HEALTHCARE SERVICES GROUP INC

Previous wording

We provide management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary service departments of healthcare facilities, including nursing homes, retirement complexes, rehabilitation centers and hospitals located throughout the United States. We believe we are the largest provider of housekeeping and laundry management services to the long-term care industry in the United States, rendering such services to over 2,600 facilities throughout the continental United States as of June 30, 2024.

Current wording

We provide management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary service departments of healthcare facilities, including nursing homes, retirement complexes, rehabilitation centers and hospitals located throughout the United States. We provide such services to approximately 2,600 facilities throughout the continental United States as of September 30, 2024. We believe we are the largest provider of housekeeping and laundry management services to the long-term care industry in the United States.

Previous 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.

Current wording

At September 30, 2024, Housekeeping services were provided at approximately 2,200 customer facilities, generating approximately 44.8% or $572.7 million of our total revenues for the nine months ended September 30, 2024. Dietary services were provided at approximately 1,600 customer facilities at September 30, 2024, generating approximately 55.2% or $705.2 million of our total revenues for the nine months ended September 30, 2024.

Previous wording

Housekeeping and Dietary revenues represented approximately 44.9% and 55.1% of consolidated revenues for the six months ended June 30, 2024, respectively.

Current wording

Housekeeping and Dietary revenues represented approximately 44.6% and 55.4% of consolidated revenues for the three months ended September 30, 2024, respectively.

Previous 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.

Current wording

Consolidated revenues increased 4.1% to $428.1 million during the three months ended September 30, 2024 compared to $411.4 million for the corresponding period in 2023, as a result of the factors discussed below under Reportable Segments.

Previous wording

Housekeeping revenues increased 0.1% and Dietary revenues increased 3.1% during the three months ended June 30, 2024 compared to the corresponding period in 2023. Housekeeping revenues remained flat, as a decrease in the number of facilities serviced was offset by increases in labor and supplies cost that were passed through to customers. Dietary revenues increased driven by contractual pass-throughs of increases in labor and supplies costs while the number of facilities serviced remained relatively flat.

Current wording

Housekeeping revenues increased 0.1% and Dietary revenues increased 7.5% during the three months ended September 30, 2024 compared to the corresponding period in 2023. During the three months ended September 30, 2023, the Company recognized changes in variable consideration as reductions to revenue of $12.6 million, including $3.7 million of Housekeeping revenues and $8.9 million of Dietary revenues. Excluding the impact of such changes, Housekeeping revenues decreased 1.8% and Dietary revenues increased 3.3%. Housekeeping revenues, adjusted for the change in variable consideration, declined due to a decrease in the number of facilities serviced. Dietary revenues, adjusted for the change in variable consideration, increased driven by contractual pass-throughs of increases in labor and supplies costs.

Previous 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.

Current wording

Costs of services provided for Housekeeping, as a percentage of Housekeeping revenues, decreased to 93.6% for the three months ended September 30, 2024 from 94.6% in the corresponding period in 2023. Costs of services provided for Dietary, as a percentage of Dietary revenues, decreased to 94.7% for the three months ended September 30, 2024 from 99.1% in the corresponding period in 2023.

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 June 30, 2024 and 2023 decreased 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 September 30, 2024 increased our total selling, general and administrative expense, while losses on the plan investments during the three months ended September 30, 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 $4.1 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.

Current wording

Excluding the change in the deferred compensation plan described above, consolidated selling, general and administrative expense increased $4.2 million or 10.4% for the three months ended September 30, 2024 compared to the corresponding period in 2023. The change was driven by increases in payroll, legal, travel and fleet-related expenses.

Previous 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.

Current wording

Investment and other income, net was a $3.8 million gain for the three months ended September 30, 2024 compared to $0.4 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 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.

Current wording

Consolidated interest expense decreased to $1.5 million for the three months ended September 30, 2024 compared to $2.1 million for the same period in 2023 due to the lower average amount of short-term borrowings during the three months ended September 30, 2024.

Previous 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.

Current wording

During the three months ended September 30, 2024, we recognized a provision for income taxes of $4.8 million, or 25.4% effective tax rate, versus a benefit for income taxes of $1.3 million, or 20.3% 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 (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.

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 our 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 (benefit) for each of the three months ended September 30, 2024 and 2023 for such discrete items was an expense of $0.3 million.

Previous wording

The following table summarizes the income statement key components that we use to evaluate our financial performance on a consolidated and reportable segment basis for the six months ended June 30, 2024 and 2023. 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.

Current wording

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, 2024 and 2023. 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.

Previous wording

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

Current wording

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

Previous wording

Consolidated revenues increased to $849.7 million for the six months ended June 30, 2024 compared to $836.2 million for the corresponding period in 2023 as a result of the factors discussed below under Reportable Segments.

Current wording

Consolidated revenues increased to $1,277.9 million for the nine months ended September 30, 2024 compared to $1,247.5 million for the corresponding period in 2023 as a result of the factors discussed below under Reportable Segments.

Previous 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.

Current wording

Housekeeping revenues decreased 0.5% during the nine months ended September 30, 2024 compared to the 2023 comparable period, while Dietary revenues increased 4.9% 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, which have increased due to inflation and market factors.

Previous wording

Consolidated costs of services increased by 1.8% to $743.7 million for the six months ended June 30, 2024 compared to $730.6 million for the six months ended June 30, 2023.

Current wording

Consolidated costs of services increased by 0.1% to $1,108.4 million for the nine months ended September 30, 2024 compared to $1,107.5 million for the nine months ended September 30, 2023.

Previous wording

Bad debt provision in the six months ended June 30, 2024 includes an increase to the allowance for doubtful accounts of $17.6 million associated with the Chapter 11 bankruptcy of LaVie. We continue to provide services to LaVie on current terms and are deferring recognition of revenues from LaVie until cash is received. The decline in our self-insurance costs during the six months ended June 30, 2024 was driven by a favorable $5.1 million adjustment to the Company's self-insurance reserves related to an actuarial assessment of the liability during the six months ended June 30, 2024.

Current wording

In addition to the expense recorded based on the aging of receivables, during the nine months ended September 30, 2024, bad debt provision includes an increase to the allowance for doubtful accounts of $17.6 million associated with the Chapter 11 bankruptcy of LaVie. We continue to provide services to LaVie on current terms and are deferring recognition of revenues from LaVie until cash is received. During the nine months ended September 30, 2023, bad debt provision includes an increase to the allowance for doubtful accounts by $13.8 million arising from two customer groups, one which entered into an assignment for the benefit of creditors and one which entered into bankruptcy.

Previous wording

Bad debt provision in the three months ended June 30, 2024 includes an increase to the allowance for doubtful accounts of $17.6 million associated with the Chapter 11 bankruptcy of LaVie Care Centers (“LaVie”). We continue to provide services to LaVie on current terms and are deferring recognition of revenues from LaVie until cash is received. The decline in our self-insurance costs during the three months ended June 30, 2024 was driven by a favorable $5.1 million adjustment to the Company's self-insurance reserves related to an actuarial assessment of the liability during the three months ended June 30, 2024.

Current wording

The decline in our self-insurance costs during the nine months ended September 30, 2024 was driven by a favorable $5.1 million adjustment to the Company's self-insurance reserves related to an actuarial assessment of the liability during the nine months ended September 30, 2024. Self-insurance costs have also decreased during the nine months ended September 30, 2024 relative to the prior comparable period due to improved outcomes on existing workers' compensation claims.

Previous wording

Costs of services provided for Housekeeping, as a percentage of Housekeeping revenues, was 90.7% and 90.5% for the six months ended June 30, 2024 and 2023. Costs of services provided for Dietary, as a percentage of Dietary revenues, decreased to 93.0% for the six months ended June 30, 2024 from 94.0% in the corresponding period in 2023.

Current wording

Costs of services provided for Housekeeping, as a percentage of Housekeeping revenues, was 91.7% and 91.8% for the nine months ended September 30, 2024 and 2023. Costs of services provided for Dietary, as a percentage of Dietary revenues, decreased to 93.6% for the nine months ended September 30, 2024 from 95.7% in the corresponding period in 2023.

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 six months ended June 30, 2024 and 2023 increased our total selling, general and administrative expense for these periods.

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 nine months ended September 30, 2024 and 2023 increased our total selling, general and administrative expense for these periods.

Previous wording

Excluding the change in the deferred compensation plan described above, consolidated selling, general and administrative expense increased $8.4 million or 10.8% for the six months ended June 30, 2024 compared to the corresponding period in 2023. The change was driven primarily by increases in payroll, legal and transportation expenses.

Current wording

Excluding the change in the deferred compensation plan described above, consolidated selling, general and administrative expense increased $12.6 million or 10.7% for the nine months ended September 30, 2024 compared to the corresponding period in 2023. The change was driven primarily by increases in payroll, legal, travel and fleet-related expenses.

Previous wording

Investment and other income was an $8.3 million gain for the six months ended June 30, 2024, compared to a $6.7 million gain during the corresponding 2023 period, due to market fluctuations in the value of our trading security investments representing the funding for our deferred compensation plan.

Current wording

Investment and other income, net was a $12.1 million gain for the nine months ended September 30, 2024, compared to a $7.0 million gain during the corresponding 2023 period, due to market fluctuations in the value of our trading security investments representing the funding for our deferred compensation plan.

Previous wording

Consolidated interest expense was $3.7 million for the six months ended June 30, 2024 and 2023 as the average borrowing amount on our line of credit and interest rates were similar for the periods.

Current wording

Consolidated interest expense was $5.3 million and $5.8 million for the nine months ended September 30, 2024 and 2023 as the average borrowing amount on our line of credit decreased, which was offset in part by increased interest rates for 2024.

Previous wording

During the six months ended June 30, 2024 and 2023, the Company recognized a provision for income taxes of $5.8 million, a 30.0% effective tax rate, and $7.2 million, a 26.4% effective tax rate, respectively. The actual annual effective tax rate will be impacted by the tax effects of option exercises or vested awards, which are treated as discrete items in the reporting period in which they occur and may vary based upon the Company’s common stock price at exercise and the volume of such exercises; therefore, these cannot be considered in the calculation of the estimated annual effective tax rate. The impact on our income tax provision for the six months ended June 30, 2024 and 2023 for such discrete items was an expense of approximately $1.2 million and $1.1 million, respectively.

Current wording

During the nine months ended September 30, 2024 and 2023, we recognized a provision for income taxes of $10.6 million, a 27.8% effective tax rate, and $5.9 million, a 28.3% effective tax rate, respectively. The actual annual effective tax rate will be impacted by the tax effects of option exercises or vested awards, which are treated as discrete items in the reporting period in which they occur and may vary based upon the our 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 nine months ended September 30, 2024 and 2023 for such discrete items was an expense of approximately $1.5 million and $1.4 million, respectively.

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 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.

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 September 30, 2024, we had cash, cash equivalents and marketable securities of $103.8 million, restricted cash equivalents of $1.1 million, restricted marketable securities of $25.1 million and working capital of $380.9 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 2.9 to 1.0 at September 30, 2024 and 2.6 to 1.0 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 six months ended June 30, 2024 and 2023, our cash flows were as follows:

Current wording

For the nine months ended September 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 six months ended June 30, 2024, cash flow from operations was negative primarily due to the increase in accounts receivable.

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 nine months ended September 30, 2024, cash flow from operations was negative primarily due to the increase in accounts receivable.

Previous wording

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

Current wording

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

Previous wording

We repurchased 0.3 million shares of our common stock for $3.0 million as part of the capital rebalancing strategy during the three and six months ended June 30, 2024. We did not repurchase any shares during the three months ended June 30, 2023 and repurchased 0.2 million shares of our common stock for $2.2 million during the six months ended June 30, 2023. We remain authorized to repurchase up to 6.2 million shares of our Common Stock pursuant to the Repurchase Plan.

Current wording

During the three months ended September 30, 2024 and 2023, we repurchased 0.1 million and 0.3 million shares of our common stock for $1.0 million and $4.0 million, respectively. During the nine months ended September 30, 2024 and 2023, we repurchased 0.4 million and 0.5 million shares of our common stock for $4.0 million and $6.2 million, respectively. We remain authorized to repurchase up to 6.1 million shares of our Common Stock pursuant to the Repurchase Plan.

Previous 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.

Current wording

At September 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 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. At September 30, 2024, we borrowed $25 million under the line of credit.

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 $3.5 million through June 30, 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 $4.9 million through September 30, 2024.