Notes to Consolidated Financial Statements
(Unaudited)
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 predominantly to clients within 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 customers receive government reimbursements related to Medicare and Medicaid. Therefore, the Company’s customers 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 customers. In such agreements, the Company is responsible for the day-to-day management of employees located at the customers’ facilities, as well as for the provision of certain supplies. The Company also provides services on the basis of management-only agreements for a limited number of customers. In a management-only agreement, the Company provides management and supervisory services while the customer facility retains payroll responsibility for the non-supervisory staff. The agreements with customers typically provide for a renewable one year service term, cancellable by either party upon 30 to 90 days’ notice after an initial period of 60 to 120 days.
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 customers’ housekeeping departments, which are principally responsible for the cleaning, disinfecting and sanitizing of resident rooms and common areas of a customer’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 customer facility.
Dietary consists of managing the customers’ dietary departments, which are principally responsible for food purchasing, meal preparation and dietitian professional services, which includes the development of menus that meet residents’ dietary needs.
Unaudited Interim Financial Data
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and the requirements of Form 10-Q and Article 10 of Regulation S-X. Accordingly, these consolidated financial statements do not include all of the information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows. However, in the Company’s opinion, all adjustments which are of a normal recurring nature and are necessary for a fair presentation have been reflected in these consolidated financial statements. The balance sheet shown in this report as of December 31, 2022 has been derived from the audited financial statements for the year ended December 31, 2022. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for any future period.
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, 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.
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.
Accounts and Notes Receivable
Accounts and notes receivable consist of Housekeeping and Dietary segment trade receivables from contracts with customers. The Company’s payment terms with customers for services provided are defined within each customer’s service agreement. All accounts receivables are considered short term assets as the Company does not grant payment terms greater than one year. Accounts receivable initially are recorded at the transaction amount, and are recorded after the Company has an unconditional right to payment where only the passage of time is required before payment is received. Each reporting period, the Company evaluates the collectability of outstanding receivable balances and records an allowance for doubtful accounts representing an estimate of future expected credit loss. Additions to the allowance for doubtful accounts are made by recording a charge to bad debt expense reported in costs of services provided.
Notes receivable are initially recorded when accounts receivable are transferred into a promissory note and are recorded as an alternative to accounts receivable to memorialize an unqualified promise to pay a specific sum, typically with interest, in accordance with a defined payment schedule. The Company’s payment terms with customers on promissory notes can vary based on several factors and the circumstances of each promissory note, however most promissory notes mature over a 1 to 4 year period. Similar to accounts receivable, each reporting period the Company evaluates the collectability of outstanding notes receivable balances and records an allowance for doubtful accounts representing an estimate of future expected credit losses.
Allowance for Doubtful Accounts
In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification subtopic 326 Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC 326”), Management utilizes financial modeling to determine an allowance that reflects its best estimate of the lifetime expected credit losses on accounts and notes receivable which is recorded as a liability to offset the receivables. Modeling is prepared after considering historical experience, current conditions, and reasonable and supportable economic forecasts to estimate lifetime expected credit losses. Accounts and notes receivables are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded as a reduction of bad debt expense when received.
Inventories and Supplies
Inventories and supplies include housekeeping, linen and laundry supplies, as well as food provisions and supplies. Non-linen inventories and supplies are stated on a first-in, first-out (FIFO) basis, and reduced as deemed necessary to approximate the lower of cost or net realizable value. Linen supplies are amortized on a straight-line basis over their estimated useful life of 24 months.
Revenue Recognition
The Company recognizes revenue from contracts with customers when or as the promised goods and services are provided to customers. Revenues are reported net of sales taxes that are collected from customers and remitted to taxing authorities. The amount of revenue recognized by the Company is based on the expected value of consideration to which the Company is entitled in exchange for providing the contracted goods and services and when it is probable that the Company will collect substantially all of such consideration.
Leases
The Company records assets and liabilities on the balance sheet to recognize the rights and obligations arising from leasing arrangements with contractual terms greater than 12 months, as permitted by U.S. GAAP. A leasing arrangement includes any contract which entitles the Company to the right of use of an identified tangible asset where there are no restrictions as to the direct of use of the asset, and the Company obtains substantially all of the economic benefits from the right of use.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, income tax expense or benefits are recognized for the amount of taxes payable or refundable for the current period. The Company accrues for probable tax obligations as required, based on facts and circumstances in various regulatory environments. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases 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.
Uncertain income tax positions taken or expected to be taken in tax returns are reflected within the Company’s consolidated financial statements based on a recognition and measurement process.
Earnings per Common Share
Basic earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is computed using the weighted-average number of common shares outstanding and dilutive common shares, such as those issuable upon exercise of stock awards.
Share-Based Compensation
The Company estimates the fair value of share-based awards on the date of grant using the Black-Scholes valuation model for stock options, using a Monte Carlo simulation for performance restricted stock units, and using the share price on the date of grant for restricted stock units and deferred 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.
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 annually during the fourth quarter 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 during the three months ended March 31, 2023 or 2022.
Concentrations of Credit Risk
The Company’s financial instruments that are subject to credit risk are cash and cash equivalents, marketable securities, deferred compensation funding and accounts and notes receivable. At March 31, 2023 and December 31, 2022, the majority of the Company’s cash and cash equivalents and marketable securities were held in one large financial institution located in the United States. The Company’s marketable securities are fixed income investments which are highly liquid and can be readily purchased or sold through established markets.
The Company’s customers are concentrated in the healthcare industry and are primarily providers of long-term care. The revenues of many of the Company’s customers 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 Company’s customers participate. As a result, the Company may not realize the full effects such programs may have on the Company’s customers until these laws are fully implemented and governmental agencies issue applicable regulations or guidance.
Note 2—Revenue
The Company presents its consolidated revenues disaggregated by reportable segment, as Management evaluates the nature, amount, timing and uncertainty of the Company’s revenues by segment. Refer to Note 12—Segment Information herein as well as the information below regarding the Company’s reportable segments.
Housekeeping
Housekeeping accounted for $193.5 million and $201.7 million of the Company’s consolidated revenues for the three months ended March 31, 2023 and 2022, respectively, which represented approximately 46.4% and 47.3% of the Company’s revenues in each respective period. Housekeeping services include managing customers’ housekeeping departments, which are principally responsible for the cleaning, disinfecting and sanitizing of resident rooms and common areas of the customers’ facilities, as well as the laundering and processing of the bed linens, uniforms, resident personal clothing and other assorted linen items utilized at the customers’ facilities. Upon beginning service with a customer facility, the Company will typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise and train the front-line personnel and coordinate housekeeping services with other facility support functions in accordance with customer requests. Such management personnel also oversee the execution of various cost and quality control procedures including continuous training and employee evaluation.
Dietary
Dietary services accounted for $223.7 million and $225.1 million of the Company’s consolidated revenues for the three months ended March 31, 2023 and 2022, respectively, which represented approximately 53.6% and 52.7% of the Company’s revenues in each respective period. Dietary services consist of managing customers’ dietary departments which are principally responsible for food purchasing, meal preparation and professional dietitian services, which include the development of menus that meet the dietary needs of residents. On-site management is responsible for all daily dietary department activities, with regular support provided by a District Manager specializing in dietary services. The Company also offers clinical consulting services to facilities which if contracted is a service bundled within the monthly service provided to customers. Upon beginning service with a customer facility, the Company will typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise and train the front-line personnel and coordinate dietitian services with other facility support functions in accordance with customer requests. Such management personnel also oversee the execution of various cost and quality control procedures including continuous training and employee evaluation.
Revenue Recognition
The Company’s revenues are derived from contracts with customers. The Company recognizes revenue to depict the transfer of promised goods and services to customers in amounts that reflect the consideration to which the Company is entitled in exchange for those goods and services. The Company’s costs of obtaining contracts are not material.
The Company performs services and provides goods in accordance with its contracts with its customers. Such contracts typically provide for a renewable one year service term, cancellable by either party upon 30 to 90 days’ notice, after an initial period of 60 to 120 days. A performance obligation is the unit of account under ASC 606 and is defined as a promise in a contract to transfer a distinct good or service to the customer. The Company’s Housekeeping and Dietary contracts relate to the provision of bundles of goods, services or both, which represent a series of distinct goods and services that are substantially the same and that have the same pattern of transfer to the customer. The Company accounts for the series as a single performance obligation satisfied over time, as the customer simultaneously receives and consumes the benefits of the goods and services provided. Revenue is recognized using the output method, which is based upon the delivery of goods and services to the customers’ facilities. In limited cases, the Company provides goods, services or both, before the execution of a written contract. In these cases, the Company defers the recognition of revenue until a contract is executed. The amount of such deferred revenue was $0.3 million as of both March 31, 2023 and December 31, 2022. Additionally, substantially all such revenue amounts deferred as of December 31, 2022 were subsequently recognized as revenue during the three months ended March 31, 2023.
The transaction price is the amount of consideration to which the Company is entitled in exchange for transferring promised goods or services to its customers. The transaction price does not include taxes assessed or collected. The Company’s contracts detail the fees that the Company charges for the goods and services it provides. For certain contracts which contain a variable component to the transaction price, the Company is required to make estimates of the amount of consideration to which the Company will be entitled, based on variability in resident and patient populations serviced, product usage or quantities consumed. The Company recognizes revenue related to such estimates only when the Company 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 payment terms 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. In some cases, the Company requires customers to pay in advance for goods and services to be provided. As of March 31, 2023 the value of the contract liabilities associated with customer prepayments was $1.7 million. As of December 31, 2022, the value of the contract liabilities associated with customer prepayments was $3.1 million. The Company recognized $1.4 million of revenue during the three months ended March 31, 2023 which was recorded as a contract liability on December 31, 2022.
Transaction Price Allocated to Remaining Performance Obligations
The Company recognizes revenue as it satisfies the performance obligations associated with contracts with customers, which due to the nature of the goods and services provided by the Company, are satisfied over time. Contracts may contain transaction prices that are fixed, variable or both. The Company’s contracts with customers typically provide for an initial term of one year, with renewable one year service terms, cancellable by either party upon 30 to 90 days’ notice after an initial period of 60 to 120 days.
At March 31, 2023, the Company had $99.0 million related to performance obligations that were unsatisfied or partially unsatisfied for which the Company expects to recognize revenue. The Company expects to recognize revenue on all of the remaining performance obligations over the next 12 months. These amounts exclude variable consideration primarily related to performance obligations that consist of a series of distinct service periods with revenues based on future performance that cannot be estimated at contract inception. The Company also has elected to apply the practical expedient that permits exclusion of information about the remaining performance obligations with original expected durations of one year or less.
Note 3—Accounts and Notes Receivable
The Company’s accounts and notes receivable balances consisted of the following as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| (in thousands) |
| Short-term | | | |
| Accounts and notes receivable | $ | 423,814 | | | $ | 406,969 | |
| Allowance for doubtful accounts | (73,030) | | | (70,192) | |
| Total net short-term accounts and notes receivable | $ | 350,784 | | | $ | 336,777 | |
| Long-term | | | |
| Notes receivable | $ | 36,164 | | | $ | 35,882 | |
| Allowance for doubtful accounts | (3,837) | | | (3,273) | |
| Total net long-term notes receivable | $ | 32,327 | | | $ | 32,609 | |
| Total net accounts and notes receivable | $ | 383,111 | | | $ | 369,386 | |
The Company makes credit decisions on a case-by-case basis after reviewing a number of qualitative and quantitative factors related to the specific customer as well as current industry variables that may impact that customer. There are a variety of factors that impact a customer’s ability to pay in accordance with the Company’s contracts. These factors include, but are not limited to, fluctuating census numbers, litigation costs and the customer’s participation in programs funded by federal and state governmental agencies. Deviations in the timing or amounts of reimbursements under those programs can impact the customer’s cash flows and its ability to make timely payments. However, the customer’s obligation to pay the Company in accordance with the contracts are not contingent upon the customer’s cash flow. Notwithstanding the Company’s efforts to minimize its credit risk exposure, the aforementioned factors, as well as other factors that impact customer cash flows or ability to make timely payments, could have an indirect, yet material adverse effect on the Company’s results of operations and financial condition.
Fluctuations in net accounts and notes receivable are generally attributable to a variety of factors including, but not limited to, the timing of cash receipts from customers and the inception, transition, modification or termination of customer relationships. The Company deploys significant resources and has invested in tools and processes to optimize Management’s credit and collections efforts. When appropriate, the Company utilizes interest-bearing promissory notes to enhance the collectability of amounts due, by instituting definitive repayment plans and providing a means by which to further evidence the amounts owed. In addition, the Company may amend contracts from full service to management-only arrangements, or adjust contractual payment terms, to accommodate customers who have in good faith established clearly-defined plans for addressing cash flow issues. These efforts are intended to minimize the Company’s collections risk.
Note 4—Allowance for Doubtful Accounts
In making the Company’s credit evaluations, management considers the general collection risk associated with trends in the long-term care industry. The Company establishes credit limits through payment terms with customers, performs ongoing credit evaluations and monitors accounts on an aging schedule basis to minimize the risk of loss. Despite the Company’s efforts to minimize credit risk exposure, customers could be adversely affected if future industry trends, including those related to COVID-19, change in such a manner as to negatively impact their cash flows. The full effects of COVID-19 on the Company’s customers are highly uncertain and cannot be predicted. As a result, the Company’s future collection experience can differ significantly from historical collection trends. If the Company’s customers experience a negative impact on their cash flows, it could have a material adverse effect on the Company’s results of operations and financial condition.
The Company evaluates its accounts and notes receivable for expected credit losses quarterly. Accounts receivables are evaluated based on internally developed credit quality indicators derived from the aging of receivables. Notes receivable are evaluated based on internally developed credit quality indicators derived from Management’s assessment of collection risk. The Company manages note receivable portfolios using a two tiered approach by disaggregating standard notes receivables, which are promissory notes in good standing, from those who have been identified by Management as having an elevated credit risk profile due to a triggering event such as bankruptcy. At the end of each period, the Company sets a reserve for expected credit losses on standard notes receivable based on the Company’s historical loss rate. Notes receivable with an elevated risk profile, which are from customers who have filed bankruptcy, are subject to collections activity or are slow payers that are experiencing financial difficulties, are aggregated and evaluated to determine the total reserve for the class of receivable.
ASC 326 permits entities to make an accounting policy election not to measure an estimate for credit losses on accrued interest if those entities write-off accrued interest deemed uncollectible in a timely manner. The Company follows an income recognition policy on all interest earned on notes receivable. Under such policy the Company accounts for all notes receivable on a non-accrual basis and defers the recognition of any interest income until receipt of cash payments. This policy was established based on the Company’s history of collections of interest on outstanding notes receivable, as we do not deem it probable that we will receive substantially all interest on outstanding notes receivable. Accordingly, the Company does not record a credit loss adjustment for accrued interest. Interest income from notes receivable for the three months ended March 31, 2023 and 2022 was $0.6 million and $0.3 million, respectively.
The following table presents the Company’s two tiers of notes receivable further disaggregated by year of origination, as well as write-off activity for the three months ended March 31, 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Notes Receivable |
| | Amortized Cost Basis by Origination Year |
| | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Total |
| | (in thousands) |
| Notes Receivable | | | | | | | | | | | | | | |
| Standard notes receivable | | $ | 18,380 | | | $ | 27,856 | | | $ | 7,922 | | | $ | 1,540 | | | $ | 53 | | | $ | 21,975 | | | $ | 77,726 | |
| Elevated risk notes receivable | | $ | — | | | $ | — | | | $ | 2,510 | | | $ | — | | | $ | — | | | $ | 795 | | | $ | 3,305 | |
| | | | | | | | | | | | | | |
| Current-period gross write-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 51 | | | $ | 51 | |
| Current-period recoveries | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Current-period net write-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 51 | | | $ | 51 | |
The following table provides information as to the status of payment on the Company’s notes receivable which were past due as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Age Analysis of Past-Due Notes Receivable as of March 31, 2023 |
| | 0 - 90 Days | | 91 - 180 Days | | Greater than 181 Days | | Total |
| | (in thousands) |
| Notes Receivable | | | | | | | | |
| Standard notes receivable | | $ | 3,305 | | | $ | 276 | | | $ | 3,414 | | | $ | 6,995 | |
| Elevated risk notes receivable | | 136 | | | — | | | 795 | | | 931 | |
| | $ | 3,441 | | | $ | 276 | | | $ | 4,209 | | | $ | 7,926 | |
The following tables provide a summary of the changes in the Company’s allowance for doubtful accounts on a portfolio segment basis for the three months ended March 31, 2023 and 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Allowance for doubtful accounts |
| Portfolio Segment: | | December 31,
2022 | | Write-Offs1 | | Bad Debt Expense | | March 31,
2023 |
| | (in thousands) |
| Accounts Receivables | | $ | 66,601 | | | $ | (3,453) | | | $ | 5,259 | | | $ | 68,407 | |
| | | | | | | | |
| Notes Receivables | | | | | | | | |
| Standard notes receivable | | $ | 6,052 | | | $ | — | | | $ | 373 | | | $ | 6,425 | |
| Elevated risk notes receivable | | 811 | | | (51) | | | 1,275 | | | 2,035 | |
| Total notes receivable | | $ | 6,863 | | | $ | (51) | | | $ | 1,648 | | | $ | 8,460 | |
| Total accounts and notes receivable | | $ | 73,464 | | | $ | (3,504) | | | $ | 6,907 | | | $ | 76,867 | |
1.Write-offs are shown net of recoveries. During the three months ended March 31, 2023, the Company collected less than $0.1 million of accounts and notes receivables which had previously been written-off as uncollectible.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Allowance for doubtful accounts |
| Portfolio Segment: | | December 31,
2021 | | Write-Offs1 | | Bad Debt Expense | | March 31,
2022 |
| | (in thousands) |
| Accounts Receivables | | $ | 50,794 | | | $ | (5,343) | | | $ | 3,960 | | | $ | 49,411 | |
| | | | | | | | |
| Notes Receivables | | | | | | | | |
| Standard notes receivable | | $ | 13,607 | | | $ | — | | | $ | (1,065) | | | $ | 12,542 | |
| Elevated risk notes receivable | | 1,183 | | | — | | | (44) | | | 1,139 | |
| Total notes receivable | | $ | 14,790 | | | $ | — | | | $ | (1,109) | | | $ | 13,681 | |
| Total Accounts and notes receivable | | $ | 65,584 | | | $ | (5,343) | | | $ | 2,851 | | | $ | 63,092 | |
1.Write-offs are shown net of recoveries. During the three months ended March 31, 2022, the Company collected $0.2 million of accounts and notes receivables which had previously been written-off as uncollectible.
Note 5—Changes in Accumulated Other Comprehensive Income by Component
The Company's accumulated other comprehensive income consists of unrealized gains and losses from the Company’s available-for-sale marketable securities. The following table provides a summary of the changes in accumulated other comprehensive income for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | |
| Unrealized Gains and Losses on Available-for-Sale Securities1 |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| (in thousands) |
| Accumulated other comprehensive (loss) income — beginning balance | $ | (3,477) | | | $ | 4,000 | |
| Other comprehensive income (loss) before reclassifications | 1,206 | | | (5,277) | |
Losses reclassified from other comprehensive income2 | 1 | | | 8 | |
Net current period other comprehensive income (loss)3 | 1,207 | | | (5,269) | |
| Accumulated other comprehensive (loss) — ending balance | $ | (2,270) | | | $ | (1,269) | |
1.All amounts are net of tax.
2.Realized gains and losses were recorded pre-tax under “Investment and other income” in the Consolidated Statements of Comprehensive Income. For the three months ended March 31, 2023 and 2022, the Company recorded less than $0.1 million of realized losses from the sale of available-for-sale securities. Refer to Note 9—Fair Value Measurements herein for further information.
3.For the three months ended March 31, 2023 and 2022, the changes in other comprehensive income were net of a tax expense of $0.3 million and $1.4 million, respectively.
| | | | | | | | | | | |
| Amounts Reclassified from Accumulated Other Comprehensive Income |
| 2023 | | 2022 |
| (in thousands) |
| Three Months Ended March 31, | | | |
| Losses from the sale of available-for-sale securities | $ | (2) | | | $ | (12) | |
| Tax benefit | 1 | | | 4 | |
| Net loss reclassified from accumulated other comprehensive income | $ | (1) | | | $ | (8) | |
Note 6—Property and Equipment
Property and equipment are recorded at cost. Depreciation is recorded over the estimated useful life of each class of depreciable asset, and is computed using the straight-line method. Leasehold improvements are amortized over the shorter of the estimated asset life or term of the lease. Repairs and maintenance costs are charged to expense as incurred.
The following table sets forth the amounts of property and equipment by each class of depreciable asset as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| (in thousands) |
| Housekeeping and dietary equipment | $ | 13,980 | | | $ | 13,585 | |
| Computer hardware and software | 6,187 | | | 6,086 | |
Operating lease — right-of-use assets | 23,559 | | | 34,445 | |
Other1 | 1,059 | | | 1,055 | |
| Total property and equipment, at cost | 44,785 | | | 55,171 | |
| Less accumulated depreciation | 21,385 | | | 32,196 | |
| Total property and equipment, net | $ | 23,400 | | | $ | 22,975 | |
1.Includes furniture and fixtures, leasehold improvements and autos and trucks.
Depreciation expense for the three months ended March 31, 2023 and 2022 was $2.5 million and $2.9 million, respectively. Of the depreciation expense recorded for the three months ended March 31, 2023 and 2022, $1.2 million and $1.6 million related to the depreciation of the Company’s operating lease - right-of-use assets (“ROU Assets”), respectively.
Note 7—Leases
The Company recognizes ROU Assets and lease liabilities (“Lease Liabilities”) for automobiles, office buildings, IT equipment, and small storage units for the temporary storage of operational equipment. The Company’s leases have remaining lease terms ranging from less than 1 year to 6 years, and have extension options ranging from 1 year to 5 years. Most leases include the option to terminate the lease within 1 year.
Upon adopting ASC 842, the Company made accounting policy elections using practical expedients offered under the guidance to combine lease and non-lease components within leasing arrangements and to recognize the payments associated with short-term leases in earnings on a straight-line basis over the lease term, with the cost associated with variable lease payments recognized when incurred. These accounting policy elections impact the value of the Company’s ROU Assets and Lease Liabilities. The value of the Company’s ROU Assets is determined as the non-depreciated fair value of its leasing arrangements and is recorded to “Property and equipment, net” on the Company’s Consolidated Balance Sheets. The value of the Company’s Lease Liabilities is the present value of fixed lease payments not yet paid, discounted using either the rate implicit in the lease contract if that rate can be determined, or the Company’s incremental borrowing rate (“IBR”) and is recorded in “Other accrued expenses” and “Lease liability — long-term portion” on the Company’s Consolidated Balance Sheets. The Company’s IBR is determined as the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment.
Any future lease payments that are not fixed based on the terms of the lease contract, or fluctuate based on a factor other than an index or rate, are considered variable lease payments and are not included in the value of the Company’s ROU Assets or Lease Liabilities. The Company’s variable lease payments are mostly incurred from automobile leases and relate to miscellaneous transportation costs including repair costs, insurance, and terminal rental adjustments payments due at lease settlement. Such rental adjustment payments can result in a reduction to the Company’s total variable lease payments.
Components of lease expense required by ASC 842 are presented below for the three months ended March 31, 2023 and 2022.
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2023 | | 2022 |
| | (in thousands) |
| Lease cost | | | | |
| Operating lease cost | | $ | 1,387 | | | $ | 1,386 | |
| Short-term lease cost | | 232 | | | 355 | |
| Variable lease cost | | 450 | | | 82 | |
| Total lease cost | | $ | 2,069 | | | $ | 1,823 | |
Supplemental information required by ASC 842 is presented below for the three months ended March 31, 2023 and 2022.
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2023 | | 2022 |
| | (dollar amounts in thousands) |
| Other information | | | | |
| Cash paid for amounts included in the measurement of lease liabilities | | | | |
| Operating cash flows from operating leases | | $ | 1,514 | | $ | 1,711 |
| Weighted-average remaining lease term — operating leases | | 4.0 years | | 4.4 years |
| Weighted-average discount rate — operating leases | | 5.1 | % | | 4.2 | % |
During the three months ended March 31, 2023 and 2022, the Company’s ROU Assets and Lease Liabilities were reduced by $0.7 million and $0.9 million, respectively due to lease cancellations.
The following is a schedule by calendar year of future minimum lease payments under operating leases that have remaining terms as of March 31, 2023:
| | | | | | | | |
| Period/Year | | Operating Leases |
| | (in thousands) |
| April 1 to December 31, 2023 | | $ | 4,169 | |
| 2024 | | 4,308 | |
| 2025 | | 2,675 | |
| 2026 | | 1,539 | |
| 2027 | | 1,365 | |
| 2028 | | 1,389 | |
| Thereafter | | 116 | |
| Total minimum lease payments | | $ | 15,561 | |
| Less: imputed lease payments | | 1,507 | |
| Present value of lease liabilities | | $ | 14,054 | |
Note 8—Goodwill and Other Intangible Assets
The Company’s other intangible assets consist of customer relationships, trade names, patents, and non-compete agreements which were obtained through acquisitions and are recorded at their fair values at the date of acquisition. Intangible assets with determinable lives are amortized on a straight-line basis over their estimated useful lives. The weighted-average amortization period of customer relationships, trade names, patents, and non-compete agreements are approximately 10 years, 13 years, 8 years, and 4 years, respectively.
The following table sets forth the estimated amortization expense for intangibles subject to amortization for the remainder of 2023, the following five fiscal years and thereafter:
| | | | | | | | |
| Period/Year | | Total Amortization Expense |
| | (in thousands) |
| April 1 to December 31, 2023 | | $ | 2,616 | |
| 2024 | | $ | 2,685 | |
| 2025 | | $ | 2,685 | |
| 2026 | | $ | 2,666 | |
| 2027 | | $ | 1,197 | |
| 2028 | | $ | 613 | |
| Thereafter | | $ | 2,281 | |
Amortization expense for the three months ended March 31, 2023 and 2022 was $1.2 million for both periods.
Note 9—Fair Value Measurements
The Company’s current assets and current liabilities are financial instruments and most of these items (other than marketable securities, inventories and the short-term portion of deferred compensation funding) are recorded at cost in the Consolidated Balance Sheets. The estimated fair value of these financial instruments approximates their carrying value due to their short-term nature. The carrying value of the Company’s line of credit represents the outstanding amount of the borrowings, which approximates fair value. The Company’s financial assets that are measured at fair value on a recurring basis are its marketable securities and deferred compensation funding. The recorded values of all of the financial instruments approximate their current fair values because of their nature, stated interest rates and respective maturity dates or durations.
The Company’s marketable securities are held by the Company’s captive insurance company to satisfy capital requirements of the state regulator related to captive insurance companies. Such securities primarily consist of tax-exempt municipal bonds, which are classified as available-for-sale and are reported at fair value. Unrealized gains and losses associated with these investments are included in “Unrealized loss on available-for-sale marketable securities, net of taxes” within the Consolidated Statements of Comprehensive Income. The fair value of these marketable securities is classified within Level 2 of the fair value hierarchy, as these securities are measured using quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable. Such valuations are determined by a third-party pricing service. For the three months ended March 31, 2023 and 2022, the Company recorded unrealized gains, net of taxes of $1.2 million and unrealized losses, net of taxes of $5.3 million on marketable securities, respectively.
As part of a prior year acquisition of a prepackaged meal manufacturer, the Company agreed to pay royalties to the seller on all future product sales. The Company recorded a liability for the expected future payments within "Other long-term liabilities" on the Consolidated Balance Sheets and any payments within 12 months within "Other accrued expenses". The fair value of this liability is measured using forecasted sales models (Level 3). For the three months ended March 31, 2023 and 2022, the Company recorded realized losses of $0.3 million and gains of $1.7 million, respectively, associated with changes in fair value of the liability. Gains and losses are recorded within "Costs of services provided" in the Consolidated Statements of Comprehensive Income related to the subsequent measurement of the liability.
For the three months ended March 31, 2023 and 2022, the Company received total proceeds, less the amount of interest received, of $0.2 million and $1.5 million, respectively, from sales of available-for-sale municipal bonds. For both the three months ended March 31, 2023 and 2022, these sales resulted in realized losses of less than $0.1 million, which were recorded in “Other income – Investment and other income, net” in the Consolidated Statements of Comprehensive Income. The basis for the sale of these securities was the specific identification of each bond sold during the period.
The investments under the funded deferred compensation plan are classified as trading securities and unrealized gains or losses are recorded in “Selling, general and administrative expense” in the Consolidated Statements of Comprehensive Income. The fair value of these investments are determined based on quoted market prices (Level 1). For the three months ended March 31, 2023 and 2022, the Company recognized unrealized gains of $1.5 million and unrealized losses of $4.1 million, respectively, related to equity securities still held at the respective reporting dates.
The following tables provide fair value measurement information for the Company’s marketable securities and deferred compensation fund investments as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2023 |
| | | | | Fair Value Measurement Using: |
| Carrying Amount | | Total Fair Value | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Financial Assets: | |
| Marketable securities | | | | | | | | | |
| Municipal bonds — available-for-sale | $ | 95,985 | | | $ | 95,985 | | | $ | — | | | $ | 95,985 | | | $ | — | |
| Deferred compensation fund | | | | | | | | | |
Money Market1 | $ | 2,077 | | | $ | 2,077 | | | $ | — | | | $ | 2,077 | | | $ | — | |
| Commodities | 203 | | | 203 | | | 203 | | | — | | | — | |
| Fixed Income | 3,923 | | | 3,923 | | | 3,923 | | | — | | | — | |
| International | 3,982 | | | 3,982 | | | 3,982 | | | — | | | — | |
| Large Cap Blend | 1,499 | | | 1,499 | | | 1,499 | | | — | | | — | |
| Large Cap Growth | 11,195 | | | 11,195 | | | 11,195 | | | — | | | — | |
| Large Cap Value | 6,084 | | | 6,084 | | | 6,084 | | | — | | | — | |
| Mid Cap Blend | 2,680 | | | 2,680 | | | 2,680 | | | — | | | — | |
| Real Estate | 339 | | | 339 | | | 339 | | | — | | | — | |
| Small Cap Blend | 3,687 | | | 3,687 | | | 3,687 | | | — | | | — | |
Deferred compensation fund2 | $ | 35,669 | | | $ | 35,669 | | | $ | 33,592 | | | $ | 2,077 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2022 |
| | | | | Fair Value Measurement Using: |
| Carrying
Amount | | Total Fair
Value | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Financial Assets: | |
| Marketable securities | | | | | | | | | |
| Municipal bonds — available-for-sale | $ | 95,200 | | | $ | 95,200 | | | $ | — | | | $ | 95,200 | | | $ | — | |
| Deferred compensation fund | | | | | | | | | |
Money Market1 | $ | 2,420 | | | $ | 2,420 | | | $ | — | | | $ | 2,420 | | | $ | — | |
| Commodities | 170 | | | 170 | | | 170 | | | — | | | — | |
| Fixed Income | 3,571 | | | 3,571 | | | 3,571 | | | — | | | — | |
| International | 4,093 | | | 4,093 | | | 4,093 | | | — | | | — | |
| Large Cap Blend | 1,210 | | | 1,210 | | | 1,210 | | | — | | | — | |
| Large Cap Growth | 11,064 | | | 11,064 | | | 11,064 | | | — | | | — | |
| Large Cap Value | 6,133 | | | 6,133 | | | 6,133 | | | — | | | — | |
| Mid Cap Blend | 2,667 | | | 2,667 | | | 2,667 | | | — | | | — | |
| Real Estate | 359 | | | 359 | | | 359 | | | — | | | — | |
| Small Cap Blend | 3,424 | | | 3,424 | | | 3,424 | | | — | | | — | |
Deferred compensation fund2 | $ | 35,111 | | | $ | 35,111 | | | $ | 32,691 | | | $ | 2,420 | | | $ | — | |
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.
2.As of March 31, 2023 and December 31, 2022, $1.4 million and $1.6 million of short-term deferred compensation funding is included in “Prepaid expenses and other assets” on the Company’s Consolidated Balance Sheets, respectively. Such amounts of short-term deferred compensation funding represent investments expected to be liquidated and paid within 12 months of March 31, 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | Credit Impairment Losses1 |
| (in thousands) |
| March 31, 2023 | | | | | | | | | |
| Type of security: | | | | | | | | | |
| Municipal bonds — available-for-sale | $ | 98,859 | | | $ | 511 | | | $ | (3,385) | | | $ | 95,985 | | | $ | — | |
| Total debt securities | $ | 98,859 | | | $ | 511 | | | $ | (3,385) | | | $ | 95,985 | | | $ | — | |
| | | | | | | | | |
| December 31, 2022 | | | | | | | | | |
| Type of security: | | | | | | | | | |
| Municipal bonds — available-for-sale | $ | 99,601 | | | $ | 229 | | | $ | (4,630) | | | $ | 95,200 | | | $ | — | |
| Total debt securities | $ | 99,601 | | | $ | 229 | | | $ | (4,630) | | | $ | 95,200 | | | $ | — | |
1.The Company performs a credit impairment loss assessment quarterly on an individual security basis. As of March 31, 2023 and December 31, 2022, no allowance for credit loss impairment has been recognized as the issuers of these securities have not established a cause for default and various rating agencies have reaffirmed each security's investment grade status. The fair value of these securities have fluctuated since the purchase date as market interest rates fluctuate. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell before the recovery of the securities' amortized cost basis.
The following table summarizes the contractual maturities of debt securities held at March 31, 2023 and December 31, 2022, which are classified as “Marketable securities, at fair value” in the Consolidated Balance Sheets:
| | | | | | | | | | | | | | |
| | Municipal Bonds — Available-for-Sale |
| Contractual maturity: | | March 31, 2023 | | December 31, 2022 |
| | (in thousands) |
| Maturing in one year or less | | $ | 6,729 | | | $ | 2,798 | |
| Maturing in second year through fifth year | | 33,048 | | | 35,068 | |
| Maturing in sixth year through tenth year | | 40,008 | | | 38,575 | |
| Maturing after ten years | | 16,200 | | | 18,759 | |
| Total debt securities | | $ | 95,985 | | | $ | 95,200 | |
Note 10—Share-Based Compensation
The components of the Company’s share-based compensation expense for the three months ended March 31, 2023 and 2022 are as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| (in thousands) |
| Stock options | $ | 212 | | | $ | 314 | |
| Restricted stock, restricted stock units and deferred stock units | 1,514 | | | 1,785 | |
| Performance stock units | 247 | | | 199 | |
| Employee Stock Purchase Plan | 85 | | | 98 | |
| Total pre-tax share-based compensation expense charged against income | $ | 2,058 | | | $ | 2,396 | |
The following table summarizes the components of share-based compensation expense included within the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| (in thousands) |
| Selling, general & administrative expense | $ | 2,033 | | | $ | 2,365 | |
| Costs of services provided | 25 | | | 31 | |
| Total share-based compensation expense | $ | 2,058 | | | $ | 2,396 | |
At March 31, 2023, the unrecognized compensation cost related to unvested stock options and awards was $23.3 million. The weighted average period over which these awards will vest is approximately 3.5 years.
2020 Omnibus Incentive Plan
On May 26, 2020, the Company adopted the 2020 Omnibus Incentive Plan (the “2020 Plan”) after approval by the Company’s Shareholders at the Annual Meeting of Shareholders. The 2020 Plan provides that current or prospective officers, employees, non-employee directors and advisors can receive share-based awards such as stock options, performance stock units, restricted stock units and other stock awards. The 2020 Plan seeks to encourage profitability and growth of the Company through short-term and long-term incentives that are consistent with the Company’s operating objectives.
As of March 31, 2023, there were 4.5 million shares of common stock reserved for issuance under the 2020 Plan, of which 0.7 million are available for future grant. The amount of shares available for issuance under the 2020 Plan will increase when outstanding awards under the Company’s Second Amended and Restated 2012 Equity Incentive Plan (the “2012 Plan”) are subsequently forfeited, terminated, lapsed, or satisfied thereunder in cash or property other than shares. No stock award will have a term in excess of 10 years. The Nominating, Compensation and Stock Option Committee (the “NCSO”) of the Board of Directors is responsible for determining the terms of the grants in accordance with the 2020 Plan.
Stock Options
A summary of stock options outstanding under the 2020 Plan and the 2012 Plan as of December 31, 2022 and changes during the three months ended March 31, 2023 are as follows:
| | | | | | | | | | | |
| Stock Options Outstanding |
| Number of Shares | | Weighted Average Exercise Price |
| (in thousands) | | |
| December 31, 2022 | 2,375 | | | $ | 31.56 | |
| Granted | 207 | | | $ | 13.72 | |
| Exercised | — | | | $ | — | |
| Forfeited | — | | | $ | — | |
| Expired | (132) | | | $ | 24.14 | |
| March 31, 2023 | 2,450 | | | $ | 30.45 | |
The weighted average grant-date fair value of stock options granted during the three months ended March 31, 2023 and 2022 was $6.53 and $4.06 per common share, respectively. No stock options were exercised during the three months ended March 31, 2023. The total intrinsic value of stock options exercised during the three months ended March 31, 2022 was $0.1 million.
The fair value of stock option awards granted in 2023 and 2022 was estimated on the date of grant using the Black-Scholes option valuation model with the following assumptions:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| Risk-free interest rate | 4.0 | % | | 1.5 | % |
| Weighted average expected life | 6.9 years | | 6.7 years |
| Expected volatility | 39.5 | % | | 36.6 | % |
| Dividend yield | — | % | | 4.6 | % |
The following table summarizes other information about the stock options at March 31, 2023:
| | | | | |
| March 31, 2023 |
| (amounts in thousands, except per share data) |
| Outstanding: | |
| Aggregate intrinsic value | $ | 31 | |
| Weighted average remaining contractual life | 5.3 years |
| Exercisable: | |
| Number of options | 1,713 | |
| Weighted average exercise price | $ | 34.72 | |
| Aggregate intrinsic value | $ | — | |
| Weighted average remaining contractual life | 3.9 years |
Restricted Stock Units
The fair value of outstanding restricted stock units was determined based on the market price of the shares on the date of grant. During the three months ended March 31, 2023, the Company granted 0.5 million restricted stock units to its employees with a weighted average grant date fair value of $13.72 per unit. During the three months ended March 31, 2022, the Company granted 0.4 million restricted stock units with a weighted average grant date fair value of $18.10 per unit.
A summary of the outstanding restricted stock units as of December 31, 2022 and changes during the three months ended March 31, 2023 is as follows:
| | | | | | | | | | | |
| Restricted Stock Units |
| Number | | Weighted Average Grant Date Fair Value |
| (in thousands) | | |
| December 31, 2022 | 825 | | | $ | 24.37 | |
| Granted | 509 | | | $ | 13.72 | |
| Vested | (237) | | | $ | 27.82 | |
| Forfeited | (5) | | | $ | 22.28 | |
| March 31, 2023 | 1,092 | | | $ | 18.67 | |
Performance Stock Units
On February 24, 2023, the NCSO granted 80,000 Performance Stock Units (“PSUs”) to the Company’s executive officers. Such PSUs are contingent upon the achievement of certain total shareholder return (“TSR”) targets as compared to the TSR of the S&P 400 MidCap Index and the participant's continued employment with the Company for the three year period ending December 31, 2025, the date at which such PSUs vest. The unrecognized share-based compensation cost of the TSR-based PSU awards at March 31, 2023 is $2.3 million and is expected to be recognized over a weighted-average period of 2.2 years.
A summary of the outstanding PSUs as of December 31, 2022 and changes during the three months ended March 31, 2023 is as follows:
| | | | | | | | | | | |
| Performance Stock Units |
| Number | | Weighted Average Grant Date Fair Value |
| (in thousands) | | |
| December 31, 2022 | 95 | | | $ | 26.01 | |
| Granted | 80 | | | $ | 16.20 | |
| Vested | — | | | $ | — | |
| Forfeited | — | | | $ | — | |
| March 31, 2023 | 175 | | | $ | 21.52 | |
Deferred Stock Units
The Company grants Deferred Stock Units ("DSUs") to our non-employee directors. Once vested, the recipient shall be entitled to receive a lump sum payment of a number of shares equal to the total number of DSUs issued to such recipient upon the first to occur of (i) the five year anniversary of the date of grant, (ii) the recipient's death, disability or separation of service from the Board, or (iii) a change of control (as defined by the 2020 Plan). Non-employee directors can also elect to receive their Board of Directors retainer in the form of DSUs in lieu of cash. The number of DSUs granted to these directors is determined based on the stock price on the award date and approximates the cash value the directors would otherwise receive for their retainer. Two non-employee directors made an election in 2022 to receive DSUs in lieu of cash for their 2023 Board of Directors retainer. The unrecognized share-based compensation cost of outstanding DSU awards at March 31, 2023 is $0.1 million and is expected to be recognized over a weighted-average period of 0.2 years.
Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plan (“ESPP”) is currently available through 2026 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 its common stock to its employees. Pursuant to such authorization, there are 1.9 million shares available for future grant at March 31, 2023.
The expense associated with the options granted under the ESPP during the three months ended March 31, 2023 and 2022 was estimated on the date of grant using the Black-Scholes option valuation model with the following assumptions:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| Risk-free interest rate | 4.8% | | 0.4% |
| Weighted average expected life (years) | 1.0 | | 1.0 |
| Expected volatility | 42.9% | | 36.9% |
| Dividend yield | 7.1% | | 4.7% |
Deferred Compensation Plan
The Company offers a Supplemental Executive Retirement Plan (“SERP”) for executives and certain key employees. The SERP allows participants to defer a portion 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 match of a portion of their deferral in the form of the Company’s common stock based on the then-current market value. Under the SERP, the Company is authorized to issue 1.0 million shares of its common stock to its employees. Pursuant to such authorization, the Company has 0.3 million shares available for future grant at March 31, 2023. At the time of issuance, such shares are accounted for at cost as treasury stock.
The following table summarizes information about the SERP during the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| | 2023 | | 2022 |
| (in thousands) |
SERP expense 1 | $ | 157 | | | $ | 157 | |
| Unrealized gain (loss) recorded in SERP liability account | $ | 1,546 | | | $ | (3,785) | |
1.Both the SERP match and the deferrals are included in the “selling, general and administrative” caption in the Consolidated Statements of Comprehensive Income.
Note 11—Income Taxes
The Company’s annual effective tax rate is impacted by the tax effects of option exercises and the vesting of awards, which are treated as discrete items in the reporting period in which they occur, and therefore cannot be considered in the calculation of the estimated annual effective tax rate. Discrete items increased the Company’s income tax provision recognized through the three months ended March 31, 2023 and March 31, 2022 by $0.9 million and $0.8 million, respectively.
Differences between the effective tax rate and the applicable U.S. federal statutory rate arise primarily from the effect of state and local income taxes, share-based compensation and tax credits available to the Company. The actual 2023 effective tax rate will likely vary from the estimate depending on the actual operating income earned with availability of tax credits and the exercise of stock options and vesting of share-based awards.
The Company accounts for income taxes using the asset and liability method, which results in recognizing income tax expense based on the amount of income taxes payable or refundable for the current year. Additionally, the Company regularly evaluates the tax positions taken or expected to be taken resulting from financial statement recognition of certain items. Based on the evaluation, there are no significant uncertain tax positions requiring recognition in the Company’s financial statements. The evaluation was performed for the tax years ended December 31, 2019 through 2022 (with regard to U.S. federal income tax returns) and December 31, 2018 through 2022 (with regard to various state and local income tax returns), the tax years which remain subject to examination by major tax jurisdictions as of March 31, 2023.
The Company may from time to time be assessed interest or penalties by taxing jurisdictions, although any such assessments historically have been minimal. When the Company has received an assessment for interest and/or penalties, it will be classified in the financial statements as selling, general and administrative expense. In addition, any interest or penalties relating to recognized uncertain tax positions would also be recorded in selling, general and administrative expense.
Note 12—Segment Information
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 a similar customer base and share many operational similarities, they are managed separately due to distinct differences in the type of services provided, as well as the specialized expertise required of the professional management personnel responsible for delivering each segment’s services. Such services are rendered pursuant to discrete contracts, specific to each reportable segment.
The Company’s accounting policies for the segments are generally the same as described in the Company’s significant accounting policies. Differences between the reportable segments’ operating results and other disclosed data and the information in the consolidated financial statements relate primarily to corporate level transactions and recording of transactions at the reportable segment level using other than generally accepted accounting principles. There are certain inventories and supplies that are primarily expensed when incurred within the operating segments, while they are capitalized in the consolidated financial statements. In addition, most corporate expenses such as corporate salary and benefit costs, certain legal costs, debt expense, information technology costs, depreciation, amortization of finite-lived intangible assets, share based compensation costs and other corporate-specific costs, are not fully allocated to the operating segments. There are also allocations for workers’ compensation and general liability expense within the operating segments that differ from the actual expense recorded by the Company under U.S. GAAP. Segment amounts disclosed are prior to elimination entries made in consolidation.
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
| | | | | (in thousands) |
| Revenues | | | | | | | |
| Housekeeping | | | | | $ | 193,519 | | | $ | 201,704 | |
| Dietary | | | | | 223,711 | | | 225,107 | |
| Total | | | | | $ | 417,230 | | | $ | 426,811 | |
| | | | | | | |
| Income before income taxes | | | | | | | |
| Housekeeping | | | | | $ | 20,053 | | | $ | 20,399 | |
| Dietary | | | | | 14,666 | | | 9,433 | |
Corporate and eliminations1 | | | | | (17,163) | | | (14,051) | |
| Total | | | | | $ | 17,556 | | | $ | 15,781 | |
1.Primarily represents corporate office costs and related overhead, recording of certain inventories and supplies and workers compensation costs at the reportable segment level which use accounting methods that differ from those used at the corporate level, as well as consolidated subsidiaries’ operating expenses that are not allocated to the reportable segments, net of investment and other income and interest expense.
Note 13—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, restricted stock units, performance stock units and deferred stock units. The table below reconciles the weighted-average basic and diluted common shares outstanding:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| (in thousands) |
| Numerator for basic and diluted earnings per share: | | | | | | | |
| Net income | $ | 12,684 | | | $ | 11,329 | | | | | |
| | | | | | | |
| Denominator | | | | | | | |
| Weighted average number of common shares outstanding - basic | 74,497 | | | 74,326 | | | | | |
Effect of dilutive securities1 | 21 | | | 7 | | | | | |
| Weighted average number of common shares outstanding - diluted | 74,518 | | | 74,333 | | | | | |
| | | | | | | |
| Basic earnings per share: | $ | 0.17 | | | $ | 0.15 | | | | | |
| | | | | | | |
| Diluted earnings per share: | $ | 0.17 | | | $ | 0.15 | | | | | |
1.Certain outstanding equity awards are anti-dilutive and therefore excluded from the calculation of the weighted average number of diluted common shares outstanding.
Anti-dilutive outstanding equity awards under share-based compensation plans were as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| (in thousands) |
| Anti-dilutive | 3,191 | | | 3,369 | | | | | |
Note 14—Other Contingencies
Line of Credit
At March 31, 2023, the Company had a $300.0 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 the Term Secured Overnight Financing Rate ("SOFR") plus 165 basis points. As of March 31, 2023, there were $35.0 million in borrowings under the line of credit. As of December 31, 2022, there were $25.0 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 March 31, 2023. The line of credit expires on November 22, 2027.
At March 31, 2023, the Company also had outstanding $85.7 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 reduced by $85.7 million to $179.3 million at March 31, 2023. The letters of credit expire on January 4, 2024.
Tax Jurisdictions and Matters
The Company provides services throughout the continental United States and is subject to numerous state and local taxing jurisdictions. In the ordinary course of business, a jurisdiction may contest the Company’s reporting positions with respect to the application of its tax code to the Company’s services, which could result in additional tax liabilities.
The Company has tax matters with various taxing authorities. Because of the uncertainties related to both the probable outcomes and amount of probable assessments due, the Company is unable to make a reasonable estimate of a liability. The Company does not expect the resolution of any of these matters, taken individually or in the aggregate, to have a material adverse effect on the consolidated financial position or results of operations based on the Company’s best estimate of the outcomes of such matters.
Legal Proceedings
The Company is subject to various claims and legal actions in the ordinary course of business. Some of these matters include payroll and employee-related matters and examinations by governmental agencies. As the Company becomes aware of such claims and legal actions, the Company records accruals for any exposures that are probable and estimable. If adverse outcomes of such claims and legal actions are reasonably possible, Management assesses materiality and provides financial disclosure, as appropriate.
At this time, the Company is unable to reasonably estimate possible losses or form a judgment that an unfavorable outcome is either probable or remote with respect to certain pending litigation claims asserted and it is not currently possible to assess whether or not the outcome of these proceedings may have a material adverse effect on the Company.
Government Regulations
The Company’s customers are concentrated in the healthcare industry and are primarily providers of long-term care many of whom have been significantly impacted by COVID-19. The revenues of many of the Company’s customers 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 customers participate.
Note 15—Subsequent Events
The Company evaluated all subsequent events through the filing date of this Form 10-Q. There were no events or transactions occurring during this subsequent reporting period which require recognition or additional disclosure in these financial statements.
