# Healthcare Services Group Inc: Form 10-Q for the period ended Sep 30, 2022

- Company: [Healthcare Services Group Inc](/companies/hcsg.md) (CIK 731012)
- Form: 10-Q
- Filed: 2022-10-21
- Accepted by EDGAR: Oct 21, 2022, 17:01 ET
- Period: 2022-09-30
- Accession: 0000731012-22-000084
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/731012/000073101222000084/hcsg-20220930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/731012/000073101222000084/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-07-01 to 2022-09-30 | $414.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2022-01-01 to 2022-09-30 | $1.27bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2022-07-01 to 2022-09-30 | $376.9m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2022-01-01 to 2022-09-30 | $1.13bn | us-gaap:CostOfGoodsAndServicesSold |
| Selling, general and administrative | 3 months, 2022-07-01 to 2022-09-30 | $35.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2022-01-01 to 2022-09-30 | $100.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Income tax | 3 months, 2022-07-01 to 2022-09-30 | $671.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-01-01 to 2022-09-30 | $6.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-07-01 to 2022-09-30 | $322.0k | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-01-01 to 2022-09-30 | $18.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-07-01 to 2022-09-30 | $0.00 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-01-01 to 2022-09-30 | $0.25 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-07-01 to 2022-09-30 | $0.00 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-01-01 to 2022-09-30 | $0.25 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-07-01 to 2022-09-30 | 74,348,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-01-01 to 2022-09-30 | 74,346,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-01-01 to 2022-09-30 | −$31.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2022-01-01 to 2022-09-30 | $4.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2022-01-01 to 2022-09-30 | $47.4m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2022-01-01 to 2022-09-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Current assets | at 2022-09-30 | $512.7m | us-gaap:AssetsCurrent |
| Total assets | at 2022-09-30 | $722.2m | us-gaap:Assets |
| Current liabilities | at 2022-09-30 | $181.8m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2022-09-30 | $422.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 35,920 characters.

### Results of Operations

The following discussion is intended to provide the reader with information that will be helpful in understanding our financial statements, including the changes in certain key items when comparing financial statements period to period. We also intend to provide the primary factors that accounted for those changes, as well as a summary of how certain accounting principles affect our financial statements. In addition, we are providing information about the financial results of our two operating segments to further assist in understanding how these segments and their results affect our consolidated results of operations. This discussion should be read in conjunction with our financial statements as of September 30, 2022 and December 31, 2021 and the notes accompanying those financial statements.

### COVID-19 Considerations

While the clinical crisis brought on by the COVID-19 pandemic has begun to show signs of abatement (e.g., new case rates are decreasing, mortality rate remains low, and the CDC is relaxing masking requirements within healthcare facilities), our clients, who have been at the epicenter of the COVID-19 pandemic since the beginning, must continue to dedicate significant financial and other resources to protect their residents, employees and visitors. Moreover, we, our clients, vendors and business partners remain challenged by the lingering effects of the COVID-19 pandemic and the global economic crisis that has resulted from it. Significant supply chain disruption, inflation, labor shortages and unprecedented wage growth remain, and nursing home occupancy levels, while increasing from 2020 levels, are still well below the national average target to support a robust recovery. All the while, nursing home workforce participation is at the lowest levels in decades and is the slowest segment in the health care sector to begin to recover toward pre-pandemic levels.

Accordingly, our ability to operate without significant negative operational impact from the COVID-19 pandemic and such lingering economic pressures remains dependent on our ability to protect our employees and our supply chain, attract and hire talented new team members, and contain existing wage pressures. To that end, we will continue to seek to innovate in managing our business, coordinating with nursing departments to do our part in the infection prevention and control continuum and remain flexible in responding to our customer-partners. However, the continued uncertainty resulting from the COVID-19 pandemic and its lingering economic pressures could result in an unforeseen disruption to our workforce and supply chain that could negatively impact our operations or employee availability.

For additional information on risk factors related to the pandemic or other risks that could impact our results, please refer to “Risk Factors” in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2021 (the “Form 10-K”) and “Risk Factors” in Part II, Item 1A of this Form 10-Q.

### Overview

We provide management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary service departments of healthcare facilities, including nursing homes, retirement complexes, rehabilitation centers and hospitals located throughout the United States. We believe we are the largest provider of housekeeping and laundry management services to the long-term care industry in the United States, rendering such services to approximately 3,000 facilities throughout the continental United States as of September 30, 2022.

We provide services primarily pursuant to full service agreements with our customers. Under such agreements, we are responsible for the day-to-day management of the employees located at our customers’ facilities, as well as for the provision of certain supplies. We also provide services on the basis of management-only agreements for a limited number of customers. Under a management-only agreement, we provide management and supervisory services while the customer facility retains payroll responsibility for the non-supervisory staff. Our 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.

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

Housekeeping consists of managing our 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, we 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 consists of managing our 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. We also offer clinical consulting services to our dietary customers, which may be provided as a stand-alone service, or bundled with other dietary department services. Upon beginning service with a customer facility, we 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.

At September 30, 2022, Housekeeping services were provided at essentially all of our customer facilities, generating approximately 47.2% or $597.7 million of our total revenues for the nine months ended September 30, 2022. Dietary services were provided to over 1,700 customer facilities at September 30, 2022 and contributed approximately 52.8% or $668.4 million of our total revenues for the nine months ended September 30, 2022.

### Three Months Ended September 30, 2022 and 2021

The following table summarizes the income statement key components that we use to evaluate our financial performance on a consolidated and reportable segment basis, for the three months ended September 30, 2022 and 2021. The differences between the reportable segments’ operating results and other disclosed data and our consolidated financial results relate primarily to corporate level transactions and adjustments related to transactions recorded at the reportable segment level which use methods other than generally accepted accounting principles.

*(in thousands)*

| Revenues | Three Months Ended September 30, 2022 | 2021 | % Change |
| --- | ---: | ---: | ---: |
| Housekeeping | $196,941 | $203,379 | (3.2)% |
| Dietary | 217,547 | 212,211 | 2.5% |
| Consolidated | $414,488 | $415,590 | (0.3)% |
| **Costs of services provided** |  |  |  |
| Housekeeping | $179,401 | $186,142 | (3.6)% |
| Dietary | 217,912 | 204,952 | 6.3% |
| Corporate and eliminations | (20,419) | (26,272) | (22.3)% |
| Consolidated | $376,894 | $364,822 | 3.3% |
| **Selling, general and administrative expense** |  |  |  |
| Corporate and eliminations | $35,803 | $38,780 | (7.7)% |
| **Investment and other income, net** |  |  |  |
| Corporate and eliminations | $1 | $462 | (99.8)% |
| **Interest expense** |  |  |  |
| Corporate and eliminations | $(799) | $(329) | 142.9% |
| **Income (loss) before income taxes** |  |  |  |
| Housekeeping | $17,540 | $17,237 | 1.8% |
| Dietary | (365) | 7,259 | (105.0)% |
| Corporate and eliminations | (16,182) | (12,375) | (30.8)% |
| Consolidated | $993 | $12,121 | (91.8)% |

Housekeeping and Dietary revenues represented approximately 47.5% and 52.5% of consolidated revenues for the three months ended September 30, 2022, respectively.

The following table sets forth the ratio of certain items to consolidated revenues:

|  | Three Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: |
| Revenues | 100.0% | 100.0% |
| Operating costs and expenses: |  |  |
| Costs of services provided | 90.9% | 87.8% |
| Selling, general and administrative expense | 8.6% | 9.3% |
| Other (expense) income: |  |  |
| Investment and other income (loss), net | 0.0% | 0.1% |
| Interest expense | (0.2)% | (0.1)% |
| Income before income taxes | 0.3% | 2.9% |
| Income tax | 0.2% | 0.6% |
| Net income | 0.1% | 2.3% |

#### Revenues

#### Consolidated

Consolidated revenues decreased 0.3% to $414.5 million for the three months ended September 30, 2022 compared to $415.6 million for the corresponding period in 2021, as a result of the factors discussed below under Reportable Segments.

#### Reportable Segments

Housekeeping revenues decreased 3.2% during the three months ended September 30, 2022 compared to the corresponding period in 2021 due to fewer facilities serviced, while Dietary revenues increased 2.5% over the same period, primarily driven by negotiated price increases with clients and growth through a prior year acquisition. Additionally, during the three months ended September 30, 2022 the Company recognized a $10.0 million reduction to revenues related to a resolution of a variable consideration with an existing customer, which reduced Housekeeping revenues by $2.3 million and Dietary revenues by $7.7 million.

#### Costs of Services Provided

#### Consolidated

Consolidated costs of services provided increased by 3.3% to $376.9 million for the three months ended September 30, 2022 compared to $364.8 million for the three months ended September 30, 2021.

The following table provides a comparison of key indicators we consider when managing the consolidated costs of services provided:

| Costs of Services Provided - Key Indicators as a % of Consolidated Revenue | Three Months Ended September 30, 2022 | 2021 | Change |
| --- | ---: | ---: | ---: |
| Bad debt provision | 1.5% | 1.0% | 0.5% |
| Self-insurance costs | 2.5% | 2.9% | (0.4)% |

The elevated bad debt provision as a percentage of consolidated revenues was primarily the result of the current aging of our accounts receivables as of the three months ended September 30, 2022.

#### Reportable Segments

Costs of services provided for Housekeeping, as a percentage of Housekeeping revenues, decreased to 91.1% for the three months ended September 30, 2022 from 91.5% in the corresponding period in 2021. Costs of services provided for Dietary, as a percentage of Dietary revenues, increased to 100.2% for the three months ended September 30, 2022 from 96.6% in the corresponding period in 2021. The year-over-year decrease in margins was primarily driven by the increase of labor and supplies as a result of inflation and the resolution of variable consideration.

The following table provides a comparison of the key indicators we consider when managing costs of services provided at the segment level, as a percentage of the respective segment’s revenues:

| Costs of Services Provided - Key Indicators as a % of Segment Revenue | Three Months Ended September 30, 2022 | 2021 | Change |
| --- | ---: | ---: | ---: |
| Housekeeping labor and other labor-related costs | 82.5% | 81.9% | 0.6% |
| Housekeeping supplies | 7.3% | 6.7% | 0.6% |
| Dietary labor and other labor-related costs | 63.5% | 64.8% | (1.3)% |
| Dietary supplies | 33.3% | 28.8% | 4.5% |

Variations within these key indicators relate to the provision of services at new facilities and changes in the mix of customers for whom we provide supplies or do not provide supplies. Management focuses on building efficiencies and managing labor and other costs at the facility level, as well as managing supply chain costs, for new and existing facilities. The decrease in dietary labor costs as a percentage of revenues was due to facility-level staffing efficiencies and the increase in dining revenues, while the increase in dietary supplies spend as a percentage of dietary revenues was driven by increases to menu item costs, which are dependent on commodity pricing factors, during the quarter ended September 30, 2022.

#### Consolidated Selling, General and Administrative Expense

Included in selling, general and administrative expense are gains and losses associated with changes in the value of investments under the deferred compensation plan. These investments represent the amounts held on behalf of the participating employees and changes in the value of these investments affect the amount of our deferred compensation liability. Losses on the plan investments during the three months ended September 30, 2022 decreased our total selling, general and administrative expense, while gains on plan investments during the same period in 2021 increased our selling, general and administrative expense for that period.

Excluding the change in the deferred compensation plan described above, consolidated selling, general and administrative expense decreased $2.0 million or 5.2% for the three months ended September 30, 2022 compared to the corresponding period in 2021. The decrease was driven by decreases in legal and professional fees in 2022 compared to the comparable period due to the resolution of the previously disclosed SEC inquiry in 2021.

The table below summarizes the changes in these components of selling, general and administrative expense:

*(dollar amounts in thousands)*

|  | Three Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative expense excluding change in deferred compensation liability | $36,963 | $38,996 | $(2,033) | (5.2)% |
| (Loss) on deferred compensation plan investments | (1,160) | (216) | (944) | 437.0% |
| Selling, general and administrative expense | $35,803 | $38,780 | $(2,977) | (7.7)% |

#### Consolidated Investment and Other Income, net

Investment and other income decreased to a less than $0.1 million gain for the three months ended September 30, 2022 compared to a $0.5 million gain in the corresponding 2021 period, primarily due to market fluctuations in the value of our trading security investments representing the funding for our deferred compensation plan.

#### Consolidated Interest Expense

Consolidated interest expense increased to $0.8 million for the three months ended September 30, 2022 compared to $0.3 million in the corresponding 2021 period due to increased short-term borrowings.

#### Consolidated Income Taxes

During the three months ended September 30, 2022, the Company recognized a provision for income taxes of $0.7 million, or 67.6% effective tax rate, versus $2.6 million, or 21.3% effective tax rate, for the same period in 2021. The increase to the Company's tax rate related to discrete items recognized during the quarter.

The actual annual effective tax rate will be impacted by the tax effects of option exercises or vested awards, among other compensation-related items, which are treated as discrete items in the reporting period in which they occur. The tax effects of stock-related compensation may vary based upon the Company's common stock price at exercise and the volume of such exercises. Discrete items cannot be considered in the calculation of the estimated annual effective tax rate but will affect the actual effective tax rate for each period. The impact on our income tax provision for the three months ended September 30, 2022 for such discrete items was an expense of $0.5 million.

### Nine Months Ended September 30, 2022 and 2021

The following table summarizes the income statement key components that we use to evaluate our financial performance on a consolidated and reportable segment basis, for the nine months ended September 30, 2022 and 2021. The differences between the reportable segments’ operating results and other disclosed data and our consolidated financial results relate primarily to corporate level transactions and adjustments related to transactions recorded at the reportable segment level which use methods other than generally accepted accounting principles.

*(in thousands)*

| Revenues | Nine Months Ended September 30, 2022 | 2021 | % Change |
| --- | ---: | ---: | ---: |
| Housekeeping | $597,710 | $621,278 | (3.8)% |
| Dietary | 668,446 | 600,234 | 11.4% |
| Consolidated | $1,266,156 | $1,221,512 | 3.7% |
| **Costs of services provided** |  |  |  |
| Housekeeping | $541,926 | $553,253 | (2.0)% |
| Dietary | 649,126 | 559,159 | 16.1% |
| Corporate and eliminations | (61,526) | (74,560) | (17.5)% |
| Consolidated | $1,129,526 | $1,037,852 | 8.8% |
| **Selling, general and administrative expense** |  |  |  |
| Corporate and eliminations | $100,820 | $128,818 | (21.7)% |
| **Investment and other income, net** |  |  |  |
| Corporate and eliminations | $(9,034) | $6,311 | (243.1)% |
| **Interest expense** |  |  |  |
| Corporate and eliminations | $(1,752) | $(1,017) | 72.3% |
| **Income (loss) before income taxes** |  |  |  |
| Housekeeping | $55,784 | $68,025 | (18.0)% |
| Dietary | 19,320 | 41,075 | (53.0)% |
| Corporate and eliminations | (50,080) | (48,964) | 2.3% |
| Consolidated | $25,024 | $60,136 | (58.4)% |

Housekeeping and Dietary revenues represented approximately 47.2% and 52.8% of consolidated revenues for the nine months ended September 30, 2022, respectively.

The following table sets forth the ratio of certain items to consolidated revenues:

|  | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: |
| Revenues | 100.0% | 100.0% |
| Operating costs and expenses: |  |  |
| Costs of services provided | 89.2% | 85.0% |
| Selling, general and administrative expense | 8.0% | 10.5% |
| Other (expense) income: |  |  |
| Investment and other income (loss), net | (0.7)% | 0.5% |
| Interest expense | (0.1)% | (0.1)% |
| Income before income taxes | 2.0% | 4.9% |
| Income tax | 0.5% | 1.3% |
| Net income | 1.5% | 3.6% |

#### Revenues

#### Consolidated

Consolidated revenues increased 3.7% to $1.3 billion for the nine months ended September 30, 2022 compared to $1.2 billion for the corresponding period in 2021 as a result of the factors discussed below under Reportable Segments.

#### Reportable Segments

Housekeeping revenues decreased 3.8% during the nine months ended September 30, 2022 compared to the corresponding period in 2021 due to fewer facilities serviced, while Dietary revenues increased 11.4% over the same period, primarily driven by negotiated price increases with clients, dining facility additions and growth through a prior year acquisition. Additionally, during the nine months ended September 30, 2022 the Company recognized a $10.0 million reduction to revenues related to a resolution of a variable consideration with an existing customer, which reduced Housekeeping revenues by $2.3 million and Dietary revenues by $7.7 million.

#### Costs of services provided

#### Consolidated

Consolidated costs of services provided increased by 8.8% to $1.1 billion for the nine months ended September 30, 2022 compared to $1.0 billion for the nine months ended September 30, 2021.

The following table provides a comparison of key indicators we consider when managing the consolidated costs of services provided:

| Costs of Services Provided - Key Indicators as a % of Consolidated Revenue | Nine Months Ended September 30, 2022 | 2021 | Change |
| --- | ---: | ---: | ---: |
| Bad debt provision | 1.8% | 0.9% | 0.9% |
| Self-insurance costs | 2.6% | 2.8% | (0.2)% |

The elevated bad debt provision includes a change in the credit risk profile of one operating group that entered into receivership during 2022. The impact of such receivership resulted in an approximate $7.1 million increase to our bad debt provision. In addition, bad debt expense increased due to the increase in outstanding accounts receivable and aged receivables during the quarter ended September 30, 2022. Self-insurance costs as a percentage of consolidated revenues have remained steady.

#### Reportable Segments

Costs of services provided for Housekeeping, as a percentage of Housekeeping revenues, increased to 90.7% for the nine months ended September 30, 2022 from 89.1% in the corresponding period in 2021. Costs of services provided for Dietary, as a percentage of Dietary revenues, increased to 97.1% for the nine months ended September 30, 2022 from 93.2% in the corresponding period in 2021. The year-over-year decrease in margins was primarily driven by the increase of labor and supplies as a result of inflation. Revenues for the nine months ended September 30, 2022 were also unfavorably impacted by a $10.0 million reduction to revenue that related to a resolution of a variable consideration with an existing customer.

The following table provides a comparison of the key indicators we consider when managing costs of services provided at the segment level, as a percentage of the respective segment’s revenues:

| Costs of Services Provided - Key Indicators as a % of Segment Revenue | Nine Months Ended September 30, 2022 | 2021 | Change |
| --- | ---: | ---: | ---: |
| Housekeeping labor and other labor-related costs | 81.4% | 80.1% | 1.3% |
| Housekeeping supplies | 6.7% | 6.4% | 0.3% |
| Dietary labor and other labor-related costs | 61.9% | 63.8% | (1.9)% |
| Dietary supplies | 32.0% | 26.8% | 5.2% |

Variations within these key indicators relate to the provision of services at facilities serviced and changes in the mix of customers for whom we provide supplies or do not provide supplies. Management focuses on building efficiencies and managing labor and other costs at the facility level, as well as managing supply chain costs, for new and existing facilities. The increase in dietary supplies spend as a percentage of dining revenues was driven by continued inflation and the mix of business where we provide all dining department supplies.

#### Consolidated Selling, General and Administrative Expense

Included in selling, general and administrative expense are gains and losses associated with changes in the value of investments under the deferred compensation plan. These investments represent the amounts held on behalf of the participating employees and changes in the value of these investments affect the amount of our deferred compensation liability. Losses on the plan investments during the nine months ended September 30, 2022 decreased our total selling, general and administrative expense for the period.

Excluding the change in the deferred compensation plan described above, consolidated selling, general and administrative expense decreased $12.7 million or 10.2% for the nine months ended September 30, 2022 compared to the corresponding period in 2021. The decrease was driven primarily by decreases in legal and professional fees in 2022 compared to the comparable period due to the resolution of the previously disclosed SEC legal matter in 2021.

The table below summarizes the changes in these components of selling, general and administrative expense:

*(dollar amounts in thousands)*

|  | Nine Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative expense excluding change in deferred compensation liability | $112,144 | $124,827 | $(12,683) | (10.2)% |
| (Loss) on deferred compensation plan investments | (11,324) | 3,991 | (15,315) | (383.7)% |
| Selling, general and administrative expense | $100,820 | $128,818 | $(27,998) | (21.7)% |

34

#### Consolidated Investment and Interest Income, net

Investment and other income decreased to a $9.0 million loss for the nine months ended September 30, 2022 compared to a $6.3 million gain in the corresponding 2021 period, primarily due to market fluctuations in the value of our trading security investments representing the funding for our deferred compensation plan.

#### Consolidated Interest Expense

Consolidated interest expense increased to $1.8 million for the nine months ended September 30, 2022 compared to $1.0 million in the corresponding 2021 period due to increased short-term borrowings.

#### Consolidated Income Taxes

During the nine months ended September 30, 2022 and 2021, the Company recognized a provision for income taxes of $6.6 million, or 26.2% and $13.8 million or 27.2%, respectively. The actual annual effective tax rate will be impacted by the tax effects of option exercises or vested awards, among other compensation-related items, which are treated as discrete items in the reporting period in which they occur. The tax effects of stock-related compensation may vary based upon the Company's common stock price at exercise and the volume of such exercises. Discrete items cannot be considered in the calculation of the estimated annual effective tax rate but will affect the actual effective rate for the period. The impact on our income tax provision for the nine months ended September 30, 2022 for discrete items was approximately $1.1 million.

### Liquidity and Capital Resources

Cash generated through operations is our primary source of liquidity. At September 30, 2022, we had cash, cash equivalents and marketable securities of $113.4 million and working capital of $330.9 million, compared to December 31, 2021 cash, cash equivalents and marketable securities of $185.2 million and working capital of $355.3 million. Our current ratio was at 2.8 to 1 at September 30, 2022 and 2.9 to 1 at December 31, 2021. Marketable securities represent fixed income investments that are highly liquid and can be readily purchased or sold through established markets. Such securities are held by our captive insurance company to satisfy capital requirements of the state regulator related to captive insurance companies.

For the nine months ended September 30, 2022 and 2021, our cash flows were as follows:

*(in thousands)*

|  | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: |
| Net cash (used in) provided by operating activities | $(31,060) | $5,731 |
| Net cash provided by (used in) investing activities | $2,872 | $(14,316) |
| Net cash used in financing activities | $(22,973) | $(51,163) |

### Operating Activities

Our primary sources of cash from operating activities are the revenues generated from our Housekeeping and Dietary services. Our primary uses of cash from operating activities are the funding of our payroll and other personnel-related costs, as well as the costs of supplies used in providing our services. Cash used in operating activities was $31.1 million for the nine months ended September 30, 2022, primarily driven by the increased aging of accounts and notes receivable during the year of $75.0 million and decrease in our accrued payroll of $21.2 million. The timing of cash receipts from accounts and notes receivable versus the timing of cash payments for payroll and outside vendors is the primary driver of the period-over-period changes in net cash used in operating activities.

We have not changed our expectations on future cash flows from operating activities due to COVID-19. We anticipate that several of our customers may experience changes in their cash flows however we will continue to pursue collections in accordance with our service agreements.

### Investing Activities

Our principal uses of cash for investing activities are the purchases of marketable securities and capital expenditures such as housekeeping and food service equipment, computer software and equipment, and furniture and fixtures (see “Capital Expenditures” below for additional information). Such uses of cash are offset by proceeds from sales of marketable securities.

Our investments in marketable securities are primarily comprised of tax-exempt municipal bonds and are intended to achieve our goal of preserving principal, maintaining adequate liquidity and maximizing returns subject to our investment guidelines. Our investment policy limits investments to certain types of instruments issued by institutions primarily with investment-grade ratings and places restrictions on concentration by type and issuer.

### Financing Activities

The primary use of cash for financing activities is the payment of dividends. We have paid regular quarterly cash dividends since the second quarter of 2003. During 2022, we paid a regular quarterly cash dividend to shareholders totaling $47.4 million as follows:

|  | Quarter Ended September 30, 2022 | June 30, 2022 | March 31, 2022 |
| --- | ---: | ---: | ---: |
| Cash dividend paid per common share | $0.21375 | $0.21250 | $0.21125 |
| Total cash dividends paid | $15,890 | $15,796 | $15,703 |
| Record date | August 19, 2022 | May 20, 2022 | February 25, 2022 |
| Payment date | September 23, 2022 | June 24, 2022 | March 25, 2022 |

Our Board of Directors reviews our dividend policy on a quarterly basis. Although there can be no assurance that we will continue to pay dividends or regarding the amount of future dividend payments, we expect to continue to pay a regular quarterly cash dividend. In connection with the establishment of our dividend policy, we adopted a Dividend Reinvestment Plan in 2003.

We remain authorized to repurchase 0.6 million shares of our common stock pursuant to previous Board of Directors’ authorization. During the nine months ended September 30, 2022 and 2021, we repurchased our common stock as part of the dividend reinvestment related to treasury shares held within the Deferred Compensation Plan. The number and value of the shares repurchased under the dividend reinvestment plan were immaterial for the nine months ended September 30, 2022 and 2021.

In 2021, we entered into a 10b5-1 plan (the “Plan”). The Plan was adopted under the safe harbor provided by Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in order to assist us in implementing our share repurchase plans. Pursuant to our share repurchase program and as authorized by the Board of Directors on March 12, 2021, we purchased 0.2 million shares of the Company's common stock during the nine months ended September 30, 2021 for a total cost of $5.4 million inclusive of transaction costs. During the nine months ended September 30, 2022, we have not purchased any shares of the Company's common stock pursuant to the Plan.

### Line of Credit

At September 30, 2022, we had a $475 million bank line of credit on which to draw for general corporate purposes. Amounts drawn under the line of credit are payable upon demand and generally bear interest at a floating rate, based on our leverage ratio, and starting at LIBOR plus 115 basis points (or if LIBOR becomes unavailable, the higher of the Overnight Bank Funding Rate, plus 50 basis points and the Prime Rate). At September 30, 2022, there were $25.0 million in borrowings under the line of credit.

The line of credit requires us to satisfy two financial covenants. The covenants and their respective status at September 30, 2022 were as follows:

| Covenant Descriptions and Requirements | As of September 30, 2022 |
| --- | ---: |
| Funded debt 1 to EBITDA 2 ratio: less than 3.50 to 1.00 | 1.83 |
| EBITDA to Interest Expense ratio: not less than 3.00 to 1.00 | 22.28 |

1\. All indebtedness for borrowed money including, but not limited to, capitalized lease obligations, reimbursement obligations in respect of letters of credit and guarantees of any such indebtedness.

2\. Net income plus interest expense, income tax expense, depreciation, amortization, stock compensation expense and extraordinary non-recurring losses/gains.

As noted above, we were in compliance with our financial covenants at September 30, 2022 and we expect to remain in compliance. The line of credit expires on December 21, 2023. We believe that our existing capacity under the line of credit provides adequate liquidity.

Our line of credit agreement provides procedures for determining a replacement or alternative rate in the event that LIBOR is unavailable (i.e., the higher of the Overnight Bank Funding Rate, plus 50 basis points and Prime Rate). However, there can be no assurances as to whether such replacement or alternative rate will be more or less favorable than LIBOR. We intend to monitor the developments with respect to the phasing out of LIBOR and will work with our lenders to ensure the transition away from LIBOR will have minimal impact on our financial condition. We however can provide no assurances regarding the impact of the discontinuation of LIBOR on the interest rate that we would be required to pay or on our financial condition.

At September 30, 2022, we also had outstanding $81.0 million in irrevocable standby letters of credit, which relate to payment obligations under our insurance programs.

### Capital Expenditures

The level of capital expenditures is generally dependent on the number of new customers obtained. Such capital expenditures primarily consist of housekeeping and food service equipment purchases, laundry and linen equipment installations, computer hardware and software, and furniture and fixtures. Although we have no specific material commitments for capital expenditures through the end of calendar year 2022, we estimate that for 2022 we will have capital expenditures of approximately $5.0 million to $6.0 million, of which we have made $4.1 million through September 30, 2022. We believe that our cash from operations, existing cash and cash equivalents balance and credit line will be adequate for the foreseeable future to satisfy the needs of our operations and to fund our anticipated growth. However, should these sources not be sufficient, we would seek to obtain necessary capital from such sources as long-term debt or equity financing.

### Material Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements, other than our irrevocable standby letter of credit previously discussed.

### Critical Accounting Policies and Estimates

Our significant accounting policies are described in the notes to the consolidated financial statements included in the Form 10-K for the period ended December 31, 2021. As described in such notes, we recognize revenue in the period in which the performance obligation is satisfied. Refer to our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Form 10-K.

In preparing our financial statements, management is required to make estimates and assumptions that, among other things, affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are most significant when they involve levels of subjectivity and judgment necessary to account for highly uncertain matters or matters susceptible to change, and where they can have a material impact on our financial condition and operating performance. If actual results were to differ materially from the estimates made, the reported results could be materially affected.

Critical accounting estimates and the related assumptions are evaluated periodically as conditions warrant, and changes to such estimates are recorded as new information or changed conditions require.

## Market risk

As filed, 1,045 characters.

At September 30, 2022, we had $113.4 million in cash, cash equivalents and marketable securities. The fair value of all of our cash equivalents and marketable securities are determined based on “Level 1” or “Level 2” inputs, which are based upon 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 in the market. We place our cash investments in instruments that meet credit quality standards, as specified in our investment policy guidelines.

Investments in both fixed-rate and floating-rate investments carry a degree of interest rate risk. The market value of fixed rate securities may be adversely impacted by an increase in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if there is a decline in the fair value of our investments.

## Controls and procedures

As filed, 1,745 characters.

### Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are intended to ensure that information required to be disclosed in our reports under the Exchange Act, such as this Form 10-Q, is reported in accordance with Securities and Exchange Commission rules. Disclosure controls are also intended to ensure that such information is accumulated and communicated to Management, including the Principal Executive Officer (President and Chief Executive Officer) and Principal Financial Officer (Principal Accounting Officer), as appropriate, to allow timely decisions regarding required disclosure.

Based on their evaluation as of September 30, 2022, pursuant to Exchange Act Rule 13a-15(b), our Management, including our Principal Executive Officer and Principal Financial Officer, believe our disclosure controls and procedures (as defined in Exchange Act 13a-15(e)) are effective.

### Changes in Internal Controls over Financial Reporting

There were no changes in the Company’s internal controls over financial reporting that occurred during the nine months ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company continues to review its disclosure controls and procedures, including its internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company’s systems evolve with its business.

### Certifications

Certifications of the Principal Executive Officer and Principal Financial and Accounting Officer regarding, among other items, disclosure controls and procedures are included as exhibits to this Form 10-Q.

## Risk factors

As filed, 2,406 characters.

There have been no other material changes in the risk factors set forth in Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, except as set forth below. The risk factor set forth below supplements, and should be read together with, the risk factors set forth in Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

***War, terrorism, other acts of violence or natural or man-made disasters may affect the markets in which the Company operates, the Company’s customers, and could have a material adverse impact on our business, results of operations, or financial condition.***

The Company’s business may be adversely affected by instability, disruption or destruction in a geographic region in which it operates, regardless of cause, including war, terrorism, riot, civil insurrection or social unrest, and natural or man-made disasters, including famine, flood, fire, earthquake, storm or pandemic events and spread of disease. Such events may cause customers to suspend their decisions on using the Company’s services, make it impossible for us to render our services, cause restrictions, and give rise to sudden significant changes in regional and global economic conditions and cycles. These events also pose significant risks to the Company’s personnel and to physical facilities and operations, which could materially adversely affect the Company’s financial results.

Further, the current Russia-Ukraine conflict has created extreme volatility in the global financial markets and is expected to have further global economic consequences, including disruptions of the global supply chain and energy markets and heightened volatility of commodity food prices. Any such volatility or disruptions may have adverse consequences on us or the third parties on whom we rely. If the equity and credit markets deteriorate, including as a result of political unrest or war, it may make any necessary debt or equity financing more difficult to obtain in a timely manner or on favorable terms, more costly or more dilutive. Our business, financial condition and results of operations may be materially and adversely affected by any negative impact on the global economy, capital markets or commodity food prices resulting from the conflict in Ukraine or any other geopolitical tensions.

Filed Oct 21, 2022.
Source: SEC EDGAR, the filing index for accession 0000731012-22-000084. Last ingested by Listed: Oct 30, 2026, 13:40 ET. No prices; not investment advice.