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11: R2 Consolidated Balance Sheets HTML 131K
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13: R4 Consolidated Statements of Comprehensive Income HTML 93K
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15: R6 Consolidated Statements of Stockholders' Equity HTML 114K
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Accounts and Notes Receivable (Details)
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Registrant’s
telephone number, including area code:
(i215) i639-4274
Former name, former address and former fiscal year, if changed since last report:
Not Applicable
Securities registered pursuant to Section 12(b)
of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, $.01 par value
iHCSG
iNASDAQ
Global Select Market
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. iYesþ No ¨
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). iYesþ No ¨
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.
iLarge
accelerated filer
þ
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No iþ
Indicate the number of shares outstanding of each of the
registrant’s classes of common stock, as of the latest practicable date. Common Stock, $.01 par value: i74,054,000 shares outstanding as of July 20, 2022.
This report and documents incorporated by reference into it may contain forward-looking statements within the meaning of federal securities laws, which are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, and our beliefs and assumptions. Words such as “believes,”“anticipates,”“plans,”“expects,”“estimates,”“will,”“goal,” and similar expressions are intended to identify forward-looking statements. The inclusion of forward-looking statements should not be regarded as a representation by us that any of our plans will be achieved. We undertake no obligation
to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Such forward-looking information is also subject to various risks and uncertainties. Such risks and uncertainties include, but are not limited to, risks arising from our providing services to the healthcare industry, primarily providers of long-term care; the impact of and future effects of the COVID-19 pandemic or other potential pandemics; having a significant portion of our consolidated revenues contributed by one customer during the six months ended June 30, 2022; credit and collection risks associated with the healthcare industry; our claims experience related to workers’ compensation and general liability insurance (including any litigation claims, enforcement actions, regulatory actions and investigations arising from personal injury and loss of life related to COVID-19); the effects
of changes in, or interpretations of laws and regulations governing the healthcare industry, our workforce and services provided, including state and local regulations pertaining to the taxability of our services and other labor-related matters such as minimum wage increases; the Company’s expectations with respect to selling, general, and administrative expense; the impact of the concluded Securities and Exchange Commission investigation and related class action lawsuit; heightened volatility of commodity food prices partially due to constrained global production as a result of the Russia-Ukraine conflict and the risk factors described in Part I of our Form 10-K for the fiscal year ended December 31, 2021 under “Government Regulation of Customers,”“Service Agreements and Collections,” and “Competition,” under Item
IA. “Risk Factors” in such Form 10-K and under Item IA. “Risk Factors” in this Form 10-Q.
These factors, in addition to delays in payments from customers and/or customers in bankruptcy, 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 by continued inflation particularly if increases in the costs of labor and labor-related costs, materials, supplies and equipment used in performing services (including the impact of potential tariffs and COVID-19) could not be passed on to our customers.
In addition, we believe that to improve our financial performance we must continue to obtain service agreements with new customers, retain and provide new services to existing customers,
achieve modest price increases on current service agreements with existing customers and/or maintain internal cost reduction strategies at our various operational levels. Furthermore, we believe that our ability to sustain the internal development of managerial personnel is an important factor impacting future operating results and the successful execution of our projected growth strategies. There can be no assurance that we will be successful in that regard.
Accounts
and notes receivable, less allowance for doubtful accounts of $i70,798 and $i59,271 as of June 30,
2022 and December 31, 2021, respectively
i331,534
i293,388
Inventories
and supplies
i23,535
i26,015
Taxes
receivable
i3,775
i8,813
Prepaid
expenses and other assets
i33,839
i32,976
Total
current assets
i521,852
i546,382
Property
and equipment, net
i25,632
i28,102
Goodwill
i75,529
i74,755
Other
intangible assets, less accumulated amortization of $i30,313 and $i27,879 as
of June 30, 2022 and December 31, 2021, respectively
i18,371
i20,805
Notes
receivable — long–term portion, less allowance for doubtful accounts of $i5,222 and $i6,312 as of June 30,
2022 and December 31, 2021, respectively
i32,901
i29,259
Deferred
compensation funding, at fair value
i32,320
i46,691
Deferred
tax asset
i33,453
i31,535
Total
assets
$
i740,058
$
i777,529
LIABILITIES
AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable
$
i66,466
$
i64,419
Accrued
payroll and related taxes
i61,572
i68,664
Other
accrued expenses
i14,819
i26,741
Borrowings
under line of credit
i10,000
i—
Deferred
compensation liability — short-term
i4,694
i6,991
Accrued
insurance claims
i26,378
i24,310
Total
current liabilities
i183,929
i191,125
Accrued
insurance claims — long-term
i69,233
i65,084
Deferred
compensation liability — long-term
i32,789
i46,888
Lease
liability — long-term
i9,856
i11,299
Other
long-term liabilities
i6,406
i10,456
Commitments
and contingencies (Note 14)
i
i
STOCKHOLDERS’
EQUITY:
Common stock, $ii0.01/
par value; ii100,000/ shares authorized; i76,160
and i76,009 shares issued, and i74,054 and i73,769
shares outstanding as of June 30, 2022 and December 31, 2021, respectively
i762
i760
Additional
paid-in capital
i298,405
i294,124
Retained
earnings
i170,267
i183,957
Accumulated
other comprehensive (loss) income, net of taxes
Note 1—Description
of Business and Significant Accounting Policies
Nature of Operations
i
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 customers 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 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 ione year service term, cancellable by either party upon i30
to i90 days’ notice after an initial period of i60 to i120
days.
The Company is organized into itwo 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
iThe
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, 2021 has been derived from the audited financial statements for the year ended December 31,
2021. 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, 2021. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for any future period.
Use of Estimates in Financial Statements
iIn
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, including the potential future effects of COVID-19. Management regularly evaluates this information to determine if it is necessary to update the basis for its estimates and to adjust for known changes.
iThe 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
iCash
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
i
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 typically promissory notes mature over a i1
to i3 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 loss.
/
Refer to Note 3—Accounts and Notes Receivable herein
for further information.
i
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.
Refer to Note 4—Allowance for Doubtful Accounts herein for further information.
Inventories and Supplies
iInventories
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 i24 months./
iThe Company recognizes revenue from contracts with customers when or as the promised goods and services are provided to customers. Revenues are reported net of sales taxes that are collected from customers and remitted to taxing authorities.
The amount of revenue recognized by the Company is based on the consideration to which the Company is entitled in exchange for providing the contracted goods and services.
Refer to Note 2—Revenue herein for further information.
Leases
iThe
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, in accordance with FASB Accounting Standards Codification subtopic ASC 842 Leases (“ASC 842”). 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. As of June 30, 2022 and December 31,
2021, the Company was only the lessee of operating lease arrangements.
Refer to Note 7—Leases herein for further information.
Income Taxes
iThe 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 financial statements based on a recognition and measurement process.
Earnings per Common Share
iBasic 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 options and upon
the vesting of restricted stock units.
Share-Based Compensation
iThe 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
iIdentifiable 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.
iiNo/ impairment
loss was recognized on the Company's intangible assets or goodwill during the six months ended June 30, 2022 or 2021.
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 June 30, 2022 and December 31, 2021, substantially all of the Company’s cash and cash equivalents and marketable securities were held in iione/
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 customers participate. As a result, the
Company may not realize the full effects of such programs until these laws are fully implemented and governmental agencies issue applicable regulations or guidance.
/
i
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 $i400.8
million and $i417.9 million of the Company’s consolidated revenues for the six months ended June 30, 2022 and 2021, respectively, which represented approximately i47.1%
and i51.9% 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 $i450.9
million and $i388.0 million of the Company’s consolidated revenues for the six months ended June 30, 2022 and 2021, respectively, which represented approximately i52.9%
and i48.1% 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.
The Company’s revenues are derived from contracts with customers. The Company accounts for revenue from contracts with customers in accordance with FASB Accounting Standards Codification subtopic ASC 606 Revenue from Contracts with Customers (“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 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 customers’ contracts. Such contracts
typically provide for a renewable ione year service term, cancellable by either party upon i30 to i90
days’ notice, after an initial period of i60 to i120 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 less than $i0.1
million and $i0.1 million as of June 30, 2022 and December 31, 2021, respectively. Additionally, substantially all such revenue amounts deferred as of December 31, 2021 were subsequently recognized as revenue during the six months ended June 30, 2022.
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 represent a single performance obligation 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 June 30, 2022 and December 31,
2021, the value of the contract liabilities associated with customer prepayments was less than $i0.1 million and $i2.5
million, respectively. Additionally, substantially all such revenue amounts deferred as of December 31, 2021 were subsequently recognized as revenue during the six months ended June 30, 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. iThe Company’s contracts with customers typically provide for an initial term of one year, with renewable ione
year service terms, cancellable by either party upon i30 to i90 days’ notice after an initial period of i60
to i120 days./
At June 30, 2022, the Company had $i161.1 million
related to performance obligations that were unsatisfied or partially unsatisfied for which the Company expects to recognize revenue. The Company expects to recognize revenue on approximately i60.0% of the remaining performance obligations over the next i12
months, with the balance to be recognized thereafter. 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.
Total
net short-term accounts and notes receivable
$
i331,534
$
i293,388
Long-term
Notes
receivable
$
i38,123
$
i35,571
Allowance
for doubtful accounts
(i5,222)
(i6,312)
Total
net long-term notes receivable
$
i32,901
$
i29,259
Total
net accounts and notes receivable
$
i364,435
$
i322,647
/
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 is 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, the quarterly analysis of the
Company's internally developed credit quality indicators 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.
/
i
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.
The guidance in 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, recognizing the environment of the long-term care industry, and not because such notes receivable are necessarily impaired. Accordingly, the Company does not record a credit loss adjustment for accrued interest. Interest income from notes receivable for the three months ended June 30, 2022 and 2021 was $i0.5
million and $i0.3 million, respectively. Interest income from notes receivable for the six months ended June 30, 2022 and 2021 was $i0.8
million and $i0.7 million, respectively.
i
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 six months ended June 30, 2022.
Notes
Receivable
Amortized Cost Basis by Origination Year
2022
2021
2020
2019
2018
Prior
Total
(in thousands)
Notes
Receivable
Standard notes receivable
$
i10,927
$
i12,589
$
i2,371
$
i173
$
i16,680
$
i22,840
$
i65,580
Elevated
risk notes receivable
$
i—
$
i—
$
i—
$
i—
$
i—
$
i1,223
$
i1,223
Current-period
gross write-offs
$
i1
$
i—
$
i—
$
i54
$
i—
$
i483
$
i538
Current-period
recoveries
i—
i—
i—
i—
i—
i—
i—
Current-period
net write-offs
$
i1
$
i—
$
i—
$
i54
$
i—
$
i483
$
i538
/
i
The
following table provides information as to the status of payment on the Company’s notes receivable which were past due as of June 30, 2022:
Age Analysis of Past-Due
Notes Receivable as of June 30, 2022
0 - 90 Days
91 - 180 Days
Greater than 181 Days
Total
(in thousands)
Notes Receivable
Standard
notes receivable
$
i1,005
$
i605
$
i12,640
$
i14,250
Elevated
risk notes receivable
i—
i—
i1,223
i1,223
$
i1,005
$
i605
$
i13,863
$
i15,473
/
ii
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 June 30, 2022 and 2021.
1.Write-offs
are shown net of recoveries. During the three months ended June 30, 2022, the Company collected less than $i0.1 million of accounts receivables and notes receivables which had previously been written-off as uncollectible.
1.Write-offs
are shown net of recoveries. During the three months ended June 30, 2021, the Company collected $i0.1 million of accounts receivables which had previously been written-off as uncollectible.
The following tables provide a summary of the changes in the
Company’s allowance for doubtful accounts on a portfolio segment basis for the six months ended June 30, 2022 and 2021.
1.Write-offs
are shown net of recoveries. During the six months ended June 30, 2022, the Company collected $i0.2 million of accounts receivables and notes receivables which had previously been written-off as uncollectible.
1.Write-offs
are shown net of recoveries. During the six months ended June 30, 2021, the Company collected $i0.1 million of accounts receivables 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. iThe
following table provides a summary of the changes in accumulated other comprehensive income for the six months ended June 30, 2022 and 2021:
Unrealized Gains and Losses on Available-for-Sale Securities1
Accumulated other comprehensive income — beginning balance
$
i4,000
$
i5,563
Other
comprehensive loss before reclassifications
(i7,234)
(i405)
Losses
(gains) reclassified from other comprehensive income2
i20
(i163)
Net
current period other comprehensive loss3
(i7,214)
(i568)
Accumulated
other comprehensive (loss) income — ending balance
$
(i3,214)
$
i4,995
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 six months ended June 30, 2022, the Company recorded less than $i0.1 million of realized losses from the sale of available-for-sale securities. For
the six months ended June 30, 2021, the Company recorded $i0.2 million of realized gains from the sale of available-for-sale securities. Refer to Note 9—Fair Value Measurements herein for further information.
3.For the six months ended June 30, 2022 and 2021,
the changes in other comprehensive income were net of a tax benefit of $i1.9 million and $i0.6
million, respectively.
i
Amounts Reclassified from Accumulated Other Comprehensive Income
2022
2021
(in
thousands)
Three Months Ended June 30,
(Losses) gains from the sale of available-for-sale securities
$
(i14)
$
i276
Tax
benefit (expense)
i3
(i77)
Net
(loss) gain reclassified from accumulated other comprehensive income
$
(i11)
$
i199
Six
Months Ended June 30,
(Losses) gains from the sale of available-for-sale securities
$
(i26)
$
i228
Tax
benefit (expense)
i6
(i65)
Net
(loss) gain reclassified from accumulated other comprehensive income
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.
i
The
following table sets forth the amounts of property and equipment by each class of depreciable asset as of June 30, 2022 and December 31, 2021:
1.Includes
furniture and fixtures, leasehold improvements and autos and trucks including auto leases.
/
Depreciation expense for the three months ended June 30, 2022 and 2021 was $i2.4 million and $i2.6
million, respectively. Depreciation expense for the six months ended June 30, 2022 and 2021 was $i5.3 million and $i5.2 million,
respectively. Of the depreciation expense recorded for the three and six months ended June 30, 2022, $i1.5 million and $i3.1
million related to the depreciation of the Company’s operating lease - right-of-use assets (“ROU Assets”), respectively. Of the depreciation expense recorded for the three and six months ended June 30, 2021, $i1.6 million and $i3.1
million related to the depreciation of the Company’s ROU Assets, respectively.
/
i
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 i1 year to i7
years, and have extension options ranging from i1 year to i5 years. Most leases include the option to terminate the lease within i1
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.
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
$
i3,300
$
i3,243
Weighted-average
remaining lease term — operating leases
i4.3 years
i5.2
years
Weighted-average discount rate — operating leases
i4.3
%
i4.2
%
/
During
the three and six months ended June 30, 2022, the Company’s ROU Assets and Lease Liabilities were reduced by $i0.5 million and $i1.4
million, respectively, due to lease cancellations. During the three and six months ended June 30, 2021, the Company's ROU Assets and Lease Liabilities were reduced by $i0.2 million and $i0.3
million, respectively, due to lease cancellations.
During the six months ended June 30, 2022, the Company’s goodwill increased $i0.7 million due to a measurement period adjustment pertaining to the prior year acquisition of a regional dining operator. As of
June 30, 2022, the Company has finalized its acquisition accounting for this transaction.
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 i10
years, i13 years, i8 years, and i4
years, respectively.
i
The following table sets forth the estimated amortization expense for intangibles subject to amortization for the remainder of 2022, the following five fiscal years and thereafter:
Amortization
expense for the three months ended June 30, 2022 and 2021 was $i1.2 million and $i1.1
million, respectively. Amortization expense for the six months ended June 30, 2022 and 2021 was $i2.4 million and $i2.1
million, respectively.
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 “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 and six months ended June 30, 2022, the Company recorded unrealized losses, net of taxes of $i1.9
million and $i7.2 million on marketable securities, respectively. For the three and six months ended June 30, 2021, the Company recorded unrealized gains, net of taxes of $i0.7
million and unrealized losses, net of taxes of $i0.6 million on marketable securities, respectively.
As part of the Company’s completed acquisition of a manufacturer of prepackaged meals in 2021, the
Company used an analysis of the discounted weighted-average cost of capital attributable to the acquired company’s revenue (an income approach) to value the contingent consideration liability. The inputs utilized in estimating the fair value of the contingent consideration have been classified as Level 3 in the fair value hierarchy levels and are subject to risk and uncertainty in accordance with FASB Accounting Standards Codification subtopic ASC 820 Fair Value Measurement (“ASC 820”). The discounted weighted-average cost of capital attributable to the acquired company’s revenue analysis is dependent on several subjective factors including future earnings, volatility and the discount rate. If assumptions vary from what was expected, the fair value of the contingent consideration liability may materially change. As of June 30, 2022 and December 31,
2021, the fair value of the contingent consideration liability was $i2.9 million and $i4.8
million, respectively, and were presented in “Other long-term liabilities” on the Company’s Consolidated Balance Sheets. For the three and six months ended June 30, 2022, the Company recorded gains of $i0.2
million and $i1.9 million, respectively, from the fair value adjustment in the Consolidated Statements of Comprehensive Income. iiNo/
such gain or loss was recorded during the three and six months ended June 30, 2021.
For the three months ended June 30, 2022 and 2021, the Company received total proceeds, less the amount of interest received, of $i8.0
million and $i7.0 million, respectively, from sales of available-for-sale municipal bonds. For the three months ended June 30, 2022 and 2021, these sales resulted in realized losses of less than $i0.1 million
and realized gains of $i0.3 million, respectively. For the six months ended June 30, 2022 and 2021, the Company received total proceeds, less the amount of interest received, of $i9.5
million and $i12.0 million, respectively, from sales of available-for-sale municipal bonds. For the six months ended June 30, 2022 and 2021, these sales resulted in realized losses of less than $i0.1
million and realized gains of $i0.2 million, respectively, 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 June 30, 2022 and 2021, the Company recognized unrealized losses of $i6.5 million and unrealized gains of $i2.9
million, respectively, related to equity securities still held at the respective reporting dates. For the six months ended June 30, 2022 and 2021, the Company recognized unrealized losses of $i10.6 million and unrealized gains of $i4.1
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 June 30, 2022 and December 31, 2021:
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 June 30, 2022 and December 31, 2021, $i4.7 million
and $i7.0 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 to former employees within 12 months of employment termination.
1.The
Company performs a quarterly credit impairment loss assessment quarterly on an individual security basis. As of June 30, 2022 and December 31, 2021, 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.
/
i
The
following table summarizes the contractual maturities of debt securities held at June 30, 2022 and December 31, 2021, which are classified as “Marketable securities, at fair value” in the Consolidated Balance Sheets:
Total
pre-tax share-based compensation expense charged against income1
$
i4,768
$
i4,569
/
1.Share-based
compensation expense is recorded in “Cost of services provided” and “Selling, general and administrative expense” in the Company’s Consolidated Statements of Comprehensive Income.
At June 30, 2022, the unrecognized compensation cost related to unvested stock options and awards was $i20.8
million. The weighted average period over which these awards will vest is approximately i3.3 years.
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 June 30, 2022, there were i4.7 million shares of common stock reserved for issuance under the
2020 Plan, of which, i1.4 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 i10 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
i
A
summary of stock options outstanding under the 2020 Plan and the 2012 Plan as of December 31, 2021 and changes during the six months ended June 30, 2022 are as follows:
The
weighted average grant-date fair value of stock options granted during the six months ended June 30, 2022 and 2021 was $i4.06 and $i7.01
per common share, respectively. The total intrinsic value of stock options exercised during the six months ended June 30, 2022 and 2021 was $i0.1 million and $i0.4 million,
respectively.
i
The fair value of stock option awards granted in 2022 and 2021 was estimated on the date of grant using the Black-Scholes option valuation model with the following assumptions:
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 six months ended June 30, 2022, the Company granted i0.4 million restricted stock units to its employees with a weighted
average grant date fair value of $i18.06 per unit. During the six months ended June 30, 2021, the Company granted i0.3
million restricted stock units with a weighted average grant date fair value of $i28.53 per unit.
i
A
summary of the outstanding restricted stock units as of December 31, 2021 and changes during the six months ended June 30, 2022 is as follows:
On January 4, 2022, the NCSO granted i60,000 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 ithree year period ending December 31, 2024, the date at which such PSUs vest. The unrecognized share-based compensation cost of the TSR-based PSU awards at June 30,
2022 is $i1.7 million and is expected to be recognized over a weighted-average period of i2.3
years.
i
A summary of the outstanding PSUs as of December 31, 2021 and changes during the six months ended June 30, 2022 is as follows:
During the six months ended June 30, 2022 , the NCSO granted i20,000 Deferred Stock Units
(“DSUs”) to the Company's non-employee directors. Each DSU award vests in ione year. 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 ifive
years 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). The unrecognized share-based compensation cost of outstanding DSU awards at June 30, 2022 is $i0.3 million and is expected to be recognized over a weighted-average period of i0.9
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 i20 hours per week and have
completed itwo 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 i4.1
million shares of its common stock to its employees. Pursuant to such authorization, there are i2.0 million shares available for future grant at June 30, 2022.
i
The
expense associated with the options granted under the ESPP during the six months ended June 30, 2022 and 2021 was estimated on the date of grant using the Black-Scholes option valuation model with the following assumptions:
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 i1.0
million shares of its common stock to its employees. Pursuant to such authorization, the Company has i0.3 million shares available for future grant at June 30, 2022. At the time of issuance, such shares are accounted for at cost as treasury stock.
i
The
following table summarizes information about the SERP during the six months ended June 30, 2022 and 2021:
Unrealized
(loss) gain recorded in SERP liability account
$
(i10,164)
$
i4,207
/
1.Both
the SERP match and the deferrals are included in the “selling, general and administrative” caption in the Consolidated Statements of Comprehensive Income.
i
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. The impact on the Company’s income tax provision through the six months ended June 30, 2022 for such discrete items was approximately $i0.6
million.
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 2022 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 ino
significant uncertain tax positions requiring recognition in the Company’s financial statements. The evaluation was performed for the tax years ended December 31, 2018 through 2021 (with regard to U.S. federal income tax returns) and December 31, 2017 through 2021 (with regard to various state and local income tax returns), the tax years which remain subject to examination by major tax jurisdictions as of June 30, 2022.
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.
i
Note 12—Segment Information
The Company manages and evaluates its operations in itwo 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.
iThe 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.
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.
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, and performance stock units. iThe
table below reconciles the weighted-average basic and diluted common shares outstanding:
Numerator for basic and diluted earnings per share:
Net income
$
i6,820
$
i9,565
$
i18,149
$
i34,218
Denominator
Weighted
average number of common shares outstanding - basic
i74,337
i75,005
i74,332
i75,004
Effect
of dilutive securities1
i21
i207
i13
i214
Weighted
average number of common shares outstanding - diluted
i74,358
i75,212
i74,345
i75,218
Basic
earnings per share:
$
i0.09
$
i0.13
$
i0.24
$
i0.46
Diluted
earnings per share:
$
i0.09
$
i0.13
$
i0.24
$
i0.45
1.Certain
outstanding equity awards are anti-dilutive and therefore excluded from the calculation of the weighted average number of diluted common shares outstanding.
i
Anti-dilutive outstanding equity awards under share-based compensation plans were as follows:
At June 30, 2022, the Company had a $i475 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 i115 basis points (or if LIBOR becomes unavailable, the higher of the Overnight Bank Funding Rate, plus i50
basis points and the Prime Rate). As of June 30, 2022, there were $i10 million in borrowings under the line of credit. As of December 31, 2021, there were ino
borrowings under the line of credit. The line of credit requires the Company to satisfy itwo financial covenants, with which the Company is in compliance as of June 30, 2022. The line of credit expires on December 21, 2023.
At
June 30, 2022, the Company also had outstanding $i81.0 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 $i81.0
million to $i384.0 million at June 30, 2022. The letters of credit expire on January 4, 2023.
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.
i
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.
Item 2. Management’s Discussion and Analysisof Financial Condition and Results ofOperations
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 when 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 June 30, 2022 and December 31, 2021 and the notes accompanying those financial
statements.
COVID-19 Considerations
The Company’s priorities during the COVID-19 pandemic have been, and will continue to be, protecting the health and safety of our employees; maximizing the impact of our main services in helping customers with the housekeeping and dietary services needs of their facilities, and deploying the talents of our employees and our resources to help the communities we serve meet and overcome the current challenges. In the quarter ended June 30, 2022, the COVID-19 pandemic did not have a material net impact on our consolidated
operating results. Revenues for the quarter ended June 30, 2022 included $0.3 million of COVID-19 supplemental billings, primarily related to employee pay premiums passed through to customers, which were offset by temporary decreases in recurring billings as a result of census-driven cost reductions in staffing and purchasing. In the future, the COVID-19 pandemic may cause reduced demand for our services if, for example, the COVID-19 pandemic results in a recessionary economic environment to the long-term care and skilled nursing industries in which we serve; however since the services that we offer are essential to our customers, and although there can be no assurance, we believe that over the long term, there will continue to be strong demand for our services. The full impact that COVID-19 will have on our future revenues is not known at this time.
Our
ability to operate without significant negative operational impact from the COVID-19 pandemic will in part depend on our ability to protect our employees and our supply chain. The Company has endeavored to follow the recommended actions of government and health authorities to protect our employees, with particular measures in place for those working in our customer facilities. For the quarter ended June 30, 2022, we have maintained the consistency of our operations since the onset of the COVID-19 pandemic. We will continue to seek to innovate in managing our business, coordinating with nursing departments to do our part in the infection prevention and control continuum and remain flexible in responding to our customer-partners. However, the continued uncertainty resulting from the COVID-19 pandemic, new or additional measures required
by national, state or local governments to combat COVID-19, and COVID-19 vaccine mandates, could result in an unforeseen disruption to our workforce and supply chain (for example, an inability of a key supplier or transportation supplier to source and transport materials) that could negatively impact our operations or employee availability.
Although there can be no assurance, we expect to continue generating operating cash flows to meet our short-term liquidity needs and to maintain access to the capital markets. We have also not observed any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic, besides a change in the credit risk profile of one operating group that entered into receivership during the three months ended June 30, 2022.
For
additional information on risk factors related to the pandemic or other risks that could impact our results, please refer to “Risk Factors” in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2021 (the “Form 10-K”) and “Risk Factors” in Part II, Item 1A of this Form 10-Q.
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 United States, rendering such services to approximately 3,000 facilities throughout the continental United States as of June 30, 2022.
We provide services primarily pursuant to full service agreements with our customers. Under such agreements, we are responsible for the day-to-day management of the employees located at our customers’ facilities, as well as for the provision of certain supplies. We also provide services on the basis of management-only agreements for a limited number of customers. Under a management-only agreement, we provide management and supervisory services while the customer facility retains
payroll responsibility for the non-supervisory staff. Our agreements with customers typically provide for a renewable one year service term, cancellable by either party upon 30 to 90 days’ notice after an initial period of 60 to 120 days.
We are organized into two reportable segments: housekeeping, laundry, linen and other services (“Housekeeping”), and dietary department services (“Dietary”).
Housekeeping consists of managing our 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, 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 customer requests. Such management personnel also oversee the execution of various cost and quality control procedures including continuous training and employee evaluation.
Dietary consists of managing our customers’ dietary departments, which are principally responsible for food purchasing, meal preparation and professional dietitian services, which include the development of menus that meet the dietary needs of residents. On-site management is responsible for all daily dietary department activities, with regular
support provided by a District Manager specializing in dietary services. We also offer clinical consulting services to our dietary customers, which may be provided as a stand-alone service, or bundled with other dietary department services. Upon beginning service with a customer facility, we typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise 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.
At June 30, 2022, Housekeeping services were provided at essentially all of our approximately 3,000 customer facilities, generating approximately
47.1% or $400.8 million of our total revenues for the six months ended June 30, 2022. Dietary services were provided to over 1,700 customer facilities at June 30, 2022 and contributed approximately 52.9% or $450.9 million of our total revenues for the six months ended June 30, 2022.
The following table summarizes the income statement key components that we use to evaluate our financial performance on a consolidated and reportable segment basis, for the three months ended June 30, 2022 and 2021. The differences between the reportable segments’ operating results and other disclosed data and our consolidated financial results relate primarily to corporate level transactions and adjustments related to transactions recorded at the reportable segment level which use methods other than generally accepted accounting principles.
Housekeeping and Dietary revenues represented approximately 46.9%
and 53.1% of consolidated revenues for the three months ended June 30, 2022, respectively.
Consolidated
revenues increased 6.7% to $424.9 million for the three months ended June 30, 2022 compared to $398.2 million for the corresponding period in 2021, as a result of the factors discussed below under Reportable Segments.
Reportable Segments
Housekeeping revenues decreased 1.9% during the three months ended June 30, 2022 compared to the corresponding period in 2021 due to fewer facilities serviced, while Dietary revenues increased 15.6% over the same period, primarily driven by negotiated price increases with clients, increased facilities serviced and growth through a prior year acquisition.
Costs
of Services Provided
Consolidated
Consolidated costs of services provided increased by 12.8% to $379.4 million for the three months ended June 30, 2022 compared to $336.4 million for the three months ended June 30, 2021.
The following table provides a comparison of key indicators we consider when managing the consolidated costs of services provided:
Three
Months Ended June 30,
Costs of Services Provided - Key Indicators as a % of Consolidated Revenue
2022
2021
Change
Bad debt provision
3.3%
0.8%
2.5%
Self-insurance costs
2.6%
2.6%
—%
The
elevated bad debt provision was primarily the result of a change in the credit risk profile of one operating group that entered into receivership during the three months ended June 30, 2022. The impact of such receivership resulted in an approximate $7.1 million increase to our bad debt provision. Self-insurance costs as a percentage of consolidated revenues have remained steady.
Reportable Segments
Costs of services provided for Housekeeping, as a percentage of Housekeeping revenues, increased to 91.0% for the three months ended June 30, 2022 from 88.8% in the corresponding period in 2021. Costs of services provided for Dietary, as a percentage of Dietary revenues, increased to 95.5% for the three months
ended June 30, 2022 from 93.0% in the corresponding period in 2021. The year-over-year decrease in margins was primarily driven by the increase of labor and supplies as a result of inflation.
The following table provides a comparison of the key indicators we consider when managing costs of services provided at the segment level, as a percentage of the respective segment’s revenues:
Three
Months Ended June 30,
Costs of Services Provided - Key Indicators as a % of Segment Revenue
2022
2021
Change
Housekeeping labor and other labor-related costs
81.2%
79.8%
1.4%
Housekeeping supplies
6.8%
6.3%
0.5%
Dietary
labor and other labor-related costs
60.9%
63.2%
(2.3)%
Dietary supplies
31.7%
27.3%
4.4%
Variations within these key indicators relate to the provision of services at new facilities and changes in the mix of customers for whom we provide supplies or do not provide supplies. Management focuses on building efficiencies
and managing labor and other costs at the facility level, as well as managing supply chain costs, for new and existing facilities. The decrease in dietary labor costs as a percentage of revenues was due to facility-level staffing efficiencies and the increase in dining revenues, while the increase in dietary supplies spend as a percentage of dietary revenues was driven by increases to menu item costs, dependent on commodity pricing factors, during the quarter ended June 30, 2022.
Consolidated Selling, General and Administrative Expense
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 the three months ended June 30, 2022 decreased our total selling, general and administrative expense, while gains on plan investments during the same period in 2021 increased our selling, general and administrative expense for that period.
Excluding the change in the deferred compensation plan described above, consolidated selling, general and administrative expense decreased $11.5 million or 24.4% for the three months ended June 30, 2022 compared to the corresponding period
in 2021. The decrease was driven primarily by the settlement of the SEC inquiry in 2021.
The table below summarizes the changes in these components of selling, general and administrative expense:
Selling, general and administrative expense excluding change in deferred compensation liability
$
35,660
$
47,145
$
(11,485)
(24.4)
%
(Loss)
gain on deferred compensation plan investments
(6,379)
2,906
(9,285)
(319.5)
%
Selling, general and administrative expense
$
29,281
$
50,051
$
(20,770)
(41.5)
%
Consolidated
Investment and Other Income, net
Investment and other income decreased to a $7.5 million loss for the three months ended June 30, 2022 compared to a $3.7 million gain in the corresponding 2021 period, primarily due to market fluctuations in the value of our trading security investments representing the funding for our deferred compensation plan.
Consolidated Interest Expense
Consolidated interest expense increased to $0.4 million for the three months ended June 30, 2022 compared to $0.3 million in the corresponding 2021 period due to increased short-term borrowings.
During the three months ended June 30, 2022, the Company recognized a provision for income taxes of $1.4 million, or 17.3% effective tax rate, versus $5.5 million, or 36.5% effective tax rate, for the same period in 2021. The decrease to the Company's tax rate related to discrete items from stock compensation expense.
The actual annual effective tax rate will be impacted by the tax effects of option exercises or vested awards, which are treated as discrete items in
the reporting period in which they occur and may vary based upon the Company's common stock price at exercise and the volume of such exercises; therefore, these cannot be considered in the calculation of the estimated annual effective tax rate. The impact on our income tax provision for the three months ended June 30, 2022 for such discrete items was a benefit of $0.2 million.
The following table summarizes the
income statement key components that we use to evaluate our financial performance on a consolidated and reportable segment basis, for the six months ended June 30, 2022 and 2021. The differences between the reportable segments’ operating results and other disclosed data and our consolidated financial results relate primarily to corporate level transactions and adjustments related to transactions recorded at the reportable segment level which use methods other than generally accepted accounting principles.
Housekeeping and Dietary revenues represented approximately 47.1%
and 52.9% of consolidated revenues for the six months ended June 30, 2022, respectively.
Consolidated
revenues increased 5.7% to $851.7 million for the six months ended June 30, 2022 compared to $805.9 million for the corresponding period in 2021 as a result of the factors discussed below under Reportable Segments.
Reportable Segments
Housekeeping revenues decreased 4.1% during the six months ended June 30, 2022 compared to the corresponding period in 2021 due to fewer facilities serviced, while Dietary revenues increased 16.2% over the same period, primarily driven by negotiated price increases with clients, dining facility additions and growth through a prior year acquisition.
Costs
of services provided
Consolidated
Consolidated costs of services provided increased by 11.8% to $752.6 million for the six months ended June 30, 2022 compared to $673.0 million for the six months ended June 30, 2021.
The following table provides a comparison of key indicators we consider when managing the consolidated costs of services provided:
Six
Months Ended June 30,
Costs of Services Provided - Key Indicators as a % of Consolidated Revenue
2022
2021
Change
Bad debt provision
2.0%
0.8%
1.2%
Self-insurance costs
2.6%
2.5%
0.1%
The
elevated bad debt provision was primarily the result of a change in the credit risk profile of one operating group that entered into receivership during 2022. The impact of such receivership resulted in an approximate $7.1 million increase to our bad debt provision. Self-insurance costs as a percentage of consolidated revenues have remained steady.
Reportable Segments
Costs of services provided for Housekeeping, as a percentage of Housekeeping revenues, increased to 90.5% for the six months ended June 30, 2022 from 87.8% in the corresponding period in 2021. Costs of services provided for Dietary, as a percentage of Dietary revenues, increased to 95.6% for the six months ended June 30, 2022 from 91.3%
in the corresponding period in 2021. The year-over-year decrease in margins was primarily driven by the increase of labor and supplies as a result of inflation.
The following table provides a comparison of the key indicators we consider when managing costs of services provided at the segment level, as a percentage of the respective segment’s revenues:
Six
Months Ended June 30,
Costs of Services Provided - Key Indicators as a % of Segment Revenue
2022
2021
Change
Housekeeping labor and other labor-related costs
81.1%
79.2%
1.9%
Housekeeping supplies
6.5%
6.2%
0.3%
Dietary
labor and other labor-related costs
61.3%
63.3%
(2.0)%
Dietary supplies
31.4%
25.7%
5.7%
Variations within these key indicators relate to the provision of services at facilities serviced and changes in the mix of customers for whom we provide supplies or do not provide supplies. Management focuses on building efficiencies
and managing labor and other costs at the facility level, as well as managing supply chain costs, for new and existing facilities. The increase in dietary supplies spend as a percentage of dining revenues was driven by continued inflation and the mix of business where we provide all dining department supplies.
Consolidated Selling, General and Administrative Expense
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 the six months ended June 30, 2022 decreased our total selling, general and administrative expense for the period. There is a possibility for additional increased selling, general and administrative expense related to the pandemic but such costs at this time are not expected to be material.
Excluding the change in the deferred compensation plan described above, consolidated selling, general and administrative expense decreased $10.7 million or 12.4% for the six months ended June 30, 2022 compared to the corresponding period in 2021. The decrease was driven primarily by the settlement of the previously disclosed SEC inquiry in 2021.
The
table below summarizes the changes in these components of selling, general and administrative expense:
Selling, general and administrative expense excluding change in deferred compensation liability
$
75,181
$
85,831
$
(10,650)
(12.4)
%
(Loss)
gain on deferred compensation plan investments
(10,164)
4,207
(14,371)
(341.6)
%
Selling, general and administrative expense
$
65,017
$
90,038
$
(25,021)
(27.8)
%
Consolidated
Investment and Interest Income, net
Investment and other income decreased to a $9.0 million loss for the six months ended June 30, 2022 compared to a $5.8 million gain in the corresponding 2021 period, primarily due to market fluctuations in the value of our trading security investments representing the funding for our deferred compensation plan.
Consolidated Interest Expense
Consolidated interest expense increased to $1.0 million for the six months ended June 30, 2022 compared to $0.7 million in the corresponding 2021 period due to increased short-term borrowings.
During the six months ended June 30, 2022 and 2021, the Company recognized a provision for income taxes of $5.9 million, or 24.5% and $13.8 million or 28.7%, respectively. The actual annual effective tax rate will be impacted by the tax effects of option exercises or vested awards, which are treated as discrete items in the reporting period in which they occur and may vary based upon the Company's common stock price at exercise and the volume of such exercises; therefore, these cannot be considered
in the calculation of the estimated annual effective tax rate. The impact on our income tax provision for the six months ended June 30, 2022 for such discrete items was approximately $0.6 million.
Liquidity and Capital Resources
Cash generated through operations is our primary source of liquidity. At June 30, 2022, we had cash, cash equivalents and marketable securities of $129.2 million and working capital of $337.9 million, compared to December 31, 2021 cash, cash equivalents and marketable securities of $185.2 million and working capital
of $355.3 million. Our current ratio remained at 2.8 to 1 at June 30, 2022 and December 31, 2021. Marketable securities represent fixed income investments that are highly liquid and can be readily purchased or sold through established markets. Such securities are held by our captive insurance company to satisfy capital requirements of the state regulator related to captive insurance companies.
For the six months ended June 30, 2022 and 2021, our cash flows were as follows:
Net cash (used in) provided by operating activities
$
(21,164)
$
28,842
Net cash provided by (used in) investing activities
$
4,158
$
(11,116)
Net
cash used in financing activities
$
(22,107)
$
(32,469)
Operating Activities
Our primary sources of cash from operating activities are the revenues generated from our Housekeeping and Dietary services. Our primary uses of cash from operating activities are the funding of our payroll and other personnel-related costs, as well as the costs of supplies used in providing our services. For the six months ended June 30, 2022 cash flow from operations included net income of $18.1 million which was off-set
by a $58.8 million increase to our accounts and notes receivable portfolio and $7.1 million of deferred compensation payments made to former employees. Such activity, along with the timing of cash receipts and cash payments, are the primary drivers of the period-over-period changes in net cash used in operating activities.
We have not changed our expectations on future cash flows from operating activities due to COVID-19. We anticipate that several of our customers may experience changes in their cash flows however we will continue to pursue collections in accordance with our service agreements.
Investing Activities
Our principal uses of cash for investing activities are the purchases of marketable securities and capital expenditures
such as 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 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 investments to certain types of instruments issued by institutions primarily with investment-grade ratings and places restrictions on concentration by type and issuer.
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 2022, we paid a regular quarterly cash dividend to shareholders totaling $31.5 million as follows:
The dividends paid to shareholders during the six months ended June 30, 2022 were funded by cash reserves. Our Board of Directors reviews our dividend policy on a quarterly basis. Although there can be no assurance that
we will continue to pay dividends or regarding the amount of future dividend payments, we expect to continue to pay a regular quarterly cash dividend. In connection with the establishment of our dividend policy, we adopted a Dividend Reinvestment Plan in 2003.
We remain authorized to repurchase 0.6 million shares of our common stock pursuant to previous Board of Directors’ authorization. During the six months ended June 30, 2022 and 2021, we repurchased our common stock as part of the dividend reinvestment related to treasury shares held within the Deferred Compensation Plan. The number and value of the shares repurchased were immaterial for the six months ended June 30, 2022 and 2021.
Line
of Credit
At June 30, 2022, 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 June 30, 2022, there were $10.0 million in borrowings under the line of credit.
The line of credit requires us to satisfy two financial covenants. The covenants and their respective status at June 30, 2022 were as follows:
Funded debt 1 to EBITDA 2 ratio: less than 3.50 to 1.00
1.02
EBITDA to Interest Expense ratio: not less than 3.00 to 1.00
35.12
1.All indebtedness for borrowed money including, but not limited to, capitalized lease obligations, reimbursement obligations in respect of letters of credit and guarantees of any such indebtedness.
2.Net
income plus interest expense, income tax expense, depreciation, amortization, stock compensation expense and extraordinary non-recurring losses/gains.
As noted above, we were in compliance with our financial covenants at June 30, 2022 and we expect to remain in compliance. The line of credit expires on December 21, 2023. We believe that our existing capacity under the line of credit provides adequate liquidity.
Our line of credit agreement provides procedures for determining a replacement or alternative rate in the event that LIBOR is unavailable (i.e., the higher of the Overnight Bank Funding Rate, plus 50 basis points and Prime Rate). However, there can be no assurances as to whether such replacement
or alternative rate will be more or less favorable than LIBOR. We intend to monitor the developments with respect to the phasing out of LIBOR and will work with our lenders to ensure the transition away from LIBOR will have minimal impact on our financial condition. We however can provide no assurances regarding the impact of the discontinuation of LIBOR on the interest rate that we would be required to pay or on our financial condition.
At June 30, 2022, we also had outstanding $81.0 million in irrevocable standby letters of credit, which relate to payment obligations under our insurance programs.
The level of capital expenditures is generally dependent on the number of new customers 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. Although we have no specific material commitments for capital expenditures through the end of calendar year 2022, we estimate that for 2022 we will have capital expenditures of approximately $5.0 million to $6.0 million, of which we have made $2.6 million through June 30, 2022. 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 previously discussed.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in the notes to the consolidated financial statements included in the Form
10-K for the period ended December 31, 2021. As described in such notes, we recognize revenue in the period in which the performance obligation is satisfied. Refer to our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Form 10-K.
In preparing our financial statements, management is required to make estimates and assumptions that, among other things, affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are most significant when they involve levels of subjectivity and judgment necessary to account for highly uncertain matters or matters susceptible to change, and where they can have a material impact on our financial condition and operating performance. If actual results were to differ materially from the estimates made, the reported
results could be materially affected.
Critical accounting estimates and the related assumptions are evaluated periodically as conditions warrant, and changes to such estimates are recorded as new information or changed conditions require.
Item 3. Quantitative and QualitativeDisclosures About Market Risk
At June 30, 2022, we had $129.2 million in cash, cash equivalents and marketable securities. The fair value of all of our cash equivalents and marketable securities
are determined based on “Level 1” or “Level 2” inputs, which are based upon quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. We place our cash investments in instruments that meet credit quality standards, as specified in our investment policy guidelines.
Investments in both fixed-rate and floating-rate investments carry a degree of interest rate risk. The market value of fixed rate securities may be adversely impacted by 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.
Item 4. Controls
and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are intended to ensure that information required to be disclosed in our reports under the Exchange Act, such as this Form 10-Q, is reported in accordance with Securities and Exchange Commission rules. Disclosure controls are also intended to ensure that such information is accumulated and communicated to Management, including the Principal Executive Officer (President and Chief Executive Officer) and Principal Financial Officer (Principal Accounting Officer), as appropriate, to allow timely decisions regarding required disclosure.
Based on their evaluation as of June 30, 2022,
pursuant to Exchange Act Rule 13a-15(b), our Management, including our Principal Executive Officer and Principal Financial Officer, believe our disclosure controls and procedures (as defined in Exchange Act 13a-15(e)) are effective.
Changes in Internal Controls over Financial Reporting
There were no changes in the Company’s internal controls over financial reporting that occurred during the six months ended June 30,
2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company continues to review its disclosure controls and procedures, including its internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company’s systems evolve with its business.
Certifications
Certifications of the Principal Executive Officer and Principal Financial and Accounting Officer regarding, among other items,
disclosure controls and procedures are included as exhibits to this Form 10-Q.
In the normal course of business, the
Company is involved in various administrative and legal proceedings, including labor and employment, contracts, personal injury, and insurance matters. 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.
At this time, the Company is unable to reasonably estimate possible losses or form a judgment that an unfavorable outcome is either probable,
reasonably possible or remote with respect to certain pending litigation claims asserted.
In light of the uncertainties involved in such proceedings, the ultimate outcome of a particular matter could become material to the Company’s results of operations for a particular period depending on, among other factors, the size of the loss or liability imposed and the level of the Company’s operating income for that period.
Item 1A. Risk Factors
There
have been no other material changes in the risk factors set forth in Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, except as set forth below. The risk factor set forth below supplements, and should be read together with, the risk factors set forth in Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
War, terrorism, other acts of violence or natural or man-made disasters may affect the markets in which the
Company operates, the Company’s customers, and could have a material adverse impact on our business, results of operations, or financial condition.
The Company’s business may be adversely affected by instability, disruption or destruction in a geographic region in which it operates, regardless of cause, including war, terrorism, riot, civil insurrection or social unrest, and natural or man-made disasters, including famine, flood, fire, earthquake, storm or pandemic events and spread of disease. Such events may cause customers to suspend their decisions on using the Company’s services, make it impossible for us to render our services, cause
restrictions, and give rise to sudden significant changes in regional and global economic conditions and cycles. These events also pose significant risks to the Company’s personnel and to physical facilities and operations, which could materially adversely affect the Company’s financial results.
Further, the current Russia-Ukraine conflict has created extreme volatility in the global financial markets and is expected to have further global economic consequences, including disruptions of the global supply chain and energy markets and heightened volatility of commodity food prices. Any such volatility or disruptions may have adverse consequences on us or the third parties on whom we rely. If the equity and credit markets deteriorate,
including as a result of political unrest or war, it may make any necessary debt or equity financing more difficult to obtain in a timely manner or on favorable terms, more costly or more dilutive. Our business, financial condition and results of operations may be materially and adversely affected by any negative impact on the global economy, capital markets or commodity food prices resulting from the conflict in Ukraine or any other geopolitical tensions.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The
following financial information from the Company’s Form 10-Q for the quarterly period ended June 30, 2022 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 Statement of Stockholders’ Equity, and (v) Notes to Consolidated Financial Statements
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Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.)
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.