Healthcare Services Group(HCSG) - 2021 Q3 - Quarterly Report

PART I — FINANCIAL INFORMATION This section encompasses the company's unaudited financial statements, including balance sheets, income statements, cash flows, and detailed notes, along with management's discussion and analysis of financial performance and market risks Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements, including balance sheets, statements of comprehensive income, cash flows, and stockholders' equity, along with detailed notes explaining the company's business, accounting policies, and specific financial line items for the periods ended September 30, 2021, and December 31, 2020 Consolidated Balance Sheets Presents the company's financial position, including assets, liabilities, and equity, at specific reporting dates | Metric | Sep 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | Change (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Cash and cash equivalents | $79,582 | $139,330 | $(59,748) | | Accounts and notes receivable, net | $289,725 | $255,474 | $34,251 | | Goodwill | $65,545 | $51,084 | $14,461 | | Total assets | $793,603 | $785,031 | $8,572 | | Total current liabilities | $153,854 | $162,260 | $(8,406) | | Total stockholders' equity | $480,205 | $480,461 | $(256) | Consolidated Statements of Comprehensive Income Details the company's revenues, expenses, and net income over specific reporting periods, reflecting overall financial performance | Metric | 3 Months Ended Sep 30, 2021 (in thousands) | 3 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2020 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Revenues | $415,590 | $435,947 | $1,221,512 | $1,337,126 | | Costs of services provided | $364,822 | $365,443 | $1,037,852 | $1,140,116 | | Selling, general and administrative expense | $38,780 | $37,337 | $128,818 | $108,819 | | Net income | $9,540 | $27,644 | $43,758 | $70,935 | | Basic earnings per common share | $0.13 | $0.37 | $0.58 | $0.95 | | Diluted earnings per common share | $0.13 | $0.37 | $0.58 | $0.95 | Consolidated Statements of Cash Flows Summarizes the cash inflows and outflows from operating, investing, and financing activities for the reporting periods | Metric | 9 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2020 (in thousands) | Change (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Net cash provided by operating activities | $5,731 | $141,549 | $(135,818) | | Net cash used in investing activities | $(14,316) | $(4,862) | $(9,454) | | Net cash used in financing activities | $(51,163) | $(54,096) | $2,933 | | Net change in cash and cash equivalents | $(59,748) | $82,591 | $(142,339) | | Cash paid for acquisition | $6,000 | $0 | $6,000 | Consolidated Statements of Stockholders' Equity Outlines changes in the company's equity accounts, including net income, dividends, and stock transactions, over the reporting periods | Metric | 9 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2020 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Total stockholders' equity (Dec 31/Jan 1) | $480,461 | $428,206 | | Net income for the period | $43,758 | $70,935 | | Dividends paid and accrued | $(47,099) | $(45,673) | | Purchases of treasury stock | $(5,397) | $0 | Notes to Consolidated Financial Statements Provides detailed explanations and disclosures supporting the consolidated financial statements, covering accounting policies and specific line items Note 1—Description of Business and Significant Accounting Policies Describes the company's business operations, segments, and the critical accounting policies used in preparing the financial statements - The Company provides management, administrative, and operating expertise and services to housekeeping, laundry, linen, facility maintenance, and dietary service departments of healthcare industry customers (nursing homes, retirement complexes, rehabilitation centers, hospitals) across the U.S[23] - Primarily operates under full-service agreements, responsible for day-to-day management of on-site employees and supply provision, also offers management-only agreements where customers retain payroll responsibility for non-supervisory staff, with agreements typically renewable one-year terms, cancellable with 30-90 days' notice after an initial 60-120 day period[24] - The Company is organized into two reportable segments: Housekeeping (housekeeping, laundry, linen, and other services) and Dietary (dietary department services)[25] - Unaudited interim financial statements are prepared in accordance with U.S. GAAP for interim financial information and Form 10-Q requirements, not including all information for a complete presentation[28] - Significant estimates are made for allowance for doubtful accounts, accrued insurance claims, valuations, deferred taxes, and impairment reviews, considering current/historical trends and potential COVID-19 effects[29] - The Company adopted ASC 326 (expected loss model) as of January 1, 2020, replacing the incurred loss model, leading to earlier recognition of credit losses[35] Note 2—Revenue Details the company's revenue recognition policies and provides a breakdown of revenues by operating segment Revenue by Segment (9 Months Ended Sep 30) | Segment | 2021 (in millions) | % of Total 2021 | 2020 (in millions) | % of Total 2020 | | :---------- | :----------------- | :---------------- | :----------------- | :---------------- | | Housekeeping | $621.3 | 50.9% | $675.4 | 50.5% | | Dietary | $600.2 | 49.1% | $661.8 | 49.5% | | Total | $1,221.5 | 100% | $1,337.2 | 100% | - The Company accounts for revenue under ASC 606, recognizing revenue as distinct goods and services are transferred over time, typically on a monthly or weekly basis[52][53][55] - As of September 30, 2021, $298.9 million in revenue is expected to be recognized from unsatisfied or partially unsatisfied performance obligations, with approximately 41.3% expected within the next 12 months[57] Note 3—Accounts and Notes Receivable Presents the balances of accounts and notes receivable and discusses the company's credit and collection policies Accounts and Notes Receivable Balances | Category | Sep 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Short-term accounts and notes receivable, net | $289,725 | $255,474 | | Long-term notes receivable, net | $30,651 | $34,417 | | Total net accounts and notes receivable | $320,376 | $289,891 | - Credit decisions are made case-by-case, considering customer-specific factors and industry variables (e.g., fluctuating census, litigation, government reimbursement), with efforts including using interest-bearing promissory notes and amending contracts to minimize collection risk[58][59] Note 4—Allowance for Doubtful Accounts Explains the methodology for estimating expected credit losses and provides a reconciliation of the allowance for doubtful accounts - The Company evaluates its accounts and notes receivable for expected credit losses quarterly using internally developed credit quality indicators based on aging for accounts receivable and management assessment for notes receivable[61] - Notes receivable are managed using a two-tiered approach: standard notes receivable (in good standing) and elevated risk notes receivable (e.g., bankruptcy, slow payers)[61] - The Company accounts for all notes receivable on a non-accrual basis, deferring interest income recognition until cash payments are received[62] Changes in Allowance for Doubtful Accounts (9 Months Ended Sep 30, 2021) | Portfolio Segment | Dec 31, 2020 (in thousands) | Write-Offs (in thousands) | Bad Debt Expense (in thousands) | Sep 30, 2021 (in thousands) | | :-------------------------- | :-------------------------- | :------------------------ | :-------------------------- | :-------------------------- | | Accounts receivable | $51,052 | $(7,807) | $10,801 | $54,046 | | Standard notes receivable | $13,258 | $(9) | $(864) | $12,385 | | Elevated risk notes receivable | $3,491 | $(2,761) | $853 | $1,583 | | Total accounts and notes receivable | $67,801 | $(10,577) | $10,790 | $68,014 | Note 5—Changes in Accumulated Other Comprehensive Income by Component Details the components and changes in accumulated other comprehensive income, including unrealized gains and losses Accumulated Other Comprehensive Income (AOCI) - 9 Months Ended Sep 30 | Metric | 2021 (in thousands) | 2020 (in thousands) | | :-------------------------------- | :------------------ | :------------------ | | AOCI — beginning balance | $5,563 | $2,919 | | Net current period other comprehensive (loss) income | $(1,582) | $1,996 | | AOCI — ending balance | $3,981 | $4,915 | - For the nine months ended September 30, 2021, there was a net gain of $161 thousand reclassified from AOCI (from sales of available-for-sale securities), compared to a net loss of $71 thousand in 2020[71][73] Note 6—Property and Equipment Provides a breakdown of property and equipment, net, and reports depreciation expense for the periods Property and Equipment, Net | Category | Sep 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Housekeeping and dietary equipment | $13,145 | $13,862 | | Computer hardware and software | $5,402 | $6,015 | | Operating lease — right-of-use assets | $32,032 | $26,074 | | Total property and equipment, net | $27,817 | $26,561 | Depreciation Expense (9 Months Ended Sep 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | | :-------------------------------- | :------------------ | :------------------ | | Total depreciation expense | $7,700 | $7,600 | | Related to ROU Assets | $4,700 | $4,200 | Note 7—Leases Outlines the company's lease accounting policies, including right-of-use assets and lease liabilities, and presents lease costs - The Company recognizes Right-of-Use (ROU) Assets and Lease Liabilities for leases with terms greater than 12 months, including automobiles, office buildings, IT equipment, and storage units, in accordance with ASC 842[78][79] Lease Cost (9 Months Ended Sep 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | | :---------------- | :------------------ | :------------------ | | Operating lease cost | $4,547 | $4,153 | | Short-term lease cost | $558 | $388 | | Variable lease cost | $(458) | $450 | | Total lease cost | $4,647 | $4,991 | - ROU Assets and Lease Liabilities were reduced by $0.6 million for the nine months ended September 30, 2021, due to lease cancellations[83] Future Minimum Lease Payments (as of Sep 30, 2021) | Period/Year | Operating Leases (in thousands) | | :-------------------------- | :------------------------------ | | Total minimum lease payments | $19,908 | | Less: imputed lease discount | $1,700 | | Present value of lease liabilities | $18,208 | Note 8—Other Intangible Assets Details the company's intangible assets, their amortization, and estimated future amortization expense - The Company's other intangible assets consist of customer relationships, patents, non-compete agreements, and trademarks, amortized on a straight-line basis over their estimated useful lives (weighted average of 9.9 years)[86] Amortization Expense (9 Months Ended Sep 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | | :----------------- | :------------------ | :------------------ | | Amortization expense | $3,300 | $3,100 | Estimated Future Amortization Expense | Period/Year | Total Amortization Expense (in thousands) | | :-------------------------- | :-------------------------------------- | | Oct 1 to Dec 31, 2021 | $1,105 | | 2022 | $4,416 | | 2023 | $3,420 | | 2024 | $2,286 | | 2025 | $2,286 | | 2026 | $2,270 | | Thereafter | $1,256 | Note 9—Fair Value Measurements Describes the company's financial assets measured at fair value and provides information on unrealized gains/losses and sales of securities - The Company's financial assets measured at fair value on a recurring basis include marketable securities (primarily tax-exempt municipal bonds, classified as available-for-sale and Level 2) and deferred compensation funding (classified as trading securities and primarily Level 1)[89][91][92] Unrealized Gains/Losses (9 Months Ended Sep 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | | :-------------------------------- | :------------------ | :------------------ | | Unrealized losses on marketable securities (net of taxes) | $(1,582) | $1,996 (gain) | | Unrealized gains on deferred compensation fund investments | $4,000 | $4,200 | Sales of Marketable Securities (9 Months Ended Sep 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | | :-------------------------------- | :------------------ | :------------------ | | Proceeds from sales | $12,400 | $6,000 | | Realized gains (losses) | $200 (gain) | $(100) (loss) | Contractual Maturities of Debt Securities (as of Sep 30, 2021) | Maturity Period | Amount (in thousands) | | :-------------------------- | :-------------------- | | One year or less | $6,207 | | Second through fifth year | $32,788 | | Sixth through tenth year | $52,902 | | After ten years | $33,686 | | Total debt securities | $125,583 | Note 10—Shared-Based Compensation Details the company's share-based compensation plans, including stock options, restricted stock units, and related expenses Total Pre-Tax Share-Based Compensation Expense (9 Months Ended Sep 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | | :-------------------------------- | :------------------ | :------------------ | | Stock options | $1,381 | $1,594 | | Restricted stock units and deferred stock units | $4,797 | $3,898 | | Performance stock units | $299 | $0 | | Employee Stock Purchase Plan | $491 | $425 | | Total expense | $6,968 | $5,917 | - Unrecognized compensation cost related to unvested awards was $20.0 million as of September 30, 2021, with a weighted average vesting period of approximately 2.9 years[96] - The 2020 Omnibus Incentive Plan, adopted on May 26, 2020, reserved 4.9 million shares, with 2.0 million available for future grant as of September 30, 2021[97][98] - As of September 30, 2021, there were 2.196 million stock options outstanding with a weighted average exercise price of $33.35[99] - As of September 30, 2021, there were 0.664 million restricted stock units outstanding with a weighted average grant date fair value of $31.01[102] - 35,000 Performance Stock Units (PSUs) were granted to executive officers in January 2021, contingent on TSR targets and continued employment through December 31, 2023[104][105] - 10,000 Deferred Stock Units (DSUs) were granted to non-employee directors in June 2021, vesting in one year[106] - The Employee Stock Purchase Plan (ESPP) was extended through 2026, with 2.1 million shares available for future grant[107][108][214] - SERP expense for the nine months ended September 30, 2021, was $458 thousand[110] Note 11—Income Taxes Explains the company's income tax accounting policies, effective tax rates, and the impact of discrete tax items - The Company uses the asset and liability method for income taxes and accrues for probable tax obligations[40][114] - The effective tax rate is impacted by discrete items such as option exercises, vested awards, and the $6.0 million SEC settlement payment, which resulted in a $2.2 million impact on the income tax provision for the nine months ended September 30, 2021[112] - No significant uncertain tax positions requiring recognition were identified as of September 30, 2021[114] Note 12—Segment Information Provides financial information broken down by the company's reportable operating segments, including revenues and income before taxes - The Company manages and evaluates its operations in two reportable segments: Housekeeping (housekeeping, laundry, linen, and other services) and Dietary (dietary department services)[25][116] Revenues by Segment (9 Months Ended Sep 30) | Segment | 2021 (in thousands) | 2020 (in thousands) | % Change | | :---------- | :------------------ | :------------------ | :--------- | | Housekeeping | $621,278 | $675,366 | (8.0)% | | Dietary | $600,234 | $661,760 | (9.3)% | | Total | $1,221,512 | $1,337,126 | (8.6)% | Income Before Income Taxes by Segment (9 Months Ended Sep 30) | Segment | 2021 (in thousands) | 2020 (in thousands) | % Change | | :---------- | :------------------ | :------------------ | :--------- | | Housekeeping | $68,025 | $73,983 | (8.1)% | | Dietary | $41,075 | $52,627 | (22.0)% | | Corporate and eliminations | $(48,964) | $(32,284) | 51.7% | | Total | $60,136 | $94,326 | (36.2)% | Note 13—Earnings Per Common Share Presents the basic and diluted earnings per common share calculations for the reporting periods Earnings Per Common Share (3 Months Ended Sep 30) | Metric | 2021 | 2020 | | :-------------------------- | :----- | :----- | | Basic EPS | $0.13 | $0.37 | | Diluted EPS | $0.13 | $0.37 | Earnings Per Common Share (9 Months Ended Sep 30) | Metric | 2021 | 2020 | | :-------------------------- | :----- | :----- | | Basic EPS | $0.58 | $0.95 | | Diluted EPS | $0.58 | $0.95 | - 2.184 million (3 months) and 1.788 million (9 months) anti-dilutive outstanding equity awards were excluded from diluted EPS calculation in 2021[122] Note 14—Other Contingencies Discloses information regarding the company's bank line of credit, outstanding letters of credit, and significant legal settlements - The Company has a $475 million bank line of credit with no borrowings outstanding as of September 30, 2021, and was in compliance with all financial covenants[123][186][187][188] - $64.9 million in irrevocable standby letters of credit were outstanding as of September 30, 2021, related to insurance programs, reducing the available line of credit[124][190] - The Company, its former CFO, and Controller settled with the SEC on August 24, 2021, regarding EPS calculation practices, resulting in a $6.0 million civil monetary penalty paid in Q3 2021[128][203] - A preliminary approval for a $16.8 million shareholder class action settlement was granted on September 15, 2021, which was funded by the Company's directors' and officers' liability insurance carriers[130][133][205] - Customers in the long-term care industry are significantly impacted by COVID-19, leading to increased operating costs, reduced admissions, and lower census, with government relief measures expected to provide support, but the full benefit is uncertain[132] Note 15—Subsequent Events Reports significant events that occurred after the balance sheet date but before the financial statements were issued - On October 15, 2021, the Company's directors' and officers' liability insurance carriers paid the $16.8 million settlement to resolve the putative shareholder class action lawsuit[133] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and liquidity, highlighting the impact of COVID-19, segment-specific results, and key financial trends for the three and nine months ended September 30, 2021, compared to the prior year, detailing revenue and cost drivers, changes in expenses, and capital management strategies COVID-19 Considerations Discusses the impact of the COVID-19 pandemic on the company's operations, financial results, and future outlook - The COVID-19 pandemic did not have a material net impact on consolidated operating results for the quarter ended September 30, 2021, with revenues including $5.2 million of COVID-19 supplemental billings, offset by temporary decreases in recurring billings due to census-driven cost reductions[136] - Future impacts on demand, workforce, and supply chain remain uncertain, but the company anticipates strong long-term demand for its essential services[136][137] - The Company continued to generate operating cash flows to meet short-term liquidity needs and expects to maintain access to capital markets, with no material asset impairments observed due to COVID-19[138] Overview of Business Provides a general description of the company's business, services, and market position within the healthcare industry - The Company provides management, administrative, and operating expertise for housekeeping, laundry, linen, facility maintenance, and dietary services to healthcare facilities across the U.S[140] - It is believed to be the largest provider of housekeeping and laundry management services to the long-term care industry in the U.S., serving approximately 3,000 facilities as of September 30, 2021[140] - Services are primarily provided through full-service agreements, with limited management-only agreements[141] - Housekeeping services generated approximately 50.9% ($621.3 million) of total revenues, and Dietary services contributed approximately 49.1% ($600.2 million) for the nine months ended September 30, 2021[145] Results of Operations - Three Months Ended September 30, 2021 and 2020 Analyzes the company's financial performance for the three months ended September 30, 2021, compared to the prior year, detailing revenue and expense drivers Revenues Analyzes the company's consolidated and segment revenues for the three months ended September 30, highlighting key drivers of change Consolidated Revenues (3 Months Ended Sep 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | % Change | | :---------------- | :------------------ | :------------------ | :--------- | | Revenues | $415,590 | $435,947 | (4.7)% | Segment Revenues (3 Months Ended Sep 30) | Segment | 2021 (in thousands) | 2020 (in thousands) | % Change | | :---------- | :------------------ | :------------------ | :--------- | | Housekeeping | $203,379 | $223,423 | (9.0)% | | Dietary | $212,211 | $212,524 | (0.1)% | - The decrease in revenues was primarily driven by decreases in recurring billings due to census-driven reductions in staffing and purchasing, a decrease in the number of facilities serviced, and modified pricing/payment terms with a customer, partially offset by $0.5 million in COVID-19 supplemental billings[151] Costs of Services Provided Examines the costs incurred to provide services for the three months ended September 30, including labor, supplies, and other related expenses Consolidated Costs of Services Provided (3 Months Ended Sep 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | % Change | | :---------------- | :------------------ | :------------------ | :--------- | | Costs of services provided | $364,822 | $365,443 | (0.2)% | Key Indicators as % of Consolidated Revenue (3 Months Ended Sep 30) | Metric | 2021 | 2020 | Change | | :---------------- | :----- | :----- | :----- | | Bad debt provision | 1.0% | 0.2% | 0.8% | | Self-insurance costs | 2.9% | 2.7% | 0.2% | Segment Costs as % of Segment Revenue (3 Months Ended Sep 30) | Segment | 2021 | 2020 | Change | | :-------------------------------- | :----- | :----- | :----- | | Housekeeping labor and other labor-related costs | 81.9% | 80.5% | 1.4% | | Housekeeping supplies | 6.7% | 6.7% | —% | | Dietary labor and other labor-related costs | 64.8% | 63.1% | 1.7% | | Dietary supplies | 28.8% | 25.8% | 3.0% | - The increase in labor costs as a percentage of revenue was driven by increased wage rates and premium pay to stabilize labor shortages, while the increase in dietary supplies was driven by continued inflation[155] Selling, General and Administrative Expense Details the selling, general, and administrative expenses for the three months ended September 30, explaining changes and key components Consolidated SG&A Expense (3 Months Ended Sep 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | % Change | | :---------------- | :------------------ | :------------------ | :--------- | | SG&A expense | $38,780 | $37,337 | 3.9% | SG&A excluding deferred compensation plan changes (3 Months Ended Sep 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | $ Change | % Change | | :-------------------------------- | :------------------ | :------------------ | :--------- | :--------- | | SG&A excluding deferred comp. | $38,996 | $34,127 | $4,869 | 14.3% | | (Loss) gain on deferred comp. investments | $(216) | $3,210 | $(3,426) | 106.7% | - The increase in SG&A (excluding deferred compensation plan changes) was driven by increased payroll costs and increased travel and entertainment costs incurred during the search for new business[157] Investment and Other Income, net Reports the company's net investment and other income for the three months ended September 30, primarily influenced by market fluctuations Investment and Other Income, net (3 Months Ended Sep 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | % Change | | :---------------- | :------------------ | :------------------ | :--------- | | Investment and other income, net | $462 | $4,279 | (89.2)% | - The decrease was primarily due to market fluctuations in the value of trading security investments representing the funding for the deferred compensation plan[159] Interest Expense Presents the company's interest expense for the three months ended September 30, reflecting costs associated with borrowings Consolidated Interest Expense (3 Months Ended Sep 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | % Change | | :---------------- | :------------------ | :------------------ | :--------- | | Interest expense | $(329) | $(314) | 4.8% | Income Taxes Details the income tax provision and effective tax rate for the three months ended September 30, including the impact of discrete items Income Tax Provision (3 Months Ended Sep 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Effective Tax Rate 2021 | Effective Tax Rate 2020 | | :---------------- | :------------------ | :------------------ | :---------------------- | :---------------------- | | Income tax provision | $2,581 | $9,488 | 21.3% | 25.6% | - The income tax provision for the three months ended September 30, 2021, included a $0.7 million impact from discrete items such as option exercises, vested awards, and the SEC settlement[161] Results of Operations - Nine Months Ended September 30, 2021 and 2020 Analyzes the company's financial performance for the nine months ended September 30, 2021, compared to the prior year, detailing revenue and expense drivers Revenues Analyzes the company's consolidated and segment revenues for the nine months ended September 30, highlighting key drivers of change Consolidated Revenues (9 Months Ended Sep 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | % Change | | :---------------- | :------------------ | :------------------ | :--------- | | Revenues | $1,221,512 | $1,337,126 | (8.6)% | Segment Revenues (9 Months Ended Sep 30) | Segment | 2021 (in thousands) | 2020 (in thousands) | % Change | | :---------- | :------------------ | :------------------ | :--------- | | Housekeeping | $621,278 | $675,366 | (8.0)% | | Dietary | $600,234 | $661,760 | (9.3)% | - The decrease in revenues was primarily driven by decreases in recurring billings due to census-driven reductions in staffing and purchasing, a decrease in the number of facilities serviced, and modified pricing/payment terms with a customer, partially offset by $5.2 million in COVID-19 supplemental billings[167] Costs of Services Provided Examines the costs incurred to provide services for the nine months ended September 30, including labor, supplies, and other related expenses Consolidated Costs of Services Provided (9 Months Ended Sep 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | % Change | | :---------------- | :------------------ | :------------------ | :--------- | | Costs of services provided | $1,037,852 | $1,140,116 | (9.0)% | Key Indicators as % of Consolidated Revenue (9 Months Ended Sep 30) | Metric | 2021 | 2020 | Change | | :---------------- | :----- | :----- | :----- | | Bad debt provision | 0.9% | 0.5% | 0.4% | | Self-insurance costs | 2.8% | 2.7% | 0.1% | Segment Costs as % of Segment Revenue (9 Months Ended Sep 30) | Segment | 2021 | 2020 | Change | | :-------------------------------- | :----- | :----- | :----- | | Housekeeping labor and other labor-related costs | 80.1% | 80.2% | (0.1)% | | Housekeeping supplies | 6.4% | 7.0% | (0.6)% | | Dietary labor and other labor-related costs | 63.8% | 63.5% | 0.3% | | Dietary supplies | 26.8% | 26.5% | 0.3% | - The increase in dietary supplies spend as a percentage of dining revenues was driven by continued inflation and the mix of business where the company provides all dining department supplies[171] Selling, General and Administrative Expense Details the selling, general, and administrative expenses for the nine months ended September 30, explaining changes and key components Consolidated SG&A Expense (9 Months Ended Sep 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | % Change | | :---------------- | :------------------ | :------------------ | :--------- | | SG&A expense | $128,818 | $108,819 | 18.4% | SG&A excluding deferred compensation plan changes (9 Months Ended Sep 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | $ Change | % Change | | :-------------------------------- | :------------------ | :------------------ | :--------- | :--------- | | SG&A excluding deferred comp. | $124,827 | $104,846 | $19,981 | 19.1% | | (Loss) gain on deferred comp. investments | $3,991 | $3,973 | $18 | (0.5)% | - The increase in SG&A (excluding deferred compensation plan changes) was primarily a result of increased payroll costs, increased travel and entertainment costs for new business, and increased legal and professional fees, including $6.0 million related to the SEC settlement and $3.0 million related to California labor matters[173] Investment and Interest Income, net Reports the company's net investment and other income for the nine months ended September 30, primarily influenced by market fluctuations Investment and Other Income, net (9 Months Ended Sep 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | % Change | | :---------------- | :------------------ | :------------------ | :--------- | | Investment and other income, net | $6,311 | $7,197 | (12.3)% | - The decrease was primarily due to market fluctuations in the value of trading security investments representing the funding for the deferred compensation plan[175] Interest Expense Presents the company's interest expense for the nine months ended September 30, reflecting costs associated with borrowings Consolidated Interest Expense (9 Months Ended Sep 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | % Change | | :---------------- | :------------------ | :------------------ | :--------- | | Interest expense | $(1,017) | $(1,062) | (4.2)% | - The decrease in interest expense was due to less interquarter borrowings[176] Income Taxes Details the income tax provision and effective tax rate for the nine months ended September 30, including the impact of discrete items Income Tax Provision (9 Months Ended Sep 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Effective Tax Rate 2021 | Effective Tax Rate 2020 | | :---------------- | :------------------ | :------------------ | :---------------------- | :---------------------- | | Income tax provision | $16,378 | $23,391 | 27.2% | 24.8% | - The income tax provision for the nine months ended September 30, 2021, included an approximate $2.2 million impact from discrete items such as option exercises, vested awards, and the SEC settlement[177] Liquidity and Capital Resources Discusses the company's ability to generate and manage cash, including operating, investing, and financing activities, and its capital structure Operating Activities Details the net cash provided by or used in operating activities, highlighting key factors influencing cash flow from core business operations Net Cash Provided by Operating Activities (9 Months Ended Sep 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change (in thousands) | | :-------------------------------- | :------------------ | :------------------ | :-------------------- | | Net cash provided by operating activities | $5,731 | $141,549 | $(135,818) | - The substantial decrease in operating cash flow was primarily due to a $32.3 million increase in 2020 related to the deferral of payroll taxes under the CARES Act, along with the timing of cash receipts and payments, and decreased net income[181] Investing Activities Summarizes the net cash provided by or used in investing activities, including purchases of securities, capital expenditures, and acquisitions Net Cash Used in Investing Activities (9 Months Ended Sep 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change (in thousands) | | :-------------------------------- | :------------------ | :------------------ | :-------------------- | | Net cash used in investing activities | $(14,316) | $(4,862) | $(9,454) | - Key uses of cash included purchases of marketable securities and capital expenditures, with the Company acquiring a business on April 26, 2021, for $16.5 million, including $6.0 million in cash and $10.5 million in accrued variable consideration[182] Financing Activities Outlines the net cash provided by or used in financing activities, such as dividends paid and share repurchases Net Cash Used in Financing Activities (9 Months Ended Sep 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change (in thousands) | | :-------------------------------- | :------------------ | :------------------ | :-------------------- | | Net cash used in financing activities | $(51,163) | $(54,096) | $2,933 | - Primary uses of cash included $46.7 million in regular quarterly cash dividends paid and $5.4 million for the repurchase of 0.2 million shares of common stock under a 10b5-1 plan[184][185] Line of Credit Provides information on the company's available bank line of credit, outstanding borrowings, and compliance with financial covenants - The Company has a $475 million bank line of credit, with no outstanding borrowings as of September 30, 2021, and was in compliance with all financial covenants[186][187][188] Covenant Compliance (as of Sep 30, 2021) | Covenant | Requirement | Actual | | :-------------------------- | :------------------ | :----- | | Funded debt to EBITDA ratio | less than 3.50 to 1.00 | 0.26 | | EBITDA to Interest Expense ratio | not less than 3.00 to 1.00 | 85.51 | - The Company is monitoring the discontinuation of LIBOR after 2021 and working with lenders to ensure a minimal impact on its financial condition[189] Capital Expenditures Reports on the company's capital spending and future capital expenditure estimates, along with its liquidity outlook - Estimated capital expenditures for 2021 are $5.0 million to $7.0 million, with $4.2 million incurred through September 30, 2021[191] - The Company believes its cash from operations, existing cash and cash equivalents, and credit line will be adequate to satisfy future operational needs and anticipated growth[191] Material Off-Balance Sheet Arrangements Discloses any significant off-balance sheet arrangements, such as guarantees or commitments, that could impact the company's financial position - The Company has no material off-balance sheet arrangements, other than its irrevocable standby letter of credit[192] Critical Accounting Policies and Estimates Highlights the company's most significant accounting policies and estimates that require subjective judgment and could materially affect financial results - Significant accounting policies and critical estimates are described in the Company's Annual Report on Form 10-K for the period ended December 31, 2020[193] - These estimates involve subjectivity and judgment for highly uncertain matters, with potential material impact on financial condition and operating performance if actual results differ[194] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's exposure to market risks, primarily interest rate risk, related to its cash, cash equivalents, and marketable securities, noting that investments are managed according to credit quality standards, but changes in interest rates could affect investment income and fair value - As of September 30, 2021, the Company had $205.2 million in cash, cash equivalents, and marketable securities[196] - The fair value of cash equivalents and marketable securities is determined based on 'Level 1' or 'Level 2' inputs[196] - Investments in both fixed-rate and floating-rate instruments carry interest rate risk, which could adversely impact future investment income or the fair value of investments if interest rates change[197] Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as of September 30, 2021, and states that no material changes occurred in internal controls over financial reporting during the nine-month period, also mentioning the inclusion of officer certifications Evaluation of Disclosure Controls and Procedures Assesses the effectiveness of the company's disclosure controls and procedures in ensuring timely and accurate financial reporting - Management, including the Principal Executive Officer and Principal Financial Officer, concluded that the Company's disclosure controls and procedures were effective as of September 30, 2021[199] Changes in Internal Controls over Financial Reporting Reports on any material changes in the company's internal controls over financial reporting during the reporting period - There were no material changes in the Company's internal controls over financial reporting during the nine months ended September 30, 2021[200] Certifications Confirms the inclusion of officer certifications regarding the accuracy and completeness of the financial statements - Certifications of the Principal Executive Officer and Principal Financial and Accounting Officer regarding disclosure controls and procedures are included as exhibits to this Form 10-Q[201] PART II — OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, and other disclosures not included in the financial statements Item 1. Legal Proceedings This section details the company's involvement in various legal proceedings, including the settlement of an SEC investigation with a $6.0 million civil penalty and a $16.8 million shareholder class action settlement funded by insurance carriers, with the company continuing to defend against active litigation - The Company paid a $6.0 million civil monetary penalty during the third quarter of 2021 to settle an SEC investigation into its EPS calculation practices[203] - A $16.8 million shareholder class action settlement was preliminarily approved on September 15, 2021, and subsequently paid by the Company's directors' and officers' liability insurance carriers on October 15, 2021[205] - The Company continues to vigorously defend against all active litigation claims, acknowledging potential substantial costs and adverse effects on business or reputation[206] Item 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2020 - 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, 2020[208] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's share repurchase activities under a 10b5-1 plan, reporting the number of shares repurchased and the aggregate cost for the nine months ended September 30, 2021 - The Company entered into a 10b5-1 plan on March 12, 2021, to assist in implementing its share repurchase plans[210] Share Repurchase Activity (9 Months Ended Sep 30, 2021) | Period | Shares Repurchased | Average Price Paid per Share | Aggregate Purchase Price (in thousands) | Remaining Shares Authorized | | :------------- | :----------------- | :--------------------------- | :-------------------------------------- | :-------------------------- | | Year-to-date | 193,250 | $28.93 | $5,397 | 1,452,000 | Item 3. Defaults Upon Senior Securities This item is not applicable to the company for the reporting period - This item is not applicable[212] Item 4. Mine Safety Disclosures This item is not applicable to the company for the reporting period - This item is not applicable[213] Item 5. Other Information This section reports the adoption of Amendment No. 4 to the Employee Stock Purchase Plan (ESPP), extending its duration for an additional five years through 2026 - On July 20, 2021, Amendment No. 4 to the Healthcare Services Group, Inc. Employee Stock Purchase Plan (ESPP) was adopted, extending the ESPP for an additional five years through 2026[214] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including the ESPP amendment, officer certifications, and financial information in iXBRL format - Exhibits filed include Amendment No. 4 to the Employee Stock Purchase Plan, Section 302 and 906 certifications of Principal Executive and Financial Officers, and iXBRL formatted financial information[215] SIGNATURES This section contains the official certifications and signatures of the company's executive officers, affirming the accuracy and completeness of the report Signatures This section contains the official signatures of the company's President & Chief Executive Officer and Principal Accounting Officer, certifying the report's submission - The report was signed on October 22, 2021, by Theodore Wahl, President & Chief Executive Officer, and Andrew M. Brophy, Principal Accounting Officer[219]