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 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.

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 2,800 facilities throughout the continental United States as of March 31, 2025. We believe we are the largest provider of housekeeping, laundry and dietary management services to the long-term care industry in the United States.

Previous wording

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

Current wording

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

Previous wording

Housekeeping consists of managing our customers’ housekeeping departments, which are principally responsible for the cleaning, disinfecting and sanitizing of resident rooms and common areas of the customers’ facilities, as well as the laundering and processing of the bed linens, uniforms, resident personal clothing and other assorted linen items utilized at the customers’ facilities. Upon beginning service with a customer facility, we typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise the front-line personnel and coordinate housekeeping services with other facility support functions in accordance with customer requests. Such management personnel also oversee the execution of various cost and quality control procedures including continuous training and employee evaluation. On-site management is responsible for all daily customer housekeeping department activities with regular support provided by a District Manager specializing in such services.

Current wording

Housekeeping services consist of managing our customers’ housekeeping departments, which are principally responsible for the cleaning, disinfecting and sanitizing of resident rooms and common areas of the customers’ facilities, as well as the laundering and processing of the bed linens, uniforms, resident personal clothing and other assorted linen items utilized at the customers’ facilities. Upon beginning service with a customer facility, we typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise the front-line personnel and coordinate housekeeping services with other facility support functions in accordance with customer requests. Such management personnel also oversee the execution of various cost and quality control procedures including continuous training and employee evaluation. On-site management is responsible for all daily customer housekeeping department activities with regular support provided by a District Manager specializing in such services.

Previous wording

Dietary consists of managing our customers’ dietary departments, which are principally responsible for food purchasing, meal preparation and professional dietitian services, which include the development of menus that meet the dietary needs of residents. On-site management is responsible for all daily dietary department activities with regular support provided by a District Manager specializing in dietary services. We also offer clinical consulting services to our dietary customers which may be provided as a standalone service or be bundled with other dietary department services. Upon beginning service with a customer facility, we typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise the front-line personnel and coordinate dietitian services with other facility support functions in accordance with customer requests. Such management personnel also oversee the execution of various cost and quality control procedures including continuous training and employee evaluation.

Current wording

Dietary services consist of managing our customers’ dietary departments, which are principally responsible for food purchasing, meal preparation and professional dietitian services, which include the development of menus that meet the dietary needs of residents. On-site management is responsible for all daily dietary department activities with regular support provided by a District Manager specializing in dietary services. We also offer clinical consulting services to our dietary customers which may be provided as a standalone service or be bundled with other dietary department services. Upon beginning service with a customer facility, we typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise the front-line personnel and coordinate dietitian services with other facility support functions in accordance with customer requests. Such management personnel also oversee the execution of various cost and quality control procedures including continuous training and employee evaluation.

Previous 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.

Current wording

Housekeeping services were provided to approximately 2,400 customer facilities at March 31, 2025 and contributed approximately 43.9% or $196.3 million of our consolidated revenues for the three months ended March 31, 2025. Dietary services were provided at approximately 1,700 customer facilities at March 31, 2025, generating approximately 56.1% or $251.3 million of our total revenues for the three months ended March 31, 2025.

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 three 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.

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 three months ended March 31, 2025 and 2024.

Previous wording

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

Current wording

Housekeeping and Dietary revenues represented approximately 43.9% and 56.1% of consolidated revenues for the three months ended March 31, 2025, respectively.

Previous 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.

Current wording

Consolidated revenues increased 5.7% to $447.7 million during the three months ended March 31, 2025 compared to $423.4 million for the corresponding period in 2024 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, 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.

Current wording

We include certain expenses classified as selling, general and administrative expenses within segment expenses. Segment expenses for Housekeeping, as a percentage of Housekeeping revenues, increased to 89.2% for the three months ended March 31, 2025 from 88.9% in the corresponding period in 2024. Segment expenses for Dietary, as a percentage of Dietary revenues, decreased to 92.4% for the three months ended March 31, 2025 from 93.0% in the corresponding period in 2024.

Previous wording

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:

Current wording

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

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.

Current wording

Variations within these key indicators relate to the provision of services at new facilities, changes in the mix of customers for whom we provide supplies or do not provide supplies, changes in the services provided to certain customers, and changes in bad debt expense. Management focuses on building efficiencies and managing labor and other costs at the facility level, as well as managing supply chain costs, for new and existing facilities.

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 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.

Current wording

Selling, general and administrative expense incurred at a segment-level is discussed in the Reportable Segments section above. Also included in consolidated selling, general and administrative expense are corporate expenses and gains and losses associated with changes in the value of investments under the deferred compensation liability. These investments represent the amounts held on behalf of the participating employees as changes in the value of these investments affect the amount of our deferred compensation liability. Losses on the plan investments during the three months ended March 31, 2025 decreased our total selling, general and administrative expense, while gains on the plan investments during the three months ended March 31, 2024 increased 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 $4.2 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.

Current wording

Excluding the change in the deferred compensation plan described above, consolidated selling, general and administrative expense increased $3.6 million or 8.5% for the three months ended March 31, 2025 compared to the corresponding period in 2024. The change was driven by increases in payroll and payroll-related costs including fleet vehicle expenses, impacted by ongoing inflation.

Previous 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.

Current wording

Investment and other income, net was a gain of $1.3 million for the three months ended March 31, 2025, compared to a gain of $5.7 million in the corresponding 2024 period, due to market fluctuations in the value of our trading security investments representing the funding for our deferred compensation plan. Excluding the impact of such market fluctuations, interest and other income increased $1.1 million due to increased interest income from notes receivable and increases in cash and marketable securities on-hand.

Previous 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.

Current wording

Consolidated interest expense decreased to $0.4 million for the three months ended March 31, 2025 compared to $2.0 million for the same period in 2024 as we incurred lower average borrowings on our line of credit during the three months ended March 31, 2025 compared to 2024.

Previous 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.

Current wording

During the three months ended March 31, 2025, we recognized a provision for income taxes of $6.7 million, or 27.9% effective tax rate, versus a provision for income taxes of $6.0 million, or 28.2% effective tax rate, for the same period in 2024. 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 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.

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 for each of the three months ended March 31, 2025 and 2024 for such discrete items was an expense of $0.8 million and $1.0 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 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.

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 March 31, 2025, we had cash, cash equivalents and marketable securities of $114.8 million, restricted cash equivalents of $0.1 million, restricted marketable securities of $29.1 million and working capital of $376.2 million, compared to cash, cash equivalents and marketable securities of $107.3 million, restricted cash equivalents of $3.4 million, restricted marketable securities of $25.1 million and working capital of $364.1 million at December 31, 2024. Our current ratio was 2.9 to 1.0 at both March 31, 2025 and December 31, 2024. Marketable securities and restricted marketable securities represent fixed income investments that are highly liquid and can be readily purchased or sold through established markets. Such securities are held by HCSG Insurance to satisfy capital requirements of the state regulator related to captive insurance companies.

Previous wording

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

Current wording

For the three months ended March 31, 2025 and 2024, 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 nine months ended September 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 three months ended March 31, 2025, cash flow from operations included $17.2 million in net income, non-cash add-backs to net income of $8.9 million, and a $1.4 million increase in cash flows from changes in operating assets and liabilities, including the impact of ERC refunds received. Such activities are the primary drivers of the period-over-period changes in net cash provided by operating activities.

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 property and equipment and marketable securities.

Current wording

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

Previous 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.

Current wording

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

Previous 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.

Current wording

The primary uses of cash for financing activities are repurchases of common stock. On February 14, 2023, our Board of Directors authorized the repurchase of up to 7.5 million outstanding shares (the “Repurchase Plan”). We repurchased 0.7 million shares of our common stock for $7.0 million, including commissions, during the three months ended March 31, 2025. We did not repurchase shares of our common stock during the three months ended March 31, 2024. We remain authorized to repurchase up to 5.4 million shares of our Common Stock pursuant to the Repurchase Plan.

Previous 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.

Current wording

At March 31, 2025, 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 to SOFR. At March 31, 2025, we had no borrowings under the line of credit.

Previous wording

Net income plus interest expense, income tax expense, depreciation, amortization, stock compensation expense, costs incurred to maintain the line of credit facility and certain third-party charges associated with the line of credit agreement or permitted acquisition-related activity, subject to limitations.

Current wording

Net income plus interest expense, income tax expense, depreciation, amortization, share-based compensation expense, costs incurred to maintain the line of credit facility and certain third-party charges associated with the line of credit agreement or permitted acquisition-related activity, subject to limitations.

Previous wording

As noted above, we were in compliance with our financial covenants at September 30, 2024 and we expect to remain in compliance. The line of credit expires on November 22, 2027. We believe that our existing capacity under the line of credit provides adequate liquidity.

Current wording

As noted above, we were in compliance with our financial covenants at March 31, 2025 and we expect to remain in compliance. The line of credit expires on November 22, 2027. We believe that our existing capacity under the line of credit and our history of favorable operating cash flows provides adequate liquidity to fund our operations for the next twelve months following the date of this report.

Previous wording

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

Current wording

At March 31, 2025, we had outstanding $48.0 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 $4.9 million through September 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 2025, we estimate that for 2025 we will have capital expenditures of approximately $5.0 million to $7.0 million, of which we have made $1.7 million through March 31, 2025.