# Healthcare Services Group Inc: Form 10-Q for the period ended Jun 30, 2023

- Company: [Healthcare Services Group Inc](/companies/hcsg.md) (CIK 731012)
- Form: 10-Q
- Filed: 2023-07-28
- Accepted by EDGAR: Jul 28, 2023, 16:31 ET
- Period: 2023-06-30
- Accession: 0000731012-23-000103
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/731012/000073101223000103/hcsg-20230630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/731012/000073101223000103/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-04-01 to 2023-06-30 | $418.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2023-01-01 to 2023-06-30 | $836.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-04-01 to 2023-06-30 | $367.7m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2023-01-01 to 2023-06-30 | $728.7m | us-gaap:CostOfGoodsAndServicesSold |
| Selling, general and administrative | 3 months, 2023-04-01 to 2023-06-30 | $41.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2023-01-01 to 2023-06-30 | $81.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | $2.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-01-01 to 2023-06-30 | $7.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | $8.6m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | $21.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.12 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | $0.29 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.12 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | $0.29 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 74,567,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 74,543,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | −$8.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-01-01 to 2023-06-30 | $2.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2023-01-01 to 2023-06-30 | $0 | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2023-01-01 to 2023-06-30 | $2.2m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Current assets | at 2023-06-30 | $549.1m | us-gaap:AssetsCurrent |
| Total assets | at 2023-06-30 | $761.8m | us-gaap:Assets |
| Current liabilities | at 2023-06-30 | $189.7m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2023-06-30 | $450.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 32,032 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 June 30, 2023 and December 31, 2022 and the notes accompanying those financial statements.

### COVID-19 Considerations

While the crisis brought on by the COVID-19 pandemic has begun to show signs of abatement (e.g., new case rates remain below prior highs, the mortality rate remains low, and the Centers for Disease Control have relaxed masking requirements within healthcare facilities), our clients, who have been at the epicenter of the COVID-19 pandemic since its outset, 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 inflation, labor shortages and unprecedented wage growth remain, and nursing home occupancy levels, while increasing from the lowest point in 2020, are still below the national average target to support a robust recovery of the healthcare sector. All the while, nursing home workforce participation remains depressed and is the slowest segment in the health care sector to recover toward pre-pandemic levels.

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, 2022 (the “Form 10-K”).

### 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 over 2,600 facilities throughout the continental United States as of June 30, 2023.

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. In certain management-only agreements, the Company maintains responsibility for purchasing supplies. 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 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. On-site management is responsible for all daily customer housekeeping department activities with regular support provided by a District Manager specializing in such services.

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 standalone service or be 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 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.

Housekeeping services generated approximately 46.0% or $384.3 million of our total revenues for the six months ended June 30, 2023. Dietary services were provided at over 1,600 customer facilities at June 30, 2023, generating approximately 54.0% or $451.8 million of our total revenues for the six months ended June 30, 2023.

### Three Months Ended June 30, 2023 and 2022

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 June 30, 2023 and 2022. 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 June 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: |
| Housekeeping | $190,817 | $199,065 | (4.1)% |
| Dietary | 228,114 | 225,792 | 1.0% |
| Consolidated | $418,931 | $424,857 | (1.4)% |
| **Costs of services provided** |  |  |  |
| Housekeeping | $174,209 | $181,220 | (3.9)% |
| Dietary | 215,671 | 215,540 | 0.1% |
| Corporate and eliminations | (22,152) | (17,390) | 27.4% |
| Consolidated | $367,728 | $379,370 | (3.1)% |
| **Selling, general and administrative expense** |  |  |  |
| Corporate and eliminations | $41,429 | $29,281 | 41.5% |
| **Investment and other income (loss), net** |  |  |  |
| Corporate and eliminations | $3,551 | $(7,511) | (147.3)% |
| **Interest expense** |  |  |  |
| Corporate and eliminations | $(1,915) | $(445) | 330.3% |
| **Income (loss) before income taxes** |  |  |  |
| Housekeeping | $16,608 | $17,845 | (6.9)% |
| Dietary | 12,443 | 10,252 | 21.4% |
| Corporate and eliminations | (17,641) | (19,847) | 11.1% |
| Consolidated | $11,410 | $8,250 | 38.3% |

Housekeeping and Dietary revenues represented approximately 45.5% and 54.5% of consolidated revenues for the three months ended June 30, 2023, respectively.

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

|  | Three Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: |
| Revenues | 100.0% | 100.0% |
| Operating costs and expenses: |  |  |
| Costs of services provided | 87.8% | 89.3% |
| Selling, general and administrative expense | 9.9% | 6.9% |
| Other income (expense): |  |  |
| Investment and other income (loss), net | 0.8% | (1.8)% |
| Interest expense | (0.5)% | (0.1)% |
| Income before income taxes | 2.6% | 1.9% |
| Income tax provision | 0.7% | 0.3% |
| Net income | 1.9% | 1.6% |

#### Revenues

#### Consolidated

Consolidated revenues decreased 1.4% to $418.9 million during the three months ended June 30, 2023 compared to $424.9 million for the corresponding period in 2022, as a result of the factors discussed below under Reportable Segments.

#### Reportable Segments

Housekeeping revenues decreased 4.1% during the three months ended June 30, 2023 compared to the corresponding period in 2022, while Dietary revenues increased 1.0% over the same period. Housekeeping revenues decreased due to a decline in the number of facilities serviced year-over-year. While the number of Dietary facilities serviced declined year-over-year, revenue increased resulting from contractual pass-through of labor and food costs to customer billings, which was a focus of our 2022 service agreement modification initiative.

#### Costs of Services Provided

#### Consolidated

Consolidated costs of services provided decreased by 3.1% to $367.7 million for the three months ended June 30, 2023 compared to $379.4 million for the three months ended June 30, 2022.

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 Revenues | Three Months Ended June 30, 2023 | 2022 | Change |
| --- | ---: | ---: | ---: |
| Bad debt provision | 2.7% | 3.3% | (0.6)% |
| Self-insurance costs | 2.5% | 2.6% | (0.1)% |

During the three months ended June 30, 2022, one customer group entered into receivership which resulted in a $7.1 million increase to our bad debt provision. The decrease in bad debt provision during three months ended June 30, 2023 as a percentage of revenues is driven by the lack of a similar customer event in 2023, offset by an increased provision based on the aging of accounts receivable.

#### Reportable Segments

Costs of services provided for Housekeeping, as a percentage of Housekeeping revenues, increased to 91.3% for the three months ended June 30, 2023 from 91.0% in the corresponding period in 2022. Costs of services provided for Dietary, as a percentage of Dietary revenues, decreased to 94.5% for the three months ended June 30, 2023 from 95.5% in the corresponding period in 2022.

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 June 30, 2023 | 2022 | Change |
| --- | ---: | ---: | ---: |
| Housekeeping labor and other labor-related costs | 81.4% | 81.2% | 0.2% |
| Housekeeping supplies | 7.4% | 6.8% | 0.6% |
| Dietary labor and other labor-related costs | 58.3% | 60.9% | (2.6)% |
| Dietary supplies | 34.2% | 31.7% | 2.5% |

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.

#### 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. Gains on the plan investments during the three months ended June 30, 2023 increased our total selling, general and administrative expense, while losses on plan investments during the same period in 2022 decreased 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 increased $3.4 million or 9.7% for the three months ended June 30, 2023 compared to the corresponding period in 2022. The change was driven primarily by increases in travel-related expenses, driven by inflationary pressures.

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

*(dollar amounts in thousands)*

|  | Three Months Ended June 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative expense excluding change in deferred compensation plan liability | $39,103 | $35,660 | $3,443 | 9.7% |
| Gain (loss) on deferred compensation plan liability | 2,326 | (6,379) | 8,705 | (136.5)% |
| Selling, general and administrative expense | $41,429 | $29,281 | $12,148 | 41.5% |

#### Consolidated Investment and Other Income, net

Investment and other income was a $3.6 million gain for the three months ended June 30, 2023 compared to a $7.5 million loss in the corresponding 2022 period. The flux was driven by 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 $1.9 million for the three months ended June 30, 2023 compared to $0.4 million for the same period in 2022 due to increased short-term borrowings during 2023 and increased market interest rates.

#### Consolidated Income Taxes

During the three months ended June 30, 2023, the Company recognized a provision for income taxes of $2.8 million, or 24.6% effective tax rate, versus $1.4 million, or 17.3% effective tax rate, for the same period in 2022. The increase to the Company’s tax rate is related to changes in discrete items from stock compensation expense, and, although there can be no assurance, it is expected that the full effect of such discrete items on the Company’s effective tax rate will diminish as the fiscal year progresses.

The actual annual effective tax rate will be impacted by the tax effects of option exercises or vested awards, which are treated as discrete items in the reporting period in which they occur and may vary based upon the Company’s common stock price at exercise and the volume of such exercises; therefore, these cannot be considered in the calculation of the estimated annual effective tax rate. The impact on our income tax provision for the three months ended June 30, 2023 for such discrete items was an $0.2 million expense versus a $0.2 million benefit for the same period in 2022.

### Six Months Ended June 30, 2023 and 2022

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 six months ended June 30, 2023 and 2022. 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 | Six Months Ended June 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: |
| Housekeeping | $384,336 | $400,769 | (4.1)% |
| Dietary | 451,825 | 450,899 | 0.2% |
| Consolidated | $836,161 | $851,668 | (1.8)% |
| **Costs of services provided** |  |  |  |
| Housekeeping | $347,675 | $362,525 | (4.1)% |
| Dietary | 424,715 | 431,214 | (1.5)% |
| Corporate and eliminations | (43,684) | (41,107) | 6.3% |
| Consolidated | $728,706 | $752,632 | (3.2)% |
| **Selling, general and administrative expense** |  |  |  |
| Corporate and eliminations | $81,476 | $65,017 | 25.3% |
| **Investment and other income (loss), net** |  |  |  |
| Corporate and eliminations | $6,653 | $(9,034) | (173.6)% |
| **Interest expense** |  |  |  |
| Corporate and eliminations | $(3,666) | $(954) | 284.3% |
| **Income (loss) before income taxes** |  |  |  |
| Housekeeping | $36,661 | $38,244 | (4.1)% |
| Dietary | 27,110 | 19,685 | 37.7% |
| Corporate and eliminations | (34,805) | (33,898) | 2.7% |
| Consolidated | $28,966 | $24,031 | 20.5% |

Housekeeping and Dietary revenues represented approximately 46.0% and 54.0% of consolidated revenues for the six months ended June 30, 2023, respectively.

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

|  | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: |
| Revenues | 100.0% | 100.0% |
| Operating costs and expenses: |  |  |
| Costs of services provided | 87.1% | 88.4% |
| Selling, general and administrative expense | 9.7% | 7.6% |
| Other income (expense): |  |  |
| Investment and other income (loss), net | 0.8% | (1.1)% |
| Interest expense | (0.4)% | (0.1)% |
| Income before income taxes | 3.6% | 2.8% |
| Income tax provision | 0.9% | 0.7% |
| Net income | 2.7% | 2.1% |

#### Revenues

#### Consolidated

Consolidated revenues decreased to $836.2 million for the six months ended June 30, 2023 compared to $851.7 million for the corresponding period in 2022 as a result of the factors discussed below under Reportable Segments.

#### Reportable Segments

Housekeeping revenues decreased 4.1%, while Dietary revenues increased 0.2%, during the six months ended June 30, 2023 compared to the corresponding period in 2022. Housekeeping revenues decreased due to a decline in the number of facilities serviced year-over-year. While the number of Dietary facilities serviced declined year-over-year, revenue increased resulting from contractual pass-through of labor and food costs to customer billings, which was a focus of our 2022 service agreement modification initiative.

#### Costs of services provided

#### Consolidated

Consolidated costs of services decreased by 3.2% to $728.7 million for the six months ended June 30, 2023 compared to $752.6 million for the six months ended June 30, 2022.

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 Revenues | Six Months Ended June 30, 2023 | 2022 | Change |
| --- | ---: | ---: | ---: |
| Bad debt provision | 2.2% | 2.0% | 0.2% |
| Self-insurance costs | 2.5% | 2.6% | (0.1)% |

Bad debt provision as a percentage of revenue increased in the six months ended June 30, 2023 relative to the comparable prior year period due to the aging of outstanding accounts receivable.

#### Reportable Segments

Costs of services provided for Housekeeping, as a percentage of Housekeeping revenues, was 90.5% for both the six months ended June 30, 2023 and 2022. Costs of services provided for Dietary, as a percentage of Dietary revenues, decreased to 94.0% for the six months ended June 30, 2023 from 95.6% in the corresponding period in 2022.

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 Revenues | Six Months Ended June 30, 2023 | 2022 | Change |
| --- | ---: | ---: | ---: |
| Housekeeping labor and other labor-related costs | 80.8% | 81.1% | (0.3)% |
| Housekeeping supplies | 7.0% | 6.5% | 0.5% |
| Dietary labor and other labor-related costs | 58.4% | 61.3% | (2.9)% |
| Dietary supplies | 32.7% | 31.4% | 1.3% |

Variations within these key indicators relate to the provision of services at facilities served 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 the mix of business where we provide all dining department supplies and some continued inflationary impacts.

#### 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. Gains on the plan investments during the six months ended June 30, 2023 and 2022 increased our total selling, general and administrative expense for these periods.

Excluding the change in the deferred compensation plan described above, consolidated selling, general and administrative expense increased $2.4 million or 3.2% for the six months ended June 30, 2023 compared to the corresponding period in 2022. The change was driven primarily by increases in travel-related expenses, impacted by inflationary pressures.

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

*(dollar amounts in thousands)*

|  | Six Months Ended June 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative expense excluding change in deferred compensation plan liability | $77,604 | $75,181 | $2,423 | 3.2% |
| Gain (loss) on deferred compensation plan liability | 3,872 | (10,164) | 14,036 | (138.1)% |
| Selling, general and administrative expense | $81,476 | $65,017 | $16,459 | 25.3% |

#### Consolidated Investment and Interest Income, net

Investment and other income was a $6.7 million gain for the six months ended June 30, 2023, compared to a $9.0 million loss during the corresponding 2022 period, 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 $3.7 million for the six months ended June 30, 2023 compared to $1.0 million during the corresponding 2022 period due to increased short-term borrowings during 2023 and increased market interest rates.

#### Consolidated Income Taxes

During the six months ended June 30, 2023 and 2022, the Company recognized a provision for income taxes of $7.7 million, a 26.5% effective tax rate, and $5.9 million, a 24.5% effective tax rate, respectively. The actual annual effective tax rate will be impacted by the tax effects of option exercises or vested awards, which are treated as discrete items in the reporting period in which they occur and may vary based upon the Company’s common stock price at exercise and the volume of such exercises; therefore, these cannot be considered in the calculation of the estimated annual effective tax rate. The impact on our income tax provision for the six months ended June 30, 2023 and 2022 for such discrete items was an expense of approximately $1.1 million and $0.6 million, respectively.

### Liquidity and Capital Resources

Our primary sources of liquidity are available cash and cash equivalents, available lines of credit under our revolving credit facility and cash flows from operating activities. At June 30, 2023, we had cash, cash equivalents and marketable securities of $121.8 million and working capital of $359.4 million, compared to cash, cash equivalents and marketable securities of $121.5 million and working capital of $330.0 million at December 31, 2022. Our current ratio was 2.9 to 1 at June 30, 2023 versus 2.8 to 1 at December 31, 2022. 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 six months ended June 30, 2023 and 2022, our cash flows were as follows:

*(in thousands)*

|  | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: |
| Net cash used in operating activities | $(8,887) | $(21,164) |
| Net cash (used in) from investing activities | $(637) | $4,158 |
| Net cash from (used in) financing activities | $11,907 | $(22,107) |

### 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. For the six months ended June 30, 2023, cash flow from operations was negative primarily due to the increase in accounts receivable, which is driven by the timing of customer payments.

### Investing Activities

Our principal uses of cash for investing activities are capital expenditures such as housekeeping and food service equipment, computer software and hardware, and furniture and fixtures (see “Capital Expenditures” below for additional information). While no purchases of marketable securities were made during the six months ended June 30, 2023, we also use cash for such purchases when deemed appropriate in line with capital funding requirements for our captive entity. 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 investment 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 from financing activities is repurchases of our common stock. Prior to 2023, the primary use of cash from financing activities was the payment of dividends. On February 14, 2023, our Board of Directors authorized the repurchase of up to 7.5 million outstanding shares and suspended the quarterly dividend issued on common stock as part of our overall capital rebalancing strategy. No dividends were issued during the six months ended June 30, 2023. In the three months ended June 30, 2022, we paid $15.8 million in cash dividends.

We did not repurchase any of our common stock during the three months ended June 30, 2023. We have repurchased 0.2 million shares of our common stock for $2.2 million for the six months ended June 30, 2023. We remain authorized to repurchase up to 7.3 million outstanding shares under the capital rebalancing strategy.

### Line of Credit

As of June 30, 2023, we had a $300 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 the Term Secured Overnight Financing Rate (“SOFR”) rate plus 165 basis points. The Company’s line of credit was amended on November 22, 2022 to, among other things, provide for a five-year unsecured revolving loan facility in the aggregate amount of $300 million with, at the Company’s option, the ability to increase the revolving loan commitments to an aggregate amount not to exceed $500 million and to change the benchmark rate from the London Interbank Offered Rate (“LIBOR”) to SOFR. At June 30, 2023, there were $40.0 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 June 30, 2023 were as follows:

| Covenant Descriptions and Requirements | As of June 30, 2023 |
| --- | ---: |
| Funded debt 1 to EBITDA 2 ratio: less than 3.50 to 1.00 | 1.32 |
| EBITDA to Interest Expense ratio: not less than 3.00 to 1.00 | 12.87 |

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, costs incurred to maintain the line of credit facility and certain third-party charges associated with the line of credit agreement or permitted acquisition-related activity, subject to limitations.

As noted above, we were in compliance with our financial covenants at June 30, 2023 and we expect to remain in compliance. The line of credit expires on November 22, 2027. We believe that our existing capacity under the line of credit provides adequate liquidity.

At June 30, 2023, we also had outstanding $85.7 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, furniture and fixtures. Although we have no specific material commitments for capital expenditures through the end of calendar year 2023, we estimate that for 2023 we will have capital expenditures of approximately $4.0 million to $6.0 million, of which we have made $2.1 million through June 30, 2023.

Although there can be no assurance, 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. In addition, there can be no assurance of the terms thereof and any subsequent equity financing sought may have dilutive effects on our current shareholders.

### 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, 2022. 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, 1,040 characters.

At June 30, 2023, we had $121.8 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, 1,788 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 June 30, 2023, pursuant to Securities Exchange Act of 1934, as amended (the "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 three months ended June 30, 2023 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, 182 characters.

There have been no 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, 2022.

Filed Jul 28, 2023.
Source: SEC EDGAR, the filing index for accession 0000731012-23-000103. Last ingested by Listed: Oct 30, 2026, 13:40 ET. No prices; not investment advice.