performance in 2018 may be comparable to the historical ratios above, absent the effects of non-recurring charges, such as those that affected selling, general and administrative costs in 2015. We anticipate that for 2018, Dietary revenues will continue to increase as a percentage of consolidated revenues by expanding upon the services performed for our current Housekeeping client base. Our expected growth in Housekeeping will primarily come from obtaining new clients.
Our costs of services can vary and may impact our operating performance. Management reviewsWe review two keyprimary indicators (costs of labor and costs of supplies)supplies as percentages of segment revenues) to monitor and manage such costs. The variability of these costs may impact each segment differently, as HousekeepingHousekeeping's percentage of revenue is more significantly impacted by costs of labor than that of Dietary. LaborSpecifically, Housekeeping labor costs accounted for approximately 80.1%82.2% of Housekeeping revenues in 2017.2023 while Dietary labor costs accounted for approximately 56.6%59.3% of Dietary revenues in 2017.2023. Changes in wage rates as a result of legislative or collective bargaining actions, market factors, adjustments to staffing levels, and other variations in our use of labor or in managementmanaging labor costs can result in variability of these costs. Housekeeping supplies, including linen products, accounted for approximately 8.0%7.0% of Housekeeping revenues in 2017.2023. In contrast, supplies consumed in performing our Dietary services accounted for approximately 36.1%34.2% of Dietary revenues. Generally, fluctuations in these expenses are influenced by factors outside of our control and are unpredictable. Housekeeping and Dietary supplies are principally commodity products and are affected by market conditions specific to the respective products. Our consolidated costs of services provided decreased 2.7% for the year ended December 31, 2023 as compared to 2022 due to a decrease in the number of facilities serviced.
Our clientscustomers are concentrated in the healthcare industry and are primarily providers of long-term care. Many of our clients’customers’ revenues are highly reliant on Medicare, Medicaid and third-party payors’ reimbursement funding rates. Legislation can significantly alter overall government reimbursement for nursing home services and such changes, as well as other trends in the long-term care industry, have affected and could adversely affect our clients’customers’ cash flows, resulting in their inability to make payments to us in accordance with agreed-upon payment terms. The climate of legislative uncertainty has posed, and will continue to pose, both risks and opportunities for us: the risks are related to our clients’customers’ cash flows and solvency, while the opportunities are related to our ability to offer our clientscustomers cost stability and efficiencies.
Years Ended December 31, 20172023 and 20162022
The following table sets forthsummarizes the 2017 income statement key components that we use to evaluate our financial performance on a consolidated and reportable segment basis, compared to 2016.for the years ended December 31, 2023 and 2022. The differences between the reportable segments’ operating results and other disclosed data and our Consolidated Financial Statementsconsolidated financial results relate primarily to corporate level transactions and adjustments related to transactions recorded at the reportable segment level which use methods other than generally accepted accounting principles.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | % Change |
| (in thousands) | | |
| Revenues | | | | | |
| Housekeeping | $ | 766,651 | | | $ | 795,687 | | | (3.6) | % |
| Dietary | 904,738 | | | 894,489 | | | 1.1 | % |
| Consolidated | $ | 1,671,389 | | | $ | 1,690,176 | | | (1.1) | % |
| | | | | |
| Costs of services provided | | | | | |
| Housekeeping | $ | 705,340 | | | $ | 722,591 | | | (2.4) | % |
| Dietary | 861,191 | | | 865,424 | | | (0.5) | % |
| Corporate and eliminations | (109,888) | | | (91,150) | | | 20.6 | % |
| Consolidated | $ | 1,456,643 | | | $ | 1,496,865 | | | (2.7) | % |
| | | | | |
| Selling, general and administrative expense | | | | | |
| Corporate and eliminations | $ | 166,772 | | | $ | 140,344 | | | 18.8 | % |
| | | | | |
| Investment and other income, net | | | | | |
| Corporate | $ | 12,938 | | | $ | (5,427) | | | (338.4) | % |
| | | | | |
| Interest expense | | | | | |
| Corporate | $ | (7,856) | | | $ | (2,987) | | | 163.0 | % |
| | | | | |
| Income (loss) before income taxes | | | | | |
| Housekeeping | $ | 61,311 | | | $ | 73,096 | | | (16.1) | % |
| Dietary | 43,547 | | | 29,065 | | | 49.8 | % |
| Corporate and eliminations | (51,802) | | | (57,608) | | | (10.1) | % |
| Consolidated | $ | 53,056 | | | $ | 44,553 | | | 19.1 | % |
| | | | | |
| Income taxes | | | | | |
| Corporate | $ | 14,670 | | | $ | 10,310 | | | 42.3 | % |
|
| | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | % Change |
| | | (in thousands) |
| Revenues | | | | | | |
| Housekeeping | | $ | 979,610 |
| | $ | 957,148 |
| | 2.3 | % |
| Dietary | | 886,521 |
| | 605,514 |
| | 46.4 | % |
| Consolidated | | $ | 1,866,131 |
| | $ | 1,562,662 |
| | 19.4 | % |
| | | | | | | |
| Costs of services provided | | | | | | |
| Housekeeping | | $ | 884,105 |
| | $ | 866,392 |
| | 2.0 | % |
| Dietary | | 840,513 |
| | 570,873 |
| | 47.2 | % |
| Corporate and eliminations | | (112,108 | ) | | (97,773 | ) | | 14.7 | % |
| Consolidated | | $ | 1,612,510 |
| | $ | 1,339,492 |
| | 20.4 | % |
| | | | | | | |
| Selling, general and administrative expense | | | | | | |
| Corporate and eliminations | | $ | 126,732 |
| | $ | 105,417 |
| | 20.2 | % |
| | | | | | | |
| Investment and interest income | | | | | | |
| Corporate and eliminations | | $ | 6,076 |
| | $ | 2,634 |
| | 130.7 | % |
| | | | | | | |
| Income (loss) before income taxes | | | | | | |
| Housekeeping | | $ | 95,505 |
| | $ | 90,756 |
| | 5.2 | % |
| Dietary | | 46,008 |
| | 34,641 |
| | 32.8 | % |
| Corporate and eliminations | | (8,548 | ) | | (5,010 | ) | | 70.6 | % |
| Consolidated | | $ | 132,965 |
| | $ | 120,387 |
| | 10.4 | % |
| | | | | | | |
| Income taxes | | | | | | |
| Corporate and eliminations | | $ | 44,739 |
| | $ | 42,991 |
| | 4.1 | % |
Revenues
Consolidated
Consolidated revenues increased 19.4%decreased 1.1% to $1.87$1.7 billion in 2017for the year ended December 31, 2023 compared to $1.56 billionthe corresponding period in 20162022 as a result of the factors discussed below under Reportable Segments.
Reportable Segments
Housekeeping’s 2.3% increaseDuring the years ended December 31, 2023 and 2022, the Company recognized changes in reportable segmentvariable consideration as reductions to revenue of $13.8 million, including $4.1 million in Housekeeping revenues resulted primarily from service agreements entered into with new clients. Dietary’s 46.4% increaseand $9.7 million in reportable segmentDietary revenues, resulted primarily from providing these servicesand $10.0 million, including $2.3 million of Housekeeping revenues and $7.7 million of Dietary revenues, respectively. Inclusive of the impact of such changes, Housekeeping revenues decreased 3.6% while Dietary revenues increased 1.1% during the year ended December 31, 2023 compared to a greaterthe corresponding period in 2022. Housekeeping revenues declined due to fewer facilities serviced year-over-year. While the number of existing Housekeeping clients.Dietary facilities serviced declined year-over-year, revenue increased resulting from contractual pass-through of labor and food costs to customer buildings, which was a focus of our 2022 service agreement modification initiative.
Costs of services provided
Consolidated
Consolidated costs of services increased 20.4%provided decreased 2.7% to $1.61$1.5 billion in 2017for the year ended December 31, 2023 compared to $1.34 billionthe corresponding period in 2016, primarily related to our overall growth,2022.
The following table provides a comparison of key indicators we consider when managing the consolidated costs of services provided:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| Costs of Services Provided - Key Indicators as a % of Consolidated Revenue | | 2023 | | 2022 | | Change |
| Bad debt provision | | 2.1% | | 1.9% | | 0.2% |
| Self-insurance costs | | 1.8% | | 1.9% | | (0.1)% |
Reportable Segments
Costs of services provided for Housekeeping, as represented by our 19.4% growth in consolidated revenues for the same period. As a percentage of consolidatedHousekeeping revenues, costincreased to 92.0% for the year ended December 31, 2023 from 90.8% in the corresponding period in 2022. Costs of services increasedprovided for Dietary, as a percentage of Dietary revenues, decreased to 86.4% in 201795.2% for the year ended December 31, 2023 from 85.7% in 2016.
Certain significant components within our costs of services are subject to fluctuation with changes in our business and client base. Labor and other labor-related costs, dining and housekeeping supplies, and self insurance costs account for most of our consolidated costs of services. See the discussion under Reportable Segments below for additional information on the changes96.8% in the components of costs of services.corresponding period in 2022.
The following table provides a comparison of the key indicators we consider when managing the consolidated costcosts of services provided:
|
| | | | | | |
| | | Year Ended December 31, |
| Costs of Services Provided - Key Indicators as % of Consolidated Revenue | | 2017 | | 2016 | | % Change |
| Bad debt provision | | 0.3% | | 0.3% | | —% |
| Self-insurance costs | | 2.4% | | 3.0% | | (0.6)% |
The bad debt provision remained consistent due to our assessment of the collectability of our accounts and notes receivables.
The decrease in self-insurance costs as a percentage of consolidated revenue is primarily the result of the Company’s ongoing initiatives to promote safety and accident prevention in the workplace, as well as proactive management of workers’ compensation claims, which have positively impacted our claims experience.
Reportable Segments
Costs of services provided for Housekeeping, as a percentage of Housekeeping revenues for 2017, decreased to 90.3% compared to 90.5% in 2016. Cost of services provided for Dietary, as a percentage of Dietary revenues for 2017, increased to 94.8% compared to 94.3% in 2016.
The following table provides a comparison of the key indicators we consider when managing cost of services at the segment level, as a percentage of the respective segment’s revenues:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| Costs of Services Provided - Key Indicators as a % of Segment Revenue | | 2023 | | 2022 | | Change |
| Housekeeping labor and other labor-related costs | | 82.2% | | 81.4% | | 0.8% |
| Housekeeping supplies | | 7.0% | | 6.8% | | 0.2% |
| Dietary labor and other labor-related costs | | 59.3% | | 61.5% | | (2.2)% |
| Dietary supplies | | 34.2% | | 32.0% | | 2.2% |
|
| | | | | | |
| | | Year Ended December 31, |
| Costs of Services Provided - Key Indicators as % of Segment Revenue | | 2017 | | 2016 | | % Change |
| Housekeeping labor and other labor-related costs | | 80.1% | | 80.2% | | (0.1)% |
| Housekeeping supplies | | 8.0% | | 7.8% | | 0.2% |
| Dietary labor and other labor-related costs | | 56.6% | | 53.8% | | 2.8% |
| Dietary supplies | | 36.1% | | 38.0% | | (1.9)% |
The ratios ofVariations within these key indicators generally remain relatively consistent. However, during this period of high-growth, the Company has experienced some inefficiencies when integrating new business and facilities. Such inefficiencies can relate to standardizing work flows and labor resources, establishing administrative structures, provisioning and other operational and logistical activities. Further, variations in these ratios can relate to changes in the mix of clients for whom we provide supplies or do not provide supplies. Management focuses on building efficiencies based on our operational expertise, managing labor and labor-related costs, as well as managing supply chain costs by leveraging economies of scale.
Consolidated Selling, General and Administrative Expense
Excluding the change in the deferred compensation plan described below, consolidated selling, general and administrative expense for 2017 increased $18.3 million or 17.6% compared to 2016, related primarily to our overall growth.
Included in selling, general and administrative expense are gains and losses associated with changes in the value of investments under the deferred compensation plan. These investments represent the amounts held on behalf of the participating employees and changes in the value of these investments affect the amount of our deferred compensation liability. Gains on the plan investments during 2017 and 2016 increased our selling, general and administrative expense for these periods.
|
| | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | % Change |
| | (in thousands) |
| Selling, general and administrative expense excluding change in deferred compensation liability | $ | 122,198 |
| | $ | 103,922 |
| | 17.6 | % |
| Gain on deferred compensation plan investments | 4,534 |
| | 1,495 |
| | 203.3 | % |
| Selling, general and administrative expense | $ | 126,732 |
| | $ | 105,417 |
| | 20.2 | % |
Consolidated Investment and Net Interest Income
Investment and interest income increased 130.7% for 2017 compared to 2016, primarily due to favorable market fluctuations in the value of our trading security investments representing the funding for our deferred compensation plan.
Consolidated Income Taxes
Our effective tax rate was 33.6% for 2017 compared to 35.7% for 2016. Changes in the accounting for the effects of income taxes took place during 2017, which impacted our effective tax rate. In the first quarter 2017, the Company adopted Accounting Standards Update (“ASU”) 2016-09, under which excess tax benefits related to share-based payments were recognized as a component of income tax expense, as opposed to additional paid-in capital, resulting in a decrease in 2017 income tax expense. In addition, in December 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law, enacting significant changes to corporate tax rates, as well as business-related exclusions, deductions and credits. During the fourth quarter 2017, the Company recognized the effects of the changes in the tax law and rates on its deferred tax balances. The net result of the remeasurement was an approximate $4.5 million decrease to the Company’s net deferred tax assets balance and a corresponding increase to the Company’s provision for income taxes. Excluding the effects of ASU 2016-09 and the Act, our estimated effective tax rate would have approximated 33.9%.
Differences between our effective tax rates and the applicable U.S. federal statutory rate arise primarily from the effects of state and local taxes and tax credits available to the Company. We participate in the Work Opportunity Tax Credit (“WOTC”) program, through which the Company receives tax credits for hiring and retaining employees from target groups with significant barriers to employment. This credit is currently scheduled to expire on December 31, 2019.
The Company expects that its effective tax rate for 2018, including the impact of the Company’s continuing participation in the WOTC program, will be approximately 21% to 23%.
Years Ended December 31, 2016 and 2015
The following table sets forth 2016 income statement key components that we use to evaluate our financial performance on a consolidated and reportable segment basis compared to 2015. The differences between the reportable segments’ operating results and other disclosed data and our Consolidated Financial Statements relate primarily to corporate level transactions and adjustments related to transactions recorded at the reportable segment level which use methods other than generally accepted accounting principles.
|
| | | | | | | | | | | |
| | | Year Ended |
| | | 2016 | | 2015 | | % Change |
| | | (in thousands) |
| Revenues | | | | | | |
| Housekeeping | | $ | 957,148 |
| | $ | 909,709 |
| | 5.2 | % |
| Dietary | | 605,514 |
| | 527,140 |
| | 14.9 | % |
| Consolidated | | $ | 1,562,662 |
| | $ | 1,436,849 |
| | 8.8 | % |
| | | | | | |
| Costs of services provided | | | | | | |
| Housekeeping | | $ | 866,392 |
| | $ | 825,238 |
| | 5.0 | % |
| Dietary | | 570,873 |
| | 495,528 |
| | 15.2 | % |
| Corporate and eliminations | | (97,773 | ) | | (84,658 | ) | | 15.5 | % |
| Consolidated | | $ | 1,339,492 |
| | $ | 1,236,108 |
| | 8.4 | % |
| | | | | | |
| Selling, general and administrative expense | | | | | | |
| Corporate and eliminations | | $ | 105,417 |
| | $ | 111,689 |
| | (5.6 | )% |
| | | | | | |
| Investment and interest income | | | | | | |
| Corporate and eliminations | | $ | 2,634 |
| | $ | 712 |
| | 269.9 | % |
| | | | | | |
| Income (loss) before income taxes | | | | | | |
| Housekeeping | | $ | 90,756 |
| | $ | 84,471 |
| | 7.4 | % |
| Dietary | | 34,641 |
| | 31,612 |
| | 9.6 | % |
| Corporate and eliminations | | (5,010 | ) | | (26,319 | ) | | (81.0 | )% |
| Consolidated | | $ | 120,387 |
| | $ | 89,764 |
| | 34.1 | % |
| | | | | | | |
| Income taxes | | | | | | |
| Corporate and eliminations | | $ | 42,991 |
| | $ | 31,740 |
| | 35.4 | % |
Revenues
Consolidated
Consolidated revenues increased 8.8% to $1.56 billion in 2016 compared to $1.44 billion in 2015 as a result of the factors discussed below under Reportable Segments.
Reportable Segments
Housekeeping’s 5.2% increase in reportable segment revenues resulted primarily from service agreements entered into with new clients.
Dietary’s 14.9% increase in reportable segment revenues resulted primarily from providing these services to a greater number of existing Housekeeping clients.
Costs of services provided
Consolidated
Consolidated costs of services increased 8.4% to $1.34 billion in 2016 compared to $1.24 billion in 2015. The increase in costs of services is primarily related to our overall growth, as represented by our 8.8% growth in consolidated revenues. Certain significant components within our costs of services are subject to fluctuation with the changes in our business and client base. The increase during 2016 compared to 2015 relates primarily to labor and other labor related costs. Historically, these significant components accounted for approximately 96% to 98% of consolidated costs of services.
As a percentage of consolidated revenues, cost of services decreasedto 85.7% in 2016 from 86.0% in 2015. The following table provides a comparison of the key indicators we consider when managing the consolidated cost of services:
|
| | | | | | |
| | | Year Ended December 31, |
| Costs of Services Provided - Key Indicators as % of Consolidated Revenue | | 2016 | | 2015 | | % Change |
| Bad debt provision | | 0.3% | | 0.3% | | —% |
| Self-insurance costs | | 3.0% | | 3.4% | | (0.4)% |
The bad debt provision remained consistent due to our assessment of the collectability of our accounts and notes receivables.
The decrease in self-insurance costs as a percentage of consolidated revenue is primarily the result of the Company’s ongoing initiatives to promote safety and accident prevention in the workplace, as well as proactive management of workers’ compensation claims, which positively impact our claims experience.
Reportable Segments
Costs of services provided for Housekeeping, as a percentage of Housekeeping revenues for 2016, decreased to 90.5% compared to 90.7% in 2015. Costs of services provided for Dietary, as a percentage of Dietary revenues for 2016, increased to 94.3% compared to 94.0% in 2015.
The following table provides a comparison of the key indicators we consider when managing cost of services at the segment level, as a percentage of the respective segment’s revenues:
|
| | | | | | |
| | | Year Ended December 31, |
| Costs of Services Provided - Key Indicators as % of Segment Revenue | | 2016 | | 2015 | | % Change |
| Housekeeping labor and other labor costs | | 80.2% | | 79.4% | | 0.8% |
| Housekeeping supplies | | 7.8% | | 8.3% | | (0.5)% |
| Dietary labor and other labor costs | | 53.8% | | 52.9% | | 0.9% |
| Dietary supplies | | 38.0% | | 38.7% | | (0.7)% |
The ratios of these key indicators remain relatively consistent. Variations relate to the provision of services at new facilities and changes in the mix of clientscustomers for whom we provide supplies or do not provide supplies. Management focuses on building efficiencies and managing labor and other costs at the facility level, as well as managing supply chain costs, for new and existing facilities. The increase in dietary supplies spend as a percentage of dietary revenues was driven by increases to our menu costs, which are dependent on commodity pricing factors, during 2023.
Consolidated Selling, General and Administrative Expense
Excluding the change in the deferred compensation plan, consolidated selling, general and administrative expense for 2016 decreased $7.8 million or 7.0% compared to 2015, related primarily to reduced legal expenses associated with settlements regarding certain employment related matters. The change in the value of the deferred compensation plan is a result of changes in the market value on the balance of investments held in our deferred compensation plan.
Included in selling, general and administrative expense are gains and losses associated with changes in the value of investments under theour deferred compensation plan.liability. These investments represent the amounts held on behalf of the participating employees andas changes in the value of these investments affect the amount of our deferred compensation liability.liability. Gains on the plan investments during 2016the year ended December 31, 2023 increased our total selling, general and administrative expense for the period whereas losses on plan investments during the year ended 2022 decreased our total selling, general and administrative expense.
Excluding the change in the deferred compensation plan described above, consolidated selling, general and administrative expense increased $10.6 million or 7.1% for the year ended December 31, 2023 compared to 2015.the corresponding period in 2022. The increase was driven by increases in professional fees and travel-related expenses, impacted by inflationary measures.
The table below summarizes the changes in these components of selling, general and administrative expense:
23 | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | $ Change | | % Change |
| (dollar amounts in thousands) | | |
| Selling, general and administrative expense excluding change in deferred compensation liability | $ | 160,088 | | | $ | 149,522 | | | $ | 10,566 | | | 7.1 | % |
| Gain (loss) on deferred compensation plan investments | 6,684 | | | (9,178) | | | 15,862 | | | (172.8) | % |
| Selling, general and administrative expense | $ | 166,772 | | | $ | 140,344 | | | $ | 26,428 | | | 18.8 | % |
|
| | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | % Change |
| | (in thousands) |
| Selling, general and administrative expense excluding change in deferred compensation liability | $ | 103,922 |
| | $ | 111,751 |
| | (7.0 | )% |
| Gain (loss) on deferred compensation plan investments | 1,495 |
| | (62 | ) | | (2,511.3 | )% |
| Selling, general and administrative expense | $ | 105,417 |
| | $ | 111,689 |
| | (5.6 | )% |
Consolidated Investment and Net Interest Income, net
Investment and interestother income increased 269.9%was a gain of $12.9 million for 2016the year ended December 31, 2023 compared to 2015,a loss of $5.4 million for the corresponding 2022 period, primarily due to favorable market fluctuations in the value of our trading security investments representing the funding for our deferred compensation plan.plan and increased interest income on notes receivable.
Consolidated Interest Expense
Consolidated interest expense increased to $7.9 million for the year ended December 31, 2023 compared to $3.0 million for the corresponding 2022 period due to increased short-term borrowings during 2023 and increased market interest rates.
Consolidated Income Taxes
Our effective tax rate was 35.7%27.7% for 2016 and 35.4% for 2015. Differences between the effectiveyear ended December 31, 2023 compared to 23.1% in 2022. The increase to our 2023 tax rates and the applicable U.S. federal statutory rate arise primarily from the effect of state and local taxes and tax credits availablecompared to the Company. The Company participatescorresponding 2022 period was primarily impacted by a decrease in the WOTC program, through which we hirefederal and retain employees from target groups with significant barriersstate tax adjustments relative to employment. As part of the program, the Company receives tax credits, and although the Company increased its participation in the program year-over-year, the increase in the effective tax rate is primarily related to the ratio of the tax credits to higher pre-tax book income in 2016 as compared to the prior year. This credit is currently scheduled to expire on December 31, 2019.before income taxes.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting standards generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Financial reporting results rely on estimating the effects of matters that are inherently uncertain. An understanding of the policies discussed below is critical to the understanding of our financial statements because the application of these policies requires judgment. Specific risks for these critical accounting policies and estimates are described in the following paragraphs. For these estimates, we caution that future events do not always occur as forecasted, and the best estimates routinely require adjustment. Any such adjustments or revisions to estimates could result in material differences from previously reported amounts.
The policies discussed below are not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP, with no need for our judgment in their application. There are also areas in which our judgment in selecting another available alternative would not produce a materially different result. See our audited consolidated financial statements and notes thereto which are included in this Annual Report on Form 10-K, which contain a discussion of our accounting policies and other disclosures required by U.S. GAAP.
Allowance for Doubtful Accounts
The allowance for doubtful accounts (the “Allowance”) is established asat the origination of an account or note receivable in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) subtopic 326 Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC 326”). ASC 326 requires the Company to estimate the lifetime expected credit losses are estimatedon such instruments and to have occurred through a provision for bad debts chargedrecord an allowance to earnings. offset the receivables.
The Allowance is evaluated quarterly based upon our financial models which consider historical collections experience, current market conditions, government funding of Medicare and Medicaid and reasonable and supportable economic forecasts to estimate lifetime expected credit losses. Portions of the Allowance are inherently more sensitive to fluctuations in management’s assumptions than others, particularly any adjustments made to reflect reasonable and supportable economic forecasts. Such qualitative assessments would be expected to have a greater effect on aged accounts receivable and notes receivable as compared to current receivables. Due to the prospective nature of the Allowance under ASC 326, Management continues to review our ongoing reviewportfolio of accounts and notes receivable and any estimate of credit losses is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
We have had varying collections experience with respect to our accounts and notes receivable. We have at times elected to extend the period of payment for certain clientscustomers beyond contractual terms. Such clientscustomers include those who have terminated service agreements and slow payers experiencing financial difficulties. In making credit evaluations, in addition to analyzing and anticipating, where possible, the specific cases described above, we consider customer-specific risks as well as the general collection risks associated with trends in the long-term care industry. We establish credit limits through our payment terms, perform ongoing credit evaluations and monitor accounts to minimize the risk of loss.
We regularly evaluate our accounts and notes receivable for impairment or loss of value and when appropriate, we will record an Allowance for such receivables. We generally follow a policy of partially reserving for receivables due from clients in bankruptcy, clients with which we are in litigation for collection and other slow paying clients. The Allowance is adjusted as additional information becomes available to more accurately estimate collectability. If the amount of our recovery of a receivable is determined,
through litigation, bankruptcy proceedings or negotiation, to be less than the amount recorded on our balance sheet, we will charge the applicable amount to the Allowance.
Summarized below for the years 2017, 2016 and 2015 are the aggregate account balances against which reserves were recorded, as well as net write-offs, the bad debt provision and the balance of the allowance for doubtful accounts:
|
| | | | | | | | | | | | | | | | |
| Year Ended | | Aggregate Account Balances of Clients in Bankruptcy or in/or Pending Collection/Litigation | | Net Write-offs of Client Accounts | | Bad Debt Provision | | Allowance for Doubtful Accounts |
| | | (in thousands) |
| 2017 | | $ | 30,035 |
| | $ | 1,176 |
| | $ | 6,250 |
| | $ | 11,985 |
|
| 2016 | | $ | 15,873 |
| | $ | 2,326 |
| | $ | 4,629 |
| | $ | 6,911 |
|
| 2015 | | $ | 12,073 |
| | $ | 5,863 |
| | $ | 4,335 |
| | $ | 4,608 |
|
Actual collections of these accounts could differ from our current estimate. If our actual collection experience is 5% less than our estimate, the related increase to our Allowance would decrease net income by approximately $0.6 million. Despite our efforts to minimize credit risk exposure, our clientscustomers could be adversely affected if future industry trends, as more fully discussed under Liquidity“Liquidity and Capital ResourcesResources” below, and in this Annual Report on Form 10-K in Part I under “Risk Factors,” “Government Regulation of Clients” andCustomers,” “Service Agreements and Collections,”Collections” and “Risk Factors” change in such a manner as to negatively impact the cash flows of our clients.customers. If our clientscustomers experience a negative impact in their cash flows, it could have a material adverse effect on our consolidated results of operations and financial condition.
Accrued Insurance Claims
We currently have a Paid Loss Retrospective Insurance Plan for general liability, and workers’ compensation insurance and other self-insurance programs, which comprise approximately 30.7%25.3% of our liabilities at December 31, 2017.2023. Under our insurance plans for general liability and workers’ compensation, predetermined loss limits are arranged with our insurance company to limit both our per occurrence cash outlay and annual insurance plan cost. Our accounting for this plan utilizes current valuations from a third partythird-party actuary, which include assumptions based on data such as historical claims and pay-outpayout experience, demographic factors, industry trends, severity factors and other actuarial calculations. In the event that our claims experience and/or industry trends result in an unfavorable change in our assumptions or outcomes, it would have an adverse effect on our results of operations and financial condition. Recently, our claims experiences have been favorable as a result of our ongoing initiative to promote safety and accident prevention in the workplace as well asand proactive management of workers’ compensation claims.
For general liability, and workers’ compensation and other self-insurance programs, we record both a reserve for the estimated future cost of claims and related expenses that have been reported but not settled as well as an estimate of claims incurred but not reported. SuchGeneral liability and workers’ compensation reserves for claims incurred but not reported are developed by a third partythird-party actuary through review of our historical data and open claims.
A summary of the changes in our total self-insurance liability is as follows:
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
| (in thousands) |
| Accrued insurance claims - January 1, | $ | 88,707 | | | $ | 89,394 | | | $ | 82,428 | |
| Claim payments | (24,488) | | | (25,175) | | | (29,061) | |
| Reserve accruals: | | | | | |
| Current year accruals | 32,693 | | | 34,293 | | | 35,830 | |
| Changes to the provision for prior year claims | (12,534) | | | (9,805) | | | 197 | |
| Change in accrued insurance claims | (4,329) | | | (687) | | | 6,966 | |
| Accrued insurance claims - December 31, | $ | 84,378 | | | $ | 88,707 | | | $ | 89,394 | |
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Accrued insurance claims - January 1, | $ | 87,653 |
| | $ | 82,250 |
| | $ | 68,262 |
|
| Claim payments | (41,077 | ) | | (35,089 | ) | | (27,883 | ) |
| Reserve accruals: |
|
| |
|
| |
|
|
| Current year accruals | 49,673 |
| | 42,592 |
| | 41,871 |
|
| Changes to the provision for prior year claims | (11,550 | ) | | (2,100 | ) | | — |
|
| Change in accrued insurance claims | (2,954 | ) | | 5,403 |
| | 13,988 |
|
| Accrued insurance claims - December 31, | $ | 84,699 |
| | $ | 87,653 |
| | $ | 82,250 |
|
Asset Valuations and Review for Potential Impairment
We review our fixed assets, deferred income taxes, goodwill and other intangible assets at least annually or whenever events or circumstances indicate that their carrying amounts may not be recoverable. This review requires that we make assumptions regarding the fair value of these assets and the changes in circumstances that would affect the carrying value of these assets. If the carrying value of an asset exceeds the fair value of the asset, an impairment loss would be recognized in earnings. The determination of fair value includes numerous uncertainties, such as the impact of competition on future value. We believe that we have made reasonable estimates and judgments in determining whether our long-term assets have been impaired; however, if there is a material
change in the assumptions used in our determination of fair value or if there is a material change in economic conditions or circumstances influencing fair value, we could be required to recognize certain impairment charges in the future. As a result of our most recent reviews, no changes in asset values were required.
Income Taxes
Deferred income taxes are recognized for the tax consequences related to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for tax purposes at each year-end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is established when necessary based on the weight of available evidence, if it is considered more likely than not that all or some portion of the deferred tax assets will not be realized. Income tax expense is the sum of current income tax plus the change in deferred tax assets and liabilities.
We are subject to income taxes in the United States and numerous state and local jurisdictions. The determination of the income tax provision is an inherently complex process, requiring management to interpret continually changing regulations and to make certain significant judgments. Our assumptions, judgments and estimates relative to the amount of deferred income taxes take into account scheduled reversals of deferred tax liabilities, recent financial operations, estimates of the amount of future taxable income and available tax planning strategies. Actual operating results in future years could render our current assumptions, judgments and estimates inaccurate. No assurance can be given that the final impact of these matters will not be different from that which is reflected in the Company’s historical income tax provisions and accruals. The Company adjusts these items in light of changing facts and circumstances. To the extent that the final impact of these matters is different than the amounts recorded, such differences could have a material effect on the income tax provisions or benefits in the periods in which such determinations are made.
Liquidity and Capital Resources
Cash generated through operations is our primary source of liquidity. At December 31, 2017,2023, we had cash, cash equivalents and marketable securities of $82.8$147.5 million and working capital of $343.2$354.8 million, compared to December 31, 20162022 cash, cash equivalents and marketable securities of $91.6$121.5 million and working capital of $313.8 million. The increase in working capital is driven by growth in our business and by the timing of cash receipts and cash payments. In addition, as of December 31, 2017, we had an unused line of credit of $187.0$319.6 million. Our current ratio at December 31, 2017 was 2.9 to 1, versus 4.12.6 to 1 at both December 31, 2016.2023 and 2022. Marketable securities represent fixed income investments that are highly liquid and can be readily purchased or sold through established markets. Such securities are held by HCSG Insurance to satisfy capital requirements of the state regulator related to captive insurance companies.
For the years ended December 31, 2017, 20162023, 2022 and 2015,2021 our cash flows were as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (in thousands) |
| Net cash provided by (used in) operating activities | $ | 43,498 | | | $ | (8,167) | | | $ | 37,108 | |
| Net cash (used in) provided by investing activities | $ | (3,293) | | | $ | 2,580 | | | $ | (22,990) | |
| Net cash used in financing activities | $ | (12,154) | | | $ | (38,928) | | | $ | (82,654) | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Net cash provided by operating activities | $ | 7,630 |
| | $ | 41,400 |
| | $ | 63,361 |
|
| Net cash used in investing activities | $ | (14,967 | ) | | $ | (6,452 | ) | | $ | (62,314 | ) |
| Net cash used in financing activities | $ | (6,959 | ) | | $ | (44,284 | ) | | $ | (43,138 | ) |
Operating Activities
Our primary sources of cash from operating activities are the revenues generated from our Housekeeping and Dietary services. Our primary uses of cash from operating activities are the funding of our payroll and other personnel-related costs as well as the costs of supplies used in providing our services. TheFor the year ended December 31, 2023 cash flow from operations included a $38.4 million in net income, an increase of $4.1 million compared to 2022, non-cash add-backs to net income of $49.3 million, and a $44.2 million decrease in cash flows from changes in operating assets and liabilities, driven primarily by increased outstanding accounts and notes receivable. Such activity, along with the timing of cash receipts and cash payments, are the primary drivers of the period-over-period changes in net cash provided by operating activities.
Investing Activities
TheOur principal uses of cash for investing activities are our purchases of marketable securities and capital expenditures such as those for housekeeping and food service equipment, computer software and equipment and furniture and fixtures (see “Capital Expenditures” below for additional information). While no purchases of marketable securities were made during the year ended December 31, 2023, we also use cash for such purchases when deemed appropriate in line with capital funding requirements for HCSG Insurance. Such uses of cash are partially offset by proceeds from sales of marketable securities.
Our investments in marketable securities are primarily comprised of tax-exempt municipal bonds and are intended to achieve our goal of preserving principal, maintaining adequate liquidity and maximizing returns subject to our investment guidelines. Our
investment policy limits investment to certain types of instruments issued by institutions primarily with investment-grade ratings and places restrictions on concentration by type and issuer.
Financing Activities
The primary use of cash for financing activities is repurchases of common stock. Prior to 2023, the primary use of cash from financing activities was the payment of dividends. We have paid regular quarterly cash dividends since the second quarter of 2003. During 2017, we paid to shareholders regular quarterly cash dividends totaling $55.2 million, as follows:
|
| | | | | | | | | | | | | | | |
| | Paid During the Quarter Ended |
| | March 31, 2017 | | June 30, 2017 | | September 30, 2017 | | December 31, 2017 |
| | (in thousands, except per share data) |
| Cash dividend per common share | $ | 0.18625 |
| | $ | 0.18750 |
| | $ | 0.18875 |
| | $ | 0.19000 |
|
| Total cash dividends paid | $ | 13,624 |
| | $ | 13,750 |
| | $ | 13,883 |
| | $ | 13,987 |
|
| Record date | February 17, 2017 |
| | May 19, 2017 |
| | August 18, 2017 |
| | November 17, 2017 |
|
| Payment date | March 24, 2017 |
| | June 23, 2017 |
| | September 22, 2017 |
| | December 22, 2017 |
|
Additionally, on January 30, 2018,On February 14, 2023, our Board of Directors declared a regularauthorized the Repurchase Plan and suspended the quarterly cash dividend issued on common stock as part of $0.19125 per common share, which will be paid on March 23, 2018 to shareholders of record as of the close of business on February 16, 2018.
Theour overall capital rebalancing strategy. No dividends paid to shareholderswere issued during the year ended December 31, 2017 were funded through cash generated from operations. Our Board of Directors reviews our dividend policy on a quarterly basis. Although there can be no assurance that2023. During 2022, we will continue to pay dividends or the amount of the dividends, we expect to continue to pay apaid regular quarterly cash dividend. Partially offsetting the cash useddividends to pay dividends are the proceeds received from the exerciseshareholders of stock options by employees and directors. In connection with the establishment$63.4 million.
We repurchased 1.0 million shares of our dividend policy, we adopted a Dividend Reinvestment Plan in 2003.common stock for $11.1 million during the year ended December 31, 2023. We remain authorized to repurchase 6.5 million shares of our Common Stock pursuant to the Repurchase Plan.
The primary source of cash from financing activities is the net borrowings under our bank line of credit. We borrow for general corporate purposes as needed throughout the year. The outstanding short-term borrowings balance as of December 31, 2017 relates to cash flow requirements due to the timing of cash receipts and cash payments.
We did not repurchase any of our Common Stock during 2017, but we remain authorized to repurchase 1.7 million shares of our Common Stock pursuant to previous Board of Directors’ authorization.
Contractual Obligations
Our future contractual obligations and commitments at December 31, 20172023 primarily consist of minimum lease payments on our operating lease agreements as discussed within Note 8 — Leases. As of December 31, 2023, the following:Company had no other material minimum purchase or capital expenditure commitments pertaining to our daily operations or existing financing arrangements.
|
| | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| Year Ended December 31, 2017 | | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | After 5 Years |
| | | (in thousands) |
| Operating lease obligations | | $ | 9,118 |
| | $ | 2,482 |
| | $ | 3,457 |
| | $ | 1,469 |
| | $ | 1,710 |
|
Line of Credit
As ofAt December 31, 2017,2023, we had a $300 million bank line of credit on which to draw for general corporate purposes. Amounts drawn under the line of credit are payable upon demand and generally bear interest at LIBORa floating rate, based on our leverage ratio, and starting at the Term Secured Overnight Financing Rate (“SOFR”) rate plus 75165 basis points (or if LIBOR becomes unavailable,points. The Company’s line of credit was amended on November 22, 2022 to, among other things, provide for a five-year unsecured revolving loan facility in the higheraggregate amount of $300 million with, at the PrimeCompany’s option, the ability to increase the revolving loan commitments to an aggregate amount not to exceed $500 million and to change the benchmark rate from the London Interbank Offered Rate or the Overnight Bank Funding Rate plus 50 basis points).(“LIBOR”) to SOFR. At December 31, 2017, there were $35.42023, we borrowed $25.0 million in borrowings under the line of credit.
The line of credit requires us to satisfy onetwo financial covenant.covenants. The covenantcovenants and itstheir respective status at December 31, 2017 was2023 were as follows:
| | | | | | | | |
| Covenant Descriptions and Requirements | | | |
Covenant Description and Requirement | | As of December 31, 20172023 |
Funded debt(1)1 to EBITDA(2)2 ratio: less than 3.50 to 1.00 | | 0.97 |
EBITDA2 to Interest Expense ratio: not less than 3.00 to 1.00 | | 0.79 |
9.92 |
1.All indebtedness for borrowed money including, but not limited to, reimbursement obligations in respect of letters of credit and guarantees of any such indebtedness.
| |
(1)
| All indebtedness for borrowed money including, but not limited to, capitalized lease obligations, reimbursement obligations in respect of letters of credit and guarantees of any such indebtedness. |
| |
(2)
| Net income plus interest expense, income tax expense, depreciation, amortization, and extraordinary non-recurring losses/gains. |
2.Net income plus interest expense, income tax expense, depreciation, amortization, share-based compensation expense and extraordinary non-recurring losses/gains.
As shown in the tablenoted above, we were in compliance with our financial covenantcovenants at December 31, 20172023 and we expect to continue to remain in compliance with such financial covenant.compliance. The line of credit expires on December 18, 2018.November 22, 2027. We believe that our existing capacity under the line of credit and our history of favorable operating cash flows provide adequate liquidity to fund our operations for the next twelve months following the date of this report.
At December 31, 2017,2023, we also had outstanding $77.6$85.9 million in irrevocable standby letters of credit, which relate to payment obligations under our insurance programs. The letters of credit expire on January 2, 2019. In connection with the issuance of the letters of credit, the amount available under the line of credit was further reduced by $77.6$85.9 million to $187.0$189.1 million at December 31, 2017. The2023. On December 29, 2023, January 2, 2024 and January 3, 2024, the letters of credit were decreased to $65.9 million on January 2, 2018.renewed, and they all expire during the first quarter of 2025.
Accounts and Notes Receivable
Any decisionDecisions to grant or to extend credit isto customers are made on a case-by-case basis and is based on a number of qualitative and quantitative factors related to the particular client,customer as well as the general risks associated with operating within the long-term carehealthcare industry.
Our net accounts and notes receivable balance increased from December 31, 2016. Such fluctuationsFluctuations in net accounts and notes receivable are attributable to a variety of factors including, but not limited to, the timing of cash receipts from customers, the Company’s assessment of collectability and corresponding provision for bad debt expense and the inception, transition, modification or termination of clientcustomer relationships.
There are a variety of factors that impact our clients’ ability to pay us in accordance with our agreements. Primary among these is our clients’ participation in programs funded by federal and state governmental agencies. Deviations in the timing or amounts of reimbursements under those programs can impact our clients’ cash flows and the timing of their payments to us. The payment terms in our service agreements are not contingent upon our clients’ cash flows and notwithstanding our efforts to minimize credit risk exposure, various factors affecting our clients’ cash flows could have an indirect, yet material adverse effect on our results of operations and financial condition.
We deploy significant resources and have invested in tools and processes to optimize our credit and collections efforts. When appropriate, we utilizethe Company utilizes interest-bearing promissory notes as an alternative to accounts receivable to enhance the collectability of amounts due, by providing ainstituting definitive repayment planplans and providing a means by which to further evidence the amounts owed. At December 31, 2017 and December 31, 2016, we had $36.6 million and $19.2 million, net of reserves, respectively, of such promissory notes outstanding. In addition, wethe Company may assist our clients who are adjusting to changes in their cash flows by amending our agreementsamend contracts from full-servicefull service to management-only arrangements, or by modifyingadjust contractual payment terms, to accommodate clientscustomers who have in good faith established clearly-defined plans for addressing cash flow issues. These efforts are intended to minimize ourthe Company’s collections risk while maintaining our relationships with our clients.risk.
In order to provide for collections issues and the general risk associated with the granting of credit terms, we recorded a bad debt provision (in an Allowance for Doubtful Accounts) of $6.3$35.6 million, $4.6$32.0 million and $4.3$10.5 million in the years ended December 31, 2017, 20162023, 2022 and 2015,2021, respectively. As a percentage of total revenues, these provisions representrepresented approximately 0.3%2.1%, 1.9% and 0.6% for each of the years ended December 31, 2017, 20162023, 2022 and 2015.2021, respectively.
Insurance Programs
We self-insure or carry a high deductible insurance planplans and therefore we retain a substantial portion of the risk associated with the expected losses under our general liability and workers compensation programs. Under our insurance plans for general liability and workers’ compensation, predetermined loss limits are arranged with our insurance company to limit both our per occurrence cash outlay and annual insurance plan cost. Our accounting for this plan is affected by various uncertainties, such as historical claims, pay-out experience, demographic factors, industry trends, severity factors and other actuarial assumptions calculated by a third partythird-party actuary. Evaluations of our accrued insurance claims estimate as of the balance sheet date are based primarily on current information derived from our actuarial valuation which assists in quantifying and valuing these trends. In the event that our claims experience and/or industry trends result in an unfavorable change resulting from, among other factors, the severity levels of reported claims and medical cost inflation, as compared to historical claim trends, it would have an adverse effect on our results of operations and financial condition. Under these plans, predetermined loss limits are arranged with an insurance company to limit both our per-occurrence cash outlay and annual insurance plan cost.
For general liability and workers’ compensation, we record a reserve for the estimated future cost of claims and related expenses that have been reported but not settled, including an estimate of claims incurred but not reported that are developed as a result of a review of our historical data and open claims, which is based on estimates provided by a third partythird-party actuary.
Capital Expenditures
OurThe level of capital expenditures is generally dependent on the number of new clientscustomers obtained. Such capital expenditures primarily consist of housekeeping and food service equipment purchases, laundry and linen equipment installations, computer hardware and software and furniture and fixtures. Our capital expenditures totaled $5.4 million in 2017.2023. Although we have no specific material commitments for capital expenditures through the end of calendar year 2018,2024, we estimate that for that period2024 we will have capital expenditures of approximately $4.5$4.0 million to $6.0 million. We
Although there can be no assurance, we believe that our cash from operations, existing cash and cash equivalents balance and credit line will be adequate for the foreseeable future to satisfy the needs of our operations and to fund our anticipated growth. However, should these sources not be sufficient, we would seek to obtain necessary capital from such sources as long-term debt or equity financing. In addition, there can be no assurance of the terms thereof and any subsequent equity financing sought may have dilutive effects on our current shareholders.
Material Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements other than our irrevocable standby letter of credit.credit previously discussed.
Although there can be no assurance thereof, we believe that in most instances we will be able to recover increases in costs attributable to inflation by passing through such cost increases to our clients.
Item 7A. Quantitative and QualitativeDisclosures About Market Risk.
At December 31, 2017,2023, we had $147.5 million in cash, cash equivalents and marketable securities. The fair value of all of our cash equivalents and marketable securities are determined based on “Level 1” or “Level 2” inputs, which are based upon 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. We place our cash investments in municipal bonds of $73.2 million. Our municipal bonds are categorizedinstruments that meet credit quality standards as marketable securities and are subject to interest rate risk, as changesspecified in interest rates affect the fair values of those instruments. our investment policy guidelines.
Investments in both fixed ratefixed-rate and floating ratefloating-rate investments carry a degree of interest rate risk. The market value of fixed rate securities may be adversely impacted due toby an increase in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if there is a decline in the fair value of our investments. We make investments in instruments that meet our credit quality standards, as specified in our investment policy guidelines.
Item 8. Financial Statements and SupplementaryData.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | |
| Page |
| |
| Page |
ReportReports of Independent Registered Public Accounting Firm (PCAOB ID Number 248) | |
Management's Report on Internal Control Over Financial Reporting | |
Report of Independent Registered Public Accounting Firm | |
| Consolidated Financial Statements | |
Consolidated Balance Sheets as of December 31, 20172023 and 20162022 | |
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 20162023, 2022 and 20152021 | |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 20162023, 2022 and 20152021 | |
Consolidated Statements of Stockholders'Stockholders’ Equity for the Years Ended December 31, 2017, 20162023, 2022 and 20152021 | |
Notes to Consolidated Financial Statements for the Years Ended December 31, 2017, 20162023, 2022 and 20152021 | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Healthcare Services Group, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Healthcare Services Group, Inc. (a Pennsylvania corporation) and subsidiaries (the “Company”) as of December 31, 20172023 and 2016,2022, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017,2023, and the related notes and schedulesfinancial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172023 and 2016,2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2023, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017,2023, based on criteria established in the 2013 Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 23, 201816, 2024 expressed an unqualifiedadverse opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for doubtful accounts
As described further in Notes 1 and 5 to the financial statements, the Company records an allowance for doubtful accounts against its accounts and notes receivable balances under ASC 326 based on the future expected credit loss. This estimate is determined based on internally developed qualitative and quantitative factors derived from the aging and collection history of receivables. We identified the allowance for doubtful accounts as a critical audit matter.
The principal considerations for our determination that the allowance for doubtful accounts is a critical audit matter includes the high degree of estimation uncertainty and judgment involved in determining the estimate. There is a high degree of subjectivity in management's assessment of the reasonableness of the allowance for doubtful accounts, which required a heightened level of auditor judgment in auditing the estimate. Further, variations in this estimate could have a significant impact on the recorded allowance.
Our audit procedures related to the allowance for doubtful accounts included the following, among others:
•We tested the design and operating effectiveness of management’s controls over the allowance for doubtful accounts.
•We evaluated the appropriateness of management’s process and methodology of estimating the allowance for doubtful accounts.
•We performed a historical lookback analysis for a sample of accounts and notes receivable balances within certain risk pools, examined current and historical collection rates, and compared the historical loss rates against the estimated loss rates within the respective risk pools as of December 31, 2023.
•We performed an analysis of the changes in loss rates applied to each respective risk pool as of December 31, 2023, compared to December 31, 2022, and obtained corroborating evidence for any significant variances.
•We evaluated the reasonableness of certain qualitative adjustments recorded by management against the allowance for doubtful accounts to appropriately reflect management’s expectation of current expected credit losses.
•We tested the mathematical accuracy of management’s allowance for doubtful accounts calculation as of December 31, 2023, by recalculating the historical loss rates for each risk pool, as well as recalculating the aging of receivables.
•We sampled accounts and notes receivable and performed confirmation procedures, as well as obtained other corroborating evidence, to ensure the accuracy of the receivables utilized by management to calculate the allowance for doubtful accounts as of December 31, 2023.
|
| | | | |
| /s/ GRANT THORNTON LLP | |
| |
| We have served as the Company’s auditor since 1992. |
| |
New York, New YorkPhiladelphia, Pennsylvania | |
February 23, 201816, 2024 | |
Management’s Annual Report on Internal Control Over FinancialReporting
The management of Healthcare Services Group, Inc. (“Healthcare”, “We” or the “Company”), is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles in the United States and includes those policies and procedures that:
| |
1. | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the Company; |
| |
2. | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
| |
3. | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. In making this assessment, the Company’s management used the criteria set forth in Internal Control -Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “2013 Framework”).
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our internal control over financial reporting, as prescribed above, for the period covered by this report. Based on our evaluation, our principal executive officer and principal financial officer concluded that the Company’s internal control over financial reporting as of December 31, 2017 is effective as a whole.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s independent registered public accounting firm has audited, and reported on, the Company’s internal control over financial reporting as of December 31, 2017.
|
| | |
/s/ Theodore Wahl | | /s/ John C. Shea |
Theodore Wahl | | John C. Shea |
Chief Executive Officer
(Principal Executive Officer)
| | Chief Financial Officer
(Principal Financial and Accounting Officer)
|
February 23, 2018 | | February 23, 2018 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Healthcare Services Group, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Healthcare Services Group, Inc. (a Pennsylvania corporation) and subsidiaries (the “Company”) as of December 31, 2017,2023, based on criteria established in the 2013 Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, because of the effect of the material weakness described in the following paragraphs on the achievement of the objectives of the control criteria, the Company has not maintained in all material respects, effective internal control over financial reporting as of December 31, 2017,2023, based on criteria established in the 2013Internal Control-IntegratedControl—Integrated Framework issued by COSO.
A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment.
The Company did not design effective controls over the calculation of accrued payroll liabilities from employee vested vacation. The Company’s controls over accrued payroll liabilities in respect to accrued vacation were not sufficiently designed to consider all accounting and disclosure ramifications of such accrued payroll liabilities.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2017,2023. The material weakness identified above was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2023 consolidated financial statements, and this report does not affect our report dated February 23, 201816, 2024 which expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
|
| | | | |
| /s/ GRANT THORNTON LLP | |
| |
New York, New YorkPhiladelphia, Pennsylvania | |
February 23, 201816, 2024 | |
Healthcare Services Group, Inc.
Consolidated Balance Sheets
(in thousands)thousands, except per share amounts)
| | | | | | | | | | | |
| As of December 31, |
| 2023 | | 2022 |
| ASSETS: | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 54,330 | | | $ | 26,279 | |
| Marketable securities, at fair value | 93,131 | | | 95,200 | |
| Accounts and notes receivable, less allowance for doubtful accounts of $87,250 and $70,192 as of December 31, 2023 and 2022, respectively | 383,509 | | | 336,777 | |
| Inventories and supplies | 18,479 | | | 21,164 | |
| Taxes receivable | — | | | 6,629 | |
| Prepaid expenses and other assets | 22,247 | | | 22,583 | |
| Total current assets | 571,696 | | | 508,632 | |
| Property and equipment, net | 28,774 | | | 22,975 | |
| Goodwill | 75,529 | | | 75,529 | |
| Other intangible assets, less accumulated amortization of $36,557 and $32,738 as of December 31, 2023 and 2022, respectively | 12,127 | | | 15,946 | |
| Notes receivable — long–term portion, less allowance for doubtful accounts of $4,449 and $3,273 as of December 31, 2023 and 2022, respectively | 24,832 | | | 32,609 | |
| Deferred compensation funding, at fair value | 40,812 | | | 33,493 | |
| Deferred tax assets | 35,226 | | | 30,840 | |
| Other long-term assets | 1,656 | | | 812 | |
| Total assets | $ | 790,652 | | | $ | 720,836 | |
| | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY: | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 83,224 | | | $ | 68,296 | |
| Accrued payroll and related taxes | 56,142 | | | 53,099 | |
| Other accrued expenses and current liabilities | 21,179 | | | 17,835 | |
| Borrowings under line of credit | 25,000 | | | 25,000 | |
| Income taxes payable | 7,201 | | | — | |
| Deferred compensation liability — short-term | 1,501 | | | 1,618 | |
| Accrued insurance claims | 22,681 | | | 23,166 | |
| Total current liabilities | 216,928 | | | 189,014 | |
| Accrued insurance claims — long-term | 61,697 | | | 65,541 | |
| Deferred compensation liability — long-term | 41,186 | | | 33,764 | |
| Lease liability — long-term | 11,235 | | | 8,097 | |
| Other long-term liabilities | 2,990 | | | 6,141 | |
| | | |
| Commitments and contingencies (Note 15) | | | |
| | | |
| STOCKHOLDERS’ EQUITY: | | | |
| Common stock, $0.01 par value; 100,000 shares authorized; 76,329 and 76,161 shares issued, and 73,341 and 74,088 shares outstanding as of December 31, 2023 and 2022, respectively | 763 | | | 762 | |
| Additional paid-in capital | 310,436 | | | 302,304 | |
| Retained earnings | 185,010 | | | 146,602 | |
| Accumulated other comprehensive loss, net of taxes | (1,844) | | | (3,477) | |
| Common stock in treasury, at cost, 2,988 and 2,240 shares as of December 31, 2023 and 2022, respectively | (37,749) | | | (27,912) | |
| Total stockholders’ equity | $ | 456,616 | | | $ | 418,279 | |
| Total liabilities and stockholders’ equity | $ | 790,652 | | | $ | 720,836 | |
|
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| ASSETS: | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 9,557 |
| | $ | 23,853 |
|
| Marketable securities, at fair value | 73,221 |
| | 67,730 |
|
| Accounts and notes receivable, less allowance for doubtful accounts of $11,985 and $6,911 as of December 31, 2017 and 2016, respectively | 378,720 |
| | 271,276 |
|
| Inventories and supplies | 42,393 |
| | 37,800 |
|
| Prepaid expenses and other assets | 23,515 |
| | 13,965 |
|
| Total current assets | 527,406 |
| | 414,624 |
|
| Property and equipment, net | 13,509 |
| | 13,455 |
|
| Goodwill | 51,084 |
| | 44,438 |
|
| Other intangible assets, less accumulated amortization of $12,853 and $14,672 as of December 31, 2017 and 2016, respectively | 30,881 |
| | 14,409 |
|
| Notes receivable — long-term portion | 15,476 |
| | 7,531 |
|
| Deferred compensation funding, at fair value | 28,885 |
| | 24,119 |
|
| Deferred income taxes | 7,498 |
| | 9,822 |
|
| Other noncurrent assets | 1,264 |
| | 48 |
|
| Total Assets | $ | 676,003 |
| | $ | 528,446 |
|
| | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY: | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 74,463 |
| | $ | 42,912 |
|
| Accrued payroll, accrued and withheld payroll taxes | 32,139 |
| | 22,303 |
|
| Other accrued expenses | 4,561 |
| | 4,397 |
|
| Borrowings under line of credit | 35,382 |
| | — |
|
| Income taxes payable | 15,378 |
| | 7,686 |
|
| Accrued insurance claims | 22,245 |
| | 23,573 |
|
| Total current liabilities | 184,168 |
| | 100,871 |
|
| Accrued insurance claims — long-term portion | 62,454 |
| | 64,080 |
|
| Deferred compensation liability | 29,429 |
| | 24,653 |
|
| Commitments and contingencies |
|
| |
|
|
| STOCKHOLDERS’ EQUITY: | | | |
| Common Stock, $.01 par value; 100,000 shares authorized; 74,960 and 74,204 shares issued, and 73,436 and 72,601 shares outstanding as of December 31, 2017 and 2016, respectively | 750 |
| | 742 |
|
| Additional paid-in capital | 244,363 |
| | 217,664 |
|
| Retained earnings | 163,860 |
| | 130,940 |
|
| Accumulated other comprehensive income (loss), net of taxes | 837 |
| | (319 | ) |
| Common Stock in treasury, at cost, 1,524 shares and 1,603 shares as of December 31, 2017 and 2016, respectively | (9,858 | ) | | (10,185 | ) |
| Total stockholders’ equity | 399,952 |
| | 338,842 |
|
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 676,003 |
| | $ | 528,446 |
|
See accompanying notes.notes to consolidated financial statements.
Healthcare Services Group, Inc.
Consolidated Statements of Comprehensive Income
(in thousands, except per share amounts)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2023 | | 2022 | | 2021 |
| Revenues | $ | 1,671,389 | | | $ | 1,690,176 | | | $ | 1,641,959 | |
| Operating costs and expenses: | | | | | |
| Costs of services provided | 1,456,643 | | | 1,496,865 | | | 1,411,393 | |
| Selling, general and administrative expense | 166,772 | | | 140,344 | | | 173,108 | |
| Other income (expense): | | | | | |
| Investment and other income (loss), net | 12,938 | | | (5,427) | | | 9,439 | |
| Interest expense | (7,856) | | | (2,987) | | | (1,385) | |
| Income before income taxes | 53,056 | | | 44,553 | | | 65,512 | |
| | | | | |
| Income tax provision | 14,670 | | | 10,310 | | | 16,969 | |
| Net income | $ | 38,386 | | | $ | 34,243 | | | $ | 48,543 | |
| | | | | |
| Per share data: | | | | | |
| Basic earnings per common share | $ | 0.52 | | | $ | 0.46 | | | $ | 0.65 | |
| Diluted earnings per common share | $ | 0.52 | | | $ | 0.46 | | | $ | 0.65 | |
| | | | | |
| | | | | |
| Weighted average number of common shares outstanding: | | | | | |
| Basic | 74,288 | | | 74,336 | | | 74,816 | |
| Diluted | 74,340 | | | 74,351 | | | 74,962 | |
| | | | | |
| Comprehensive income: | | | | | |
| Net income | $ | 38,386 | | | $ | 34,243 | | | $ | 48,543 | |
| Other comprehensive income (loss): | | | | | |
| Unrealized gain (loss) on available-for-sale marketable securities, net of taxes | 1,633 | | | (7,477) | | | (1,563) | |
| Total comprehensive income | $ | 40,019 | | | $ | 26,766 | | | $ | 46,980 | |
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Revenues | $ | 1,866,131 |
| | $ | 1,562,662 |
| | $ | 1,436,849 |
|
| Operating costs and expenses: | | | | | |
| Costs of services provided | 1,612,510 |
| | 1,339,492 |
| | 1,236,108 |
|
| Selling, general and administrative | 126,732 |
| | 105,417 |
| | 111,689 |
|
| Other income: | | | | | |
| Investment and interest | 6,076 |
| | 2,634 |
| | 712 |
|
| Income before income taxes | 132,965 |
| | 120,387 |
| | 89,764 |
|
| Income taxes | 44,739 |
| | 42,991 |
| | 31,740 |
|
| Net income | $ | 88,226 |
| | $ | 77,396 |
| | $ | 58,024 |
|
| | | | | | |
| Per share data: | | | | | |
| Basic earnings per common share | $ | 1.20 |
| | $ | 1.06 |
| | $ | 0.81 |
|
| Diluted earnings per common share | $ | 1.19 |
| | $ | 1.05 |
| | $ | 0.80 |
|
| | | | | | |
| Weighted average number of common shares outstanding: | | | | | |
| Basic | 73,355 |
| | 72,754 |
| | 71,826 |
|
| Diluted | 74,348 |
| | 73,474 |
| | 72,512 |
|
| | | | | | |
| Comprehensive income: | | | | | |
| Net income | $ | 88,226 |
| | $ | 77,396 |
| | $ | 58,024 |
|
| Other comprehensive income: | | | | | |
| Unrealized gain (loss) on available-for-sale marketable securities, net of taxes | 1,156 |
| | (862 | ) | | 518 |
|
| Total comprehensive income | $ | 89,382 |
| | $ | 76,534 |
| | $ | 58,542 |
|
See accompanying notes.notes to consolidated financial statements.
Healthcare Services Group, Inc.
Consolidated Statements of Cash Flows
| | | | Years Ended December 31, | | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2023 | | 2022 | | 2021 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 88,226 |
| | $ | 77,396 |
| | $ | 58,024 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Net income | |
| Net income | |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |
| Depreciation and amortization | |
| Depreciation and amortization | |
| Depreciation and amortization | 8,886 |
| | 7,496 |
| | 7,660 |
|
| Bad debt provision | 6,250 |
| | 4,629 |
| | 4,335 |
|
| Deferred income tax | 1,887 |
| | 3,001 |
| | 17,842 |
|
Stock-based compensation expense, net of tax benefit from equity compensation plans(1) | 276 |
| | 1,271 |
| | 1,668 |
|
| Deferred income tax (benefit) expense | |
| Share-based compensation expense | |
| Amortization of premium on marketable securities | 1,296 |
| | 1,723 |
| | 681 |
|
| Unrealized (gain) loss on deferred compensation fund investments | (4,509 | ) | | (1,460 | ) | | 24 |
|
| Changes in fair value of other long-term liabilities | |
| Net loss on disposals of property and equipment | |
| Changes in operating assets and liabilities: |
| |
| |
|
| Accounts and notes receivable | |
| Accounts and notes receivable | |
| Accounts and notes receivable | (121,639 | ) | | (65,610 | ) | | (18,854 | ) |
| Inventories and supplies | (1,873 | ) | | (1,492 | ) | | (846 | ) |
| Prepaid expenses and other assets | (9,545 | ) | | (2,470 | ) | | (1,710 | ) |
| Deferred compensation funding | (257 | ) | | 2,732 |
| | (649 | ) |
| Deferred compensation funding, net | |
| Accounts payable and other accrued expenses | 11,197 |
| | (4,251 | ) | | 2,403 |
|
| Accrued payroll, accrued and withheld payroll taxes | 11,927 |
| | 6,307 |
| | (28,314 | ) |
| Income taxes receivable and payable | |
| Accrued insurance claims | (2,954 | ) | | 5,404 |
| | 13,987 |
|
| Deferred compensation liability | 5,061 |
| | (731 | ) | | 1,113 |
|
Income taxes payable (1) | 13,401 |
| | 7,455 |
| | 5,997 |
|
| Net cash provided by operating activities | 7,630 |
| | 41,400 |
| | 63,361 |
|
| Cash flows from investing activities: |
| |
| |
|
| Disposals of fixed assets | 338 |
| | 275 |
| | 267 |
|
| Net cash provided by (used in) operating activities | |
| Cash flows (used in) from investing activities: | |
| Disposals of property and equipment | |
| Disposals of property and equipment | |
| Disposals of property and equipment | |
| Additions to property and equipment | (5,397 | ) | | (5,442 | ) | | (4,998 | ) |
| Purchases of marketable securities | (33,861 | ) | | (29,449 | ) | | (75,150 | ) |
| Sales of marketable securities | 28,537 |
| | 28,164 |
| | 17,567 |
|
| Cash paid for acquisitions | (4,584 | ) | | — |
| | — |
|
| Net cash used in investing activities | (14,967 | ) | | (6,452 | ) | | (62,314 | ) |
| Cash flows from financing activities: |
| |
| |
|
| | Net cash (used in) provided by investing activities | |
| Net cash (used in) provided by investing activities | |
| Net cash (used in) provided by investing activities | |
| Cash flows used in financing activities: | |
| Dividends paid | |
| Dividends paid | |
| Dividends paid | (55,244 | ) | | (53,342 | ) | | (51,375 | ) |
| Reissuance of treasury stock pursuant to Dividend Reinvestment Plan | 95 |
| | 109 |
| | 113 |
|
Tax benefit from equity compensation plans (1) | — |
| | 2,981 |
| | 1,873 |
|
| Proceeds from the exercise of stock options | 12,808 |
| | 5,968 |
| | 6,251 |
|
| Net proceeds from short-term borrowings | 35,382 |
| | — |
| | — |
|
| Purchases of treasury stock | |
| Short-term borrowings, net of repayments | |
| Payments of statutory withholding on net issuance of restricted stock units | |
| Net cash used in financing activities | (6,959 | ) | | (44,284 | ) | | (43,138 | ) |
| Net change in cash and cash equivalents | (14,296 | ) | | (9,336 | ) | | (42,091 | ) |
| Cash and cash equivalents at beginning of the period | 23,853 |
| | 33,189 |
| | 75,280 |
|
| Cash and cash equivalents at end of the period | $ | 9,557 |
| | $ | 23,853 |
| | $ | 33,189 |
|
| Supplementary cash flow information: |
| |
| |
|
| Cash paid for interest | $ | 1,363 |
| | $ | 574 |
| | $ | 258 |
|
| Cash paid for income taxes, net of refunds | $ | 35,367 |
| | $ | 32,532 |
| | $ | 7,901 |
|
| Cash paid for interest | |
| Cash paid for interest | |
| Cash paid for income taxes | |
| | Accrued variable consideration for acquisition of businesses | |
| Accrued variable consideration for acquisition of businesses | |
| Accrued variable consideration for acquisition of businesses | |
(1) The Company adopted the provisions of ASU 2016-09 prospectively, and as such the amounts reflected for the years ended December 31, 2016 and 2015 have not been adjusted.
See accompanying notes.notes to consolidated financial statements.
Healthcare Services Group, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss), net of Taxes | | Retained Earnings | | Treasury Stock | | Stockholders’ Equity |
| Shares | | Amount | | | | | |
| Balance, December 31, 2020 | 75,798 | | | $ | 758 | | | $ | 282,206 | | | $ | 5,563 | | | $ | 190,708 | | | $ | (8,959) | | | $ | 470,276 | |
| Comprehensive income: | | | | | | | | | | | | | |
| Net income for the period | — | | | — | | | — | | | — | | | 48,543 | | | — | | | 48,543 | |
| Unrealized loss on available-for-sale marketable securities, net of taxes | — | | | — | | | — | | | (1,563) | | | — | | | — | | | (1,563) | |
| Comprehensive income for the period | | | | | | | | | | | | | $ | 46,980 | |
| Exercise of stock options and other share-based compensation, net of shares tendered for payment | 207 | | | 2 | | | 2,423 | | | — | | | — | | | — | | | 2,425 | |
| Payment of statutory withholding on issuance of restricted stock and restricted stock units | — | | | — | | | (1,410) | | | — | | | — | | | — | | | (1,410) | |
| Share-based compensation expense | — | | | — | | | 8,600 | | | — | | | — | | | — | | | 8,600 | |
| Purchases of treasury stock | — | | | — | | | — | | | — | | | — | | | (21,535) | | | (21,535) | |
| Treasury shares issued for Deferred Compensation Plan funding, net | — | | | — | | | 574 | | | — | | | — | | | (206) | | | 368 | |
| Shares issued pursuant to Employee Stock Plan | — | | | — | | | 1,554 | | | — | | | — | | | 498 | | | 2,052 | |
| Dividends paid and accrued, $0.84 per share | — | | | — | | | — | | | — | | | (62,800) | | | — | | | (62,800) | |
| Shares issued pursuant to Dividend Reinvestment Plan | — | | | — | | | 54 | | | — | | | — | | | 38 | | | 92 | |
| Other | 4 | | | — | | | 123 | | | — | | | — | | | — | | | 123 | |
| Balance, December 31, 2021 | 76,009 | | | 760 | | | 294,124 | | | 4,000 | | | 176,451 | | | (30,164) | | | $ | 445,171 | |
| Comprehensive income: | | | | | | | | | | | | | |
| Net income for the period | — | | | — | | | — | | | — | | | 34,243 | | | — | | | 34,243 | |
| Unrealized loss on available-for-sale marketable securities, net of taxes | — | | | — | | | — | | | (7,477) | | | — | | | — | | | (7,477) | |
| Comprehensive income for the period | | | | | | | | | | | | | $ | 26,766 | |
| Exercise of stock options and other share-based compensation, net of shares tendered for payment | 148 | | | 2 | | | 408 | | | — | | | — | | | — | | | 410 | |
| Payment of statutory withholding on issuance of restricted stock units | — | | | — | | | (1,071) | | | — | | | — | | | — | | | (1,071) | |
| Share-based compensation expense | — | | | — | | | 9,044 | | | — | | | — | | | — | | | 9,044 | |
| Treasury shares issued for Deferred Compensation Plan funding, net | — | | | — | | | (634) | | | — | | | — | | | 1,008 | | | 374 | |
| Shares issued pursuant to Employee Stock Plan | — | | | — | | | 368 | | | — | | | — | | | 1,144 | | | 1,512 | |
| Dividends paid and accrued, $0.86 per share | — | | | — | | | — | | | — | | | (64,092) | | | — | | | (64,092) | |
| Shares issued pursuant to Dividend Reinvestment Plan | — | | | — | | | 6 | | | — | | | — | | | 100 | | | 106 | |
| Other | 4 | | | — | | | 59 | | | — | | | — | | | — | | | 59 | |
| Balance, December 31, 2022 | 76,161 | | | $ | 762 | | | $ | 302,304 | | | $ | (3,477) | | | $ | 146,602 | | | $ | (27,912) | | | $ | 418,279 | |
| Comprehensive income: | | | | | | | | | | | | | |
| Net income for the period | — | | | — | | | — | | | — | | | 38,386 | | | — | | | 38,386 | |
| Unrealized gain on available-for-sale marketable securities, net of taxes | — | | | — | | | — | | | 1,633 | | | — | | | — | | | 1,633 | |
| Comprehensive income for the period | | | | | | | | | | | | | $ | 40,019 | |
| Exercise of stock options and other share-based compensation, net of shares tendered for payment | 167 | | | 1 | | | (1) | | | — | | | — | | | — | | | — | |
| Payment of statutory withholding on issuance of restricted stock units | — | | | — | | | (870) | | | — | | | — | | | — | | | (870) | |
| Share-based compensation expense | — | | | — | | | 8,836 | | | — | | | — | | | — | | | 8,836 | |
| Purchases of treasury stock | — | | | — | | | — | | | — | | | — | | | (11,283) | | | (11,283) | |
| Treasury shares issued for Deferred Compensation Plan funding, net | — | | | — | | | 298 | | | — | | | — | | | 172 | | | 470 | |
| Shares issued pursuant to Employee Stock Plan | — | | | — | | | (139) | | | — | | | — | | | 1,274 | | | 1,135 | |
| Other | 1 | | | — | | | 8 | | | — | | | 22 | | | — | | | 30 | |
| Balance, December 31, 2023 | 76,329 | | | $ | 763 | | | $ | 310,436 | | | $ | (1,844) | | | $ | 185,010 | | | $ | (37,749) | | | $ | 456,616 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss), net of Taxes | | Retained Earnings | | Treasury Stock | | Stockholders’ Equity |
| | Shares | | Amount | |
| Balance, December 31, 2014 | 72,878 |
| | $ | 729 |
| | $ | 186,022 |
| | $ | 25 |
| | $ | 100,237 |
| | $ | (11,183 | ) | | $ | 275,830 |
|
| Comprehensive income: |
| |
| |
| |
| |
| |
| |
|
| Net income for the period |
| |
| |
| |
| | 58,024 |
| |
| | 58,024 |
|
| Unrealized gain on available-for-sale marketable securities, net of taxes |
| |
| |
| | 518 |
| |
| |
| | 518 |
|
| Comprehensive income |
| |
| |
| |
| |
| |
| | $ | 58,542 |
|
| Exercise of stock options and other stock-based compensation, net of shares tendered for payment | 386 |
| | 4 |
| | 6,247 |
| |
| |
| |
|
| | 6,251 |
|
| Tax benefit from equity compensation plans |
| |
| | 1,873 |
| |
| |
| |
| | 1,873 |
|
| Share-based compensation expense — stock options and restricted stock |
| |
| | 3,033 |
| |
| |
| |
| | 3,033 |
|
| Treasury shares issued for Deferred Compensation Plan funding and redemptions |
| |
| | 418 |
| |
| |
| | 70 |
| | 488 |
|
| Shares issued pursuant to Employee Stock Plans |
| |
| | 1,363 |
| |
| |
| | 338 |
| | 1,701 |
|
| Dividends paid |
| |
| |
| |
| | (51,375 | ) | |
| | (51,375 | ) |
| Shares issued pursuant to Dividend Reinvestment Plan |
| |
| | 343 |
| |
| |
| | (230 | ) | | 113 |
|
| Shares issued pursuant to prior year acquisition | 529 |
| | 5 |
| | (5 | ) | |
|
| |
|
| |
|
| | — |
|
| Balance, December 31, 2015 | 73,793 |
| | 738 |
| | 199,294 |
| | 543 |
| | 106,886 |
| | (11,005 | ) | | 296,456 |
|
| Comprehensive income: |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| Net income for the period |
| |
| |
| |
| | 77,396 |
| |
| | 77,396 |
|
| Unrealized loss on available-for-sale marketable securities, net of taxes |
| |
| |
| | (862 | ) | |
|
| |
| | (862 | ) |
| Comprehensive income |
| |
| |
| |
|
| |
| |
| | $ | 76,534 |
|
| Exercise of stock options and other stock-based compensation, net of shares tendered for payment | 301 |
| | 3 |
| | 5,965 |
| |
| |
| |
| | 5,968 |
|
| Tax benefit from equity compensation plans |
|
| |
|
| | 2,773 |
| |
| |
| |
|
| | 2,773 |
|
| Share-based compensation expense — stock options and restricted stock |
| |
| | 3,743 |
| |
| |
| |
| | 3,743 |
|
| Treasury shares issued for Deferred Compensation Plan funding and redemptions |
| |
| | 103 |
| |
| |
| | 431 |
| | 534 |
|
| Shares issued pursuant to Employee Stock Plans |
| |
| | 1,696 |
| |
| |
| | 371 |
| | 2,067 |
|
| Dividends paid |
| |
| |
|
| |
| | (53,342 | ) | |
|
| | (53,342 | ) |
| Shares issued pursuant to Dividend Reinvestment Plan |
| |
| | 91 |
| |
| |
|
| | 18 |
| | 109 |
|
| Shares issued pursuant to previous settlement | 113 |
| | 1 |
| | 3,999 |
| |
| |
| |
|
| | 4,000 |
|
| Other | (3 | ) | |
| |
|
| |
| |
| |
|
| | — |
|
| Balance, December 31, 2016 | 74,204 |
| | 742 |
| | 217,664 |
| | (319 | ) | | 130,940 |
| | (10,185 | ) | | 338,842 |
|
| Comprehensive income: |
| |
| |
|
| |
| |
| |
|
| |
|
|
| Net income for the period |
|
| |
|
| |
|
| |
|
| | 88,226 |
| |
|
| | 88,226 |
|
| Unrealized gain on available-for-sale marketable securities, net of taxes |
|
| |
|
| |
|
| | 1,156 |
| |
|
| |
|
| | 1,156 |
|
| Comprehensive income |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | $ | 89,382 |
|
| Exercise of stock options and other stock-based compensation, net of shares tendered for payment | 697 |
| | 7 |
| | 12,801 |
| |
|
| |
|
| |
|
| | 12,808 |
|
| Share-based compensation expense — stock options and restricted stock |
|
| |
|
| | 4,945 |
| |
|
| |
|
| |
|
| | 4,945 |
|
| Treasury shares issued for Deferred Compensation Plan funding and redemptions |
|
| |
|
| | 181 |
| |
|
| |
|
| | (25 | ) | | 156 |
|
| Shares issued pursuant to Employee Stock Plans |
|
| |
|
| | 1,752 |
| |
|
| |
|
| | 339 |
| | 2,091 |
|
| Dividends paid and accrued |
|
| |
|
| |
|
| |
|
| | (55,306 | ) | |
|
| | (55,306 | ) |
| Shares issued pursuant to Dividend Reinvestment Plans |
|
| |
|
| | 82 |
| |
|
| |
|
| | 13 |
| | 95 |
|
| Shares issued pursuant to acquisition | 59 |
| | 1 |
| | 6,938 |
| |
|
| |
|
| |
|
| | 6,939 |
|
| Balance, December 31, 2017 | 74,960 |
| | $ | 750 |
| | $ | 244,363 |
| | $ | 837 |
| | $ | 163,860 |
| | $ | (9,858 | ) | | $ | 399,952 |
|
See accompanying notes.notes to consolidated financial statements.
Healthcare Services Group, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2017, 20162023, 2022 and 20152021
Note 1—1 — Description of Business and Significant Accounting Policies
Nature of Operations
Healthcare Services Group, Inc. (the “Company”) provides management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary service departments of the healthcare facilities,industry, including nursing homes, retirement complexes, rehabilitation centers and hospitals located throughout the United States. Although the Company does not directly participate in any government reimbursement programs, the Company’s clientscustomers receive government reimbursements related to Medicare and Medicaid. Therefore, they are directly affected by any legislation relating to Medicare and Medicaid reimbursement programs.
The Company provides services primarily pursuant to full service agreements with its clients.customers. In such agreements, the Company is responsible for the day-to-day management of employees located at the clients’ facilities.customers’ facilities, as well as for the provision of certain supplies. The Company also provides services on the basis of management-only agreements for a limited number of clients.customers. In a management-only agreement, the Company provides management and supervisory services while the customer facility retains payroll responsibility for the non-supervisory staff. The Company’s agreements with its clientscustomers typically provide for a renewable one year service term, cancelablecancellable by either party upon 30 to 90 days’ notice after thean initial period of 60 to 120 day period.days.
The Company is organized into two reportable segments;segments: housekeeping, laundry, linen and other services (“Housekeeping”), and dietary department services (“Dietary”).
Housekeeping consists of managing the clients’customers’ housekeeping departments, which are principally responsible for the cleaning, disinfecting and sanitizing of resident rooms and common areas of a client’scustomer’s facility, as well as the laundering and processing of the bed linens, uniforms, resident personal clothing and other assorted linen items utilized at a clientcustomer facility.
Dietary consists of managing the clients’customers’ dietary departments, which are principally responsible for food purchasing, meal preparation and dietitian professional services, which includes the development of menus that meet residents’ dietary needs.
UsePrinciples of Estimates in Financial StatementsConsolidation
In preparingThe financial statements have been prepared in conformityaccordance with United States generally accepted accounting principles (“U.S. GAAP”), and with the rules and regulations of the SEC, specifically Regulation S-X and the instructions to Form 10-K. Unless otherwise indicated, all references to years are to the Company’s fiscal year, which ends on December 31.
The accompanying Consolidated Financial Statements include the accounts of Healthcare Services Group, Inc. and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates in Financial Statements
In preparing financial statements in conformity with U.S. GAAP, estimates and assumptions are made that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Significant estimates are used in determining, but are not limited to, the Company’s allowance for doubtful accounts, accrued insurance claims, valuations, deferred taxes and reviews for potential impairment. The estimates are based upon various factors including current and historical trends, as well as other pertinent industry and regulatory authority information. Management regularly evaluates this information to determine if it is necessary to update the basis for its estimates and to adjust for known changes.
The accompanying Consolidated Financial Statements include the accounts of Healthcare Services Group, Inc. and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Fair Value of Financial Instruments
The Company determines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company utilizes valuation techniques that maximize the use of observable inputs (Levels 1 and 2) and minimize the use of unobservable inputs (Level 3) within the fair value hierarchy.
Assets and liabilities are classified within the fair value hierarchy based on the lowest level (least observable) input that is significant to the measurement in its entirety.
While unobservable inputs reflect the Company’s market assumptions, preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:
Level 1 – Quoted prices for identical instruments in active markets;
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable; and
Level 3 – Significant inputs to the valuation model are unobservable
The Company’s financial instruments that are measured at fair value on a recurring basis consist of marketable securities and the deferred compensation fund investments. OtherThe carrying value of other financial instruments such as cash and cash equivalents, accounts and short-term notes receivable, accounts payable (including income taxes payable and accrued expenses) and borrowings under the Company’s line of credit are short-term in nature, and therefore the carrying value of these instruments are deemed to approximate their fair value.
The Company has certain notes receivable that either do not bear interest or bear interest at a below-market rate. Therefore, such notes receivable of $6.9 million and $5.7 millionvalues at December 31, 20172023 and 2016, respectively, have been discounted2022, due to their present value and are reported at valuesthe short period of $6.8 million and $5.7 million at December 31, 2017 and 2016, respectively.time to maturity or repayment.
Cash and Cash Equivalents
Cash and cash equivalents are held in U.S. financial institutions or in custodial accounts with U.S. financial institutions. Cash and cash equivalents are defined as short-term, highly liquid investments with a maturity of three months or less at time of purchase that are readily convertible into cash and have insignificant interest rate risk. The Company currently has bank deposits with financial institutions in the U.S. that exceed FDIC insurance limits.
Investments in Marketable Securities
Marketable securities are defined as fixed income investments which are highly liquid and can be readily purchased or sold through established markets. AtAs of December 31, 2017,2023 and 2022, the Company had marketable securities of $73.2$93.1 million which wereand $95.2 million, respectively, comprised primarily of tax exempttax-exempt municipal bonds. These investments are accounted for as available-for-sale securities and are reported at fair value on the balance sheet.Company's Consolidated Balance Sheets. For the year ended December 31, 2017, $1.12023, $1.6 million of unrealized gains related to these investments were recorded in otherOther comprehensive income.income (loss). For the years ended December 31, 2022 and 2021, $7.5 million and $1.6 million of unrealized losses related to these marketable securities were recorded in Other comprehensive income (loss), respectively. Unrealized gains and losses are recorded net of income taxes.
These assets are available for future needs underheld by the Company’s self-insurance programs.wholly-owned captive insurance company subsidiary as required by state insurance regulations. The Company’s investment policy is intended to manage the assets to achieve the goals of preserving principal, maintaining adequate liquidity at all times and maximizing returns subject to investment guidelines. The investment policy limits investment to certain types of instruments issued by institutions primarily with investment grade credit ratings and places restrictions on concentration by type and issuer.
The Company periodically reviews the investments in marketable securities for other than temporary declines incredit impairment when an investment’s fair value declines below the amortized cost basis and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As of December 31, 2017, Management2023, management believes that the recorded value of the Company’s investments in marketable securities was recoverable in all material respects.
Accounts and Notes Receivable
Accounts and notes receivable consist of Housekeeping and Dietary segment trade receivables from contracts with customers. The Company’s payment terms with customers for services provided are defined within each customer’s service agreement and range from prepaid to 120 days. Accounts receivable are considered short term assets as the Company does not grant payment terms greater than one year. Accounts receivable initially are recorded at the transaction amount and are recorded after the Company has an unconditional right to payment where only the passage of time is required before payment is received. Each reporting period, the Company evaluates the collectability of outstanding receivable balances and records an allowance for doubtful accounts representing an estimate of current expected credit loss. Additions to the allowance for doubtful accounts are made by recording a charge to bad debt expense reported in costs of services provided.
Notes receivable are initially recorded when accounts receivable are transferred into a promissory note and are recorded as an alternative to accounts receivable to memorialize an unqualified promise to pay a specific sum, typically with interest, in accordance with a defined payment schedule. The Company’s payment terms with customers on promissory notes can vary based on several factors and the circumstances of each promissory note, however typically promissory notes mature over a 1 to 4 year period. Similar to accounts receivable, each reporting period the Company evaluates the collectability of outstanding notes receivable balances and records an allowance for doubtful accounts representing an estimate of future expected credit losses.
Allowance for Doubtful Accounts
Management utilizes financial modeling to determine an allowance that reflects its best estimate of the lifetime expected credit losses on accounts and notes receivable which is recorded to offset the receivables. Modeling is prepared after considering historical experience, current conditions, and reasonable and supportable economic forecasts to estimate lifetime expected credit losses. Accounts and notes receivable are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded as a reduction of bad debt expense when received.
Inventories and Supplies
Inventories and supplies include housekeeping, linen and laundry supplies, as well as food provisions and supplies. InventoriesNon-linen inventories and supplies are stated at cost to approximateon a first-in, first-out (FIFO) basis.basis, and reduced as deemed necessary to approximate the lower of cost or net realizable value. Linen supplies are amortized on a straight-line basis over their estimated useful life of 24 months.
Revenue Recognition
The Company recognizes revenue from contracts with customers when or as the promised goods and services are provided to customers. Revenues are reported net of sales taxes that are collected from customers and remitted to taxing authorities. The amount of revenue recognized by the Company is based on the consideration to which the Company is entitled in exchange for providing the contracted goods and services and when it is probable that the Company will collect substantially all of such consideration.
Leases
The Company records assets and liabilities on the Consolidated Balance Sheets to recognize the rights and obligations arising from leasing arrangements with contractual terms greater than 12 months. A leasing arrangement includes any contract which entitles the Company to the right of use of an identified tangible asset where there are no restrictions as to the direct of use of the asset, and the Company obtains substantially all of the economic benefits from the right of use.
Property and Equipment, Net
Property and equipment, with the exception of those pertaining to leases, are stated at cost, net of accumulated depreciation. Additions, renewals and improvements are capitalized, while maintenance and repair costs are expensed when incurred. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts and any resulting gain or loss is included in income.Investment and other income (loss), net on the Consolidated Statements of Comprehensive Income. Depreciation is recorded using the straight-line method over the following estimated useful lives: Housekeeping and Dietary equipment — 53 to 75 years; computer hardware and software — 3 to 75 years; and other, consisting of furniture and fixtures, leasehold improvements and vehicles — 5 to 10 years. Depreciation expense on property and equipment, inclusive of amortization of lease right-of-use assets, for the years ended December 31, 2017, 20162023, 2022 and 20152021 was $5.0$10.5 million, $4.8$10.5 million and $4.4$10.3 million, respectively.
Revenue Recognition
Revenues from the Company’s service agreements with clients are recognized as services are performed. Revenues are reported net of sales taxes that are collected from customers and remitted to taxing authorities.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, income tax expense isor benefits are recognized for the amount of taxes payable or refundable for the current year.period. The Company accrues for probable tax obligations as required bybased on facts and circumstances in various regulatory environments. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basisbases of assets and liabilities. When appropriate, valuation allowances are recorded to reduce deferred tax assets to amounts for which realization is more likely than not. Deferred tax assets and liabilities are more fully described in Note 12.
Uncertain income tax positions taken or expected to be taken in tax returns are reflected within the Company’s financial statementsConsolidated Financial Statements based on a recognition and measurement process.
The Company may from time to time be assessed interest or penalties by taxing jurisdictions, although any such assessments historically have been minimal and immaterial to its financial results. When the Company has received an assessment for interest and/or penalties, it will be classified in the financial statements as selling, general and administrative expense. In addition, any interest or penalties relating to recognized uncertain tax positions would also be recorded in selling, general and administrative expense.
Earnings per Common Share
Basic earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculatedcomputed using the weighted-average number of common shares outstanding and dilutive common shares, such as those issuable upon exercise of stock options and upon the vesting of restricted stock and restricted stock units.
Share-Based Compensation
The Company estimates the fair value of share-based awards on the date of grant using the Black-Scholes valuation model for stock options, using a Monte Carlo simulation for performance restricted stock units and using the share price on the date of grant for restricted stock units and restricteddeferred stock units. The value of the award is recognized ratably as an expense in the Company’s Consolidated Statements of Comprehensive Income over the requisite service periods, with adjustments made for forfeitures as they occur.
Advertising Costs
Advertising costs are expensed when incurred. Advertising costs were not material for the years ended December 31, 2017, 20162023, 2022 and 2015.2021.
Impairment of Long-Lived Assets
The carrying amounts of long-lived assets are periodically reviewed to determine whether current events or circumstances warrant adjustment to such carrying amounts. Any impairment would be measured as the amount that the carrying value of such assets exceeds their fair value, primarily based on estimated undiscounted cash flows.value. Considerable management judgment is necessary to estimate the fair value of assets. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value, less cost to sell. No impairment loss was recognized on the Company’s long-lived assets during the years ended December 31, 2023, 2022 or 2021.
Identifiable Intangible Assets and Goodwill
Identifiable intangible assets are amortized on a straight-line basis over their respective lives. Goodwill represents the excess of cost over the fair value of net assets of acquired businesses. Management reviews the carrying value of goodwill at least annually during the fourth quarter of each year to assess for impairment on a reporting unit basis or more often if events or circumstances indicate that the carrying value may exceed its estimated fair value.
No impairment loss was recognized on the Company’sCompany's intangible assets or goodwill forduring the years ended December 31, 2017, 20162023, 2022 or 2015.2021.
Treasury Stock
Treasury stock purchases are accounted for under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. Gains or losses on the subsequent reissuance of shares are credited or charged to additional paid inpaid-in capital.
Reclassification
Certain prior period amounts have been reclassified to conform to current year presentation.
Concentrations of Credit Risk
The Company’s financial instruments that are subject to concentrations of credit risk are cash and cash equivalents, marketable securities, deferred compensation funding and accounts and notes receivable. The Company’s marketable securities are fixed income investments which are highly liquid and can be readily purchased or sold using established markets. At December 31, 20172023 and 2016, substantially all2022, the majority of the Company’s cash and cash equivalents and marketable securities were held in one large financial institution located in the United States. The Company’s marketable securities are fixed income investments which are highly liquid and can be readily purchased or sold through established markets.
The Company’s clientscustomers are concentrated in the healthcare industry and are primarily providers of long-term care. The revenues of many of the Company’s clientscustomers are highly reliant on Medicare, Medicaid and third-partythird party payors’ reimbursement funding rates. New legislation or changes in existing regulations could be made which could directly impact the governmental reimbursement
programs in which the clientscustomers participate. As a result, the Company may not knowrealize the full effects of such programs until these laws are fully implemented and governmental agencies issue applicable regulations or guidance.
Although the Company negotiates the pricing and other terms for the majority of our purchases of food and dining supplies directly with national manufacturers, the Company procures more than 50% of these products and other items through Sysco Corporation (“Sysco”). Sysco is responsible for tracking the Company’s orders and delivering products to the Company’s specific locations.
Significant ClientsCustomer
For the yearyears ended December 31, 2017,2023, 2022 and 2021, Genesis Healthcare, Inc. (“Genesis”) accounted for $181.4 million or 10.9%, $169.1 million or 10.0% and $177.1 million or 10.8% of the Company’s consolidated revenues, respectively. As of December 31, 2023, the Company had several clients who individually contributed over 3%, with one client, a multi-state operator, contributing as high as 17.6%,outstanding accounts receivable and notes receivable of the Company’s total consolidated revenues.$61.8 million and $20.4 million, respectively, from Genesis. Although the Company expects to continue its relationshipsrelationship with these clients,Genesis, there can be no assurance thereof. Revenues generated from Genesis were included in both operating segments previously mentioned. Any extended discontinuance of revenues, or significant reduction, from this customer could, if not replaced, have a material impact on our operations. In addition, if Genesis fails to abide by current payment terms it could increase our accounts receivable balance and have a material adverse effect on our financial condition, results of operations, and cash flows. No other single customer or customer group represented more than 10% of consolidated revenues for the years ended December 31, 2023, 2022 and 2021.
Reclassification
Certain prior period amounts have been reclassified to conform to current year presentation, including the presentation of deferred taxes in Note 12 — Income Taxes. There was no impact to the Company's consolidated financial statements as a result of this reclassification.
Recent Accounting Pronouncements
In November 2023, the FASB issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which updates reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The loss, individually oramendments are effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied retrospectively to all prior periods presented in the aggregate,financial statements. The Company is currently evaluating this ASU to determine its impact on the Company’s disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which enhances effective tax rate reconciliation disclosure requirements and provides clarity to the disclosures of income taxes paid, income before taxes and provision for income taxes. The amendments are effective for fiscal years beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The amendments in this update should be applied on a prospective basis. Retrospective application is permitted. The Company is currently evaluating this ASU to determine its impact on the Company’s disclosures.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the SEC did not, or are not believed by management to, have a material impact on the Company’s present or future consolidated financial statements.
Employee Retention Credit
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). One provision within the CARES Act provided an Employee Retention Credit (“ERC”), which allows for employers to claim a refundable tax credit against the employer share of Social Security tax equal to 50% of the qualified wages paid to employees from March 13, 2020 through December 31, 2020. The ERC was subsequently expanded in 2021 for employers to claim a refundable tax credit for 70% of the qualified wages paid to employees from January 1, 2021 through September 30, 2021.
The Company accounted for the ERC by analogy to International Accounting Standard (“IAS”) 20, Accounting for Government Grants and Disclosure of Government Assistance. During the quarter ended June 30, 2023, the Company filed a claim for the ERC for qualified wages paid in 2020 and 2021. Through February 16, 2024, the Company has yet to receive any refunds or receive any correspondence from the IRS regarding the ERC filing. The Company believes that there is not reasonable assurance that any receipt of credits will be obtained and therefore has not recognized any amounts related to the ERC in the accompanying consolidated financial statements. Should reasonable assurance over receipt of and compliance with terms of the ERC credits be obtained in future periods, the Company would recognize such amounts as an offset to expense within “Costs of services provided” in the Consolidated Statements of Comprehensive Income. In the event the Company obtains a refund in future periods, such refunds would be subject to IRS audit under the applicable statute of limitations.
Note 2 — Revision of Prior Period Financial Statements
During the current year-end financial reporting process, the Company identified a prior period accounting error related to the Company’s estimate for accrued payroll, and specifically accrued vacation that was concluded to not be material to the Company’s previously reported consolidated financial statements or unaudited interim condensed consolidated financial statements. The Company assessed the quantitative and qualitative factors associated with the foregoing error in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 99 and 108, Materiality, codified in ASC 250, Presentation of Financial Statements, and concluded that the error was not material to any of the Company’s previously reported annual or interim consolidated financial statements. Notwithstanding this conclusion, the Company corrected the errors by revising the consolidated 2022 and 2021 accompanying consolidated financial statements and related notes to give effect to the correction of these errors.
The identified error related to the accuracy of the Company’s estimate for accrued payroll, and specifically accrued vacation, which US GAAP provides guidance for within ASC 710 - Compensation. Over the past three years the Company had paid vacation hours, either to current employees or for payouts to terminated employees, and such amounts were recorded to expense in the corresponding payroll periods that the vacation was paid.
The effect of the correction of the error noted above on the Company’s Consolidated Balance Sheets as of December 31, 2022 is as follows:
| | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| As reported | | Adjustment | | Revised |
| (in thousands) |
| Deferred tax asset | $ | 28,338 | | | $ | 2,502 | | | $ | 30,840 | |
| Total assets | $ | 718,334 | | | $ | 2,502 | | | $ | 720,836 | |
| Accrued payroll and related taxes | $ | 42,704 | | | $ | 10,395 | | | $ | 53,099 | |
| Total current liabilities | $ | 178,619 | | | $ | 10,395 | | | $ | 189,014 | |
| Retained earnings | $ | 154,495 | | | $ | (7,893) | | | $ | 146,602 | |
| Total liabilities and stockholders' equity | $ | 718,334 | | | $ | 2,502 | | | $ | 720,836 | |
The effect of the correction of the error noted above on the Company’s Consolidated Statements of Comprehensive Income for the year ended December 31, 2022 is as follows:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, 2022 |
| As reported | | Adjustment | | Revised |
| (in thousands, except per share amounts) |
| Costs of services provided | $ | 1,496,336 | | | $ | 529 | | | $ | 1,496,865 | |
| Income before income taxes | $ | 45,082 | | | $ | (529) | | | $ | 44,553 | |
| Income tax provision | $ | 10,452 | | | $ | (142) | | | $ | 10,310 | |
| Net income | $ | 34,630 | | | $ | (387) | | | $ | 34,243 | |
| Basic earnings per common share | $ | 0.47 | | | $ | (0.01) | | | $ | 0.46 | |
| Diluted earnings per common share | $ | 0.47 | | | $ | (0.01) | | | $ | 0.46 | |
The effect of the correction of the errors noted above on the Company’s Consolidated Statements of Comprehensive Income for the year ended December 31, 2021 is as follows:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, 2021 |
| As reported | | Adjustment | | Revised |
| (in thousands, except per share amounts) |
| Costs of services provided | $ | 1,415,082 | | | $ | (3,689) | | | $ | 1,411,393 | |
| Income before income taxes | $ | 61,823 | | | $ | 3,689 | | | $ | 65,512 | |
| Income tax provision | $ | 15,960 | | | $ | 1,009 | | | $ | 16,969 | |
| Net income | $ | 45,863 | | | $ | 2,680 | | | $ | 48,543 | |
| Basic earnings per common share | $ | 0.61 | | | $ | 0.04 | | | $ | 0.65 | |
| Diluted earnings per common share | $ | 0.61 | | | $ | 0.04 | | | $ | 0.65 | |
In addition to the effect of the corrections noted above, the errors also reduced retained earnings by $7.5 million and $10.2 million as of December 31, 2021 and December 31, 2020, respectively, as presented in the Consolidated Statements of Stockholders’ Equity. The effect of the correction of the errors noted above had no impact on the Company’s previously reported consolidated statements of cash flows for the years ended December 31, 2022 or 2021, except for adjustments to individual line items as described in the tables above. The effect of the correction of the errors above on income tax provision for the years ended December 31, 2022 and 2021 and related footnotes is reflected in Note 12 — Income Taxes.
Note 3 — Revenue
The Company presents its consolidated revenues disaggregated by reportable segment, as Management evaluates the nature, amount, timing and uncertainty of the Company’s revenues by segment. Refer to Note 13 — Segment Information herein as well as the information below regarding the Company’s reportable segments.
Housekeeping
Housekeeping accounted for $766.7 million, $795.7 million and $821.3 million of the Company’s consolidated revenues for the years ended December 31, 2023, 2022 and 2021, respectively. The Housekeeping services include managing customers’ housekeeping departments, which are principally responsible for the cleaning, disinfecting and sanitizing of resident rooms and common areas of the customers’ facilities, as well as the laundering and processing of the bed linens, uniforms, resident personal clothing and other assorted linen items utilized at the customers’ facilities. Upon beginning service with a customer facility, the Company will typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise and train the front-line personnel and coordinate housekeeping services with other facility support functions in accordance with customer requests. Such management personnel also oversee the execution of various cost and quality control procedures including continuous training and employee evaluation.
Dietary
Dietary services accounted for $904.7 million, $894.5 million and $820.6 million of the Company’s consolidated revenues for the years ended December 31, 2023, 2022 and 2021, respectively. Dietary services consist of managing customers’ dietary departments which are principally responsible for food purchasing, meal preparation and professional dietitian services, which include the development of menus that meet the dietary needs of residents. On-site management is responsible for all daily dietary department activities, with regular support provided by a District Manager specializing in dietary services. The Company also offers clinical consulting services to facilities which if contracted is a service bundled within the monthly service provided to customers. Upon beginning service with a customer facility, the Company will typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise and train the front-line personnel and coordinate dietitian services with other facility support functions in accordance with customer requests. Such management personnel also oversee the execution of various cost and quality control procedures including continuous training and employee evaluation.
Revenue Recognition
The Company’s revenues are derived from contracts with customers. The Company recognizes revenue to depict the transfer of promised goods and services to customers in amounts that reflect the consideration to which the Company is entitled in exchange for those goods and services. The Company’s costs of obtaining contracts are not material.
The Company performs services and provides goods in accordance with its contracts with its customers. Such contracts typically provide for a renewable one year service term, cancellable by either party upon 30 to 90 days’ notice, after an initial period of 60 to 120 days. A performance obligation is the unit of account under Accounting Standards Codification (“ASC”) 606 and is defined as a promise in a contract to transfer a distinct good or service to the customer. The Company’s Housekeeping and Dietary contracts relate to the provision of bundles of goods, services or both, which represent a series of distinct goods and services that are substantially the same and that have the same pattern of transfer to the customer. The Company accounts for the series as a single performance obligation satisfied over time, as the customer simultaneously receives and consumes the benefits of the goods and services provided. Revenue is recognized using the output method, which is based upon the delivery of goods and services to the customers’ facilities. In limited cases, the Company provides goods, services or both before the execution of a written contract. In these cases, the Company defers the recognition of revenue until a contract is executed. The amount of such clients,deferred revenue was less than $0.1 million and $0.3 million as of December 31, 2023 and 2022, respectively. Additionally, all such revenue amounts deferred as of December 31, 2022 were subsequently recognized as revenue during the year ended December 31, 2023.
The transaction price is the amount of consideration to which the Company is entitled in exchange for transferring promised goods or services to its customers. The transaction price does not include taxes assessed or collected. The Company’s contracts detail the fees that the Company charges for the goods and services it provides. For certain contracts which contain a variable component to the transaction price, the Company is required to make estimates of the amount of consideration to which the Company will be entitled, based on variability in resident and patient populations serviced, product usage, quantities consumed or history of implicit price concessions. The Company recognizes revenue related to such estimates when the Company determines that it is probable there will not be a significant reductionreversal in the revenuesamount of revenue recognized. In instances where variable consideration exists and management’s estimate of variable consideration changes in subsequent periods, resulting in a change in transaction price, the Company receivesrecords an adjustment to revenue on a cumulative catch-up basis. The Company’s contracts generally do not contain significant financing components, as payment terms are less than one year.
During the year ended December 31, 2023, the Company recorded an adjustment to revenues to reflect the Company’s change in estimate for price concessions based on new facts and circumstances related to a client’s out-of-court restructuring. Such adjustment reflects the Company’s current anticipated concession to be granted on certain amounts due as the Company’s current operating plans are to maintain providing services under this arrangement. For the year ended December 31, 2023, the adjustment was a $13.8 million reduction to revenue. During the year ended December 31, 2022, the Company recognized a reduction to revenues of $10.0 million related to the resolution of a previously offered variable consideration.
The Company allocates the transaction price to each performance obligation, noting that the bundle of goods, services or goods and services provided under each Housekeeping and Dietary contract represents a single performance obligation that is satisfied over time. The Company recognizes the related revenue when it satisfies the performance obligation by transferring a bundle of promised goods, services or both to a customer. Such recognition is on a monthly or weekly basis, as goods are provided and services are performed. In some cases, the Company requires customers to pay in advance for goods and services to be provided. As of December 31, 2023 and 2022, the value of the contract liabilities associated with customer prepayments was $3.2 million and $3.1 million, respectively. The Company recognized $1.8 million of revenue during the year ended December 31, 2023 which was recorded as a contract liability on December 31, 2022.
Transaction Price Allocated to Remaining Performance Obligations
The Company recognizes revenue as it satisfies the performance obligations associated with contracts with customers, which due to the nature of the goods and services provided by the Company, are satisfied over time. Contracts may contain transaction prices that are fixed, variable or both. The Company’s contracts with customers typically provide for an initial term of one year, with renewable one year service terms, cancellable by either party upon 30 to 90 days’ notice after an initial period of 60 to 120 days.
At December 31, 2023, the Company had $13.7 million related to performance obligations that were unsatisfied or partially unsatisfied for which the Company expects to recognize revenue. The Company expects to recognize revenue on approximately 100.0% of the remaining performance obligations over the next 12 months. These amounts exclude variable consideration primarily related to performance obligations that consists of a series of distinct service periods with revenues based on future performance that cannot be estimated at contract inception. The Company also has elected to apply the practical expedient that permits exclusion of information about the remaining performance obligations with original expected durations of one year or less.
Note 4 — Accounts and Notes Receivable
The Company’s accounts and notes receivable balances consisted of the following as of December 31, 2023 and 2022:
| | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| (in thousands) |
| Short-term | | | |
| Accounts and notes receivable | $ | 470,759 | | | $ | 406,969 | |
| Allowance for doubtful accounts | (87,250) | | | (70,192) | |
| Total net short-term accounts and notes receivable | $ | 383,509 | | | $ | 336,777 | |
| Long-term | | | |
| Notes receivable | $ | 29,281 | | | $ | 35,882 | |
| Allowance for doubtful accounts | (4,449) | | | (3,273) | |
| Total net long-term notes receivable | $ | 24,832 | | | $ | 32,609 | |
| Total net accounts and notes receivable | $ | 408,341 | | | $ | 369,386 | |
The Company makes credit decisions on a case-by-case basis after reviewing a number of qualitative and quantitative factors related to the specific customer as well as current industry variables that may impact that customer. There are a variety of factors that impact a customer’s ability to pay in accordance with the Company’s contracts. These factors include, but are not limited to, fluctuating census numbers, litigation costs and the customer’s participation in programs funded by federal and state governmental agencies. Deviations in the timing or amounts of reimbursements under those programs can impact the customer’s cash flows and its ability to make timely payments. However, the customer’s obligation to pay the Company in accordance with the contracts are not contingent upon the customer’s cash flow. Notwithstanding the Company’s efforts to minimize its credit risk exposure, the aforementioned factors, as well as other factors that impact customer cash flows or ability to make timely payments, could have an indirect, yet material adverse effect on the Company’s consolidated results of operations and financial condition.
Fluctuations in net accounts and notes receivable are generally attributable to a variety of factors including, but not limited to, the timing of cash receipts from customers and the inception, transition, modification or termination of customer relationships. The Company deploys significant resources and has invested in tools and processes to optimize Management’s credit and collections efforts. When appropriate, the Company utilizes interest-bearing promissory notes to enhance the collectability of amounts due, by instituting definitive repayment plans and providing a means by which to further evidence the amounts owed. In addition, the Company may amend contracts from full service to management-only arrangements, or adjust contractual payment terms, to accommodate customers who have in good faith established clearly-defined plans for addressing cash flow issues. These efforts are intended to minimize the Company’s collections risk.
Note 5 — Allowance for Doubtful Accounts
In making the Company’s credit evaluations, management considers the general collection risk associated with trends in the long-term care industry. The Company establishes credit limits through payment terms with customers, performs ongoing credit evaluations and monitors accounts on an aging schedule basis to minimize the risk of loss. Despite the Company’s efforts to minimize credit risk exposure, customers could be adversely affected if future industry trends change in such clients,a manner as to negatively impact their cash flows. As a result, the Company’s future collection experience can differ significantly from historical collection trends. If the Company’s customers experience a negative impact on their cash flows, it could have a material adverse effect on the Company’s consolidated results of operations. In addition, if anyoperations and financial condition.
The Company evaluates its accounts and notes receivable for expected credit losses quarterly. Accounts receivable are evaluated based on internally developed credit quality indicators derived from the aging of these clients changereceivables. Notes receivable are evaluated based on internally developed credit quality indicators derived from management’s assessment of collection risk. The Company manages the accounts and notes receivable portfolios using a two-tiered approach by disaggregating standard notes receivables, which are invoices or alter current payments terms, it could increasepromissory notes in good standing, from those who have been identified by management as having an elevated credit risk profile due to a triggering event such as bankruptcy. At the Company’send of each period, the Company sets a reserve for expected credit losses on standard accounts receivables balance and have a material adverse effectnotes receivable based on the Company’s cash flows.historical loss rates. Accounts and notes receivable with an elevated risk profile, which are from customers who have filed bankruptcy, are subject to collections activity or are slow payers that are experiencing financial difficulties, are aggregated and evaluated to determine the total reserve for the class of receivable.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-09, Stock Compensation: ImprovementsASC 326 permits entities to Employee Share-Based Payment Accounting. ASU 2016-09 was intendedmake an accounting policy election not to simplify several aspects of the accountingmeasure an estimate for share-based payments.credit losses on accrued interest if those entities write-off accrued interest deemed uncollectible in a timely manner. The Company adoptedfollows an income recognition policy on all interest earned on notes receivable. Under such policy the standard beginning January 1, 2017. The impact of adopting the standard includedCompany accounts for all notes receivable on a non-accrual basis and defers the recognition of excess tax benefits related to share-based paymentsany interest income until receipt of cash payments. This policy was established based on the Company’s history of collections of interest on outstanding notes receivable, as a componentwe do not deem it probable that we will receive substantially all interest on outstanding notes receivable. For the years ended December 31, 2023, 2022 and 2021, the Company recognized $2.8 million, $1.1 million and $1.2 million in interest income from notes receivable, respectively.
The following tables present the Company’s two tiers of income tax expense, as opposed to additional paid-in capital; an amendment tonotes receivable for the calculationyears ended December 31, 2023 and 2022, respectively, further disaggregated by year of diluted earnings per share to exclude windfall tax benefits from assumed proceeds when calculating diluted shares outstanding;origination, as well as accounting for forfeitures of share-based awardswrite-off activity:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Notes Receivable as of December 31, 2023 |
| | Amortized Cost Basis by Origination Year |
| | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Total |
| | (in thousands) |
| Notes Receivable | | | | | | | | | | | | | | |
| Standard notes receivable | | $ | 18,175 | | | $ | 25,505 | | | $ | 855 | | | $ | 1,529 | | | $ | 3 | | | $ | 21,033 | | | $ | 67,100 | |
| Elevated risk notes receivable | | $ | — | | | $ | — | | | $ | 7,259 | | | $ | — | | | $ | — | | | $ | — | | | $ | 7,259 | |
| | | | | | | | | | | | | | |
| Current-period gross write-offs | | $ | — | | | $ | 189 | | | $ | — | | | $ | — | | | $ | 50 | | | $ | 2,253 | | | $ | 2,492 | |
| Current-period recoveries | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Current-period net write-offs | | $ | — | | | $ | 189 | | | $ | — | | | $ | — | | | $ | 50 | | | $ | 2,253 | | | $ | 2,492 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Notes Receivable as of December 31, 2022 |
| | Amortized Cost Basis by Origination Year |
| | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total |
| | (in thousands) |
| Notes Receivable | | | | | | | | | | | | | | |
| Standard notes receivable | | $ | 31,406 | | | $ | 10,887 | | | $ | 1,683 | | | $ | 208 | | | $ | 13 | | | $ | 21,982 | | | $ | 66,179 | |
| Elevated risk notes receivable | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,223 | | | $ | 1,223 | |
| | | | | | | | | | | | | | |
| Current-period gross write-offs | | $ | 1 | | | $ | — | | | $ | 51 | | | $ | 54 | | | $ | — | | | $ | 491 | | | $ | 597 | |
| Current-period recoveries | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Current-period net write-offs | | $ | 1 | | | $ | — | | | $ | 51 | | | $ | 54 | | | $ | — | | | $ | 491 | | | $ | 597 | |
The following tables provide information as they occur, as opposed to reserving for estimated forfeitures. The most material impact of the adoption was a reduction to income tax expense in 2017 of $5.7 million.
In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business. The guidance changes the definition of a business to assist entities in evaluating whether a set of transferred assets and activities constitutes a business under Topic 805. The guidance is effective for annual periods beginning after December 15, 2017, with early adoption permitted. The Company adopted the standard effective January 1, 2018.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which was subsequently amended and updated throughout 2015 and 2016. The standard provides guidance on revenue recognition, among other topics such as the accounting for compensation and costs to obtain a contract. The standard requires that an entity 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 be entitled in exchange for those goods or services. Adoption is required for reporting periods beginning after December 15, 2017, with early adoption prohibited. The Company adopted the standard beginning on January 1, 2018 utilizing the modified retrospective method. The Company has evaluated the impact of the adoption of the standard by reviewing the nature and terms of existing contracts under the provisions of the new guidance and designing operational and process updates required for ongoing compliance. Management does not expect this guidance to result in a material impact to the Company's accounting forstatus of payment on the revenue earned related to its Housekeeping and Dietary department services and accordingly, does not expect to record an adjustment to its consolidated financial statements upon adoption of the standard. Management anticipates that the most significant impact of the new standard will relate to additional disclosure obligations.
In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires lessees to recognize assets and liabilities on their balance sheet related to the rights and obligations created by most leases, while continuing to recognize expenses on their income statements over the lease term. It will also require disclosures designed to give financial statement users information regarding the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted for all entities. The Company will adopt the new guidanceCompany’s gross notes receivable which were past due as of January 1, 2019. Management is continuing to evaluate the expected impact of the requirements, however it is expected that the primary impact will relate to the capitalization of operating leases of office space, vehiclesDecember 31, 2023 and equipment.2022, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Age Analysis of Past-Due Notes Receivable as of December 31, 2023 |
| | 0-90 Days | | 91 - 180 Days | | Greater than 181 Days | | Total |
| | (in thousands) |
| Notes Receivable | | | | | | | | |
| Standard notes receivable | | $ | 3,851 | | | $ | 4,852 | | | $ | 6,914 | | | $ | 15,617 | |
| Elevated risk notes receivable | | 569 | | | 569 | | | 949 | | | 2,087 | |
| | $ | 4,420 | | | $ | 5,421 | | | $ | 7,863 | | | $ | 17,704 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Age Analysis of Past-Due Notes Receivable as of December 31, 2022 |
| | 0-90 Days | | 91 - 180 Days | | Greater than 181 Days | | Total |
| | (in thousands) |
| Notes Receivable | | | | | | | | |
| Standard notes receivable | | $ | 894 | | | $ | 263 | | | $ | 3,330 | | | $ | 4,487 | |
| Elevated risk notes receivable | | — | | | — | | | 1,223 | | | 1,223 | |
| | $ | 894 | | | $ | 263 | | | $ | 4,553 | | | $ | 5,710 | |
The following tables provide a summary of the changes in the Company’s allowance for doubtful accounts on a portfolio segment basis for the years ended December 31, 2023 and 2022, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Allowance for doubtful accounts |
| Portfolio Segment: | | December 31,
2022 | | Write-Offs1 | | Bad Debt Expense | | December 31,
2023 |
| | (in thousands) |
| Accounts receivable | | $ | 66,601 | | | $ | (14,877) | | | $ | 29,095 | | | $ | 80,819 | |
| | | | | | | | |
| Notes receivable | | | | | | | | |
| Standard notes receivable | | $ | 6,052 | | | $ | (1,646) | | | $ | 1,719 | | | $ | 6,125 | |
| Elevated risk notes receivable | | 811 | | | (846) | | | 4,790 | | | 4,755 | |
| Total notes receivable | | $ | 6,863 | | | $ | (2,492) | | | $ | 6,509 | | | $ | 10,880 | |
| Total accounts and notes receivable | | $ | 73,464 | | | $ | (17,369) | | | $ | 35,604 | | | $ | 91,699 | |
1.Write-offs are shown net of recoveries. During the year ended December 31, 2023, the Company collected $0.2 million of accounts receivables that were recovered subsequent to being written-off.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Allowance for doubtful accounts |
| Portfolio Segment: | | December 31,
2021 | | | Write-Offs/Adjustments1 | | Bad Debt Expense | | December 31,
2022 |
| | (in thousands) |
| Accounts receivable | | $ | 50,794 | | | | $ | (16,825) | | | $ | 32,632 | | | $ | 66,601 | |
| | | | | | | | | |
| Notes receivable | | | | | | | | | |
| Standard notes receivable | | $ | 13,607 | | | | $ | (6,783) | | | $ | (772) | | | $ | 6,052 | |
| Elevated risk notes receivable | | 1,183 | | | | (481) | | | 109 | | | 811 | |
| Total notes receivable | | $ | 14,790 | | | | $ | (7,264) | | | $ | (663) | | | $ | 6,863 | |
| Total accounts and notes receivable | | $ | 65,584 | | | | $ | (24,089) | | | $ | 31,969 | | | $ | 73,464 | |
1.Write-offs are shown net of recoveries. During the year ended December 31, 2022, the Company collected $0.3 million of accounts receivables that were recovered subsequent to being written-off. Adjustments include a reduction of $8.0 million of allowance for doubtful accounts which related to a contract modification during the year ended December 31, 2022.
Note 2—6 — Changes in Accumulated Other Comprehensive (Loss) Income by Component
For the years ended December 31, 2017, 20162023, 2022 and 2015,2021, the Company’s accumulated other comprehensive (loss) income related to theconsisted of unrealized gains and losses from the Company’s available-for-sale marketable securities.
The following table providestables provide a summary of the changes in accumulated other comprehensive income, net of taxes:
| | | | | | | | | | | | | | | | | |
| Unrealized Gains and (Losses) on Available-for-Sale Securities1 |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (in thousands) |
| Accumulated other comprehensive (loss) income — beginning balance | $ | (3,477) | | | $ | 4,000 | | | $ | 5,563 | |
| Other comprehensive income (loss) before reclassifications | 1,624 | | | (7,505) | | | (1,522) | |
Losses (gains) reclassified from other comprehensive income2 | 9 | | | 28 | | | (41) | |
Net current period other comprehensive income (loss)3 | 1,633 | | | (7,477) | | | (1,563) | |
| Accumulated other comprehensive (loss) income — ending balance | $ | (1,844) | | | $ | (3,477) | | | $ | 4,000 | |
1.All amounts are net of tax.
2.Realized gains and losses were recorded pre-tax under “Investment and other income (loss), net” in the Consolidated Statements of Comprehensive Income. For the years ended December 31, 2023 and 2022, the Company recorded less than $0.1 million of realized losses from the sale of available-for-sale securities. For the year ended December 31, 2021, the Company recorded $0.1 million of realized gains from the sale of available-for-sale securities. Refer to Note 10 — Fair Value Measurements herein for further information.
3.For the year ended December 31, 2023, the change in other comprehensive (loss) income was net of a tax expense of $0.4 million. For the years ended December 31, 2022 and 2021, the changes in other comprehensive (loss) income were net of a tax benefit of $2.0 million and benefit of $0.4 million, respectively.
| | | | | | | | | | | | | | | | | |
| Amounts Reclassified from Accumulated Other Comprehensive (Loss) Income |
| 2023 | | 2022 | | 2021 |
| (in thousands) |
| Year Ended December 31, | | | | | |
| (Losses) gains from the sale of available-for-sale securities | $ | (12) | | | $ | (37) | | | $ | 55 | |
| Tax benefit (expense) | 3 | | | 9 | | | (14) | |
| Net (loss) gain reclassified from accumulated other comprehensive income | $ | (9) | | | $ | (28) | | | $ | 41 | |
|
| | | | | | | | | | | |
| | Unrealized Gains and (Losses) on Available-for Sale-Securities (1) |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Accumulated other comprehensive (loss) income — beginning balance | $ | (319 | ) | | $ | 543 |
| | $ | 25 |
|
| Other comprehensive income (loss) before reclassifications | 1,149 |
| | (1,005 | ) | | 535 |
|
Losses (gains) reclassified from other comprehensive income(2) | 7 |
| | 143 |
| | (17 | ) |
Net current period other comprehensive income (loss)(3) | 1,156 |
| | (862 | ) | | 518 |
|
| Accumulated other comprehensive income (loss) — ending balance | $ | 837 |
| | $ | (319 | ) | | $ | 543 |
|
| |
(1)
| All amounts are net of tax. |
| |
(2)
| For the years ended December 31, 2017 and 2016, the Company recorded less than $0.1 million and $0.2 million of realized losses from the sale of available-for-sale securities, respectively. For the year ended December 31, 2015, the Company recorded less than $0.1 million of realized gains for the sale of available-for-sale securities. Refer to Note 5 herein for further information. |
| |
(3)
| For the years ended December 31, 2017 and 2015, the changes in other comprehensive income were both net of tax expense of $0.3 million. For the year ended December 31, 2016, the changes in other comprehensive income were net of a tax benefit of $0.5 million. |
|
| | | | | | | | | | | |
| | Amounts Reclassified from Accumulated Other Comprehensive Income |
| | 2017 | | 2016 | | 2015 |
| For the Year Ended December 31, | (in thousands) |
| Losses (gains) from the sale of available-for-sale securities | $ | 11 |
| | $ | 222 |
| | $ | (27 | ) |
| Tax (benefit) expense | (4 | ) | | (79 | ) | | 10 |
|
| Net loss (gain) reclassified from accumulated other comprehensive income | 7 |
| | $ | 143 |
| | $ | (17 | ) |
Note 3—7 — Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method and is recorded over the estimated useful life of each class of depreciable asset.asset and is computed using the straight-line method. Leasehold improvements are amortized over the shorter of the estimated asset life or term of the lease. Repairs and maintenance costs are charged to expense as incurred.
The following table sets forth the amounts of property and equipment by each class of depreciable asset as of December 31, 20172023 and December 31, 2016:2022:
| | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| (in thousands) |
| Housekeeping and Dietary equipment | $ | 15,764 | | | $ | 13,585 | |
| Computer hardware and software | 6,870 | | | 6,086 | |
Operating lease — right-of-use assets | 27,099 | | | 34,445 | |
Other1 | 1,070 | | | 1,055 | |
| Total property and equipment, at cost | 50,803 | | | 55,171 | |
Less accumulated depreciation2 | 22,029 | | | 32,196 | |
| Total property and equipment, net | $ | 28,774 | | | $ | 22,975 | |
|
| | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | (in thousands) |
| Housekeeping and Dietary equipment | $ | 22,349 |
| | $ | 21,136 |
|
| Computer hardware and software | 12,665 |
| | 11,750 |
|
Other (1) | 990 |
| | 1,133 |
|
| Total property and equipment, at cost | $ | 36,004 |
| | $ | 34,019 |
|
| Less accumulated depreciation | 22,495 |
| | 20,564 |
|
| Total property and equipment, net | $ | 13,509 |
| | $ | 13,455 |
|
| |
(1)
| Includes furniture and fixtures, leasehold improvements and autos and trucks. |
2.Includes $9.4 million and $22.1 million related to accumulated depreciation on Operating lease – right-of-use assets as of December 31, 2023 and 2022, respectively.
Depreciation expense for the years ended December 31, 2017, 20162023, 2022 and 20152021 was $5.0$10.5 million, $4.8$10.5 million, and $4.4$10.3 million, respectively. Of the depreciation expense recorded for the years ended December 31, 2023, 2022 and 2021 $6.4 million, $6.1 million and $6.4 million related to the depreciation of the Company’s operating lease - right-of-use assets (“ROU Assets”), respectively.
Note 4—8 — Leases
The Company recognizes ROU assets and lease liabilities for automobiles, office buildings, IT equipment and small storage units for the temporary storage of operational equipment. The Company’s leases have remaining lease terms ranging from less than 1 year to 5 years, and have extension options ranging from 1 year to 5 years. Most leases include the option to terminate the lease within 1 year.
The Company uses practical expedients offered under the ASC 842 guidance to combine lease and non-lease components within leasing arrangements and to recognize the payments associated with short-term leases in earnings on a straight-line basis over the lease term, with the cost associated with variable lease payments recognized when incurred. These accounting policy elections impact the value of the Company’s ROU assets and lease liabilities. The value of the Company’s ROU assets is determined as the carrying value of its leasing arrangements and is recorded in Property and equipment, net on the Company’s Consolidated Balance Sheets. The value of the Company’s lease liabilities is the present value of fixed lease payments not yet paid, which is discounted using either the rate implicit in the lease contract if that rate can be determined or the Company’s incremental borrowing rate (“IBR”) and is recorded in Other accrued expenses and current liabilities and Lease liability — long-term on the Company’s Consolidated Balance Sheets. The Company’s IBR is determined as the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. Any future lease payments that are not fixed based on the terms of the lease contract, or fluctuate based on a factor other than an index or rate, are considered variable lease payments and are not included in the value of the Company’s ROU assets or lease liabilities. The Company’s IBR is determined as the rate of interest that the Company would incur to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
As of December 31, 2023 and 2022, the Company’s short-term portion of lease obligations were $7.4 million and $5.3 million, respectively, and are recorded in Other accrued expenses and current liabilities with the remaining balance recognized under the Lease liability — long-term portion caption on the Company’s Consolidated Balance Sheets. The corresponding expense for the Company’s lease commitments are primarily recorded in selling, general and administrative expense on the Company’s Consolidated Statements of Comprehensive Income.
Components of lease expense are presented below for the years ended December 31, 2023, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| | (in thousands) |
| Lease cost | | | | | | |
| Operating lease cost | | $ | 6,400 | | | $ | 5,673 | | | $ | 6,210 | |
| Short-term lease cost | | 1,037 | | | 1,265 | | | 747 | |
| Variable lease cost | | 1,952 | | | 857 | | | 973 | |
| Total lease cost | | $ | 9,389 | | | $ | 7,795 | | | $ | 7,930 | |
Supplemental information is presented below for the years ended December 31, 2023, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| | (dollar amounts in thousands) |
| Other information | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities | | | | | | |
| Operating cash flows from operating leases | | $ | 6,808 | | $ | 6,385 | | $ | 6,609 |
| ROU Assets obtained in exchange for lease obligations | | $ | 6,064 | | 1,650 | | 7,143 |
| Weighted-average remaining lease term — operating leases | | 3.3 years | | 4.2 years | | 4.5 years |
| Weighted-average discount rate — operating leases | | 6.6 | % | | 4.4 | % | | 4.2 | % |
During the years ended December 31, 2023 and 2022, the Company’s ROU assets and lease liabilities were reduced by $2.7 million and $1.7 million, respectively due to lease cancellations.
The following is a schedule by calendar year of future minimum lease payments under operating leases that have remaining terms as of December 31, 2023:
| | | | | | | | |
| Period/Year | | Operating Leases |
| | (in thousands) |
| 2024 | | $ | 7,365 | |
| 2025 | | 6,617 | |
| 2026 | | 3,768 | |
| 2027 | | 1,365 | |
| 2028 | | 1,389 | |
| Thereafter | | 116 | |
| Total minimum lease payments | | $ | 20,620 | |
| Less: imputed lease payments | | 1,999 | |
| Present value of lease liabilities | | $ | 18,621 | |
Note 9 — Goodwill and Other Intangible Assets
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets of acquired businesses. Goodwill is not amortized but is evaluated for impairment on an annual basis or more frequently if impairment indicators arise. To date, the Company has not recognized an impairment of its goodwill.
GoodwillThe following table sets forth the amounts of goodwill by reportable operating segment as described in Note 14 - Segment Information, was approximately $42.4 million and $8.7 million for Housekeeping and Dietary, respectively, as of December 31, 2017. At December 31, 2016, goodwill by reportable operating segment was $42.4 million2023 and $2.1 million for Housekeeping and Dietary, respectively. The increase in goodwill is related to the acquisition of certain Dietary-related assets during 2017.2022:
| | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| (in thousands) |
| Housekeeping | $ | 42,377 | | | $ | 42,377 | |
| Dietary | 33,152 | | | 33,152 | |
| Total Goodwill | $ | 75,529 | | | $ | 75,529 | |
Intangible Assets
The Company’s other intangible assets consist of customer relationships, trade names, patents and non-compete agreements which were obtained through acquisitions and are recorded at their fair values at the date of acquisition. The following table sets forth the amounts of other intangible assets as of December 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| Gross Amount | | Accumulated Amortization | | Net Amount | | Gross Amount | | Accumulated Amortization | | Net Amount |
| (in thousands) |
| Customer relationships | $ | 45,634 | | | $ | 35,718 | | | $ | 9,916 | | | $ | 45,634 | | | $ | 32,211 | | | $ | 13,423 | |
| Trade names | 1,731 | | | 329 | | | 1,402 | | | 1,731 | | | 191 | | | 1,540 | |
| Patents | 1,086 | | | 369 | | | 717 | | | 1,086 | | | 232 | | | 854 | |
| Non-compete agreements | 233 | | | 141 | | | 92 | | | 233 | | | 104 | | | 129 | |
| Total other intangible assets | $ | 48,684 | | | $ | 36,557 | | | $ | 12,127 | | | $ | 48,684 | | | $ | 32,738 | | | $ | 15,946 | |
No acquisitions occurred during the year ended December 31, 2023. Intangible assets with determinable useful lives are amortized on a straight-line basis over their estimated useful lives. The customer relationships have a weighted-average amortization period of 9.9 years. The increase from the prior year is due to the acquisition of certain Dietary-related assets during 2017.customer relationships, trade names, patents, and non-compete agreements are approximately 10 years, 13 years, 8 years and 4 years, respectively.
The following table sets forth the estimated amortization expense for intangibles subject to amortization for 2024, the next fivefollowing four fiscal years and thereafter:
| | | | | | | | |
| Period/Year | | Total Amortization Expense |
| | (in thousands) |
| 2024 | | $ | 2,685 | |
| 2025 | | $ | 2,685 | |
| 2026 | | $ | 2,666 | |
| 2027 | | $ | 1,196 | |
| 2028 | | $ | 613 | |
| Thereafter | | $ | 2,282 | |
| Total | | $ | 12,127 | |
|
| | | | |
| Period/Year | | Total Amortization Expense |
| | (in thousands) |
| 2018 | | $ | 4,364 |
|
| 2019 | | $ | 4,165 |
|
| 2020 | | $ | 4,165 |
|
| 2021 | | $ | 4,165 |
|
| 2022 | | $ | 4,165 |
|
| Thereafter | | $ | 9,859 |
|
Amortization expense for the years ended December 31, 2017, 20162023, 2022 and 20152021 was $3.9$3.8 million, $2.7$4.9 million and $3.2$4.4 million, respectively.
Note 5—10 — Fair Value Measurements
The Company’s current assets and current liabilities are financial instruments and most of these items (other than marketable securities, inventories and inventories)the short-term portion of deferred compensation funding) are recorded at cost in the Consolidated Balance Sheets. The estimated fair value of these financial instruments approximates their carrying value due to their short-term nature. The carrying value of the Company’s line of credit represents the outstanding amount of the borrowings, which approximates fair value. The Company’s financial assets that are measured at fair value on a recurring basis are its marketable securities and deferred compensation funding. The recorded values of all of the financial instruments approximate their current fair values because of their nature, stated interest rates and respective maturity dates or durations.
The Company’s marketable securities are held by the Company’s captive insurance company to satisfy capital requirements of the state regulator related to captive insurance companies. Such securities primarily consist of tax-exempt municipal bonds, which are classified as available-for-sale and are reported at fair value. Unrealized gains and losses associated with these investments are included in other comprehensive income (netUnrealized gain (loss) on available-for-sale marketable securities, net of tax)taxes within the Consolidated Statements of Comprehensive Income. The fair value of these marketable securities is classified within Level 2 of the fair value hierarchy, as these securities are measured using 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. Such valuations are determined by a third-party pricing service. For the yearsyear ended December 31, 2017, 2016 and 2015,2023, the Company recorded unrealized gains, net of $1.2taxes of $1.6 million on marketable securities. For the years ended December 31, 2022 and 2021, the Company recorded unrealized losses, net of $0.9taxes of $7.5 million and unrealized gains of $0.5$1.6 million on marketable securities, respectively.
For the years ended December 31, 2017, 20162023, 2022 and 2015,2021, the Company received total proceeds, less the amount of interest received, of $28.5$2.0 million, $28.1$10.4 million and $16.4$26.7 million, respectively, from sales of available-for-sale municipal bonds. For theboth years
ended December 31, 20172023 and 2016,2022, these sales each resulted in realized losses of less than $0.1 million, and $0.2 million, respectively. For the year ended December 31, 2015, there were realized gains of less than $0.1 million.million for the year ended December 31, 2021. Such gains and losses were recorded in “Other income-InvestmentInvestment and interest”other income (loss), net in the Consolidated Statements of Comprehensive Income. The basis for the sale of these securities was the specific identification of each bond sold during the period.
As part of a 2021 acquisition of a prepackaged meal manufacturer, the Company agreed to pay royalties to the seller on all future product sales. The Company recorded a liability for the expected future payments within Other long-term liabilities on the Consolidated Balance Sheets. The fair value of this liability is measured using forecasted sales models (Level 3). For the years ended December 31, 2023, 2022 and 2021, the Company recorded realized gains of $1.1 million, $2.4 million and $0.1 million, respectively, within Costs of services provided in the Consolidated Statements of Comprehensive Income related to the subsequent measurement of the liability at each balance sheet date.
The investments under the funded deferred compensation plan are accounted for as trading securities and unrealized gains or losses are includedrecorded within other income (expense), net in earnings.the Consolidated Statements of Comprehensive Income. The fair value of these investments, areexcluding amounts held in money market accounts, is determined based on quoted market prices (Level 1). The fair value of money market accounts is measured using quoted prices for identical or similar instruments in markets that are not active (Level 2). For the years ended December 31, 2023, 2022 and 2021, the Company recorded unrealized gains of $6.6 million, losses of $9.3 million and gains of $6.5 million, respectively, related to equity securities still held at the respective reporting dates.
The following tables provide fair value measurement information for the Company’s marketable securities and deferred compensation fund investment assetsinvestments as of December 31, 20172023 and 2016:December 31, 2022:
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2017 |
| | | | | | Fair Value Measurement Using: |
| | Carrying
Amount | | Total Fair
Value | | Quoted
Prices
in Active
Markets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| | (in thousands) |
| Financial Assets: | | | | | | | | | |
| Marketable securities | | | | | | | | | |
| Municipal bonds — available-for-sale | $ | 73,221 |
| | $ | 73,221 |
| | $ | — |
| | $ | 73,221 |
| | $ | — |
|
| Deferred compensation fund | | | | | | | | | |
Money Market (1) | $ | 2,720 |
| | $ | 2,720 |
| | $ | — |
| | $ | 2,720 |
| | $ | — |
|
| Balanced and Lifestyle | 8,523 |
| | 8,523 |
| | 8,523 |
| | — |
| | — |
|
| Large Cap Growth | 7,802 |
| | 7,802 |
| | 7,802 |
| | — |
| | — |
|
| Small Cap Growth | 3,442 |
| | 3,442 |
| | 3,442 |
| | — |
| | — |
|
| Fixed Income | 3,050 |
| | 3,050 |
| | 3,050 |
| | — |
| | — |
|
| International | 1,531 |
| | 1,531 |
| | 1,531 |
| | — |
| | — |
|
| Mid Cap Growth | 1,817 |
| | 1,817 |
| | 1,817 |
| | — |
| | — |
|
| Deferred compensation fund | $ | 28,885 |
| | $ | 28,885 |
| | $ | 26,165 |
| | $ | 2,720 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2023 |
| | | | | Fair Value Measurement Using: |
| Carrying Amount | | Total Fair Value | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (in thousands) |
| Financial Assets: | | | | | | | | | |
| Marketable securities | | | | | | | | | |
| Municipal bonds — available-for-sale | $ | 93,131 | | | $ | 93,131 | | | $ | — | | | $ | 93,131 | | | $ | — | |
| | | | | | | | | |
| Deferred compensation fund | | | | | | | | | |
Money Market 1 | $ | 2,007 | | | $ | 2,007 | | | $ | — | | | $ | 2,007 | | | $ | — | |
| Commodities | 298 | | | 298 | | | 298 | | | — | | | — | |
| Fixed Income | 4,254 | | | 4,254 | | | 4,254 | | | — | | | — | |
| International | 4,621 | | | 4,621 | | | 4,621 | | | — | | | — | |
| Large Cap Blend | 5,053 | | | 5,053 | | | 5,053 | | | — | | | — | |
| Large Cap Growth | 13,886 | | | 13,886 | | | 13,886 | | | — | | | — | |
| Large Cap Value | 5,964 | | | 5,964 | | | 5,964 | | | — | | | — | |
| Mid Cap Blend | 3,192 | | | 3,192 | | | 3,192 | | | — | | | — | |
| Real Estate | 374 | | | 374 | | | 374 | | | — | | | — | |
| Small Cap Blend | 2,664 | | | 2,664 | | | 2,664 | | | — | | | — | |
Deferred compensation fund2 | $ | 42,313 | | | $ | 42,313 | | | $ | 40,306 | | | $ | 2,007 | | | $ | — | |
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2016 |
| | | | | | Fair Value Measurement Using: |
| | Carrying
Amount | | Total Fair
Value | | Quoted
Prices
in Active
Markets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| | (in thousands) |
| Financial Assets: | | | | | | | | | |
| Marketable securities | | | | | | | | | |
| Municipal bonds — available-for-sale | $ | 67,730 |
| | $ | 67,730 |
| | $ | — |
| | $ | 67,730 |
| | $ | — |
|
| Deferred compensation fund | | | | | | | | | |
Money Market (1) | $ | 3,147 |
| | $ | 3,147 |
| | $ | — |
| | $ | 3,147 |
| | $ | — |
|
| Balanced and Lifestyle | 7,162 |
| | 7,162 |
| | 7,162 |
| | — |
| | — |
|
| Large Cap Growth | 5,583 |
| | 5,583 |
| | 5,583 |
| | — |
| | — |
|
| Small Cap Value | 2,933 |
| | 2,933 |
| | 2,933 |
| | — |
| | — |
|
| Fixed Income | 2,752 |
| | 2,752 |
| | 2,752 |
| | — |
| | — |
|
| International | 1,132 |
| | 1,132 |
| | 1,132 |
| | — |
| | — |
|
| Mid Cap Growth | 1,410 |
| | 1,410 |
| | 1,410 |
| | — |
| | — |
|
| Deferred compensation fund | $ | 24,119 |
| | $ | 24,119 |
| | $ | 20,972 |
| | $ | 3,147 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2022 |
| | | | | Fair Value Measurement Using: |
| Carrying
Amount | | Total Fair
Value | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (in thousands) |
| Financial Assets: | | | | | | | | | |
| Marketable securities | | | | | | | | | |
| Municipal bonds — available-for-sale | $ | 95,200 | | | $ | 95,200 | | | $ | — | | | $ | 95,200 | | | $ | — | |
| | | | | | | | | |
| Deferred compensation fund | | | | | | | | | |
Money Market 1 | $ | 2,420 | | | $ | 2,420 | | | $ | — | | | $ | 2,420 | | | $ | — | |
| Commodities | 170 | | | 170 | | | 170 | | | — | | | — | |
| Fixed Income | 3,571 | | | 3,571 | | | 3,571 | | | — | | | — | |
| International | 4,093 | | | 4,093 | | | 4,093 | | | — | | | — | |
| Large Cap Blend | 1,210 | | | 1,210 | | | 1,210 | | | — | | | — | |
| Large Cap Growth | 11,064 | | | 11,064 | | | 11,064 | | | — | | | — | |
| Large Cap Value | 6,133 | | | 6,133 | | | 6,133 | | | — | | | — | |
| Mid Cap Blend | 2,667 | | | 2,667 | | | 2,667 | | | — | | | — | |
| Real Estate | 359 | | | 359 | | | 359 | | | — | | | — | |
| Small Cap Blend | 3,424 | | | 3,424 | | | 3,424 | | | — | | | — | |
Deferred compensation fund 2 | $ | 35,111 | | | $ | 35,111 | | | $ | 32,691 | | | $ | 2,420 | | | $ | — | |
(1)1.The fair value of the money market fund is based on the net asset value (“NAV”) of the shares held by the planfund at the end of the period. The money market fund includes short-term United States dollar denominated money-marketmoney market instruments and the NAV is determined by the custodian of the fund. The money market fund can be redeemed at its NAV at the measurement date as there are no significant restrictions on the ability to sell this investment.
2.The deferred compensation fund carrying amounts and total fair value amounts as of December 31, 2023 and 2022 are inclusive of $1.5 million and $1.6 million of holdings expected to be paid to former employees within the next twelve months and were recorded under Prepaid expenses and other assets in the Company’s Consolidated Balance Sheets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | Impairments |
| (in thousands) |
| December 31, 2023 | | | | | | | | | |
| Type of security: | | | | | | | | | |
| Municipal bonds — available-for-sale | $ | 95,466 | | | $ | 387 | | | $ | (2,722) | | | $ | 93,131 | | | $ | — | |
| Total debt securities | $ | 95,466 | | | $ | 387 | | | $ | (2,722) | | | $ | 93,131 | | | $ | — | |
| | | | | | | | | |
| December 31, 2022 | | | | | | | | | |
| Type of security: | | | | | | | | | |
| Municipal bonds — available-for-sale | $ | 99,601 | | | $ | 229 | | | $ | (4,630) | | | $ | 95,200 | | | $ | — | |
| Total debt securities | $ | 99,601 | | | $ | 229 | | | $ | (4,630) | | | $ | 95,200 | | | $ | — | |
|
| | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | Other-Than-Temporary Impairments |
| | (in thousands) |
| December 31, 2017 | | | | | | | | | |
| Marketable securities | | | | | | | | | |
| Municipal bonds — available-for-sale | $ | 72,249 |
| | $ | 1,169 |
| | $ | (197 | ) | | $ | 73,221 |
| | $ | — |
|
| Total debt securities | $ | 72,249 |
| | $ | 1,169 |
| | $ | (197 | ) | | $ | 73,221 |
| | $ | — |
|
| December 31, 2016 | | | | | | | | | |
| Marketable securities | | | | | | | | | |
| Municipal bonds — available-for-sale | $ | 68,220 |
| | $ | 178 |
| | $ | (668 | ) | | $ | 67,730 |
| | $ | — |
|
| Total debt securities | $ | 68,220 |
| | $ | 178 |
| | $ | (668 | ) | | $ | 67,730 |
| | $ | — |
|
| December 31, 2015 | | | | | | | | | |
| Marketable securities | | | | | | | | | |
| Municipal bonds — available-for-sale | $ | 68,640 |
| | $ | 869 |
| | $ | (13 | ) | | $ | 69,496 |
| | $ | — |
|
| Total debt securities | $ | 68,640 |
| | $ | 869 |
| | $ | (13 | ) | | $ | 69,496 |
| | $ | — |
|
The following table summarizes the contractual maturities of debt securities held at December 31, 20172023 and 2016,December 31, 2022, which are classified as marketable securities in the Company’s Consolidated Balance Sheets:
| | | | | | | | | | | | | | |
| | Municipal Bonds — Available-for-Sale |
| Contractual maturity: | | December 31, 2023 | | December 31, 2022 |
| | (in thousands) |
| Maturing in one year or less | | $ | 6,324 | | | $ | 2,798 | |
| Maturing in second year through fifth year | | 34,939 | | | 35,068 | |
| Maturing in sixth year through tenth year | | 39,309 | | | 38,575 | |
| Maturing after ten years | | 12,559 | | | 18,759 | |
| Total debt securities | | $ | 93,131 | | | $ | 95,200 | |
|
| | | | | | | |
| | Municipal Bonds — Available-for-Sale |
| | December 31, |
| | 2017 | | 2016 |
| | (in thousands) |
| Contractual maturity: | | | |
| Maturing in one year or less | $ | 916 |
| | $ | 973 |
|
| Maturing in second year through fifth year | 15,948 |
| | 28,671 |
|
| Maturing in sixth year through tenth year | 22,851 |
| | 21,651 |
|
| Maturing after ten years | 33,506 |
| | 16,435 |
|
| Total debt securities | $ | 73,221 |
| | $ | 67,730 |
|
Note 6— Accounts and Notes Receivable11 — Share-Based Compensation
Any decision to extend credit is made on a case-by-case basis and is based on a number of qualitative and quantitative factors related to the particular client, as well as the general risks associated with operating within the long-term care industry.
The Company’s net accounts and notes receivable balance increased from December 31, 2016. Fluctuations in net accounts and notes receivable are attributable to a varietycomponents of factors including, but not limited to, the timing of cash receipts from customers and the inception, transition or termination of client relationships.
There are a variety of factors that impact the clients’ ability to pay in accordance with the Company’s agreements. Primary among these factors is the clients’ participation in programs funded by federal and state governmental agencies. Deviations in the timing or amounts of reimbursements under those programs can impact the clients’ cash flows and the timing of their payments. The payment terms in the Company’s service agreements are not contingent upon the clients’ cash flows and notwithstanding the Company’s efforts to minimize credit risk exposure, various factors affecting the clients’ cash flows could have an indirect, yet material adverse effect on the Company’s results of operations and financial condition.
The Company deploys significant resources and has invested in tools and processes to optimize Management’s credit and collections efforts. When appropriate, the Company utilizes interest-bearing promissory notes as an alternative to accounts receivable to enhance the collectability of amounts due, by providing a definitive repayment plan and providing a means by which to further evidence the amounts owed. At December 31, 2017 and 2016, the Company had $36.6 million and $19.2 million, net of reserves, respectively, of such promissory notes outstanding. In addition, the Company may assist clients who are adjusting to changes in their cash flows by amending the Company’s agreements from full-service to management-only arrangements, or by modifying contractual payment terms to accommodate clients who have in good faith established clearly-defined plans for addressing cash flow issues. These efforts are intended to minimize the Company’s collections risk while maintaining relationships with the clients.
Note 7— Allowance for Doubtful Accounts
The allowance for doubtful accounts is established as losses are estimated to have occurred through a provision for bad debts charged to cost of services provided in the Company’s Consolidated Statements of Comprehensive Income. The allowance for doubtful accounts is evaluated based on the Company’s ongoing review of accounts and notes receivable and is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The Company has had varying collections experience with respect to its accounts and notes receivable. The Company has sometimes extended the period of payment for certain clients beyond contractual terms. Such clients include those who have terminated service agreements and slow payers experiencing financial difficulties. In order to provide for these collection problems and the general risk associated with the granting of credit terms, the Company recorded the following bad debt provisions (in an Allowance for Doubtful Accounts):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Bad debt provision | $ | 6,250 |
| | $ | 4,629 |
| | $ | 4,335 |
|
As a percentage of total revenues, these provisions represent approximately 0.3% for each of the years ended December 31, 2017, 2016 and 2015.
In making the Company’s credit evaluations, in addition to analyzing and anticipating, where possible, the specific cases described above, management considered the general collection risk associated with trends in the long-term care industry. The Company establishes credit limits, performs ongoing credit evaluations and monitors accounts to minimize the risk of loss. Despite the Company’s efforts to minimize credit risk exposure, clients could be adversely affected if future industry trends change in such a manner as to negatively impact their cash flows. If the Company’s clients experience a negative impact on their cash flows, it could have a material adverse effect on the Company’s results of operations and financial condition.
Impaired Notes Receivable
The Company evaluates its notes receivable for impairment quarterly and on an individual client basis. Notes receivable are generally evaluated for impairment when the respective clients are either in bankruptcy, are subject to collections activity or are slow payers that are experiencing financial difficulties. In the event that the evaluation results in a determination that a note receivable is impaired, it is valued at the present value of expected future cash flows or at the market value of related collateral. Summary schedules of impaired notes receivable, and the related reserve,share-based compensation expense for the years ended December 31, 2017, 20162023, 2022 and 20152021 are as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (in thousands) |
| Stock options | $ | 969 | | | $ | 1,253 | | | $ | 1,832 | |
| Restricted stock, restricted stock units and deferred stock units | 6,657 | | | 6,972 | | | 6,367 | |
| Performance stock units | 1,210 | | | 819 | | | 401 | |
| Employee Stock Purchase Plan | 149 | | | 170 | | | 227 | |
| Total pre-tax share-based compensation expense charged against income | $ | 8,985 | | | $ | 9,214 | | | $ | 8,827 | |
| | | | | |
| Total recognized tax deficiency related to share-based compensation | $ | (773) | | | $ | (783) | | | $ | (217) | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Impaired Notes Receivable |
| Year Ended December 31, | | Balance Beginning of Year | | Additions | | Deductions | | Balance End of Year | | Average Outstanding Balance |
| | | (in thousands) |
| 2017 | | $ | 5,685 |
| | $ | 1,169 |
| | $ | — |
| | $ | 6,854 |
| | $ | 6,270 |
|
| 2016 | | $ | 6,471 |
| | $ | — |
| | $ | 786 |
| | $ | 5,685 |
| | $ | 6,078 |
|
| 2015 | | $ | 10,208 |
| | $ | 395 |
| | $ | 4,132 |
| | $ | 6,471 |
| | $ | 8,340 |
|
|
| | | | | | | | | | | | | | | | |
| | | Reserve for Impaired Notes Receivable |
| Year Ended December 31, | | Balance Beginning of Year | | Additions | | Deductions | | Balance End of Year |
| | | (in thousands) |
| 2017 | | $ | 2,419 |
| | $ | 465 |
| | $ | — |
| | $ | 2,884 |
|
| 2016 | | $ | 2,139 |
| | $ | 280 |
| | $ | — |
| | $ | 2,419 |
|
| 2015 | | $ | 3,031 |
| | $ | 99 |
| | $ | 991 |
| | $ | 2,139 |
|
For impaired notes receivable, interest income is recognized on a cost recovery basis only. As a result, no interest income was recognized on impaired notes receivable. The Company follows an income recognition policy on all other notes receivable that do not recognize interest income until cash payments are received. This policy was established, recognizing the environment of the long-term care industry, and not because such notes receivable are necessarily impaired. The difference between income recognition on a full accrual basis and cash basis, for notes receivable that are not considered impaired, is not material.
Note 8 — Lease Commitments
The Company leases office facilities, equipment and vehicles under operating leases expiring on various dates through 2025. Certain office leases contain renewal options. The following is a schedule by calendar yeartable summarizes the components of future minimum lease payments under operating leases that have remaining terms asshare-based compensation expense included within the Consolidated Statements of December 31, 2017:
|
| | | | |
| Period/Year | | Operating Leases |
| | | (in thousands) |
| 2018 | | $ | 2,482 |
|
| 2019 | | 1,968 |
|
| 2020 | | 1,489 |
|
| 2021 | | 734 |
|
| 2022 | | 735 |
|
| Thereafter | | 1,710 |
|
| Total minimum lease payments | | $ | 9,118 |
|
Total expense for all operating leasesComprehensive Income for the years ended December 31, 2017, 20162023, 2022 and 2015 was as follows:2021:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Operating lease expense | $ | 3,833 |
| | $ | 2,615 |
| | $ | 2,003 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (in thousands) |
| Selling, general & administrative expense | $ | 8,942 | | | $ | 9,160 | | | $ | 8,767 | |
| Costs of services provided | 43 | | | 54 | | | 60 | |
| Total | $ | 8,985 | | | $ | 9,214 | | | $ | 8,827 | |
Note 9— Share-Based Compensation
A summary of stock-based compensation expense and related tax benefits for the years ended December 31, 2017, 2016 and 2015 is as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Stock options | $ | 3,740 |
| | $ | 3,193 |
| | $ | 2,781 |
|
| Restricted stock and restricted stock units | 1,205 |
| | 550 |
| | 252 |
|
| Employee Stock Purchase Plan | 1,040 |
| | 509 |
| | 508 |
|
Total pre-tax stock-based compensation expense charged against income (1) | $ | 5,985 |
| | $ | 4,252 |
| | $ | 3,541 |
|
| | | | | | |
| Total recognized tax benefit related to stock-based compensation | $ | 5,709 |
| | $ | 2,773 |
| | $ | 1,873 |
|
| |
(1)
| Stock-based compensation expense is recorded in the selling, general and administrative caption in the Consolidated Statements of Comprehensive Income. |
At December 31, 2017,2023 and 2022, the unrecognized compensation cost related to unvested stock options and awards was $11.4 million.$16.5 million and $15.8 million, respectively. The weighted average period over which these awards will vest iswas approximately 2.7 years.2.8 years as of both December 31, 2023 and December 31, 2022.
2012 EquityAmended 2020 Omnibus Incentive Plan
The Company’s 2012 EquityOn May 26, 2020, the Company adopted the 2020 Omnibus Incentive Plan (the “Plan”“2020 Plan”) after approval by the Company’s shareholders. On May 30, 2023, the Company increased the authorized shares under the 2020 Omnibus Incentive Plan (as amended, the “Amended 2020 Plan”) by 2,500,000 shares after approval by the Company’s shareholders at the 2023 Annual Meeting of Shareholders. The Amended 2020 Plan provides that current or prospective officers, employees, non-employee directors and advisors can receive share-based awards such as stock options, restrictedperformance stock units, restricted stock units and other stock awards. The Amended 2020 Plan seeks to promote the highest level of performance by providing an economic interest in the long-term successencourage profitability and growth of the Company.Company through short-term and long-term incentives that are consistent with the Company’s operating objectives.
As of December 31, 2017, 3.22023, there were 7.0 million shares of Common Stock werecommon stock reserved for issuance under the Amended 2020 Plan, including 0.8of which 3.2 million are available for future grant. The amount of shares available for future grant.issuance under the Amended 2020 Plan will increase when outstanding awards under the Company’s Second Amended and Restated 2012 Equity Incentive Plan (the “2012 Plan”) are subsequently forfeited, terminated, lapsed or satisfied thereunder in cash or property other than shares. No stock award will have a term in excess of ten10 years. All awards granted under the Plan become vested and exercisable ratably over a five year period on each yearly anniversary of the grant date.
The Nominating, Compensation and Stock Option Committee (the “NCSO”) of the Board of Directors is responsible for determining the individuals who will be granted stock awards, the number of stock awards each individual will receive and the terms of the grants in accordance with the Amended 2020 Plan.
Stock Options
A summary of stock options outstanding under the Amended 2020 Plan and the 2012 Plan as of December 31, 20172023, December 31, 2022 and changes during 2017 isthe year ended December 31, 2023 are as follows:
| | | | | | | | | | | |
| Stock Options Outstanding |
| Number of Shares | | Weighted Average Exercise Price |
| (in thousands) | | |
| December 31, 2022 | 2,375 | | | $ | 31.56 | |
| Granted | 207 | | | $ | 13.72 | |
| Exercised | — | | | $ | — | |
| Forfeited | — | | | $ | — | |
| Expired | (144) | | | $ | 24.99 | |
| December 31, 2023 | 2,438 | | | $ | 30.43 | |
|
| | | | | | |
| | Number of Shares | | Weighted Average Exercise Price |
| | (in thousands, except per share data) |
| December 31, 2016 | 2,615 |
| | $ | 24.61 |
|
| Granted | 544 |
| | $ | 39.38 |
|
| Exercised | (682 | ) | | $ | 18.95 |
|
| Forfeited | (100 | ) | | $ | 34.10 |
|
| Expired | (3 | ) | | $ | 23.49 |
|
| December 31, 2017 | 2,374 |
| | $ | 29.22 |
|
The weighted average grant-date fair value of stock options granted during the years ended 2017, 2016December 31, 2023, 2022 and 2015 were $8.52, $7.462021 was $6.53, $4.06 and $6.64$7.01 per common share, respectively. No stock options were exercised during the year ended December 31, 2023. The total intrinsic value of stock options exercised during the years ended 2017, 2016December 31, 2022 and 2015 were $19.5 million, $4.92021 was $0.1 million and $6.5$0.7 million, respectively. The total fair value of stock options vested during the years ended December 31, 2023, 2022 and 2021 were $1.3 million, $1.8 million and $2.1 million, respectively.
TheFor the year ended December 31, 2023 there was no tax benefitdeficiency realized from stock options exercised. For the years ended December 31, 2022 and 2021 the tax deficiency realized from stock options exercised during 2017 was $5.3 million.immaterial.
The fair value of the stock option awards granted during 2017, 2016in 2023, 2022 and 20152021 were estimated on the dates of grant using the Black-Scholes option valuation model andwith the following assumptions:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| Risk-free interest rate | 4.0 | % | | 1.5 | % | | 0.6 | % |
| Weighted average expected life | 6.9 years | | 6.7 years | | 6.6 years |
| Expected volatility | 39.5 | % | | 36.6 | % | | 34.7 | % |
| Dividend yield | — | % | | 4.6 | % | | 2.9 | % |
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Risk-free interest rate | 2.0 | % | | 2.0 | % | | 1.9 | % |
| Weighted average expected life | 5.8 years |
| | 5.8 years |
| | 5.8 years |
|
| Expected volatility | 25.1 | % | | 26.0 | % | | 27.2 | % |
| Dividend yield | 1.9 | % | | 2.0 | % | | 2.2 | % |
The following table summarizes other information about the stock options at December 31, 2017:2023:
| | | | | |
| December 31, 2023 |
| (amounts in thousands, except per share data) |
| Outstanding: | |
| Aggregate intrinsic value | $ | — | |
| Weighted average remaining contractual life | 4.5 years |
| Exercisable: | |
| Number of options | 1,702 | |
| Weighted average exercise price | $ | 34.72 | |
| Aggregate intrinsic value | $ | — | |
| Weighted average remaining contractual life | 2.6 years |
|
| | | |
| | December 31, 2017 |
| | (dollars in thousands, except per share data) |
| Outstanding: | |
| Aggregate intrinsic value | $ | 55,789 |
|
| Weighted average remaining contractual life | 6.5 years |
|
| Exercisable: | |
| Number of options | 954 |
|
| Weighted average exercise price | $ | 22.19 |
|
| Aggregate intrinsic value | $ | 29,134 |
|
| Weighted average remaining contractual life | 4.7 years |
|
Restricted Stock Units
A summaryThe fair value of theoutstanding restricted stock outstanding under the Plan as of December 31, 2017 and changes during 2017 are as follows:
|
| | | | | | |
| | Number of Restricted Shares | | Weighted Average Grant-Date Fair Value |
| | (in thousands, except per share data) |
| December 31, 2016 | 74 |
| | $ | 32.09 |
|
| Granted | — |
| | $ | — |
|
| Vested | (17 | ) | | $ | 31.41 |
|
| Forfeited | — |
| | $ | — |
|
| December 31, 2017 | 57 |
| | $ | 32.30 |
|
There were no grants of restricted stock during 2017. The weighted average grant-date fair values and total fair values of restricted stock vested during 2017, 2016 and 2015 are as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands, except per share data) |
| Weighted average grant-date fair value of restricted stock granted | $ | — |
| | $ | 34.14 |
| | $ | 30.30 |
|
| Total fair value of restricted stock vested | $ | 690 |
| | $ | 311 |
| | $ | 123 |
|
Fair value isunits was determined based on the market price of the shares on the date of grant. The weighted average remaining vesting period forDuring the unvested restricted stock is 2.5 years.
Restricted Stock Units
For the yearyears ended December 31, 2017,2023, 2022 and 2021, the Company granted 0.10.5 million, 0.4 million and 0.3 million restricted stock units with a weighted average grant date fair valuevalues of $40.16$13.72, $18.06 and $28.53 per unit. Fair value is determined based on the market price of the underlying shares on the date of grant. During 2016 and 2015, there were no grants of restricted stock units.unit, respectively.
A summary of the outstanding restricted stock units as of December 31, 20172023, December 31, 2022 and changes during 2017the year ended December 31, 2023 is as follows:
| | | | | | | | | | | |
| Restricted Stock Units |
| Number | | Weighted Average Grant Date Fair Value |
| (in thousands) | | |
| December 31, 2022 | 825 | | | $ | 24.37 | |
| Granted | 536 | | | $ | 13.72 | |
| Vested | (237) | | | $ | 27.82 | |
| Forfeited | (22) | | | $ | 18.76 | |
| December 31, 2023 | 1,102 | | | $ | 18.57 | |
|
| | | | | | |
| | Number of Restricted Units | | Weighted Average Grant Date Fair Value |
| | (in thousands, except per share data) |
| December 31, 2016 | — |
| | $ | — |
|
| Granted | 88 |
| | $ | 40.16 |
|
| Vested | — |
| | $ | — |
|
| Forfeited | — |
| | $ | — |
|
| December 31, 2017 | 88 |
| | $ | 40.16 |
|
The weighted average remaining vesting period for the unvested restricted stock units is 4.13.1 years.
The weighted average grant-date fair values and total fair values of restricted stock units vested during 2023, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| | (in thousands, except per share data) |
| Weighted average grant-date fair value of restricted stock units granted | | $ | 13.72 | | | $ | 18.06 | | | $ | 28.53 | |
| Total fair value of restricted stock units and restricted shares vested | | $ | 2,991 | | | $ | 3,307 | | | $ | 4,185 | |
Performance Stock Units
On February 24, 2023, the NCSO granted 80,000 Performance Stock Units (“PSUs”) to the Company’s executive officers. Such PSUs are contingent upon the achievement of certain total shareholder return (“TSR”) targets as compared to the TSR of the S&P 400 MidCap Index and the participant’s continued employment with the Company for the three year period ending December 31, 2025, the date at which such awards vest. The unrecognized share-based compensation cost of the TSR-based PSU awards at December 31, 2023 is $1.3 million and is expected to be recognized over a weighted-average period of 1.4 years.
A summary of the outstanding PSUs as of December 31, 2023, December 31, 2022 and changes during the year ended December 31, 2023 is as follows:
| | | | | | | | | | | |
| Performance Stock Units |
| Number | | Weighted Average Grant Date Fair Value |
| (in thousands) | | |
| December 31, 2022 | 95 | | | $ | 26.01 | |
| Granted | 80 | | | $ | 16.20 | |
| Vested | — | | | $ | — | |
| Forfeited | — | | | $ | — | |
| December 31, 2023 | 175 | | | $ | 21.52 | |
Deferred Stock Units
The Company grants Deferred Stock Units (“DSUs”) to the Company’s non-employee directors. Once vested, the recipient shall be entitled to receive a lump sum payment of a number of shares equal to the total number of DSUs issued to such recipient upon the first to occur of (i) the five year anniversary of the date of grant, (ii) the recipient’s death, disability or separation of service from the Board, or (iii) a change of control (as defined by the Amended 2020 Plan). Non-employee directors can also elect to receive their Board of Directors retainer in the form of DSUs in lieu of cash. DSUs issued in lieu of cash for retainers vest immediately. The number of DSUs granted to these directors is determined based on the stock price on the award date and approximates the cash value the directors would otherwise receive for their retainer. Two non-employee directors made an election in 2022 to receive DSUs in lieu of cash for their 2023 Board of Directors retainer.
On May 30, 2023, the NCSO granted an aggregate of 23,000 DSUs to the Company’s non-employee directors. Each DSU award granted vests in one year. The unrecognized share-based compensation cost of DSU awards at December 31, 2023 is $0.1 million and is expected to be recognized over a weighted-average period of 0.4 years.
Employee Stock Purchase Plan
The Company'sCompany’s Employee Stock Purchase Plan ("ESPP"(“ESPP”) is currently available through 20212026 to all eligible employees. All full-time and part-time employees who work an average of 20 hours per week and have completed two years of continuous service with the Company are eligible to participate. Annual offerings commence and terminate on the respective year’s first and last calendar day.
Under the ESPP, the Company is authorized to issue up to 4.1 million shares of Common Stockits common stock to its employees. Pursuant to such authorization, there are 2.31.8 million shares available for future grant at December 31, 2017 (after deducting the 2017 funding of the 54,000 shares delivered in 2018).2023. Under the terms of the ESPP, participants may contribute through payroll deductions up to $21,250 (85% of IRS limitation) of their compensation toward the purchase of the Company’s Common Stock.common stock. No employee may purchase Common Stockcommon stock which exceeds $25,000 in fair market value (determined on the option date) for each calendar year. The
per option price per share is equal to the lower of 85% of the fair market price on the first day of the offering period, or 85% of the fair market price on the last day of the offering period.
The following table summarizes information about the Company’s ESPP annual offerings for the years ended December 31, 2017, 20162023, 2022 and 2015:2021:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (in thousands, except per share data) |
| Common shares purchased | 95 | | | 95 | | | 85 | |
| Per common share purchase price | $ | 8.81 | | | $ | 10.20 | | | $ | 15.12 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands, except per share data) |
| Common shares purchased | 54 |
| | 53 |
| | 59 |
|
| Per common share purchase price | $ | 33.29 |
| | $ | 29.64 |
| | $ | 26.29 |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 |
| Risk-free interest rate | 4.8% | | 0.4% |
| Weighted average expected life (years) | 1.0 | | 1.0 |
| Expected volatility | 42.9% | | 36.9% |
| Dividend yield | 7.1% | | 4.7% |
Deferred Compensation Plan
The Company offers a Supplemental Executive Retirement Plan (“SERP”) for executives and certain key executives and employees. The SERP is not qualified under Section 401 of the Internal Revenue Code. The SERP allows participants to defer up to 25% of their earned income on a pre-tax basis and as of the last day of each plan year, each participant will be credited with a 25% match of up to 15% of their deferralearnings deferred in the form of Company Common Stockthe Company’s common stock based on the then-current market value. SERP participants fully vest in the Company’s matching contribution three years from the first day of the initial year of participation. The income deferred and the matching contributions are unsecured and subject to the claims of the Company’s general creditors.
Under the SERP, the Company is authorized to issue up to 1.0 million shares of Common Stockits common stock to its employees. Pursuant to such authorization, there are 0.4the Company has 0.2 million shares available for future grant at December 31, 2017 (after deducting the 2017 funding of 9,000 shares delivered in 2018).2023. At the time of issuance, such shares wereare accounted for at cost as treasury stock. At December 31, 2017,2023, approximately 0.3 million of such shares granted under the SERP are vested and remain in the respective active participants’ accounts with the trustee.
The following table summarizes information about the SERP forduring the plan years ended December 31, 2017, 20162023, 2022 and 2015:2021:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| (in thousands) |
SERP expense 1 | $ | 533 | | | $ | 486 | | | $ | 531 | |
Treasury shares issued to fund SERP expense2 | 50 | | | 40 | | | 30 | |
Year end SERP trust account balance3 | $ | 42,313 | | | $ | 35,111 | | | $ | 59,086 | |
| Unrealized gain (loss) recorded in SERP liability account | $ | 6,684 | | | $ | (9,178) | | | $ | 6,676 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
SERP expense (1) | $ | 503 |
| | $ | 511 |
| | $ | 538 |
|
Treasury shares issued to fund SERP expense (2) | 9 |
| | 13 |
| | 15 |
|
SERP trust account balance at December 31 (3) | $ | 42,467 |
| | $ | 34,599 |
| | $ | 37,765 |
|
| Unrealized gain (loss) recorded in SERP liability account | $ | 4,534 |
| | $ | 1,495 |
| | $ | (62 | ) |
2.Shares related to the SERP match for each year are funded at the beginning of the subsequent year.
| |
(1)
| Both the SERP match and the deferrals are included in the selling, general and administrative caption in the Consolidated Statements of Comprehensive Income. |
| |
(2)
| Shares related to the SERP match for each year are funded at the beginning of the subsequent year. |
| |
(3)
| SERP trust account investments are recorded at their fair value which is based on quoted market prices. Differences between such amounts in the table above and the deferred compensation funding asset reported on the Consolidated Balance Sheets represent the value of Company Common Stock3.SERP trust account investments are recorded at their fair value which is based on quoted market prices. Differences between such amounts in the table above and the deferred compensation funding asset reported on the Company’s Consolidated Balance Sheets represent the value of Company common stock held in the Plan participants’ trust accounts and reported by the Company as treasury stock in the Consolidated Balance Sheets. |
Note 10— Other Employee Benefit Plans
Retirement Savings Plan
Since October 1, 1999, the Company has had a retirement savings plan for eligible employees (the “RSP”) under Section 401(k) ofas treasury stock in the Internal Revenue Code. The RSP allows eligible employees to contribute up to 15% of their eligible compensation on a pre-tax basis. There is no match by the Company.Company’s Consolidated Balance Sheets.
Note 11— Dividends
The Company has paid regular quarterly cash dividends since the second quarter of 2003. During 2017, the Company paid regular quarterly cash dividends totaling $55.2 million as detailed below:
|
| | | | | | | | | | | | | | | |
| | Paid During the Quarter Ended |
| | March 31, 2017 | | June 30, 2017 | | September 30, 2017 | | December 31, 2017 |
| | (in thousands, except per share amounts) |
| Cash dividends paid per common share | $ | 0.18625 |
| | $ | 0.18750 |
| | $ | 0.18875 |
| | $ | 0.19000 |
|
| Total cash dividends paid | $ | 13,624 |
| | $ | 13,750 |
| | $ | 13,883 |
| | $ | 13,987 |
|
| Record date | February 17, 2017 |
| | May 19, 2017 |
| | August 18, 2017 |
| | November 17, 2017 |
|
| Payment date | March 24, 2017 |
| | June 23, 2017 |
| | September 22, 2017 |
| | December 22, 2017 |
|
Additionally, on January 30, 2018, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.19125 per common share, which will be paid on March 23, 2018 to shareholders of record as of the close of business on February 16, 2018.
Cash dividends declared on the Company’s outstanding weighted average number of basic common shares for the years ended December 31, 2017, 2016 and 2015 were as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Cash dividends declared per common share | $ | 0.75750 |
| | $ | 0.73750 |
| | $ | 0.71750 |
|
The Company’s Board of Directors review the dividend policy on a quarterly basis. Although there can be no assurance that the Company will continue to pay dividends or the amount of the dividends, the Company expects to continue to pay a regular quarterly cash dividend. In connection with the establishment of the Company’s dividend policy, the Company adopted a Dividend Reinvestment Plan in 2003.
Note 12—12 — Income Taxes
The following table summarizes the provision for income taxes:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (amounts in thousands) |
| Current: | | | | | |
| Federal | $ | 13,728 | | | $ | 3,022 | | | $ | 9,120 | |
| State | 5,762 | | | 2,381 | | | 3,766 | |
| $ | 19,490 | | | $ | 5,403 | | | $ | 12,886 | |
| Deferred: | | | | | |
| Federal | $ | (4,183) | | | $ | 4,163 | | | $ | 3,127 | |
| State | (637) | | | 744 | | | 956 | |
| $ | (4,820) | | | $ | 4,907 | | | $ | 4,083 | |
| | | | | |
| Tax provision | $ | 14,670 | | | $ | 10,310 | | | $ | 16,969 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Current: | | | | | |
| Federal | $ | 35,673 |
| | $ | 33,032 |
| | $ | 11,917 |
|
| State | 7,179 |
| | 6,958 |
| | 2,173 |
|
| | 42,852 |
| | 39,990 |
| | 14,090 |
|
| Deferred: | | | | | |
| Federal | 2,924 |
| | 2,163 |
| | 13,646 |
|
| State | (1,037 | ) | | 838 |
| | 4,004 |
|
| | 1,887 |
| | 3,001 |
| | 17,650 |
|
| Tax provision | $ | 44,739 |
| | $ | 42,991 |
| | $ | 31,740 |
|
Deferred income taxes are recorded using the asset and liability method. Deferred tax assets and liabilities are determined based on differences between the financial reporting and income tax basis of assets and liabilities.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law, enacting significant changes to corporate tax rates, as well as business-related exclusions, deductions and credits. The primary impact to the Company was the decrease in the U.S. federal corporate income tax rate from 35% to 21%. Accordingly, during the fourth quarter 2017, the Company recognized the effects of the changes in the tax law and rates on its deferred tax balances. The net result of the remeasurement was an approximately $4.5 million decrease to the Company’s net deferred tax assets balance and a corresponding increase to the Company’s provision for income taxes.
Significant components of the Company’s federal and state deferred tax asset and liability balances arewere as follows:
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 |
| (in thousands) |
| Deferred tax assets: | | | |
| Allowance for doubtful accounts | $ | 22,788 | | | $ | 18,139 | |
| Deferred compensation | 9,048 | | | 8,686 | |
| Accrued insurance claims | 5,580 | | | 5,609 | |
| Non-deductible reserves | 169 | | | 256 | |
| Lease liabilities | 4,765 | | | 5,709 | |
| Share based compensation | 2,988 | | | 2,142 | |
| Other | 2,418 | | | 2,848 | |
| $ | 47,756 | | | $ | 43,389 | |
| Deferred tax liabilities: | | | |
| Expensing of housekeeping supplies | $ | (2,351) | | | $ | (2,510) | |
| Amortization of goodwill and intangibles | (3,000) | | | (2,389) | |
| Depreciation of property and equipment | (1,688) | | | (1,769) | |
| Lease right-of-use assets | (4,571) | | | (5,482) | |
| Other | (920) | | | (399) | |
| $ | (12,530) | | | $ | (12,549) | |
| | | |
| Net deferred tax assets | $ | 35,226 | | | $ | 30,840 | |
|
| | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 |
| | (in thousands) |
| Deferred tax assets: | | | |
| Allowance for doubtful accounts | $ | 3,109 |
| | $ | 2,672 |
|
| Deferred compensation | 6,601 |
| | 8,532 |
|
| Accrued insurance claims | 3,665 |
| | 5,862 |
|
| Non-deductible reserves | 567 |
| | 1,257 |
|
| Amortization of intangibles | 162 |
| | 624 |
|
| Other | 662 |
| | 858 |
|
| | 14,766 |
| | 19,805 |
|
| Deferred tax liabilities: | | | |
| Expensing of housekeeping supplies | (4,678 | ) | | (6,752 | ) |
| Depreciation of property and equipment | (1,745 | ) | | (2,568 | ) |
| Other | (845 | ) | | (663 | ) |
| | (7,268 | ) | | (9,983 | ) |
| | | | |
| Net deferred tax assets | $ | 7,498 |
| | $ | 9,822 |
|
Realization of the Company’s deferred tax assets is dependent upon future earnings in specific tax jurisdictions, the timing and amount of which are uncertain. Management assesses the Company’s income tax positions and records tax benefits for all years subject to examination based upon an evaluation of the facts, circumstances and information available at the reporting dates, which include historical operating results and expectations of future earnings. As such, management believes it is more likely than not that the deferred tax assets recorded will be realized to reduce future income taxes and therefore no valuation allowances are necessary.
The table below provides a reconciliation between the tax expense computed by applying the statutory federal income tax rate to income before income taxes and the provision for income taxes:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| (in thousands) |
| Income tax expense computed at statutory rate | $ | 11,182 | | | $ | 9,356 | | | $ | 13,758 | |
| Increases (decreases) resulting from: | | | | | |
| State income taxes, net of federal tax benefit | 4,153 | | | 2,594 | | | 4,165 | |
| Federal jobs credits | (2,014) | | | (2,571) | | | (3,177) | |
| Tax exempt interest | (348) | | | (308) | | | (324) | |
| Share-based compensation | 1,610 | | | 1,250 | | | 1,072 | |
| Fines and penalties | 55 | | | 4 | | | 1,294 | |
| Other, net | 32 | | | (15) | | | 181 | |
| Income tax expense | $ | 14,670 | | | $ | 10,310 | | | $ | 16,969 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Income tax expense computed at statutory rate | $ | 46,538 |
| | $ | 42,136 |
| | $ | 31,418 |
|
| Increases (decreases) resulting from: | | | | | |
| State income taxes, net of federal tax benefit | 3,661 |
| | 5,064 |
| | 4,015 |
|
| Federal jobs credits | (4,193 | ) | | (4,550 | ) | | (3,900 | ) |
| Tax exempt interest | (568 | ) | | (457 | ) | | (132 | ) |
| Other, net | (699 | ) | | 798 |
| | 339 |
|
| Income tax expense | $ | 44,739 |
| | $ | 42,991 |
| | $ | 31,740 |
|
The Company performs an evaluation each period of its tax positions taken and expected to be taken in tax returns. The evaluation is performed on positions relating to tax years that remain subject to examination by major tax jurisdictions, the earliest of which is the tax year ended December 31, 2012.2018. Based on the evaluation, the Company concluded that there are no significant uncertain
tax positions requiring recognition in the Company’s financial statements. Therefore, the table reporting on the change in the liability for unrecognized tax benefits during the years ended December 31, 20172023 and 20162022 is omitted as there is no activity to report in such account for the years ended December 31, 20172023 or 2016, and there was no balance of unrecognized tax benefits at the beginning of 2016.2022.
The Company may from time to time be assessed interest or penalties by taxing jurisdictions, although any such assessments historically have been minimal and immaterial to its financial results. When the Company has received an assessment for interest and/or penalties, it will be classified in the financial statements as selling, general and administrative expense. In addition, any interest or penalties relating to recognized uncertain tax positions would also be recorded in selling, general and administrative expense.
Note 13—Related Party Transactions
A director is a member of a law firm which was retained by the Company. During the years ended December 31, 2017, 2016 and 2015, fees paid by the Company to such firm did not exceed $120,000 in any period. Additionally, such fees did not exceed, in any period, 5% of such firm’s revenues or the Company’s revenues.
Note 14—13 — Segment Information
Reportable Operating Segments
The Company manages and evaluates its operations in two reportable segments: Housekeeping (housekeeping, laundry, linen and other services) and Dietary (dietary department services). Although both segments serve the same clienta similar customer base and share many operational similarities, they are managed separately due to distinct differences in the type of services provided, as well as the specialized expertise required of the professional management personnel responsible for delivering each segment’s services. Such services are rendered pursuant to discrete service agreements,contracts, specific to each reportable segment.
The Company’s accounting policies for the segments are generally the same as described in the Company’s significant accounting policies. Differences between the reportable segments’ operating results and other disclosed data and the information in the Consolidated Financial Statements relate primarily to corporate level transactions and recording of transactions at the reportable segment level using other than generally accepted accounting principles. There are certain inventories and supplies that are primarily expensed when incurred within the operating segments, while they are capitalized in the Consolidated Financial Statements.consolidated financial statements. In addition, most corporate expenses such as corporate salary and benefit costs, certain legal costs, bad debt expense, information technology costs, depreciation, amortization of finite-lived intangible assets, share based compensation costs and other corporate-specific costs, are not fully allocated to the operating segments. There are also allocations for workers’ compensation and general liability expense within the operating segments that differ from the actual expense recorded by the Company under U.S. GAAP. Segment amounts disclosed are prior to elimination entries made in consolidation.
All revenues and net income are earned in the United States.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| | (in thousands) |
Revenues1 | | | | | | |
| Housekeeping | | $ | 766,651 | | | $ | 795,687 | | | $ | 821,329 | |
| Dietary | | 904,738 | | | 894,489 | | | 820,630 | |
| Total | | $ | 1,671,389 | | | $ | 1,690,176 | | | $ | 1,641,959 | |
| | | | | | |
| Income before income taxes | | | | | | |
| Housekeeping | | $ | 61,311 | | | $ | 73,096 | | | $ | 79,380 | |
| Dietary | | 43,547 | | | 29,065 | | | 45,758 | |
Corporate2 | | (51,802) | | | (57,608) | | | (59,626) | |
| Total | | $ | 53,056 | | | $ | 44,553 | | | $ | 65,512 | |
| | | | | | |
| Depreciation and amortization | | | | | | |
| Housekeeping | | $ | 4,380 | | | $ | 5,491 | | | $ | 5,399 | |
| Dietary | | 3,001 | | | 3,075 | | | 2,611 | |
| Corporate | | 6,963 | | | 6,750 | | | 6,657 | |
| Consolidated | | $ | 14,344 | | | $ | 15,316 | | | $ | 14,667 | |
| | | | | | |
| Total assets | | | | | | |
| Housekeeping | | $ | 253,729 | | | $ | 250,444 | | | $ | 225,531 | |
| Dietary | | 291,550 | | | 263,126 | | | 221,911 | |
Corporate3 | | 245,373 | | | 207,266 | | | 332,447 | |
| Consolidated | | $ | 790,652 | | | $ | 720,836 | | | $ | 779,889 | |
| | | | | | |
| Capital expenditures | | | | | | |
| Housekeeping | | $ | 4,684 | | | $ | 4,412 | | | $ | 5,005 | |
| Dietary | | 494 | | | 499 | | | 451 | |
| Corporate | | 228 | | | 299 | | | 231 | |
| Consolidated | | $ | 5,406 | | | $ | 5,210 | | | $ | 5,687 | |
1.For the years ended December 31, 2023 and 2022, both the Housekeeping and Dietary segments earned revenue from several significant customers, although Genesis was the only customer to contribute more than 10% of consolidated revenue. For the years ended December 31, 2023, 2022 and 2021, Genesis accounted for $181.4 million or 10.9%, $169.1 million or 10.0% and $177.1 million or 10.8% of the Company’s consolidated revenues, respectively.
2.Primarily represents corporate office costs and related overhead, recording of certain inventories and supplies and workers compensation costs at the reportable segment level which use accounting methods that differ from those used at the corporate level, as well as consolidated subsidiaries’ operating expenses that are not allocated to the reportable segments, net of investment and other income and interest expense.
3.Primarily consists of cash and cash equivalents, marketable securities, deferred income taxes and other current and noncurrent assets.
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| | | (in thousands) |
Revenues(1) | | | | | | |
| Housekeeping services | | $ | 979,610 |
| | $ | 957,148 |
| | $ | 909,709 |
|
| Dietary services | | 886,521 |
| | 605,514 |
| | 527,140 |
|
| Corporate and eliminations | | — |
| | — |
| | — |
|
| Consolidated | | $ | 1,866,131 |
| | $ | 1,562,662 |
| | $ | 1,436,849 |
|
| | | | | | | |
| Income before income taxes | | | | | | |
| Housekeeping services | | $ | 95,505 |
| | $ | 90,756 |
| | $ | 84,471 |
|
| Dietary services | | 46,008 |
| | 34,641 |
| | 31,612 |
|
Corporate and eliminations(2) | | (8,548 | ) | | (5,010 | ) | | (26,319 | ) |
| Consolidated | | $ | 132,965 |
| | $ | 120,387 |
| | $ | 89,764 |
|
| | | | | | | |
| Depreciation and amortization | | | | | | |
| Housekeeping services | | $ | 6,547 |
| | $ | 6,535 |
| | $ | 6,488 |
|
| Dietary services | | 1,813 |
| | 439 |
| | 685 |
|
| Corporate and eliminations | | 526 |
| | 522 |
| | 487 |
|
| Consolidated | | $ | 8,886 |
| | $ | 7,496 |
| | $ | 7,660 |
|
| | | | | | | |
| Total assets | | | | | | |
| Housekeeping services | | $ | 304,303 |
| | $ | 266,464 |
| | $ | 228,116 |
|
| Dietary services | | 242,874 |
| | 127,187 |
| | 104,797 |
|
Corporate and eliminations(3) | | 128,826 |
| | 134,795 |
| | 148,036 |
|
| Consolidated | | $ | 676,003 |
| | $ | 528,446 |
| | $ | 480,949 |
|
| | | | | | | |
| Capital expenditures | | | | | | |
| Housekeeping services | | $ | 4,287 |
| | $ | 4,612 |
| | $ | 3,586 |
|
| Dietary services | | 663 |
| | 410 |
| | 336 |
|
| Corporate and eliminations | | 447 |
| | 420 |
| | 1,076 |
|
| Consolidated | | $ | 5,397 |
| | $ | 5,442 |
| | $ | 4,998 |
|
| |
(1)
| For the year ended December 31, 2017, the Company earned revenue from one customer that amounted to more than 10% of total consolidated revenues. Housekeeping services and Dietary services both earned revenue from the customer, the total of which amounted to $327.5 million. |
| |
(2)
| Represents primarily corporate office cost and related overhead, recording of certain inventories and supplies and workers compensation costs at the reportable segment level which use accounting methods that differ from those used at the corporate level, as well as consolidated subsidiaries’ operating expenses that are not allocated to the reportable segments, net of investment and interest income. |
| |
(3)
| Primarily consists of cash and cash equivalents, marketable securities, deferred income taxes and other current and noncurrent assets. |
Note 15—14 — Earnings Per Common Share
Basic and diluted earnings per common share are computed by dividing net income by the weighted-average number of basic and diluted common shares outstanding, respectively. The weighted-average number of diluted common shares includes the impact of dilutive securities, including outstanding stock options and unvested restricted stock and restricted stock units. The table below reconciles the weighted-average basic and diluted common shares outstanding for 2017, 20162023, 2022 and 2015:2021:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| |
| Numerator for basic and diluted earnings per share: | | | | | |
| Net income | $ | 38,386 | | | $ | 34,243 | | | $ | 48,543 | |
| | | | | |
| Denominator: | | | | | |
| Weighted average number of common shares outstanding - basic | 74,288 | | | 74,336 | | | 74,816 | |
Effect of dilutive securities1 | 52 | | | 15 | | | 146 | |
| Weighted average number of common shares outstanding - diluted | 74,340 | | | 74,351 | | | 74,962 | |
| | | | | |
| Basic earnings per share: | $ | 0.52 | | | $ | 0.46 | | | $ | 0.65 | |
| | | | | |
| Diluted earnings per share: | $ | 0.52 | | | $ | 0.46 | | | $ | 0.65 | |
|
| | | | | | | | |
| | Year Ended December 31, 2017 |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Weighted average number of common shares outstanding - basic | 73,355 |
| | 72,754 |
| | 71,826 |
|
Effect of dilutive securities (1) | 993 |
| | 720 |
| | 686 |
|
| Weighted average number of common shares outstanding - diluted | 74,348 |
| | 73,474 |
| | 72,512 |
|
(1)1.Certain outstanding stock optionequity awards are anti-dilutive and therefore were therefore excluded from the calculation of the weighted averageweighted-average number of diluted common shares outstanding. For the year ended December 31, 2017, options to purchase less than a thousand shares, having a weighted average exercise price of $39.38,
Anti-dilutive outstanding equity awards under share-based compensation plans were excluded from the computation. For the years ended December 2016 and 2015, the computation excluded options to purchase 0.5 million and 0.9 million shares, having weighted average exercise prices of $34.14 and $29.34, respectively.as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (in thousands) |
| Anti-dilutive equity awards | 3,228 | | | 3,203 | | | 1,980 | |
Note 16—Contractual Obligations and15 — Other Contingencies
Line of Credit
As ofAt December 31, 2017,2023, the Company had a $300 million bank line of credit on which to draw for general corporate purposes. Amounts drawn under the line of credit are payable upon demand and generally bear interest at LIBORa floating rate, based on the Company’s leverage ratio, and starting at Term Secured Overnight Financing Rate (“SOFR”) plus 75165 basis points (or if LIBOR becomes unavailable, the higherpoints. As of the Prime Rate or the Overnight Bank Funding Rate plus 50 basis points). At December 31, 2017,2023 and 2022, there were $35.4$25.0 million inof borrowings under the line of credit. The line of credit requires the Company to satisfy onetwo financial covenant,covenants, with which the Company is in compliance as of December 31, 2017 and expects to remain in compliance.2023. The line of credit expires on December 18, 2018.November 22, 2027. The Company’s line of credit was amended on November 22, 2022 to, among other things, provide for a five-year unsecured revolving loan facility in the aggregate amount of $300 million with, at the Company’s option, the ability to increase the revolving loan commitments to an aggregate amount not to exceed $500 million and to change the benchmark rate from the London Interbank Offered Rate to SOFR.
At December 31, 2017,2023, the Company also had outstanding $77.6$85.9 million in irrevocable standby letters of credit, which relate to payment obligations under the Company'sCompany’s insurance programs. The letters of credit expire on January 2, 2019. In connection with the issuance of the letters of credit, the amount available under the line of credit was further reduced by $77.6$85.9 million to $187.0$189.1 million at December 31, 2017. The2023. On December 29, 2023, January 2, 2024 and January 3, 2024, the letters of credit were decreased to $65.9 million on January 2, 2018.renewed, and they all expire in the first quarter of 2025.
Tax Jurisdictions and Matters
The Company provides services throughout the continental United States and is subject to numerous state and local taxing jurisdictions. In the ordinary course of business, a jurisdiction may contest the Company’s reporting positions with respect to the application of its tax code to the Company’s services, which could result in additional tax liabilities.
The Company has tax matters with various taxing authorities. Because of the uncertainties related to both the probable outcomes and amount of probable assessments due, the Company is unable to make a reasonable estimate of a liability. The Company does not expect the resolution of any of these matters, taken individually or in the aggregate, to have a material adverse effect on the consolidated financial position or results of operations based on the Company’s best estimate of the outcomes of such matters.
Legal Proceedingsand Other Contingencies
The Company is subjectinvolved in litigation and other matters incidental to various claims and legal actionsthe conduct of its business, the results of which, in the ordinary courseopinion of business. Some of these matters include payroll and employee-related matters and examinations by governmental agencies. Asmanagement, are not likely to be material to the Company becomes aware of such claims and legal actions, the Company records accruals for any exposures that are probable and estimable. If adverse outcomes of such claims and legal actions are reasonably possible, Management assesses materiality and provides financial disclosure, as appropriate. The Company believes it is not a party to, nor are any of its properties the subject of, any pending legal proceeding or governmental examination that would have a material adverse effect on the Company’s consolidatedCompany's financial condition, results of operations or liquidity.cash flows.
Government Regulations
The Company’s clientscustomers are concentrated in the healthcare industry and are primarily providers of long-term care. The revenues of many of the Company’s clientscustomers are highly reliant on Medicare, Medicaid and third party payors’ reimbursement funding rates. New legislation or additional changes in existing regulations could directly impact the governmental reimbursement programs in which the clientscustomers participate. The full effect of any such programs would not be realized until these laws are fully implemented and government agencies issue applicable regulations or guidance.
Note 17—16 — Other Employee Benefit Plans
Retirement Savings Plan
Since October 1, 1999, the Company has had a retirement savings plan for eligible employees (the “RSP”) under Section 401(k) of the Internal Revenue Code. The RSP allows eligible employees to contribute up to 15% of their eligible compensation on a pre-tax basis.
Note 17 — Related Party Transactions
For the years ended December 31, 2023, 2022 and 2021, the Company did not have any material related party transactions.
Note 18 — Accrued Insurance Claims
The Company currently has a Paid Loss Retrospective Insurance Plan for general liability, and workers’ compensation insurance and other self-insurance programs, which comprisecomprised approximately 30.7%25.3% and 29.3% of the Company’s liabilities at December 31, 2017.2023 and 2022, respectively. Under the Company’s insurance plans, for general liability and workers’ compensation, predetermined loss limits are arranged with the Company’s insurance company to limit both per occurrence cash outlay and annual insurance plan cost. The Company’s accounting for this plan utilizes current valuations from a third partythird-party actuary, which include assumptions based on data such as historical claims, pay-out experience, demographic factors, industry trends, severity factors and other actuarial calculations. In the event that the Company’s claims experience and/or industry trends result in an unfavorable change in the assumptions or outcomes, it would have an adverse effect on the Company’s results of operations and financial condition.
For general liability, and workers’ compensation and other self-insurance programs, the Company records both a reserve for the estimated future cost of claims and related expenses that have been reported but not settled, as well as an estimate of claims incurred but not reported. SuchGeneral liability and workers’ compensation reserves for claims incurred but not reported are developed by a third party actuary through review of the Company’s historical data and open claims.
In 2023, our self-insurance liabilities decreased due to a favorable $12.5 million adjustment after considering our updated actuarial estimates for projected incurred losses on past claims. Such estimates declined in 2023 due to favorable claim experience and loss mitigation efforts.
Note 18—19 — Treasury Stock
On February 14, 2023, our Board of Directors authorized the repurchase of up to 7.5 million outstanding shares of common stock (the “Repurchase Plan”). Pursuant to the Repurchase Plan, the Company purchased 1.0 million shares of the Company’s common stock during the year ended December 31, 2023 for a total cost of $11.1 million inclusive of transaction costs. For the year ended December 31, 2022, the number of shares and value of shares repurchased were immaterial.
Note 20 — Subsequent Events
The Company evaluated all subsequent events through the filing date of this Annual Report on Form 10-K. There were no events or transactions occurring during this subsequent reporting period which require recognition or additional disclosure in these financial statements.
Note 19—Selected Quarterly Financial Data (Unaudited)
The following tables summarize the unaudited quarterly financial data for the last two fiscal years.
|
| | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| | (in thousands, except per share amounts) |
| 2017 | | | | | | | |
| Revenues | $ | 404,490 |
| | $ | 470,876 |
| | $ | 491,355 |
| | $ | 499,410 |
|
| Operating costs and expenses | $ | 373,780 |
| | $ | 439,313 |
| | $ | 459,864 |
| | $ | 466,285 |
|
| Income before income taxes | $ | 32,279 |
| | $ | 33,078 |
| | $ | 32,930 |
| | $ | 34,678 |
|
| Net income | $ | 22,017 |
| | $ | 22,551 |
| | $ | 23,472 |
| | $ | 20,186 |
|
| Basic earnings per common share | $ | 0.30 |
| | $ | 0.31 |
| | $ | 0.32 |
| | $ | 0.27 |
|
| Diluted earnings per common share | $ | 0.30 |
| | $ | 0.30 |
| | $ | 0.31 |
| | $ | 0.27 |
|
| Cash dividends declared per common share | $ | 0.18750 |
| | $ | 0.18875 |
| | $ | 0.19000 |
| | $ | 0.19125 |
|
| 2016 | | | | | | | |
| Revenues | $ | 384,807 |
| | $ | 386,556 |
| | $ | 392,734 |
| | $ | 398,565 |
|
| Operating costs and expenses | $ | 355,390 |
| | $ | 357,875 |
| | $ | 363,522 |
| | $ | 368,122 |
|
| Income before income taxes | $ | 29,604 |
| | $ | 29,683 |
| | $ | 30,571 |
| | $ | 30,529 |
|
| Net income | $ | 18,626 |
| | $ | 18,760 |
| | $ | 19,711 |
| | $ | 20,299 |
|
| Basic earnings per common share | $ | 0.26 |
| | $ | 0.26 |
| | $ | 0.27 |
| | $ | 0.28 |
|
| Diluted earnings per common share | $ | 0.26 |
| | $ | 0.26 |
| | $ | 0.27 |
| | $ | 0.28 |
|
| Cash dividends declared per common share | $ | 0.18250 |
| | $ | 0.18375 |
| | $ | 0.18500 |
| | $ | 0.18625 |
|
Item 9. Changes in and Disagreements withAccountants on Accounting and FinancialDisclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
In accordance with Securitiesthe Exchange Act Rules 13a-15 and 15a-15, the Company carried out an evaluation, under the supervision and with the participation of management, including the Company’s Chief Executive Officer (“CEO”) and Chief FinancialPrincipal Accounting Officer (“PAO”), of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive OfficerCEO and Chief Financial OfficerPAO concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures were not effective as of December 31, 2017.
Design and Evaluation of Internal Control Over Financial Reporting
Pursuant2023 due to Section 404 ofa material weakness in the Sarbanes-Oxley Act of 2002, the Company included a report of management’s assessment of the design and effectiveness of the Company’sCompany's internal controlscontrol over financial reporting as partdisclosed below.
Notwithstanding the conclusion by our CEO and PAO that our disclosure controls and procedures as of December 31, 2023 were not effective, and notwithstanding the material weakness in our internal control over financial reporting described below, management believes that the consolidated financial statements and related financial information included in this Annual Report on Form 10-K fairly present in all material respects our financial condition, results of operations and cash flows as of the dates presented, and for the fiscalperiods ended on such dates, in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Management’s Report on Internal Control Over FinancialReporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of the Company’s management, including the Company’s principal executive and principal financial officers, management conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control - Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, the Company’s management concluded that our internal control over financial reporting was not effective as of December 31, 2023.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that a reasonable possibility exists that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.
In the course of preparing the Company’s consolidated financial statements as of and for the year ended December 31, 2017. 2023, management identified a material weakness related to accrued payroll liabilities from employee vested vacation. Our controls over accrued payroll liabilities in respect to accrued vacation were not sufficiently designed to consider all accounting and disclosure ramifications of such accrued payroll liabilities. This material weakness resulted in immaterial misstatements in our 2022 and 2021 financial statements related to the accounting for accrued vacation which were corrected prior to issuance of the Company’s 2023 financial statements. Furthermore, there is a reasonable possibility that material misstatements to the Company’s future annual or interim financial statements will not be prevented or detected in a timely basis as a result of the identified material weakness.
Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Plan to Remediate Material Weakness
The Company is currently in the process of remediating the material weakness and has taken and continues to take steps that address the underlying causes of the material weakness including improving controls over the identification and estimation of payroll-related accruals in respect to accrued vacation. The Company has instituted enhanced controls including review processes and reconciliations related to the vacation accrual. The Company intends to remediate these deficiencies as soon as possible and believes these actions will be sufficient to remediate the identified material weaknesses and strengthen the Company's internal control over financial reporting; however, there can be no guarantee that such remediation will be sufficient. The Company will continue to monitor the effectiveness of its controls and will make any further changes management determines appropriate.
Audit Report on internal Controls Over Financial Reporting of the Registered Public Accounting Firm
Grant Thornton LLP, the Company’s independent registered public accounting firm alsohas audited the Company’s internal control overconsolidated financial reporting. Management’s report and the independent registered public accounting firm’s audit report arestatements included in this Annual Report on Form 10-K within Part II, Item 8 underand, as part of their audit, has issued their report, included herein, on the captions entitled “Management’s Report on Internal Control Over Financial Reporting” and “Reporteffectiveness of Independent Registered Public Accounting Firm”.the Company’s internal control over financial reporting as of December 31, 2023.
Changes in Internal Control over Financial Reporting
ThereOther than the material weaknesses described above, there were no changes in the Company’s internal control over financial reporting that occurred during the period covered by this Annual Report on Form 10-K that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Inherent Limitation on the Effectiveness of Internal Control over Financial Reporting and Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Principal Accounting Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected or preventable.
Item 9B. Other Information.
During the three months ended December 31, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934, as amended), adopted, terminated or modified a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K of the Securities Act of 1933, as amended).
On February 13, 2024, the Board of Directors of the Company approved amendments to the Second Amended and Restated By-Laws of the Company (as amended the “Third Amended and Restated By-Laws”), effective immediately. The amendments contained in the Third Amended and Restated By-Laws, among other things:
•address the universal proxy rules adopted by the SEC, by providing that no person may solicit proxies in support of a director nominee other than the Board of Directors’ nominees unless such person has, or is part of a group that has, complied with Rule 14a-19 under the Securities Exchange Act of 1934, as amended (such rule, “Rule 14a-19”), including applicable notice and solicitation requirements;
•require a shareholder that solicits proxies pursuant to Rule 14a-19 and the Third Amended and Restated Bylaws to provide evidence that it has met the requirements of Rule 14a-19; and
•requires director nominees to provide certain additional information, including but not limited to written representations that such nominee if elected will serve as a director and comply with Company policies; and
•provides that if a shareholder does not comply with Rule 14a-19, the Company will disregard proxies and votes for such shareholder’s nominees.
The above summary does not purport to be complete and is qualified in its entirety by reference to the Third Amended and Restated By-Laws, effective February 13, 2024, a copy of which is filed as Exhibit 3.3 to this Annual Report on Form 10-K.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
PART III
Item 10. Directors, Executive Officers andCorporate Governance.
The information regarding directors and executive officers is incorporated herein by reference to the Company’s definitive proxy statement to be mailed to its shareholders in connection with its 20182024 Annual Meeting of Shareholders and to be filed within 120 days of the close of the year ended December 31, 2017.2023.
Code of Ethics
The Company has adopted a code of ethics that applies to all employees, including executive officers and directors. The code of ethics is publicly available on the Corporate Governance page of the Company’s website at www.hcsg.com. If the Company makes any amendments or grant any waivers, including implicit waivers, from a provision of the Company code of ethics that applies to the principal executive officer, principal financial officer, principal accounting officer or any person performing similar functions, the Company will disclose the nature of the amendment or waiver, its effective date and to whom it applies on the Company’s website set forth above or in a report on Form 8-K filed with the Securities and Exchange Commission.
Item 11. Executive Compensation.
The information regarding executive compensation is incorporated herein by reference to the Company’s definitive proxy statement to be mailed to shareholders in connection with its 20182024 Annual Meeting of Shareholders and to be filed within 120 days of the close of the fiscal year ended December 31, 2017.2023.
Item 12. Security Ownership of CertainBeneficial Owners and Management and RelatedStockholder Matters.
The information regarding security ownership of certain beneficial owners and management and related stockholder matters is incorporated herein by reference to the Company’s definitive proxy statement to be mailed to shareholders in connection with its 20182024 Annual Meeting of Shareholders and to be filed within 120 days of the close of the fiscal year ending December 31, 2017.2023.
Item 13. Certain Relationships and RelatedTransactions, and Director Independence.
The information regarding certain relationships and related transactions, and director independence is incorporated herein by reference to the Company’s definitive proxy statement mailed to shareholders in connection with its 20182024 Annual Meeting of Shareholders and to be filed within 120 days of the close of the fiscal year ended December 31, 2017.2023.
Item 14. Principal Accountant Fees andServices.
The information regarding principal accountant fees and services is incorporated herein by reference to the Company’s definitive proxy statement mailed to shareholders in connection with its 20182024 Annual Meeting of Shareholders and to be filed within 120 days of the close of the fiscal year ended December 31, 2017.2023.
PART IV
Item 15. Exhibits and Financial StatementSchedules.
| |
(a) | The following financial statements, schedules and exhibits are filed as part of this report: |
| |
1. | Index to Consolidated Financial Statements — The Financial Statements required by this item are listed on the Index to Financial Statements in Part II, Item 8 of this report.
|
| |
2. | Index to Financial Statement Schedules —
|
| |
a. | Schedule II—Valuation and Qualifying Accounts and Reserves; and |
| |
b. | Other financial statement schedules are not included because they are not required or the information is otherwise shown in the financial statements or notes thereto. |
| |
a. | The exhibits listed below are filed as part of, or are incorporated by reference into, this report. |
| |
(b) | See Item 15(a)(3) above. |
| |
(c) | See Item 15(a)(2) above. |
(a) The following financial statements, schedules and exhibits are filed as part of this report:
1.Index to Consolidated Financial Statements — The Financial Statements required by this item are listed on the Index to Financial Statements in Part II, Item 8 of this report.
2.Index to Financial Statement Schedules —
a.Schedule II—Valuation and Qualifying Accounts and Reserves; and
b.Other financial statement schedules are not included because they are not required or the information is otherwise shown in the financial statements or notes thereto.
3.Index to Exhibits —
a. The exhibits listed below are filed as part of, or are incorporated by reference into, this report.
(b) See Item 15(a)(3) above.
(c) See Item 15(a)(2) above.
Item 16. Form 10-K Summary.
None.
Healthcare Services Group, Inc.
Schedule II — Valuationand Qualifying Accounts and Reserves | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Description | Beginning Balance | | Charged to Costs and Expenses | | Deductions | | Ending Balance |
| (in thousands) |
| 2023 | | | | | | | |
| Allowance for Doubtful Accounts | $ | 73,464 | | | $ | 35,604 | | | $ | 17,369 | | | $ | 91,699 | |
| 2022 | | | | | | | |
| Allowance for Doubtful Accounts | $ | 65,584 | | | $ | 31,969 | | | $ | 24,088 | | | $ | 73,464 | |
| 2021 | | | | | | | |
| Allowance for Doubtful Accounts | $ | 67,801 | | | $ | 10,483 | | | $ | 12,700 | | | $ | 65,584 | |
|
| | | | | | | | | | | | | | | | | | | |
| | | | Additions | | | | |
| Description | Beginning Balance | | Charged to Costs and Expenses | | Charged to Other Accounts | | Deductions | | Ending Balance |
| (in thousands) |
| 2017 | | | | | | | | | |
| Allowance for Doubtful Accounts | $ | 6,911 |
| | $ | 6,250 |
| | $ | — |
| | $ | 1,176 |
| | $ | 11,985 |
|
| 2016 | | | | | | | | | |
| Allowance for Doubtful Accounts | $ | 4,608 |
| | $ | 4,629 |
| | $ | — |
| | $ | 2,326 |
| | $ | 6,911 |
|
| 2015 | | | | | | | | | |
| Allowance for Doubtful Accounts | $ | 6,136 |
| | $ | 4,335 |
| | $ | — |
| | $ | 5,863 |
| | $ | 4,608 |
|
Exhibit Index
The following Exhibits are filed as part of this Report (references are to Reg. S-K Exhibit Numbers):
|
| | | | | | | | | | | | |
| | | | | Incorporated by Reference | | |
| Exhibit Number | | Description | | Form | | File No. | | Date of Filing | | Exhibit Number | | Filed Herewith |
| 3.1 | | | | 10-K | | 0-12015 | | 3/21/2001 | | 3.2 | | — |
| 3.2 | | | | 8-K | | 0-12015 | | 5/24/2007 | | 3.1 | | — |
| 3.3 | | | | 10-K | | 0-12015 | | 2/19/2015 | | 3.3 | | — |
| 4.1 (P) | | Specimen Certificate of the Common Stock, $.01 par value, of the Registrant | | S-18 | | 2-87625-W | | — | | 4.1 | | — |
| 4.2† | | | | S-8 | | 333-92835 | | 12/15/1999 | | 4(a) | | — |
| 4.3† | | | | 10-Q | | 0-12015 | | 10/28/2016 | | 4.1 | | — |
| 4.5† | | | | 10-Q | | 0-12015 | | 10/22/2012 | | 10.1 | | — |
| 10.1† | | | | 10-Q | | 0-12015 | | 7/27/2012 | | 10.1 | | — |
| 10.1 | | | | 10-Q | | 0-12015 | | 7/28/2017 | | 10.1 | | |
| 10.2 | | | | S-3D | | 333-108182 | | 8/22/2003 | | 99.0 | | — |
| 21 | | | | — | | — | | — | | — | | X |
| 23 | | | | — | | — | | — | | — | | X |
| 31.1 | | | | — | | — | | — | | — | | X |
| 31.2 | | | | — | | — | | — | | — | | X |
| 32.1 | | | | — | | — | | — | | — | | X |
| 32.2 | | | | — | | — | | — | | — | | X |
| 101 | | The following financial information from the Company's Form 10-K for the fiscal year ended December 31, 2015 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statements of Stockholders' Equity, and (v) Notes to Consolidated Financial Statements | | — | | — | | — | | — | | X |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
| Exhibit Number | | Description | | Form | | File No. | | Date of Filing | | Exhibit Number | | Filed Herewith |
| 3.1 | | | | 10-K | | 0-12015 | | 3/21/2001 | | 3.2 | | — |
| 3.2 | | | | 8-K | | 0-12015 | | 5/24/2007 | | 3.1 | | — |
| 3.3 | | | | — | | — | | — | | — | | X |
| 4.1 (P) | | Specimen Certificate of the Common Stock, $0.01 par value, of the Registrant | | S-18 | | 2-87625-W | | — | | 4.1 | | — |
| 4.2† | | | | S-8 | | 333-92835 | | 12/15/1999 | | 4(a) | | — |
| 4.3† | | | | 10-Q | | 0-12015 | | 10/28/2016 | | 4.1 | | — |
| 4.4† | | | | 10-Q | | 0-12015 | | 7/23/2021 | | 4.1 | | — |
| 4.5† | | | | 10-Q | | 0-12015 | | 10/22/2012 | | 10.1 | | — |
| 4.6 | | | | S-8 | | 333-240096 | | 7/24/2020 | | 4.7 | | — |
| 10.1† | | | | 8-K | | 0-12015 | | 6/1/2023 | | 10.1 | | — |
| 10.2 | | | | 8-K | | 0-12015 | | 12/31/2018 | | 10.1 | | — |
| 10.3 | | | | 8-K | | 0-12015 | | 11/28/2022 | | 10.1 | | — |
| 10.4 | | | | S-3D | | 333-108182 | | 8/22/2003 | | 99.0 | | — |
| 19 | | | | — | | — | | — | | — | | X |
| 21 | | | | — | | — | | — | | — | | X |
| 23 | | | | — | | — | | — | | — | | X |
| 31.1 | | | | — | | — | | — | | — | | X |
| 31.2 | | | | — | | — | | — | | — | | X |
| 32.1 | | | | — | | — | | — | | — | | X |
| 97 | | | | — | | — | | — | | — | | X |
| 101 | | The following financial information from the Company's Form 10-K for the fiscal year ended December 31, 2023, 2022, and 2021 were formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statements of Stockholders' Equity, and (v) Notes to Consolidated Financial Statements | | — | | — | | — | | — | | X |
| 104 | | Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.) | | — | | — | | — | | — | | X |
| | | | | | | | |
| † | | Indicates a management plan or compensatory plan or arrangement. |
| (P) | | Prior to digital copy |
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant hasregistrant had duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| | | |
| | | |
Dated: February 23, 201816, 2024 | | HEALTHCARE SERVICES GROUP, INC. |
| | (Registrant) |
| | | |
| | By: | | By: | /s/ Theodore Wahl |
| | | Theodore Wahl |
| | | President and& Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons and in the capacities and on the date indicated:
| | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | | | |
Signature | | Title | | Date |
| | | | |
| | | | |
| /s/ Theodore Wahl | | Director and President & Chief Executive Officer | | February 23, 201816, 2024 |
| Theodore Wahl | | (Principal Executive Officer) | | |
| | | | |
| /s/ Andrew M. Brophy | | Vice President, Controller & Principal Accounting Officer | | February 16, 2024 |
| Andrew M. Brophy | | | | |
/s/ John C. Shea | | Chief Financial Officer | | February 23, 2018 |
John C. Shea | | (Principal Financial and Accounting Officer) | | |
| | | | |
| /s/ Jude Visconto | | Chairman of the Board | | February 23, 201816, 2024 |
| Jude Visconto | | | | |
| | | | |
| /s/ Diane S. Casey | |
Director | | February 16, 2024 |
| Diane S. Casey | | | | |
| | | | |
| /s/ Daniela Castagnino | | Director | | February 16, 2024 |
/s/ Michael E. McBryanDaniela Castagnino | | | Director and Executive Vice President & Chief Revenue Officer | | February 23, 2018
| Michael E. McBryan | | | |
| | | | |
/s/ John M. Briggs | | Director | | February 23, 2018 |
John M. Briggs | | | | |
| | | | |
| /s/ Robert L. Frome | | Director | | Director | February 23, 201816, 2024 |
| Robert L. Frome | | | | |
| | | | |
| /s/ Laura Grant | | Director | | February 16, 2024 |
| Laura Grant | | | | |
| | | | |
| /s/ John J. McFadden | | Director | | February 16, 2024 |
/s/ Diane S. CaseyJohn J. McFadden | | | Director | | February 23, 2018
| Diane S. Casey | | | |
| | | | |
/s/ Robert J. Moss | | Director | | February 23, 2018 |
Robert J. Moss | | | | |
| | | | |
| /s/ Dino D. Ottaviano | | Director | | Director | February 23, 201816, 2024 |
| Dino D. Ottaviano | | | | |
| | | | |
| /s/ Kurt Simmons, Jr. | | Director | | February 16, 2024 |
| Kurt Simmons, Jr. | | | | |
/s/ John J. McFadden | | Director | | February 23, 2018 |
John J. McFadden | | | | |
| | | | |
