Healthcare Services Group Inc: Form 10-Q for the period ended Mar 31, 2026

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 March 31, 2026 and December 31, 2025 and the notes accompanying those financial statements.

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 provide such services to more than 2,500 facilities throughout the continental United States as of March 31, 2026. We believe we are the largest provider of housekeeping, laundry and dietary management services to the long-term care industry in the United States.

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 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 (“Environmental Services” or “EVS”) and dietary department services (“Dietary”).

Environmental Services consist 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 services consist 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.

EVS services were provided to approximately 2,300 customer facilities at March 31, 2026 and contributed approximately 45.0% or $208.3 million of our consolidated revenues for the three months ended March 31, 2026. Dietary services were provided at approximately 1,600 customer facilities at March 31, 2026, generating approximately 55.0% or $254.5 million of our total revenues for the three months ended March 31, 2026.

Three Months Ended March 31, 2026 and 2025

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 March 31, 2026 and 2025.

(in thousands)

1. Represents selling, general and administrative expense less amounts allocated to segments for labor and labor-related and other segment items.

2. These line items represent corporate costs not allocated to segments.

EVS and Dietary revenues represented approximately 45.0% and 55.0% of consolidated revenues for the three months ended March 31, 2026, respectively.

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

Revenues

Consolidated

Consolidated revenues increased 3.4% to $462.8 million during the three months ended March 31, 2026 compared to $447.7 million for the corresponding period in 2025 as a result of the factors discussed below under Reportable Segments.

Reportable Segments

EVS revenues increased 6.1% and Dietary revenues increased 1.3% during the three months ended March 31, 2026 compared to the corresponding period in 2025. The increase in revenues was driven by client wins and retention, driven by consistent service execution across our customer facilities, contractual price increases, and increased pass-through costs to customers.

Costs of Services Provided

Consolidated

Consolidated costs of services provided increased by 1.9% to $386.9 million for the three months ended March 31, 2026 compared to $379.7 million for the corresponding period in 2025 as a result of the factors discussed below under Reportable Segments and due to the timing of actuarial adjustments to our self-insurance liabilities. Costs of services provided, as a percentage of revenues, was 83.6% for the three months ended March 31, 2026 compared to 84.8% for the same period in 2025. During the three months ended March 31, 2026, updates to our loss estimates for workers’ compensation and general liability reduced costs of services provided during the three months ended March 31, 2026 by $4.7 million.

Reportable Segments

We include certain expenses classified as selling, general and administrative expenses within segment expenses. Segment expenses for EVS, as a percentage of EVS revenues, decreased to 87.8% for the three months ended March 31, 2026 from 89.2% in the corresponding period in 2025. Segment expenses for Dietary, as a percentage of Dietary revenues, decreased to 91.0% for the three months ended March 31, 2026 from 92.4% in the corresponding period in 2025.

The following tables provide a comparison of the key indicators we consider when managing segment expenses as a percentage of the respective segment’s revenues:

1. Inclusive of certain expenses reported within selling, general and administrative expense that are segment-specific.

1. Inclusive of certain expenses reported within selling, general and administrative expense that are segment-specific.

Variations within these key indicators relate to the provision of services at new facilities, changes in the mix of customers for whom we provide supplies or do not provide supplies, changes in the services provided to certain customers, and changes in bad debt expense. 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, and has also evaluated the impact of recent tariff and trade policy changes, which to date have not had a material impact on our operations or financial results as such costs are generally passed through to customers. The decrease in labor and labor-related costs across both segments is driven primarily by reductions in workers’ compensation expense.

Consolidated Selling, General and Administrative Expense

Selling, general and administrative expense incurred at a segment-level is discussed in the Reportable Segments section above. Also included in consolidated selling, general and administrative expense are corporate expenses and gains and losses associated with changes in the value of investments in the deferred compensation plan. These investments represent the amounts held on behalf of the participating employees as 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 March 31, 2026 and 2025 decreased our total selling, general and administrative expense for each period.

Excluding the change in the deferred compensation plan described above, consolidated selling, general and administrative expense decreased $2.9 million or 6.2% for the three months ended March 31, 2026 compared to the corresponding period in 2025. Decreases were driven by discipline in execution and leveraging our topline growth to gain efficiencies.

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

(dollar amounts in thousands)

36

Consolidated Investment and Other Income, net

Investment and other income, net was a gain of $1.1 million and $1.3 million for the three months ended March 31, 2026 and 2025, respectively. Interest income from outstanding cash and marketable securities increased, offset by a reduction in interest received on notes receivable (driven by a reduction in the notes receivable balance) and increased losses on deferred compensation plan investments.

The table below summarizes the changes in these components of investment and other income, net:

(dollar amounts in thousands)

Consolidated Interest Expense

Consolidated interest expense was $0.4 million for each of the three months ended March 31, 2026 and 2025. As we did not have significant borrowings during either period, interest expense is limited to access fees associated with the line of credit and letters of credit from our Credit Agreement.

Consolidated Income Taxes

During the three months ended March 31, 2026, we recognized a provision for income taxes of $8.5 million, or 24.6% effective tax rate, versus a provision for income taxes of $6.7 million, or 27.9% effective tax rate, for the same period in 2025. The effective tax rate change is based on the impact of discrete items in each quarter combined with the impact of our full year income estimate on the tax provision.

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 on our common stock price at exercise and the volume of such exercises; therefore, these are not considered in the calculation of the estimated annual effective tax rate. The impact on our income tax provision for the three months ended March 31, 2026 and 2025 for such discrete items was a gain of $0.4 million and an expense of $0.8 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. The following table includes the balances of our primary sources of liquidity at March 31, 2026 and December 31, 2025:

(in thousands)

Our current ratio was 3.1 to 1.0 at March 31, 2026, and 3.4 to 1.0 at December 31, 2025. Marketable securities and restricted 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 the Company’s captive insurance company to satisfy capital requirements of the state regulator of our captive insurance company.

For the three months ended March 31, 2026 and 2025, our cash flows were as follows:

(in thousands)

Operating Activities

Our primary sources of cash from operating activities are the revenues generated from our Environmental 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 three months ended March 31, 2026, cash flow from operations included $26.1 million in net income, non-cash add-backs to net income of $12.7 million, and a $5.0 million increase in cash flows from changes in operating assets and liabilities.

Investing Activities

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

Our investments in marketable securities and restricted marketable securities are primarily comprised of municipal bonds, treasury notes, corporate bonds and other government 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 uses of cash for financing activities are repurchases of common stock. On February 10, 2026, our Board of Directors authorized the repurchase of up to 10.0 million outstanding shares (the “2026 Repurchase Plan”). This replaced a previous authorization from our Board of Directors on February 14, 2023, which had authorized the repurchase of up to 7.5 million outstanding shares (the “2023 Repurchase Plan”, together with the 2026 Repurchase Plan, the “Repurchase Plans”) and of which 5.9 million had been repurchased.

During the three months ended March 31, 2026 and 2025, under the Repurchase Plans we repurchased 1.2 million and 0.7 million shares of our common stock for $24.2 million and $7.0 million, respectively, including commissions and taxes. We remain authorized to repurchase up to 9.2 million shares of our common Stock pursuant to the 2026 Repurchase Plan.

For the three months ended March 31, 2026 and the year ended December 31, 2025, our quarterly repurchases of common stock were as follows:

(in thousands, except for per share data)

38

Line of Credit

At March 31, 2026, we had a $300 million bank line of credit (the “Credit Agreement”) 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. Our line of credit also provides, at our discretion, the ability to increase the revolving loan commitments to an aggregate amount not to exceed $500 million. At March 31, 2026, we had no borrowings under the line of credit.

The line of credit requires us to satisfy two financial covenants. The covenants and their respective status at March 31, 2026 were as follows:

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. As of March 31, 2026, we do not have any funded debt, as defined in the Credit Agreement.

2. EBITDA is defined as net income plus interest expense, income tax expense, depreciation, amortization, share-based 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 outlined in the credit agreement, incurred over a trailing twelve-month period.

We were in compliance with our financial covenants as of March 31, 2026 and expect to remain in compliance. We believe that our existing capacity under the line of credit and our history of favorable operating cash flows provides adequate liquidity to fund our operations for the next twelve months following the date of this report. At March 31, 2026, we had outstanding $32.0 million in irrevocable standby letters of credit, which relate to payment obligations under our insurance programs.

On April 7, 2026, we entered into a Second Amendment to the existing bank line of credit (the “Second Amendment”). The Second Amendment, among other things, extended the maturity date of the Credit Agreement from November 22, 2027 to April 7, 2031, amended the definition of Consolidated EBITDA and added a daily SOFR rate option to the Credit Agreement. Except as expressly amended by the Second Amendment, the terms of the Credit Agreement remain in full force and effect.

Capital Expenditures

The level of capital expenditures is generally dependent on the number of new customers obtained. Such capital expenditures primarily consist of EVS 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 2026, we estimate that for 2026 we will have capital expenditures of approximately $5.0 million to $7.0 million, of which we have made $1.4 million through March 31, 2026.

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, 2025. 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.

At March 31, 2026, we had $214.6 million in cash and cash equivalents, restricted cash equivalents, marketable securities and restricted 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.

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 Securities Exchange Act of 1934, as amended (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 the Principal Financial Officer (Chief Financial Officer) as appropriate, to allow timely decisions regarding required disclosure. Based on their evaluation as of March 31, 2026, pursuant to the Exchange Act Rule 13a-15(b), our Management, including our Principal Executive Officer and Principal Financial Officer, concluded that our internal control over financial reporting was effective.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal controls over financial reporting that occurred during the three months ended March 31, 2026 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 Officer regarding, among other items, disclosure controls and procedures are included as exhibits to this Form 10-Q.

As of March 31, 2026, there have been no material changes to the Risk Factors disclosed in “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2025, except as set forth below.

Macroeconomic conditions, including geopolitical instability and related increases in fuel, energy and other input costs, may adversely affect our business and results of operations.

Geopolitical instability, including conflicts in the Middle East and related disruptions in global energy and commodity markets, could result in increased volatility in fuel, transportation and other operating costs. Rising oil, natural gas and other commodity prices may also contribute to broader inflationary pressures affecting wages, food, supplies and other goods and services used in our operations. If we are unable to mitigate these cost increases through pricing actions, contractual pass-throughs, other contractual adjustments, procurement strategies, operating efficiencies or other measures, our cost of services, margins, results of operations and cash flows could be adversely affected. In addition, increased macroeconomic uncertainty could affect customer spending patterns and the overall business environment in which we operate. The extent, timing and duration of these developments remain uncertain, and their impact on our business, financial condition and results of operations could be material.