Notes to Consolidated Financial Statements
Years Ended December 31,
2017
,
2016
and
2015
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 healthcare facilities, 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 clients 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 clients. In such agreements, the Company is responsible for the day-to-day management of employees located at the clients’ facilities. The Company also provides services on the basis of management-only agreements for a limited number of clients. The Company’s agreements with its clients typically provide for a
one
year service term, cancelable by either party upon
30
to
90
days’ notice, after the initial
60
to
120
day period.
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 clients’ housekeeping departments, which are principally responsible for the cleaning, disinfecting and sanitizing of resident rooms and common areas of a client’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 client facility.
Dietary consists of managing the clients’ 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.
Use of Estimates in Financial Statements
In preparing financial statements in conformity with United States generally accepted accounting principles (“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. Management regularly evaluates this information to determine if it is necessary to update the basis for its estimates and to adjust for known changes.
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.
Fair Value of Financial Instruments
The Company determines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company utilizes valuation techniques that maximize the use of observable inputs (Levels 1 and 2) and minimize the use of unobservable inputs (Level 3) within the fair value hierarchy. Assets and liabilities are classified within the fair value hierarchy based on the lowest level (least observable) input that is significant to the measurement in its entirety.
The Company’s financial instruments that are measured at fair value on a recurring basis consist of marketable securities and the deferred compensation fund investments. Other financial instruments such as cash and cash equivalents, accounts and notes receivable, accounts payable (including income taxes payable and accrued expenses) and borrowings under the Company’s line of credit are short-term in nature, and therefore the carrying value of these instruments are deemed to approximate their fair value.
The Company has certain notes receivable that either do not bear interest or bear interest at a below-market rate. Therefore, such notes receivable of
$6.9 million
and
$5.7 million
at
December 31, 2017
and
2016
, respectively, have been discounted to their present value and are reported at values of
$6.8 million
and
$5.7 million
at
December 31, 2017
and
2016
, respectively.
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 and 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.
Investments in Marketable Securities
Marketable securities are defined as fixed income investments which are highly liquid and can be readily purchased or sold through established markets. At
December 31, 2017
, the Company had marketable securities of
$73.2 million
which were comprised primarily of tax exempt municipal bonds. These investments are accounted for as available-for-sale securities and are reported at fair value on the balance sheet. For the year ended
December 31, 2017
,
$1.1 million
of unrealized
gains
related to these investments were recorded in other comprehensive income. Unrealized gains and losses are recorded net of income taxes.
These assets are available for future needs under the Company’s self-insurance programs. The Company’s investment policy is intended to manage the assets to achieve the goals of preserving principal, maintaining adequate liquidity at all times, and maximizing returns subject to investment guidelines. The investment policy limits investment to certain types of instruments issued by institutions primarily with investment grade credit ratings and places restrictions on concentration by type and issuer.
The Company periodically reviews the investments in marketable securities for other than temporary declines in fair value below the cost basis and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As of
December 31, 2017
, Management believes that the recorded value of the Company’s investments in marketable securities was recoverable in all material respects.
Inventories and Supplies
Inventories and supplies include housekeeping, linen and laundry supplies, as well as food provisions and supplies. Inventories and supplies are stated at cost to approximate a first-in, first-out (FIFO) basis. Linen supplies are amortized on a straight-line basis over their estimated useful life of
24
months.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Additions, renewals and improvements are capitalized, while maintenance and repair costs are expensed when incurred. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts and any resulting gain or loss is included in income. Depreciation is recorded using the straight-line method over the following estimated useful lives: Housekeeping and Dietary equipment —
5
to
7
years; computer hardware and software —
3
to
7
years; and other, consisting of furniture and fixtures, leasehold improvements and vehicles —
5
to
10
years. Depreciation expense on property and equipment for the years ended
December 31, 2017
,
2016
and
2015
was
$5.0 million
,
$4.8 million
and
$4.4 million
, respectively.
Revenue Recognition
Revenues from the Company’s service agreements with clients are recognized as services are performed. Revenues are reported net of sales taxes that are collected from customers and remitted to taxing authorities.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. The Company accrues for probable tax obligations as required by facts and circumstances in various regulatory environments. In addition, deferred tax assets and liabilities are recognized for expected future tax consequences of temporary differences between the financial reporting and tax basis 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. Deferred tax assets and liabilities are more fully described in Note 12.
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 calculated 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 and 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 and using the share price on the date of grant for restricted stock and restricted 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.
Advertising Costs
Advertising costs are expensed when incurred. Advertising costs were
no
t material for the years ended
December 31, 2017
,
2016
and
2015
.
Impairment of Long-Lived Assets
The carrying amounts of long-lived assets are periodically reviewed to determine whether current events or circumstances warrant adjustment to such carrying amounts. Any impairment would be measured as the amount that the carrying value of such assets exceeds their fair value, primarily based on estimated undiscounted cash flows. Considerable management judgment is necessary to estimate the fair value of assets. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value, less cost to sell.
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 at least annually during the fourth quarter of each year 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 for the years ended
December 31, 2017
,
2016
or
2015
.
Treasury Stock
Treasury stock purchases are accounted for under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. Gains or losses on the subsequent reissuance of shares are credited or charged to additional paid in capital.
Reclassification
Certain prior period amounts have been reclassified to conform to current year presentation.
Concentrations of Credit Risk
The Company’s financial instruments that are subject to concentrations of credit risk are cash and cash equivalents, marketable securities, deferred compensation funding and accounts and notes receivable. The Company’s marketable securities are fixed income investments which are highly liquid and can be readily purchased or sold using established markets. At
December 31, 2017
and
2016
, 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 clients are concentrated in the healthcare industry, and are primarily providers of long-term care. The revenues of many of the Company’s clients are highly reliant on Medicare, Medicaid and third-party payors’ reimbursement funding rates. New legislation or changes in existing regulations could be made which could directly impact the governmental reimbursement
programs in which the clients participate. As a result, the Company may not know the full effects of such programs until these laws are fully implemented and governmental agencies issue applicable regulations or guidance.
Significant Clients
For the year ended
December 31, 2017
, the Company had several clients who individually contributed over 3%, with one client, a multi-state operator, contributing as high as
17.6%
, of the Company’s total consolidated revenues. Although the Company expects to continue its relationships with these clients, there can be no assurance thereof. The loss, individually or in the aggregate, of such clients, or a significant reduction in the revenues the Company receives from such clients, could have a material adverse effect on the Company’s results of operations. In addition, if any of these clients change or alter current payments terms, it could increase the Company’s accounts receivables balance and have a material adverse effect on the Company’s cash flows.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-09,
Stock Compensation: Improvements to Employee Share-Based Payment Accounting.
ASU 2016-09 was intended to simplify several aspects of the accounting for share-based payments. The Company adopted the standard beginning January 1, 2017. The impact of adopting the standard included the recognition of excess tax benefits related to share-based payments as a component of income tax expense, as opposed to additional paid-in capital; an amendment to the calculation of diluted earnings per share to exclude windfall tax benefits from assumed proceeds when calculating diluted shares outstanding; as well as accounting for forfeitures of share-based awards as they occur, as opposed to reserving for estimated forfeitures. The most material impact of the adoption was a reduction to income tax expense in 2017 of
$5.7 million
.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations: Clarifying the Definition of a Business
. The guidance changes the definition of a business to assist entities in evaluating whether a set of transferred assets and activities constitutes a business under Topic 805. The guidance is effective for annual periods beginning after December 15, 2017, with early adoption permitted. The Company adopted the standard effective January 1, 2018.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, which was subsequently amended and updated throughout 2015 and 2016. The standard provides guidance on revenue recognition, among other topics such as the accounting for compensation and costs to obtain a contract. The standard requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Adoption is required for reporting periods beginning after December 15, 2017, with early adoption prohibited. The Company adopted the standard beginning on January 1, 2018 utilizing the modified retrospective method. The Company has evaluated the impact of the adoption of the standard by reviewing the nature and terms of existing contracts under the provisions of the new guidance and designing operational and process updates required for ongoing compliance. Management does not expect this guidance to result in a material impact to the Company's accounting for the revenue earned related to its Housekeeping and Dietary department services and accordingly, does not expect to record an adjustment to its consolidated financial statements upon adoption of the standard. Management anticipates that the most significant impact of the new standard will relate to additional disclosure obligations.
In February 2016, the FASB issued ASU 2016-02,
Leases
. ASU 2016-02 requires lessees to recognize assets and liabilities on their balance sheet related to the rights and obligations created by most leases, while continuing to recognize expenses on their income statements over the lease term. It will also require disclosures designed to give financial statement users information regarding the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted for all entities. The Company will adopt the new guidance as of January 1, 2019. Management is continuing to evaluate the expected impact of the requirements, however it is expected that the primary impact will relate to the capitalization of operating leases of office space, vehicles and equipment.
Note 2—Changes in Accumulated Other Comprehensive Income by Component
For the years ended
December 31, 2017
,
2016
and
2015
, the Company’s other comprehensive income related to the unrealized gains and losses from the Company’s available-for-sale marketable securities.
The following table provides a summary of changes in accumulated other comprehensive income, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains and (Losses) on Available-for Sale-Securities
(1)
|
|
2017
|
|
2016
|
|
2015
|
|
(in thousands)
|
Accumulated other comprehensive (loss) income — beginning balance
|
$
|
(319
|
)
|
|
$
|
543
|
|
|
$
|
25
|
|
Other comprehensive income (loss) before reclassifications
|
1,149
|
|
|
(1,005
|
)
|
|
535
|
|
Losses (gains) reclassified from other comprehensive income
(2)
|
7
|
|
|
143
|
|
|
(17
|
)
|
Net current period other comprehensive income (loss)
(3)
|
1,156
|
|
|
(862
|
)
|
|
518
|
|
Accumulated other comprehensive income (loss) — ending balance
|
$
|
837
|
|
|
$
|
(319
|
)
|
|
$
|
543
|
|
|
|
(1)
|
All amounts are net of tax.
|
|
|
(2)
|
For the years ended
December 31, 2017
and
2016
, the Company recorded
less than $0.1 million
and
$0.2 million
of realized
losses
from the sale of available-for-sale securities, respectively. For the year ended
December 31, 2015
, the Company recorded
less than $0.1 million
of realized
gains
for the sale of available-for-sale securities. Refer to Note 5 herein for further information.
|
|
|
(3)
|
For the years ended
December 31, 2017
and 2015, the changes in other comprehensive income were both net of tax expense of $
0.3 million
. For the year ended December 31, 2016, the changes in other comprehensive income were net of a tax benefit of $
0.5 million
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Reclassified from Accumulated Other Comprehensive Income
|
|
2017
|
|
2016
|
|
2015
|
For the Year Ended December 31,
|
(in thousands)
|
Losses (gains) from the sale of available-for-sale securities
|
$
|
11
|
|
|
$
|
222
|
|
|
$
|
(27
|
)
|
Tax (benefit) expense
|
(4
|
)
|
|
(79
|
)
|
|
10
|
|
Net loss (gain) reclassified from accumulated other comprehensive income
|
7
|
|
|
$
|
143
|
|
|
$
|
(17
|
)
|
Note 3—Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method and is recorded over the estimated useful life of each class of depreciable asset. 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
December 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Housekeeping and Dietary equipment
|
$
|
22,349
|
|
|
$
|
21,136
|
|
Computer hardware and software
|
12,665
|
|
|
11,750
|
|
Other
(1)
|
990
|
|
|
1,133
|
|
Total property and equipment, at cost
|
$
|
36,004
|
|
|
$
|
34,019
|
|
Less accumulated depreciation
|
22,495
|
|
|
20,564
|
|
Total property and equipment, net
|
$
|
13,509
|
|
|
$
|
13,455
|
|
|
|
(1)
|
Includes furniture and fixtures, leasehold improvements and autos and trucks.
|
Depreciation expense for the years ended
December 31, 2017
,
2016
and
2015
was
$5.0 million
,
$4.8 million
and
$4.4 million
, respectively.
Note 4—Goodwill and Other Intangible Assets
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets of acquired businesses. Goodwill is not amortized, but is evaluated for impairment on an annual basis, or more frequently if impairment indicators arise.
Goodwill by reportable operating segment, as described in Note 14 - Segment Information, was approximately
$42.4 million
and
$8.7 million
for Housekeeping and Dietary, respectively, as of
December 31, 2017
. At
December 31, 2016
, goodwill by reportable operating segment was
$42.4 million
and
$2.1 million
for Housekeeping and Dietary, respectively. The increase in goodwill is related to the acquisition of certain Dietary-related assets during
2017
.
Intangible Assets
The Company’s intangible assets consist of customer relationships 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 customer relationships have a weighted-average amortization period of
9.9 years
. The increase from the prior year is due to the acquisition of certain Dietary-related assets during
2017
.
The following table sets forth the estimated amortization expense for intangibles subject to amortization for the next five years and thereafter:
|
|
|
|
|
|
Period/Year
|
|
Total Amortization Expense
|
|
(in thousands)
|
2018
|
|
$
|
4,364
|
|
2019
|
|
$
|
4,165
|
|
2020
|
|
$
|
4,165
|
|
2021
|
|
$
|
4,165
|
|
2022
|
|
$
|
4,165
|
|
Thereafter
|
|
$
|
9,859
|
|
Amortization expense for the years ended
December 31, 2017
,
2016
and
2015
was
$3.9 million
,
$2.7 million
and
$3.2 million
, respectively.
Note 5—Fair Value Measurements
The Company’s current assets and current liabilities are financial instruments and most of these items (other than marketable securities and inventories) 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 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 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 in other comprehensive income (net of tax) 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 years ended
December 31, 2017
,
2016
and
2015
, the Company recorded unrealized
gains
of
$1.2 million
, unrealized
losses
of
$0.9 million
and unrealized
gains
of
$0.5 million
on marketable securities, respectively.
For the years ended
December 31, 2017
,
2016
and
2015
, the Company received total proceeds, less the amount of interest received, of
$28.5 million
,
$28.1 million
and
$16.4 million
, respectively, from sales of available-for-sale municipal bonds. For the years
ended
December 31, 2017
and
2016
, these sales resulted in realized
losses
of
less than $0.1 million
and
$0.2 million
, respectively. For the year ended
December 31, 2015
, there were realized
gains
of
less than $0.1 million
. Such gains and losses were recorded in “Other income-Investment and interest” 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 accounted for as trading securities and unrealized gains or losses are included in earnings. The fair value of these investments are determined based on quoted market prices (Level 1).
The following tables provide fair value measurement information for the Company’s marketable securities and deferred compensation fund investment assets as of
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
|
|
|
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
|
$
|
73,221
|
|
|
$
|
73,221
|
|
|
$
|
—
|
|
|
$
|
73,221
|
|
|
$
|
—
|
|
Deferred compensation fund
|
|
|
|
|
|
|
|
|
|
Money Market
(1)
|
$
|
2,720
|
|
|
$
|
2,720
|
|
|
$
|
—
|
|
|
$
|
2,720
|
|
|
$
|
—
|
|
Balanced and Lifestyle
|
8,523
|
|
|
8,523
|
|
|
8,523
|
|
|
—
|
|
|
—
|
|
Large Cap Growth
|
7,802
|
|
|
7,802
|
|
|
7,802
|
|
|
—
|
|
|
—
|
|
Small Cap Growth
|
3,442
|
|
|
3,442
|
|
|
3,442
|
|
|
—
|
|
|
—
|
|
Fixed Income
|
3,050
|
|
|
3,050
|
|
|
3,050
|
|
|
—
|
|
|
—
|
|
International
|
1,531
|
|
|
1,531
|
|
|
1,531
|
|
|
—
|
|
|
—
|
|
Mid Cap Growth
|
1,817
|
|
|
1,817
|
|
|
1,817
|
|
|
—
|
|
|
—
|
|
Deferred compensation fund
|
$
|
28,885
|
|
|
$
|
28,885
|
|
|
$
|
26,165
|
|
|
$
|
2,720
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
|
|
|
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
|
$
|
67,730
|
|
|
$
|
67,730
|
|
|
$
|
—
|
|
|
$
|
67,730
|
|
|
$
|
—
|
|
Deferred compensation fund
|
|
|
|
|
|
|
|
|
|
Money Market
(1)
|
$
|
3,147
|
|
|
$
|
3,147
|
|
|
$
|
—
|
|
|
$
|
3,147
|
|
|
$
|
—
|
|
Balanced and Lifestyle
|
7,162
|
|
|
7,162
|
|
|
7,162
|
|
|
—
|
|
|
—
|
|
Large Cap Growth
|
5,583
|
|
|
5,583
|
|
|
5,583
|
|
|
—
|
|
|
—
|
|
Small Cap Value
|
2,933
|
|
|
2,933
|
|
|
2,933
|
|
|
—
|
|
|
—
|
|
Fixed Income
|
2,752
|
|
|
2,752
|
|
|
2,752
|
|
|
—
|
|
|
—
|
|
International
|
1,132
|
|
|
1,132
|
|
|
1,132
|
|
|
—
|
|
|
—
|
|
Mid Cap Growth
|
1,410
|
|
|
1,410
|
|
|
1,410
|
|
|
—
|
|
|
—
|
|
Deferred compensation fund
|
$
|
24,119
|
|
|
$
|
24,119
|
|
|
$
|
20,972
|
|
|
$
|
3,147
|
|
|
$
|
—
|
|
(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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Estimated Fair Value
|
|
Other-Than-Temporary Impairments
|
|
(in thousands)
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
Municipal bonds — available-for-sale
|
$
|
72,249
|
|
|
$
|
1,169
|
|
|
$
|
(197
|
)
|
|
$
|
73,221
|
|
|
$
|
—
|
|
Total debt securities
|
$
|
72,249
|
|
|
$
|
1,169
|
|
|
$
|
(197
|
)
|
|
$
|
73,221
|
|
|
$
|
—
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
Municipal bonds — available-for-sale
|
$
|
68,220
|
|
|
$
|
178
|
|
|
$
|
(668
|
)
|
|
$
|
67,730
|
|
|
$
|
—
|
|
Total debt securities
|
$
|
68,220
|
|
|
$
|
178
|
|
|
$
|
(668
|
)
|
|
$
|
67,730
|
|
|
$
|
—
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
Municipal bonds — available-for-sale
|
$
|
68,640
|
|
|
$
|
869
|
|
|
$
|
(13
|
)
|
|
$
|
69,496
|
|
|
$
|
—
|
|
Total debt securities
|
$
|
68,640
|
|
|
$
|
869
|
|
|
$
|
(13
|
)
|
|
$
|
69,496
|
|
|
$
|
—
|
|
The following table summarizes the contractual maturities of debt securities held at
December 31, 2017
and
2016
, which are classified as marketable securities in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
Municipal Bonds — Available-for-Sale
|
|
December 31,
|
|
2017
|
|
2016
|
|
(in thousands)
|
Contractual maturity:
|
|
|
|
Maturing in one year or less
|
$
|
916
|
|
|
$
|
973
|
|
Maturing in second year through fifth year
|
15,948
|
|
|
28,671
|
|
Maturing in sixth year through tenth year
|
22,851
|
|
|
21,651
|
|
Maturing after ten years
|
33,506
|
|
|
16,435
|
|
Total debt securities
|
$
|
73,221
|
|
|
$
|
67,730
|
|
Note 6— Accounts and Notes Receivable
Any decision to extend credit is made on a case-by-case basis and is based on a number of qualitative and quantitative factors related to the particular client, as well as the general risks associated with operating within the long-term care industry.
The Company’s net accounts and notes receivable balance
increased
from
December 31, 2016
. Fluctuations in net accounts and notes receivable are attributable to a variety of factors including, but not limited to, the timing of cash receipts from customers and the inception, transition or termination of client relationships.
There are a variety of factors that impact the clients’ ability to pay in accordance with the Company’s agreements. Primary among these factors is the clients’ participation in programs funded by federal and state governmental agencies. Deviations in the timing or amounts of reimbursements under those programs can impact the clients’ cash flows and the timing of their payments. The payment terms in the Company’s service agreements are not contingent upon the clients’ cash flows and notwithstanding the Company’s efforts to minimize credit risk exposure, various factors affecting the clients’ cash flows could have an indirect, yet material adverse effect on the Company’s results of operations and financial condition.
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 as an alternative to accounts receivable to enhance the collectability of amounts due, by providing a definitive repayment plan and providing a means by which to further evidence the amounts owed. At
December 31, 2017
and
2016
, the Company had
$36.6 million
and
$19.2 million
, net of reserves, respectively, of such promissory notes outstanding. In addition, the Company may assist clients who are adjusting to changes in their cash flows by amending the Company’s agreements from full-service to management-only arrangements, or by modifying contractual payment terms to accommodate clients 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 while maintaining relationships with the clients.
Note 7— Allowance for Doubtful Accounts
The allowance for doubtful accounts is established as losses are estimated to have occurred through a provision for bad debts charged to cost of services provided in the Company’s Consolidated Statements of Comprehensive Income. The allowance for doubtful accounts is evaluated based on the Company’s ongoing review of accounts and notes receivable and is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The Company has had varying collections experience with respect to its accounts and notes receivable. The Company has sometimes extended the period of payment for certain clients beyond contractual terms. Such clients include those who have terminated service agreements and slow payers experiencing financial difficulties. In order to provide for these collection problems and the general risk associated with the granting of credit terms, the Company recorded the following bad debt provisions (in an Allowance for Doubtful Accounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(in thousands)
|
Bad debt provision
|
$
|
6,250
|
|
|
$
|
4,629
|
|
|
$
|
4,335
|
|
As a percentage of total revenues, these provisions represent approximately
0.3%
for each of the years ended
December 31, 2017
,
2016
and
2015
.
In making the Company’s credit evaluations, in addition to analyzing and anticipating, where possible, the specific cases described above, management considered the general collection risk associated with trends in the long-term care industry. The Company establishes credit limits, performs ongoing credit evaluations and monitors accounts to minimize the risk of loss. Despite the Company’s efforts to minimize credit risk exposure, clients could be adversely affected if future industry trends change in such a manner as to negatively impact their cash flows. If the Company’s clients 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.
Impaired Notes Receivable
The Company evaluates its notes receivable for impairment quarterly and on an individual client basis. Notes receivable are generally evaluated for impairment when the respective clients are either in bankruptcy, are subject to collections activity or are slow payers that are experiencing financial difficulties. In the event that the evaluation results in a determination that a note receivable is impaired, it is valued at the present value of expected future cash flows or at the market value of related collateral. Summary schedules of impaired notes receivable, and the related reserve, for the years ended
December 31, 2017
,
2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Notes Receivable
|
Year Ended December 31,
|
|
Balance Beginning of Year
|
|
Additions
|
|
Deductions
|
|
Balance End of Year
|
|
Average Outstanding Balance
|
|
|
(in thousands)
|
2017
|
|
$
|
5,685
|
|
|
$
|
1,169
|
|
|
$
|
—
|
|
|
$
|
6,854
|
|
|
$
|
6,270
|
|
2016
|
|
$
|
6,471
|
|
|
$
|
—
|
|
|
$
|
786
|
|
|
$
|
5,685
|
|
|
$
|
6,078
|
|
2015
|
|
$
|
10,208
|
|
|
$
|
395
|
|
|
$
|
4,132
|
|
|
$
|
6,471
|
|
|
$
|
8,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for Impaired Notes Receivable
|
Year Ended December 31,
|
|
Balance Beginning of Year
|
|
Additions
|
|
Deductions
|
|
Balance End of Year
|
|
|
(in thousands)
|
2017
|
|
$
|
2,419
|
|
|
$
|
465
|
|
|
$
|
—
|
|
|
$
|
2,884
|
|
2016
|
|
$
|
2,139
|
|
|
$
|
280
|
|
|
$
|
—
|
|
|
$
|
2,419
|
|
2015
|
|
$
|
3,031
|
|
|
$
|
99
|
|
|
$
|
991
|
|
|
$
|
2,139
|
|
For impaired notes receivable, interest income is recognized on a cost recovery basis only. As a result, no interest income was recognized on impaired notes receivable. The Company follows an income recognition policy on all other notes receivable that do not recognize interest income until cash payments are received. This policy was established, recognizing the environment of the long-term care industry, and not because such notes receivable are necessarily impaired. The difference between income recognition on a full accrual basis and cash basis, for notes receivable that are not considered impaired, is not material.
Note 8 — Lease Commitments
The Company leases office facilities, equipment and vehicles under operating leases expiring on various dates through
2025
. Certain office leases contain renewal options. The following is a schedule by calendar year of future minimum lease payments under operating leases that have remaining terms as of
December 31, 2017
:
|
|
|
|
|
|
Period/Year
|
|
Operating Leases
|
|
|
(in thousands)
|
2018
|
|
$
|
2,482
|
|
2019
|
|
1,968
|
|
2020
|
|
1,489
|
|
2021
|
|
734
|
|
2022
|
|
735
|
|
Thereafter
|
|
1,710
|
|
Total minimum lease payments
|
|
$
|
9,118
|
|
Total expense for all operating leases for the years ended
December 31, 2017
,
2016
and
2015
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(in thousands)
|
Operating lease expense
|
$
|
3,833
|
|
|
$
|
2,615
|
|
|
$
|
2,003
|
|
Note 9— Share-Based Compensation
A summary of stock-based compensation expense and related tax benefits for the years ended
December 31, 2017
,
2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(in thousands)
|
Stock options
|
$
|
3,740
|
|
|
$
|
3,193
|
|
|
$
|
2,781
|
|
Restricted stock and restricted stock units
|
1,205
|
|
|
550
|
|
|
252
|
|
Employee Stock Purchase Plan
|
1,040
|
|
|
509
|
|
|
508
|
|
Total pre-tax stock-based compensation expense charged against income
(1)
|
$
|
5,985
|
|
|
$
|
4,252
|
|
|
$
|
3,541
|
|
|
|
|
|
|
|
Total recognized tax benefit related to stock-based compensation
|
$
|
5,709
|
|
|
$
|
2,773
|
|
|
$
|
1,873
|
|
|
|
(1)
|
Stock-based compensation expense is recorded in the selling, general and administrative caption in the Consolidated Statements of Comprehensive Income.
|
At
December 31, 2017
, the unrecognized compensation cost related to unvested stock options and awards was
$11.4 million
. The weighted average period over which these awards will vest is approximately
2.7
years.
2012 Equity Incentive Plan
The Company’s 2012 Equity Incentive Plan (the “Plan”) provides that current or prospective officers, employees, non-employee directors and advisors can receive share-based awards such as stock options, restricted stock, restricted stock units and other stock awards. The Plan seeks to promote the highest level of performance by providing an economic interest in the long-term success of the Company.
As of
December 31, 2017
,
3.2 million
shares of Common Stock were reserved for issuance under the Plan, including
0.8 million
shares available for future grant. No stock award will have a term in excess of
ten years
. All awards granted under the Plan become vested and exercisable ratably over a
five
year period on each yearly anniversary of the grant date.
The Nominating, Compensation and Stock Option Committee of the Board of Directors is responsible for determining the individuals who will be granted stock awards, the number of stock awards each individual will receive and the terms of the grants in accordance with the Plan.
Stock Options
A summary of stock options outstanding under the Plan as of
December 31, 2017
and changes during
2017
is as follows:
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
|
(in thousands, except per share data)
|
December 31, 2016
|
2,615
|
|
|
$
|
24.61
|
|
Granted
|
544
|
|
|
$
|
39.38
|
|
Exercised
|
(682
|
)
|
|
$
|
18.95
|
|
Forfeited
|
(100
|
)
|
|
$
|
34.10
|
|
Expired
|
(3
|
)
|
|
$
|
23.49
|
|
December 31, 2017
|
2,374
|
|
|
$
|
29.22
|
|
The weighted average grant-date fair value of stock options granted during the years ended
2017
,
2016
and
2015
were
$8.52
,
$7.46
and
$6.64
per common share, respectively. The total intrinsic value of options exercised during the years ended
2017
,
2016
and
2015
were
$19.5 million
,
$4.9 million
and
$6.5 million
, respectively.
The tax benefit realized from stock options exercised during
2017
was
$5.3 million
.
The fair value of the stock option awards granted during
2017
,
2016
and
2015
were estimated on the dates of grant using the Black-Scholes option valuation model and the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Risk-free interest rate
|
2.0
|
%
|
|
2.0
|
%
|
|
1.9
|
%
|
Weighted average expected life
|
5.8 years
|
|
|
5.8 years
|
|
|
5.8 years
|
|
Expected volatility
|
25.1
|
%
|
|
26.0
|
%
|
|
27.2
|
%
|
Dividend yield
|
1.9
|
%
|
|
2.0
|
%
|
|
2.2
|
%
|
The following table summarizes other information about the stock options at
December 31, 2017
:
|
|
|
|
|
|
December 31, 2017
|
|
(dollars in thousands, except per share data)
|
Outstanding:
|
|
Aggregate intrinsic value
|
$
|
55,789
|
|
Weighted average remaining contractual life
|
6.5 years
|
|
Exercisable:
|
|
Number of options
|
954
|
|
Weighted average exercise price
|
$
|
22.19
|
|
Aggregate intrinsic value
|
$
|
29,134
|
|
Weighted average remaining contractual life
|
4.7 years
|
|
Restricted Stock
A summary of the restricted stock outstanding under the Plan as of
December 31, 2017
and changes during
2017
are as follows:
|
|
|
|
|
|
|
|
|
Number of Restricted Shares
|
|
Weighted Average Grant-Date Fair Value
|
|
(in thousands, except per share data)
|
December 31, 2016
|
74
|
|
|
$
|
32.09
|
|
Granted
|
—
|
|
|
$
|
—
|
|
Vested
|
(17
|
)
|
|
$
|
31.41
|
|
Forfeited
|
—
|
|
|
$
|
—
|
|
December 31, 2017
|
57
|
|
|
$
|
32.30
|
|
There were
no
grants of restricted stock during
2017
. The weighted average grant-date fair values and total fair values of restricted stock vested during
2017
,
2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(in thousands, except per share data)
|
Weighted average grant-date fair value of restricted stock granted
|
$
|
—
|
|
|
$
|
34.14
|
|
|
$
|
30.30
|
|
Total fair value of restricted stock vested
|
$
|
690
|
|
|
$
|
311
|
|
|
$
|
123
|
|
Fair value is determined based on the market price of the shares on the date of grant. The weighted average remaining vesting period for the unvested restricted stock is
2.5 years
.
Restricted Stock Units
For the year ended
December 31, 2017
, the Company granted
0.1 million
restricted stock units with a weighted average grant date fair value of
$40.16
per unit. Fair value is determined based on the market price of the underlying shares on the date of grant. During
2016
and
2015
, there were
no
grants of restricted stock units.
A summary of the outstanding restricted stock units as of
December 31, 2017
and changes during
2017
is as follows:
|
|
|
|
|
|
|
|
|
Number of Restricted Units
|
|
Weighted Average Grant Date Fair Value
|
|
(in thousands, except per share data)
|
December 31, 2016
|
—
|
|
|
$
|
—
|
|
Granted
|
88
|
|
|
$
|
40.16
|
|
Vested
|
—
|
|
|
$
|
—
|
|
Forfeited
|
—
|
|
|
$
|
—
|
|
December 31, 2017
|
88
|
|
|
$
|
40.16
|
|
The weighted average remaining vesting period for the unvested restricted stock units is
4.1 years
.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan ("ESPP") is currently available through 2021 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 Common Stock to its employees. Pursuant to such authorization, there are
2.3 million
shares available for future grant at
December 31, 2017
(after deducting the
2017
funding of the
54,000
shares delivered in
2018
). Under the terms of the ESPP, participants may contribute through payroll deductions up to
$21,250
(
85%
of IRS limitation) of their compensation toward the purchase of the Company’s Common Stock. No employee may purchase Common Stock which exceeds
$25,000
in fair market value (determined on the option date) for each calendar year. The
option price per share is equal to the lower of
85%
of the fair market price on the first day of the offering period, or
85%
of the fair market price on the last day of the offering period.
The following table summarizes information about the Company’s ESPP annual offerings for the years ended
December 31, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(in thousands, except per share data)
|
Common shares purchased
|
54
|
|
|
53
|
|
|
59
|
|
Per common share purchase price
|
$
|
33.29
|
|
|
$
|
29.64
|
|
|
$
|
26.29
|
|
Deferred Compensation Plan
The Company offers a Supplemental Executive Retirement Plan (“SERP”) for certain key executives and employees. The SERP is not qualified under Section 401 of the Internal Revenue Code. The SERP allows participants to defer up to
25%
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
25%
match of up to
15%
of their deferral in the form of Company Common Stock based on the then-current market value. SERP participants fully vest in the Company’s matching contribution
three years
from the first day of the initial year of participation. The income deferred and the matching contributions are unsecured and subject to the claims of the Company’s general creditors.
Under the SERP, the Company is authorized to issue up to
1.0 million
shares of Common Stock to its employees. Pursuant to such authorization, there are
0.4 million
shares available for future grant at
December 31, 2017
(after deducting the
2017
funding of
9,000
shares delivered in
2018
). At the time of issuance, such shares were accounted for at cost as treasury stock. At
December 31, 2017
, approximately
0.3 million
of such shares are vested and remain in the respective active participants’ accounts with the trustee.
The following table summarizes information about the SERP for the plan years ended
December 31, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(in thousands)
|
SERP expense
(1)
|
$
|
503
|
|
|
$
|
511
|
|
|
$
|
538
|
|
Treasury shares issued to fund SERP expense
(2)
|
9
|
|
|
13
|
|
|
15
|
|
SERP trust account balance at December 31
(3)
|
$
|
42,467
|
|
|
$
|
34,599
|
|
|
$
|
37,765
|
|
Unrealized gain (loss) recorded in SERP liability account
|
$
|
4,534
|
|
|
$
|
1,495
|
|
|
$
|
(62
|
)
|
|
|
(1)
|
Both the SERP match and the deferrals are included in the selling, general and administrative caption in the Consolidated Statements of Comprehensive Income.
|
|
|
(2)
|
Shares related to the SERP match for each year are funded at the beginning of the subsequent year.
|
|
|
(3)
|
SERP trust account investments are recorded at their fair value which is based on quoted market prices. Differences between such amounts in the table above and the deferred compensation funding asset reported on the Consolidated Balance Sheets represent the value of Company Common Stock held in the Plan participants’ trust accounts and reported by the Company as treasury stock in the Consolidated Balance Sheets.
|
Note 10— Other Employee Benefit Plans
Retirement Savings Plan
Since October 1, 1999, the Company has had a retirement savings plan for eligible employees (the “RSP”) under Section 401(k) of the Internal Revenue Code. The RSP allows eligible employees to contribute up to
15%
of their eligible compensation on a pre-tax basis. There is no match by the Company.
Note 11— Dividends
The Company has paid regular quarterly cash dividends since the second quarter of 2003. During
2017
, the Company paid regular quarterly cash dividends totaling
$55.2 million
as detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid During the Quarter Ended
|
|
March 31, 2017
|
|
June 30, 2017
|
|
September 30, 2017
|
|
December 31, 2017
|
|
(in thousands, except per share amounts)
|
Cash dividends paid per common share
|
$
|
0.18625
|
|
|
$
|
0.18750
|
|
|
$
|
0.18875
|
|
|
$
|
0.19000
|
|
Total cash dividends paid
|
$
|
13,624
|
|
|
$
|
13,750
|
|
|
$
|
13,883
|
|
|
$
|
13,987
|
|
Record date
|
February 17, 2017
|
|
|
May 19, 2017
|
|
|
August 18, 2017
|
|
|
November 17, 2017
|
|
Payment date
|
March 24, 2017
|
|
|
June 23, 2017
|
|
|
September 22, 2017
|
|
|
December 22, 2017
|
|
Additionally, on
January 30, 2018
, the Company’s Board of Directors declared a regular quarterly cash dividend of
$0.19125
per common share, which will be paid on
March 23, 2018
to shareholders of record as of the close of business on
February 16, 2018
.
Cash dividends declared on the Company’s outstanding weighted average number of basic common shares for the years ended
December 31, 2017
,
2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Cash dividends declared per common share
|
$
|
0.75750
|
|
|
$
|
0.73750
|
|
|
$
|
0.71750
|
|
The Company’s Board of Directors review the dividend policy on a quarterly basis. Although there can be no assurance that the Company will continue to pay dividends or the amount of the dividends, the Company expects to continue to pay a regular quarterly cash dividend. In connection with the establishment of the Company’s dividend policy, the Company adopted a Dividend Reinvestment Plan in 2003.
Note 12— Income Taxes
The following table summarizes the provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(in thousands)
|
Current:
|
|
|
|
|
|
Federal
|
$
|
35,673
|
|
|
$
|
33,032
|
|
|
$
|
11,917
|
|
State
|
7,179
|
|
|
6,958
|
|
|
2,173
|
|
|
42,852
|
|
|
39,990
|
|
|
14,090
|
|
Deferred:
|
|
|
|
|
|
Federal
|
2,924
|
|
|
2,163
|
|
|
13,646
|
|
State
|
(1,037
|
)
|
|
838
|
|
|
4,004
|
|
|
1,887
|
|
|
3,001
|
|
|
17,650
|
|
Tax provision
|
$
|
44,739
|
|
|
$
|
42,991
|
|
|
$
|
31,740
|
|
Deferred income taxes are recorded using the asset and liability method. Deferred tax assets and liabilities are determined based on differences between the financial reporting and income tax basis of assets and liabilities.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law, enacting significant changes to corporate tax rates, as well as business-related exclusions, deductions and credits. The primary impact to the Company was the decrease in the U.S. federal corporate income tax rate from 35% to 21%. Accordingly, during the fourth quarter 2017, the Company recognized the effects of the changes in the tax law and rates on its deferred tax balances. The net result of the remeasurement was an approximately
$4.5 million
decrease to the Company’s net deferred tax assets balance and a corresponding increase to the Company’s provision for income taxes.
Significant components of the Company’s federal and state deferred tax asset and liability balances are as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
(in thousands)
|
Deferred tax assets:
|
|
|
|
Allowance for doubtful accounts
|
$
|
3,109
|
|
|
$
|
2,672
|
|
Deferred compensation
|
6,601
|
|
|
8,532
|
|
Accrued insurance claims
|
3,665
|
|
|
5,862
|
|
Non-deductible reserves
|
567
|
|
|
1,257
|
|
Amortization of intangibles
|
162
|
|
|
624
|
|
Other
|
662
|
|
|
858
|
|
|
14,766
|
|
|
19,805
|
|
Deferred tax liabilities:
|
|
|
|
Expensing of housekeeping supplies
|
(4,678
|
)
|
|
(6,752
|
)
|
Depreciation of property and equipment
|
(1,745
|
)
|
|
(2,568
|
)
|
Other
|
(845
|
)
|
|
(663
|
)
|
|
(7,268
|
)
|
|
(9,983
|
)
|
|
|
|
|
Net deferred tax assets
|
$
|
7,498
|
|
|
$
|
9,822
|
|
Realization of the Company’s deferred tax assets is dependent upon future earnings in specific tax jurisdictions, the timing and amount of which are uncertain. Management assesses the Company’s income tax positions and records tax benefits for all years subject to examination based upon an evaluation of the facts, circumstances, and information available at the reporting dates, which include historical operating results and expectations of future earnings. As such, management believes it is more likely than not that the deferred tax assets recorded will be realized to reduce future income taxes and therefore no valuation allowances are necessary.
The table below provides a reconciliation between the tax expense computed by applying the statutory federal income tax rate to income before income taxes and the provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(in thousands)
|
Income tax expense computed at statutory rate
|
$
|
46,538
|
|
|
$
|
42,136
|
|
|
$
|
31,418
|
|
Increases (decreases) resulting from:
|
|
|
|
|
|
State income taxes, net of federal tax benefit
|
3,661
|
|
|
5,064
|
|
|
4,015
|
|
Federal jobs credits
|
(4,193
|
)
|
|
(4,550
|
)
|
|
(3,900
|
)
|
Tax exempt interest
|
(568
|
)
|
|
(457
|
)
|
|
(132
|
)
|
Other, net
|
(699
|
)
|
|
798
|
|
|
339
|
|
Income tax expense
|
$
|
44,739
|
|
|
$
|
42,991
|
|
|
$
|
31,740
|
|
The Company performs an evaluation each period of its tax positions taken and expected to be taken in tax returns. The evaluation is performed on positions relating to tax years that remain subject to examination by major tax jurisdictions, the earliest of which is the tax year ended
December 31, 2012
. Based on the evaluation, the Company concluded that there are no significant uncertain
tax positions requiring recognition in the Company’s financial statements. Therefore, the table reporting on the change in the liability for unrecognized tax benefits during the years ended
December 31, 2017
and
2016
is omitted as there is no activity to report in such account for the years ended
December 31, 2017
or
2016
, and there was
no
balance of unrecognized tax benefits at the beginning of
2016
.
The Company may from time to time be assessed interest or penalties by taxing jurisdictions, although any such assessments historically have been minimal and immaterial to its financial results. 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 13—Related Party Transactions
A director is a member of a law firm which was retained by the Company. During the years ended
December 31, 2017
,
2016
and
2015
, fees paid by the Company to such firm did not exceed
$120,000
in any period. Additionally, such fees did not exceed, in any period,
5%
of such firm’s revenues or the Company’s revenues.
Note 14—Segment Information
Reportable Operating Segments
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 the same client 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 service agreements, 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, information technology costs, depreciation, amortization of finite-lived intangible assets, share based compensation costs and other corporate-specific costs, are not 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.
All revenues and net income are earned in the United States.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
Revenues
(1)
|
|
|
|
|
|
|
Housekeeping services
|
|
$
|
979,610
|
|
|
$
|
957,148
|
|
|
$
|
909,709
|
|
Dietary services
|
|
886,521
|
|
|
605,514
|
|
|
527,140
|
|
Corporate and eliminations
|
|
—
|
|
|
—
|
|
|
—
|
|
Consolidated
|
|
$
|
1,866,131
|
|
|
$
|
1,562,662
|
|
|
$
|
1,436,849
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
Housekeeping services
|
|
$
|
95,505
|
|
|
$
|
90,756
|
|
|
$
|
84,471
|
|
Dietary services
|
|
46,008
|
|
|
34,641
|
|
|
31,612
|
|
Corporate and eliminations
(2)
|
|
(8,548
|
)
|
|
(5,010
|
)
|
|
(26,319
|
)
|
Consolidated
|
|
$
|
132,965
|
|
|
$
|
120,387
|
|
|
$
|
89,764
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
Housekeeping services
|
|
$
|
6,547
|
|
|
$
|
6,535
|
|
|
$
|
6,488
|
|
Dietary services
|
|
1,813
|
|
|
439
|
|
|
685
|
|
Corporate and eliminations
|
|
526
|
|
|
522
|
|
|
487
|
|
Consolidated
|
|
$
|
8,886
|
|
|
$
|
7,496
|
|
|
$
|
7,660
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
Housekeeping services
|
|
$
|
304,303
|
|
|
$
|
266,464
|
|
|
$
|
228,116
|
|
Dietary services
|
|
242,874
|
|
|
127,187
|
|
|
104,797
|
|
Corporate and eliminations
(3)
|
|
128,826
|
|
|
134,795
|
|
|
148,036
|
|
Consolidated
|
|
$
|
676,003
|
|
|
$
|
528,446
|
|
|
$
|
480,949
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
Housekeeping services
|
|
$
|
4,287
|
|
|
$
|
4,612
|
|
|
$
|
3,586
|
|
Dietary services
|
|
663
|
|
|
410
|
|
|
336
|
|
Corporate and eliminations
|
|
447
|
|
|
420
|
|
|
1,076
|
|
Consolidated
|
|
$
|
5,397
|
|
|
$
|
5,442
|
|
|
$
|
4,998
|
|
|
|
(1)
|
For the year ended
December 31, 2017
, the Company earned revenue from one customer that amounted to more than 10% of total consolidated revenues. Housekeeping services and Dietary services both earned revenue from the customer, the total of which amounted to
$327.5 million
.
|
|
|
(2)
|
Represents primarily corporate office cost 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 interest income.
|
|
|
(3)
|
Primarily consists of cash and cash equivalents, marketable securities, deferred income taxes and other current and noncurrent assets.
|
Note 15— 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 and unvested restricted stock and restricted stock units. The table below reconciles the weighted-average basic and diluted common shares outstanding for
2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
2017
|
|
2016
|
|
2015
|
|
(in thousands)
|
Weighted average number of common shares outstanding - basic
|
73,355
|
|
|
72,754
|
|
|
71,826
|
|
Effect of dilutive securities
(1)
|
993
|
|
|
720
|
|
|
686
|
|
Weighted average number of common shares outstanding - diluted
|
74,348
|
|
|
73,474
|
|
|
72,512
|
|
(1)
Certain outstanding stock option awards are anti-dilutive and were therefore excluded from the calculation of the weighted average number of diluted common shares outstanding. For the year ended
December 31, 2017
, options to purchase less than a thousand shares, having a weighted average exercise price of
$39.38
, were excluded from the computation. For the years ended December
2016
and
2015
, the computation excluded options to purchase
0.5 million
and
0.9 million
shares, having weighted average exercise prices of
$34.14
and
$29.34
, respectively.
Note 16—Contractual Obligations and Other Contingencies
Line of Credit
As of
December 31, 2017
, the Company 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 LIBOR plus
75 basis points
(or if LIBOR becomes unavailable, the higher of the Prime Rate or the Overnight Bank Funding Rate plus
50 basis points
). At
December 31, 2017
, there were
$35.4 million
in borrowings under the line of credit. The line of credit requires the Company to satisfy
one
financial covenant, with which the Company is in compliance as of
December 31, 2017
and expects to remain in compliance. The line of credit expires on
December 18, 2018
.
At
December 31, 2017
, the Company also had outstanding
$77.6 million
in irrevocable standby letters of credit, which relate to payment obligations under the Company's insurance programs. The letters of credit expire on January 2, 2019. In connection with the issuance of the letters of credit, the amount available under the line of credit was
further reduced by
$77.6 million
to
$187.0 million
at
December 31, 2017
. The letters of credit were
decreased to
$65.9 million
on
January 2, 2018
.
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.
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. 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.
Government Regulations
The Company’s clients are concentrated in the healthcare industry and are primarily providers of long-term care. The revenues of many of the Company’s clients are highly reliant on Medicare, Medicaid and third party payors’ reimbursement funding rates. New legislation or additional changes in existing regulations could directly impact the governmental reimbursement programs in which the clients participate. The full effect of any such programs would not be realized until these laws are fully implemented and government agencies issue applicable regulations or guidance.
Note 17—Accrued Insurance Claims
The Company currently has a Paid Loss Retrospective Insurance Plan for general liability and workers’ compensation insurance, which comprise approximately
30.7%
of the Company’s liabilities at
December 31, 2017
. Under the Company’s insurance plans for general liability and workers’ compensation, predetermined loss limits are arranged with the Company’s insurance company to limit both per occurrence cash outlay and annual insurance plan cost. The Company’s accounting for this plan utilizes current valuations from a third party actuary, which include assumptions based on data such as historical claims, pay-out experience, demographic factors, industry trends, severity factors, and other actuarial calculations. In the event that the Company’s claims experience and/or industry trends result in an unfavorable change in the assumptions or outcomes, it would have an adverse effect on the Company’s results of operations and financial condition.
For general liability and workers’ compensation, the Company records both a reserve for the estimated future cost of claims and related expenses that have been reported but not settled, as well as an estimate of claims incurred but not reported. Such reserves for claims incurred but not reported are developed by a third party actuary through review of the Company’s historical data and open claims.
Note 18—Subsequent Events
The Company evaluated all subsequent events through the date of this Annual Report on Form 10-K. There were no events or transactions occurring during this subsequent reporting period which require recognition or additional disclosure in these financial statements.
Note 19—Selected Quarterly Financial Data (Unaudited)
The following tables summarize the unaudited quarterly financial data for the last two fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
(in thousands, except per share amounts)
|
2017
|
|
|
|
|
|
|
|
Revenues
|
$
|
404,490
|
|
|
$
|
470,876
|
|
|
$
|
491,355
|
|
|
$
|
499,410
|
|
Operating costs and expenses
|
$
|
373,780
|
|
|
$
|
439,313
|
|
|
$
|
459,864
|
|
|
$
|
466,285
|
|
Income before income taxes
|
$
|
32,279
|
|
|
$
|
33,078
|
|
|
$
|
32,930
|
|
|
$
|
34,678
|
|
Net income
|
$
|
22,017
|
|
|
$
|
22,551
|
|
|
$
|
23,472
|
|
|
$
|
20,186
|
|
Basic earnings per common share
|
$
|
0.30
|
|
|
$
|
0.31
|
|
|
$
|
0.32
|
|
|
$
|
0.27
|
|
Diluted earnings per common share
|
$
|
0.30
|
|
|
$
|
0.30
|
|
|
$
|
0.31
|
|
|
$
|
0.27
|
|
Cash dividends declared per common share
|
$
|
0.18750
|
|
|
$
|
0.18875
|
|
|
$
|
0.19000
|
|
|
$
|
0.19125
|
|
2016
|
|
|
|
|
|
|
|
Revenues
|
$
|
384,807
|
|
|
$
|
386,556
|
|
|
$
|
392,734
|
|
|
$
|
398,565
|
|
Operating costs and expenses
|
$
|
355,390
|
|
|
$
|
357,875
|
|
|
$
|
363,522
|
|
|
$
|
368,122
|
|
Income before income taxes
|
$
|
29,604
|
|
|
$
|
29,683
|
|
|
$
|
30,571
|
|
|
$
|
30,529
|
|
Net income
|
$
|
18,626
|
|
|
$
|
18,760
|
|
|
$
|
19,711
|
|
|
$
|
20,299
|
|
Basic earnings per common share
|
$
|
0.26
|
|
|
$
|
0.26
|
|
|
$
|
0.27
|
|
|
$
|
0.28
|
|
Diluted earnings per common share
|
$
|
0.26
|
|
|
$
|
0.26
|
|
|
$
|
0.27
|
|
|
$
|
0.28
|
|
Cash dividends declared per common share
|
$
|
0.18250
|
|
|
$
|
0.18375
|
|
|
$
|
0.18500
|
|
|
$
|
0.18625
|
|