10-Q 1 hcsg-20220331.htm 10-Q hcsg-20220331
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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, 2022
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: 74,036,000 shares outstanding as of April 20, 2022.



Healthcare Services Group, Inc.
Quarterly Report on Form 10-Q
For the Period Ended March 31, 2022

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 federal securities laws, which are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, and our beliefs and assumptions. Words such as “believes,” “anticipates,” “plans,” “expects,” “estimates,” “will,” “goal,” and similar expressions are intended to identify forward-looking statements. The inclusion of forward-looking statements should not be regarded as a representation by us that any of our plans will be achieved. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Such forward-looking information is also subject to various risks and uncertainties. Such risks and uncertainties include, but are not limited to, risks arising from our providing services to the healthcare industry, primarily providers of long-term care; the impact of and future effects of the COVID-19 pandemic or other potential pandemics; having a significant portion of our consolidated revenues contributed by one customer during the three months ended March 31, 2022; credit and collection risks associated with the healthcare industry; our claims experience related to workers’ compensation and general liability insurance (including any litigation claims, enforcement actions, regulatory actions and investigations arising from personal injury and loss of life related to COVID-19); the effects of changes in, or interpretations of laws and regulations governing the healthcare industry, our workforce and services provided, including state and local regulations pertaining to the taxability of our services and other labor-related matters such as minimum wage increases; the Company’s expectations with respect to selling, general, and administrative expense; the impact of the concluded Securities and Exchange Commission investigation and related class action lawsuit; heightened volatility of commodity food prices due to constrained global production as a result of the Russia-Ukraine conflict and the risk factors described in Part I of our Form 10-K for the fiscal year ended December 31, 2021 under “Government Regulation of Customers,” “Service Agreements and Collections,” and “Competition,” under Item IA. “Risk Factors” in such Form 10-K and under Item IA. “Risk Factors” in this Form 10-Q.

These factors, in addition to delays in payments from customers and/or customers in bankruptcy, have resulted in, and could continue to result in, significant additional bad debts in the near future. Additionally, our operating results would be adversely affected by continued inflation particularly if increases in the costs of labor and labor-related costs, materials, supplies and equipment used in performing services (including the impact of potential tariffs and COVID-19) could not be passed on to our customers.

In addition, we believe that to improve our financial performance we must continue to obtain service agreements with new customers, retain and provide new services to existing customers, achieve modest price increases on current service agreements with existing customers and/or maintain internal cost reduction strategies at our various operational levels. Furthermore, we believe that our ability to sustain the internal development of managerial personnel is an important factor impacting future operating results and the successful execution of our projected growth strategies. There can be no assurance that we will be successful in that regard.




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,
2022
December 31,
2021
ASSETS:
Current assets:
Cash and cash equivalents$32,899 $70,794 
Marketable securities, at fair value107,171 114,396 
Accounts and notes receivable, less allowance for doubtful accounts of $57,784 and $59,271 as of March 31, 2022 and December 31, 2021, respectively
319,095 293,388 
Inventories and supplies24,820 26,015 
Taxes receivable5,049 8,813 
Prepaid expenses and other assets35,793 32,976 
Total current assets524,827 546,382 
Property and equipment, net26,702 28,102 
Goodwill75,529 74,755 
Other intangible assets, less accumulated amortization of $29,097 and $27,879 as of March 31, 2022 and December 31, 2021, respectively
19,587 20,805 
Notes receivable – long–term portion, less allowance for doubtful accounts of $5,308 and $6,312 as of March 31, 2022 and December 31, 2021, respectively
27,923 29,259 
Deferred compensation funding, at fair value39,012 46,691 
Deferred tax asset32,936 31,535 
Total assets$746,516 $777,529 
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable$64,037 $64,419 
Accrued payroll and related taxes42,160 68,664 
Other accrued expenses26,497 26,741 
Borrowings under line of credit10,000  
Deferred compensation liability — short-term6,294 6,991 
Accrued insurance claims25,316 24,310 
Total current liabilities174,304 191,125 
Accrued insurance claims — long-term67,134 65,084 
Deferred compensation liability — long-term39,157 46,888 
Lease liability — long-term10,588 11,299 
Other long-term liabilities8,696 10,456 
Commitments and contingencies (Note 15)
STOCKHOLDERS’ EQUITY:
Common stock, $0.01 par value; 100,000 shares authorized; 76,158 and 76,009 shares issued, and 74,036 and 73,769 shares outstanding as of March 31, 2022 and December 31, 2021, respectively
762 760 
Additional paid-in capital296,304 294,124 
Retained earnings179,427 183,957 
Accumulated other comprehensive (loss) income, net of taxes(1,269)4,000 
Common stock in treasury, at cost, 2,122 and 2,240 shares as of March 31, 2022 and December 31, 2021, respectively
(28,587)(30,164)
Total stockholders’ equity$446,637 $452,677 
Total liabilities and stockholders’ equity$746,516 $777,529 
See accompanying notes to consolidated financial statements.
1



Healthcare Services Group, Inc.
Consolidated Statements of Comprehensive Income
(in thousands, except per share amounts)
(Unaudited)

Three Months Ended March 31,
20222021
Revenues$426,811 $407,751 
Operating costs and expenses:
Costs of services provided373,262 336,619 
Selling, general and administrative expense35,736 39,987 
Other (expense) income:
Investment and other (loss) income, net(1,523)2,165 
Interest expense(509)(358)
Income before income taxes15,781 32,952 
Income tax provision4,452 8,299 
Net income$11,329 $24,653 
Per share data:
Basic earnings per common share$0.15 $0.33 
Diluted earnings per common share$0.15 $0.33 
Weighted average number of common shares outstanding:
Basic74,326 75,003 
Diluted74,333 75,224 
Comprehensive income:
Net income$11,329 $24,653 
Other comprehensive loss:
Unrealized loss on available-for-sale marketable securities, net of taxes(5,269)(1,271)
Total comprehensive income$6,060 $23,382 




See accompanying notes to consolidated financial statements.
2

Healthcare Services Group, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 Three Months Ended March 31,
 20222021
Cash flows from operating activities:
Net income$11,329 $24,653 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization4,147 3,607 
Bad debt provision2,851 3,415 
Share-based compensation expense2,396 2,271 
Amortization of premium on marketable securities561 536 
Unrealized loss (gain) on deferred compensation fund investments4,074 (1,146)
Changes in other long-term liabilities(1,760) 
Net loss on disposals of fixed assets173 268 
Changes in operating assets and liabilities:
Accounts and notes receivable(27,222)1,903 
Inventories and supplies1,195 2,416 
Prepaid expenses and other assets(2,462)(19,814)
Deferred compensation funding3,605 990 
Accounts payable and other accrued expenses(3,051)6,064 
Accrued payroll, accrued and withheld payroll taxes(24,933)(30,747)
Income taxes receivable3,764 7,908 
Accrued insurance claims3,056 622 
Deferred compensation liability(7,905)556 
Net cash (used in) provided by operating activities(30,182)3,502 
Cash flows from (used in) investing activities:
Disposals of fixed assets152 54 
Additions to property and equipment(1,407)(850)
Purchases of marketable securities(1,525)(7,902)
Sales of marketable securities1,519 4,995 
Cash paid for acquisitions(114) 
Net cash used in investing activities(1,375)(3,703)
Cash flows from financing activities:
Dividends paid(15,704)(15,472)
Reissuance of treasury stock pursuant to Dividend Reinvestment Plan25 23 
Proceeds from the exercise of stock options410 1,475 
Proceeds from short-term borrowings10,000  
Payments of statutory withholding on net issuance of restricted stock units(1,069)(1,501)
Net cash used in financing activities(6,338)(15,475)
Net change in cash and cash equivalents(37,895)(15,676)
Cash and cash equivalents at beginning of the period70,794 139,330 
Cash and cash equivalents at end of the period$32,899 $123,654 


See accompanying notes to consolidated financial statements.
3


Healthcare Services Group, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands)
(Unaudited)
For the three months ended March 31, 2022
Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income, net of taxesRetained EarningsTreasury StockStockholders’ Equity
SharesAmount
Balance, December 31, 202176,009 $760 $294,124 $4,000 $183,957 $(30,164)$452,677 
Comprehensive income:
Net income for the period— — — — 11,329 — 11,329 
Unrealized loss on available-for-sale marketable securities, net of taxes— — — (5,269)— — (5,269)
Comprehensive income for the period$6,060 
Exercise of stock options and other share-based compensation, net of shares tendered for payment145 2 408 — — — 410 
Payment of statutory withholding on issuance of restricted stock units— — (1,069)— — — (1,069)
Share-based compensation expense— — 2,298 — — — 2,298 
Treasury shares issued for Deferred Compensation Plan funding and redemptions— — 110 — — 414 524 
Shares issued pursuant to Employee Stock Plan— — 368 — — 1,144 1,512 
Dividends paid and accrued, $0.21 per share
— — — — (15,859)— (15,859)
Shares issued pursuant to Dividend Reinvestment Plan— — 6 — — 19 25 
Other4 — 59 — — — 59 
Balance, March 31, 202276,158 $762 $296,304 $(1,269)$179,427 $(28,587)$446,637 


For the three months ended March 31, 2021
Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income, net of taxesRetained EarningsTreasury StockStockholders’ Equity
SharesAmount
Balance, December 31, 202075,798 $758 $282,206 $5,563 $200,893 $(8,959)$480,461 
Comprehensive income:
Net income for the period— — — — 24,653 — 24,653 
Unrealized loss on available-for-sale marketable securities, net of taxes— — — (1,271)— — (1,271)
Comprehensive income for the period$23,382 
Exercise of stock options and other share-based compensation, net of shares tendered for payment156 2 1,473 — — — 1,475 
Payment of statutory withholding on issuance of restricted stock and restricted stock units— — (1,501)— — — (1,501)
Share-based compensation expense— — 2,104 — — — 2,104 
Treasury shares issued for Deferred Compensation Plan funding and redemptions— — 545 — — (36)509 
Shares issued pursuant to Employee Stock Plan— — 1,554 — — 498 2,052 
Dividends paid and accrued, $0.21 per share
— — — — (15,526)— (15,526)
Shares issued pursuant to Dividend Reinvestment Plan— — 18 — — 5 23 
Other4 — 123 — — — 123 
Balance, March 31, 202175,958 $760 $286,522 $4,292 $210,020 $(8,492)$493,102 
See accompanying notes to consolidated financial statements.
4

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 customers receive government reimbursements related to Medicare and Medicaid. Therefore, they are directly affected by any legislation relating to Medicare and Medicaid reimbursement programs.

The Company provides services primarily pursuant to full service agreements with its customers. In such agreements, the Company is responsible for the day-to-day management of employees located at the customers’ facilities, as well as for the provision of certain supplies. The Company also provides services on the basis of management-only agreements for a limited number of customers. In a management-only agreement, the Company provides management and supervisory services while the customer facility retains payroll responsibility for the non-supervisory staff. The agreements with customers typically provide for a renewable one year service term, cancellable by either party upon 30 to 90 days’ notice after an initial period of 60 to 120 days.

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

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

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

Unaudited Interim Financial Data

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and the requirements of Form 10-Q and Article 10 of Regulation S-X. Accordingly, these consolidated financial statements do not include all of the information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows. However, in the Company’s opinion, all adjustments which are of a normal recurring nature and are necessary for a fair presentation have been reflected in these consolidated financial statements. The balance sheet shown in this report as of December 31, 2021 has been derived from the audited financial statements for the year ended December 31, 2021. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. The results of operations for the three months ended March 31, 2022 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.
5


Principles of Consolidation

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

Cash and Cash Equivalents

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

Accounts and Notes Receivable

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

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

In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification subtopic 326 Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC 326”), Management utilizes financial modeling to determine an allowance that reflects its best estimate of the lifetime expected credit losses on accounts and notes receivable which is recorded as a liability to offset the receivables. Modeling is prepared after considering historical experience, current conditions, and reasonable and supportable economic forecasts to estimate lifetime expected credit losses. Accounts and notes receivables are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded as a reduction of bad debt expense when received.

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

Inventories and Supplies

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.

6

Revenue Recognition

The Company recognizes revenue from contracts with customers when or as the promised goods and services are provided to customers. Revenues are reported net of sales taxes that are collected from customers and remitted to taxing authorities. The amount of revenue recognized by the Company is based on the consideration to which the Company is entitled in exchange for providing the contracted goods and services.

Refer to Note 2—Revenue herein for further information.

Leases

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, in accordance with FASB Accounting Standards Codification subtopic ASC 842 Leases (“ASC 842”). A leasing arrangement includes any contract which entitles the Company to the right of use of an identified tangible asset where there are no restrictions as to the direct of use of the asset, and the Company obtains substantially all of the economic benefits from the right of use. As of March 31, 2022 and December 31, 2021, the Company was only the lessee of operating lease arrangements.

Refer to Note 7—Leases herein for further information.

Income Taxes

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 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, using a Monte Carlo simulation for performance restricted stock units, and using the share price on the date of grant for restricted stock units and deferred stock units. The value of the award is recognized ratably as an expense in the Company’s Consolidated Statements of Comprehensive Income over the requisite service periods, with adjustments made for forfeitures as they occur.

Identifiable Intangible Assets and Goodwill

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

No impairment loss was recognized on the Company's intangible assets or goodwill during the three months ended March 31, 2022 or 2021.

7

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, 2022 and December 31, 2021, 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 customers are concentrated in the healthcare industry and are primarily providers of long-term care. The revenues of many of the Company’s customers are highly reliant on Medicare, Medicaid and third party payors’ reimbursement funding rates. New legislation or changes in existing regulations could directly impact the governmental reimbursement programs in which the customers participate. As a result, the Company may not realize the full effects of such programs until these laws are fully implemented and governmental agencies issue applicable regulations or guidance.

Note 2—Revenue

The Company presents its consolidated revenues disaggregated by reportable segment, as Management evaluates the nature, amount, timing and uncertainty of the Company’s revenues by segment. Refer to Note 12—Segment Information herein as well as the information below regarding the Company’s reportable segments.

Housekeeping

Housekeeping accounted for $201.7 million and $215.1 million of the Company’s consolidated revenues for the three months ended March 31, 2022 and 2021, respectively, which represented approximately 47.3% and 52.7% of the Company’s revenues in each respective period. The Housekeeping services include managing customers’ housekeeping departments, which are principally responsible for the cleaning, disinfecting and sanitizing of resident rooms and common areas of the customers’ facilities, as well as the laundering and processing of the bed linens, uniforms, resident personal clothing and other assorted linen items utilized at the customers’ facilities. Upon beginning service with a customer facility, the Company will typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise and train the front-line personnel and coordinate housekeeping services with other facility support functions in accordance with customer requests. Such management personnel also oversee the execution of various cost and quality-control procedures including continuous training and employee evaluation.

Dietary

Dietary services accounted for $225.1 million and $192.7 million of the Company’s consolidated revenues for the three months ended March 31, 2022 and 2021, respectively, which represented approximately 52.7% and 47.3% of the Company’s revenues in each respective period. Dietary services consist of managing customers’ dietary departments which are principally responsible for food purchasing, meal preparation and professional dietitian services, which include the development of menus that meet the dietary needs of residents. On-site management is responsible for all daily dietary department activities, with regular support provided by a District Manager specializing in dietary services. The Company also offers clinical consulting services to facilities which if contracted is a service bundled within the monthly service provided to customers. Upon beginning service with a customer facility, the Company will typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise and train the front-line personnel and coordinate dietitian services with other facility support functions in accordance with customer requests. Such management personnel also oversee the execution of various cost and quality control procedures including continuous training and employee evaluation.

8

Revenue Recognition

The Company’s revenues are derived from contracts with customers. The Company accounts for revenue from contracts with customers in accordance with FASB Accounting Standards Codification subtopic ASC 606 Revenue from Contracts with Customers (“ASC 606”), and as such, the Company recognizes revenue to depict the transfer of promised goods and services to customers in amounts that reflect the consideration to which the Company is entitled in exchange for those goods and services. The Company’s costs of obtaining contracts are not material.

The Company performs services and provides goods in accordance with its customers' contracts. Such contracts typically provide for a renewable one year service term, cancellable by either party upon 30 to 90 days’ notice, after an initial period of 60 to 120 days. A performance obligation is the unit of account under ASC 606 and is defined as a promise in a contract to transfer a distinct good or service to the customer. The Company’s Housekeeping and Dietary contracts relate to the provision of bundles of goods, services or both, which represent a series of distinct goods and services that are substantially the same and that have the same pattern of transfer to the customer. The Company accounts for the series as a single performance obligation satisfied over time, as the customer simultaneously receives and consumes the benefits of the goods and services provided. Revenue is recognized using the output method, which is based upon the delivery of goods and services to the customers’ facilities. In limited cases, the Company provides goods, services or both, before the execution of a written contract. In these cases, the Company defers the recognition of revenue until a contract is executed. The amount of such deferred revenue was $0.8 million and $0.1 million as of March 31, 2022 and December 31, 2021, respectively. Additionally, substantially all such revenue amounts deferred as of December 31, 2021 were subsequently recognized as revenue during the three months ended March 31, 2022.

The transaction price is the amount of consideration to which the Company is entitled in exchange for transferring promised goods or services to its customers. The transaction price does not include taxes assessed or collected. The Company’s contracts detail the fees that the Company charges for the goods and services it provides. For certain contracts which contain a variable component to the transaction price, the Company is required to make estimates of the amount of consideration to which the Company will be entitled, based on variability in resident and patient populations serviced, product usage or quantities consumed. The Company recognizes revenue related to such estimates only when the Company determines that there will not be a significant reversal in the amount of revenue recognized. The Company’s contracts generally do not contain significant financing components, as payment terms are less than one year.

The Company allocates the transaction price to each performance obligation, noting that the bundle of goods, services or goods and services provided under each Housekeeping and Dietary contract represent a single performance obligation satisfied over time. The Company recognizes the related revenue when it satisfies the performance obligation by transferring a bundle of promised goods, services or both to a customer. Such recognition is on a monthly or weekly basis, as goods are provided and services are performed. In some cases, the Company requires customers to pay in advance for goods and services to be provided. As of March 31, 2022 the value of the contract liabilities associated with customer prepayments was less than $0.1 million. As of December 31, 2021, the value of the contract liabilities associated with customer prepayments was $2.5 million. Additionally, substantially all such revenue amounts deferred as of December 31, 2021 were subsequently recognized as revenue during the three months ended March 31, 2022.

Transaction Price Allocated to Remaining Performance Obligations

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

At March 31, 2022, the Company had $187.0 million related to performance obligations that were unsatisfied or partially unsatisfied for which the Company expects to recognize revenue. The Company expects to recognize revenue on approximately 52.2% 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 consist of a series of distinct service periods with revenues based on future performance that cannot be estimated at contract inception. The Company also has elected to apply the practical expedient that permits exclusion of information about the remaining performance obligations with original expected durations of one year or less.

9

Note 3—Accounts and Notes Receivable

The Company’s accounts and notes receivable balances consisted of the following as of March 31, 2022 and December 31, 2021:
March 31, 2022December 31, 2021
(in thousands)
Short-term
Accounts and notes receivable$376,879 $352,659 
Allowance for doubtful accounts(57,784)(59,271)
Total net short-term accounts and notes receivable$319,095 $293,388 
Long-term
Notes receivable$33,231 $35,571 
Allowance for doubtful accounts(5,308)(6,312)
Total net long-term notes receivable$27,923 $29,259 
Total net accounts and notes receivable$347,018 $322,647 

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

Fluctuations in net accounts and notes receivable are generally attributable to a variety of factors including, but not limited to, the timing of cash receipts from customers and the inception, transition, modification or termination of customer relationships. The Company deploys significant resources and has invested in tools and processes to optimize Management’s credit and collections efforts. When appropriate, the Company utilizes interest-bearing promissory notes to enhance the collectability of amounts due, by instituting definitive repayment plans and providing a means by which to further evidence the amounts owed. In addition, the Company may amend contracts from full service to management-only arrangements, or adjust contractual payment terms, to accommodate customers who have in good faith established clearly-defined plans for addressing cash flow issues. These efforts are intended to minimize the Company’s collections risk.

Note 4—Allowance for Doubtful Accounts

In making the Company’s credit evaluations, management considers the general collection risk associated with trends in the long-term care industry. The Company establishes credit limits through payment terms with customers, performs ongoing credit evaluations and monitors accounts on an aging schedule basis to minimize the risk of loss. Despite the Company’s efforts to minimize credit risk exposure, customers could be adversely affected if future industry trends, including those related to COVID-19, change in such a manner as to negatively impact their cash flows. The full effects of COVID-19 on the Company’s customers are highly uncertain and cannot be predicted. As a result, the Company’s future collection experience can differ significantly from historical collection trends. If the Company’s customers experience a negative impact on their cash flows, it could have a material adverse effect on the Company’s results of operations and financial condition.

The Company evaluates its accounts and notes receivable for expected credit losses quarterly. Accounts receivables are evaluated based on internally developed credit quality indicators derived from the aging of receivables. Notes receivable are evaluated based on internally developed credit quality indicators derived from Management’s assessment of collection risk. The Company manages note receivable portfolios using a two tiered approach by disaggregating standard notes receivables, which are promissory notes in good standing, from those who have been identified by Management as having an elevated credit risk profile due to a triggering event such as bankruptcy. At the end of each period, the Company sets a reserve for expected credit losses on standard notes receivable based on the Company’s historical loss rate. Notes receivable with an elevated risk profile, which are from customers who have filed bankruptcy, are subject to collections activity or are slow payers that are experiencing financial difficulties, are aggregated and evaluated to determine the total reserve for the class of receivable.

10

The guidance in ASC 326 permits entities to make an accounting policy election not to measure an estimate for credit losses on accrued interest if those entities write-off accrued interest deemed uncollectible in a timely manner. The Company follows an income recognition policy on all interest earned on notes receivable. Under such policy the Company accounts for all notes receivable on a non-accrual basis and defers the recognition of any interest income until receipt of cash payments. This policy was established, recognizing the environment of the long-term care industry, and not because such notes receivable are necessarily impaired. Accordingly, the Company does not record a credit loss adjustment for accrued interest. Interest income from notes receivable for the three months ended March 31, 2022 and 2021 was $0.3 million and $0.4 million, respectively.

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 well as write-off activity for the three months ended March 31, 2022.
Notes Receivable
Amortized Cost Basis by Origination Year
20222021202020192018PriorTotal
(in thousands)
Notes Receivable
Standard notes receivable$486 $15,461 $5,588 $272 $18,715 $22,842 $63,364 
Elevated risk notes receivable$ $ $ $ $ $1,715 $1,715 
Current-period gross write-offs$ $ $ $ $ $ $ 
Current-period recoveries       
Current-period net write-offs$ $ $ $ $ $ $ 

The following table provides information as to the status of payment on the Company’s notes receivable which were past due as of March 31, 2022:
Age Analysis of Past-Due Notes Receivable as of March 31, 2022
0 - 90 Days91 - 180 DaysGreater than 181 DaysTotal
(in thousands)
Notes Receivable
Standard notes receivable$1,030 $608 $12,176 $13,814 
Elevated risk notes receivable  1,715 1,715 
$1,030 $608 $13,891 $15,529 

11

The following tables provide a summary of the changes in the Company’s allowance for doubtful accounts on a portfolio segment basis for the three months ended March 31, 2022 and 2021.
Allowance for doubtful accounts
Portfolio Segment:December 31,
2021
Write-Offs1
Bad Debt ExpenseMarch 31,
2022
(in thousands)
Accounts Receivables$50,794 $(5,343)$3,960 $49,411 
Notes Receivables
Standard notes receivable$13,607 $ $(1,065)$12,542 
Elevated risk notes receivable1,183  (44)1,139 
Total notes receivable$14,790 $ $(1,109)$13,681 
Total accounts and notes receivable$65,584 $(5,343)$2,851 $63,092 
1.Write-offs are shown net of recoveries. During the three months ended March 31, 2022, the Company collected $0.2 million of accounts receivables and notes receivables which had previously been written-off as uncollectible.
Allowance for doubtful accounts
Portfolio Segment:December 31,
2020
Write-Offs1
Bad Debt ExpenseMarch 31,
2021
(in thousands)
Accounts Receivables$51,052 $(7,305)$2,779 $46,526 
Notes Receivables
Standard notes receivable$13,258 $(9)$(256)$12,993 
Elevated risk notes receivable3,491 (2,800)892 1,583 
Total notes receivable$16,749 $(2,809)$636 $14,576 
Total Accounts and notes receivable$67,801 $(10,114)$3,415 $61,102 
1.Write-offs are shown net of recoveries. During the three months ended March 31, 2021, the amount of such recoveries was not material.



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Note 5—Changes in Accumulated Other Comprehensive Income by Component

The Company's accumulated other comprehensive income consists of unrealized gains and losses from the Company’s available-for-sale marketable securities. The following table provides a summary of the changes in accumulated other comprehensive income for the three months ended March 31, 2022 and 2021:
Unrealized Gains and Losses on Available-for-Sale Securities1
Three Months Ended March 31,
20222021
(in thousands)
Accumulated other comprehensive income — beginning balance$4,000 $5,563 
Other comprehensive loss before reclassifications(5,277)(1,307)
Losses reclassified from other comprehensive income2
8 36 
Net current period other comprehensive loss3
(5,269)(1,271)
Accumulated other comprehensive (loss) income — ending balance$(1,269)$4,292 
1.All amounts are net of tax
2.Realized gains and losses were recorded pre-tax under “Investment and other income” in the Consolidated Statements of Comprehensive Income. For the three months ended March 31, 2022 and 2021, the Company recorded less than $0.1 million of realized losses from the sale of available-for-sale securities. Refer to Note 9—Fair Value Measurements herein for further information.
3.For the three months ended March 31, 2022 and 2021, the changes in other comprehensive income were net of a tax benefit of $1.4 million and $0.3 million, respectively.

Amounts Reclassified from Accumulated Other Comprehensive Income
20222021
(in thousands)
Three Months Ended March 31,
Losses from the sale of available-for-sale securities$(12)$(48)
Tax benefit4 12 
Net loss reclassified from accumulated other comprehensive income$(8)$(36)

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Note 6—Property and Equipment

Property and equipment are recorded at cost. Depreciation is recorded over the estimated useful life of each class of depreciable asset, and is computed using the straight-line method. Leasehold improvements are amortized over the shorter of the estimated asset life or term of the lease. Repairs and maintenance costs are charged to expense as incurred.

The following table sets forth the amounts of property and equipment by each class of depreciable asset as of March 31, 2022 and December 31, 2021:
March 31, 2022December 31, 2021
(in thousands)
Housekeeping and dietary equipment$13,614 $13,468 
Computer hardware and software5,976 5,880 
Operating lease — right-of-use assets
33,446 33,217 
Other1
1,680 1,736 
Total property and equipment, at cost54,716 54,301 
Less accumulated depreciation28,014 26,199 
Total property and equipment, net$26,702 $28,102 
1.Includes furniture and fixtures, leasehold improvements and autos and trucks including auto leases.

Depreciation expense for the three months ended March 31, 2022 and 2021 was $2.9 million and $2.6 million, respectively. Of the depreciation expense recorded for the three months ended March 31, 2022 and 2021, $1.6 million and $1.5 million related to the depreciation of the Company’s operating lease - right-of-use assets (ROU Assets”), respectively.

Note 7—Leases

The Company recognizes ROU Assets and lease liabilities (“Lease Liabilities”) for automobiles, office buildings, IT equipment, and small storage units for the temporary storage of operational equipment. The Company’s leases have remaining lease terms ranging from less than 1 year to 7 years, and have extension options ranging from 1 year to 5 years. Most leases include the option to terminate the lease within 1 year.

Upon adopting ASC 842, the Company made accounting policy elections using practical expedients offered under the guidance to combine lease and non-lease components within leasing arrangements and to recognize the payments associated with short-term leases in earnings on a straight-line basis over the lease term, with the cost associated with variable lease payments recognized when incurred. These accounting policy elections impact the value of the Company’s ROU Assets and Lease Liabilities. The value of the Company’s ROU Assets is determined as the non-depreciated fair value of its leasing arrangements and is recorded to “Property and equipment, net” on the Company’s Consolidated Balance Sheets. The value of the Company’s Lease Liabilities is the present value of fixed lease payments not yet paid, discounted using either the rate implicit in the lease contract if that rate can be determined, or the Company’s incremental borrowing rate (IBR”) and is recorded in “Other accrued expenses” and “Lease liability — long-term portion” on the Company’s Consolidated Balance Sheets. The Company’s IBR is determined as the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment.

Any future lease payments that are not fixed based on the terms of the lease contract, or fluctuate based on a factor other than an index or rate, are considered variable lease payments and are not included in the value of the Company’s ROU Assets or Lease Liabilities. The Company's variable lease payments are mostly incurred from automobile leases and relate to miscellaneous transportation costs including repair costs, insurance, and terminal rental adjustments payments due at lease settlement. Such rental adjustment payments can result in a reduction to the Company's total variable lease payments.

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Components of lease expense required by ASC 842 are presented below for the three months ended March 31, 2022 and 2021.
Three Months Ended March 31,
20222021
(in thousands)
Lease cost
Operating lease cost$1,386 $1,439 
Short-term lease cost355 167 
Variable lease cost82 72 
Total lease cost$1,823 $1,678 

Supplemental information required by ASC 842 is presented below for the three months ended March 31, 2022 and 2021.
Three Months Ended March 31,
20222021
(dollar amounts in thousands)
Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases$1,711$1,583
Weighted-average remaining lease term — operating leases4.4 years5.6 years
Weighted-average discount rate — operating leases4.2 %4.2 %

During the three months ended March 31, 2022 and 2021, the Company’s ROU Assets and Lease Liabilities were reduced by $0.9 million and $0.2 million, respectively, due to lease cancellations.

The following is a schedule by calendar year of future minimum lease payments under operating leases that have remaining terms as of March 31, 2022:
Period/YearOperating Leases
(in thousands)
April 1 to December 31, 2022$4,634 
20234,956 
20243,119 
20251,396 
20261,337 
20271,363 
Thereafter1,505 
Total minimum lease payments$18,310 
Less: imputed lease payments1,703 
Present value of lease liabilities$16,607 

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Note 8—Goodwill and Other Intangible Assets

Goodwill

During the three months ended March 31, 2022, the Company’s goodwill increased $0.7 million due to a measurement period adjustment pertaining to the prior year acquisition of a regional dining operator. As of March 31, 2022, the Company has finalized its acquisition accounting for this transaction.

Intangible Assets

The Company’s other intangible assets consist of customer relationships, trade names, patents, and non-compete agreements which were obtained through acquisitions and are recorded at their fair values at the date of acquisition. Intangible assets with determinable lives are amortized on a straight-line basis over their estimated useful lives. The weighted-average amortization period of customer relationships, trade names, patents, and non-compete agreements are approximately 10 years, 13 years, 8 years, and 4 years, respectively.

The following table sets forth the estimated amortization expense for intangibles subject to amortization for the remainder of 2022, the following five fiscal years and thereafter:
Period/YearTotal Amortization Expense
(in thousands)
April 1 to December 31, 2022$3,642 
2023$3,819 
2024$2,685 
2025$2,685 
2026$2,665 
2027$1,196 
Thereafter$2,895 

Amortization expense for the three months ended March 31, 2022 and 2021 was $1.2 million and $1.0 million, respectively.

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Note 9—Fair Value Measurements

The Company’s current assets and current liabilities are financial instruments and most of these items (other than marketable securities, inventories and the short-term portion of deferred compensation funding) are recorded at cost in the Consolidated Balance Sheets. The estimated fair value of these financial instruments approximates their carrying value due to their short-term nature. The carrying value of the Company’s line of credit represents the outstanding amount of the borrowings, which approximates fair value. The Company’s financial assets that are measured at fair value on a recurring basis are its marketable securities and deferred compensation funding. The recorded values of all of the financial instruments approximate their current fair values because of their nature, stated interest rates and respective maturity dates or durations.

The Company’s marketable securities are held by the Company’s captive insurance company to satisfy capital requirements of the state regulator related to captive insurance companies. Such securities primarily consist of tax-exempt municipal bonds, which are classified as available-for-sale and are reported at fair value. Unrealized gains and losses associated with these investments are included in “Unrealized loss on available-for-sale marketable securities, net of taxes” within the Consolidated Statements of Comprehensive Income. The fair value of these marketable securities is classified within Level 2 of the fair value hierarchy, as these securities are measured using quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable. Such valuations are determined by a third-party pricing service. For the three months ended March 31, 2022 and 2021, the Company recorded unrealized losses, net of taxes of $5.3 million and $1.3 million on marketable securities, respectively.

As part of the Company’s completed acquisition of a manufacturer of prepackaged meals in 2021, the Company used an analysis of the discounted weighted-average cost of capital attributable to the acquired company’s revenue (an income approach) to value the contingent consideration liability. The inputs utilized in estimating the fair value of the contingent consideration have been classified as Level 3 in the fair value hierarchy levels and are subject to risk and uncertainty. The discounted weighted-average cost of capital attributable to the acquired company’s revenue analysis is dependent on several subjective factors including future earnings, volatility and the discount rate. If assumptions vary from what was expected, the fair value of the contingent consideration liability may materially change. As of March 31, 2022 and December 31, 2021, the fair value of the contingent consideration liability was $3.1 million and $4.8 million, respectively, and were presented in “Other long-term liabilities” on the Company’s Consolidated Balance Sheets. For the three months ended March 31, 2022, the Company recorded a gain of $1.7 million from the fair value adjustment in “Other income – Investment and other income, net” in the Consolidated Statements of Comprehensive Income. No such gain or loss was recorded during the three months ended March 31, 2021.

For the three months ended March 31, 2022 and 2021, the Company received total proceeds, less the amount of interest received, of $1.5 million and $5.0 million, respectively, from sales of available-for-sale municipal bonds. For both the three months ended March 31, 2022 and 2021, these sales resulted in realized losses of less than $0.1 million, which were recorded in “Other income – Investment and other income, net” in the Consolidated Statements of Comprehensive Income. The basis for the sale of these securities was the specific identification of each bond sold during the period.

The investments under the funded deferred compensation plan are classified as trading securities and unrealized gains or losses are recorded in “Selling, general and administrative expense” in the Consolidated Statements of Comprehensive Income. The fair value of these investments are determined based on quoted market prices (Level 1). For the three months ended March 31, 2022 and 2021, the Company recognized unrealized losses of $4.1 million and unrealized gains of $1.1 million, respectively, related to equity securities still held at the respective reporting dates.

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The following tables provide fair value measurement information for the Company’s marketable securities and deferred compensation fund investments as of March 31, 2022 and December 31, 2021:

As of March 31, 2022
Fair Value Measurement Using:
Carrying AmountTotal Fair ValueQuoted Prices in Active Markets (Level 1)Significant Other Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)
Financial Assets:
Marketable securities
Municipal bonds — available-for-sale$107,171 $107,171 $ $107,171 $ 
Deferred compensation fund
Money Market1
$2,428 $2,428 $ $2,428 $ 
Balanced and Lifestyle12,194 12,194 12,194   
Large Cap Growth16,206 16,206 16,206   
Small Cap Growth5,174 5,174 5,174   
Fixed Income4,414 4,414 4,414   
International1,719 1,719 1,719   
Mid Cap Growth3,171 3,171 3,171   
Deferred compensation fund2
$45,306 $45,306 $42,878 $2,428 $ 

As of December 31, 2021
Fair Value Measurement Using:
Carrying
Amount
Total Fair
Value
Quoted Prices in Active Markets (Level 1)Significant Other Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)
Financial Assets:
Marketable securities
Municipal bonds — available-for-sale$114,396 $114,396 $ $114,396 $ 
Deferred compensation fund
Money Market1
$2,882 $2,882 $ $2,882 $ 
Balanced and Lifestyle12,578 12,578 12,578   
Large Cap Growth20,358 20,358 20,358   
Small Cap Growth6,561 6,561 6,561   
Fixed Income4,826 4,826 4,826   
International2,299 2,299 2,299  
Mid Cap Growth4,179 4,179 4,179   
Deferred compensation fund2
$53,683 $