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, 2018
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.
Pennsylvania
23-2018365
(Exact
name
of
registrant
as
specified
in
its
charter)
(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 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
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
o
o
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, 2018 was
approximately $2.02 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 (March 14,
2019). 74,036,000
Portions of the definitive Proxy Statement for the Registrant’s Annual Meeting of Shareholders to be held on May 28, 2019 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, 2018
TABLE OF CONTENTS
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
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
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
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
8
13
13
14
14
15
17
17
30
31
63
63
63
64
64
64
64
64
65
65
67
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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 a significant portion of our consolidated
revenues contributed by one customer during the year ended December 31, 2018; credit and collection risks associated with the healthcare 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
healthcare industry, our workforce and services provided, including state and local regulations pertaining to the taxability of our services and other labor-related
matters such as minimum wage increases; the Company's expectations with respect to selling, general, and administrative expense; 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 tax rates and financial results; and the risk factors described in Part I of
this report under “Government Regulation of Clients,” “Service Agreements and Collections,” and "Competition;" 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 (including the impact of potential tariffs)
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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In this Annual Report on Form 10-K for the year ended December 31, 2018, 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.”
PART I
Item I. Business.
General
Healthcare Service Group, Inc. 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 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, 2018.
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 15—Segment
Information in the Notes to Consolidated Financial Statements for the years ended December 31, 2018, 2017 and 2016.
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 each
segment provides opportunities for growth.
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Housekeeping
Housekeeping accounted for approximately 48.5%, or $973.8 million, of our consolidated revenues in 2018. 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.
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 78.8% of Housekeeping
revenues for 2018. 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 2018, the cost of Housekeeping supplies as a percentage of Housekeeping revenues was 7.8%. Generally,
the cost of such supplies is dictated by specific product market conditions, 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 51.5%, or $1,035.0 million, of our consolidated revenues in 2018. 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 provided by a
District Manager specializing in dietary services. We also offer clinical consulting services to our dietary clients, which may be provided as a stand-alone service,
or bundled with other dietary department services. 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 dietitian 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.
Dietary operating performance is impacted by price fluctuations in labor and supply costs resulting from similar factors discussed above for Housekeeping. In
2018, the costs of labor and food-related supplies represented approximately 57.2% and 34.4% of Dietary revenues, respectively.
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Significant Customers
For the years ended December 31, 2018 and 2017, both the Housekeeping and Dietary segments earned revenue from several significant customers, including
Genesis Healthcare, Inc. ("Genesis"). For the years ended December 31, 2018 and 2017, Genesis accounted for $386.7 million or 19.3% and $327.5 million
or 17.5% of the Company's consolidated revenues, respectively.
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
is 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.
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 (e.g., skilled nursing facilities, residential care and assisted living facilities) and hospitals (e.g., acute care, critical access, psychiatric). Such facilities may
be specialized or general, privately owned or public, for-profit or not-for-profit, and may serve residents on a long-term or short-term basis. We market our
services to facilities after consideration of a variety of factors including facility type, size, location, and service opportunities (Housekeeping or Dietary). 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 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.
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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.
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. In order
to provide for such collection issues and the general risk associated with the granting of credit terms, we have recorded bad debt provisions (in an Allowance for
Doubtful Accounts) of $51.4 million, $6.3 million and $4.6 million in the years ended December 31, 2018, 2017 and 2016, respectively (see Schedule II -
Valuation and Qualifying Accounts and Reserves for year-end balances). As a percentage of total revenues, these provisions represented approximately 2.6% for
the year ended December 31, 2018, and 0.3% for the years ended December 31, 2017 and 2016. The increase to our bad debt provision for 2018 related to
multiple corporate restructurings of privately-held, multi-facility operators that occurred during 2018 that resulted in increased expense compared to our historical
experience. 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 establish credit limits, perform ongoing credit evaluations and monitor accounts to
minimize the risk of loss. Despite our 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 our clients experience a negative impact on their cash flows, it could have a material adverse effect on our results of
operations and financial condition.
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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, 2018, we employed over 55,000 people, of which approximately 6,600 were corporate and field management personnel. The Company's
employment of some of its employees is 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 Genesis contributing 19.3% and 17.5%, of our total consolidated revenues for the years ended
December 31, 2018 and 2017, respectively. 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 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.
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.
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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 order to provide for such collection issues and the general risk associated with the
granting of credit terms, we have recorded bad debt provisions (in an Allowance for Doubtful Accounts) of $51.4 million for the year ended December 31, 2018 as
compared to $6.3 million and $4.6 million in the years ended December 31, 2017 and 2016, respectively. In making our credit evaluations, in addition to analyzing
and anticipating, where possible, the specific cases described above, we consider the general collection risk associated with trends in the long-term care industry.
We establish credit limits, perform ongoing credit evaluations and monitor accounts to minimize the risk of loss. Despite our 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 our clients experience a
negative impact on their cash flows, it could have a material adverse effect on our 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 on a tax position we’ve taken and upon final
adjudication we are required to change such position, we could incur additional tax liability, including interest and penalties. Such costs and expenses could have a
material adverse impact on our results of operations, financial condition and cash flows. 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. If we fail to comply with applicable tax
laws and regulations, we could suffer civil or criminal penalties in addition to the delinquent tax assessment. In the taxing jurisdictions where our services have
been determined to be subject to tax, the jurisdiction may increase the tax rate assessed on such services. We seek to pass-through to our clients such tax increases.
In the event we are not able to pass-through any portion of the tax increase, our results of operations, financial condition and cash flows could be adversely
impacted.
Our business and financial results could be adversely affected by 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.
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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.
A significant majority of our customer base are multi-facility management groups and independent facility operators who lease the buildings in which they
operate and may experience risks relating to their leases including termination, escalators, extensions and special charges.
The credit worthiness of our existing clients, and potential clients, is impacted by their ability to maintain positive relationships with their respective landlords.
Any loss or deterioration in the relationship between our clients and their respective landlords may adversely affect their financial condition and ability to make
payments on their service agreement with us on agreed upon terms. Any failure by our clients to make rent payments or comply with the provisions of their lease
terms could result in the termination of such lease agreements. In such cases, our clients may lose their ability to continue conducting operations and as a result
terminate their service agreements with us.
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. 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. 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.
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We may be adversely affected by inflationary or market fluctuations, including impact of tariffs, in the cost of products consumed in providing our services or
our cost of labor. Additionally, we rely on certain vendors for housekeeping, laundry and dietary supplies.
The prices we pay for the principal items we consume in performing our services are dependent primarily on current market prices. We have consolidated certain
supply purchases with national vendors through agreements containing negotiated prospective pricing. In the event such vendors are not able to comply with their
obligations under the agreements and we are required to seek alternative suppliers, we may incur increased costs of supplies.
Dietary supplies, to a much greater extent than Housekeeping supplies, are impacted by commodity pricing factors, including the impact of tariffs, which in many
cases are unpredictable and outside of our control. We seek to pass on to 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 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.
11
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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 there can be no guarantee that we will be able to do so 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.
The SEC’s investigation into our earnings per share (“EPS”) calculation practices could result in potential sanctions or penalties, distraction to our
management and result in litigation from third parties, each of which could adversely affect or cause variability in our financial results.
Beginning in November 2017, the Company has been in dialogue with the SEC regarding EPS calculation, rounding and reporting practices and in March 2018 we
learned that the SEC had opened a formal investigation into these matters. In response to the SEC’s investigation, during the fourth quarter of 2018, the Company
authorized its outside counsel to conduct an internal investigation, under the direction of the Company’s Audit Committee regarding these matters. The internal
investigation was completed in March 2019, prior to the filing of this Annual Report on Form 10-K.
Notwithstanding the completion of the internal investigation, the SEC’s investigation is ongoing and there can be no assurance that the SEC or another regulatory
body will not make further regulatory inquiries or pursue further action that could result in significant costs and expenses including potential sanctions or penalties
as well as distraction to management. In addition, the Company may be subject to litigation from third parties related to the matters under review by the SEC.
Accordingly, the ongoing SEC investigation and/or any related litigation could adversely affect or cause variability in our financial results.
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, financial covenants under our credit facility 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.
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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. A significant disruption or failure of our information
technology systems may have a significant impact on our operations, potentially resulting in service interruptions, security violations, regulatory compliance
failures and other operational difficulties. In addition, any attack perpetrated against our information systems including through a system failure, security breach or
disruption by malware or other damage, could similarly impact our operations and result in loss or misuse of information, litigation and potential liability.
Although we have taken steps intended to mitigate the risks presented by potential cyber incidents, it is not possible to protect against every potential power loss,
telecommunications failure, cybersecurity attack or similar event that may arise. Moreover, the safeguards we use are subject to human implementation and
maintenance and to other uncertainties. Any of these cyber incidents may result in a violation of applicable laws or regulations (including privacy and other laws),
damage our reputation, cause a loss of customers and give rise to monetary fines and other penalties, which could be significant. Such events could have an adverse
effect on our results of operations, financial condition and liquidity.
There are risks related to the implementation of our new global enterprise resource planning system.
We are currently engaged in a multi-year process of conforming our financial and accounting data onto a new enterprise resource planning system ("ERP"). The
ERP is designed to improve the efficiency of our financial transaction processes, accurately maintain our books and records, and provide information important to
the operation of the business to our management team. The implementation of the ERP will continue to require significant investment of human and financial
resources, and we may experience delays and increased costs as a result. Any significant disruption or deficiency in the design and implementation of the ERP
could have a material adverse effect on our ability to fulfill and invoice customer orders, apply cash receipts, place purchase orders with suppliers, and make cash
disbursements, and could negatively impact data processing, which may have a material adverse effect on our business, consolidated financial condition or results
of operations. While we have invested significant resources in planning and project management, significant implementation issues may arise.
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 Colorado, South
Carolina, Connecticut, Georgia, California and New Jersey. The New Jersey office is the headquarters of our wholly-owned subsidiaries. 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.
13
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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.
14
Table of Contents
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
PART II
The Company’s Common Stock, $0.01 par value (the “Common Stock”), is traded under the symbol “HCSG” on the NASDAQ Global Select Market. As of
March 14, 2019, there were approximately 74.0 million shares of our Common Stock outstanding.
Holders
As of March 14, 2019, we had approximately 400 holders of record of our Common Stock. Based on reports of security position listings compiled for the 2018
annual meeting of shareholders, we believe we may have approximately 8,000 beneficial owners of our Common Stock.
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, 2018.
Number of Securities to be Issued
Upon Exercise of Outstanding
Options, Warrants and Rights
(a)
Weighted-Average Exercise
Price of Outstanding Options,
Warrants and Rights
(b)
Number of Securities Remaining
Available for Future Issuance
Under Equity Compensation Plans
(Excluding Securities Issued and
not Exercised)
(c)
(in thousands, except per share amounts)
2,121 1 $
—
2,121
$
31.53
—
31.53
3,119 2
—
3,119
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
1
2
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.
Includes stock awards to purchase 0.5 million shares available for future grant under the Company’s 2012 Plan (the "2012 Plan"), 2.2 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 (the "Deferred Compensation Plan"). Treasury shares may be issued under the 1999 Plan and the Company’s
Amended and Restated Deferred Compensation Plan.
Performance Graph
The following graph matches Healthcare Services Group, Inc.’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, 2013 to December 31, 2018. 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.
15
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, 2013 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2019 Standard & Poor’s, a division of S&P Global. All rights reserved.
Copyright© 2019 Russell Investment Group. All rights reserved.
Company/Index
Healthcare Services Group, Inc.
S&P 500
Russell 2000
NASDAQ Composite
2013
2014
2015
2016
2017
2018
$
$
$
$
100.00 $
100.00 $
100.00 $
100.00 $
111.71 $
113.69 $
104.89 $
114.62 $
128.64 $
115.26 $
100.26 $
122.81 $
147.39 $
129.05 $
121.63 $
133.19 $
201.58 $
157.22 $
139.44 $
172.11 $
156.45
150.33
124.09
165.84
December 31,
Unregistered Sales of Equity Securities and Use of Proceeds
None
16
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
Weighted average number of common shares outstanding -
basic
Weighted average number of common shares outstanding -
diluted
2018
2017
2016
2015
2014
(in thousands, except per share amounts)
Years Ended December 31,
$
$
$
$
$
$
$
$
2,008,821 $
1,866,131 $
1,562,662 $
1,436,849 $
1,293,183
83,524 $
88,226 $
77,396 $
58,024 $
1.13 $
1.12 $
1.20 $
1.19 $
1.06 $
1.05 $
0.81 $
0.80 $
692,603 $
440,780 $
676,003 $
399,952 $
528,446 $
338,842 $
480,949 $
296,456 $
344,745 $
0.7775 $
343,238 $
0.7575 $
313,753 $
0.7375 $
269,277 $
0.7175 $
74,002
74,612
73,355
74,348
72,754
73,474
71,826
72,512
21,850
0.31
0.31
469,579
275,830
213,414
0.6975
70,616
71,341
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,
“2018”
refers
to
the
year
ended
December
31,
2018,
“2017”
refers
to
the
year
ended
December
31,
2017
and
“2016”
refers
to
the
year
ended
December
31,
2016.
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, 2018 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 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, 2018.
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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. 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.
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. On-site management is responsible for all daily dietary department
activities, with regular support provided by a District Manager specializing in dietary services. We also offer clinical consulting services to our dietary clients,
which may be provided as a stand-alone service, or bundled with other dietary department services. 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 dietitian
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.
At December 31, 2018, Housekeeping services were provided at essentially all of our more than 3,500 client facilities, generating approximately 48.5%, or $973.8
million, of 2018 total revenues. Dietary services were provided to over 1,500 client facilities at December 31, 2018 and contributed approximately 51.5%, or
$1,035.0 million, of 2018 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. HCSG Insurance provides workers’ compensation, general liability and other insurance coverages to
such entities with respect to such transitioned workforce, such entities provide housekeeping, laundry and dietary services as a subcontracted provider to the
Company, and 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.
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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
2018, 2017 and 2016:
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,
2018
2017
2016
100.0 %
100.0 %
100.0 %
88.2 %
6.8 %
0.0%
5.0 %
0.8 %
4.2 %
86.4 %
6.8 %
0.3 %
7.1 %
2.4 %
4.7 %
85.7 %
6.7 %
0.2 %
7.8 %
2.8 %
5.1 %
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 2019 may be comparable to the historical ratios above, absent the effects of adjustments to our bad debt expense and self-
insurance reserves in costs of services provided and the change in the provision for income taxes. We anticipate that for 2019, 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 as
percentages of segment revenues) 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 78.8% of Housekeeping revenues in 2018. Dietary labor costs
accounted for approximately 57.2% of Dietary revenues in 2018. 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 7.8% of Housekeeping revenues in 2018. In contrast, supplies consumed in performing our Dietary services
accounted for approximately 34.4% 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.
19
Table of Contents
Years Ended December 31, 2018 and 2017
The following table sets forth the 2018 income statement key components that we use to evaluate our financial performance on a consolidated and reportable
segment basis compared to 2017. 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
2018
Year Ended December 31,
2017
(in thousands)
% Change
973,826 $
1,034,995
2,008,821 $
865,521 $
974,433
(67,973)
1,771,981 $
979,610
886,521
1,866,131
884,105
840,513
(112,108)
1,612,510
(0.6)%
16.7 %
7.6 %
(2.1)%
15.9 %
(39.4)%
9.9 %
136,603 $
126,732
7.8 %
(327) $
6,076
(105.4)%
108,305 $
60,562
(68,957)
99,910 $
95,505
46,008
(8,548)
132,965
13.4 %
31.6 %
706.7 %
(24.9)%
16,386 $
44,739
(63.4)%
$
$
$
$
$
$
$
$
$
Consolidated revenues increased 7.6% to $2.0 billion in 2018 compared to $1.9 billion in 2017 as a result of the factors discussed below under Reportable
Segments.
Reportable
Segments
Housekeeping’s 0.6% decrease in reportable segment revenues resulted primarily from adjustments during 2018 to our contractual relationships with multiple
regional customers as well as a number of independent facilities. Dietary’s 16.7% 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 9.9% to $1.8 billion in 2018 compared to $1.6 billion in 2017, primarily related to our overall growth, as represented by
our 7.6% growth in consolidated revenues for the same period. As a percentage of consolidated revenues, cost of services increased to 88.2% in 2018 from 86.4%
in 2017.
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,
2018
2.6%
1.9%
2017
0.3%
2.4%
% Change
2.3%
(0.5)%
The increase to our bad debt provision for 2018 related to multiple corporate restructurings of privately-held, multi-facility operators that occurred during 2018
that resulted in increased expense compared to our historical experience.
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 2018, decreased to 88.9% compared to 90.3% in 2017. Cost of
services provided for Dietary, as a percentage of Dietary revenues for 2018, decreased to 94.1% compared to 94.8% in 2017.
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
2018
78.8%
7.8%
57.2%
34.4%
Year Ended December 31,
2017
80.1%
8.0%
56.6%
36.1%
% Change
(1.3)%
(0.2)%
0.6%
(1.7)%
The ratios of these key indicators generally remain relatively consistent. 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 2018 increased $15.9
million or 13.0% compared to 2017, related to our overall growth, a $3 million, state-specific sales tax settlement and ongoing investments in technology.
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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 . Losses on the plan investments during 2018 decreased our selling, general and administrative expense for the year. Gains on the
plan investments during 2017 increased our selling, general and administrative expense for the year.
Selling, general and administrative expense excluding change in
deferred compensation liability
(Loss) gain on deferred compensation plan investments
Selling, general and administrative expense
$
$
138,072 $
(1,469)
136,603 $
(in thousands)
122,198 $
4,534
126,732 $
15,874
(6,003)
9,871
13.0 %
(132.4)%
7.8 %
2018
2017
% Change
% Change
Year Ended December 31,
Consolidated Investment and Net Interest Income
Investment and interest income decreased 105.4% for 2018 compared to 2017, primarily due to higher interest costs associated with our short–term borrowings
and unfavorable 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 16.4% for 2018 compared to 33.6% for 2017. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the "Act"), which
lowered our U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018.
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.
Additionally, the Company recognized a deferred tax asset of $13.0 million during 2018 which was primarily driven from the impact of the Company's provision
for bad debt during the period and contributed to the difference between our effective tax rates and the applicable U.S. federal statutory rate.
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Years Ended December 31, 2017 and 2016
The following table sets forth 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
2016
(in thousands)
% Change
979,610 $
886,521
1,866,131 $
884,105 $
840,513
(112,108)
957,148
605,514
1,562,662
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 $1.9 billion in 2017 compared to $1.6 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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Costs of services provided
Consolidated
Consolidated costs of services increased 20.4% to $1.6 billion in 2017 compared to $1.3 billion in 2016. The increase in costs of services is 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 the 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:
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 positively impact 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. Costs 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 costs
Housekeeping supplies
Dietary labor and other labor 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, consolidated selling, general and administrative expense for 2017 increased $18.3 million or 17.6%
compared to 2016, related primarily to our overall growth.
Included in selling, general and administrative expense are gains and losses associated with changes in the value of investments under the deferred compensation
plan. These investments represent the amounts held on behalf of the participating employees and changes in the value of these investments affect the amount of our
deferred compensation liability . Gains on the plan investments during 2017 and 2016 increased our selling, general and administrative expense for these periods.
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Selling, general and administrative expense excluding change in deferred
compensation liability
Gain on deferred compensation plan investments
Selling, general and administrative expense
$
$
122,198 $
103,922 $
4,534
1,495
126,732 $
105,417 $
18,276
3,039
21,315
17.6 %
203.3 %
20.2 %
Year Ended December 31,
2017
2016
$ Change
% Change
(in thousands)
Consolidated Investment and Net Interest Income
Investment and interest income increased 130.7% for 2017 compared to 2016, primarily due to favorable market fluctuations in the value of our trading security
investments representing the funding for our deferred compensation plan.
Consolidated Income Taxes
Our effective tax rate was 33.6% for 2017 and 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 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 Act was signed into law, enacting significant changes to corporate tax rates, as well as business-related exclusions, deductions and
credits.
During 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%.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting standards generally accepted in the United States (“U.S. GAAP”) requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period.
Financial reporting results rely on estimating the effects of matters that are inherently uncertain. An understanding of the policies discussed below is critical to the
understanding of our financial statements because the application of these policies requires judgment. Specific risks for these critical accounting policies and
estimates are described in the following paragraphs. For these estimates, we caution that future events do not always occur as forecasted, and the best estimates
routinely require adjustment. Any such adjustments or revisions to estimates could result in material differences from previously reported amounts.
The policies discussed below are not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by U.S. GAAP, with no need for our judgment in their application. There are also areas in which our judgment in selecting
another available alternative would not produce a materially different result. See our audited consolidated financial statements and notes thereto which are included
in this Annual Report on Form 10-K, which contain a discussion of our accounting policies and other disclosures required by U.S. GAAP.
Allowance for Doubtful Accounts
The allowance for doubtful accounts (the “Allowance”) is established 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.
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Table of Contents
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, 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 2018, 2017 and 2016 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
2018
2017
2016
$
$
$
Aggregate Account Balances of Clients in
Bankruptcy or in/or Pending
Collection/Litigation
Net Write-offs of Client
Accounts
(in thousands)
Bad Debt Provision
Allowance for Doubtful
Accounts
115,659 $
30,035 $
15,873 $
6,163 $
1,176 $
2,326 $
51,387 $
6,250 $
4,629 $
57,209
11,985
6,911
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 $2.4 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 31.6% of
our liabilities at December 31, 2018. 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.
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Table of Contents
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
2018
2017
(in thousands)
2016
84,699 $
(34,901)
87,653 $
(41,077)
45,478
(15,676)
(5,099)
49,673
(11,550)
(2,954)
79,600 $
84,699 $
82,250
(35,089)
42,592
(2,100)
5,403
87,653
$
$
We review our fixed assets, deferred income taxes, goodwill and other intangible assets at least annually or whenever events or circumstances indicate that their
carrying amounts may not be recoverable. This review requires that we make assumptions regarding the fair value of these assets and the changes in circumstances
that would affect the carrying value of these assets. If the carrying value of an asset exceeds the fair value of the asset, an impairment loss would be recognized in
earnings. The determination of fair value includes numerous uncertainties, such as the impact of competition on future value. We believe that we have made
reasonable estimates and judgments in determining whether our long-term assets have been impaired; however, if there is a material change in the assumptions
used in our determination of fair value or if there is a material change in economic conditions or circumstances influencing fair value, we could be required to
recognize certain impairment charges in the future. As a result of our most recent reviews, no changes in asset values were required.
Income Taxes
Deferred income taxes are recognized for the tax consequences related to temporary differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes at each year-end, based on enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. A valuation allowance is established when necessary based on the weight of available evidence, if it is
considered more likely than not that all or some portion of the deferred tax assets will not be realized. Income tax expense is the sum of current income tax plus the
change in deferred tax assets and liabilities.
We are subject to income taxes in the United States and numerous state and local jurisdictions. The determination of the income tax provision is an inherently
complex process, requiring management to interpret continually changing regulations and to make certain significant judgments. Our assumptions, judgments and
estimates relative to the amount of deferred income taxes take into account scheduled reversals of deferred tax liabilities, recent financial operations, estimates of
the amount of future taxable income and available tax planning strategies. Actual operating results in future years could render our current assumptions, judgments
and estimates inaccurate. No assurance can be given that the final impact of these matters will not be different from that which is reflected in the Company’s
historical income tax provisions and accruals. The Company adjusts these items in light of changing facts and circumstances. To the extent that the final impact of
these matters is different than the amounts recorded, such differences could have a material effect on the income tax provisions or benefits in the periods in which
such determinations are made.
Liquidity and Capital Resources
Cash generated through operations is our primary source of liquidity. At December 31, 2018, we had cash, cash equivalents and marketable securities of $102.4
million and working capital of $344.7 million, compared to December 31, 2017 cash, cash equivalents and marketable securities of $82.8 million and working
capital of $343.2 million. The change 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, 2018, we had an unused line of credit of $379.1 million. Our current ratio at December 31, 2018 was 3.1 to 1, versus 2.9 to 1 at December 31,
2017. Marketable securities represents fixed income investments which are highly liquid and can be readily purchased or sold through established markets and are
held by our captive insurance company that are required by state insurance regulations to remain in the captive insurance company.
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For the years ended December 31, 2018, 2017 and 2016, our cash flows were as follows:
2018
Year Ended December 31,
2017
(in thousands)
2016
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
$
$
$
80,031 $
(9,586) $
(53,977) $
7,630 $
(14,967) $
(6,959) $
41,400
(6,452)
(44,284)
Operating Activities
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 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 2018, we paid to shareholders regular quarterly cash dividends totaling $57.2 million, as follows:
March 31, 2018
June 30, 2018
September 30, 2018
December 31, 2018
(amounts in thousands, except per share data)
Quarter Ended
Cash dividend per common share
Total cash dividends paid
$
$
Record date
Payment date
0.19125 $
14,149 $
February 16, 2018
March 23, 2018
0.19250 $
14,249 $
May 25, 2018
June 29, 2018
0.19375 $
14,350 $
0.19500
14,453
August 24, 2018
November 23, 2018
September 28, 2018
December 28, 2018
Additionally, on February 5, 2019, our Board of Directors declared a regular quarterly cash dividend of $0.19625 per common share, which will be paid on
March 22, 2019 to shareholders of record as of the close of business on February 15, 2019.
The dividends paid to shareholders during the year ended December 31, 2018 were funded through cash generated from operations. Our Board of Directors
reviews our dividend policy on a quarterly basis and as part of such review considers our results of operations, financial condition and terms of our credit facility.
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, 2018 relates to cash flow requirements due to the timing of cash receipts
and cash payments.
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We did not repurchase any of our Common Stock during 2018, 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, 2018 consist of the following:
Payments Due by Period
Year Ended December 31, 2018
Total
Less Than 1 Year
1-3 Years
3-5 Years
After 5 Years
Operating lease obligations
$
9,130 $
3,203 $
3,896 $
1,354 $
677
(in thousands)
Line of Credit
As of December 31, 2018, we had a $475 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 a floating rate, based on our leverage ratio, and starting at LIBOR plus 115 basis points (or if LIBOR becomes
unavailable, the higher of the Overnight Bank Funding Rate, plus 50 basis points and the Prime Rate). At December 31, 2018, there were $30.0 million in
borrowings under the line of credit.
The line of credit requires us to satisfy two financial covenants. The covenants and respective status at December 31, 2018 were as follows:
Covenant Description and Requirement
As of December 31, 2018
Funded debt 1 to EBITDA 2 ratio: less than 3.50 to 1.00
EBITDA 2 to Interest Expense ratio: not less than 3.0 to 1.00
0.59
38.20
1
2
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.
Net income plus int erest expense, income tax expense, depreciation, amortization, stock compensation expense and extraordinary non-recurring losses/gains.
As shown in the table above, we were in compliance with our financial covenants at December 31, 2018 and we expect to continue to remain in compliance with
such financial covenants. The line of credit expires on December 21, 2023.
At December 31, 2018, we also had outstanding $65.9 million in irrevocable standby letters of credit, which relate to payment obligations under our insurance
programs. In connection with the issuance of the letters of credit, the amount available under the line of credit was further reduced by $65.9 million at
December 31, 2018. On January 2, 2019, we amended our letters of credit and decreased the outstanding amount to $62.7 million. The amended letters of credit
expire on January 2, 2020.
Accounts and Notes Receivable
Decisions to grant or to extend credit to customers are made on a case-by-case basis and 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 healthcare industry.
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, the
Company’s assessment of collectability and corresponding provision for bad debt expense and the inception, transition, modification or termination of client
relationships.
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 further enhance the collectability of amounts due by memorializing the amount and related
payment schedule as well as securing additional business protections and guarantees.
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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 $51.4 million, $6.3 million and $4.6 million in the years ended December 31, 2018, 2017 and 2016, respectively. As a percentage of total
revenues, these provisions represented approximately 2.6% for the year ended December 31, 2018, and 0.3% for the years ended December 31, 2017 and 2016.
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 $4.9 million in 2018. Although we have no specific material commitments for capital expenditures through the end of calendar year 2019, we estimate that
for that period we will have capital expenditures of approximately $5.0 million to $7.0 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, 2018, we had investments in municipal bonds of $76.4 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.
30
Table of Contents
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, 2018 and 2017
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements for the Years Ended December 31, 2018, 2017 and 2016
31
Page
32
33
34
35
36
37
38
39
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, 2018 and 2017, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the three years
in the period ended December 31, 2018, and the related notes and financial statement schedules included under Item 15(a) (collectively referred to as the “financial
statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and
2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, 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, 2018, 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 March 18, 2019 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
March 18, 2019
32
Table of Contents
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, 2018. 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, 2018 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, 2018.
/s/ Theodore Wahl
Theodore Wahl
Chief Executive Officer
(Principal Executive Officer)
March 18, 2019
/s/ John C. Shea
John C. Shea
Chief Financial Officer
(Principal Financial and Accounting Officer)
March 18, 2019
33
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, 2018, 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, 2018, 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, 2018, and our report dated March 18, 2019 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
March 18, 2019
34
Table of Contents
ASSETS:
Current assets:
Cash and cash equivalents
Marketable securities, at fair value
Healthcare Services Group, Inc.
Consolidated Balance Sheets
(in thousands, except per share amounts)
As of December 31,
2018
2017
Accounts and notes receivable, less allowance for doubtful accounts of $47,209 and $11,985 as of December 31,
2018 and 2017, respectively
Inventories and supplies
Prepaid expenses and other assets
Total current assets
Property and equipment, net
Goodwill
Other intangible assets, less accumulated amortization of $17,216 and $12,853 as of December 31, 2018 and 2017,
respectively
Notes receivable – long–term portion, less allowance for doubtful accounts of $10,000 and $0 as of December 31,
2018 and 2017, respectively
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; 75,344 and 74,960 shares issued, and 73,877 and
73,436 shares outstanding as of December 31, 2018 and 2017, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income, net of taxes
Common Stock in treasury, at cost, 1,467 shares and 1,524 shares as of December 31, 2018 and 2017, respectively
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes.
35
$
$
$
26,025 $
76,362
341,838
41,443
22,468
508,136
12,900
51,084
26,518
43,043
29,113
20,552
1,257
692,603 $
61,467 $
35,198
8,890
30,000
7,140
20,696
163,391
58,904
29,528
753
259,440
190,092
158
(9,663)
440,780
$
692,603 $
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
676,003
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
676,003
Table of Contents
Revenues
Operating costs and expenses:
Costs of services provided
Selling, general and administrative
Other (expense) 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
Healthcare Services Group, Inc.
Consolidated Statements of Comprehensive Income
(in thousands, except per share amounts)
Years Ended December 31,
2018
2017
2016
$
2,008,821 $
1,866,131 $
1,562,662
1,771,981
136,603
(327)
99,910
16,386
1,612,510
126,732
6,076
132,965
44,739
83,524 $
88,226 $
1.13 $
1.12 $
1.20 $
1.19 $
74,002
74,612
73,355
74,348
1,339,492
105,417
2,634
120,387
42,991
77,396
1.06
1.05
72,754
73,474
83,524 $
88,226 $
77,396
(679)
82,845 $
1,156
89,382 $
(862)
76,534
$
$
$
$
$
Weighted average number of common shares outstanding:
Basic
Diluted
Comprehensive income:
Net income
Other comprehensive income:
Unrealized (loss) gain on available-for-sale marketable securities, net of taxes
Total comprehensive income
See accompanying notes.
36
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 (benefit) expense
Stock-based compensation expense 1
Tax benefit from equity compensation plans 1
Amortization of premium on marketable securities
Unrealized loss (gain) 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 (repayments) 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
Contingent shares settled pursuant to acquisition
Years Ended December 31,
2018
2017
2016
$
83,524 $
88,226 $
77,396
9,272
51,387
(13,013)
5,900
—
1,373
1,429
8,886
6,250
1,887
5,985
—
1,296
(4,509)
7,496
4,629
3,001
4,252
(2,981)
1,723
(1,460)
(44,363)
(121,639)
(65,610)
950
1,054
(1,536)
(9,144)
6,085
(5,099)
450
(8,238)
80,031
640
(4,940)
(14,297)
9,011
—
(9,586)
(1,873)
(9,545)
(257)
11,197
11,927
(2,954)
5,061
7,692
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)
(57,201)
(55,244)
(53,342)
89
—
8,517
(5,382)
(53,977)
16,468
9,557
95
—
12,808
35,382
(6,959)
(14,296)
23,853
$
$
$
$
26,025 $
9,557 $
3,094 $
37,680 $
2,291 $
1,363 $
35,367 $
— $
109
2,981
5,968
—
(44,284)
(9,336)
33,189
23,853
574
32,532
—
1
The Company adopted the provisions of ASU 2016-09 prospectively, and as such the amounts reflected for the year ended December 31, 2016 have not been adjusted.
See accompanying notes.
37
Exercise of stock options and other stock-based compensation, net of
shares tendered for payment
301
3
Table of Contents
Balance, December 31, 2015
Comprehensive income:
Net income for the period
Unrealized loss on available-for-sale marketable securities, net of
taxes
Comprehensive income for the period
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 Plan
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 for the period
Exercise of stock options and other stock-based compensation, net of
shares tendered for payment
Share-based compensation expense — stock options, restricted stock
and restricted stock units
Treasury shares issued for Deferred Compensation Plan funding and
redemptions
Shares issued pursuant to Employee Stock Plan
Dividends paid and accrued
Shares issued pursuant to Dividend Reinvestment Plan
Shares issued pursuant to acquisition
Balance, December 31, 2017
Comprehensive income:
Net income for the period
Unrealized loss on available-for-sale marketable securities, net of
taxes
Comprehensive income for the period
Exercise of stock options and other stock-based compensation, net of
shares tendered for payment
Share-based compensation expense — stock options, restricted stock
and restricted stock units
Treasury shares issued for Deferred Compensation Plan funding and
redemptions
Shares issued pursuant to Employee Stock Plan
Dividends paid and accrued
Shares issued pursuant to Dividend Reinvestment Plan
Contingent shares settled pursuant to acquisition
Other
Balance, December 31, 2018
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
Treasury Stock
Stockholders’
Equity
73,793 $
738 $
199,294
$
543 $
106,886 $
(11,005)
$
296,456
77,396
(862)
(53,342)
431
371
18
5,965
2,773
3,743
103
1,696
91
3,999
217,664
(319)
130,940
(10,185)
88,226
1,156
113
(3)
74,204
1
742
697
7
12,801
4,945
181
1,752
82
6,938
244,363
8,514
5,580
519
2,475
75
(2,291)
205
59
74,960
1
750
380
3
4
(55,306)
(25)
339
13
837
163,860
(9,858)
83,524
(679)
(165)
346
14
(57,361)
69
75,344 $
753 $
259,440
$
158 $
190,092 $
(9,663)
$
See accompanying notes.
38
$
$
$
77,396
(862)
76,534
5,968
2,773
3,743
534
2,067
(53,342)
109
4,000
—
338,842
88,226
1,156
89,382
12,808
4,945
156
2,091
(55,306)
95
6,939
399,952
83,524
(679)
82,845
8,517
5,580
354
2,821
(57,361)
89
(2,291)
274
440,780
Table of Contents
Healthcare Services Group, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2018, 2017 and 2016
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 the healthcare industry, including nursing homes, retirement complexes, rehabilitation centers and hospitals
located throughout the United States. Although the Company does not directly participate in any government reimbursement programs, the Company’s 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 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.
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 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.
39
Table of Contents
While unobservable inputs reflect the Company's market assumptions. Preference is given to observable inputs. These two types of inputs create the following fair
value hierarchy:
Level 1 – Quoted prices for identical instruments in active markets;
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and
model-derived valuations whose inputs are observable or whose significant value drivers are observable; and
Level 3 – Significant inputs to the valuation model are unobservable
The Company’s financial instruments that are measured at fair value on a recurring basis consist of marketable securities and the deferred compensation fund
investments. 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.
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 $2.9 million
and $6.9 million at December 31, 2018 and 2017, respectively, have been discounted to their present value and are reported at values of $2.9 million and $6.8
million at December 31, 2018 and 2017, respectively. See Note 6—Fair Value Measurements for the fair value hierarchy table and for details on the measurement
of fair value for assets and liabilities.
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 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. As
of December 31, 2018 and 2017, the Company had marketable securities of $76.4 million and $73.2 million, respectively, 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 years
ended December 31, 2018 and 2017, $0.8 million of unrealized losses and $1.1 million of unrealized gains related to these investments were recorded in other
comprehensive income, respectively. Unrealized gains and losses are recorded net of income taxes.
These assets are available for future needs under the Company’s self-insurance programs and are held by the Company's wholly-owned captive subsidiary as
required by state insurance regulations. The Company’s investment policy is intended to manage the assets to achieve the goals of preserving principal,
maintaining adequate liquidity at all times, and maximizing returns subject to investment guidelines. The investment policy limits investment to certain types of
instruments issued by institutions primarily with investment grade credit ratings and places restrictions on concentration by type and issuer.
The Company periodically reviews the investments in marketable securities for other than temporary declines 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, 2018, management believes that the
recorded value of the Company’s investments in marketable securities was recoverable in all material respects. See Note 6—Fair Value Measurements for other
than temporary impairment considerations.
Inventories and Supplies
Inventories and supplies include housekeeping, linen and laundry supplies, as well as food provisions and supplies. Non-linen 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.
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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, 2018, 2017 and 2016 was $4.9
million, $5.0 million and $4.8 million, respectively.
Revenue Recognition
The Company recognizes revenue from service agreements with customers when or as the promised goods and services are provided to customers. Revenues are
reported net of sales taxes that are collected from customers and remitted to taxing authorities.
The guidance under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification subtopic 606 Revenue from Contracts with
Customers (“ASC 606”) became effective and was adopted by the Company as of January 1, 2018, by applying the modified retrospective method for contracts
that were not completed as of January 1, 2018. The standard requires the Company to recognize revenue as the promised goods and services within the terms of the
Company’s contracts are performed and satisfied. The amount of revenue which the Company recognizes is based on the consideration which the Company
expects to be entitled to in exchange for contracted promised goods and services. The adoption of this standard did not have a material impact to the Company's
accounting for revenue earned relating to the Housekeeping and Dietary segments. The Company also did not recognize an opening adjustment to retained earnings
as a result of the adoption of the standard. See Note 2—Revenue herein for additional revenue disclosure that is being presented as a result of the newly adopted
standard.
Prior period amounts were not adjusted and continue to be reported in accordance with previous guidance.
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 period. 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 13— Income Taxes.
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.
The Company may from time to time be assessed interest or penalties by taxing jurisdictions, although any such assessments historically have been minimal and
immaterial to its financial results. When the Company has received an assessment for interest and/or penalties, it will be classified in the financial statements as
selling, general and administrative expense. In addition, any interest or penalties relating to recognized uncertain tax positions would also be recorded in selling,
general and administrative expense.
Earnings per Common Share
Basic earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per common share is 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.
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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 not material for the years ended December 31, 2018, 2017 and 2016.
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, 2018, 2017 or 2016.
In 2018, the Company adopted the FASB issued Accounting Standards Update 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU
2017-04 no longer requires the Company to perform a hypothetical purchase price allocation to measure impairment, eliminating step 2 of the goodwill impairment
test. Instead, impairment is measured using the difference of the carrying amount to the fair value of goodwill on a reporting unit basis.
Additionally in 2018, the Company adopted the FASB issued Accounting Standards Update 2018-15, Intangibles - Goodwill and Other - Internal-Use Software
("ASU 2018-15). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the
requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use
software license). The results of applying ASU 2018-15 were insignificant and did not have a material impact on the Company's consolidated financial statements.
The capitalized implementation costs incurred from adopting ASU 2018-15 are recorded in the prepaid expenses and other assets caption in the Consolidated
Balance Sheets.
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, including the presentation of tax benefit from equity compensation
plans in the Consolidated Statements of Cash Flows. The tax benefit from equity compensation plans is now reflected as a component of the change in income
taxes payable, as opposed to an offset to stock-based compensation expense. There was no impact to the Company's net cash provided by operating activities as a
result of the immaterial correction.
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Concentrations of Credit Risk
The 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
through established markets. At December 31, 2018 and 2017, 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 directly
impact the governmental reimbursement 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 years ended December 31, 2018 and 2017, the Company had several clients who individually contributed over 3% of the Company's consolidated
revenues, including Genesis Healthcare, Inc. ("Genesis") which accounted for $386.7 million or 19.3% and $327.5 million or 17.5%, respectively. 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 February 2016, the FASB issued ASU 2016-02, Leases
("ASC 842"). ASC 842 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. This guidance may be applied through a
modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial
statements with certain practical expedients available. Alternatively, this guidance may also be applied at the adoption date by recognizing a cumulative-effect
adjustment to the opening balance of retained earnings in the period of adoption.
ASC 842 provides several optional practical expedients in transition including the ‘package of practical expedients,’ which permits the Company to not reassess
under the new standard the Company's prior conclusions about lease identification, lease classification and initial direct costs. ASC 842 also provides the Company
the option to, as an accounting policy, not capitalize lease obligations for leases with lease terms of less than 12 months.
The Company adopted ASC 842 as of January 1, 2019 using a modified retrospective transition approach which resulted in the capitalization of the Company's
existing operating leases as of January 1, 2019 which consisted of office space, vehicles and equipment. The Company elected to adopt ASC 842 using the package
of practical expedients mentioned above and elected to not capitalize leases with lease terms of less than 12 months. The lease liability and corresponding right-of-
use asset recognized upon adoption of ASU 842 was $11.4 million. The Company does not expect ASC 842 to have a material impact to the Consolidated
Statements of Operations however will require additional disclosures pertaining to the Company's lease commitments. The Company did not recognize a
cumulative-effect adjustment to the opening balance of retained earnings.
In June 2016, the FASB issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments ("ASC 326"). The standard significantly
changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The
standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt
securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment
model. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which
the guidance is effective. The standard is effective for interim and annual reporting periods beginning after December 15, 2019. The Company is currently
assessing the impact of adopting this standard on the Company’s financial statements and related disclosures.
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Note 2—Revenue
The Company disaggregates its consolidated revenues by reportable segment, as management evaluates the nature, amount, timing and uncertainty of the
Company’s revenues by segment. Refer to Note 15—Segment Information herein as well as the information below regarding the Company’s reportable segments.
Housekeeping
Housekeeping accounted for $973.8 million, $979.6 million and $957.1 million, of the Company’s consolidated revenues for the years ended December 31,
2018, 2017 and 2016, respectively. The services provided under this segment include managing 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, the
Company will typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise and train the front-line
personnel and coordinate housekeeping services with other facility support functions in accordance with 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.
Dietary
Dietary services represented $1,035.0 million, $886.5 million and $605.5 million, of the Company’s consolidated revenues for the years ended December 31, 2018,
2017 and 2016, respectively. Dietary services consist of managing 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 provided by a District Manager specializing in dietary services. The Company also
offers clinical consulting services to facilities which if contracted is a service bundled within the monthly service provided to clients. Upon beginning service with
a client facility, the Company will typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise and train
the front-line personnel and coordinate dietitian services with other facility support functions in accordance with client requests. Such management personnel also
oversee the execution of various cost- and quality-control procedures including continuous training and employee evaluation.
Revenue Recognition
Substantially all of the Company's revenues are derived from contracts with customers. The Company accounts for revenue from contracts with customers in
accordance with ASC 606, and as such, the Company recognizes revenue to depict the transfer of promised goods and services to customers in amounts that reflect
the consideration to which the Company expects to be entitled in exchange for those goods and services. The Company’s costs of obtaining contracts are not
material.
The Company performs services and provides goods in accordance with contracts with its customers. Such contracts 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. A performance obligation is a promise in a contract to
transfer a distinct good or service to the customer and is defined as the unit of account under ASC 606. The Company’s Housekeeping and Dietary contracts relate
to the provision of bundles of goods, services or both, which represent a series of distinct goods and services and that are substantially the same and that have the
same pattern of transfer to the customer. Accordingly, the Company accounts for the series as a single performance obligation satisfied over time, as the customer
simultaneously receives and consumes the benefits of the goods and services provided. Revenue is recognized using the output method, which is based upon the
delivery of goods and services to the clients’ facilities. In limited cases, the Company provides goods, services or both, before the execution of a written contract.
In these cases, the Company defers the recognition of revenue until a contract is executed. The amount of such deferred revenue was $0.2 million as of
December 31, 2018. There were no such deferred revenues as of December 31, 2017
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The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to its
customers. The transaction price does not include taxes assessed or collected. The Company’s contracts detail the fees that the Company charges for the goods and
services it provides. For certain contracts which contain a variable component to the transaction price, the Company is required to make estimates of the amount of
consideration to which the Company will be entitled, based on variability in resident and patient populations serviced, product usage or quantities consumed. The
Company recognizes revenue related to such estimates only when management determines that there will not be a significant reversal in the amount of revenue
recognized. The Company’s contracts generally do not contain significant financing components, as the contracts contain payment terms that are less than one
year.
The Company allocates the transaction price to each performance obligation, noting that the bundle of goods, services or goods and services provided under each
Housekeeping and Dietary contract represents a single performance obligation that is satisfied over time. The Company recognizes the related revenue when it
satisfies the performance obligation by transferring a bundle of promised goods, services or both to a customer. Such recognition is on a monthly or weekly basis,
as goods are provided and services are performed. The time between completion of the performance obligation and collection of cash is consistent with the
customers' payment terms and typically not more than 30-60 days. In certain contractual arrangements, the Company requires customers to pay in advance for
goods and services to be provided. As of December 31, 2018, the value of the associated contract liabilit ies for such collections in advance was $4.6 million. As
of December 31, 2017, the Company did not have any such contract liabilities.
Remaining Performance Obligations
The Company recognizes revenue as it satisfies the performance obligations associated with contracts with customers, which due to the nature of the goods and
services provided by the Company, are satisfied over time. Contracts may contain transaction prices that are fixed, variable or both. The significant majority of the
Company’s contracts with customers have an initial term of one year or less, with 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. For the purpose of disclosing future revenues under its remaining performance obligations, the Company elected to
apply practical expedients available under the guidance in ASC 606 to exclude from the calculation future revenues expected for the performance of services under
contracts with variable consideration that are for a term of one year or less. Although only a small portion of the Company’s contracts have an original expected
duration that exceeds one year, the Company has historically had, and expects to continue to have, favorable client retention rates. As of December 31, 2018, the
revenue expected to be recognized from remaining performance obligations under the Company’s existing contracts with a term greater than one year is $186.2
million for 2019, $186.2 million for 2020, $186.2 million for 2021, $186.2 million for 2022, $186.2 million for 2023, and $31.0 million thereafter
Note 3—Changes in Accumulated Other Comprehensive Income by Component
For the years ended December 31, 2018, 2017 and 2016, the Company’s other comprehensive income related to the unrealized gains and losses from the
Company’s available-for-sale marketable securities.
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The following table provides a summary of changes in accumulated other comprehensive income, net of taxes:
Unrealized Gains and (Losses) on Available-for Sale-Securities 1
2017
2016
2018
Accumulated other comprehensive income (loss) — beginning balance
Other comprehensive (loss) income before reclassifications
Losses reclassified from other comprehensive income 2
Net current period other comprehensive (loss) income 3
Accumulated other comprehensive income (loss) — ending balance
$
$
(in thousands)
837 $
(319) $
(844)
165
(679)
1,149
7
1,156
158 $
837 $
543
(1,005)
143
(862)
(319)
1
2
3
All amounts are net of tax.
Realized losses were recorded pre-tax under “Other income, net - Investment and interest” in our Consolidated Statements of Comprehensive Income. For the years
ended December 31, 2018, 2017 and 2016 the Company recorded $0.2 million, less than $0.1 million and $0.2 million of realized losses from the sale of available-for-
sale securities, respectively. Refer to Note 6—Fair Value Measurements herein for further information.
For the years ended December 31, 2018 and 2016, the changes in other comprehensive income were net of a tax benefit of $0.1 million and $0.5 million, respectively.
For the year ended December 31, 2017 the changes in other comprehensive income were net of a tax expense of $0.3 million.
For the Year Ended December 31,
Losses from the sale of available-for-sale securities
Tax benefit
Net loss reclassified from accumulated other comprehensive income
Note 4—Property and Equipment
Amounts Reclassified from Accumulated Other
Comprehensive Income
2018
2017
2016
(in thousands)
$
$
197 $
(32)
165 $
11 $
(4)
7 $
222
(79)
143
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, 2018 and December 31, 2017:
December 31, 2018
December 31, 2017
Housekeeping and Dietary equipment
Computer hardware and software
Other 1
Total property and equipment, at cost
Less accumulated depreciation
Total property and equipment, net
$
$
(in thousands)
22,596 $
12,114
920
35,630
22,730
12,900 $
22,349
12,665
990
36,004
22,495
13,509
1
Includes furniture and fixtures, leasehold improvements and autos and trucks.
Depreciation expense for the years ended December 31, 2018, 2017 and 2016 was $4.9 million, $5.0 million and $4.8 million, respectively.
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Note 5—Goodwill and Other Intangible Assets
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets of acquired businesses. Goodwill is not amortized, but is evaluated for
impairment on an annual basis, or more frequently if impairment indicators arise. To date, the Company has not recognized an impairment of its goodwill.
Goodwill by reportable operating segment, as described in Note 15—Segment Information, was approximately $42.4 million and $8.7 million for Housekeeping
and Dietary, respectively, as of December 31, 2018 and 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 following table sets forth the estimated amortization expense for intangibles subject to amortization for the next five years and thereafter:
Period/Year
2019
2020
2021
2022
2023
Thereafter
Total Amortization Expense
(in thousands)
4,165
4,165
4,165
4,165
3,168
6,690
$
$
$
$
$
$
Amortization expense for the years ended December 31, 2018, 2017 and 2016 was $4.4 million, $3.9 million and $2.7 million, respectively.
Note 6—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 carrying value of the Company’s line of credit represents the outstanding amount of the borrowings, which approximates fair value. The
Company’s financial assets that are measured at fair value on a recurring basis are its marketable securities and deferred compensation funding. The recorded
values of all of the financial instruments approximate their current fair values because of their nature, stated interest rates and respective maturity dates or
durations.
The Company’s marketable securities 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, 2018, 2017 and 2016, the Company recorded unrealized losses of
$0.7 million, unrealized gains of $1.2 million and unrealized losses of $0.9 million on marketable securities, respectively.
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For the years ended December 31, 2018, 2017 and 2016, the Company received total proceeds, less the amount of interest received, of $9.0 million, $28.5 million
and $28.1 million, respectively, from sales of available-for-sale municipal bonds. These sales resulted in realized losses of $0.2 million, less than $0.1 million and
$0.2 million for the years ended December 31, 2018, 2017, and 2016 respectively. Such 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, 2018 and 2017:
Carrying
Amount
Total Fair
Value
As of December 31, 2018
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
$
76,362 $
76,362 $
— $
76,362 $
Deferred compensation fund
Money Market 1
Balanced and Lifestyle
Large Cap Growth
Small Cap Growth
Fixed Income
International
Mid Cap Growth
2,529
8,265
8,195
3,217
3,432
1,485
1,990
2,529
8,265
8,195
3,217
3,432
1,485
1,990
—
8,265
8,195
3,217
3,432
1,485
1,990
2,529
—
—
—
—
—
—
Deferred compensation fund
$
29,113 $
29,113 $
26,584 $
2,529 $
—
—
—
—
—
—
—
—
—
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Carrying
Amount
Total Fair
Value
As of December 31, 2017
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
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 $
—
—
—
—
—
—
—
—
—
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
(in thousands)
Estimated Fair Value
Other-Than-Temporary
Impairments
December 31, 2018
Marketable securities
Municipal bonds — available-for-sale
Total debt securities
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
$
$
$
$
$
$
76,162 $
76,162 $
633 $
633 $
(433) $
(433) $
76,362 $
76,362 $
72,249 $
72,249 $
1,169 $
1,169 $
(197) $
(197) $
73,221 $
73,221 $
68,220 $
68,220 $
178 $
178 $
(668) $
(668) $
67,730 $
67,730 $
—
—
—
—
—
—
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The following table summarizes the contractual maturities of debt securities held at December 31, 2018 and 2017, 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 7— Accounts and Notes Receivable
Municipal Bonds — Available-for-Sale
December 31,
2018
2017
(in thousands)
$
$
1,645 $
24,649
14,769
35,299
76,362 $
916
15,948
22,851
33,506
73,221
The Company’s accounts and notes receivable balances consisted of the following as of December 31, 2018 and 2017:
Short-term
Accounts and notes receivable
Allowance for doubtful accounts
Total net short-term accounts and notes receivable
Long-term
Notes receivable
Allowance for doubtful accounts
Total net long-term notes receivable
Total net accounts and notes receivable
December 31, 2018
December 31, 2017
(in thousands)
$
$
389,047 $
(47,209)
341,838
53,043
(10,000)
43,043
384,881 $
390,705
(11,985)
378,720
15,476
—
15,476
394,196
The Company makes credit decisions on a case–by–case basis after reviewing a number of qualitative and quantitative factors related to the specific client as well
as current industry variables that may impact that client. There are a variety of factors that impact a client’s ability to pay in accordance with the Company’s
service agreements. These factors include, but are not limited to, fluctuating census numbers, litigation costs and the client’s participation in programs funded by
federal and state governmental agencies. Deviations in the timing or amounts of reimbursements under those programs can impact the client’s cash flows and their
ability to make timely payments. However, the client's obligation to pay the Company in accordance with the service agreements are not contingent upon the
client’s cash flows. Notwithstanding the Company’s efforts to minimize its credit risk exposure, the aforementioned factors, as well as other factors that impact
client cash flows or ability to make timely payments, could have an indirect, yet material adverse effect on the Company’s results of operations and financial
condition.
The Company’s net current accounts and notes receivable balance decreased from December 31, 2017. Fluctuations in net accounts and notes receivable are
generally attributable to a variety of factors including, but not limited to, the timing of cash receipts from customers and the inception, transition, modification or
termination of client relationships. However, the Company offset its accounts and notes receivable with an increased allow ance for doubtful accounts in 2018
related to multiple corporate restructurings of privately-held, multi-facility operators that occurred during 2018 that resulted in increased expense compared to our
historical experience. In addition, the Company converted approximately $24.8 million of accounts receivable to long-term notes receivable. Additionally, in
2018 the Company finalized an agreement for a long-term promissory note receivable related to the previously mentioned corporate restructurings. The promissory
note receivable was $10.0 million, net of reserve which has been classified as a long-term notes receivable on the Company's balance sheet for the year ended
December 31, 2018.
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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 instituting a definitive
repayment plan and providing a means by which to further evidence the amounts owed. As of December 31, 2018 and 2017, the Company had $63.3 million and
$36.6 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 8 — Allowance for Doubtful Accounts
The allowance for doubtful accounts is established when the Company determines that it is probable that receivables have been impaired and the Company can
reasonably estimate the amount of the losses. The related provision for bad debts is charged to costs 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 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):
2018
Year Ended December 31,
2017
(in thousands)
2016
Bad debt provision
$
51,387 $
6,250 $
4,629
The increase to the bad debt provision for 2018 related to multiple corporate restructurings of privately-held, multi-facility operators that occurred during 2018 that
resulted in increased expense compared to the Company's historical experience.
In making the Company’s credit evaluations, in addition to analyzing and anticipating, where possible, the specific cases described above, management considers
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 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. The increase in impaired notes receivable and the related reserve during the year ended December 31, 2018 related to the corporate restructuring
of a privately held, multi-state operator that occurred during 2018. A result of the corporate restructuring was a long-term promissory note receivable of $10.0
million, net of reserve. Summary schedules of impaired notes receivable, and the related reserve, for the years ended December 31, 2018, 2017 and 2016 are as
follows:
Impaired Notes Receivable
Year Ended December 31,
Balance Beginning of
Year
Additions
Deductions
Balance End of Year
Average Outstanding
Balance
2018
2017
2016
$
$
$
6,854 $
5,685 $
6,471 $
23,382 $
1,169 $
— $
4,532 $
— $
786 $
25,704 $
6,854 $
5,685 $
15,448
6,270
6,078
(in thousands)
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Year Ended December 31,
2018
2017
2016
Reserve for Impaired Notes Receivable
Balance Beginning of
Year
$
$
$
2,884 $
2,419 $
2,139 $
Additions
Deductions
Balance End of Year
(in thousands)
12,526 $
465 $
280 $
1,938 $
— $
— $
13,472
2,884
2,419
For impaired notes receivable, interest income is recognized on a cost recovery basis only. As a result, no interest income was recognized on impaired notes
receivable. The Company follows an income recognition policy on all other notes receivable that do not recognize interest income until cash payments are
received. This policy was established, recognizing the environment of the long-term care industry, and not because such notes receivable are necessarily impaired.
The difference between income recognition on a full accrual basis and cash basis, for notes receivable that are not considered impaired, is not material.
Note 9 — 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,
2018:
Period/Year
Operating Leases
(in thousands)
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
$
$
3,203
2,799
1,097
677
677
677
9,130
Total expense for all operating leases for the years ended December 31, 2018, 2017 and 2016 was as follows:
Operating lease expense
$
4,039 $
3,833 $
2,615
Note 10— Share-Based Compensation
A summary of stock-based compensation expense and related tax benefits for the years ended December 31, 2018, 2017 and 2016 is as follows:
2018
Year Ended December 31,
2017
(in thousands)
2016
Stock options
Restricted stock units and restricted stock
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,
2018
2017
2016
(in thousands)
2,989 $
3,740 $
2,591
320
1,205
1,040
5,900 $
5,985 $
3,193
550
509
4,252
1,480 $
5,709 $
2,773
$
$
$
1
Stock-based compensation expense is recorded in the selling, general and administrative caption in the Consolidated Statements of Comprehensive Income.
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As of December 31, 2018 and 2017, the unrecognized compensation cost related to unvested stock options and awards was $14.0 million and $11.4 million,
respectively. The weighted average period over which these awards will vest was approximately 2.5 years as of December 31, 2018 and 2.7 years as
of December 31, 2017.
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, 2018, 2.9 million shares of Common Stock were reserved for issuance under the Plan, including 0.5 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.
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, 2018 and changes during 2018 is as follows:
December 31, 2017
Granted
Exercised
Forfeited
Expired
December 31, 2018
Number of Shares
(in thousands)
Weighted Average Exercise
Price
2,374 $
169 $
(351) $
(65) $
(6) $
2,121 $
29.22
52.06
25.12
35.50
27.10
31.53
The weighted average grant-date fair value of stock options granted during the years ended 2018, 2017 and 2016 were $10.48, $8.52 and $7.46 per common share,
respectively. The total intrinsic value of options exercised during the years ended 2018, 2017 and 2016 were $7.8 million, $19.5 million and $4.9 million,
respectively. The total fair value of options vested during the years ended 2018, 2017 and 2016 were $3.7 million, $3.2 million and $2.8 million, respectively.
For the years ended December 31, 2018 and 2017 the tax benefit realized from stock options exercised were $1.0 million and $5.3 million, respectively.
The fair value of the stock option awards granted during 2018, 2017 and 2016 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
Year Ended December 31,
2018
2017
2016
2.1 %
5.8 years
21.5 %
1.5 %
2.0 %
5.8 years
25.1 %
1.9 %
2.0 %
5.8 years
26.0 %
2.0 %
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The following table summarizes other information about the stock options at December 31, 2018:
December 31, 2018
(amounts in thousands, except per share data)
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
Restricted Stock Units and Restricted Stock
$
$
$
20,351
5.9 years
1,051
25.20
15,750
4.5 years
The fair value of outstanding restricted stock units and restricted stock was determined based on the market price of the shares on the date of grant. For both the
years ended December 31, 2018 and 2017, the Company granted 0.1 million restricted stock units with a weighted average grant date fair value of $52.06 and
$40.16 per unit, respectively. There were no restricted stock units granted during 2016.
For the years ended December 31, 2018 and 2017, the Company did not grant restricted stock. For the year ended December 31, 2016 the Company granted less
than 0.1 million shares of restricted stock, with a weighted average grant date fair value of $34.14 per share.
A summary of the outstanding restricted stock units and restricted stock as of December 31, 2018 and changes during 2018 is as follows:
December 31, 2017
Granted
Vested
Forfeited
December 31, 2018
Restricted Stock Units and Restricted Stock
Number
(in thousands)
Weighted Average Grant Date
Fair Value
145 $
139 $
(36) $
(7) $
241 $
37.07
52.06
35.79
52.06
45.47
The weighted average remaining vesting period for the unvested restricted stock units and restricted stock is 3.3 years.
The weighted average grant-date fair values and total fair values of restricted stock units and restricted stock vested during 2018, 2017 and 2016 are as follows:
Weighted average grant-date fair value of restricted stock units and restricted stock granted
Total fair value of restricted stock units and restricted stock vested
$
$
52.06 $
1,822 $
40.16 $
690 $
34.14
311
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 3.3 years.
Year Ended December 31,
2018
2017
2016
(in thousands, except per share data)
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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 2.2
million shares available for future grant at December 31, 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 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, 2018, 2017 and 2016:
Common shares purchased
Per common share purchase price
Deferred Compensation Plan
Year Ended December 31,
2018
2017
2016
(in thousands, except per share data)
53
54
$
34.15 $
33.29 $
53
29.64
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, 2018. At the time of issuance, such shares were accounted for at cost as treasury stock. At December 31,
2018, 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, 2018, 2017 and 2016:
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
2018
Year Ended December 31,
2017
(in thousands)
2016
$
$
$
547 $
14
39,766 $
(1,469) $
503 $
9
42,467 $
4,534 $
511
13
34,599
1,495
1
2
3
Both the SERP match and the deferrals are included in the selling, general and administrative caption in the Consolidated Statements of Comprehensive Income.
Shares related to the SERP match for each year are funded at the beginning of the subsequent year.
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.
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Note 11— 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.
Note 12— Dividends
The Company has paid regular quarterly cash dividends since the second quarter of 2003. During 2018, the Company paid regular quarterly cash dividends totaling
$57.2 million as detailed below:
March 31, 2018
June 30, 2018
September 30, 2018
December 31, 2018
(in thousands, except per share amounts)
Quarter Ended
Cash dividends paid per common share
Total cash dividends paid
$
$
Record date
Payment date
0.19125 $
14,149 $
February 16, 2018
March 23, 2018
0.19250 $
14,249 $
May 25, 2018
June 29, 2018
0.19375 $
14,350 $
0.19500
14,453
August 24, 2018
November 23, 2018
September 28, 2018
December 28, 2018
Additionally, on February 5, 2019, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.19625 per common share, which will be
paid on March 22, 2019 to shareholders of record as of the close of business on February 15, 2019.
Cash dividends declared on the Company’s outstanding weighted average number of basic common shares for the years ended December 31, 2018, 2017 and 2016
were as follows:
Cash dividends declared per common share
Note 13— Income Taxes
The following table summarizes the provision for income taxes:
Current:
Federal
State
Deferred:
Federal
State
Tax provision
Year Ended December 31,
2018
2017
2016
$
0.77750 $
0.75750 $
0.73750
Year Ended December 31,
2018
2017
(in thousands)
2016
23,407 $
35,673 $
5,992
29,399
(9,526)
(3,487)
(13,013)
7,179
42,852
2,924
(1,037)
1,887
16,386 $
44,739 $
33,032
6,958
39,990
2,163
838
3,001
42,991
$
$
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.
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On December 22, 2017, the Tax Cuts and Jobs 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 for the year ended December 31, 2017.
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,
2018
2017
(in thousands)
$
14,599 $
7,350
3,715
336
24
1,730
27,754
(4,375)
(1,913)
(914)
(7,202)
3,109
6,601
3,665
567
162
662
14,766
(4,678)
(1,745)
(845)
(7,268)
Net deferred tax assets
$
20,552 $
7,498
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
Stock-based compensation
United States Tax Reform - remeasurement of deferred taxes
Other, net
Income tax expense
2018
Year Ended December 31,
2017
(in thousands)
2016
$
20,981 $
46,538 $
42,136
1,936
(5,006)
(384)
(1,179)
—
38
3,661
(4,193)
(568)
(4,632)
3,719
214
5,064
(4,550)
(457)
653
—
145
$
16,386 $
44,739 $
42,991
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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, 2013. Based on the
evaluation, the Company concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements. Therefore, the
table reporting on the change in the liability for unrecognized tax benefits during the years ended December 31, 2018 and 2017 is omitted as there is no activity to
report in such account for the years ended December 31, 2018 or 2017.
Note 14—Related Party Transactions
For the year ended December 31, 2018, the Company did not have any related party transactions. For the years ended December 31, 2017 and 2016, a director was
a member of a law firm which was retained by the Company. The 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 15—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.
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Revenues 1
Housekeeping services
Dietary services
Corporate and eliminations
Consolidated
Income before income taxes
Housekeeping services 2
Dietary services
Corporate and eliminations 3
Consolidated
Depreciation and amortization
Housekeeping services
Dietary services
Corporate and eliminations
Consolidated
Total assets
Housekeeping services
Dietary services
Corporate and eliminations 4
Consolidated
Capital expenditures
Housekeeping services
Dietary services
Corporate and eliminations
Consolidated
2018
Year Ended December 31,
2017
(in thousands)
2016
973,826 $
1,034,995
— $
979,610 $
886,521
— $
957,148
605,514
—
2,008,821 $
1,866,131 $
1,562,662
108,305 $
60,562
(68,957)
99,910 $
6,315 $
2,433
524
9,272 $
291,117 $
235,183
166,303
692,603 $
3,996 $
690
254
4,940 $
95,505 $
46,008
(8,548)
132,965 $
6,547 $
1,813
526
8,886 $
304,303 $
242,874
128,826
676,003 $
4,287 $
663
447
5,397 $
90,756
34,641
(5,010)
120,387
6,535
439
522
7,496
266,464
127,187
134,795
528,446
4,612
410
420
5,442
$
$
$
$
$
$
$
$
$
$
$
1
2
3
4
F or the years ended December 31, 2018 and 2017, both the Housekeeping and Dietary segments earned revenue from several significant customers, including Genesis.
For the years ended December 31, 2018 and 2017, Genesis accounted for $386.7 million or 19.3% and $327.5 million or 17.5% of the Company's consolidated revenues,
respectively.
Includes the impact of the revenues earned and expenses incurred from the Voluntary Benefits Program of the Company's wholly-owned captive insurance subsidiary.
Represents primarily corp orate 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.
Primarily consists of cash and cash equivalents, marketable securities, deferred income taxes and other current and noncurrent assets.
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Note 16— 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 2018,
2017 and 2016:
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, 2018
2018
2017
(in thousands)
2016
74,002
610
74,612
73,355
993
74,348
72,754
720
73,474
1
Certain outstanding equity 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, 2018, 2017 and 2016, options to purchase 0.6 million, less than 0.1 million shares and 0.5 million shares were excluded
from the calculation of weighted average number of diluted common shares outstanding, respectively. The per share exercise prices of such awards were $42.84, $39.38
and $34.14, respectively.
Note 17—Contractual Obligations and Other Contingencies
Line of Credit
As of December 31, 2018, the Compa ny had a $475 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 a floating rate, based on the Company's leverage ratio, and starting at LIBOR plus 115 basis points
(or if LIBOR becomes unavailable, the higher of the Overnight Bank Funding Rate, plus 50 basis points and the Prime Rate). At December 31, 2018, there were
$30.0 million in borrowings under the line of credit. The line of credit requires the Company to satisfy two financial covenants, with which the Company is in
compliance as of December 31, 2018 and expects to remain in compliance. The line of credit expires on December 21, 2023.
At December 31, 2018, the Company also had outstanding $65.9 million in irrevocable standby letters of credit, which relate to payment obligations under the
Company's insurance programs. In connection with the issuance of the letters of credit, the amount available under the line of credit was further reduced by $65.9
million at December 31, 2018. On January 2, 2019, the letters of credit were amended and decreased the outstanding amounts to $62.7 million. The letters of credit
expire on January 2, 2020.
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.
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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.
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 18—Accrued Insurance Claims
The Company currently has a Paid Loss Retrospective Insurance Plan for general liability and workers’ compensation insurance, which comprise approximately
31.6% of the Company’s liabilities at December 31, 2018. 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 19—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.
61
Table of Contents
Note 20—Selected Quarterly Financial Data (Unaudited)
The following tables summarize the unaudited quarterly financial data for the last two fiscal years.
2018
Revenues
Operating costs and expenses
(Loss) income before income taxes
Net income
Basic earnings per common share
Diluted earnings per common share
Cash dividends declared per common share
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
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
(in thousands, except per share amounts)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
501,810 $
503,681 $
(1,395) $
72 $
0.00 $
0.00 $
503,732 $
471,736 $
33,316 $
25,814 $
0.35 $
0.35 $
506,871 $
475,916 $
32,982 $
26,086 $
0.35 $
0.35 $
496,408
457,251
35,007
31,552
0.43
0.42
0.19250 $
0.19375 $
0.19500 $
0.19625
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
62
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, 2018.
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, 2018. 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.
63
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 2019 Annual Meeting of Shareholders and to be filed within 120 days of the close of the year ended December 31, 2018.
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 2019 Annual Meeting of Shareholders and to be filed within 120 days of the close of the fiscal year ended December 31, 2018.
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 2019 Annual Meeting of Shareholders and to be filed within 120 days
of the close of the fiscal year ending December 31, 2018.
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 2019 Annual Meeting of Shareholders and to be filed within 120 days of the close of the fiscal year
ended December 31, 2018.
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 2019 Annual Meeting of Shareholders and to be filed within 120 days of the close of the fiscal year ended December 31, 2018.
64
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.
65
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
2018
Allowance for Doubtful Accounts
2017
Allowance for Doubtful Accounts
2016
Allowance for Doubtful Accounts
$
$
$
(in thousands)
11,985 $
51,387 $
6,911 $
6,250 $
4,608 $
4,629 $
—
—
—
$
$
$
6,163
1,176
2,326
$
$
$
57,209
11,985
6,911
66
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
0-12015
0-12015
3/21/2001
5/24/2007
2/19/2015
2-87625-W
—
333-92835
0-12015
0-12015
0-12015
0-12015
333-108182
—
—
—
—
—
—
—
12/15/1999
10/28/2016
10/22/2012
7/27/2012
12/31/2018
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†
10.2
10.3
21
23
31.1
31.2
32.1
32.2
101
to the Amended and Restated Articles of
Amended and Restated Articles of Incorporation of the
Registrant as of May 30, 2000
Amendment
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
Second Amended and Restated 2012 Equity Incentive Plan
$475,000,000 Revolving Credit Facility, dated as of December
21, 2018
Healthcare Services Group, Inc. Dividend Reinvestment Plan
Subsidiaries of Healthcare Services Group, Inc.
Consent of Independent Registered Public Accounting Firm
Certification of
pursuant
Section 302 of the Sarbanes-Oxley Act
Certification of
Section 302 of the Sarbanes-Oxley Act
Certification of the Principal Executive Officer pursuant to
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, 2018 were
formatted in iXBRL (Inline eXtensible Business Reporting
Language): (i) Consolidated Balance Sheets, (ii) Consolidated
Statements of Comprehensive Income, (iii) Consolidated
Statements of Cash Flows, (iv) Consolidated Statements of
Stockholders' Equity, and (v) Notes to Consolidated Financial
Statements
Executive Officer
Financial
Principal
Principal
pursuant
Officer
to
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
8-K
S-3D
—
—
—
—
—
—
—
67
Table of Contents
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.
Signatures
Dated: March 18, 2019
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
March 18, 2019
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial and Accounting Officer)
Chairman of the Board
March 18, 2019
March 18, 2019
/s/ Michael E. McBryan
Director and Executive Vice President & Chief Revenue Officer
March 18, 2019
Michael E. McBryan
/s/ John M. Briggs
John M. Briggs
/s/ Robert L. Frome
Robert L. Frome
/s/ Diane S. Casey
Diane S. Casey
/s/ Robert J. Moss
Robert J. Moss
Director
Director
Director
Director
/s/ Dino D. Ottaviano
Director
Dino D. Ottaviano
/s/ John J. McFadden
Director
John J. McFadden
/s/ Daniela Castagnino
Director
Daniela Castagnino
68
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
SUBSIDIARIES OF HEALTHCARE SERVICES GROUP, INC.
AS OF DECEMBER 31, 2018
Year Formed
2011
Jurisdiction
Pennsylvania
Description
Staff Leasing offers professional employer organization services to
clients in the healthcare industry.
Exhibit 21
Entity Name
HCSG Staff Leasing Solutions, LLC ("Staff
Leasing")
HCSG Insurance Corp.
HCSG Labor Supply, LLC ("Labor Supply")
HCSG East, LLC
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
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 healthcare 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
healthcare 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 March 18, 2019 , 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, 2018 . 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, 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
March 18, 2019
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: March 18, 2019
/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: March 18, 2019
/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, 2018 as filed with the
Securities and Exchange commission on the date hereof (the “Report”), I, Theodore Wahl, President and Chief Executive Officer 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: March 18, 2019
/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, 2018 as filed with the
Securities and Exchange commission on the date hereof (the “Report”), I, John C. Shea, Chief Financial Officer 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: March 18, 2019
/s/ John C. Shea
John C. Shea
Chief Financial Officer
(Principal Financial and Accounting Officer)