Healthcare Services Group(HCSG) - 2023 Q4 - Annual Report

Part I Business The company provides housekeeping, laundry, and dietary services to US healthcare facilities, with revenue split between its Housekeeping and Dietary segments - HCSG provides housekeeping, laundry, and dietary services to approximately 2,700 healthcare facilities across the United States as of December 31, 2023[12] - Genesis Healthcare, Inc. is a significant customer, accounting for 10.9% ($181.4 million) of consolidated revenues in 2023[21] - The company's bad debt provisions have increased, representing 2.1% of total revenues in 2023, reflecting collection challenges in the long-term care industry[35] - As of December 31, 2023, the company employed approximately 33,400 people, with a diverse workforce of 69% women and 62% BIPOC[40][43] 2023 Revenue and Cost Structure by Segment | Segment | 2023 Revenue | % of Total Revenue | Key Cost Components (% of Segment Revenue) | | :--- | :--- | :--- | :--- | | Housekeeping | $766.7 million | 45.9% | Labor: 82.2%, Supplies: 7.0% | | Dietary | $904.7 million | 54.1% | Labor: 59.3%, Food Supplies: 34.2% | Risk Factors The company faces significant risks from customer concentration, industry financial instability, and a material weakness in internal controls - A significant risk is customer concentration, with Genesis Healthcare contributing 10.9% of total consolidated revenues in 2023[54] - The company's collections are vulnerable to changes in government reimbursement rates and customer cash flow issues due to its healthcare industry focus[55] - A material weakness in internal control over financial reporting was identified in 2023 related to accrued payroll liabilities from employee vested vacation[65] - The company retains substantial risk through its high-deductible insurance plan for general liability and workers' compensation[60] - Service agreements are typically for one-year terms and are cancellable with 30 to 90 days' notice, creating a risk of customer loss[61] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[81] Cybersecurity The company's cybersecurity program is based on the NIST Framework and overseen by the Board's Audit Committee - The company's cybersecurity risk management is governed by an Information Security Policy based on the NIST Cybersecurity Framework[83] - Day-to-day cybersecurity risk management is handled by the Executive VP, Chief Compliance Officer, and the Senior VP of Information and Technology[86] - The Board of Directors' Audit Committee oversees the company's cybersecurity risk mitigation efforts[88] Properties The company leases its corporate headquarters and regional offices, with no single property considered materially significant - The company leases its corporate offices in Bensalem, PA, and other regional offices in various states, with no individual property considered materially significant[89] Legal Proceedings The company is involved in various legal proceedings incidental to its business but cannot currently estimate possible losses - The company is involved in various legal proceedings incidental to its business but is currently unable to reasonably estimate possible losses for certain claims[91] Mine Safety Disclosures This section is not applicable to the company's operations - Not applicable[93] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on Nasdaq, and a share repurchase plan was active in Q4 2023 - As of the end of Q4 2023, 6.5 million shares remain authorized for repurchase under the current plan[108] Equity Compensation Plan Information (as of Dec 31, 2023) | Plan Category | Securities to be Issued Upon Exercise (thousands) | Weighted-Average Exercise Price | Securities Remaining for Future Issuance (thousands) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 3,715 | $30.43 | 5,204 | Q4 2023 Share Repurchases | Period | Total Shares Repurchased | Average Price Paid | Aggregate Purchase Price (thousands) | | :--- | :--- | :--- | :--- | | Oct 2023 | 102,200 | $9.75 | $996 | | Nov 2023 | 406,200 | $9.81 | $3,983 | | Dec 2023 | — | $— | $— | | Q4 Total | 508,400 | $9.80 | $4,979 | Management's Discussion and Analysis of Financial Condition and Results of Operations Revenues decreased slightly in 2023, but lower service costs and higher SG&A expenses led to a 19.1% increase in pre-tax income - Consolidated selling, general and administrative expense, excluding deferred compensation plan changes, increased by $10.6 million (7.1%) in 2023 compared to 2022[131] - The effective tax rate increased to 27.7% in 2023 from 23.1% in 2022[135] - The company maintains a $300 million bank line of credit, with $25.0 million borrowed as of December 31, 2023, and was in compliance with all financial covenants[154][157] - In February 2023, the Board authorized a share repurchase plan and suspended the quarterly dividend as part of a capital rebalancing strategy[151] Consolidated Financial Performance Summary (2023 vs. 2022) | Metric (in thousands) | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Consolidated Revenues | $1,671,389 | $1,690,176 | (1.1)% | | Housekeeping Revenues | $766,651 | $795,687 | (3.6)% | | Dietary Revenues | $904,738 | $894,489 | 1.1% | | Costs of services provided | $1,456,643 | $1,496,865 | (2.7)% | | Income before income taxes | $53,056 | $44,553 | 19.1% | Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk on its $147.5 million portfolio of cash and marketable securities - The company has $147.5 million in cash, cash equivalents, and marketable securities, which are subject to interest rate risk[168] - The market value of fixed-rate securities may be adversely impacted by rising interest rates, while floating-rate securities may produce less income if rates fall[169] Financial Statements and Supplementary Data The auditor issued an adverse opinion on internal controls due to a material weakness, and prior period financials were revised for an accounting error - The independent auditor issued an adverse opinion on the company's internal control over financial reporting as of December 31, 2023, due to a material weakness[176][185][187] - The company revised its 2022 and 2021 financial statements to correct a prior period accounting error related to the estimate for accrued vacation[248][251] Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total current assets | $571,696 | $508,632 | | Total assets | $790,652 | $720,836 | | Total current liabilities | $216,928 | $189,014 | | Total stockholders' equity | $456,616 | $418,279 | Consolidated Income Statement Highlights (in thousands) | Account | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Revenues | $1,671,389 | $1,690,176 | $1,641,959 | | Income before income taxes | $53,056 | $44,553 | $65,512 | | Net income | $38,386 | $34,243 | $48,543 | | Diluted EPS | $0.52 | $0.46 | $0.65 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no disagreements with its accountants on accounting or auditing matters - None reported[354] Controls and Procedures Management concluded that disclosure controls were not effective as of year-end 2023 due to a material weakness in internal control - The CEO and PAO concluded that disclosure controls and procedures were not effective as of December 31, 2023[355] - A material weakness was identified related to controls over accrued payroll liabilities from employee vested vacation[359] - The company is implementing a remediation plan that includes enhanced controls, review processes, and reconciliations related to the vacation accrual[361] Other Information The company amended its by-laws in February 2024 to align with the SEC's universal proxy rules - On February 13, 2024, the company amended its by-laws to address the SEC's universal proxy rules (Rule 14a-19) and enhance requirements for director nominees[366] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, officers, and governance is incorporated by reference from the 2024 proxy statement - Information is incorporated by reference from the 2024 definitive proxy statement[371] - The company has adopted a code of ethics applicable to all employees, officers, and directors, which is available on its website[372] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2024 proxy statement - Information is incorporated by reference from the 2024 definitive proxy statement[373] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the 2024 proxy statement - Information is incorporated by reference from the 2024 definitive proxy statement[374] Certain Relationships and Related Transactions, and Director Independence Information regarding related transactions and director independence is incorporated by reference from the 2024 proxy statement - Information is incorporated by reference from the 2024 definitive proxy statement[375] Principal Accountant Fees and Services Information regarding accountant fees and services is incorporated by reference from the 2024 proxy statement - Information is incorporated by reference from the 2024 definitive proxy statement[376] Part IV Exhibits and Financial Statement Schedules This section lists filed exhibits and includes a schedule detailing the activity in the Allowance for Doubtful Accounts Schedule II — Allowance for Doubtful Accounts (in thousands) | Year | Beginning Balance | Charged to Costs and Expenses | Deductions | Ending Balance | | :--- | :--- | :--- | :--- | :--- | | 2023 | $73,464 | $35,604 | $17,369 | $91,699 | | 2022 | $65,584 | $31,969 | $24,088 | $73,464 | | 2021 | $67,801 | $10,483 | $12,700 | $65,584 | Form 10-K Summary No Form 10-K summary is provided by the company - None[381]