HEALTHCARE SERVICES GROUP INC - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☑

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

For the quarterly period ended September 30, 2022

☐

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

For the transition period from to

Commission file number: 0-12015

HEALTHCARE SERVICES GROUP, INC.

(Exact name of registrant as specified in its charter)


Pennsylvania						23-2018365
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

3220 Tillman Drive, Suite 300, Bensalem, Pennsylvania

(Address of principal executive office)

19020

(Zip Code)

Registrant’s telephone number, including area code:

(215) 639-4274

Former name, former address and former ﬁscal year, if changed since last report:

Not Applicable

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $.01 par value	HCSG	NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

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Non-accelerated filer

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Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No þ

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. Common Stock, $.01 par value: 74,088,000 shares outstanding as of October 19, 2022.

Healthcare Services Group, Inc.

Quarterly Report on Form 10-Q

For the Period Ended September 30, 2022

TABLE OF CONTENTS


		Page
PART I
Item 1.	Financial Statements (Unaudited)	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	38

PART II
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	39
Item 4.	Mine Safety Disclosures	39
Item 5.	Other Information	39
Item 6.	Exhibits	40

SIGNATURES		41

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report and documents incorporated by reference into it may contain forward-looking statements within the meaning of federal securities laws, which are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, and our beliefs and assumptions. Words such as “believes,” “anticipates,” “plans,” “expects,” “estimates,” “will,” “goal,” and similar expressions are intended to identify forward-looking statements. The inclusion of forward-looking statements should not be regarded as a representation by us that any of our plans will be achieved. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Such forward-looking information is also subject to various risks and uncertainties. Such risks and uncertainties include, but are not limited to, risks arising from our providing services to the healthcare industry, primarily providers of long-term care; the impact of and future effects of the COVID-19 pandemic or other potential pandemics; having a significant portion of our consolidated revenues contributed by one customer during the nine months ended September 30, 2022; credit and collection risks associated with the healthcare industry; our claims experience related to workers’ compensation and general liability insurance (including any litigation claims, enforcement actions, regulatory actions and investigations arising from personal injury and loss of life related to COVID-19); the effects of changes in, or interpretations of laws and regulations governing the healthcare industry, our workforce and services provided, including state and local regulations pertaining to the taxability of our services and other labor-related matters such as minimum wage increases; the Company’s expectations with respect to selling, general, and administrative expense; the impact of the concluded Securities and Exchange Commission investigation and related class action lawsuit; heightened volatility of commodity food prices partially due to constrained global production as a result of the Russia-Ukraine conflict and inflation and the risk factors described in Part I of our Form 10-K for the fiscal year ended December 31, 2021 under “Government Regulation of Customers,” “Service Agreements and Collections,” and “Competition,” under Item IA. “Risk Factors” in such Form 10-K and under Item IA. “Risk Factors” in this Form 10-Q.

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

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

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Healthcare Services Group, Inc.

Consolidated Balance Sheets

(in thousands, except per share amounts)

(Unaudited)


	September 30, 2022		December 31, 2021
ASSETS:
Current assets:
Cash and cash equivalents	$	19,633	$	70,794
Marketable securities, at fair value	93,748		114,396
Accounts and notes receivable, less allowance for doubtful accounts of $68,099 and $59,271 as of September 30, 2022 and December 31, 2021, respectively	347,494		293,388
Inventories and supplies	22,712		26,015
Taxes receivable	5,430		8,813
Prepaid expenses and other assets	23,676		32,976
Total current assets	512,693		546,382
Property and equipment, net	24,244		28,102
Goodwill	75,529		74,755
Other intangible assets, less accumulated amortization of $31,530 and $27,879 as of September 30, 2022 and December 31, 2021, respectively	17,154		20,805
Notes receivable — long–term portion, less allowance for doubtful accounts of $2,376 and $6,312 as of September 30, 2022 and December 31, 2021, respectively	26,854		29,259
Deferred compensation funding, at fair value	31,627		46,691
Deferred tax asset	34,063		31,535
Total assets	$	722,164	$	777,529

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable	$	67,474	$	64,419
Accrued payroll and related taxes	45,853		68,664
Other accrued expenses	16,033		26,741
Borrowings under line of credit	25,000		—

Deferred compensation liability — short-term	1,220		6,991
Accrued insurance claims	26,242		24,310
Total current liabilities	181,822		191,125
Accrued insurance claims — long-term	69,707		65,084
Deferred compensation liability — long-term	31,807		46,888


Lease liability — long-term	8,748		11,299
Other long-term liabilities	8,004		10,456

Commitments and contingencies (Note 14)

STOCKHOLDERS’ EQUITY:
Common stock, $0.01 par value; 100,000 shares authorized; 76,160 and 76,009 shares issued, and 74,088 and 73,769 shares outstanding as of September 30, 2022 and December 31, 2021, respectively	762		760
Additional paid-in capital	300,241		294,124
Retained earnings	154,501		183,957
Accumulated other comprehensive (loss) income, net of taxes	(5,507)		4,000
Common stock in treasury, at cost, 2,072 and 2,240 shares as of September 30, 2022 and December 31, 2021, respectively	(27,921)		(30,164)
Total stockholders’ equity	$	422,076	$	452,677
Total liabilities and stockholders’ equity	$	722,164	$	777,529

See accompanying notes to consolidated financial statements.

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Healthcare Services Group, Inc.

Consolidated Statements of Comprehensive Income

(in thousands, except per share amounts)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenues	$	414,488	$	415,590	$	1,266,156	$	1,221,512
Operating costs and expenses:
Costs of services provided	376,894		364,822		1,129,526		1,037,852
Selling, general and administrative expense	35,803		38,780		100,820		128,818
Other (expense) income:
Investment and other income (loss), net	1		462		(9,034)		6,311
Interest expense	(799)		(329)		(1,752)		(1,017)
Income before income taxes	993		12,121		25,024		60,136

Income tax provision	671		2,581		6,553		16,378
Net income	$	322	$	9,540	$	18,471	$	43,758

Per share data:
Basic earnings per common share	$	0.00	$	0.13	$	0.25	$	0.58
Diluted earnings per common share	$	0.00	$	0.13	$	0.25	$	0.58


Weighted average number of common shares outstanding:
Basic	74,340		74,943		74,334		74,983
Diluted	74,348		75,076		74,346		75,170

Comprehensive income:
Net income	$	322	$	9,540	$	18,471	$	43,758
Other comprehensive loss:
Unrealized loss on available-for-sale marketable securities, net of taxes	(2,293)		(1,014)		(9,507)		(1,582)
Total comprehensive (loss) income	$	(1,971)	$	8,526	$	8,964	$	42,176

See accompanying notes to consolidated financial statements.

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Healthcare Services Group, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2022		2021
Cash flows from operating activities:
Net income	$	18,471	$	43,758
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	11,560		10,961
Bad debt provision	23,342		10,790

Deferred income tax expense	—		198
Share-based compensation expense	7,156		6,968
Amortization of premium on marketable securities	1,673		1,740
Unrealized loss (gain) on deferred compensation fund investments	11,445		(3,958)
Changes in contingent consideration	(2,408)		—
Net loss on disposals of fixed assets	942		1,157
Changes in operating assets and liabilities:
Accounts and notes receivable	(75,042)		(41,275)
Inventories and supplies	3,303		4,872
Prepaid expenses and other assets	6,180		(23,459)
Deferred compensation funding	7,093		72
Accounts payable and other accrued expenses	(13,134)		10,694
Accrued payroll, accrued and withheld payroll taxes	(21,240)		(26,085)
Taxes receivable	3,383		—
Accrued insurance claims	6,555		4,871
Deferred compensation liability	(20,339)		4,427
Net cash (used in) provided by operating activities	(31,060)		5,731
Cash flows from investing activities:
Disposals of fixed assets	187		201
Additions to property and equipment	(4,142)		(4,202)
Purchases of marketable securities	(2,875)		(16,683)
Sales of marketable securities	9,816		12,368
Cash paid for acquisitions	(114)		(6,000)
Net cash provided by (used in) investing activities	2,872		(14,316)
Cash flows from financing activities:
Dividends paid	(47,389)		(46,672)
Reissuance of treasury stock pursuant to Dividend Reinvestment Plan	77		69
Proceeds from the exercise of stock options	410		2,238
Purchases of treasury stock	—		(5,397)
Proceeds from short-term borrowings	25,000		—
Payments of statutory withholding on net issuance of restricted stock units	(1,071)		(1,401)

Net cash used in financing activities	(22,973)		(51,163)
Net change in cash and cash equivalents	(51,161)		(59,748)
Cash and cash equivalents at beginning of the period	70,794		139,330
Cash and cash equivalents at end of the period	$	19,633	$	79,582

Supplemental disclosure of non-cash investing activities
Accrued variable consideration from acquisition of a business	$	—	$	10,562

See accompanying notes to consolidated financial statements.

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Healthcare Services Group, Inc.

Consolidated Statements of Stockholders’ Equity

(in thousands)

(Unaudited)


	For the nine months ended September 30, 2022
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income, net of taxes		Retained Earnings		Treasury Stock		Stockholders’ Equity
	Shares	Amount
Balance, December 31, 2021	76,009	$	760	$	294,124	$	4,000	$	183,957	$	(30,164)	$	452,677
Comprehensive income:
Net income for the period	—	—		—		—		11,329		—		11,329
Unrealized loss on available-for-sale marketable securities, net of taxes	—	—		—		(5,269)		—		—		(5,269)
Comprehensive income for the period												$	6,060
Exercise of stock options and other share-based compensation, net of shares tendered for payment	145	2		408		—		—		—		410
Payment of statutory withholding on issuance of restricted stock units	—	—		(1,069)		—		—		—		(1,069)
Share-based compensation expense	—	—		2,298		—		—		—		2,298

Treasury shares issued for Deferred Compensation Plan funding and redemptions	—	—		110		—		—		414		524
Shares issued pursuant to Employee Stock Plan	—	—		368		—		—		1,144		1,512
Dividends paid and accrued, $0.21 per share	—	—		—		—		(15,859)		—		(15,859)
Shares issued pursuant to Dividend Reinvestment Plan	—	—		6		—		—		19		25

Other	4	—		59		—		—		—		59
Balance, March 31, 2022	76,158	$	762	$	296,304	$	(1,269)	$	179,427	$	(28,587)	$	446,637
Comprehensive income:
Net income for the period	—	—		—		—		6,820		—		6,820
Unrealized loss on available-for-sale marketable securities, net of taxes	—	—		—		(1,945)		—		—		(1,945)
Comprehensive income for the period												$	4,875
Exercise of stock options and other share-based compensation, net of shares tendered for payment	2	—		—		—		—		—		—

Share-based compensation expense	—	—		2,292		—		—		—		2,292

Treasury shares issued for Deferred Compensation Plan funding and redemptions		—		(196)		—		—		191		(5)

Dividends paid and accrued, $0.21 per share	—	—		—		—		(15,980)		—		(15,980)
Shares issued pursuant to Dividend Reinvestment Plan	—	—		5		—		—		21		26


Balance, June 30, 2022	76,160	$	762	$	298,405	$	(3,214)	$	170,267	$	(28,375)	$	437,845
Comprehensive loss:
Net income for the period	—	—		—		—		322		—		322
Unrealized loss on available-for-sale marketable securities, net of taxes	—	—		—		(2,293)		—		—		(2,293)
Comprehensive loss for the period												$	(1,971)
Payment of statutory withholding on issuance of restricted stock units	—	—		(2)		—		—		—		(2)
Share-based compensation expense	—	—		2,271		—		—		—		2,271

Treasury shares issued for Deferred Compensation Plan funding and redemptions	—	—		(432)		—		—		426		(6)
Dividends paid and accrued, $0.21 per share	—	—		—		—		(16,088)		—		(16,088)
Shares issued pursuant to Dividend Reinvestment Plan	—	—		(1)		—		—		28		27

Balance, September 30, 2022	76,160	$	762	$	300,241	$	(5,507)	$	154,501	$	(27,921)	$	422,076

See accompanying notes to consolidated financial statements.

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	For the nine months ended September 30, 2021
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income, net of taxes		Retained Earnings		Treasury Stock		Stockholders’ Equity
	Shares	Amount
Balance, December 31, 2020	75,798	$	758	$	282,206	$	5,563	$	200,893	$	(8,959)	$	480,461
Comprehensive income:
Net income for the period	—	—		—		—		24,653		—		24,653
Unrealized loss on available-for-sale marketable securities, net of taxes	—	—		—		(1,271)		—		—		(1,271)
Comprehensive income for the period												$	23,382
Exercise of stock options and other share-based compensation, net of shares tendered for payment	156	2		1,473		—		—		—		1,475
Payment of statutory withholding on issuance of restricted stock and restricted stock units	—	—		(1,501)		—		—		—		(1,501)
Share-based compensation expense	—	—		2,104		—		—		—		2,104
Treasury shares issued for Deferred Compensation Plan funding and redemptions	—	—		545		—		—		(36)		509
Shares issued pursuant to Employee Stock Plan	—	—		1,554		—		—		498		2,052
Dividends paid and accrued, $0.21 per share	—	—		—		—		(15,526)		—		(15,526)
Shares issued pursuant to Dividend Reinvestment Plan	—	—		18		—		—		5		23

Other	4	—		123		—		—		—		123
Balance, March 31, 2021	75,958	$	760	$	286,522	$	4,292	$	210,020	$	(8,492)	$	493,102
Comprehensive income:
Net income for the period	—	—		—		—		9,565		—		9,565
Unrealized gain on available-for-sale marketable securities, net of taxes	—	—		—		703		—		—		703
Comprehensive income for the period												$	10,268
Exercise of stock options and other share-based compensation, net of shares tendered for payment	11	—		380		—		—		—		380

Share-based compensation expense	—	—		2,159		—		—		—		2,159
Purchases of treasury stock	—	—		—		—		—		(1,835)		(1,835)
Treasury shares issued for Deferred Compensation Plan funding and redemptions	—	—		60		—		—		(61)		(1)
Dividends paid and accrued, $0.21 per share	—	—		—		—		(15,792)		—		(15,792)
Shares issued pursuant to Dividend Reinvestment Plan	—	—		17		—		—		6		23


Balance, June 30, 2021	75,969	$	760	$	289,138	$	4,995	$	203,793	$	(10,382)	$	488,304
Comprehensive income:
Net income for the period	—	—		—		—		9,540		—		9,540
Unrealized gain on available-for-sale marketable securities, net of taxes	—	—		—		(1,014)		—		—		(1,014)
Comprehensive income for the period												$	8,526
Exercise of stock options and other share-based compensation, net of shares tendered for payment	28	—		383		—		—		—		383
Payment of statutory withholding on issuance of restricted stock units	—	—		100		—		—		—		100
Share-based compensation expense	—	—		2,214		—		—		—		2,214
Purchases of treasury stock	—	—		—		—		—		(3,562)		(3,562)
Treasury shares issued for Deferred Compensation Plan funding and redemptions	—	—		50		—		—		(50)		—
Dividends paid and accrued, $0.21 per share	—	—		—		—		(15,783)		—		(15,783)
Shares issued pursuant to Dividend Reinvestment Plan	—	—		14		—		—		9		23
Balance, September 30, 2021	75,997	$	760	$	291,899	$	3,981	$	197,550	$	(13,985)	$	480,205

See accompanying notes to consolidated financial statements.

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Healthcare Services Group, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Note 1—Description of Business and Significant Accounting Policies

Nature of Operations

Healthcare Services Group, Inc. (the “Company”) provides management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary service departments of the healthcare industry, including nursing homes, retirement complexes, rehabilitation centers and hospitals located throughout the United States. Although the Company does not directly participate in any government reimbursement programs, the Company’s customers receive government reimbursements related to Medicare and Medicaid. Therefore, they are directly affected by any legislation relating to Medicare and Medicaid reimbursement programs.

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

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

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

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

Unaudited Interim Financial Data

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

Use of Estimates in Financial Statements

In preparing financial statements in conformity with U.S. GAAP, estimates and assumptions are made that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Significant estimates are used in determining, but are not limited to, the Company’s allowance for doubtful accounts, accrued insurance claims, valuations, deferred taxes and reviews for potential impairment. The estimates are based upon various factors including current and historical trends, as well as other pertinent industry and regulatory authority information, including the potential future effects of COVID-19. Management regularly evaluates this information to determine if it is necessary to update the basis for its estimates and to adjust for known changes.

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Principles of Consolidation

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

Cash and Cash Equivalents

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

Accounts and Notes Receivable

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

Notes receivable are initially recorded when accounts receivable are transferred into a promissory note and are recorded as an alternative to accounts receivable to memorialize an unqualified promise to pay a specific sum, typically with interest, in accordance with a defined payment schedule. The Company’s payment terms with customers on promissory notes can vary based on several factors and the circumstances of each promissory note, however typically promissory notes mature over a 1 to 3 year period. Similar to accounts receivable, each reporting period the Company evaluates the collectability of outstanding notes receivable balances and records an allowance for doubtful accounts representing an estimate of future expected credit loss.

Refer to Note 3—Accounts and Notes Receivable herein for further information.

Allowance for Doubtful Accounts

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

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

Inventories and Supplies

Inventories and supplies include housekeeping, linen and laundry supplies, as well as food provisions and supplies. Non-linen inventories and supplies are stated on a first-in, first-out (FIFO) basis, and reduced as deemed necessary to approximate the lower of cost or net realizable value. Linen supplies are amortized on a straight-line basis over their estimated useful life of 24 months.

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Revenue Recognition

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

Refer to Note 2—Revenue herein for further information.

Leases

The Company records assets and liabilities on the balance sheet to recognize the rights and obligations arising from leasing arrangements with contractual terms greater than 12 months, in accordance with FASB Accounting Standards Codification subtopic 842 Leases (“ASC 842”). A leasing arrangement includes any contract which entitles the Company to the right of use of an identified tangible asset where there are no restrictions as to the direct of use of the asset, and the Company obtains substantially all of the economic benefits from the right of use. As of September 30, 2022 and December 31, 2021, the Company was only the lessee of operating lease arrangements.

Refer to Note 7—Leases herein for further information.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Under this method, income tax expense or benefits are recognized for the amount of taxes payable or refundable for the current period. The Company accrues for probable tax obligations as required, based on facts and circumstances in various regulatory environments. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. When appropriate, valuation allowances are recorded to reduce deferred tax assets to amounts for which realization is more likely than not.

Uncertain income tax positions taken or expected to be taken in tax returns are reflected within the Company’s financial statements based on a recognition and measurement process.

Earnings per Common Share

Basic earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is computed using the weighted-average number of common shares outstanding and dilutive common shares, such as those issuable upon exercise of stock options and upon the vesting of restricted stock units.

Share-Based Compensation

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

Identifiable Intangible Assets and Goodwill

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

No impairment loss was recognized on the Company's intangible assets or goodwill during the nine months ended September 30, 2022 or 2021.

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Concentrations of Credit Risk

The Company’s financial instruments that are subject to credit risk are cash and cash equivalents, marketable securities, deferred compensation funding and accounts and notes receivable. At September 30, 2022 and December 31, 2021, substantially all of the Company’s cash and cash equivalents and marketable securities were held in one large financial institution located in the United States. The Company’s marketable securities are fixed income investments which are highly liquid and can be readily purchased or sold through established markets.

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

Note 2—Revenue

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

Housekeeping

Housekeeping accounted for $597.7 million and $621.3 million of the Company’s consolidated revenues for the nine months ended September 30, 2022 and 2021, respectively, which represented approximately 47.2% and 50.9% of the Company’s revenues in each respective period. Housekeeping services include managing customers’ housekeeping departments, which are principally responsible for the cleaning, disinfecting and sanitizing of resident rooms and common areas of the customers’ facilities, as well as the laundering and processing of the bed linens, uniforms, resident personal clothing and other assorted linen items utilized at the customers’ facilities. Upon beginning service with a customer facility, the Company will typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise and train the front-line personnel and coordinate housekeeping services with other facility support functions in accordance with customer requests. Such management personnel also oversee the execution of various cost and quality-control procedures including continuous training and employee evaluation.

Dietary

Dietary services accounted for $668.4 million and $600.2 million of the Company’s consolidated revenues for the nine months ended September 30, 2022 and 2021, respectively, which represented approximately 52.8% and 49.1% of the Company’s revenues in each respective period. Dietary services consist of managing customers’ dietary departments which are principally responsible for food purchasing, meal preparation and professional dietitian services, which include the development of menus that meet the dietary needs of residents. On-site management is responsible for all daily dietary department activities, with regular support provided by a District Manager specializing in dietary services. The Company also offers clinical consulting services to facilities which if contracted is a service bundled within the monthly service provided to customers. Upon beginning service with a customer facility, the Company will typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise and train the front-line personnel and coordinate dietitian services with other facility support functions in accordance with customer requests. Such management personnel also oversee the execution of various cost and quality control procedures including continuous training and employee evaluation.

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Revenue Recognition

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

The Company performs services and provides goods in accordance with its customers’ contracts. Such contracts typically provide for a renewable one year service term, cancellable by either party upon 30 to 90 days’ notice, after an initial period of 60 to 120 days. A performance obligation is the unit of account under ASC 606 and is defined as a promise in a contract to transfer a distinct good or service to the customer. The Company’s Housekeeping and Dietary contracts relate to the provision of bundles of goods, services or both which represent a series of distinct goods and services that are substantially the same and that have the same pattern of transfer to the customer. The Company accounts for the series as a single performance obligation satisfied over time, as the customer simultaneously receives and consumes the benefits of the goods and services provided. Revenue is recognized using the output method, which is based upon the delivery of goods and services to the customers’ facilities. In limited cases, the Company provides goods, services or both, before the execution of a written contract. In these cases, the Company defers the recognition of revenue until a contract is executed. The amount of such deferred revenue was $1.7 million and $0.1 million as of September 30, 2022 and December 31, 2021, respectively. Additionally, substantially all such revenue amounts deferred as of December 31, 2021 were subsequently recognized as revenue during the nine months ended September 30, 2022.

The transaction price is the amount of consideration to which the Company is entitled in exchange for transferring promised goods or services to its customers. The transaction price does not include taxes assessed or collected. The Company’s contracts detail the fees that the Company charges for the goods and services it provides. For certain contracts which contain a variable component to the transaction price, the Company is required to make estimates of the amount of consideration to which the Company will be entitled, based on variability in resident and patient populations serviced, product usage or quantities consumed. The Company recognizes revenue related to such estimates only when the Company determines that there will not be a significant reversal in the amount of revenue recognized. In instances where the transaction prices are modified with existing customers, the Company accounts for such transactions as reductions to revenue under the variable consideration framework within ASC 606. During the three and 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. The Company’s contracts generally do not contain significant financing components, as payment terms are less than one year.

The Company allocates the transaction price to each performance obligation, noting that the bundle of goods, services or goods and services provided under each Housekeeping and Dietary contract represent a single performance obligation satisfied over time. The Company recognizes the related revenue when it satisfies the performance obligation by transferring a bundle of promised goods, services or both to a customer. Such recognition is on a monthly or weekly basis, as goods are provided and services are performed. In some cases, the Company requires customers to pay in advance for goods and services to be provided. As of September 30, 2022 and December 31, 2021, the value of the contract liabilities associated with customer prepayments was $0.2 million and $2.5 million, respectively. Additionally, substantially all such revenue amounts deferred as of December 31, 2021 were subsequently recognized as revenue during the nine months ended September 30, 2022.

Transaction Price Allocated to Remaining Performance Obligations

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

At September 30, 2022, the Company had $150.6 million related to performance obligations that were unsatisfied or partially unsatisfied for which the Company expects to recognize revenue. The Company expects to recognize revenue on approximately 70.6% of the remaining performance obligations over the next 12 months, with the balance to be recognized thereafter. These amounts exclude variable consideration primarily related to performance obligations that consist of a series of distinct service periods with revenues based on future performance that cannot be estimated at contract inception. The Company also has elected to apply the practical expedient that permits exclusion of information about the remaining performance obligations with original expected durations of one year or less.

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Note 3—Accounts and Notes Receivable

The Company’s accounts and notes receivable balances consisted of the following as of September 30, 2022 and December 31, 2021:


	September 30, 2022		December 31, 2021
	(in thousands)
Short-term
Accounts and notes receivable - gross	$	415,593	$	352,659
Accounts and notes receivable - allowance	(68,099)		(59,271)
Total net short-term accounts and notes receivable	$	347,494	$	293,388
Long-term
Notes receivable	$	29,230	$	35,571
Allowance for doubtful accounts	(2,376)		(6,312)
Total net long-term notes receivable	$	26,854	$	29,259
Total net accounts and notes receivable	$	374,348	$	322,647

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

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

Note 4—Allowance for Doubtful Accounts

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

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

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The guidance in ASC 326 permits entities to make an accounting policy election not to measure an estimate for credit losses on accrued interest if those entities write-off accrued interest deemed uncollectible in a timely manner. The Company follows an income recognition policy on all interest earned on notes receivable. Under such policy the Company accounts for all notes receivable on a non-accrual basis and defers the recognition of any interest income until receipt of cash payments. This policy was established, recognizing the environment of the long-term care industry, and not because such notes receivable are necessarily impaired. Accordingly, the Company does not record a credit loss adjustment for accrued interest. Interest income from notes receivable for the three months ended September 30, 2022 and 2021 was $0.2 million and $0.3 million, respectively. Interest income from notes receivable for both the nine months ended September 30, 2022 and 2021 was $1.0 million.

The following table presents the Company’s two tiers of notes receivable further disaggregated by year of origination, as well as write-off activity for the nine months ended September 30, 2022.


	Notes Receivable
	Amortized Cost Basis by Origination Year
	2022		2021		2020		2019		2018		Prior		Total
	(in thousands)
Notes Receivable
Standard notes receivable	$	17,508	$	11,917	$	1,972	$	206	$	13	$	21,991	$	53,607
Elevated risk notes receivable	$	—	$	—	$	—	$	—	$	—	$	1,223	$	1,223

Current-period gross write-offs	$	1	$	—	$	49	$	54	$	—	$	483	$	587
Current-period recoveries	—		—		—		—		—		—		—
Current-period net write-offs	$	1	$	—	$	49	$	54	$	—	$	483	$	587

The following table provides information as to the status of payment on the Company’s notes receivable which were past due as of September 30, 2022:


	Age Analysis of Past-Due Notes Receivable as of September 30, 2022
	0 - 90 Days		91 - 180 Days		Greater than 181 Days		Total
	(in thousands)
Notes Receivable
Standard notes receivable	$	469	$	162	$	3,205	$	3,836
Elevated risk notes receivable	—		—		1,223		1,223
	$	469	$	162	$	4,428	$	5,059

The following tables provide a summary of the changes in the Company’s allowance for doubtful accounts on a portfolio segment basis for the three months ended September 30, 2022 and 2021.


	Allowance for doubtful accounts
Portfolio Segment:	June 30, 2022		Write-Offs/Adjustments1		Bad Debt Expense		September 30, 2022
	(in thousands)
Accounts Receivables	$	62,603	$	(5,145)	$	7,863	$	65,321

Notes Receivables
Standard notes receivable	$	12,606	$	(6,718)	$	(1,545)	$	4,343
Elevated risk notes receivable	811		—		—		811
Total notes receivable	$	13,417	$	(6,718)	$	(1,545)	$	5,154
Total	$	76,020	$	(11,863)	$	6,318	$	70,475

1.Write-offs are shown net of recoveries. During the three months ended September 30, 2022, the Company collected less than $0.1 million of accounts receivables and notes receivables which had previously been written-off as uncollectible. Adjustments

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include a reduction of $8.0 million of allowance for doubtful accounts which related to a customer concession granted during the three months ended September 30, 2022.


	Allowance for doubtful accounts
Portfolio Segment:	June 30, 2021		Write-Offs1		Bad Debt Expense		September 30, 2021
	(in thousands)
Accounts Receivables	$	50,243	$	(427)	$	4,230	$	54,046

Notes Receivables
Standard notes receivable	$	12,534	$	—	$	(149)	$	12,385
Elevated risk notes receivable	1,583		—		—		1,583
Total notes receivable	$	14,117	$	—	$	(149)	$	13,968
Total	$	64,360	$	(427)	$	4,081	$	68,014

1.Write-offs are shown net of recoveries. During the three months ended September 30, 2021, the Company collected an immaterial amount of accounts receivables which had previously been written-off as uncollectible.

The following tables provide a summary of the changes in the Company’s allowance for doubtful accounts on a portfolio segment basis for the nine months ended September 30, 2022 and 2021.


	Allowance for doubtful accounts
Portfolio Segment:	December 31, 2021		Write-Offs/Adjustments1		Bad Debt Expense		September 30, 2022
	(in thousands)
Accounts Receivables	$	50,794	$	(11,195)	$	25,722	$	65,321

Notes Receivables
Standard notes receivable	$	13,607	$	(6,773)	$	(2,491)	$	4,343
Elevated risk notes receivable	1,183		(483)		111		811
Total notes receivable	$	14,790	$	(7,256)	$	(2,380)	$	5,154
Total	$	65,584	$	(18,451)	$	23,342	$	70,475

1.Write-offs are shown net of recoveries. During the nine months ended September 30, 2022, the Company collected $0.2 million of accounts receivables and notes receivables which had previously been written-off as uncollectible. Adjustments include a reduction of $8.0 million of allowance for doubtful accounts which related to a customer concession granted during the nine months ended September 30, 2022.


	Allowance for doubtful accounts
Portfolio Segment:	December 31, 2020		Write-Offs1		Bad Debt Expense		September 30, 2021
	(in thousands)
Accounts Receivables	$	51,052	$	(7,807)	$	10,801	$	54,046

Notes Receivables
Standard notes receivable	$	13,258	$	(9)	$	(864)	$	12,385
Elevated risk notes receivable	3,491		(2,761)		853		1,583
Total notes receivable	$	16,749	$	(2,770)	$	(11)	$	13,968
Total	$	67,801	$	(10,577)	$	10,790	$	68,014

1.Write-offs are shown net of recoveries. During the nine months ended September 30, 2021, the Company collected $0.1 million of accounts receivables and notes receivables which had previously been written-off as uncollectible.

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Note 5—Changes in Accumulated Other Comprehensive Income by Component

The Company’s accumulated other comprehensive income consists of unrealized gains and losses from the Company’s available-for-sale marketable securities. The following table provides a summary of the changes in accumulated other comprehensive income for the nine months ended September 30, 2022 and 2021:


	Unrealized Gains and Losses on Available-for-Sale Securities1
	Nine Months Ended September 30,
	2022		2021
	(in thousands)
Accumulated other comprehensive income — beginning balance	$	4,000	$	5,563
Other comprehensive loss before reclassifications	(9,530)		(1,421)
Losses (gains) reclassified from other comprehensive income2	23		(161)
Net current period other comprehensive loss3	(9,507)		(1,582)
Accumulated other comprehensive (loss) income — ending balance	$	(5,507)	$	3,981

1.All amounts are net of tax.

2.Realized gains and losses were recorded pre-tax under “Investment and other income” in the Consolidated Statements of Comprehensive Income. For the nine months ended September 30, 2022, the Company recorded less than $0.1 million of realized losses from the sale of available-for-sale securities. For the nine months ended September 30, 2021, the Company recorded $0.2 million of realized gains from the sale of available-for-sale securities. Refer to Note 9—Fair Value Measurements herein for further information.

3.For the nine months ended September 30, 2022 and 2021, the changes in other comprehensive income were net of a tax benefit of $2.5 million and $0.4 million, respectively.


	Amounts Reclassified from Accumulated Other Comprehensive Income
	2022		2021
	(in thousands)
Three Months Ended September 30,
Losses from the sale of available-for-sale securities	$	(5)	$	(7)
Tax benefit	2		5
Net loss reclassified from accumulated other comprehensive income	$	(3)	$	(2)
Nine Months Ended September 30,
(Losses) gains from the sale of available-for-sale securities	$	(31)	$	221
Tax benefit (expense)	8		(60)
Net (loss) gain reclassified from accumulated other comprehensive income	$	(23)	$	161

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Note 6—Property and Equipment

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

The following table sets forth the amounts of property and equipment by each class of depreciable asset as of September 30, 2022 and December 31, 2021:


	September 30, 2022		December 31, 2021
	(in thousands)
Housekeeping and dietary equipment	$	13,461	$	13,468
Computer hardware and software	6,089		5,880
Operating lease — right-of-use assets	33,974		33,217
Other1	1,026		1,736
Total property and equipment, at cost	54,550		54,301
Less accumulated depreciation	30,306		26,199
Total property and equipment, net	$	24,244	$	28,102

1.Includes furniture and fixtures, leasehold improvements and autos and trucks including auto leases.

Depreciation expense for the three months ended September 30, 2022 and 2021 was $2.6 million and $2.5 million, respectively. Depreciation expense for the nine months ended September 30, 2022 and 2021 was $7.9 million and $7.7 million, respectively. Of the depreciation expense recorded for the three and nine months ended September 30, 2022, $1.5 million and $4.6 million related to the depreciation of the Company’s operating lease - right-of-use assets (“ROU Assets”), respectively. Of the depreciation expense recorded for the three and nine months ended September 30, 2021, $1.6 million and $4.7 million related to the depreciation of the Company’s ROU Assets, respectively.

Note 7—Leases

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

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

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

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Components of lease expense required by ASC 842 are presented below for the three and nine months ended September 30, 2022 and 2021.


	Three Months Ended September 30,
	2022		2021
	(in thousands)
Lease cost
Operating lease cost	$	1,449	$	1,629
Short-term lease cost	283		122
Variable lease cost	230		73
Total lease cost	$	1,962	$	1,824


	Nine Months Ended September 30,
	2022		2021
	(in thousands)
Lease cost
Operating lease cost	$	4,364	$	4,547
Short-term lease cost	863		558
Variable lease cost	557		(458)
Total lease cost	$	5,784	$	4,647

Supplemental information required by ASC 842 is presented below for the nine months ended September 30, 2022 and 2021.


	Nine Months Ended September 30,
	2022			2021
	(dollar amounts in thousands)
Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	4,853		$	4,902
Weighted-average remaining lease term — operating leases	4.2 years			4.8 years
Weighted-average discount rate — operating leases	4.3		%	4.2		%

During the three and nine months ended September 30, 2022, the Company’s ROU Assets and Lease Liabilities were reduced by $0.3 million and $1.6 million, respectively, due to lease cancellations. During the three and nine months ended September 30, 2021, the Company's ROU Assets and Lease Liabilities were reduced by $0.3 million and $0.6 million, respectively, due to lease cancellations.

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The following is a schedule by calendar year of future minimum lease payments under operating leases that have remaining terms as of September 30, 2022:


Period/Year	Operating Leases
	(in thousands)
October 1 to December 31, 2022	$	1,511
2023	5,107
2024	3,323
2025	1,461
2026	1,337
2027	1,363
Thereafter	1,505
Total minimum lease payments	$	15,607
Less: imputed lease payments	1,417
Present value of lease liabilities	$	14,190

Note 8—Other Intangible Assets

Goodwill

During the nine months ended September 30, 2022, the Company’s goodwill increased $0.7 million due to a measurement period adjustment pertaining to the prior year acquisition of a regional dining operator. The Company finalized the acquisition accounting for this transaction as of March 31, 2022.

Intangible Assets

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

The following table sets forth the estimated amortization expense for intangibles subject to amortization for the remainder of 2022, the following five fiscal years and thereafter:


Period/Year	Total Amortization Expense
	(in thousands)
October 1 to December 31, 2022	$	1,209
2023	$	3,819
2024	$	2,685
2025	$	2,685
2026	$	2,666
2027	$	1,196
Thereafter	$	2,894

Amortization expense for the three months ended September 30, 2022 and 2021 was $1.2 million and $1.1 million, respectively. Amortization expense for the nine months ended September 30, 2022 and 2021 was $3.7 million and $3.3 million, respectively.

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Note 9—Fair Value Measurements

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

The Company’s marketable securities are held by the Company’s captive insurance company to satisfy capital requirements of the state regulator related to captive insurance companies. Such securities primarily consist of tax-exempt municipal bonds, which are classified as available-for-sale and are reported at fair value. Unrealized gains and losses associated with these investments are included “Unrealized loss on available-for-sale marketable securities, net of taxes” within the Consolidated Statements of Comprehensive Income. The fair value of these marketable securities is classified within Level 2 of the fair value hierarchy, as these securities are measured using quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable. Such valuations are determined by a third-party pricing service. For the three and nine months ended September 30, 2022, the Company recorded unrealized losses, net of taxes of $2.3 million and $9.5 million on marketable securities, respectively. For the three and nine months ended September 30, 2021, the Company recorded unrealized losses, net of taxes of $1.0 million and $1.6 million on marketable securities, respectively.

As part of the Company’s completed acquisition of a manufacturer of prepackaged meals in 2021, the Company used an analysis of the discounted weighted-average cost of capital attributable to the acquired company’s revenue (an income approach) to value the contingent consideration liability. The inputs utilized in estimating the fair value of the contingent consideration have been classified as Level 3 in the fair value hierarchy levels and are subject to risk and uncertainty in accordance with FASB Accounting Standards Codification subtopic 820 Fair Value Measurement (“ASC 820”). The discounted weighted-average cost of capital attributable to the acquired company’s revenue analysis is dependent on several subjective factors including future earnings, volatility and the discount rate. If assumptions vary from what was expected, the fair value of the contingent consideration liability may materially change. As of September 30, 2022 and December 31, 2021, the fair value of the contingent consideration liability was $2.5 million and $4.8 million, respectively, and were presented in “Other long-term liabilities” on the Company’s Consolidated Balance Sheets. For the three and nine months ended September 30, 2022, the Company recorded gains of $0.4 million and $2.3 million, respectively, from the fair value adjustment in the Consolidated Statements of Comprehensive Income. No such gain or loss was recorded during the three and nine months ended September 30, 2021.

For both the three months ended September 30, 2022 and 2021, the Company received total proceeds, less the amount of interest received, of $0.3 million, from sales of available-for-sale municipal bonds resulting in realized losses of less than $0.1 million. For the nine months ended September 30, 2022 and 2021, the Company received total proceeds, less the amount of interest received, of $9.8 million and $12.4 million, respectively, from sales of available-for-sale municipal bonds. For the nine months ended September 30, 2022 and 2021, these sales resulted in realized losses of less than $0.1 million and realized gains of $0.2 million, respectively, which were recorded in “Other income – Investment and other income, net” in the Consolidated Statements of Comprehensive Income. The basis for the sale of these securities was the specific identification of each bond sold during the period.

The investments under the funded deferred compensation plan are classified as trading securities and unrealized gains or losses are recorded in “Investment and other income, net” in the Consolidated Statements of Comprehensive Income. The fair value of these investments are determined based on quoted market prices (Level 1). For the three months ended September 30, 2022 and 2021, the Company recognized unrealized losses of $0.8 million and $0.1 million, respectively, related to equity securities still held at the respective reporting dates. For the nine months ended September 30, 2022 and 2021, the Company recognized unrealized losses of $11.4 million and unrealized gains of $4.0 million, respectively, related to equity securities still held at the respective reporting dates.

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The following tables provide fair value measurement information for the Company’s marketable securities and deferred compensation fund investments as of September 30, 2022 and December 31, 2021:


	As of September 30, 2022
					Fair Value Measurement Using:
	Carrying Amount		Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Financial Assets:
Marketable securities
Municipal bonds — available-for-sale	$	93,748	$	93,748	$	—	$	93,748	$	—
Deferred compensation fund
Money Market1	$	2,450	$	2,450	$	—	$	2,450	$	—
Commodities	149		149		149		—		—
Fixed Income	2,928		2,928		2,928		—		—
International	3,993		3,993		3,993		—		—
Large Cap Blend	1,073		1,073		1,073		—		—
Large Cap Growth	10,823		10,823		10,823		—		—
Large Cap Value	5,413		5,413		5,413		—		—
Mid Cap Blend	2,466		2,466		2,466		—		—
Real Estate	367		367		367		—		—
Small Cap Blend	3,185		3,185		3,185		—		—
Deferred compensation fund2	$	32,847	$	32,847	$	30,397	$	2,450	$	—


	As of December 31, 2021
					Fair Value Measurement Using:
	Carrying Amount		Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Financial Assets:
Marketable securities
Municipal bonds — available-for-sale	$	114,396	$	114,396	$	—	$	114,396	$	—
Deferred compensation fund
Money Market1	2,882		2,882		—		2,882		—
Balanced and Lifestyle	12,578		12,578		12,578		—		—
Large Cap Growth	20,358		20,358		20,358		—		—
Small Cap Growth	6,561		6,561		6,561		—		—
Fixed Income	4,826		4,826		4,826		—		—
International	2,299		2,299		2,299		—		—
Mid Cap Growth	4,179		4,179		4,179		—		—
Deferred compensation fund2	$	53,683	$	53,683	$	50,801	$	2,882	$	—

1.The fair value of the money market fund is based on the net asset value (“NAV”) of the shares held by the plan at the end of the period. The money market fund includes short-term United States dollar denominated money market instruments and the NAV is determined by the custodian of the fund. The money market fund can be redeemed at its NAV at the measurement date as there are no significant restrictions on the ability to sell this investment.

2.As of September 30, 2022 and December 31, 2021, $1.2 million and $7.0 million of short-term deferred compensation funding is included in the “Prepaid expenses and other assets” caption on the Company's Consolidated Balance Sheets, respectively. Such amounts of short-term deferred compensation funding represent investments expected to be liquidated and paid to former employees within 12 months of September 30, 2022.

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	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Credit Impairment Losses1
	(in thousands)
September 30, 2022
Type of security:
Municipal bonds — available-for-sale	$	100,719	$	4	$	(6,975)	$	93,748	$	—
Total debt securities	$	100,719	$	4	$	(6,975)	$	93,748	$	—

December 31, 2021
Type of security:
Municipal bonds — available-for-sale	$	109,331	$	5,219	$	(154)	$	114,396	$	—
Total debt securities	$	109,331	$	5,219	$	(154)	$	114,396	$	—

1.The Company performs a quarterly credit impairment loss assessment quarterly on an individual security basis. As of September 30, 2022 and December 31, 2021, no allowance for credit loss impairment has been recognized as the issuers of these securities have not established a cause for default and various rating agencies have reaffirmed each security's investment grade status. The fair value of these securities have fluctuated since the purchase date as market interest rates fluctuate. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell before the recovery of the securities' amortized cost basis.

The following table summarizes the contractual maturities of debt securities held at September 30, 2022 and December 31, 2021, which are classified as “Marketable securities, at fair value” in the Consolidated Balance Sheets:


	Municipal Bonds — Available-for-Sale
Contractual maturity:	September 30, 2022		December 31, 2021
	(in thousands)
Maturing in one year or less	$	3,207	$	5,606
Maturing in second year through fifth year	28,942		23,054
Maturing in sixth year through tenth year	43,487		52,180
Maturing after ten years	18,112		33,556
Total debt securities	$	93,748	$	114,396

Note 10—Share-Based Compensation

The components of the Company’s share-based compensation expense for the nine months ended September 30, 2022 and 2021 are as follows:


	Nine Months Ended September 30,
	2022		2021
	(in thousands)
Stock options	$	939	$	1,381
Restricted stock and restricted stock units	5,310		4,797
Performance stock units	612		299
Employee stock purchase plan	295		491
Total pre-tax share-based compensation expense charged against income1	$	7,156	$	6,968

1.Share-based compensation expense is recorded in “Cost of services provided” and “Selling, general and administrative expense” in the Company’s Consolidated Statements of Comprehensive Income.

At September 30, 2022, the unrecognized compensation cost related to unvested stock options and awards was $18.3 million. The weighted average period over which these awards will vest is approximately 3.0 years.

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2020 Omnibus Incentive Plan

On May 26, 2020, the Company adopted the 2020 Omnibus Incentive Plan (the “2020 Plan”) after approval by the Company's Shareholders at the Annual Meeting of Shareholders. The 2020 Plan provides that current or prospective officers, employees, non-employee directors and advisors can receive share-based awards such as stock options, performance stock units, restricted stock units and other stock awards. The 2020 Plan seeks to encourage profitability and growth of the Company through short-term and long-term incentives that are consistent with the Company's operating objectives.

As of September 30, 2022, there were 4.7 million shares of common stock reserved for issuance under the 2020 Plan, of which, 1.4 million are available for future grant. The amount of shares available for issuance under the 2020 Plan will increase when outstanding awards under the Company's Second Amended and Restated 2012 Equity Incentive Plan (the “2012 Plan”) are subsequently forfeited, terminated, lapsed, or satisfied thereunder in cash or property other than shares. No stock award will have a term in excess of 10 years. The Nominating, Compensation and Stock Option Committee (the “NCSO”) of the Board of Directors is responsible for determining the terms of the grants in accordance with the 2020 Plan.

Stock Options

A summary of stock options outstanding under the 2020 Plan and the 2012 Plan as of December 31, 2021 and changes during the nine months ended September 30, 2022 are as follows:


	Stock Options Outstanding
	Number of Shares	Weighted Average Exercise Price
	(in thousands)
December 31, 2021	2,181	$	33.42
Granted	352	$	18.10
Exercised	(23)	$	17.50
Forfeited	—	$	—
Expired	(123)	$	28.32
September 30, 2022	2,387	$	31.58

The weighted average grant-date fair value of stock options granted during the nine months ended September 30, 2022 and 2021 was $4.06 and $7.01 per common share, respectively. The total intrinsic value of stock options exercised during the nine months ended September 30, 2022 and 2021 was $0.1 million and $0.6 million, respectively.

The fair value of stock option awards granted in 2022 and 2021 was estimated on the date of grant using the Black-Scholes option valuation model with the following assumptions:


	Nine Months Ended September 30,
	2022		2021
Risk-free interest rate	1.5	%	0.6	%
Weighted average expected life	6.7 years		6.6 years
Expected volatility	36.6	%	34.7	%
Dividend yield	4.6	%	2.9	%

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The following table summarizes other information about the stock options at September 30, 2022:


	September 30, 2022
	(amounts in thousands, except per share data)
Outstanding:
Aggregate intrinsic value	$	—
Weighted average remaining contractual life	5.1 years
Exercisable:
Number of options	1,631
Weighted average exercise price	$	34.53
Aggregate intrinsic value	$	—
Weighted average remaining contractual life	3.6 years

Restricted Stock Units

The fair value of outstanding restricted stock units was determined based on the market price of the shares on the date of grant. During the nine months ended September 30, 2022, the Company granted 0.4 million restricted stock units to its employees with a weighted average grant date fair value of $18.06 per unit. During the nine months ended September 30, 2021, the Company granted 0.3 million restricted stock units with a weighted average grant date fair value of $28.53 per unit.

A summary of the outstanding restricted stock units as of December 31, 2021 and changes during the nine months ended September 30, 2022 is as follows:


	Restricted Stock Units
	Number	Weighted Average Grant Date Fair Value
	(in thousands)
December 31, 2021	652	$	31.03
Granted	410	$	18.06
Vested	(184)	$	33.68
Forfeited	(39)	$	25.68
September 30, 2022	839	$	24.37

Performance Stock Units

On January 4, 2022, the NCSO granted 60,000 Performance Stock Units (“PSUs”) to the Company's executive officers. Such PSUs are contingent upon the achievement of certain total shareholder return (“TSR”) targets as compared to the TSR of the S&P 400 MidCap Index and the participant's continued employment with the Company for the three year period ending December 31, 2024, the date at which such PSUs vest. The unrecognized share-based compensation cost of the TSR-based PSU awards at September 30, 2022 is $1.5 million and is expected to be recognized over a weighted-average period of 2.0 years.

A summary of the outstanding PSUs as of December 31, 2021 and changes during the nine months ended September 30, 2022 is as follows:


	Performance Stock Units
	Number	Weighted Average Grant Date Fair Value
	(in thousands)
December 31, 2021	35	$	34.52
Granted	60	$	21.00
Vested	—	$	—
Forfeited	—	$	—
September 30, 2022	95	$	26.01

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Deferred Stock Units

During the nine months ended September 30, 2022, the NCSO granted 20,000 Deferred Stock Units (“DSUs”) to the Company's non-employee directors. Each DSU award vests in one year. Once vested, the recipient shall be entitled to receive a lump sum payment of a number of shares equal to the total number of DSUs issued to such recipient upon the first to occur of (i) the five years anniversary of the date of grant, (ii) the recipient's death, disability or separation of service from the Board, or (iii) a change of control (as defined by the 2020 Plan). The unrecognized share-based compensation cost of outstanding DSU awards at September 30, 2022 is $0.2 million and is expected to be recognized over a weighted-average period of 0.7 years.

Employee Stock Purchase Plan

The Company’s Employee Stock Purchase Plan (“ESPP”) is currently available through 2026 to all eligible employees. All full-time and part-time employees who work an average of 20 hours per week and have completed two years of continuous service with the Company are eligible to participate. Annual offerings commence and terminate on the respective year’s first and last calendar day.

Under the ESPP, the Company is authorized to issue up to 4.1 million shares of its common stock to its employees. Pursuant to such authorization, there are 2.0 million shares available for future grant at September 30, 2022.

The expense associated with the options granted under the ESPP during the nine months ended September 30, 2022 and 2021 was estimated on the date of grant using the Black-Scholes option valuation model with the following assumptions:


	Nine Months Ended September 30,
	2022	2021
Risk-free interest rate	0.4%	0.1%
Weighted average expected life (years)	1.0	1.0
Expected volatility	36.9%	61.7%
Dividend yield	4.7%	2.9%

Deferred Compensation Plan

The Company offers a Supplemental Executive Retirement Plan (“SERP”) for executives and certain key employees. The SERP allows participants to defer a portion of their earned income on a pre-tax basis and as of the last day of each plan year, each participant will be credited with a match of a portion of their deferral in the form of the Company’s common stock based on the then-current market value. Under the SERP, the Company is authorized to issue 1.0 million shares of its common stock to its employees. Pursuant to such authorization, the Company has 0.3 million shares available for future grant at September 30, 2022. At the time of issuance, such shares are accounted for at cost as treasury stock.

The following table summarizes information about the SERP during the nine months ended September 30, 2022 and 2021:


	Nine Months Ended September 30,
	2022		2021
	(in thousands)
SERP expense1	$	416	$	458
Unrealized (loss) gain recorded in SERP liability account	$	(11,324)	$	3,990

1.Both the SERP match and the deferrals are included in the “selling, general and administrative” caption in the Consolidated Statements of Comprehensive Income.

Note 11—Income Taxes

The Company’s income tax expense during interim periods are based on the estimated annual effective income tax rate plus any discrete items that are recorded in the period in which they occur. The impact on the Company’s income tax provision through the nine months ended September 30, 2022 for such discrete items was approximately $1.1 million.

Differences between the effective tax rate and the applicable U.S. federal statutory rate arise primarily from the effect of state and local income taxes, share-based compensation and tax credits available to the Company. The actual 2022 effective tax rate will likely vary from the estimate depending on the actual operating income earned with availability of tax credits and the exercise of stock options and vesting of share-based awards.

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The Company accounts for income taxes using the asset and liability method, which results in recognizing income tax expense based on the amount of income taxes payable or refundable for the current year. Additionally, the Company regularly evaluates the tax positions taken or expected to be taken resulting from financial statement recognition of certain items. Based on the evaluation, there are no significant uncertain tax positions requiring recognition in the Company’s financial statements. The evaluation was performed for the tax years ended December 31, 2018 through 2021 (with regard to U.S. federal income tax returns) and December 31, 2017 through 2021 (with regard to various state and local income tax returns), the tax years which remain subject to examination by major tax jurisdictions as of September 30, 2022.

The Company may from time to time be assessed interest or penalties by taxing jurisdictions, although any such assessments historically have been minimal. When the Company has received an assessment for interest and/or penalties, it will be classified in the financial statements as selling, general and administrative expense. In addition, any interest or penalties relating to recognized uncertain tax positions would also be recorded in selling, general and administrative expense.

Note 12—Segment Information

The Company manages and evaluates its operations in two reportable segments: Housekeeping (housekeeping, laundry, linen and other services) and Dietary (dietary department services). Although both segments serve a similar customer base and share many operational similarities, they are managed separately due to distinct differences in the type of services provided, as well as the specialized expertise required of the professional management personnel responsible for delivering each segment’s services. Such services are rendered pursuant to discrete contracts, specific to each reportable segment.

The Company’s accounting policies for the segments are generally the same as described in the Company’s significant accounting policies. Differences between the reportable segments’ operating results and other disclosed data and the information in the consolidated financial statements relate primarily to corporate level transactions and recording of transactions at the reportable segment level using other than generally accepted accounting principles. There are certain inventories and supplies that are primarily expensed when incurred within the operating segments, while they are capitalized in the consolidated financial statements. In addition, most corporate expenses such as corporate salary and benefit costs, certain legal costs, debt expense, information technology costs, depreciation, amortization of finite-lived intangible assets, share based compensation costs and other corporate-specific costs, are not fully allocated to the operating segments. There are also allocations for workers’ compensation and general liability expense within the operating segments that differ from the actual expense recorded by the Company under U.S. GAAP. Segment amounts disclosed are prior to elimination entries made in consolidation.


	Three Months Ended September 30,			Nine Months Ended September 30,
		2022		2021		2022		2021
		(in thousands)
Revenues
Housekeeping		$	196,941	$	203,379	$	597,710	$	621,278
Dietary		217,547		212,211		668,446		600,234
Total		$	414,488	$	415,590	$	1,266,156	$	1,221,512

Income before income taxes
Housekeeping		$	17,540	$	17,237	$	55,784	$	68,025
Dietary		(365)		7,259		19,320		41,075
Corporate and eliminations1		(16,182)		(12,375)		(50,080)		(48,964)
Total		$	993	$	12,121	$	25,024	$	60,136

1.Primarily represents corporate office costs and related overhead, recording of certain inventories and supplies and workers compensation costs at the reportable segment level which use accounting methods that differ from those used at the corporate level, as well as consolidated subsidiaries’ operating expenses that are not allocated to the reportable segments, net of investment and other income and interest expense.

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Note 13—Earnings Per Common Share

Basic and diluted earnings per common share are computed by dividing net income by the weighted-average number of basic and diluted common shares outstanding, respectively. The weighted-average number of diluted common shares includes the impact of dilutive securities, including outstanding stock options, restricted stock units, and performance stock units. The table below reconciles the weighted-average basic and diluted common shares outstanding:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(in thousands)
Numerator for basic and diluted earnings per share:
Net income	$	322	$	9,540	$	18,471	$	43,758

Denominator
Weighted average number of common shares outstanding - basic	74,340		74,943		74,334		74,983
Effect of dilutive securities1	8		133		12		187
Weighted average number of common shares outstanding - diluted	74,348		75,076		74,346		75,170

Basic earnings per share:	$	0.00	$	0.13	$	0.25	$	0.58

Diluted earnings per share:	$	0.00	$	0.13	$	0.25	$	0.58

1.Certain outstanding equity awards are anti-dilutive and therefore excluded from the calculation of the weighted average number of diluted common shares outstanding.

Anti-dilutive outstanding equity awards under share-based compensation plans were as follows:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2022	2021	2022	2021
	(in thousands)
Anti-dilutive	3,287	2,184	3,201	1,788

Note 14—Other Contingencies

Line of Credit

At September 30, 2022, the Company 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 the Company’s 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). As of September 30, 2022, there were $25 million in borrowings under the line of credit. As of December 31, 2021, there were no borrowings under the line of credit. The line of credit requires the Company to satisfy two financial covenants, with which the Company is in compliance as of September 30, 2022. The line of credit expires on December 21, 2023.

At September 30, 2022, the Company also had outstanding $81.0 million in irrevocable standby letters of credit, which relate to payment obligations under the Company’s insurance programs. In connection with the issuance of the letters of credit, the amount available under the line of credit was reduced by $81.0 million to $369.0 million at September 30, 2022. The letters of credit expire on January 4, 2023.

Tax Jurisdictions and Matters

The Company provides services throughout the continental United States and is subject to numerous state and local taxing jurisdictions. In the ordinary course of business, a jurisdiction may contest the Company’s reporting positions with respect to the application of its tax code to the Company’s services, which could result in additional tax liabilities.

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The Company has tax matters with various taxing authorities. Because of the uncertainties related to both the probable outcomes and amount of probable assessments due, the Company is unable to make a reasonable estimate of a liability. The Company does not expect the resolution of any of these matters, taken individually or in the aggregate, to have a material adverse effect on the consolidated financial position or results of operations based on the Company’s best estimate of the outcomes of such matters.

Legal Proceedings

The Company is subject to various claims and legal actions in the ordinary course of business. Some of these matters include payroll and employee-related matters and examinations by governmental agencies. As the Company becomes aware of such claims and legal actions, the Company records accruals for any exposures that are probable and estimable. If adverse outcomes of such claims and legal actions are reasonably possible, Management assesses materiality and provides financial disclosure, as appropriate.

At this time, the Company is unable to reasonably estimate possible losses or form a judgment that an unfavorable outcome is either probable or remote with respect to certain pending litigation claims asserted and it is not currently possible to assess whether or not the outcome of these proceedings may have a material adverse effect on the Company.

Government Regulations

The Company’s customers are concentrated in the healthcare industry and are primarily providers of long-term care many of whom have been significantly impacted by COVID-19. The revenues of many of the Company’s customers are highly reliant on Medicare, Medicaid and third party payers’ reimbursement funding rates. New legislation or additional changes in existing regulations could directly impact the governmental reimbursement programs in which the customers participate.

Note 15—Subsequent Events

The Company evaluated all subsequent events through the filing date of this Form 10-Q. There were no events or transactions occurring during this subsequent reporting period which require recognition or additional disclosure in these financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

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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.

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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.


	Three Months Ended September 30,
	2022		2021		% Change
	(in thousands)
Revenues
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.

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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:


	Three Months Ended September 30,
Costs of Services Provided - Key Indicators as a % of Consolidated Revenue	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.

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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:


	Three Months Ended September 30,
Costs of Services Provided - Key Indicators as a % of Segment Revenue	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:


	Three Months Ended September 30,
	2022		2021		$ Change		% Change
	(dollar amounts in thousands)
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.

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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.


	Nine Months Ended September 30,
	2022		2021		% Change
	(in thousands)
Revenues
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.

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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:


	Nine Months Ended September 30,
Costs of Services Provided - Key Indicators as a % of Consolidated Revenue	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.

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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:


	Nine Months Ended September 30,
Costs of Services Provided - Key Indicators as a % of Segment Revenue	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:


	Nine Months Ended September 30,
	2022		2021		$ Change		% Change
	(dollar amounts in thousands)
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)	%

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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:


	Nine Months Ended September 30,
	2022		2021
	(in thousands)
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.

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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.

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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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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.

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Item 4. Controls and Procedures

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.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

In the normal course of business, the Company is involved in various administrative and legal proceedings, including labor and employment, contracts, personal injury, and insurance matters. The Company believes it is not a party to, nor are any of its properties the subject of, any pending legal proceeding or governmental examination that would have a material adverse effect on the Company’s consolidated financial condition or liquidity.

At this time, the Company is unable to reasonably estimate possible losses or form a judgment that an unfavorable outcome is either probable, reasonably possible or remote with respect to certain pending litigation claims asserted.

In light of the uncertainties involved in such proceedings, the ultimate outcome of a particular matter could become material to the Company’s results of operations for a particular period depending on, among other factors, the size of the loss or liability imposed and the level of the Company’s operating income for that period.

Item 1A. Risk Factors

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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

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Item 6. Exhibits

The following exhibits are filed as part of this Report:


Exhibit Number						Description

31.1						Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
31.2						Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
32.1						Certification of the Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
101						The following financial information from the Company’s Form 10-Q for the quarterly period ended September 30, 2022 formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statement of Stockholders’ Equity, and (v) Notes to Consolidated Financial Statements
104						Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.)

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

HEALTHCARE SERVICES GROUP, INC.

Date:

October 21, 2022

/s/ Theodore Wahl

Theodore Wahl

President & Chief Executive Officer

(Principal Executive Officer)

Date:

October 21, 2022

/s/ Andrew M. Brophy

Andrew M. Brophy

Vice President, Controller & Principal Accounting Officer

(Principal Financial and Accounting Officer)