UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 2017
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
(State
or
other
jurisdiction
of
incorporation
or
organization)
(I.R.S.
Employer
Identification
No.)
3220 Tillman Drive, Suite 300, Bensalem, PA
(Address
of
principal
executive
offices)
19020
(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)
Title
of
each
class
The NASDAQ Global Select Market
Name
of
each
exchange
on
which
registered
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 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 ¨
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 þ
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 þ
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
Non-accelerated filer
o (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Emerging growth company
o
o
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
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ¨
NO þ
The aggregate market value of the voting stock (Common Stock, $.01 par value) held by non-affiliates of the Registrant as of the close of business on June 30, 2017 was
approximately $2.49 billion 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 Registrant 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 par value) as of the latest practicable date ( February 21,
2018 ). 73,679,000
Portions of the definitive Proxy Statement for the Registrant’s Annual Meeting of Shareholders to be held on May 29, 2018 have been incorporated by reference into Parts II
and III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
Healthcare Services Group, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2017
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Exhibit Index
Signatures
1
3
7
12
12
12
12
13
16
16
29
30
58
58
58
59
59
59
59
59
60
60
62
63
Table of Contents
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, 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,” “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, primarily providers of long-term care; having several clients who individually
contributed over 3%, with one as high as 17.6% , of our total consolidated revenues for the year ended December 31, 2017 ; credit and collection risks associated
with this industry; our claims experience related to workers’ compensation and general liability insurance; the effects of changes in, or interpretations of laws and
regulations governing the 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 reorganization and self-funded health
insurance program; risks associated with the reorganization of our corporate structure; realization of our expectations regarding the impact of the Tax Cuts and
Jobs Act on our financial results; and the risk factors described in Part I in this report under “Government Regulation of Clients,” “Service Agreements and
Collections” and “Competition;” and under Item IA “Risk Factors.”
These factors, in addition to delays in payments from clients and/or clients 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 would be adversely affected if unexpected
increases in the costs of labor and labor-related costs, materials, supplies and equipment used in performing services could not be passed on to our clients.
In addition, we believe that to improve our financial performance we must continue to obtain service agreements with new clients, retain and provide new services
to existing clients, achieve modest price increases on current service agreements with existing clients and 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.
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Table of Contents
PART I
In this Annual Report on Form 10-K for the year ended December 31, 2017 , 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 Service 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 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.
Segment Information
The information called for herein is discussed below in Description of Services, and within Item 8 of this Annual Report on Form 10-K under Note 14 in the Notes
to Consolidated Financial Statements for the years ended December 31, 2017 , 2016 and 2015 .
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 client facilities and provide Dietary services to over 1,500 facilities. Although we do not directly
participate in any government reimbursement programs, our clients 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. Under such agreements, we are responsible for the day-to-day management of
the employees located at our clients’ facilities, as well as the provision of certain supplies. We also provide services on the basis of management-only agreements
for a limited number of clients. Under a management-only agreement, we provide management and supervisory services while the client facility retains payroll
responsibility for the non-supervisory staff. Our agreements with clients typically provide for a renewable one year service term, cancelable 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% , or $979.6 million , of our consolidated revenues in 2017 . The services provided under this segment include
managing our clients’ housekeeping departments, which are principally responsible for the cleaning, disinfecting and sanitizing of resident rooms and common
areas of the clients’ 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’ facilities. Upon beginning service with a client 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 client
requests. Such management personnel also oversee the execution of various cost- and quality-control procedures including continuous training and employee
evaluation, and on-site testing for infection control.
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Table of Contents
Housekeeping’s operating performance is significantly impacted by our management of labor costs. Management reviews costs as a percentage of revenues, in
order to normalize and evaluate such costs in the context of the Company’s growth. Housekeeping labor costs represented approximately 80.1% of Housekeeping
revenues for 2017 . 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 , the cost of Housekeeping supplies as a percentage of Housekeeping revenues was 8.0% . 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% , or $886.5 million , of our consolidated revenues in 2017 . Dietary services consist of managing our clients’
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. We also offer clinical consulting services to facilities.
Dietary operating performance is also impacted by price fluctuations in labor and supply costs resulting from similar factors discussed above for Housekeeping. In
2017 , the costs of labor and food-related supplies represented approximately 56.6% and 36.1% of Dietary revenues, respectively.
Significant Customers
For the year ended December 31, 2017 , both the Housekeeping and Dietary segments earned revenue from several significant customers, including Genesis
Healthcare, Inc.
Operational Management Structure
By applying our professional management techniques, we offer our clients 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, 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
consistent with the Company’s systems and budgets.
Vice Presidents of Operations are ultimately responsible for all aspects of the operations, compliance and financial performance of the Directors of Operations who
they oversee.
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We believe that our organizational structure facilitates our ability to best serve and expand our service offerings to existing clients, while also securing new clients.
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 nursing facilities, residential care and assisted living facilities, etc.) and hospitals (acute care, critical access, psychiatric, etc.). 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). 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 by our Chief Revenue Officer, Vice Presidents of Sales and our Directors of Sales. 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 primarily through referrals and in-person solicitation of target facilities. We also participate in industry trade shows, healthcare trade
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. 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. Once the prospective client accepts the proposal and executes our service agreement, we are structured to timely and efficiently establish our operations and
systems at the client facilities.
Government Regulation of Clients
We do not directly participate in any government reimbursement programs and our contractual relationships with our clients determine their payment obligations to
us. However, our clients 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’ 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’ cash flows, resulting in their inability 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 are uncertain. We are unable to predict or to estimate
the ultimate impact of any further changes in reimbursement programs affecting our clients’ 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 client retention rate and expect to continue to maintain satisfactory relationships with our clients, despite many of our service
agreements being cancelable on short notice.
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We have had varying collections experiences with respect to our accounts and notes receivable. We have 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. Related to
these collection matters, we have recorded bad debt provisions (in an Allowance for Doubtful Accounts) of $6.3 million , $4.6 million and $4.3 million in the years
ended December 31, 2017 , 2016 and 2015 , 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% for each of the years ended December 31, 2017 , 2016 and 2015 . In making our
credit evaluations, 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, perform ongoing credit evaluations and monitor accounts to minimize the risk of loss. Despite our efforts to minimize credit risk exposure, our clients
could be adversely affected if future industry trends change in a way that negatively impacts their cash flows, as discussed in “Government Regulation of Clients”
and “Risk Factors” in this report. If our clients 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. In addition, a number of local firms compete with us in the regional markets in which we conduct business. Several
national service firms are larger and have greater financial and marketing resources than we do, although historically such firms have concentrated their marketing
efforts primarily on hospitals, rather than the long-term care facilities typically serviced by us.
Employees
At December 31, 2017 , we employed over 55,000 people, of which approximately 6,700 were corporate and field management personnel. Approximately 10% of
our employees are unionized. The majority of these union employees are subject to collective bargaining agreements that are negotiated by individual client
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 client facilities and their employee unions, or between us and such unions. We consider our relationship with our
employees to be good.
Available Information
Healthcare Services Group, Inc. is a reporting company under the Securities Exchange Act of 1934, as amended, and files reports, proxy statements and other
information with the Securities and Exchange Commission (the “Commission” or “SEC”). The public may read 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 obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. Additionally, because we make filings to the Commission electronically, you may access this information 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.
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Item 1A. Risk 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.
We provide services to several clients which contribute significantly, on an individual as well as an aggregate basis, to our total revenues.
We have several clients who individually contributed over 3%, with one as high as 17.6% , of our total consolidated revenues for the year ended December 31,
2017 . Although we expect to continue the relationship with these clients, there can be no assurance thereof. The loss, individually or in aggregate, of such clients,
or a significant reduction in the revenues we receive from such clients, could have a material adverse effect on the results of operations of our two operating
segments and the Company. In addition, if any of these clients change or alter current payment terms it could increase our accounts receivable balance and have a
material adverse effect on our cash flows.
Our clients are concentrated in the healthcare industry, which is subject to changes in government regulation. Many of our clients rely on reimbursement from
Medicare, Medicaid and other third-party payors. Rates from such payors may be altered or reduced, thus affecting our clients’ 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’ 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. Because many of our clients’
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’ cash flows, resulting in their inability to make payments to us
on agreed upon payment terms. These factors, in addition to delays in payments from clients have resulted in, and could continue to result in, significant additional
bad debts in the future.
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 to experience significant budget deficits and such deficits may result in reduction of
reimbursements 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.
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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, customers’ dependence on continued Medicare and Medicaid funding
and the impact of additional regulatory actions. We have sometimes been required to extend 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 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, perform ongoing credit evaluations and monitor accounts to minimize the risk of loss. Despite our efforts
to minimize credit risk exposure, our clients could be adversely affected if future industry trends change in such a manner as to negatively impact their cash flows.
If our clients experience a negative impact in their cash flows, it could have a material adverse effect on our consolidated results of operations, financial condition
and cash flows.
We have a Paid Loss Retrospective Insurance Plan for general liability and workers’ 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 our results of operations and financial position.
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.
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Our business and financial results could be adversely affected by unfavorable results 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 term, cancelable by either party upon 30 to 90 days’ notice after an initial 60
to 120 day service agreement period.
We do not enter into long-term contractual agreements with our clients for the rendering of our services. Consequently, our clients can unilaterally decrease the
amount of services we provide or terminate all services pursuant to the terms of our service agreements. Any loss of 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, 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 clients and obtaining new clients.
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.
9
Table of Contents
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 products 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 client facilities, it could materially harm our business, 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 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. 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.
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Table of Contents
Investor and market expectations regarding our financial performance are high and rely greatly on execution of our growth strategy 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 a material adverse effect on our ability to report our financial results on a
timely and accurate basis.
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, we cannot guarantee that control deficiencies will not result in a misstatement in the future.
Any decrease in or suspension of our dividend could cause our stock price to decline.
We expect to continue to pay a regular quarterly cash dividend. However, our dividend policy and the payment of future cash dividends under the policy are
subject to the final determination each quarter by our Board of Directors that (i) the dividend will be made in compliance with laws applicable to the declaration
and payment of cash dividends, including Section 1551(b) of the Pennsylvania Business Corporation Law, and (ii) the policy remains in our best interests, which
determination will be based on a number of factors, including the impact of changing laws and regulations, economic conditions, our results of operations and/or
financial condition, capital resources, the ability to satisfy financial covenants and other factors considered relevant by the Board of Directors. While we have
continually increased the amount of our dividends, given these considerations, there can be no assurance these increases will continue and our Board of Directors
may increase or decrease the amount of the dividend at any time and may also decide to suspend or discontinue the payment of cash dividends in the future. Any
decrease in the amount of the dividend, or suspension or discontinuance of payment of a dividend, could cause our stock price to decline.
Cyber 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. Although we have taken measures to protect our
technology systems and infrastructure, including employee education programs regarding cybersecurity, a breach of the security surrounding these functions could
result in operational disruptions, theft or fraud, or exposure of sensitive information to unauthorized parties. Such events could result in additional costs related to
operational inefficiencies, or damages, claims or fines.
11
Table of Contents
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We lease our corporate offices, located at 3220 Tillman Drive, Bensalem, Pennsylvania 19020.We also lease office space at other locations in Pennsylvania,
Colorado, South Carolina, Connecticut, Georgia, California and New Jersey. The New Jersey office is the headquarters of our subsidiaries, including HCSG
Insurance Corp. 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.
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, personal
injury, workers compensation and insurance matters. We believe the Company 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 our consolidated financial condition or liquidity. However, in light of the
uncertainties involved in such proceedings, the ultimate outcome of a particular matter could become material to our results of operations for a particular period
depending on, among other factors, the size of the loss or liability imposed and the level of our operating income for that period.
Item 4. Mine Safety Disclosures.
Not applicable.
12
Table of Contents
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
The Company’s Common Stock, $.01 par value (the “Common Stock”), is traded under the symbol “HCSG” on the NASDAQ Global Select Market. As of
February 21, 2018 , there were approximately 73.7 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
March 31, 2017
June 30, 2017
September 30, 2017
December 31, 2017
Quarter Ended
March 31, 2016
June 30, 2016
September 30, 2016
December 31, 2016
Dividends
$
$
$
$
$
$
$
$
High
High
43.91 $
50.00 $
55.68 $
55.29 $
36.99 $
41.40 $
42.18 $
40.88 $
Low
Cash Dividends Declared
0.18750
37.54 $
41.05 $
45.10 $
49.09 $
0.18875
0.19000
0.19125
Low
Cash Dividends Declared
0.18250
31.50 $
36.47 $
36.58 $
34.83 $
0.18375
0.18500
0.18625
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 , we had approximately 500 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 of our Common Stock.
13
Table of Contents
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 .
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)
Equity compensation plans approved
by security holders
Equity compensation plans not
approved by security holders
Total
(in thousands, except per share amounts)
2,374 (1) $
—
2,374
$
29.22
—
29.22
3,422
(2)
—
3,422
(1) Represents shares of Common Stock issuable upon exercise of outstanding stock awards granted under the 2012 Equity Incentive Plan and carryover shares
from pre-existing Plans.
(2) Includes stock awards to purchase 0.8 million shares available for future grant under the Company’s 2012 Equity Incentive Plan, 2.3 million shares
available for issuance under the Company’s 1999 Employee Stock Purchase Plan (the “1999 Plan”) as amended and 0.4 million shares available for
issuance under the Company’s Amended and Restated 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.’s cumulative five-year total shareholder return on Common Stock with the cumulative total returns
of the S&P 500 index, the NASDAQ Composite 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, 2012 to December 31, 2017 . 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
client base, and among its closest industry peers, it is unique in size and financial profile. As such, we opted to utilize the Russell 2000 index to compare the
Company performance to issuers with similar market capitalization.
14
Table of Contents
Comparison of 5 Year Cumulative Total Return*
Among Healthcare Services Group, Inc., the S&P 500 Index, the NASDAQ Composite Index and the Russell 2000 Index
*$100 invested on December 31, 2012 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2017 Standard & Poor’s, a division of S&P Global. All rights reserved.
Copyright© 2017 Russell Investment Group. All rights reserved.
Company/Index
Healthcare Services Group, Inc.
S&P 500
Russell 2000
NASDAQ Composite
2012
2013
2014
2015
2016
2017
$
$
$
$
100.00 $
100.00 $
100.00 $
100.00 $
125.52 $
132.39 $
138.82 $
141.63 $
140.22 $
150.51 $
145.62 $
162.09 $
161.47 $
152.59 $
139.19 $
173.33 $
185.00 $
170.84 $
168.85 $
187.19 $
253.03
208.14
193.58
242.29
December 31,
Unregistered Sales of Equity Securities and Use of Proceeds
During the second quarter 2017, the Company issued 59,000 shares of common stock to a qualified offeree in accordance with the exemption provided by Section
4(a)(2) of the Securities Act of 1933, as amended.
15
Table of Contents
Item 6. Selected Financial Data.
The following selected condensed consolidated financial data has been derived from, and should be read in conjunction with “Management’s Discussion and
Analysis of 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.
Selected Operating Results
Revenues
Net income
Basic earnings per common share
Diluted earnings per common share
Selected Balance Sheet Data
Total assets
Stockholders’ equity
Selected Other Financial Data
Working capital
Cash dividends declared per common share
$
$
$
$
$
$
$
$
Years Ended December 31,
2017
2016
2015
2014
2013
(in thousands, except per share amounts)
1,866,131 $
1,562,662 $
1,436,849 $
1,293,183 $
1,149,890
88,226 $
77,396 $
58,024 $
21,850 $
47,129
1.20 $
1.19 $
1.06 $
1.05 $
0.81 $
0.80 $
0.31 $
0.31 $
0.68
0.67
676,003 $
528,446 $
480,949 $
469,579 $
399,952 $
338,842 $
296,456 $
275,830 $
343,238 $
313,753 $
269,277 $
213,414 $
0.75750 $
0.73750 $
0.71750 $
0.69750 $
425,342
285,143
207,750
0.67750
69,206
Weighted average number of common shares outstanding - basic
73,355
72,754
71,826
70,616
Weighted average number of common shares outstanding -
diluted
74,348
73,474
72,512
71,341
70,045
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
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
”
refers
to
the
year
ended
December
31,
2017
,
“
2016
”
refers
to
the
year
ended
December
31,
2016
and
“
2015
”
refers
to
the
year
ended
December
31,
2015
.
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 in 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 financial statements as of December 31, 2017 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
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.
16
Table of Contents
We provide services primarily pursuant to full service agreements with our clients. Under such agreements, we are responsible for the day-to-day management of
the employees located at our clients’ facilities, as well as the provision of certain supplies. We also provide services on the basis of management-only agreements
for a limited number of clients. Under a management-only agreement, we provide management and supervisory services while the client facility retains payroll
responsibility for the non-supervisory staff. Our agreements with clients typically provide for a renewable one year service term, cancelable 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’ housekeeping departments, which are principally responsible for the cleaning, disinfecting and sanitizing of
resident rooms and common areas of the clients’ 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’ facilities.
Dietary consists of managing our clients’ 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.
At December 31, 2017 , Housekeeping services were provided at essentially all of our more than 3,500 client facilities, generating approximately 52.5% , or $979.6
million , of 2017 total revenues. Dietary services were provided to over 1,500 client facilities at December 31, 2017 and contributed approximately 47.5% , or
$886.5 million , of 2017 total revenues.
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 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-service management and administrative support services to such entities.
Our ability to acquire new clients, retain existing clients and increase revenues are affected by many factors. Competitive factors consist primarily of competing
with potential clients’ use of in-house support staff, as well as local or regional companies providing services similar to ours. We are unaware of any other
companies, on a national, regional or local level, which have a significant presence or will impact our ability to secure new clients in our market. We believe the
primary revenue drivers of our business are our ability to obtain new clients and to provide additional services to existing clients. In addition, 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 clients to attain desired profit margins at the facility level. The primary economic factor in acquiring new clients is our ability to demonstrate the cost-
effectiveness of our services, because many of our clients’ revenues are generally highly reliant on Medicare and Medicaid reimbursements. Therefore, our clients’
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 clients 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 clients 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 clients and increasing revenues.
17
Table of Contents
When evaluating financial performance, we consider the ratio of certain financial items to consolidated revenues. The table below summarizes those metrics for
2017 , 2016 and 2015 :
Revenues
Operating costs and expenses:
Costs of services provided
Selling, general and administrative
Net investment and interest income
Income before income taxes
Income taxes
Net income
Relation to Consolidated Revenues
Years Ended December 31,
2017
2016
2015
100.0%
100.0%
100.0%
86.4%
6.8%
0.3%
7.1%
2.4%
4.7%
85.7%
6.7%
0.2%
7.8%
2.8%
5.0%
86.0%
7.8%
0.0%
6.2%
2.2%
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 reviews two key indicators (costs of labor and costs of supplies) to
monitor and manage such costs. The variability of these costs may impact each segment differently, as Housekeeping is more significantly impacted by costs of
labor than Dietary. Labor costs accounted for approximately 80.1% of Housekeeping revenues in 2017 . Dietary labor costs accounted for approximately 56.6% of
Dietary revenues in 2017 . 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 management labor costs can result in variability of these costs. Housekeeping supplies, including linen products, accounted for
approximately 8.0% of Housekeeping revenues in 2017 . In contrast, supplies consumed in performing our Dietary services accounted for approximately 36.1% 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 clients are concentrated in the healthcare industry and are primarily providers of long-term care. Many of our clients’ 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’ 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’ cash flows and solvency, while the opportunities are related to our ability to offer our clients cost stability
and efficiencies.
18
Table of Contents
Years Ended December 31, 2017 and 2016
The following table sets forth the 2017 income statement key components that we use to evaluate our financial performance on a consolidated and reportable
segment basis compared to 2016 . 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.
Revenues
Housekeeping
Dietary
Consolidated
Costs of services provided
Housekeeping
Dietary
Corporate and eliminations
Consolidated
Selling, general and administrative expense
Corporate and eliminations
Investment and interest income
Corporate and eliminations
Income (loss) before income taxes
Housekeeping
Dietary
Corporate and eliminations
Consolidated
Income taxes
Corporate and eliminations
Revenues
Consolidated
2017
Year Ended December 31,
2016
(in thousands)
% Change
979,610 $
886,521
957,148
605,514
1,866,131 $
1,562,662
884,105 $
840,513
(112,108)
866,392
570,873
(97,773)
1,612,510 $
1,339,492
2.3%
46.4%
19.4%
2.0%
47.2%
14.7%
20.4%
126,732 $
105,417
20.2%
6,076 $
2,634
130.7%
95,505 $
46,008
(8,548)
132,965 $
90,756
34,641
(5,010)
120,387
5.2%
32.8%
70.6%
10.4%
44,739 $
42,991
4.1%
$
$
$
$
$
$
$
$
$
Consolidated revenues increased 19.4% to $1.87 billion in 2017 compared to $1.56 billion in 2016 as a result of the factors discussed below under Reportable
Segments.
Reportable
Segments
Housekeeping’s 2.3% increase in reportable segment revenues resulted primarily from service agreements entered into with new clients. Dietary’s 46.4% increase
in reportable segment revenues resulted primarily from providing these services to a greater number of existing Housekeeping clients.
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Table of Contents
Costs of services provided
Consolidated
Consolidated costs of services increased 20.4% to $1.61 billion in 2017 compared to $1.34 billion in 2016 , primarily related to our overall growth, as represented
by our 19.4% growth in consolidated revenues for the same period. As a percentage of consolidated revenues, cost of services increased to 86.4% in 2017 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 changes in the components of costs of services.
The following table provides a comparison of the key indicators we consider when managing the consolidated cost of services provided:
Costs of Services Provided - Key Indicators as % of Consolidated Revenue
Bad debt provision
Self-insurance costs
Year Ended December 31,
2017
0.3%
2.4%
2016
0.3%
3.0%
% Change
—%
(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:
Costs of Services Provided - Key Indicators as % of Segment Revenue
Housekeeping labor and other labor-related costs
Housekeeping supplies
Dietary labor and other labor-related costs
Dietary supplies
2017
80.1%
8.0%
56.6%
36.1%
Year Ended December 31,
2016
80.2%
7.8%
53.8%
38.0%
% Change
(0.1)%
0.2%
2.8%
(1.9)%
The ratios of 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.
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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.
Selling, general and administrative expense excluding change in deferred compensation
liability
Gain on deferred compensation plan investments
Selling, general and administrative expense
Consolidated Investment and Net Interest Income
Year Ended December 31,
2017
2016
% Change
(in thousands)
$
$
122,198 $
4,534
126,732 $
103,922
1,495
105,417
17.6%
203.3%
20.2%
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%.
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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.
Revenues
Housekeeping
Dietary
Consolidated
Costs of services provided
Housekeeping
Dietary
Corporate and eliminations
Consolidated
Selling, general and administrative expense
Corporate and eliminations
Investment and interest income
Corporate and eliminations
Income (loss) before income taxes
Housekeeping
Dietary
Corporate and eliminations
Consolidated
Income taxes
Corporate and eliminations
Revenues
Consolidated
2016
Year Ended
2015
(in thousands)
% Change
957,148 $
605,514
909,709
527,140
1,562,662 $
1,436,849
866,392 $
570,873
(97,773)
825,238
495,528
(84,658)
1,339,492 $
1,236,108
5.2 %
14.9 %
8.8 %
5.0 %
15.2 %
15.5 %
8.4 %
105,417 $
111,689
(5.6)%
2,634 $
712
269.9 %
90,756 $
34,641
(5,010)
120,387 $
84,471
31,612
(26,319)
89,764
7.4 %
9.6 %
(81.0)%
34.1 %
42,991 $
31,740
35.4 %
$
$
$
$
$
$
$
$
$
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.
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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 decreased to 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:
Costs of Services Provided - Key Indicators as % of Consolidated Revenue
Bad debt provision
Self-insurance costs
Year Ended December 31,
2016
0.3%
3.0%
2015
0.3%
3.4%
% Change
—%
(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:
Costs of Services Provided - Key Indicators as % of Segment Revenue
Housekeeping labor and other labor costs
Housekeeping supplies
Dietary labor and other labor costs
Dietary supplies
2016
80.2%
7.8%
53.8%
38.0%
Year Ended December 31,
2015
79.4%
8.3%
52.9%
38.7%
% Change
0.8%
(0.5)%
0.9%
(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 clients 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.
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 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 2016 increased our selling, general and administrative expense compared to 2015 .
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Selling, general and administrative expense excluding change in deferred compensation
liability
Gain (loss) on deferred compensation plan investments
Selling, general and administrative expense
Consolidated Investment and Net Interest Income
Year Ended December 31,
2016
2015
% Change
(in thousands)
$
$
103,922 $
111,751
1,495
(62)
105,417 $
111,689
(7.0)%
(2,511.3)%
(5.6)%
Investment and interest income increased 269.9% for 2016 compared to 2015 , 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 35.7% for 2016 and 35.4% for 2015 . Differences between the effective tax rates and the applicable U.S. federal statutory rate arise
primarily from the effect of state and local taxes and tax credits available to the Company. The Company participates in the WOTC program, through which we
hire and retain employees from target groups with significant barriers 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.
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 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 as losses are estimated to have occurred through a provision for bad debts charged to
earnings. The Allowance is evaluated based on our 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.
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
clients beyond contractual terms. Such clients 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, 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,
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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
2017
2016
2015
$
$
$
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
30,035 $
15,873 $
12,073 $
(in thousands)
1,176 $
2,326 $
5,863 $
6,250 $
4,629 $
4,335 $
11,985
6,911
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 clients could be adversely
affected if future industry trends, as more fully discussed under Liquidity and Capital Resources below, and in this Annual Report on Form 10-K in Part I under
“Risk Factors,” “Government Regulation of Clients” and “Service Agreements and Collections,” change in such a manner as to negatively impact the cash flows of
our clients. If our clients experience a negative impact in their cash flows, it could have a material adverse effect on our 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, which comprise approximately 30.7% of
our liabilities at December 31, 2017 . 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
party actuary, which include assumptions based on data such as historical claims and pay-out 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 as proactive management of workers’ compensation claims.
For general liability and workers’ compensation, 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. Such reserves for claims incurred but not reported are developed by a third 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:
Accrued insurance claims - January 1,
Claim payments
Reserve accruals:
Current year accruals
Changes to the provision for prior year claims
Change in accrued insurance claims
Accrued insurance claims - December 31,
Asset Valuations and Review for Potential Impairment
2017
2016
(in thousands)
2015
87,653 $
(41,077)
82,250 $
(35,089)
49,673
(11,550)
(2,954)
42,592
(2,100)
5,403
84,699 $
87,653 $
68,262
(27,883)
41,871
—
13,988
82,250
$
$
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
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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 , we had cash, cash equivalents and marketable securities of $82.8
million and working capital of $343.2 million , compared to December 31, 2016 cash, cash equivalents and marketable securities of $91.6 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 million . Our current ratio at December 31, 2017 was 2.9 to 1, versus 4.1 to 1 at December 31,
2016 .
For the years ended December 31, 2017 , 2016 and 2015 , our cash flows were as follows:
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Operating Activities
2017
Year Ended December 31,
2016
(in thousands)
$
$
$
7,630 $
(14,967) $
(6,959) $
41,400 $
(6,452) $
(44,284) $
2015
63,361
(62,314)
(43,138)
Our primary sources of cash are the revenues generated from our Housekeeping and Dietary services. Our primary uses of cash are the funding of our payroll and
other personnel-related costs, as well as the costs of supplies used in providing our services. 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
The 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). 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
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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 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:
March 31, 2017
June 30, 2017
September 30, 2017
December 31, 2017
(in thousands, except per share data)
Paid During the Quarter Ended
Cash dividend per common share
Total cash dividends paid
$
$
Record date
Payment date
0.18625 $
13,624 $
February 17, 2017
March 24, 2017
0.18750 $
13,750 $
May 19, 2017
June 23, 2017
0.18875 $
13,883 $
0.19000
13,987
August 18, 2017
November 17, 2017
September 22, 2017
December 22, 2017
Additionally, 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 .
The dividends paid to shareholders 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 that we will continue to pay dividends or the amount of the dividends, we
expect to continue to pay a regular quarterly cash dividend. Partially offsetting the cash used to pay dividends are the proceeds received from the exercise of stock
options by employees and directors. In connection with the establishment of our dividend policy, we adopted a Dividend Reinvestment Plan in 2003.
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, 2017 consist of the following:
Year Ended December 31, 2017
Total
Less Than 1 Year
1-3 Years
3-5 Years
After 5 Years
Operating lease obligations
$
9,118 $
2,482 $
3,457 $
1,469 $
1,710
(in thousands)
Payments Due by Period
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Line of Credit
As of December 31, 2017 , 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 LIBOR plus 75 basis points (or if LIBOR becomes unavailable, the higher of the Prime Rate or the Overnight
Bank Funding Rate plus 50 basis points). At December 31, 2017 , there were $35.4 million in borrowings under the line of credit.
The line of credit requires us to satisfy one financial covenant. The covenant and its respective status at December 31, 2017 was as follows:
Covenant Description and Requirement
Funded debt (1) to EBITDA (2) ratio: less than 3.00 to 1.00
As of December 31, 2017
0.79
(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.
As shown in the table above, we were in compliance with our financial covenant at December 31, 2017 and we expect to continue to remain in compliance with
such financial covenant. The line of credit expires on December 18, 2018 .
At December 31, 2017 , we also had outstanding $77.6 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 million to $187.0 million at December 31, 2017 . The letters of credit were decreased to $65.9 million on January 2, 2018 .
Accounts and Notes Receivable
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.
Our net accounts and notes receivable balance increased from December 31, 2016 . Such fluctuations 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 and the inception, transition or termination of client 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 utilize 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 December 31, 2016 , we had $36.6 million and $19.2 million , net
of reserves, respectively, of such promissory notes outstanding. In addition, we may assist our clients who are adjusting to changes in their cash flows by amending
our 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 our collections risk while maintaining our relationships
with our clients.
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 million , $4.6 million and $4.3 million in the years ended December 31, 2017 , 2016 and 2015 , respectively. As a percentage of total
revenues, these provisions represent approximately 0.3% for each of the years ended December 31, 2017 , 2016 and 2015 .
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Insurance Programs
We self-insure or carry a high deductible insurance plan 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 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 party actuary.
Capital Expenditures
Our level of capital expenditures is generally dependent on the number of new clients 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 . Although we have no specific material commitments for capital expenditures through the end of calendar year 2018 , we estimate that
for that period we will have capital expenditures of approximately $4.5 million to $6.0 million . 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.
Material Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements, other than our irrevocable standby letter of credit.
Effects of Inflation
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 Qualitative Disclosures About Market Risk.
At December 31, 2017 , we had investments in municipal bonds of $73.2 million . Our municipal bonds are categorized as marketable securities and are subject to
interest rate risk, as changes in interest rates affect the fair values of those instruments. Investments in both fixed rate and floating rate investments carry a degree
of interest rate risk. The value of fixed rate securities may be adversely impacted due to 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.
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Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
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, 2017 and 2016
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements for the Years Ended December 31, 2017, 2016 and 2015
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Table of Contents
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, 2017 and 2016 , 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 , and the related notes and schedules (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, 2017 and 2016 , and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2017 , 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 , based on criteria established in the 2013 Internal
Control-Integrated
Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 23, 2018 expressed an unqualified 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 supporting 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.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 1992.
New York, New York
February 23, 2018
31
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Management’s Annual Report on Internal Control Over Financial Reporting
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.
2.
3.
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the Company;
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
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
Theodore Wahl
Chief Executive Officer
(Principal Executive Officer)
February 23, 2018
/s/ John C. Shea
John C. Shea
Chief Financial Officer
(Principal Financial and Accounting Officer)
February 23, 2018
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Table of Contents
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 , based on criteria established in the 2013 Internal
Control-Integrated
Framework
issued by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2017 , based on criteria established in the 2013 Internal
Control-Integrated
Framework
issued by COSO.
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 , and our report dated February 23, 2018 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 York
February 23, 2018
33
$
$
$
Table of Contents
ASSETS:
Current assets:
Cash and cash equivalents
Marketable securities, at fair value
Healthcare Services Group, Inc.
Consolidated Balance Sheets
(in thousands)
Accounts and notes receivable, less allowance for doubtful accounts of $11,985 and $6,911 as of December 31, 2017
and 2016, respectively
Inventories and supplies
Prepaid expenses and other assets
Total current assets
Property and equipment, net
Goodwill
Other intangible assets, less accumulated amortization of $12,853 and $14,672 as of December 31, 2017 and 2016,
respectively
Notes receivable — long-term portion
Deferred compensation funding, at fair value
Deferred income taxes
Other noncurrent assets
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable
Accrued payroll, accrued and withheld payroll taxes
Other accrued expenses
Borrowings under line of credit
Income taxes payable
Accrued insurance claims
Total current liabilities
Accrued insurance claims — long-term portion
Deferred compensation liability
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
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss), net of taxes
Common Stock in treasury, at cost, 1,524 shares and 1,603 shares as of December 31, 2017 and 2016, respectively
Total stockholders’ equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
See accompanying notes.
34
As of December 31,
2017
2016
9,557 $
73,221
378,720
42,393
23,515
527,406
13,509
51,084
30,881
15,476
28,885
7,498
1,264
23,853
67,730
271,276
37,800
13,965
414,624
13,455
44,438
14,409
7,531
24,119
9,822
48
676,003 $
528,446
74,463 $
32,139
4,561
35,382
15,378
22,245
184,168
62,454
29,429
750
244,363
163,860
837
(9,858)
399,952
42,912
22,303
4,397
—
7,686
23,573
100,871
64,080
24,653
742
217,664
130,940
(319)
(10,185)
338,842
528,446
$
676,003 $
Healthcare Services Group, Inc.
Consolidated Statements of Comprehensive Income
(in thousands, except per share amounts)
Table of Contents
Revenues
Operating costs and expenses:
Costs of services provided
Selling, general and administrative
Other income:
Investment and interest
Income before income taxes
Income taxes
Net income
Per share data:
Basic earnings per common share
Diluted earnings per common share
Weighted average number of common shares outstanding:
Basic
Diluted
Comprehensive income:
Net income
Other comprehensive income:
Unrealized gain (loss) on available-for-sale marketable securities, net of taxes
Total comprehensive income
See accompanying notes.
35
Years Ended December 31,
2017
1,866,131 $
2016
1,562,662 $
2015
1,436,849
1,612,510
126,732
1,339,492
105,417
1,236,108
111,689
6,076
132,965
44,739
2,634
120,387
42,991
88,226 $
77,396 $
1.20 $
1.19 $
1.06 $
1.05 $
73,355
74,348
72,754
73,474
712
89,764
31,740
58,024
0.81
0.80
71,826
72,512
88,226 $
77,396 $
58,024
1,156
89,382 $
(862)
76,534 $
518
58,542
$
$
$
$
$
$
Table of Contents
Healthcare Services Group, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Bad debt provision
Deferred income tax
Stock-based compensation expense, net of tax benefit from equity compensation plans (1)
Amortization of premium on marketable securities
Unrealized (gain) loss on deferred compensation fund investments
Changes in operating assets and liabilities:
Accounts and notes receivable
Inventories and supplies
Prepaid expenses and other assets
Deferred compensation funding
Accounts payable and other accrued expenses
Accrued payroll, accrued and withheld payroll taxes
Accrued insurance claims
Deferred compensation liability
Income taxes payable (1)
Net cash provided by operating activities
Cash flows from investing activities:
Disposals of fixed assets
Additions to property and equipment
Purchases of marketable securities
Sales of marketable securities
Cash paid for acquisitions
Net cash used in investing activities
Cash flows from financing activities:
Dividends paid
Reissuance of treasury stock pursuant to Dividend Reinvestment Plan
Tax benefit from equity compensation plans (1)
Proceeds from the exercise of stock options
Net proceeds from short-term borrowings
Net cash used in financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of the period
Cash and cash equivalents at end of the period
Supplementary cash flow information:
Cash paid for interest
Cash paid for income taxes, net of refunds
Years Ended December 31,
2017
2016
2015
$
88,226 $
77,396 $
58,024
8,886
6,250
1,887
276
1,296
(4,509)
7,496
4,629
3,001
1,271
1,723
(1,460)
(121,639)
(65,610)
(1,873)
(9,545)
(257)
11,197
11,927
(2,954)
5,061
13,401
7,630
338
(5,397)
(33,861)
28,537
(4,584)
(14,967)
(1,492)
(2,470)
2,732
(4,251)
6,307
5,404
(731)
7,455
41,400
275
(5,442)
(29,449)
28,164
—
(6,452)
7,660
4,335
17,842
1,668
681
24
(18,854)
(846)
(1,710)
(649)
2,403
(28,314)
13,987
1,113
5,997
63,361
267
(4,998)
(75,150)
17,567
—
(62,314)
(55,244)
(53,342)
(51,375)
95
—
12,808
35,382
(6,959)
(14,296)
23,853
109
2,981
5,968
—
(44,284)
(9,336)
33,189
$
$
$
9,557 $
23,853 $
1,363 $
35,367 $
574 $
32,532 $
113
1,873
6,251
—
(43,138)
(42,091)
75,280
33,189
258
7,901
(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.
36
Healthcare Services Group, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands)
Common Stock
Shares
Amount
Additional Paid-
in Capital
Accumulated Other
Comprehensive Income
(Loss), net of Taxes
Retained
Earnings
72,878
$
729
$
186,022
$
25
$
100,237
Treasury Stock
$
(11,183)
$
Table of Contents
Balance, December 31, 2014
Comprehensive income:
Net income for the period
Unrealized gain on available-for-sale marketable securities, net of
taxes
Comprehensive income
Exercise of stock options and other stock-based compensation, net of
shares tendered for payment
386
4
Tax benefit from equity compensation plans
Share-based compensation expense — stock options and restricted stock
Treasury shares issued for Deferred Compensation Plan funding and
redemptions
Shares issued pursuant to Employee Stock Plans
Dividends paid
Shares issued pursuant to Dividend Reinvestment Plan
Shares issued pursuant to prior year acquisition
Balance, December 31, 2015
Comprehensive income:
Net income for the period
529
73,793
5
738
Unrealized loss on available-for-sale marketable securities, net of taxes
Comprehensive income
Exercise of stock options and other stock-based compensation, net of
shares tendered for payment
301
3
Tax benefit from equity compensation plans
Share-based compensation expense — stock options and restricted stock
Treasury shares issued for Deferred Compensation Plan funding and
redemptions
Shares issued pursuant to Employee Stock Plans
Dividends paid
Shares issued pursuant to Dividend Reinvestment Plan
Shares issued pursuant to previous settlement
Other
Balance, December 31, 2016
Comprehensive income:
Net income for the period
Unrealized gain on available-for-sale marketable securities, net of
taxes
Comprehensive income
Exercise of stock options and other stock-based compensation, net of
shares tendered for payment
697
Share-based compensation expense — stock options and restricted stock
Treasury shares issued for Deferred Compensation Plan funding and
redemptions
Shares issued pursuant to Employee Stock Plans
Dividends paid and accrued
Shares issued pursuant to Dividend Reinvestment Plans
Shares issued pursuant to acquisition
Balance, December 31, 2017
Stockholders’
Equity
275,830
58,024
518
58,542
6,251
1,873
3,033
488
1,701
(51,375)
113
—
58,024
518
$
70
338
(230)
(51,375)
6,247
1,873
3,033
418
1,363
343
(5)
199,294
543
106,886
(11,005)
296,456
77,396
(862)
(53,342)
$
431
371
18
77,396
(862)
76,534
5,968
2,773
3,743
534
2,067
(53,342)
109
4,000
—
5,965
2,773
3,743
103
1,696
91
3,999
113
(3)
1
74,204
742
217,664
(319)
130,940
(10,185)
338,842
88,226
1,156
(55,306)
$
(25)
339
13
88,226
1,156
89,382
12,808
4,945
156
2,091
(55,306)
95
6,939
7
1
12,801
4,945
181
1,752
82
6,938
59
74,960
$
750
$
244,363
$
837
$
163,860
$
(9,858)
$
399,952
See accompanying notes.
37
Table of Contents
Healthcare Services Group, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2017 , 2016 and 2015
Note 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 healthcare facilities, 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 clients
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. In such agreements, the Company is responsible for the day-to-day
management of employees located at the clients’ facilities. The Company also provides services on the basis of management-only agreements for a limited number
of clients. The Company’s agreements with its clients typically provide for a one year service term, cancelable by either party upon 30 to 90 days’ notice, after the
initial 60 to 120 day period.
The Company is organized into two reportable segments; housekeeping, laundry, linen and other services (“Housekeeping”), and dietary department services
(“Dietary”).
Housekeeping consists of managing the clients’ housekeeping departments, which are principally responsible for the cleaning, disinfecting and sanitizing of
resident rooms and common areas of a client’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 client facility.
Dietary consists of managing the clients’ 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.
Use of Estimates in Financial Statements
In preparing financial statements in conformity with United States generally accepted accounting principles (“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.
Principles of Consolidation
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.
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. Other financial instruments such as cash and cash equivalents, accounts and 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.
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Table of Contents
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 million at December 31, 2017 and 2016 , respectively, have been discounted to their present value and are reported at values of $6.8 million and $5.7
million at December 31, 2017 and 2016 , respectively.
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.
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. At
December 31, 2017 , the Company had marketable securities of $73.2 million which were comprised primarily of tax exempt municipal bonds. These investments
are accounted for as available-for-sale securities and are reported at fair value on the balance sheet. For the year ended December 31, 2017 , $1.1 million of
unrealized gains related to these investments were recorded in other comprehensive income. Unrealized gains and losses are recorded net of income taxes.
These assets are available for future needs under the Company’s self-insurance programs. 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 in fair value below the 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 , Management believes that the
recorded value of the Company’s investments in marketable securities was recoverable in all material respects.
Inventories and Supplies
Inventories and supplies include housekeeping, linen and laundry supplies, as well as food provisions and supplies. Inventories and supplies are stated at cost to
approximate a first-in, first-out (FIFO) basis. Linen supplies are amortized on a straight-line basis over their estimated useful life of 24 months.
Property and Equipment
Property and equipment 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. Depreciation is recorded using the straight-line method over the following estimated useful lives:
Housekeeping and Dietary equipment — 5 to 7 years; computer hardware and software — 3 to 7 years; and other, consisting of furniture and fixtures, leasehold
improvements and vehicles — 5 to 10 years. Depreciation expense on property and equipment for the years ended December 31, 2017 , 2016 and 2015 was $5.0
million , $4.8 million and $4.4 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 is recognized for the amount of taxes
payable or refundable for the current year. The Company accrues for probable tax obligations as required by facts and circumstances in various regulatory
environments. In addition, deferred tax assets and liabilities are recognized for expected future tax consequences of temporary differences between the financial
reporting and tax basis 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.
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Table of Contents
Uncertain income tax positions taken or expected to be taken in tax returns are reflected within the Company’s financial statements based on a recognition and
measurement process.
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 calculated 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 and using the share
price on the date of grant for restricted stock and restricted 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 no t material for the years ended December 31, 2017 , 2016 and 2015 .
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. 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.
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,
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’s
intangible assets or goodwill for the years ended December 31, 2017 , 2016 or 2015 .
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 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, 2017 and 2016 , substantially all 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 clients are concentrated in the healthcare industry, and are primarily providers of long-term care. The revenues of many of the Company’s clients
are highly reliant on Medicare, Medicaid and third-party payors’ reimbursement funding rates. New legislation or changes in existing regulations could be made
which could directly impact the governmental reimbursement
40
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programs in which the clients participate. As a result, the Company may not know the full effects of such programs until these laws are fully implemented and
governmental agencies issue applicable regulations or guidance.
Significant Clients
For the year ended December 31, 2017 , the Company had several clients who individually contributed over 3%, with one client, a multi-state operator,
contributing as high as 17.6% , of the Company’s total consolidated revenues. Although the Company expects to continue its relationships with these clients, there
can be no assurance thereof. The loss, individually or in the aggregate, of such clients, or a significant reduction in the revenues the Company receives from such
clients, could have a material adverse effect on the Company’s results of operations. In addition, if any of these clients change or alter current payments terms, it
could increase the Company’s accounts receivables balance and have a material adverse effect on the Company’s cash flows.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-09, Stock
Compensation:
Improvements
to
Employee
Share-Based
Payment
Accounting.
ASU 2016-09 was intended to simplify several aspects of the accounting for share-based payments. The Company adopted the standard
beginning January 1, 2017. The impact of adopting the standard included the recognition of excess tax benefits related to share-based payments as a component of
income tax expense, as opposed to additional paid-in capital; an amendment to the calculation of diluted earnings per share to exclude windfall tax benefits from
assumed proceeds when calculating diluted shares outstanding; as well as accounting for forfeitures of share-based awards 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 for 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 guidance 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, vehicles and equipment.
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Note 2—Changes in Accumulated Other Comprehensive Income by Component
For the years ended December 31, 2017 , 2016 and 2015 , the Company’s other comprehensive income related to the unrealized gains and losses from the
Company’s available-for-sale marketable securities.
The following table provides a summary of changes in accumulated other comprehensive income, net of taxes:
Accumulated other comprehensive (loss) income — beginning balance
Other comprehensive income (loss) before reclassifications
Losses (gains) reclassified from other comprehensive income (2)
Net current period other comprehensive income (loss) (3)
Accumulated other comprehensive income (loss) — ending balance
Unrealized Gains and (Losses) on Available-for Sale-Securities
(1)
2017
2016
2015
$
$
(in thousands)
(319) $
1,149
7
1,156
543 $
(1,005)
143
(862)
837 $
(319) $
25
535
(17)
518
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 .
For the Year Ended December 31,
Losses (gains) from the sale of available-for-sale securities
Tax (benefit) expense
Net loss (gain) reclassified from accumulated other comprehensive income
Note 3—Property and Equipment
Amounts Reclassified from Accumulated Other
Comprehensive Income
2017
2016
2015
(in thousands)
$
11 $
(4)
7 $
222 $
(79)
143 $
(27)
10
(17)
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. 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, 2017 and December 31, 2016 :
Housekeeping and Dietary equipment
Computer hardware and software
Other (1)
Total property and equipment, at cost
Less accumulated depreciation
Total property and equipment, net
(1) Includes furniture and fixtures, leasehold improvements and autos and trucks.
42
December 31, 2017
December 31, 2016
(in thousands)
22,349 $
12,665
990
36,004 $
22,495
13,509 $
21,136
11,750
1,133
34,019
20,564
13,455
$
$
$
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Depreciation expense for the years ended December 31, 2017 , 2016 and 2015 was $5.0 million , $4.8 million and $4.4 million , respectively.
Note 4—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.
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 million 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 .
Intangible
Assets
The Company’s intangible assets consist of customer relationships which were obtained through acquisitions and are recorded at their fair values at the date of
acquisition. Intangible assets with determinable 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 .
The following table sets forth the estimated amortization expense for intangibles subject to amortization for the next five years and thereafter:
Period/Year
Total Amortization Expense
(in thousands)
Thereafter
2018 $
2019 $
2020 $
2021 $
2022 $
$
4,364
4,165
4,165
4,165
4,165
9,859
Amortization expense for the years ended December 31, 2017 , 2016 and 2015 was $3.9 million , $2.7 million and $3.2 million , respectively.
Note 5—Fair Value Measurements
The Company’s current assets and current liabilities are financial instruments and most of these items (other than marketable securities and inventories) 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 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 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 (net of tax) 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 years ended December 31, 2017 , 2016 and 2015 , the Company recorded unrealized gains of
$1.2 million , unrealized losses of $0.9 million and unrealized gains of $0.5 million on marketable securities, respectively.
For the years ended December 31, 2017 , 2016 and 2015 , the Company received total proceeds, less the amount of interest received, of $28.5 million , $28.1
million and $16.4 million , respectively, from sales of available-for-sale municipal bonds. For the years
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Table of Contents
ended December 31, 2017 and 2016 , these sales 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 . Such gains and losses were recorded in “Other income-Investment and interest” 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.
The investments under the funded deferred compensation plan are accounted for as trading securities and unrealized gains or losses are included in earnings. The
fair value of these investments are determined based on quoted market prices (Level 1).
The following tables provide fair value measurement information for the Company’s marketable securities and deferred compensation fund investment assets as of
December 31, 2017 and 2016 :
Carrying
Amount
Total Fair
Value
As of December 31, 2017
Fair Value Measurement Using:
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Quoted
Prices
in Active
Markets
(Level 1)
(in thousands)
Financial Assets:
Marketable securities
Municipal bonds — available-for-sale
Deferred compensation fund
Money Market (1)
Balanced and Lifestyle
$
$
Large Cap Growth
Small Cap Growth
Fixed Income
International
Mid Cap Growth
73,221 $
73,221 $
— $
73,221 $
2,720 $
2,720 $
— $
2,720 $
8,523
7,802
3,442
3,050
1,531
1,817
8,523
7,802
3,442
3,050
1,531
1,817
8,523
7,802
3,442
3,050
1,531
1,817
—
—
—
—
—
—
Deferred compensation fund
$
28,885 $
28,885 $
26,165 $
2,720 $
—
—
—
—
—
—
—
—
—
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Carrying
Amount
Total Fair
Value
As of December 31, 2016
Fair Value Measurement Using:
Quoted
Prices
in Active
Markets
(Level 1)
(in thousands)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Financial Assets:
Marketable securities
Municipal bonds — available-for-sale
Deferred compensation fund
Money Market (1)
Balanced and Lifestyle
$
$
Large Cap Growth
Small Cap Value
Fixed Income
International
Mid Cap Growth
67,730 $
67,730 $
— $
67,730 $
3,147 $
3,147 $
— $
3,147 $
7,162
5,583
2,933
2,752
1,132
1,410
7,162
5,583
2,933
2,752
1,132
1,410
7,162
5,583
2,933
2,752
1,132
1,410
—
—
—
—
—
—
Deferred compensation fund
$
24,119 $
24,119 $
20,972 $
3,147 $
—
—
—
—
—
—
—
—
—
(1) The fair value of the money market fund is based on the net asset value (“NAV”) of the shares held by the plan at the end of the period. The money market
fund includes short-term United States dollar denominated money-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.
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
Total debt securities
December 31, 2016
Marketable securities
Municipal bonds — available-for-sale
Total debt securities
December 31, 2015
Marketable securities
Municipal bonds — available-for-sale
Total debt securities
$
$
$
$
$
$
72,249 $
72,249 $
1,169 $
1,169 $
(197) $
(197) $
73,221 $
73,221 $
68,220 $
68,220 $
68,640 $
68,640 $
178 $
178 $
869 $
869 $
45
(668) $
(668) $
67,730 $
67,730 $
(13) $
(13) $
69,496 $
69,496 $
—
—
—
—
—
—
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The following table summarizes the contractual maturities of debt securities held at December 31, 2017 and 2016 , which are classified as marketable securities in
the Consolidated Balance Sheets:
Contractual maturity:
Maturing in one year or less
Maturing in second year through fifth year
Maturing in sixth year through tenth year
Maturing after ten years
Total debt securities
Note 6— Accounts and Notes Receivable
Municipal Bonds — Available-for-Sale
December 31,
2017
2016
(in thousands)
$
$
916 $
15,948
22,851
33,506
73,221 $
973
28,671
21,651
16,435
67,730
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 variety 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):
Bad debt provision
$
6,250 $
4,629 $
4,335
Year Ended December 31,
2017
2016
2015
(in thousands)
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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, for the years ended December 31, 2017 , 2016 and 2015 are as
follows:
Year Ended December 31,
Balance Beginning
of Year
Additions
Deductions
Balance End of Year
Average Outstanding
Balance
Impaired Notes Receivable
2017
2016
2015
Year Ended December 31,
2017
2016
2015
$
$
$
5,685 $
6,471 $
10,208 $
1,169 $
— $
395 $
(in thousands)
— $
786 $
4,132 $
6,854 $
5,685 $
6,471 $
6,270
6,078
8,340
Reserve for Impaired Notes Receivable
Balance Beginning
of Year
Additions
Deductions
Balance End of
Year
$
$
$
2,419 $
2,139 $
3,031 $
(in thousands)
465 $
280 $
99 $
— $
— $
991 $
2,884
2,419
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.
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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 year of future minimum lease payments under operating leases that have remaining terms as of December 31,
2017 :
Period/Year
2018
2019
2020
2021
2022
Thereafter
Total minimum lease payments
Operating Leases
(in thousands)
2,482
1,968
1,489
734
735
1,710
9,118
$
$
Total expense for all operating leases for the years ended December 31, 2017 , 2016 and 2015 was as follows:
Operating lease expense
$
3,833 $
2,615 $
2,003
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
Restricted stock and restricted stock units
Employee Stock Purchase Plan
Total pre-tax stock-based compensation expense charged against income (1)
Total recognized tax benefit related to stock-based compensation
Year Ended December 31,
2017
2016
2015
(in thousands)
3,740 $
3,193 $
1,205
1,040
550
509
5,985 $
4,252 $
2,781
252
508
3,541
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 , the unrecognized compensation cost related to unvested stock options and awards was $11.4 million . The weighted average period over
which these awards will vest is approximately 2.7 years.
2012 Equity Incentive Plan
The Company’s 2012 Equity Incentive Plan (the “Plan”) provides that current or prospective officers, employees, non-employee directors and advisors can receive
share-based awards such as stock options, restricted stock, restricted stock units and other stock awards. The Plan seeks to promote the highest level of
performance by providing an economic interest in the long-term success of the Company.
As of December 31, 2017 , 3.2 million shares of Common Stock were reserved for issuance under the Plan, including 0.8 million shares available for future grant.
No stock award will have a term in excess of ten 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.
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Table of Contents
The Nominating, Compensation and Stock Option Committee 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 Plan.
Stock Options
A summary of stock options outstanding under the Plan as of December 31, 2017 and changes during 2017 is as follows:
December 31, 2016
Granted
Exercised
Forfeited
Expired
December 31, 2017
Number of Shares
Weighted Average Exercise
Price
(in thousands, except per share data)
2,615 $
544 $
(682) $
(100) $
(3) $
2,374 $
24.61
39.38
18.95
34.10
23.49
29.22
The weighted average grant-date fair value of stock options granted during the years ended 2017 , 2016 and 2015 were $8.52 , $7.46 and $6.64 per common share,
respectively. The total intrinsic value of options exercised during the years ended 2017 , 2016 and 2015 were $19.5 million , $4.9 million and $6.5 million ,
respectively.
The tax benefit realized from stock options exercised during 2017 was $5.3 million .
The fair value of the stock option awards granted during 2017 , 2016 and 2015 were estimated on the dates of grant using the Black-Scholes option valuation
model and the following assumptions:
Risk-free interest rate
Weighted average expected life
Expected volatility
Dividend yield
2017
2016
2015
Year Ended December 31,
2.0%
5.8 years
25.1%
1.9%
2.0%
5.8 years
26.0%
2.0%
1.9%
5.8 years
27.2%
2.2%
The following table summarizes other information about the stock options at December 31, 2017 :
Outstanding:
Aggregate intrinsic value
Weighted average remaining contractual life
Exercisable:
Number of options
Weighted average exercise price
Aggregate intrinsic value
Weighted average remaining contractual life
49
December 31, 2017
(dollars in thousands, except per share data)
$
$
$
55,789
6.5 years
954
22.19
29,134
4.7 years
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Restricted Stock
A summary of the restricted stock outstanding under the Plan as of December 31, 2017 and changes during 2017 are as follows:
December 31, 2016
Granted
Vested
Forfeited
December 31, 2017
Number of Restricted Shares
Weighted Average Grant-
Date Fair Value
(in thousands, except per share data)
74
$
— $
(17)
$
— $
57
$
32.09
—
31.41
—
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:
Weighted average grant-date fair value of restricted stock granted
Total fair value of restricted stock vested
Year Ended December 31,
2017
2016
2015
$
$
(in thousands, except per share data)
— $
34.14 $
690 $
311 $
30.30
123
Fair value is determined based on the market price of the shares on the date of grant. The weighted average remaining vesting period for the unvested restricted
stock is 2.5 years .
Restricted Stock Units
For the year ended December 31, 2017 , the Company granted 0.1 million restricted stock units with a weighted average grant date fair value of $40.16 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.
A summary of the outstanding restricted stock units as of December 31, 2017 and changes during 2017 is as follows:
December 31, 2016
Granted
Vested
Forfeited
December 31, 2017
Number of Restricted Units
Weighted Average Grant Date
Fair Value
(in thousands, except per share data)
— $
88 $
— $
— $
88 $
—
40.16
—
—
40.16
The weighted average remaining vesting period for the unvested restricted stock units is 4.1 years .
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan ("ESPP") is currently available through 2021 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 Stock to its employees. Pursuant to such authorization, there are 2.3
million shares available for future grant at December 31, 2017 (after deducting the 2017 funding of the 54,000 shares delivered in 2018 ). 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. No employee may purchase Common Stock which exceeds $25,000 in fair market value (determined on the option date) for each calendar year.
The
50
Table of Contents
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 , 2016 and 2015 :
Common shares purchased
Per common share purchase price
Deferred Compensation Plan
Year Ended December 31,
2017
2016
2015
(in thousands, except per share data)
54
53
$
33.29 $
29.64 $
59
26.29
The Company offers a Supplemental Executive Retirement Plan (“SERP”) for 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 deferral in the form of Company 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 Stock to its employees. Pursuant to such authorization, there are 0.4
million shares available for future grant at December 31, 2017 (after deducting the 2017 funding of 9,000 shares delivered in 2018 ). At the time of issuance, such
shares were accounted for at cost as treasury stock. At December 31, 2017 , approximately 0.3 million of such shares are vested and remain in the respective active
participants’ accounts with the trustee.
The following table summarizes information about the SERP for the plan years ended December 31, 2017 , 2016 and 2015 :
SERP expense (1)
Treasury shares issued to fund SERP expense (2)
SERP trust account balance at December 31 (3)
Unrealized gain (loss) recorded in SERP liability account
2017
Year Ended December 31,
2016
(in thousands)
2015
$
$
$
503 $
9
42,467 $
4,534 $
511 $
13
34,599 $
1,495 $
538
15
37,765
(62)
(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 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) of 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.
51
Table of Contents
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:
March 31, 2017
June 30, 2017
September 30, 2017
December 31, 2017
(in thousands, except per share amounts)
Paid During the Quarter Ended
Cash dividends paid per common share $
Total cash dividends paid
$
Record date
Payment date
0.18625 $
13,624 $
February 17, 2017
March 24, 2017
0.18750 $
13,750 $
May 19, 2017
June 23, 2017
0.18875 $
13,883 $
0.19000
13,987
August 18, 2017
November 17, 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:
Cash dividends declared per common share
Year Ended December 31,
2017
2016
2015
$
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— Income Taxes
The following table summarizes the provision for income taxes:
Current:
Federal
State
Deferred:
Federal
State
Tax provision
Year Ended December 31,
2017
2016
2015
(in thousands)
$
35,673 $
33,032 $
7,179
42,852
2,924
(1,037)
1,887
6,958
39,990
2,163
838
3,001
$
44,739 $
42,991 $
11,917
2,173
14,090
13,646
4,004
17,650
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.
52
Table of Contents
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 are as follows:
Deferred tax assets:
Allowance for doubtful accounts
Deferred compensation
Accrued insurance claims
Non-deductible reserves
Amortization of intangibles
Other
Deferred tax liabilities:
Expensing of housekeeping supplies
Depreciation of property and equipment
Other
Year Ended December 31,
2017
2016
(in thousands)
$
3,109 $
6,601
3,665
567
162
662
2,672
8,532
5,862
1,257
624
858
14,766
19,805
(4,678)
(1,745)
(845)
(7,268)
(6,752)
(2,568)
(663)
(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:
Income tax expense computed at statutory rate
Increases (decreases) resulting from:
State income taxes, net of federal tax benefit
Federal jobs credits
Tax exempt interest
Other, net
Income tax expense
Year Ended December 31,
2017
2016
2015
(in thousands)
46,538 $
42,136 $
31,418
3,661
(4,193)
(568)
(699)
5,064
(4,550)
(457)
798
44,739 $
42,991 $
4,015
(3,900)
(132)
339
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 . Based on the
evaluation, the Company concluded that there are no significant uncertain
53
Table of Contents
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, 2017 and 2016 is omitted as there is no activity to report in such account for the years ended December 31, 2017 or 2016 ,
and there was no balance of unrecognized tax benefits at the beginning of 2016 .
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—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 client 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, 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. In
addition, most corporate expenses such as corporate salary and benefit costs, certain legal costs, information technology costs, depreciation, amortization of finite-
lived intangible assets, share based compensation costs and other corporate-specific costs, are not 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.
54
Table of Contents
Revenues (1)
Housekeeping services
Dietary services
Corporate and eliminations
Consolidated
Income before income taxes
Housekeeping services
Dietary services
Corporate and eliminations (2)
Consolidated
Depreciation and amortization
Housekeeping services
Dietary services
Corporate and eliminations
Consolidated
Total assets
Housekeeping services
Dietary services
Corporate and eliminations (3)
Consolidated
Capital expenditures
Housekeeping services
Dietary services
Corporate and eliminations
Consolidated
2017
Year Ended December 31,
2016
(in thousands)
2015
979,610 $
886,521
—
957,148 $
605,514
—
909,709
527,140
—
1,866,131 $
1,562,662 $
1,436,849
95,505 $
46,008
(8,548)
90,756 $
34,641
(5,010)
132,965 $
120,387 $
6,547 $
1,813
526
8,886 $
304,303 $
242,874
128,826
676,003 $
6,535 $
439
522
7,496 $
266,464 $
127,187
134,795
528,446 $
4,287 $
4,612 $
663
447
5,397 $
410
420
5,442 $
84,471
31,612
(26,319)
89,764
6,488
685
487
7,660
228,116
104,797
148,036
480,949
3,586
336
1,076
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.
55
Table of Contents
Note 15— 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 ,
2016 and 2015 :
Weighted average number of common shares outstanding - basic
Effect of dilutive securities (1)
Weighted average number of common shares outstanding - diluted
Year Ended December 31, 2017
2017
2016
(in thousands)
2015
73,355
993
74,348
72,754
720
73,474
71,826
686
72,512
(1) Certain outstanding stock option awards are anti-dilutive and were therefore excluded from the calculation of the weighted 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 , 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.
Note 16—Contractual Obligations and Other Contingencies
Line of Credit
As of December 31, 2017 , 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 LIBOR plus 75 basis points (or if LIBOR becomes unavailable, the higher of the Prime Rate or the
Overnight Bank Funding Rate plus 50 basis points ). At December 31, 2017 , there were $35.4 million in borrowings under the line of credit. The line of credit
requires the Company to satisfy one financial covenant, with which the Company is in compliance as of December 31, 2017 and expects to remain in compliance.
The line of credit expires on December 18, 2018 .
At December 31, 2017 , the Company also had outstanding $77.6 million in irrevocable standby letters of credit, which relate to payment obligations under the
Company'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 million to $187.0 million at December 31, 2017 . The letters of credit were decreased to $65.9 million on January 2,
2018 .
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 Proceedings
The Company is subject to various claims and legal actions in the ordinary course of business. Some of these matters include payroll and employee-related matters
and examinations by governmental agencies. As 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 consolidated financial condition or liquidity.
56
Government Regulations
The Company’s clients are concentrated in the healthcare industry and are primarily providers of long-term care. The revenues of many of the Company’s clients
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 clients 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—Accrued Insurance Claims
The Company currently has a Paid Loss Retrospective Insurance Plan for general liability and workers’ compensation insurance, which comprise approximately
30.7% of the Company’s liabilities at December 31, 2017 . 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 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, 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. Such 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.
Note 18—Subsequent Events
The Company evaluated all subsequent events through the 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
Operating costs and expenses
Income before income taxes
Net income
Basic earnings per common share
Diluted earnings per common share
Cash dividends declared per common share
2016
Revenues
Operating costs and expenses
Income before income taxes
Net income
Basic earnings per common share
Diluted earnings per common share
Cash dividends declared per common share
404,490 $
373,780 $
32,279 $
22,017 $
0.30 $
0.30 $
470,876 $
439,313 $
33,078 $
22,551 $
0.31 $
0.30 $
491,355 $
459,864 $
32,930 $
23,472 $
0.32 $
0.31 $
499,410
466,285
34,678
20,186
0.27
0.27
0.18750 $
0.18875 $
0.19000 $
0.19125
384,807 $
355,390 $
29,604 $
18,626 $
0.26 $
0.26 $
386,556 $
357,875 $
29,683 $
18,760 $
0.26 $
0.26 $
392,734 $
363,522 $
30,571 $
19,711 $
0.27 $
0.27 $
398,565
368,122
30,529
20,299
0.28
0.28
0.18250 $
0.18375 $
0.18500 $
0.18625
$
$
$
$
$
$
$
$
$
$
$
$
$
$
57
Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
In accordance with Securities 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 and Chief Financial Officer, 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 Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2017 .
Design and Evaluation of Internal Control Over Financial Reporting
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, the Company included a report of management’s assessment of the design and effectiveness of the
Company’s internal controls over financial reporting as part of this Annual Report on Form 10-K for the fiscal year ended December 31, 2017 . Grant Thornton,
LLP, the Company’s independent registered public accounting firm, also audited the Company’s internal control over financial reporting. Management’s report and
the independent registered public accounting firm’s audit report are included in this Annual Report on Form 10-K within Part II, Item 8 under the captions entitled
“Management’s Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm”.
Changes in Internal Control over Financial Reporting
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.
Item 9B. Other Information.
Not applicable.
58
Table of Contents
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
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 2018 Annual Meeting of Shareholders and to be filed within 120 days of the close of the year ended December 31, 2017 .
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 2018 Annual Meeting of Shareholders and to be filed within 120 days of the close of the fiscal year ended December 31, 2017 .
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder 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 2018 Annual Meeting of Shareholders and to be filed within 120 days
of the close of the fiscal year ending December 31, 2017 .
Item 13. Certain Relationships and Related Transactions, 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 2018 Annual Meeting of Shareholders and to be filed within 120 days of the close of the fiscal year
ended December 31, 2017 .
Item 14. Principal Accountant Fees and Services.
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 2018 Annual Meeting of Shareholders and to be filed within 120 days of the close of the fiscal year ended December 31, 2017 .
59
Table of Contents
Item 15. Exhibits and Financial Statement Schedules.
(a) The following financial statements, schedules and exhibits are filed as part of this report:
PART IV
1.
2.
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.
Index
to
Financial
Statement
Schedules
—
Schedule II—Valuation and Qualifying Accounts and Reserves; and
a.
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.
60
Table of Contents
Healthcare Services Group, Inc.
Schedule II — Valuation and Qualifying Accounts and Reserves
Additions
Description
Beginning Balance
Charged to Costs and
Expenses
Charged to Other
Accounts
Deductions
Ending Balance
(in thousands)
2017
Allowance for Doubtful Accounts
2016
Allowance for Doubtful Accounts
2015
Allowance for Doubtful Accounts
$
$
$
6,911 $
6,250 $
— $
1,176 $
11,985
4,608 $
4,629 $
— $
2,326 $
6,136 $
4,335 $
— $
5,863 $
6,911
4,608
61
Table of Contents
The following Exhibits are filed as part of this Report (references are to Reg. S-K Exhibit Numbers):
Exhibit Index
Incorporated by Reference
Date of Filing
Exhibit Number Filed Herewith
File No.
0-12015
3/21/2001
0-12015
5/24/2007
0-12015
2/19/2015
2-87625-W
—
333-92835
0-12015
12/15/1999
10/28/2016
0-12015
10/22/2012
0-12015
0-12015
7/27/2012
7/28/2017
333-108182
8/22/2003
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3.2
3.1
3.3
4.1
4(a)
4.1
10.1
10.1
10.1
99.0
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
X
X
X
X
X
X
X
Exhibit
Number
Description
3.1
3.2
3.3
4.1 (P)
4.2†
4.3†
4.5†
10.1†
10.1
10.2
21
23
31.1
31.2
32.1
32.2
101
Amended and Restated Articles of Incorporation of the Registrant as
of May 30, 2000
Amendment to the Amended and Restated Articles of Incorporation of
the Registrant as of May 22, 2007
Second Amended and Restated Bylaws of the Registrant as of
February 17, 2015
Specimen Certificate of the Common Stock, $.01 par value, of the
Registrant
Healthcare Services Group, Inc. Employee Stock Purchase Plan
Healthcare Services Group, Inc. Amendment No. 3 to Employee Stock
Purchase Plan
Healthcare Services Group, Inc. Amended and Restated Deferred
Compensation Plan
Healthcare Services Group, Inc. 2012 Equity Incentive Plan
Amended and Restated Committed Line of Credit Note as of July 11,
2017
Healthcare Services Group, Inc. Dividend Reinvestment Plan
Subsidiaries of Healthcare Services Group, Inc.
Consent of Independent Registered Public Accounting Firm
the Principal
Executive Officer
Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act
Certification of Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act
Certification of
Section 906 of the Sarbanes-Oxley Act
Certification of the Principal Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act
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
pursuant
to
†
(P)
Indicates a management plan or compensatory plan or arrangement.
Prior to digital copy
Form
10-K
8-K
10-K
S-18
S-8
10-Q
10-Q
10-Q
10-Q
S-3D
—
—
—
—
—
—
—
62
Table of Contents
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: February 23, 2018
HEALTHCARE SERVICES GROUP, INC.
(Registrant)
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
/s/ Theodore Wahl
Theodore Wahl
/s/ John C. Shea
John C. Shea
/s/ Jude Visconto
Jude Visconto
Director and President & Chief Executive Officer
February 23, 2018
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial and Accounting Officer)
Chairman of the Board
February 23, 2018
February 23, 2018
/s/ Michael E. McBryan
Director and Executive Vice President & Chief Revenue Officer
February 23, 2018
Michael E. McBryan
/s/ John M. Briggs
John M. Briggs
Director
/s/ Robert L. Frome
Director
Robert L. Frome
/s/ Diane S. Casey
Diane S. Casey
/s/ Robert J. Moss
Robert J. Moss
Director
Director
/s/ Dino D. Ottaviano
Director
Dino D. Ottaviano
/s/ John J. McFadden
Director
John J. McFadden
63
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
SUBSIDIARIES OF HEALTHCARE SERVICES GROUP, INC.
AS OF DECEMBER 31, 2017
Exhibit 21
Entity Name
HCSG Staff Leasing Solutions, LLC ("Staff
Leasing")
HCSG Insurance Corp.
HCSG Labor Supply, LLC ("Labor Supply")
HCSG East, LLC
Year Formed
2011
Jurisdiction
Pennsylvania
2014
2014
2015
New Jersey
Pennsylvania
New Jersey
HCSG Central, LLC
2015
New Jersey
HCSG West, LLC
2015
New Jersey
HCSG East Labor Supply, LLC
2015
New Jersey
HCSG Clinical Services, LLC
2017
New Jersey
Description
Staff Leasing offers professional employer organization services to
clients in the health care industry.
HCSG Insurance Corp. is a captive insurance company which
provides the Company with certain insurance-related services.
Labor Supply offers personnel solutions on an indefinite basis in
specific job classifications to clients in the health care industry.
HCSG East, LLC provides housekeeping, laundry and dietary
services at client facilities as a subcontracted service provider on
behalf of HCSG.
HCSG Central, LLC provides housekeeping, laundry and dietary
services at client facilities as a subcontracted service provider on
behalf of HCSG.
HCSG West, LLC provides housekeeping, laundry and dietary
services at client facilities as a subcontracted service provider on
behalf of HCSG.
HCSG East Labor Supply, LLC provides personnel solutions on an
indefinite basis in specific job classifications to clients in the health
care industry.
HCSG Clinical Services, LLC provides clinical, nutrition, dietician
and similar services as a subcontracted service provider on behalf of
HCSG.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our reports dated February 23, 2018 , with respect to the consolidated financial statements, schedule, and internal control over financial reporting
included in the Annual Report of Healthcare Services Group, Inc. and Subsidiaries on Form 10-K for the year ended December 31, 2017 . We consent to the
incorporation by reference of said reports in the Registration Statements of Healthcare Services Group, Inc. on Forms S-3 (File No. 333-108182, effective August
22, 2003, File No. 333-137713, effective September 29, 2006, File No. 333-161553, effective August 26, 2009, File No. 333-189986, effective July 17, 2013, and
File No.333-197900, effective August 6, 2014) and on Forms S-8 (File No. 333-92835, effective December 15, 1999, and File No. 333-184612, effective October
26, 2012).
Exhibit 23
/s/ GRANT THORNTON LLP
New York, New York
February 23, 2018
Exhibit 31.1
Certification of the Chief Executive Officer
Pursuant to Rules 13a-14(a) and 15d-14(a)
Under the Securities Exchange Act, as Amended
I, Theodore Wahl, certify that:
1. I have reviewed this Annual Report on Form 10-K of Healthcare Services Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s Board of Directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting
Date:
February 23, 2018
/s/ Theodore Wahl
Theodore Wahl
President & Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
Certification of the Chief Financial Officer
Pursuant to Rules 13a-14(a) and 15d-14(a)
Under the Securities Exchange Act, as Amended
I, John C. Shea, certify that:
1. I have reviewed this Annual Report on Form 10-K of Healthcare Services Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s Board of Directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting
Date:
February 23, 2018
/s/ John C. Shea
John C. Shea
Chief Financial Officer
(Principal Financial and Accounting Officer)
Certification Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K of Healthcare Services Group, Inc. (the “Company”) for the year ended December 31, 2017 as filed with the
Securities and Exchange commission on the date hereof (the “Report”), I, Theodore Wahl, President and Chief Executive Officer of the of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d), of the Securities Exchange Act of 1934; and
(2) That information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
February 23, 2018
/s/ Theodore Wahl
Theodore Wahl
President & Chief Executive Officer
(Principal Executive Officer)
Certification Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2
In connection with the Annual Report on Form 10-K of Healthcare Services Group, Inc. (the “Company”) for the year ended December 31, 2017 as filed with the
Securities and Exchange commission on the date hereof (the “Report”), I, John C. Shea, Chief Financial Officer of the of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d), of the Securities Exchange Act of 1934; and
(2) That information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
February 23, 2018
/s/ John C. Shea
John C. Shea
Chief Financial Officer
(Principal Financial and Accounting Officer)