Notes to Consolidated Financial Statements
(Unaudited)
Note 1— Description of Business and Significant Accounting Policies
Nature of Operations
Healthcare Services Group, Inc. (the “Company”) provides management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary service departments of the health care industry, including nursing homes, retirement complexes, rehabilitation centers and hospitals located throughout the United States. Although we do not directly participate in any government reimbursement programs, our clients’ reimbursements are subject to government regulation. Therefore, they are directly affected by any legislation relating to Medicare and Medicaid reimbursement programs.
We provide our services primarily pursuant to full service agreements with our clients. In such agreements, we are responsible for the day-to-day management of employees located at our clients’ facilities. We also provide services on the basis of management-only agreements for a limited number of clients. Our agreements with clients typically provide for renewable
one year
service terms, cancelable by either party upon
30
to
90
days notice after the initial
60
to
120
day period.
We are organized into
two
reportable segments: housekeeping, laundry, linen and other services (“Housekeeping”), and dietary department services (“Dietary”).
Housekeeping consists of the managing of clients’ housekeeping departments, which are principally responsible for the cleaning, disinfecting and sanitizing of patient rooms and common areas of a client’s facility, as well as the laundering and processing of the personal clothing belonging to the facility’s patients. Also within the scope of this segment’s service is the responsibility for laundering and processing of bed linens, uniforms and other assorted linen items utilized by a client facility.
Dietary consists of managing clients’ dietary department which is principally responsible for food purchasing, meal preparation and providing dietitian consulting professional services, which includes the development of a menu that meets patients’ dietary needs.
Unaudited Interim Financial Data
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”) for interim financial information and the requirements of Form 10-Q and Article 10 of Regulation S-X. Accordingly, these consolidated financial statements do not include all of the information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows. However, in our opinion, all adjustments which are of a normal recurring nature and necessary for a fair presentation have been reflected in these consolidated financial statements. The balance sheet shown in this report as of
December 31, 2015
has been derived from, and does not include, all of the disclosures contained in the financial statements for the year ended
December 31, 2015
. These financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2015
. The results of operations for the three and
nine months ended September 30, 2016
are not necessarily indicative of the results that may be expected for any future period.
Certain amounts in the prior year financial statements have been reclassified to conform to current presentation.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Healthcare Services Group, Inc. and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents are held in U.S. financial institutions or in custodial accounts with U.S. financial institutions. Cash equivalents are defined as short-term, highly liquid investments with a maturity of three months or less at the time of purchase that are readily convertible into cash and have insignificant interest rate risk.
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.
Revenue Recognition
Revenues from our service agreements with clients are recognized as services are performed.
As a distributor of laundry equipment, we occasionally sell laundry installations to certain clients. The sales in most cases represent the construction and installation of a turn-key operation and have payment terms ranging from
24
to
60
months. During the three and
nine months ended September 30, 2016
and
2015
, laundry installation sales were not material.
Income Taxes
We use 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 period. We accrue 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 book and tax bases of assets and liabilities. When appropriate, valuation allowances are recorded to reduce deferred tax assets to amounts for which realization is more likely than not.
Uncertain income tax positions taken or expected to be taken in tax returns are reflected within our financial statements based on a recognition and measurement process.
Earnings per Common Share
Basic earnings per common share are 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 are calculated using the weighted-average number of common shares outstanding and dilutive common shares, such as those issuable upon exercise of stock options.
Share-Based Compensation
The Company recognizes compensation expense for share-based awards and programs for employees and directors. We estimate the fair value of stock options as of the date of grant using a Black-Scholes option valuation model, while share-based awards are valued based on the market-price on the date of grant. The value of the portion of the award that is ultimately expected to vest, after accounting for forfeitures, is recognized as an expense in the Company’s consolidated statements of comprehensive income ratably over the requisite service periods.
Use of Estimates in Financial Statements
In preparing financial statements in conformity with U.S. GAAP, we make estimates and assumptions 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, our allowance for doubtful accounts, accrued insurance claims, asset 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. We regularly evaluate this information to determine if it is necessary to update the basis for our estimates and to adjust for known changes.
Self-Funded Captive Insurance Programs
In 2015, the Company transitioned its workers compensation and certain employee health & welfare insurance programs to HCSG Insurance Corp. (“HCSG Insurance”), its wholly owned captive insurance subsidiary which previously provided only general liability coverage to the Company. HCSG Insurance was formed to provide the Company with greater efficiency in managing its property & casualty and health & welfare programs.
Concentrations of Credit Risk
Our financial instruments consist principally of cash and cash equivalents, marketable securities, deferred compensation funding and accounts and notes receivable. Our marketable securities are fixed income investments which are highly liquid and can be readily purchased or sold through established markets. At
September 30, 2016
and
December 31, 2015
, substantially all of our cash and cash equivalents and marketable securities were held in
one
large financial institution located in the United States.
Our clients are concentrated in the health care industry and are primarily providers of long-term care. Many of our clients’ revenues are highly reliant on Medicare, Medicaid and third party payors’ reimbursement funding rates. Legislation can significantly alter overall government reimbursement for nursing home services and such changes, as well as other trends in the long-term care industry, have affected and could adversely affect the liquidity of our clients, resulting in their inability to make payments to us in accordance with agreed upon payment terms. These factors could result in the recognition of significant additional bad debts in the future.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13,
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments
. The update replaces the current incurred loss impairment methodology of recognizing credit losses with a methodology that instead reflects expected credit losses and requires consideration of a broader range of information to inform credit loss estimates. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those years, with early adoption permitted for fiscal years and interim periods beginning after December 15, 2018. The Company is in the process of evaluating the impact of the adoption of this ASU.
In March 2016, the FASB issued ASU 2016-09,
Stock Compensation: Improvements to Employee Share-Based Payment Accounting.
ASU 2016-09 is intended to simplify several aspects of the accounting for share-based payments. The guidance will be effective for fiscal years beginning after December 15, 2016, including interim periods within that year. The Company is in the process of evaluating the impact of the adoption of this ASU.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, and a subsequent amendment to the standard in March 2016 with ASU 2016-08. The original standard provides guidance on recognizing revenue, including a five step model to determine when revenue recognition is appropriate. 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. The amendment to the standard clarifies implementation guidance on principal versus agent considerations. Adoption of the new standard is effective for reporting periods beginning after December 15, 2017, with early adoption prohibited. The Company is in the process of evaluating the impact of the adoption of this ASU.
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 is currently evaluating the impact ASU 2016-02 will have on our consolidated financial statements and associated disclosures.
In November 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes
. The amendment in this ASU requires that deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent in a classified statement of financial position. The guidance becomes effective for annual reporting periods beginning after December 15, 2016 with early adoption permitted. Management elected to adopt the standard in the first quarter of 2016, with retrospective application to prior period balances presented. The adoption of ASU 2015-17 did not have a material impact on the Company’s consolidated financial statements.
Note 2—Changes in Accumulated Other Comprehensive Income by Component
Accumulated other comprehensive income consists of unrealized gains and losses from our available for sale marketable securities.
The following table provides a summary of the changes in accumulated other comprehensive income for the
nine months ended September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
Unrealized Gains and Losses on Available for Sale Securities
(1)
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
Accumulated other comprehensive income — beginning balance
|
$
|
543,000
|
|
|
$
|
25,000
|
|
Other comprehensive income before reclassifications
|
914,000
|
|
|
184,000
|
|
Amounts reclassified from accumulated other comprehensive income
(2)(3)
|
(149,000
|
)
|
|
(3,000
|
)
|
Net current period change in other comprehensive income
|
765,000
|
|
|
181,000
|
|
Accumulated other comprehensive income — ending balance
|
$
|
1,308,000
|
|
|
$
|
206,000
|
|
|
|
(1)
|
All amounts are net of tax.
|
|
|
(2)
|
Realized gains and losses are recorded pre-tax under “Other income - Investment and interest” on our consolidated statements of comprehensive income.
|
|
|
(3)
|
For the
nine months ended September 30, 2016
and
2015
, the Company recorded
$226,000
and
$5,000
, respectively, of realized gains from the sale of available for sale securities. Refer to Note 5 herein for further information.
|
Note 3—Property and Equipment
Property and equipment are recorded at cost. Depreciation is recorded over the estimated useful life of each class of depreciable assets, and is computed using the straight-line method. Leasehold improvements are amortized over the shorter of the estimated asset life or term of the lease. Repairs and maintenance costs are charged to expense as incurred.
The following table sets forth the amounts of property and equipment by each class of depreciable assets as of
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Housekeeping and office equipment and furniture
|
$
|
31,763,000
|
|
|
$
|
29,852,000
|
|
Laundry and linen equipment installations
|
1,201,000
|
|
|
1,117,000
|
|
Autos and trucks
|
138,000
|
|
|
138,000
|
|
Total property and equipment, at cost
|
33,102,000
|
|
|
31,107,000
|
|
Less accumulated depreciation
|
19,827,000
|
|
|
18,021,000
|
|
Total property and equipment, net
|
$
|
13,275,000
|
|
|
$
|
13,086,000
|
|
Depreciation expense for the
three months ended September 30, 2016
and
2015
was
$1,114,000
and
$1,036,000
, respectively. Depreciation expense for the
nine months ended September 30, 2016
and
2015
was
$3,541,000
and
$3,247,000
, respectively.
Note 4—Goodwill and Other Intangible Assets
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net assets of an acquired business. 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 10 herein, was approximately
$42,377,000
and
$2,061,000
for Housekeeping and Dietary, respectively, as of
September 30, 2016
and
December 31, 2015
.
Intangible Assets
Our intangible assets represent customer relationships and non-compete agreements related to business combinations. The cost of intangible assets is based on 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
nine
years.
The following table sets forth the amounts of our identifiable intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Customer relationships
|
$
|
29,081,000
|
|
|
$
|
35,781,000
|
|
Non-compete agreements
|
—
|
|
|
800,000
|
|
Total other intangibles, gross
|
29,081,000
|
|
|
36,581,000
|
|
Less accumulated amortization
|
14,065,000
|
|
|
19,473,000
|
|
Other intangibles, net
|
$
|
15,016,000
|
|
|
$
|
17,108,000
|
|
The following table sets forth the estimated amortization expense for intangibles subject to amortization for the remainder of
2016
, the following five fiscal years and thereafter:
|
|
|
|
|
|
Period/Year
|
|
Total Amortization Expense
|
October 1 to December 31, 2016
|
|
$
|
607,000
|
|
2017
|
|
$
|
2,427,000
|
|
2018
|
|
$
|
2,328,000
|
|
2019
|
|
$
|
2,130,000
|
|
2020
|
|
$
|
2,130,000
|
|
2021
|
|
$
|
2,130,000
|
|
Thereafter
|
|
$
|
3,264,000
|
|
Amortization expense for the
three months ended September 30, 2016
and
2015
was
$607,000
and
$811,000
, respectively. Amortization expense for the
nine months ended September 30, 2016
and
2015
was
$2,092,000
and
$2,431,000
, respectively.
Note 5—Fair Value Measurements
The following tables provide details of our financial assets measured at fair value on a recurring basis as of
September 30, 2016
and
December 31, 2015
and the basis for those measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 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)
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
Municipal bonds — available for sale
|
$
|
80,623,000
|
|
|
$
|
80,623,000
|
|
|
$
|
—
|
|
|
$
|
80,623,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation fund
|
|
|
|
|
|
|
|
|
|
Money Market
(1)
|
$
|
5,791,000
|
|
|
$
|
5,791,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Balanced and Lifestyle
|
6,821,000
|
|
|
6,821,000
|
|
|
6,821,000
|
|
|
—
|
|
|
—
|
|
Large Cap Growth
|
5,636,000
|
|
|
5,636,000
|
|
|
5,636,000
|
|
|
—
|
|
|
—
|
|
Small Cap Growth
|
2,723,000
|
|
|
2,723,000
|
|
|
2,723,000
|
|
|
—
|
|
|
—
|
|
Fixed Income
|
2,780,000
|
|
|
2,780,000
|
|
|
2,780,000
|
|
|
—
|
|
|
—
|
|
International
|
1,183,000
|
|
|
1,183,000
|
|
|
1,183,000
|
|
|
—
|
|
|
—
|
|
Mid Cap Growth
|
1,398,000
|
|
|
1,398,000
|
|
|
1,398,000
|
|
|
—
|
|
|
—
|
|
Deferred compensation fund
|
$
|
26,332,000
|
|
|
$
|
26,332,000
|
|
|
$
|
20,541,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
|
|
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)
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
Municipal bonds — available for sale
|
$
|
69,496,000
|
|
|
$
|
69,496,000
|
|
|
$
|
—
|
|
|
$
|
69,496,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation fund
|
|
|
|
|
|
|
|
|
|
Money Market
(1)
|
$
|
3,896,000
|
|
|
$
|
3,896,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Balanced and Lifestyle
|
9,136,000
|
|
|
9,136,000
|
|
|
9,136,000
|
|
|
—
|
|
|
—
|
|
Large Cap Growth
|
5,218,000
|
|
|
5,218,000
|
|
|
5,218,000
|
|
|
—
|
|
|
—
|
|
Small Cap Growth
|
2,275,000
|
|
|
2,275,000
|
|
|
2,275,000
|
|
|
—
|
|
|
—
|
|
Fixed Income
|
2,624,000
|
|
|
2,624,000
|
|
|
2,624,000
|
|
|
—
|
|
|
—
|
|
International
|
1,025,000
|
|
|
1,025,000
|
|
|
1,025,000
|
|
|
—
|
|
|
—
|
|
Mid Cap Growth
|
1,217,000
|
|
|
1,217,000
|
|
|
1,217,000
|
|
|
—
|
|
|
—
|
|
Deferred compensation fund
|
$
|
25,391,000
|
|
|
$
|
25,391,000
|
|
|
$
|
21,495,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
(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.
|
The Company’s marketable securities are classified as available-for-sale and unrealized gains or losses are included in accumulated other comprehensive income (net of tax), until realized. The fair value of these municipal bonds is classified within Level 2 of the fair value hierarchy as these securities are measured using third party pricing service data. 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 investments in the funded deferred compensation plan are valued based on quoted market prices (Level 1).
The Company’s financial assets and liabilities not measured at fair value on a recurring basis include cash and cash equivalents, accounts and notes receivable, prepaid expenses and accounts payable (including income taxes payable and accrued expenses). The carrying value of these financial instruments approximates their fair value because of their short-term nature.
For the
three months ended September 30, 2016
, we recorded unrealized losses on marketable securities of
$369,000
and for the
three months ended September 30, 2015
, we recorded unrealized gains on marketable securities of
$198,000
. For the
nine months ended September 30, 2016
, we recorded unrealized gains of
$765,000
and for the
nine months ended September 30, 2015
, we recorded unrealized gains of
$181,000
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Estimated Fair Value
|
|
Other-than-temporary Impairments
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
Type of security:
|
|
|
|
|
|
|
|
|
|
Municipal bonds — available for sale
|
$
|
78,482,000
|
|
|
$
|
2,175,000
|
|
|
$
|
(34,000
|
)
|
|
$
|
80,623,000
|
|
|
$
|
—
|
|
Total debt securities
|
$
|
78,482,000
|
|
|
$
|
2,175,000
|
|
|
$
|
(34,000
|
)
|
|
$
|
80,623,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
Type of security:
|
|
|
|
|
|
|
|
|
|
Municipal bonds — available for sale
|
$
|
68,640,000
|
|
|
$
|
869,000
|
|
|
$
|
(13,000
|
)
|
|
$
|
69,496,000
|
|
|
$
|
—
|
|
Total debt securities
|
$
|
68,640,000
|
|
|
$
|
869,000
|
|
|
$
|
(13,000
|
)
|
|
$
|
69,496,000
|
|
|
$
|
—
|
|
For the
three months ended September 30, 2016
and
2015
, we received total proceeds from sales of available-for-sale municipal bonds, less the amount of interest received, of
$2,983,000
and
$1,858,000
, respectively. For the
three months ended September 30, 2016
, these sales resulted in realized
losses
of
$17,000
which were recorded in other income – investment and interest in our consolidated statements of comprehensive income. The basis for the sale of these securities was the specific identification of each bond sold during the period. For the
three months ended September 30, 2015
, there were
$2,000
in realized
gains
.
For the
nine months ended September 30, 2016
and
2015
, we received total proceeds from sales of available-for-sale municipal bonds, less the amount of interest received, of
$8,137,000
and
$4,404,000
, respectively. These sales resulted in realized
gains
of
$226,000
and
$5,000
, respectively, and were recorded in other income – investment and interest in our consolidated statements of comprehensive income for the
nine months ended September 30, 2016
and
2015
. The basis for the sale of these securities was the specific identification of each bond sold during the period.
The following table summarizes the contractual maturities of debt securities held at
September 30, 2016
and
December 31, 2015
, which are classified as marketable securities in the Consolidated Balance Sheet.
|
|
|
|
|
|
|
|
|
|
Municipal Bonds — Available for Sale
|
Contractual maturity:
|
September 30, 2016
|
|
December 31, 2015
|
Maturing in one year or less
|
$
|
2,587,000
|
|
|
$
|
774,000
|
|
Maturing in second year through fifth year
|
18,411,000
|
|
|
13,852,000
|
|
Maturing in sixth year through tenth year
|
40,748,000
|
|
|
36,273,000
|
|
Maturing after ten years
|
18,877,000
|
|
|
18,597,000
|
|
Total debt securities
|
$
|
80,623,000
|
|
|
$
|
69,496,000
|
|
Note 6— Share-Based Compensation
A summary of stock-based compensation expense for the
nine months ended September 30, 2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
Stock options
|
$
|
2,399,000
|
|
|
$
|
2,093,000
|
|
Restricted stock
|
412,000
|
|
|
187,000
|
|
Employee Stock Purchase Plan
|
302,000
|
|
|
287,000
|
|
Total pre-tax stock-based compensation expense charged against income
(1)
|
$
|
3,113,000
|
|
|
$
|
2,567,000
|
|
|
|
(1)
|
Stock-based compensation expense is recorded in selling, general and administrative expense in our consolidated statements of comprehensive income.
|
At
September 30, 2016
, the unrecognized compensation cost related to unvested stock options and awards was
$9,447,000
. The weighted average period over which these awards will vest is approximately
3.0
years.
Other information pertaining to activity of our stock awards is as follows:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
Total grant-date fair value of stock options and awards granted
|
$
|
5,203,000
|
|
|
$
|
4,027,000
|
|
Total fair value of stock options and awards vested during period
|
$
|
3,092,000
|
|
|
$
|
2,719,000
|
|
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 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
September 30, 2016
,
3,931,000
shares of common stock were reserved for issuance under the Plan, including
1,282,000
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 terms of the grants in accordance with the Plan.
Stock Options
A summary of our stock options outstanding under the Plan as of
December 31, 2015
and changes during the
nine months ended September 30, 2016
is as follows:
|
|
|
|
|
|
|
|
|
Stock Options Outstanding
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
December 31, 2015
|
2,461,000
|
|
|
$
|
22.16
|
|
Granted
|
569,000
|
|
|
$
|
34.14
|
|
Cancelled
|
(105,000
|
)
|
|
$
|
29.60
|
|
Exercised
|
(276,000
|
)
|
|
$
|
20.41
|
|
September 30, 2016
|
2,649,000
|
|
|
$
|
24.62
|
|
The weighted average grant-date fair value of stock options granted during the
nine months ended September 30, 2016
and
2015
was
$7.46
and
$6.64
per common share, respectively.
The following table summarizes other information about our stock options at
September 30, 2016
:
|
|
|
|
|
|
|
|
Stock Options
|
Range of exercise prices
|
|
$10.39 - $34.14
|
|
Outstanding:
|
|
|
Weighted average remaining contractual life (years)
|
|
6.5
|
|
Aggregate intrinsic value
|
|
$
|
39,626,000
|
|
Exercisable:
|
|
|
Number of shares
|
|
1,191,000
|
|
Weighted average remaining contractual life (years)
|
|
4.6
|
|
Aggregate intrinsic value
|
|
$
|
25,163,000
|
|
Exercised:
|
|
|
Aggregate intrinsic value
|
|
$
|
4,581,000
|
|
The fair value of stock option awards granted in
2016
and
2015
was estimated on the date of grant using the Black-Scholes option valuation model using the following assumptions:
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
Risk-free interest rate
|
2.0%
|
|
1.9%
|
Weighted average expected life (years)
|
5.8
|
|
5.8
|
Expected volatility
|
26.0%
|
|
27.2%
|
Dividend yield
|
2.0%
|
|
2.2%
|
Restricted Stock
During the
nine months ended September 30, 2016
, the Company granted
44,000
shares of restricted stock with a weighted average grant date fair value of
$34.14
per share. Fair value is determined based on the market price of the shares on the date of grant. During the
nine months ended September 30, 2015
, the Company granted
25,000
shares of restricted stock with a weighted average grant date fair value of
$30.30
per share.
A summary of our outstanding stock-based compensation as of
December 31, 2015
and changes during the
nine months ended September 30, 2016
is as follows:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
December 31, 2015
|
40,000
|
|
|
$
|
29.10
|
|
Granted
|
44,000
|
|
|
$
|
34.14
|
|
Vested
|
(9,000
|
)
|
|
$
|
28.76
|
|
Forfeited
|
(1,000
|
)
|
|
$
|
34.14
|
|
September 30, 2016
|
74,000
|
|
|
$
|
32.09
|
|
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan (“ESPP”) for all eligible employees. On August 1, 2016, the Company adopted an amendment to the ESPP, extending the program through 2021. All full-time and certain part-time employees who have completed
two
years of continuous service with us 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
4,050,000
shares of our common stock to our employees. Pursuant to such authorization, there are
2,362,000
shares available for future grant at
September 30, 2016
.
The stock-based compensation expense associated the options granted in
2016
and
2015
under our ESPP was estimated on the date of grant using the Black-Scholes option valuation model using the following assumptions:
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
Risk-free interest rate
|
0.58%
|
|
0.18%
|
Weighted average expected life (years)
|
1.0
|
|
1.0
|
Expected volatility
|
19.7%
|
|
19.2%
|
Dividend yield
|
2.0%
|
|
2.2%
|
Note 7— Dividends
During the
nine months ended September 30, 2016
, we paid regular quarterly cash dividends of approximately
$39,849,000
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
March 31, 2016
|
|
June 30, 2016
|
|
September 30, 2016
|
Cash dividend per common share
|
$
|
0.18125
|
|
|
$
|
0.18250
|
|
|
$
|
0.18375
|
|
Total cash dividends paid
|
$
|
13,158,000
|
|
|
$
|
13,293,000
|
|
|
$
|
13,398,000
|
|
Record date
|
February 19, 2016
|
|
|
May 20, 2016
|
|
|
August 19, 2016
|
|
Payment date
|
March 25, 2016
|
|
|
June 24, 2016
|
|
|
September 23, 2016
|
|
Additionally, on
October 11, 2016
, our Board of Directors declared a regular quarterly cash dividend of
$0.1850
per common share, which will be paid on
December 23, 2016
, to shareholders of record as of the close of business on
November 18, 2016
.
Cash dividends declared on our outstanding weighted average number of basic common shares for the periods presented were approximately as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Cash dividends per common share
|
$
|
0.19
|
|
|
$
|
0.18
|
|
|
$
|
0.55
|
|
|
$
|
0.53
|
|
Note 8— Income Taxes
The
2016
estimated annual effective tax rate is expected to be approximately
36.5%
. Differences between the effective tax rate and the applicable U.S. federal statutory rate arise primarily from the effect of state and local income taxes and tax credits available to the Company. The actual
2016
effective tax rate could vary from the estimate depending on the availability of tax credits.
We account for income taxes using the asset and liability method, which results in recognizing income tax expense based on the amount of income taxes payable or refundable for the current year. Additionally, we evaluate regularly the tax positions taken or expected to be taken resulting from financial statement recognition of certain items. Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our financial statements. Our evaluation was performed for the tax years ended December 31, 2013 through 2015 (with regard to U.S. federal income tax returns) and December 31, 2011 through 2015 (with regard to various state and local income tax returns), the tax years which remain subject to examination by major tax jurisdictions as of
September 30, 2016
.
We may from time to time be assessed interest or penalties by taxing jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. When we have received an assessment for interest and/or penalties, it has been 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 9—Related Party Transactions
A director is a member of a law firm retained by us. In each of the
nine months ended September 30, 2016
and
2015
, fees received from us by such firm did not exceed
$120,000
. Additionally, such fees did not exceed, in either period,
5%
of such firm’s or the Company’s revenues.
Note 10—Segment Information
Reportable Operating Segments
We manage and evaluate our operations in
two
reportable segments: Housekeeping (housekeeping, laundry, linen and other services) and Dietary (dietary department services). Although both segments serve a similar client base and share many operational similarities, they are managed separately due to differences in the type of services provided, as well as the specialized expertise required of the professional management personnel responsible for delivering the respective segments’ services. Such services are rendered pursuant to distinct 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 our consolidated financial statements relate primarily to corporate level transactions and recording of transactions at the reportable segment level which use methods 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 for the consolidated financial statements. As discussed, most corporate expenses are not allocated to the operating segments. Such expenses include corporate salary and benefit costs, bad debt expense, certain legal costs, information technology costs, depreciation, amortization of finite lived intangible assets, share based compensation costs and other corporate specific costs. Additionally, there are allocations for workers’ compensation and general liability expense within the operating segments that differ from our actual expense recorded for U.S. GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
Housekeeping services
|
$
|
239,584,000
|
|
|
$
|
227,760,000
|
|
|
$
|
716,154,000
|
|
|
$
|
681,306,000
|
|
Dietary services
|
153,150,000
|
|
|
132,405,000
|
|
|
447,943,000
|
|
|
389,461,000
|
|
Total
|
$
|
392,734,000
|
|
|
$
|
360,165,000
|
|
|
$
|
1,164,097,000
|
|
|
$
|
1,070,767,000
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
Housekeeping services
|
$
|
23,645,000
|
|
|
$
|
21,770,000
|
|
|
$
|
68,966,000
|
|
|
$
|
64,139,000
|
|
Dietary services
|
7,884,000
|
|
|
8,239,000
|
|
|
26,103,000
|
|
|
25,008,000
|
|
Corporate and eliminations
(1)
|
(958,000
|
)
|
|
(3,268,000
|
)
|
|
(5,211,000
|
)
|
|
(11,095,000
|
)
|
Total
|
$
|
30,571,000
|
|
|
$
|
26,741,000
|
|
|
$
|
89,858,000
|
|
|
$
|
78,052,000
|
|
|
|
(1)
|
Primarily represents corporate office costs and related overhead, recording of certain inventories and supplies and workers compensation costs at the reportable segment level which use accounting methods that differ from those used at the corporate level, as well as consolidated subsidiaries’ operating expenses that are not allocated to the reportable segments, net of investment and interest income.
|
Total Revenues from Clients
We earned total revenues from clients in the following service categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Housekeeping services
|
$
|
171,802,000
|
|
|
$
|
158,019,000
|
|
|
$
|
510,080,000
|
|
|
$
|
471,692,000
|
|
Dietary services
|
153,150,000
|
|
|
132,405,000
|
|
|
447,943,000
|
|
|
389,461,000
|
|
Laundry and linen services
|
67,363,000
|
|
|
69,060,000
|
|
|
204,529,000
|
|
|
207,887,000
|
|
Maintenance services and other
|
419,000
|
|
|
681,000
|
|
|
1,545,000
|
|
|
1,727,000
|
|
|
$
|
392,734,000
|
|
|
$
|
360,165,000
|
|
|
$
|
1,164,097,000
|
|
|
$
|
1,070,767,000
|
|
Note 11— 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 unvested, unexercised stock options and unvested restricted stock. The table below reconciles the weighted-average basic and diluted common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Weighted average number of common shares outstanding - basic
|
72,839,000
|
|
|
72,009,000
|
|
|
72,718,000
|
|
|
71,714,000
|
|
Effect of dilutive securities
(1)
|
753,000
|
|
|
682,000
|
|
|
717,000
|
|
|
667,000
|
|
Weighted average number of common shares outstanding - diluted
|
73,592,000
|
|
|
72,691,000
|
|
|
73,435,000
|
|
|
72,381,000
|
|
|
|
(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. During the three and
nine months ended September 30, 2016
, options to purchase
501,000
and
544,000
shares having a weighted average exercise price of
$34.14
were excluded. During the three and
nine months ended September 30, 2015
, options to purchase
597,000
and
925,000
shares having weighted average exercise prices of
$30.03
and
$29.33
, respectively, were excluded.
|
Note 12— Other Contingencies
Line of Credit
We have a
$200,000,000
bank line of credit on which we may draw to meet short-term liquidity requirements. Amounts drawn under the line of credit are payable upon demand. At
September 30, 2016
, there were
no
borrowings under the line of credit. At
September 30, 2016
, we also had outstanding a
$78,078,000
irrevocable standby letter of credit, which relates to payment obligations under our insurance programs. In connection with the issuance of the letter of credit, the amount available under the line of credit was reduced by
$78,078,000
at
September 30, 2016
. The letter of credit was decreased to
$63,735,000
on October 25, 2016. The line of credit requires us to satisfy
one
financial covenant. We are in compliance with our financial covenant at
September 30, 2016
and expect to remain in compliance with such financial covenant. The line of credit expires on
December 18, 2018
.
Tax Jurisdictions and Matters
We provide our services in
48
states and are subject to numerous local taxing jurisdictions within those states. In the ordinary course of business, a jurisdiction may contest our reporting positions with respect to the application of its tax code to our services. A jurisdiction’s conflicting position on the taxability of our services could result in additional tax liabilities.
We have tax matters with various taxing authorities. Because of the uncertainties related to both the probable outcomes and amount of probable assessments due, we are unable to make a reasonable estimate of a liability. We do not expect the resolution of any of these matters, taken individually or in the aggregate, to have a material adverse effect on our consolidated financial position or results of operations based on our best estimate of the outcomes of such matters.
Legal Proceedings
We are 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 we become aware of such claims and legal actions, we record accruals for any exposures that are probable and estimable. If an adverse outcome of such claims and legal actions is reasonably possible, we assess materiality and provide such 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
Our clients are concentrated in the health care industry and are primarily providers of long-term care. Many of our clients’ revenues are highly reliant on Medicare, Medicaid and third party payors’ reimbursement funding rates. New legislation or additional changes in existing regulations could be made which could directly impact the governmental reimbursement programs in which
our clients participate. As a result, we may not know the full effects of such programs until these laws are fully implemented and government agencies issue applicable regulations or guidance.
Note 13—Subsequent Events
We evaluated all subsequent events through the filing date of this Form 10-Q. We believe there were no events or transactions occurring during this subsequent reporting period which require recognition or additional disclosure in these financial statements.