HEALTHCARE SERVICES GROUP INC [HCSG] Filings

10-Q 1 hcsg-20230331.htm 10-Q hcsg-20230331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

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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)


Pennsylvania						23-2018365
(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 class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	HCSG	NASDAQ 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 filer

Accelerated filer

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Non-accelerated filer

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Smaller reporting company

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Emerging growth company

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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, $0.01 par value: 74,195,000 shares outstanding as of April 26, 2023.

Healthcare Services Group, Inc.

Quarterly Report on Form 10-Q

For the Period Ended March 31, 2023

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		Page
PART I
Item 1.	Financial Statements (Unaudited)	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	32

PART II
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Mine Safety Disclosures	34
Item 5.	Other Information	34
Item 6.	Exhibits	35

SIGNATURES		36

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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 and 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, 2023; credit and collection risks associated with the healthcare industry; the impact of bank failures; 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; and the risk factors described in Part I of our Form 10-K for the fiscal year ended December 31, 2022 under “Government Regulation of Customers,” “Service Agreements and Collections,” and “Competition” and under Item 1A. “Risk Factors” in such Form 10-K.

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) cannot 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.

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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, 2023		December 31, 2022
ASSETS:
Current assets:
Cash and cash equivalents	$	16,153	$	26,279
Marketable securities, at fair value	95,985		95,200
Accounts and notes receivable, less allowance for doubtful accounts of $73,030 and $70,192 as of March 31, 2023 and December 31, 2022, respectively	350,784		336,777
Inventories and supplies	20,229		21,164
Taxes receivable	1,748		6,629
Prepaid expenses and other assets	25,188		22,583
Total current assets	510,087		508,632
Property and equipment, net	23,400		22,975
Goodwill	75,529		75,529
Other intangible assets, less accumulated amortization of $33,941 and $32,738 as of March 31, 2023 and December 31, 2022, respectively	14,743		15,946
Notes receivable — long–term portion, less allowance for doubtful accounts of $3,837 and $3,273 as of March 31, 2023 and December 31, 2022, respectively	32,327		32,609
Deferred compensation funding, at fair value	34,312		33,493
Deferred tax asset	27,975		28,338
Other long-term assets	760		812
Total assets	$	719,133	$	718,334

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable	$	64,351	$	68,296
Accrued payroll and related taxes	20,394		42,704
Other accrued expenses	17,088		17,835
Borrowings under line of credit	35,000		25,000

Deferred compensation liability — short-term	1,357		1,618
Accrued insurance claims	23,974		23,166
Total current liabilities	162,164		178,619
Accrued insurance claims — long-term	67,100		65,541
Deferred compensation liability — long-term	34,263		33,764


Lease liability — long-term	8,586		8,097
Other long-term liabilities	6,448		6,141
Commitments and contingencies (Note 15)
STOCKHOLDERS’ EQUITY:
Common stock, $0.01 par value; 100,000 shares authorized; 76,329 and 76,161 shares issued, and 74,194 and 74,088 shares outstanding as of March 31, 2023 and December 31, 2022, respectively	763		762
Additional paid-in capital	303,582		302,304
Retained earnings	167,190		154,495
Accumulated other comprehensive loss, net of taxes	(2,270)		(3,477)
Common stock in treasury, at cost, 2,135 and 2,073 shares as of March 31, 2023 and December 31, 2022, respectively	(28,693)		(27,912)
Total stockholders’ equity	$	440,572	$	426,172
Total liabilities and stockholders’ equity	$	719,133	$	718,334

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,
	2023		2022
Revenues	$	417,230	$	426,811
Operating costs and expenses:
Costs of services provided	360,978		373,262
Selling, general and administrative expense	40,047		35,736
Other income (expense):
Investment and other income (loss), net	3,102		(1,523)
Interest expense	(1,751)		(509)
Income before income taxes	17,556		15,781

Income tax provision	4,872		4,452
Net income	$	12,684	$	11,329

Per share data:
Basic earnings per common share	$	0.17	$	0.15
Diluted earnings per common share	$	0.17	$	0.15


Weighted average number of common shares outstanding:
Basic	74,497		74,326
Diluted	74,518		74,333

Comprehensive income:
Net income	$	12,684	$	11,329
Other comprehensive gain (loss):
Unrealized gain (loss) on available-for-sale marketable securities, net of taxes	1,207		(5,269)
Total comprehensive income	$	13,891	$	6,060

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,
	2023		2022
Cash flows used in operating activities:
Net income	$	12,684	$	11,329
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	3,720		4,147
Bad debt provision	6,907		2,851
Deferred income tax benefit	43		—
Share-based compensation expense	2,058		2,396
Amortization of premium on marketable securities	533		561
Unrealized (gain) loss on deferred compensation fund investments	(1,502)		4,074
Changes in other long-term liabilities	336		(1,760)
Net loss on disposals of fixed assets	128		173
Changes in operating assets and liabilities:
Accounts and notes receivable	(20,633)		(27,222)
Inventories and supplies	935		1,195
Prepaid expenses and other assets	4,076		(2,462)
Deferred compensation funding	683		3,605
Accounts payable and other accrued expenses	(6,422)		(3,051)
Accrued payroll, accrued and withheld payroll taxes	(21,167)		(24,933)
Income taxes receivable	(1,748)		3,764
Accrued insurance claims	2,366		3,056
Deferred compensation liability	713		(7,905)
Net cash used in operating activities	(16,290)		(30,182)
Cash flows used in investing activities:
Disposals of fixed assets	57		152
Additions to property and equipment	(1,010)		(1,407)
Purchases of marketable securities	—		(1,525)
Sales of marketable securities	210		1,519
Cash paid for acquisitions	—		(114)
Net cash used in investing activities	(743)		(1,375)
Cash flows from (used in) financing activities:
Dividends paid	—		(15,704)
Reissuance of treasury stock pursuant to Dividend Reinvestment Plan	—		25
Proceeds from the exercise of stock options	—		410
Purchases of treasury stock	(2,223)		—
Proceeds from short-term borrowings	10,000		10,000
Payments of statutory withholding on net issuance of restricted stock units	(870)		(1,069)

Net cash from (used in) financing activities	6,907		(6,338)
Net change in cash and cash equivalents	(10,126)		(37,895)
Cash and cash equivalents at beginning of the period	26,279		70,794
Cash and cash equivalents at end of the period	$	16,153	$	32,899

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, 2023
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Loss, net of taxes		Retained Earnings		Treasury Stock		Stockholders’ Equity
	Shares	Amount
Balance, December 31, 2022	76,161	$	762	$	302,304	$	(3,477)	$	154,495	$	(27,912)	$	426,172
Comprehensive income:
Net income for the period	—	—		—		—		12,684		—		12,684
Unrealized gain on available-for-sale marketable securities, net of taxes	—	—		—		1,207		—		—		1,207
Comprehensive income for the period												$	13,891
Other share-based compensation, net	167	1		(1)		—		—		—		—
Payment of statutory withholding on issuance of restricted stock units	—	—		(870)		—		—		—		(870)
Share-based compensation expense	—	—		1,973		—		—		—		1,973
Purchases of treasury stock	—	—		—		—		—		(2,223)		(2,223)
Treasury shares issued for Deferred Compensation Plan, net	—	—		307		—		—		168		475
Shares issued pursuant to Employee Stock Plan	—	—		(139)		—		—		1,274		1,135



Other	1	—		8		—		11		—		19
Balance, March 31, 2023	76,329	$	763	$	303,582	$	(2,270)	$	167,190	$	(28,693)	$	440,572


	For the three months ended March 31, 2022
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Loss, net of taxes		Retained Earnings		Treasury Stock		Stockholders’ Equity
	Shares	Amount
Balance, December 31, 2021	76,009	$	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 payment	145	2		408		—		—		—		410
Payment of statutory withholding on issuance of restricted stock and restricted stock units	—	—		(1,069)		—		—		—		(1,069)
Share-based compensation expense	—	—		2,298		—		—		—		2,298
Treasury shares issued for Deferred Compensation Plan, net	—	—		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

Other	4	—		59		—		—		—		59
Balance, March 31, 2022	76,158	$	762	$	296,304	$	(1,269)	$	179,427	$	(28,587)	$	446,637

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 predominantly to clients within 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, the Company’s customers 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, 2022 has been derived from the audited financial statements for the year ended December 31, 2022. 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, 2022. The results of operations for the three months ended March 31, 2023 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, 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. Management regularly evaluates this information to determine if it is necessary to update the basis for its estimates and to adjust for known changes.

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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 most promissory notes mature over a 1 to 4 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 losses.

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.

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 amount of revenue recognized by the Company is based on the expected value of consideration to which the Company is entitled in exchange for providing the contracted goods and services and when it is probable that the Company will collect substantially all of such consideration.

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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, 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.

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 consolidated 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 awards.

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, 2023 or 2022.

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, 2023 and December 31, 2022, the majority 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 Company’s customers participate. As a result, the Company may not realize the full effects such programs may have on the Company’s customers until these laws are fully implemented and governmental agencies issue applicable regulations or guidance.

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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 $193.5 million and $201.7 million of the Company’s consolidated revenues for the three months ended March 31, 2023 and 2022, respectively, which represented approximately 46.4% and 47.3% of the Company’s revenues in each respective period. Housekeeping services include managing customers’ housekeeping departments, which are principally responsible for the cleaning, disinfecting and sanitizing of resident rooms and common areas of the customers’ facilities, as well as the laundering and processing of the bed linens, uniforms, resident personal clothing and other assorted linen items utilized at the customers’ facilities. Upon beginning service with a customer facility, the Company will typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise and train the front-line personnel and coordinate housekeeping services with other facility support functions in accordance with customer requests. Such management personnel also oversee the execution of various cost and quality control procedures including continuous training and employee evaluation.

Dietary

Dietary services accounted for $223.7 million and $225.1 million of the Company’s consolidated revenues for the three months ended March 31, 2023 and 2022, respectively, which represented approximately 53.6% and 52.7% 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.

Revenue Recognition

The Company’s revenues are derived from contracts with customers. 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 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 $0.3 million as of both March 31, 2023 and December 31, 2022. Additionally, substantially all such revenue amounts deferred as of December 31, 2022 were subsequently recognized as revenue during the three months ended March 31, 2023.

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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 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, 2023 the value of the contract liabilities associated with customer prepayments was $1.7 million. As of December 31, 2022, the value of the contract liabilities associated with customer prepayments was $3.1 million. The Company recognized $1.4 million of revenue during the three months ended March 31, 2023 which was recorded as a contract liability on December 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, 2023, the Company had $99.0 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 all of the remaining performance obligations over the next 12 months. 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.

Note 3—Accounts and Notes Receivable

The Company’s accounts and notes receivable balances consisted of the following as of March 31, 2023 and December 31, 2022:


	March 31, 2023		December 31, 2022
	(in thousands)
Short-term
Accounts and notes receivable	$	423,814	$	406,969
Allowance for doubtful accounts	(73,030)		(70,192)
Total net short-term accounts and notes receivable	$	350,784	$	336,777
Long-term
Notes receivable	$	36,164	$	35,882
Allowance for doubtful accounts	(3,837)		(3,273)
Total net long-term notes receivable	$	32,327	$	32,609
Total net accounts and notes receivable	$	383,111	$	369,386

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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.

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 based on the Company’s history of collections of interest on outstanding notes receivable, as we do not deem it probable that we will receive substantially all interest on outstanding notes receivable. 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, 2023 and 2022 was $0.6 million and $0.3 million, respectively.

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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, 2023.


	Notes Receivable
	Amortized Cost Basis by Origination Year
	2023		2022		2021		2020		2019		Prior		Total
	(in thousands)
Notes Receivable
Standard notes receivable	$	18,380	$	27,856	$	7,922	$	1,540	$	53	$	21,975	$	77,726
Elevated risk notes receivable	$	—	$	—	$	2,510	$	—	$	—	$	795	$	3,305

Current-period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	51	$	51
Current-period recoveries	—		—		—		—		—		—		—
Current-period net write-offs	$	—	$	—	$	—	$	—	$	—	$	51	$	51

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, 2023:


	Age Analysis of Past-Due Notes Receivable as of March 31, 2023
	0 - 90 Days		91 - 180 Days		Greater than 181 Days		Total
	(in thousands)
Notes Receivable
Standard notes receivable	$	3,305	$	276	$	3,414	$	6,995
Elevated risk notes receivable	136		—		795		931
	$	3,441	$	276	$	4,209	$	7,926

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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, 2023 and 2022.


	Allowance for doubtful accounts
Portfolio Segment:	December 31, 2022		Write-Offs1		Bad Debt Expense		March 31, 2023
	(in thousands)
Accounts Receivables	$	66,601	$	(3,453)	$	5,259	$	68,407

Notes Receivables
Standard notes receivable	$	6,052	$	—	$	373	$	6,425
Elevated risk notes receivable	811		(51)		1,275		2,035
Total notes receivable	$	6,863	$	(51)	$	1,648	$	8,460
Total accounts and notes receivable	$	73,464	$	(3,504)	$	6,907	$	76,867

1.Write-offs are shown net of recoveries. During the three months ended March 31, 2023, the Company collected less than $0.1 million of accounts and notes receivables which had previously been written-off as uncollectible.


	Allowance for doubtful accounts
Portfolio Segment:	December 31, 2021		Write-Offs1		Bad Debt Expense		March 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 receivable	1,183		—		(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 and notes receivables which had previously been written-off as uncollectible.

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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, 2023 and 2022:


	Unrealized Gains and Losses on Available-for-Sale Securities1
	Three Months Ended March 31,
	2023		2022
	(in thousands)
Accumulated other comprehensive (loss) income — beginning balance	$	(3,477)	$	4,000
Other comprehensive income (loss) before reclassifications	1,206		(5,277)
Losses reclassified from other comprehensive income2	1		8
Net current period other comprehensive income (loss)3	1,207		(5,269)
Accumulated other comprehensive (loss) — ending balance	$	(2,270)	$	(1,269)

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, 2023 and 2022, 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, 2023 and 2022, the changes in other comprehensive income were net of a tax expense of $0.3 million and $1.4 million, respectively.


	Amounts Reclassified from Accumulated Other Comprehensive Income
	2023		2022
	(in thousands)
Three Months Ended March 31,
Losses from the sale of available-for-sale securities	$	(2)	$	(12)
Tax benefit	1		4
Net loss reclassified from accumulated other comprehensive income	$	(1)	$	(8)

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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, 2023 and December 31, 2022:


	March 31, 2023		December 31, 2022
	(in thousands)
Housekeeping and dietary equipment	$	13,980	$	13,585
Computer hardware and software	6,187		6,086
Operating lease — right-of-use assets	23,559		34,445
Other1	1,059		1,055
Total property and equipment, at cost	44,785		55,171
Less accumulated depreciation	21,385		32,196
Total property and equipment, net	$	23,400	$	22,975

1.Includes furniture and fixtures, leasehold improvements and autos and trucks.

Depreciation expense for the three months ended March 31, 2023 and 2022 was $2.5 million and $2.9 million, respectively. Of the depreciation expense recorded for the three months ended March 31, 2023 and 2022, $1.2 million and $1.6 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 6 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, 2023 and 2022.


	Three Months Ended March 31,
	2023		2022
	(in thousands)
Lease cost
Operating lease cost	$	1,387	$	1,386
Short-term lease cost	232		355
Variable lease cost	450		82
Total lease cost	$	2,069	$	1,823

Supplemental information required by ASC 842 is presented below for the three months ended March 31, 2023 and 2022.


	Three Months Ended March 31,
	2023			2022
	(dollar amounts in thousands)
Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	1,514		$	1,711
Weighted-average remaining lease term — operating leases	4.0 years			4.4 years
Weighted-average discount rate — operating leases	5.1		%	4.2		%

During the three months ended March 31, 2023 and 2022, the Company’s ROU Assets and Lease Liabilities were reduced by $0.7 million and $0.9 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, 2023:


Period/Year	Operating Leases
	(in thousands)
April 1 to December 31, 2023	$	4,169
2024	4,308
2025	2,675
2026	1,539
2027	1,365
2028	1,389
Thereafter	116
Total minimum lease payments	$	15,561
Less: imputed lease payments	1,507
Present value of lease liabilities	$	14,054

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Note 8—Goodwill and Other 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 2023, the following five fiscal years and thereafter:


Period/Year	Total Amortization Expense
	(in thousands)
April 1 to December 31, 2023	$	2,616
2024	$	2,685
2025	$	2,685
2026	$	2,666
2027	$	1,197
2028	$	613
Thereafter	$	2,281

Amortization expense for the three months ended March 31, 2023 and 2022 was $1.2 million for both periods.

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, 2023 and 2022, the Company recorded unrealized gains, net of taxes of $1.2 million and unrealized losses, net of taxes of $5.3 million on marketable securities, respectively.

As part of a prior year acquisition of a prepackaged meal manufacturer, the Company agreed to pay royalties to the seller on all future product sales. The Company recorded a liability for the expected future payments within "Other long-term liabilities" on the Consolidated Balance Sheets and any payments within 12 months within "Other accrued expenses". The fair value of this liability is measured using forecasted sales models (Level 3). For the three months ended March 31, 2023 and 2022, the Company recorded realized losses of $0.3 million and gains of $1.7 million, respectively, associated with changes in fair value of the liability. Gains and losses are recorded within "Costs of services provided" in the Consolidated Statements of Comprehensive Income related to the subsequent measurement of the liability.

For the three months ended March 31, 2023 and 2022, the Company received total proceeds, less the amount of interest received, of $0.2 million and $1.5 million, respectively, from sales of available-for-sale municipal bonds. For both the three months ended March 31, 2023 and 2022, 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.

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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, 2023 and 2022, the Company recognized unrealized gains of $1.5 million and unrealized losses of $4.1 million, respectively, related to equity securities still held at the respective reporting dates.

The following tables provide fair value measurement information for the Company’s marketable securities and deferred compensation fund investments as of March 31, 2023 and December 31, 2022:


	As of March 31, 2023
					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	$	95,985	$	95,985	$	—	$	95,985	$	—
Deferred compensation fund
Money Market1	$	2,077	$	2,077	$	—	$	2,077	$	—
Commodities	203		203		203		—		—
Fixed Income	3,923		3,923		3,923		—		—
International	3,982		3,982		3,982		—		—
Large Cap Blend	1,499		1,499		1,499		—		—
Large Cap Growth	11,195		11,195		11,195		—		—
Large Cap Value	6,084		6,084		6,084		—		—
Mid Cap Blend	2,680		2,680		2,680		—		—
Real Estate	339		339		339		—		—
Small Cap Blend	3,687		3,687		3,687		—		—
Deferred compensation fund2	$	35,669	$	35,669	$	33,592	$	2,077	$	—


	As of December 31, 2022
					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	$	95,200	$	95,200	$	—	$	95,200	$	—
Deferred compensation fund
Money Market1	$	2,420	$	2,420	$	—	$	2,420	$	—
Commodities	170		170