Company Quick10K Filing
Healthcare Services Group
Price24.86 EPS1
Shares75 P/E24
MCap1,855 P/FCF23
Net Debt-41 EBIT91
TEV1,814 TEV/EBIT20
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-04-24
10-K 2019-12-31 Filed 2020-02-21
10-Q 2019-09-30 Filed 2019-10-25
10-Q 2019-06-30 Filed 2019-07-26
10-Q 2019-03-31 Filed 2019-05-03
10-K 2018-12-31 Filed 2019-03-18
10-Q 2018-09-30 Filed 2018-10-19
10-Q 2018-06-30 Filed 2018-07-27
10-Q 2018-03-31 Filed 2018-04-27
10-K 2017-12-31 Filed 2018-02-23
10-Q 2017-09-30 Filed 2017-10-27
10-Q 2017-06-30 Filed 2017-07-28
10-Q 2017-03-31 Filed 2017-04-28
10-K 2016-12-31 Filed 2017-02-24
10-Q 2016-09-30 Filed 2016-10-28
10-Q 2016-06-30 Filed 2016-07-22
10-Q 2016-03-31 Filed 2016-04-22
10-K 2015-12-31 Filed 2016-02-19
10-Q 2015-09-30 Filed 2015-10-23
10-Q 2015-06-30 Filed 2015-07-22
10-Q 2015-03-31 Filed 2015-04-23
10-K 2014-12-31 Filed 2015-02-19
10-Q 2014-09-30 Filed 2014-10-30
10-Q 2014-06-30 Filed 2014-07-24
10-Q 2014-03-31 Filed 2014-04-24
10-K 2013-12-31 Filed 2014-02-21
10-Q 2013-09-30 Filed 2013-10-24
10-Q 2013-06-30 Filed 2013-07-25
10-Q 2013-03-31 Filed 2013-04-26
10-K 2012-12-31 Filed 2013-02-21
10-Q 2012-09-30 Filed 2012-10-22
10-Q 2012-06-30 Filed 2012-07-27
10-Q 2012-03-31 Filed 2012-04-27
10-K 2011-12-31 Filed 2012-02-23
10-Q 2011-09-30 Filed 2011-10-21
10-Q 2011-06-30 Filed 2011-07-22
10-Q 2011-03-31 Filed 2011-04-25
10-K 2010-12-31 Filed 2011-02-18
10-Q 2010-09-30 Filed 2010-10-22
10-Q 2010-06-30 Filed 2010-07-23
10-Q 2010-03-31 Filed 2010-04-19
10-K 2009-12-31 Filed 2010-02-16
8-K 2020-04-21 Earnings, Other Events, Exhibits
8-K 2020-02-11 Earnings, Officers, Other Events, Exhibits
8-K 2019-10-22
8-K 2019-07-23 Earnings, Officers, Other Events, Exhibits
8-K 2019-05-28 Shareholder Vote
8-K 2019-04-30 Earnings, Other Events, Exhibits
8-K 2019-03-04 Other Events
8-K 2019-02-05 Earnings, Other Events, Exhibits
8-K 2018-12-31 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-10-16 Earnings, Other Events, Exhibits
8-K 2018-07-17 Earnings, Other Events, Exhibits
8-K 2018-05-29 Shareholder Vote
8-K 2018-04-17 Earnings, Other Events, Exhibits
8-K 2018-04-16 Earnings, Exhibits
8-K 2018-02-06 Earnings, Exhibits
8-K 2018-01-30 Earnings, Other Events, Exhibits

HCSG 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements (Unaudited)
Note 1 - Description of Business and Significant Accounting Policies
Note 2 - Revenue
Note 3 - Accounts and Notes Receivable
Note 4 - Allowance for Doubtful Accounts
Note 5 - Changes in Accumulated Other Comprehensive Income By Component
Note 6 - Property and Equipment
Note 7 - Leases
Note 8 - Other Intangible Assets
Note 9 - Fair Value Measurements
Note 10 - Shared - Based Compensation
Note 11 - Dividends
Note 12 - Income Taxes
Note 13 - Segment Information
Note 14 - Earnings per Common Share
Note 15 - Other Contingencies
Note 16 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ceosection302certifica.htm
EX-31.2 cfosection302certifica.htm
EX-32 section906certificatio.htm

Healthcare Services Group Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
0.80.60.50.30.20.02012201420172020
Assets, Equity
0.60.50.30.20.0-0.12012201420172020
Rev, G Profit, Net Income
0.10.10.0-0.0-0.1-0.12012201420172020
Ops, Inv, Fin

hcsg-20200331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q

(Mark One)
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to                    

Commission file number: 0-12015

HEALTHCARE SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania23-2018365
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)

3220 Tillman Drive, Suite 300, Bensalem, Pennsylvania
(Address of principal executive office)

19020
(Zip Code)

Registrant’s telephone number, including area code:
(215) 639-4274

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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $.01 par valueHCSGNASDAQ 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. Yes  þ    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). Yes  þ    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.
Large accelerated filerþAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes    No  þ

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: 74,416,000 shares outstanding as of April 23, 2020.



Healthcare Services Group, Inc.
Quarterly Report on Form 10-Q
For the Period Ended March 31, 2020

TABLE OF CONTENTS

Page




Table of Contents
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report and documents incorporated by reference into it may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, and our beliefs and assumptions. Words such as “believes,” “anticipates,” “plans,” “expects,” “will,” “goal,” and similar expressions are intended to identify forward-looking statements. The inclusion of forward-looking statements should not be regarded as a representation by us that any of our plans will be achieved. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Such forward-looking information is also subject to various risks and uncertainties. Such risks and uncertainties include, but are not limited to, risks arising from our providing services exclusively to the healthcare industry, primarily providers of long-term care; 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 three months ended March 31, 2020; credit and collection risks associated with the healthcare industry; our claims experience related to workers’ compensation and general liability insurance; the effects of changes in, or interpretations of laws and regulations governing the healthcare industry, our workforce and services provided, including state and local regulations pertaining to the taxability of our services and other labor-related matters such as minimum wage increases; the Company’s expectations with respect to selling, general, and administrative expense; continued realization of tax benefits arising from our corporate reorganization and self-funded health insurance program; the impact of the Securities and Exchange Commission investigation and related class action lawsuit; risks associated with the reorganization of our corporate structure; and the risk factors described in Part I of our Form 10-K for the fiscal year ended December 31, 2019 and the risk factors described in Part I of our Form 10-K for the fiscal year ended December 31, 2019 under “Government Regulation of Clients,” “Service Agreements and Collections,” and “Competition,” and under Item IA. “Risk Factors” in such Form 10-K and this Form 10-Q.

These factors, in addition to delays in payments from clients and/or clients 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 if unexpected increases in the costs of labor and labor-related costs, materials, supplies and equipment used in performing services (including the impact of potential tariffs and COVID-19) could not be passed on to our clients.

In addition, we believe that to improve our financial performance we must continue to obtain service agreements with new clients, retain and provide new services to existing clients, achieve modest price increases on current service agreements with existing clients and/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.


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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Healthcare Services Group, Inc.
Consolidated Balance Sheets
(in thousands, except per share amounts)
(Unaudited)
March 31,
2020
December 31,
2019
ASSETS:
Current assets:
Cash and cash equivalents$64,498  $27,329  
Marketable securities, at fair value90,497  90,711  
Accounts and notes receivable, less allowance for doubtful accounts of $87,453 and $45,726 as of March 31, 2020 and December 31, 2019, respectively
303,804  340,930  
Inventories and supplies36,938  36,517  
Prepaid expenses and other assets24,819  20,245  
Total current assets520,556  515,732  
Property and equipment, net29,010  28,820  
Goodwill51,084  51,084  
Other intangible assets, less accumulated amortization of $20,342 and $19,300 as of March 31, 2020 and December 31, 2019, respectively
21,311  22,353  
Notes receivable — long–term portion, less allowance for doubtful accounts of $4,827 and $6,667 as of March 31, 2020 and December 31, 2019, respectively
49,466  46,992  
Deferred compensation funding, at fair value30,008  37,247  
Deferred income taxes30,642  20,364  
Total assets$732,077  $722,592  
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable$60,794  $54,418  
Accrued payroll, accrued and withheld payroll taxes29,763  36,413  
Other accrued expenses11,443  16,489  
Borrowings under line of credit50,000  10,000  
Income taxes payable10,555  8,075  
Accrued insurance claims23,729  23,256  
Total current liabilities186,284  148,651  
Accrued insurance claims — long-term portion65,272  64,366  
Deferred compensation liability30,098  37,621  
Lease liability — long-term portion12,244  11,649  
Commitments and contingencies (Note 15)
STOCKHOLDERS’ EQUITY:
Common stock, $0.01 par value; 100,000 shares authorized; 75,725 and 75,557 shares issued, and 74,416 and 74,149 shares outstanding as of March 31, 2020 and December 31, 2019, respectively
757  756  
Additional paid-in capital275,447  270,614  
Retained earnings168,404  195,455  
Accumulated other comprehensive income, net of taxes2,386  2,919  
Common stock in treasury, at cost, 1,309 and 1,408 shares as of March 31, 2020 and December 31, 2019, respectively
(8,815) (9,439) 
Total stockholders’ equity438,179  460,305  
Total liabilities and stockholders’ equity$732,077  $722,592  

See accompanying notes to consolidated financial statements.
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Healthcare Services Group, Inc.
Consolidated Statements of Comprehensive Income
(in thousands, except per share amounts)
(Unaudited)

Three Months Ended March 31,
20202019
Revenues$449,150  $476,111  
Operating costs and expenses:
Costs of services provided387,156  427,265  
Selling, general and administrative expense30,017  41,101  
Other (expense) income:
Investment and other income, net(4,827) 5,203  
Interest expense(368) (1,056) 
Income before income taxes26,782  11,892  
Income tax provision6,592  2,736  
Net income$20,190  $9,156  
Per share data:
Basic earnings per common share$0.27  $0.12  
Diluted earnings per common share$0.27  $0.12  
Weighted average number of common shares outstanding:
Basic74,658  74,301  
Diluted74,767  74,719  
Comprehensive income:
Net income$20,190  $9,156  
Other comprehensive income:
Unrealized (loss) gain on available-for-sale marketable securities, net of taxes(533) 1,416  
Total comprehensive income$19,657  $10,572  




See accompanying notes to consolidated financial statements.
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Healthcare Services Group, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 Three Months Ended March 31,
 20202019
Cash flows from operating activities:
Net income$20,190  $9,156  
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization3,556  3,489  
Bad debt provision2,060  18,470  
Share-based compensation expense1,973  1,838  
Amortization of premium on marketable securities450  382  
Unrealized loss (gain) on deferred compensation fund investments5,761  (3,445) 
Changes in operating assets and liabilities:
Accounts and notes receivable(9,645) (25,986) 
Inventories and supplies(421) 300  
Prepaid expenses and other assets(4,574) (323) 
Deferred compensation funding1,478  744  
Accounts payable and other accrued expenses(379) (5,322) 
Accrued payroll, accrued and withheld payroll taxes(4,626) 18,465  
Income taxes payable2,480  (5,730) 
Accrued insurance claims1,379  2,622  
Deferred compensation liability(6,994) 2,917  
Net cash provided by operating activities12,688  17,577  
Cash flows from investing activities:
Disposals of fixed assets129  64  
Additions to property and equipment(788) (1,336) 
Purchases of marketable securities(2,670) (4,277) 
Sales of marketable securities1,757  3,539  
Net cash used in investing activities(1,572) (2,010) 
Cash flows from financing activities:
Dividends paid(15,033) (14,588) 
Reissuance of treasury stock pursuant to Dividend Reinvestment Plan23  24  
Proceeds from the exercise of stock options1,724  1,913  
Proceeds from short-term borrowings40,000    
Payments of statutory withholding on net issuance of restricted stock units(661) (579) 
Net cash provided by (used in) financing activities26,053  (13,230) 
Net change in cash and cash equivalents37,169  2,337  
Cash and cash equivalents at beginning of the period27,329  26,025  
Cash and cash equivalents at end of the period$64,498  $28,362  


See accompanying notes to consolidated financial statements.
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Healthcare Services Group, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands)
(Unaudited)

For the three months ended March 31, 2020
Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income, net of taxesRetained EarningsTreasury StockStockholders’ Equity
SharesAmount
Balance, December 31, 201975,557  $756  $270,614  $2,919  $195,455  $(9,439) $460,305  
Adjustment to adopt credit-loss guidance1
—  —  —  —  (32,099) —  (32,099) 
Balance, January 1, 202075,557  $756  $270,614  $2,919  $163,356  $(9,439) $428,206  
Comprehensive income:
Net income for the period—  —  —  —  20,190  —  20,190  
Unrealized loss on available-for-sale marketable securities, net of taxes—  —  —  (533) —  —  (533) 
Comprehensive income for the period$19,657  
Exercise of stock options and other share-based compensation, net of shares tendered for payment162  1  1,723  —  —  —  1,724  
Payment of statutory withholding on issuance of restricted stock and restricted stock units—  —  (661) —  —  —  (661) 
Share-based compensation expense — stock options, restricted stock and restricted stock units—  —  1,822  —  —  —  1,822  
Treasury shares issued for Deferred Compensation Plan funding and redemptions—  —  417  —  —  111  528  
Shares issued pursuant to Employee Stock Plan—  —  1,329  —  —  506  1,835  
Dividends paid and accrued, $0.20 per share
—  —  —  —  (15,142) —  (15,142) 
Shares issued pursuant to Dividend Reinvestment Plan—  —  16  —  —  7  23  
Other6  —  187  —  —  —  187  
Balance, March 31, 202075,725  $757  $275,447  $2,386  $168,404  $(8,815) $438,179  

1.See Note 4—Allowance for Doubtful Accounts regarding the new credit-loss guidance

See accompanying notes to consolidated financial statements.
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For the three months ended March 31, 2019
Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income, net of taxesRetained EarningsTreasury StockStockholders’ Equity
SharesAmount
Balance, December 31, 201875,344  $753  $259,440  $158  $190,092  $(9,663) $440,780  
Comprehensive income:
Net income for the period—  —  —  —  9,156  —  9,156  
Unrealized gain on available-for-sale marketable securities, net of taxes—  —  —  1,416  —  —  1,416  
Comprehensive income for the period$10,572  
Exercise of stock options and other share-based compensation, net of shares tendered for payment115  2  1,911  —  —  —  1,913  
Payment of statutory withholding on issuance of restricted stock and restricted stock units—  —  (579) —  —  —  (579) 
Share-based compensation expense — stock options, restricted stock and restricted stock units—  —  1,656  —  —  —  1,656  
Treasury shares issued for Deferred Compensation Plan funding and redemptions—  —  535  —  —  1  536  
Shares issued pursuant to Employee Stock Plan—  —  1,781  —  —  349  2,130  
Dividends paid and accrued, $0.20 per share
—  —  —  —  (14,656) —  (14,656) 
Shares issued pursuant to Dividend Reinvestment Plan—  —  18  —  —  5  23  
Other6  —  174  —  —  —  174  
Balance, March 31, 201975,465  $755  $264,936  $1,574  $184,592  $(9,308) $442,549  

See accompanying notes to consolidated financial statements.
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Healthcare Services Group, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

Note 1—Description of Business and Significant Accounting Policies

Nature of Operations

Healthcare Services Group, Inc. (the “Company”) provides management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary service departments of the healthcare industry, including nursing homes, retirement complexes, rehabilitation centers and hospitals located throughout the United States. Although the Company does not directly participate in any government reimbursement programs, the Company’s clients receive government reimbursements related to Medicare and Medicaid. Therefore, they are directly affected by any legislation relating to Medicare and Medicaid reimbursement programs.

The Company provides services primarily pursuant to full service agreements with its clients. In such agreements, the Company is responsible for the day-to-day management of employees located at the clients’ facilities. The Company also provides services on the basis of management-only agreements for a limited number of clients. The agreements with clients typically provide for a renewable one year service term, cancellable by either party upon 30 to 90 days’ notice after an initial period of 60 to 120 days.

The Company is organized into two reportable segments: housekeeping, laundry, linen and other services (“Housekeeping”), and dietary department services (“Dietary”).

Housekeeping consists of managing the clients’ housekeeping departments, which are principally responsible for the cleaning, disinfecting and sanitizing of resident rooms and common areas of a client’s facility, as well as the laundering and processing of the bed linens, uniforms, resident personal clothing and other assorted linen items utilized at a client facility.

Dietary consists of managing the clients’ dietary departments, which are principally responsible for food purchasing, meal preparation and dietitian professional services, which includes the development of menus that meet residents’ dietary needs.

Unaudited Interim Financial Data

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and the requirements of Form 10-Q and Article 10 of Regulation S-X. Accordingly, these consolidated financial statements do not include all of the information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows. However, in the Company’s opinion, all adjustments which are of a normal recurring nature and are necessary for a fair presentation have been reflected in these consolidated financial statements. The balance sheet shown in this report as of December 31, 2019 has been derived from the audited financial statements for the year ended December 31, 2019. 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, 2019. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for any future period.

Use of Estimates in Financial Statements

In preparing financial statements in conformity with U.S. GAAP, estimates and assumptions are made that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Significant estimates are used in determining, but are not limited to, the Company’s allowance for doubtful accounts, accrued insurance claims, 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.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Healthcare Services Group, Inc. and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

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Cash and Cash Equivalents

Cash and cash equivalents are held in U.S. financial institutions or in custodial accounts with U.S. financial institutions. Cash equivalents are defined as short-term, highly liquid investments with a maturity of three months or less at time of purchase that are readily convertible into cash and have insignificant interest rate risk.

Accounts and Notes Receivable

Accounts and notes receivable consist of Housekeeping and Dietary segment trade receivables from contracts with customers. The Company’s payment terms with customers for services provided are defined within each customer’s service agreement. All accounts receivables are considered short term assets as the Company does not grant payment terms greater than one year. Accounts receivable initially are recorded at the transaction amount, and are recorded after the Company has an unconditional right to payment where only the passage of time is required before payment is received. Each reporting period, the Company evaluates the collectability of outstanding receivable balances and records an allowance for doubtful accounts representing an estimate of future expected credit loss. Additions to the allowance for doubtful accounts are made by recording a charge to bad debt expense reported in costs of services provided.

Notes receivable are initially recorded when accounts receivable are transferred into a promissory note and are recorded as an alternative to accounts receivable to memorialize an unqualified promise to pay a specific sum, typically with interest, in accordance with a defined payment schedule. The Company’s payment terms with customers on promissory notes can vary based on several factors and the circumstances of each promissory note, however typically promissory notes mature over a 1 to 3 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.

Allowance for Doubtful Accounts

The guidance under the Financial Accounting Standards Board ("FASB") Accounting Standards Codification subtopic 326 Credit Losses - Measurement of Credit Losses on Financial Instruments ("ASC 326") became effective and was adopted by the Company prospectively as of January 1, 2020. In adopting ASC 326 the Company replaced its previous incurred loss impairment model for estimating credit losses on accounts and notes receivables for its reporting of quarterly and annual financial results with an expected loss model prepared in accordance with ASC 326. While the incurred loss impairment model had the Company recognize credit losses when it was probable that a loss had been incurred, ASC 326 requires the Company to estimate the lifetime expected credit losses on such instruments and to record an allowance to offset the receivables. ASC 326 requires the recognition of credit losses that are expected based on existing accounts and notes receivable as compared to the incurred loss approach. Accordingly, credit losses under ASC 326 generally are recognized earlier in the life cycle of a receivable than under the Company’s previous incurred loss model. Modeling must be prepared after considering historical experience, current conditions, and reasonable and supportable economic forecasts to estimate lifetime expected credit losses. Under the previous incurred loss impairment model, credit losses were recognized when Management determined that it was more likely than not that a loss had been incurred and such loss was estimable.

Refer to Note 4—Allowance for Doubtful Accounts herein for further information.

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The cumulative effect of initially applying the new ASC 326 guidance to the consolidated financial statements on January 1, 2020 was as follows:

Consolidated Statement of Financial PositionDecember 31, 2019Cumulative Impact from Adopting ASC 326 GuidanceJanuary 1, 2020
(in thousands)
Assets
Short-term accounts and notes receivable, less allowance for doubtful accounts$340,930  $(41,100) $299,830  
Notes receivable – long–term portion, less allowance for doubtful accounts$46,992  $(1,136) $45,856  
Allowance for doubtful accounts on short-term accounts and notes receivables$(45,726) $(41,100) $(86,826) 
Allowance for doubtful accounts on long-term notes receivables$(6,667) $(1,136) $(7,803) 
Deferred income taxes$20,364  $10,137  $30,501  
Stockholders’ equity
Retained earnings$195,455  $(32,099) $163,356  


Inventories and Supplies

Inventories and supplies include housekeeping, linen and laundry supplies, as well as food provisions and supplies. Non-linen inventories and supplies are stated on a first-in, first-out (FIFO) basis, and reduced as deemed necessary to approximate the lower of cost or net realizable value. Linen supplies are amortized on a straight-line basis over their estimated useful life of 24 months.

Revenue Recognition

The Company recognizes revenue from contracts with customers when or as the promised goods and services are provided to customers. Revenues are reported net of sales taxes that are collected from customers and remitted to taxing authorities.

The guidance under the FASB Accounting Standards Codification subtopic 606 Revenue from Contracts with Customers ("ASC 606") requires the Company to recognize revenue as the promised goods and services within the terms of the Company’s contracts are performed and satisfied. The amount of revenue recognized by the Company is based on the consideration to which the Company is entitled in exchange for providing the contracted goods and services. The adoption of this standard did not have a material impact on the Company’s accounting for revenue earned relating to the Housekeeping and Dietary segments. The Company also did not recognize an opening adjustment to retained earnings as a result of the adoption of the standard. Refer to Note 2—Revenue herein for further information.

Leases

The guidance under FASB Accounting Standards Codification subtopic ASC 842 Leases (“ASC 842”) became effective and was adopted by the Company as of January 1, 2019, by applying a modified retrospective transition approach which resulted in the capitalization of the Company’s existing operating leases as of January 1, 2019. As such, the Company records assets and liabilities on the balance sheet to recognize the rights and obligations arising from leasing arrangements with contractual terms greater than 12 months, as permitted by U.S. GAAP. A leasing arrangement includes any contract which entitles the Company to the right of use of an identified tangible asset where there are no restrictions as to the direct of use of the asset, and the Company obtains substantially all of the economic benefits from the right of use. As of March 31, 2020 and December 31, 2019, the Company was only the lessee of operating lease arrangements.
Refer to Note 7—Leases herein for further information.

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Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Under this method, income tax expense or benefits are recognized for the amount of taxes payable or refundable for the current period. The Company accrues for probable tax obligations as required, based on facts and circumstances in various regulatory environments. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. When appropriate, valuation allowances are recorded to reduce deferred tax assets to amounts for which realization is more likely than not.

Uncertain income tax positions taken or expected to be taken in tax returns are reflected within the Company’s financial statements based on a recognition and measurement process.

Earnings per Common Share

Basic earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is computed using the weighted-average number of common shares outstanding and dilutive common shares, such as those issuable upon exercise of stock options and upon the vesting of restricted stock and restricted stock units.

Share-Based Compensation

The Company estimates the fair value of share-based awards on the date of grant using the Black-Scholes valuation model for stock options and using the share price on the date of grant for restricted stock and restricted stock units. The value of the award is recognized ratably as an expense in the Company’s Consolidated Statements of Comprehensive Income over the requisite service periods, with adjustments made for forfeitures as they occur.

Identifiable Intangible Assets and Goodwill

Identifiable intangible assets are amortized on a straight-line basis over their respective lives. Goodwill represents the excess of cost over the fair value of net assets of acquired businesses. Management reviews the carrying value of goodwill annually during the fourth quarter to assess for impairment, or more often if events or circumstances indicate that the carrying value may exceed its estimated fair value.

During the first quarter of 2020, the Company reviewed the carrying value of goodwill due to the events and circumstances surrounding the COVID-19 pandemic. No impairment loss on the Company’s intangible assets or goodwill during the three months ended March 31, 2020 was recorded as a result of such review. There was no impairment loss recognized on the Company’s intangible assets or goodwill during the three months ended March 31, 2019.

Concentrations of Credit Risk

The Company’s financial instruments that are subject to credit risk are cash and cash equivalents, marketable securities, deferred compensation funding and accounts and notes receivable. At March 31, 2020 and December 31, 2019, substantially all of the Company’s cash and cash equivalents and marketable securities were held in one large financial institution located in the United States. The Company’s marketable securities are fixed income investments which are highly liquid and can be readily purchased or sold through established markets.

The Company’s clients are concentrated in the healthcare industry and are primarily providers of long-term care. The revenues of many of the Company’s clients are highly reliant on Medicare, Medicaid and third party payors’ reimbursement funding rates. New legislation or changes in existing regulations could directly impact the governmental reimbursement programs in which the clients participate. As a result, the Company may not realize the full effects of such programs until these laws are fully implemented and governmental agencies issue applicable regulations or guidance.

Note 2—Revenue

The Company presents its consolidated revenues disaggregated by reportable segment, as Management evaluates the nature, amount, timing and uncertainty of the Company’s revenues by segment. Refer to Note 13—Segment Information herein as well as the information below regarding the Company’s reportable segments.
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Housekeeping

Housekeeping accounted for $224.3 million and $233.1 million of the Company’s consolidated revenues for the three months ended March 31, 2020 and 2019, respectively, which represented approximately 49.9% and 49.0% of the Company’s revenues in each respective period. The Housekeeping services include managing clients’ housekeeping departments, which are principally responsible for the cleaning, disinfecting and sanitizing of resident rooms and common areas of the clients’ facilities, as well as the laundering and processing of the bed linens, uniforms, resident personal clothing and other assorted linen items utilized at the clients’ facilities. Upon beginning service with a client facility, the Company will typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise and train the front-line personnel and coordinate housekeeping services with other facility support functions in accordance with client requests. Such management personnel also oversee the execution of various cost and quality-control procedures including continuous training and employee evaluation.

Dietary

Dietary services accounted for $224.9 million and $243.0 million of the Company’s consolidated revenues for the three months ended March 31, 2020 and 2019, respectively, which represented approximately 50.1% and 51.0% of the Company’s revenues in each respective period. Dietary services consist of managing clients’ dietary departments which are principally responsible for food purchasing, meal preparation and professional dietitian services, which include the development of menus that meet the dietary needs of residents. On-site management is responsible for all daily dietary department activities, with regular support provided by a District Manager specializing in dietary services. The Company also offers clinical consulting services to facilities which if contracted is a service bundled within the monthly service provided to clients. Upon beginning service with a client facility, the Company will typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise and train the front-line personnel and coordinate dietitian services with other facility support functions in accordance with client requests. Such management personnel also oversee the execution of various cost and quality-control procedures including continuous training and employee evaluation.

Revenue Recognition

All of the Company’s revenues are derived from contracts with customers. The Company accounts for revenue from contracts with customers in accordance with ASC 606, and as such, the Company recognizes revenue to depict the transfer of promised goods and services to customers in amounts that reflect the consideration to which the Company is entitled in exchange for those goods and services. The Company’s costs of obtaining contracts are not material.

The Company performs services and provides goods in accordance with its contracts with its customers. Such contracts typically provide for a renewable one year service term, cancellable by either party upon 30 to 90 days’ notice, after an initial period of 60 to 120 days. A performance obligation is the unit of account under ASC 606 and is defined as a promise in a contract to transfer a distinct good or service to the customer. The Company’s Housekeeping and Dietary contracts relate to the provision of bundles of goods, services or both, which represent a series of distinct goods and services that are substantially the same and that have the same pattern of transfer to the customer. The Company accounts for the series as a single performance obligation satisfied over time, as the customer simultaneously receives and consumes the benefits of the goods and services provided. Revenue is recognized using the output method, which is based upon the delivery of goods and services to the clients’ facilities. In limited cases, the Company provides goods, services or both, before the execution of a written contract. In these cases, the Company defers the recognition of revenue until a contract is executed. The amount of such deferred revenue was not material as of March 31, 2020 and December 31, 2019. Additionally, substantially all such revenue amounts deferred as of December 31, 2019 were subsequently recognized as revenue during the three months ended March 31, 2020.

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.

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The Company allocates the transaction price to each performance obligation, noting that the bundle of goods, services or goods and services provided under each Housekeeping and Dietary contract represents a single performance obligation that is satisfied over time. The Company recognizes the related revenue when it satisfies the performance obligation by transferring a bundle of promised goods, services or both to a customer. Such recognition is on a monthly or weekly basis, as goods are provided and services are performed. In some cases, the Company requires customers to pay in advance for goods and services to be provided. As of March 31, 2020 and December 31, 2019, the value of the contract liabilities associated with customer prepayments was not material. Additionally, substantially all such revenue amounts deferred as of December 31, 2019 were subsequently recognized as revenue during the three months ended March 31, 2020.

Transaction Price Allocated to Remaining Performance Obligations

The Company recognizes revenue as it satisfies the performance obligations associated with contracts with customers, which due to the nature of the goods and services provided by the Company, are satisfied over time. Contracts may contain transaction prices that are fixed, variable or both. The Company’s contracts with customers typically provide for an initial term of one year, with renewable one year service terms, cancellable by either party upon 30 to 90 days’ notice after an initial period of 60 to 120 days.

At March 31, 2020, the Company had $612.9 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 25.6% of the remaining performance obligations over the next 12 months, with the balance to be recognized thereafter. These amounts exclude variable consideration primarily related to performance obligations that consists of a series of distinct service periods with revenues based on future performance that cannot be estimated at contract inception. The Company also has elected to apply the practical expedient that permits exclusion of information about the remaining performance obligations with original expected durations of one year or less.

Note 3—Accounts and Notes Receivable

The Company’s accounts and notes receivable balances consisted of the following as of March 31, 2020 and December 31, 2019:
March 31, 2020December 31, 2019
(in thousands)
Short-term
Accounts and notes receivable$391,257  $386,656  
Allowance for doubtful accounts1
(87,453) (45,726) 
Total net short-term accounts and notes receivable$303,804  $340,930  
Long-term
Notes receivable$54,293  $53,659  
Allowance for doubtful accounts1
(4,827) (6,667) 
Total net long-term notes receivable$49,466  $46,992  
Total net accounts and notes receivable$353,270  $387,922  
1.Effective January 1, 2020, the Company adopted ASC 326 and recorded a one-time adoption adjustment of $42.2 million

The Company makes credit decisions on a case-by-case basis after reviewing a number of qualitative and quantitative factors related to the specific client as well as current industry variables that may impact that client. There are a variety of factors that impact a client’s ability to pay in accordance with the Company’s contracts. These factors include, but are not limited to, fluctuating census numbers, litigation costs and the client’s participation in programs funded by federal and state governmental agencies. Deviations in the timing or amounts of reimbursements under those programs can impact the client’s cash flows and its ability to make timely payments. However, the client’s obligation to pay the Company in accordance with the contracts are not contingent upon the client’s cash flow. Notwithstanding the Company’s efforts to minimize its credit risk exposure, the aforementioned factors, as well as other factors that impact client cash flows or ability to make timely payments, could have an indirect, yet material adverse effect on the Company’s results of operations and financial condition.

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Fluctuations in net accounts and notes receivable are generally attributable to a variety of factors including, but not limited to, the timing of cash receipts from customers and the inception, transition, modification or termination of client relationships. 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 clients who have in good faith established clearly-defined plans for addressing cash flow issues. These efforts are intended to minimize the Company’s collections risk.

Note 4 - Allowance for Doubtful Accounts

On January 1, 2020 (the "adoption date"), the Company replaced its previous incurred loss impairment model for estimating credit losses on accounts and notes receivables with an expected loss model prepared in accordance with ASC 326. While the incurred loss impairment model had the Company recognize credit losses when it was probable that a loss had been incurred, ASC 326 requires the Company to estimate future expected credit losses on such instruments before an impairment may occur. On the adoption date the Company recorded an initial increase of $42.2 million to the Company's allowance for doubtful accounts, with an offset recorded as an opening adjustment to retained earnings.

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, clients 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 clients 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 clients experience a negative impact on their cash flows, it could have a material adverse effect on the Company’s results of operations and financial condition.

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 trigger 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. For the three months ended March 31, 2020, the Company recognized $0.6 million in interest income from notes receivables.

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As part of the Company’s adoption of ASC 326, there are additional disclosures required to be made on a class of financing receivable basis. The following table presents the Company’s two tiers of notes receivable further disaggregated by year of origination as of March 31, 2020. The information is updated as of March 31, 2020:

Notes Receivable
Amortized Cost Basis by Origination Year
20202019201820172016PriorTotal
(in thousands)
Notes Receivable
Standard note receivable$6,810  $16,058  $17,745  $27,066  $1,989  $1,606  $71,274  
Elevated risk note receivable$  $  $397  $5,511  $  $2,457  $8,365  
Current-period gross write-offs$—  $—  $—  $—  $—  $—  $