HEALTHCARE SERVICES GROUP INC

Previous wording

At March 31, 2024, Housekeeping services were provided at approximately 2,300 customer facilities, generating approximately 45.0% or $190.6 million of our total revenues for the three months ended March 31, 2024. Dietary services were provided at approximately 1,600 customer facilities at March 31, 2024, generating approximately 55.0% or $232.9 million of our total revenues for the three months ended March 31, 2024.

Current wording

At June 30, 2024, Housekeeping services were provided at approximately 2,300 customer facilities, generating approximately 44.9% or $381.6 million of our total revenues for the six months ended June 30, 2024. Dietary services were provided at approximately 1,600 customer facilities at June 30, 2024, generating approximately 55.1% or $468.2 million of our total revenues for the six months ended June 30, 2024.

Previous wording

Housekeeping and Dietary revenues represented approximately 45.0% and 55.0% of consolidated revenues for the three months ended March 31, 2024, respectively.

Current wording

Housekeeping and Dietary revenues represented approximately 44.8% and 55.2% of consolidated revenues for the three months ended June 30, 2024, respectively.

Previous wording

Consolidated revenues increased 1.5% to $423.4 million during the three months ended March 31, 2024 compared to $417.2 million for the corresponding period in 2023, as a result of the factors discussed below under Reportable Segments.

Current wording

Consolidated revenues increased 1.8% to $426.3 million during the three months ended June 30, 2024 compared to $418.9 million for the corresponding period in 2023, as a result of the factors discussed below under Reportable Segments.

Previous wording

Costs of services provided for Housekeeping, as a percentage of Housekeeping revenues, increased to 90.3% for the three months ended March 31, 2024 from 89.6% in the corresponding period in 2023. Costs of services provided for Dietary, as a percentage of Dietary revenues, decreased to 92.4% for the three months ended March 31, 2024 from 93.4% in the corresponding period in 2023.

Current wording

Costs of services provided for Housekeeping, as a percentage of Housekeeping revenues, decreased to 91.1% for the three months ended June 30, 2024 from 91.3% in the corresponding period in 2023. Costs of services provided for Dietary, as a percentage of Dietary revenues, decreased to 93.7% for the three months ended June 30, 2024 from 94.5% in the corresponding period in 2023.

Previous wording

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.

Current wording

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.

Previous wording

Included in selling, general and administrative expense are gains and losses associated with changes in the value of investments under the deferred compensation plan. These investments represent the amounts held on behalf of the participating employees and changes in the value of these investments affect the amount of our deferred compensation liability. Gains on the plan investments during the three months ended March 31, 2024 and 2023 increased our total selling, general and administrative expense.

Current wording

Included in selling, general and administrative expense are gains and losses associated with changes in the value of investments under the deferred compensation plan. These investments represent the amounts held on behalf of the participating employees and changes in the value of these investments affect the amount of our deferred compensation liability. Gains on the plan investments during the three months ended June 30, 2024 and 2023 decreased our total selling, general and administrative expense.

Previous wording

Excluding the change in the deferred compensation plan described above, consolidated selling, general and administrative expense increased $4.3 million or 11.2% for the three months ended March 31, 2024 compared to the corresponding period in 2023. The change was driven by increases in payroll and travel-related expenses.

Current wording

Excluding the change in the deferred compensation plan described above, consolidated selling, general and administrative expense increased $4.1 million or 10.4% for the three months ended June 30, 2024 compared to the corresponding period in 2023. The change was driven by increases in payroll, legal and transportation expenses.

Previous wording

Investment and other income was a $5.7 million gain for the three months ended March 31, 2024 compared to a $3.1 million gain in the corresponding 2023 period. The change was driven by market fluctuations in the value of our trading security investments representing the funding for our deferred compensation plan.

Current wording

Investment and other income was a $2.6 million gain for the three months ended June 30, 2024 compared to a $3.6 million gain in the corresponding 2023 period. The change was driven by market fluctuations in the value of our trading security investments representing the funding for our deferred compensation plan.

Previous wording

Consolidated interest expense increased to $2.0 million for the three months ended March 31, 2024 compared to $1.8 million for the same period in 2023 due to increased short-term borrowings during 2024 and increased market interest rates.

Current wording

Consolidated interest expense decreased to $1.7 million for the three months ended June 30, 2024 compared to $1.9 million for the same period in 2023 due to the lower average amount of short-term borrowings during the three months ended June 30, 2024.

Previous wording

During the three months ended March 31, 2024, the Company recognized a provision for income taxes of $6.0 million, or 28.2% effective tax rate, versus a provision for income taxes of $4.5 million, or 27.8% effective tax rate, for the same period in 2023. The effective tax rate change is based on the impact of discrete items in each quarter combined with the impact of our full year income estimate on the tax provision.

Current wording

During the three months ended June 30, 2024, the Company recognized a benefit for income taxes of $0.2 million, or 10.0% effective tax rate, versus a provision for income taxes of $2.7 million, or 24.5% effective tax rate, for the same period in 2023. The effective tax rate change is based on the impact of discrete items in each quarter combined with the impact of our full year income estimate on the tax provision.

Previous wording

The actual annual effective tax rate will be impacted by the tax effects of option exercises or vested awards, which are treated as discrete items in the reporting period in which they occur and may vary based upon the Company’s common stock price at exercise and the volume of such exercises; therefore, these cannot be considered in the calculation of the estimated annual effective tax rate. The impact on our income tax provision for the three months ended March 31, 2024 for such discrete items was a $1.0 million expense versus a $0.9 million expense for the same period in 2023.

Current wording

The actual annual effective tax rate will be impacted by the tax effects of option exercises or vested awards, which are treated as discrete items in the reporting period in which they occur and may vary based upon the Company’s common stock price at exercise and the volume of such exercises; therefore, these cannot be considered in the calculation of the estimated annual effective tax rate. The impact on our income tax (benefit) provision for each of the three months ended June 30, 2024 and 2023 for such discrete items was an expense of $0.2 million.

Previous wording

Housekeeping revenues decreased 1.5% during the three months ended March 31, 2024 compared to the corresponding period in 2023, while Dietary revenues increased 4.1% over the same period. Housekeeping revenues decreased due to a decline in the number of facilities serviced year-over-year. While there was a slight increase in the number of Dietary facilities year-over-year, Dietary revenues also increased due to passing the impact of labor and supplies cost increases through to customers following our contract modification initiatives.

Current wording

Housekeeping revenues decreased 0.7% during the six months ended June 30, 2024 and 2023, while Dietary revenues increased 3.6% over the same period. Housekeeping revenues decreased due to a decline in the number of facilities serviced year-over-year, offset in part by increases to revenue from costs passed through to customer billings. Dietary revenues increased resulting from increases to contractual pass-throughs of labor and food costs to customer billings.

Previous wording

Our primary sources of liquidity are available cash and cash equivalents, available lines of credit under our revolving credit facility and cash flows from operating activities. At March 31, 2024, we had cash, cash equivalents and marketable securities of $104.9 million, restricted cash equivalents of $24.7 million and working capital of $371.0 million, compared to cash, cash equivalents and marketable securities of $147.5 million and working capital of $354.8 million at December 31, 2023. Our current ratio was 2.8 to 1 at both March 31, 2024 and December 31, 2023. 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. Restricted cash equivalents represent highly liquid investments held in a trust account as collateral for certain insurance coverages the Company obtained from a third-party insurance carrier.

Current wording

Our primary sources of liquidity are available cash and cash equivalents, available lines of credit under our revolving credit facility and cash flows from operating activities. At June 30, 2024, we had cash, cash equivalents and marketable securities of $105.6 million, restricted cash equivalents of $3.1 million, restricted marketable securities of $22.0 million and working capital of $363.7 million, compared to cash, cash equivalents and marketable securities of $147.5 million and working capital of $354.8 million at December 31, 2023. Our current ratio was 2.7 to 1 at June 30, 2024 and 2.6 to 1 at December 31, 2023. 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. Restricted cash equivalents and restricted marketable securities, at fair value represent highly liquid investments held in a trust account as collateral for certain insurance coverages the Company obtained from a third-party insurance carrier.

Previous wording

For the three months ended March 31, 2024 and 2023, our cash flows were as follows:

Current wording

For the six months ended June 30, 2024 and 2023, our cash flows were as follows:

Previous wording

Our primary sources of cash from operating activities are the revenues generated from our Housekeeping and Dietary services. Our primary uses of cash from operating activities are the funding of our payroll and other personnel-related costs as well as the costs of supplies used in providing our services. For the three months ended March 31, 2024, cash flow from operations was negative primarily due to the increase in accounts receivable and decrease in accrued payroll. The increase in accounts receivable was driven by, among other things, a cybersecurity incident at Change Healthcare, a third-party patient claims processor which many of our customers use to submit patient claims, which resulted in delays in government reimbursements to our customers.

Current wording

Our primary sources of cash from operating activities are the revenues generated from our Housekeeping and Dietary services. Our primary uses of cash from operating activities are the funding of our payroll and other personnel-related costs as well as the costs of supplies used in providing our services. For the six months ended June 30, 2024, cash flow from operations was negative primarily due to the increase in accounts receivable.

Previous wording

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 hardware, and furniture and fixtures (see “Capital Expenditures” below for additional information). Such uses of cash are offset by proceeds from sales of marketable securities.

Current wording

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 hardware, and furniture and fixtures (see “Capital Expenditures” below for additional information). Such uses of cash are offset by proceeds from sales of property and equipment and marketable securities.

Previous wording

The primary use of cash from financing activities is repurchases of our common stock. On February 14, 2023, our Board of Directors authorized the repurchase of up to 7.5 million outstanding shares and suspended the quarterly dividend previously issued on common stock as part of our overall capital rebalancing strategy. We have repurchased 1.0 million shares of our common stock as part of the capital rebalancing strategy. We did not repurchase shares of our common stock during the three months ended March 31, 2024. We remain authorized to repurchase up to 6.5 million outstanding shares under this authorization.

Current wording

The primary use of cash from financing activities is repurchases of our common stock. On February 14, 2023, our Board of Directors authorized the repurchase of up to 7.5 million outstanding shares (the “Repurchase Plan”) and suspended the quarterly dividend previously issued on common stock as part of our overall capital rebalancing strategy.

Previous wording

As of March 31, 2024, we had a $300 million bank line of credit on which to draw for general corporate purposes. Amounts drawn under the line of credit are payable upon demand and generally bear interest at a floating rate, based on our leverage ratio, and starting at the Term Secured Overnight Financing Rate (“SOFR”) rate plus 165 basis points. The Company’s line of credit was amended on November 22, 2022 to, among other things, provide for a five-year unsecured revolving loan facility in the aggregate amount of $300 million with, at the Company’s option, the ability to increase the revolving loan commitments to an aggregate amount not to exceed $500 million and to change the benchmark rate from the London Interbank Offered Rate (“LIBOR”) to SOFR. At March 31, 2024, there were $40.0 million in borrowings under the line of credit.

Current wording

At June 30, 2024, we had a $300 million bank line of credit on which to draw for general corporate purposes. Amounts drawn under the line of credit are payable upon demand and generally bear interest at a floating rate, based on our leverage ratio, and starting at the Term Secured Overnight Financing Rate (“SOFR”) rate plus 165 basis points. The Company’s line of credit was amended on November 22, 2022 to, among other things, provide for a five-year unsecured revolving loan facility in the aggregate amount of $300 million with, at the Company’s option, the ability to increase the revolving loan commitments to an aggregate amount not to exceed $500 million and to change the benchmark rate from the London Interbank Offered Rate (“LIBOR”) to SOFR. At June 30, 2024, we borrowed $30 million under the line of credit.

Previous wording

At March 31, 2024, we also had outstanding $72.4 million in irrevocable standby letters of credit, which relate to payment obligations under our insurance programs.

Current wording

At June 30, 2024, we also had outstanding $60.2 million in irrevocable standby letters of credit, which relate to payment obligations under our insurance programs.

Previous wording

The level of capital expenditures is generally dependent on the number of new customers obtained. Such capital expenditures primarily consist of housekeeping and food service equipment purchases, laundry and linen equipment installations, computer hardware and software, furniture and fixtures. Although we have no specific material commitments for capital expenditures through the end of calendar year 2024, we estimate that for 2024 we will have capital expenditures of approximately $5.0 million to $7.0 million, of which we have made $2.2 million through March 31, 2024.

Current wording

The level of capital expenditures is generally dependent on the number of new customers obtained. Such capital expenditures primarily consist of housekeeping and food service equipment purchases, laundry and linen equipment installations, computer hardware and software, furniture and fixtures. Although we have no specific material commitments for capital expenditures through the end of calendar year 2024, we estimate that for 2024 we will have capital expenditures of approximately $5.0 million to $7.0 million, of which we have made $3.5 million through June 30, 2024.