Notes to Consolidated Financial Statements
Years Ended December 31,
2016
,
2015
and
2014
Note 1— Description of Business and Significant Accounting Policies
Nature of Operations
We provide 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 receive government reimbursements related to Medicare and Medicaid. 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 the employees located at our clients’ facilities. We also provide services on the basis of a management-only agreements for a limited number of clients. Our agreements with 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.
We are organized into
two
reportable segments; housekeeping, laundry, linen and other services (“Housekeeping”), and dietary department services (“Dietary”).
Housekeeping consists of managing of the client’s housekeeping department which is 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 client’s dietary department which is principally responsible for food purchasing, meal preparation and dietitian professional services, which includes the development of a menu that meets the 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”), we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are used for, but are not limited to, our allowance for doubtful accounts, accrued insurance claims, asset valuations and review for potential impairment, and deferred taxes. 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 compensate 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
We determine 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. We utilize 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.
Our financial instruments that are measured at fair value on a recurring basis consist of marketable securities and our deferred compensation fund investments. Other financial instruments such as cash and cash equivalents, accounts and notes receivable and accounts payable (including income taxes payable and accrued expenses) are short-term in nature, and therefore the carrying value of these instruments is deemed to approximate their fair value.
We have certain notes receivable that either do not bear interest or bear interest at a below-market rate. Therefore, such notes receivable of
$5.7 million
and
$6.5 million
at
December 31, 2016
and
2015
, respectively, have been discounted to their present value and are reported at values of
$5.7 million
and
$6.5 million
at
December 31, 2016
and
2015
, 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
We define our marketable securities as fixed income investments which are highly liquid and can be readily purchased or sold through established markets. At
December 31, 2016
, we had marketable securities of
$67.7 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 our balance sheet. For the year ended
December 31, 2016
,
$0.9 million
of unrealized losses 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 of the Company to support our current and projected growth, if required. Our investment policy is intended to manage our assets to achieve our goals of preserving principal, maintaining adequate liquidity at all times, and maximizing returns subject to our investment guidelines. Our investment policy limits investment to certain types of instruments issued by institutions primarily with investment grade credit ratings and places restrictions on concentration by type and issuer.
We periodically review our 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, 2016
, we believe that the recorded value of our 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 autos and trucks —
5
to
10
years. Depreciation expense on property and equipment for the years ended
December 31, 2016
,
2015
and
2014
was
$4.8 million
,
$4.4 million
and
$3.9 million
respectively.
Revenue Recognition
Revenues from our 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
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 year. We accrue for probable tax obligations as required by facts and circumstances in the 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 bases of assets and liabilities. If appropriate, we would record a valuation allowance to reduce deferred tax assets to an amount 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 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 common shares outstanding for the period. Diluted earnings per common share reflect the weighted-average common shares outstanding and dilutive common shares, such as those issuable upon exercise of stock options and upon the vesting of restricted stock.
Share-Based Compensation
We estimate 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. The value of the portion of the award that is ultimately expected to vest is recognized ratably as an expense in the Company’s consolidated statements of income over the requisite service periods. Because share-based compensation expense is based on awards that are ultimately expected to vest, share-based compensation expense will be reduced to account for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Advertising Costs
Advertising costs are expensed when incurred. Advertising costs were
no
t material for the years ended
December 31, 2016
,
2015
and
2014
.
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 is measured by the amount that the carrying value of such assets exceeds their fair value, primarily based on estimated discounted 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. We review 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 exceeds its estimated fair value.
No
impairment loss was recognized on our intangible assets or goodwill for the years ended
December 31, 2016
,
2015
or
2014
.
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.
Change in Accounting Estimate
In fiscal year 2015, the Company transitioned its workers compensation and certain employee health & welfare insurance programs to HCSG Insurance Corp. (“HCSG Insurance” or the “Captive”), its wholly owned captive insurance subsidiary which was previously providing general liability coverage to the Company. HCSG Insurance was formed in January 2014 to provide the Company with greater flexibility and cost efficiency in meeting its property & casualty and health & welfare needs. In conjunction with the aforementioned insurance programs being administered and provided by the Captive, during the third quarter 2014, management conducted a review of its self-insurance reserves to enhance its self-insurance estimation process. After analysis and consultation with insurance regulators and advisors, the Company recorded a non-cash adjustment of
$37.4 million
to reflect estimated current and future insurance claims projected to be closed out over the next
15
to
17
years. This tax-effected adjustment
was recorded in the third quarter 2014 and is accounted for as a change in estimate, along with charges related to the corporate reorganization, self-funded health insurance program transition and other related expenses in our consolidated statements of comprehensive income.
Concentrations of Credit Risk
Our 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. We define our marketable securities as fixed income investments which are highly liquid investments that can be readily purchased or sold using established markets. At
December 31, 2016
and
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, primarily providers of long-term care. Many of our clients’ revenues are highly contingent 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 governmental agencies issue applicable regulations or guidance.
Significant Clients
We have several clients who individually contributed over
5%
, with one as high as
9.5%
, of our total consolidated revenues for the year ended
December 31, 2016
. Although we expect to continue relationships with these clients, there can be no assurance thereof. The loss of such clients, or a significant reduction in the revenues we receive from these clients, would have a material adverse effect on the results of operations of our
two
operating segments. In addition, if such clients change their respective payment terms it could increase our accounts receivable balance and have a material adverse effect on our cash flows and cash and cash equivalents.
Recent Accounting Pronouncements
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 will adopt the standard beginning January 1, 2017, and is not expecting a material impact to results of operations or financial position. The impacts of adopting the standard will relate to the recognition of excess tax benefits related to share-based payments as a component of income tax expense, as opposed to in 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.
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 plans to adopt the standard beginning on January 1, 2018. The Company is in the process of evaluating the impact of the adoption of this ASU, as well as determining the transition method that will be applied. Our analysis has consisted of reviewing the nature and terms of our existing contracts under the provisions of the new guidance and assessing any operational changes and process updates required for compliance. Currently, the Company does not expect a material impact to our accounting for the revenue we earn related to our Housekeeping and Dietary services. We anticipate 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. We are continuing to evaluate the expected impact of the requirements, however we expect the primary impact will relate to the capitalization of operating leases of office space, vehicles and equipment.
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 merely resulted in the reclassification within the asset section of the balance sheet and did not have a material impact on the Company’s working capital or consolidated financial statements.
Note 2—Changes in Accumulated Other Comprehensive Income by Component
U.S. GAAP establishes standards for presenting information about significant items reclassified out of accumulated other comprehensive income by component. As of
December 31, 2016
and
2015
, respectively, we generated other comprehensive income from one component. This component relates to the unrealized gains and losses from our available for sale marketable securities during a given reporting period.
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)
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
Accumulated other comprehensive income - beginning balance
|
$
|
543
|
|
|
$
|
25
|
|
|
$
|
49
|
|
Other comprehensive (loss) income before reclassifications
|
(1,005
|
)
|
|
535
|
|
|
(16
|
)
|
Amounts reclassified from accumulated other comprehensive (loss) income
(2)(3)
|
143
|
|
|
(17
|
)
|
|
(8
|
)
|
Net current period change in other comprehensive (loss) income
(4)
|
$
|
(862
|
)
|
|
$
|
518
|
|
|
$
|
(24
|
)
|
Accumulated other comprehensive (loss) income - ending balance
|
$
|
(319
|
)
|
|
$
|
543
|
|
|
$
|
25
|
|
|
|
(1)
|
All amounts are net of tax.
|
|
|
(2)
|
Realized gains and losses are recorded pre-tax in the other income - investment and interest caption in our consolidated statements of comprehensive income.
|
|
|
(3)
|
For the year ended
December 31, 2016
, the Company recorded
$0.2 million
of realized
losses
from the sale of available for sale securities. For the years ended
December 31, 2015
and
2014
, 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.
|
|
|
(4)
|
For the years ended
December 31, 2016
,
2015
and
2014
, these changes in other comprehensive income were net of tax effects of
$0.5 million
,
$0.3 million
and
$0.1 million
, respectively.
|
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
December 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
(in thousands)
|
Housekeeping and Dietary equipment
|
$
|
21,136
|
|
|
$
|
19,445
|
|
Computer hardware and software
|
11,750
|
|
|
10,528
|
|
Other
(1)
|
1,133
|
|
|
1,134
|
|
Total property and equipment, at cost
|
$
|
34,019
|
|
|
$
|
31,107
|
|
Less accumulated depreciation
|
20,564
|
|
|
18,021
|
|
Total property and equipment, net
|
$
|
13,455
|
|
|
$
|
13,086
|
|
|
|
(1)
|
Includes furniture and fixtures, leasehold improvements and autos and trucks.
|
Depreciation expense for the years ended
December 31, 2016
,
2015
and
2014
was
$4.8 million
,
$4.4 million
and
$3.9 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. The carrying value of goodwill as of
December 31, 2016
and
2015
was
$44.4 million
.
Intangible Assets
Our intangible assets were acquired 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
9.7 years
. As of December 31, 2015, the Company’s non-compete agreements and certain of the Company’s customer relationship intangible assets had been fully amortized and the respective balances were written-off during 2016.
The following table sets forth the amounts of our identifiable intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(in thousands)
|
Customer relationships
|
$
|
29,081
|
|
|
$
|
35,781
|
|
Non-compete agreements
|
—
|
|
|
800
|
|
Total other intangibles, gross
|
$
|
29,081
|
|
|
$
|
36,581
|
|
Less accumulated amortization
|
14,672
|
|
|
19,473
|
|
Other intangibles, net
|
$
|
14,409
|
|
|
$
|
17,108
|
|
The following table sets forth the estimated amortization expense for intangibles subject to amortization for the next five years:
|
|
|
|
|
|
|
|
|
|
Period/Year
|
|
Customer
Relationships
|
|
Total
|
|
|
(in thousands)
|
2017
|
|
$
|
2,427
|
|
|
$
|
2,427
|
|
2018
|
|
$
|
2,328
|
|
|
$
|
2,328
|
|
2019
|
|
$
|
2,130
|
|
|
$
|
2,130
|
|
2020
|
|
$
|
2,130
|
|
|
$
|
2,130
|
|
2021
|
|
$
|
2,130
|
|
|
$
|
2,130
|
|
Thereafter
|
|
$
|
3,264
|
|
|
$
|
3,264
|
|
Amortization expense for the years ended
December 31, 2016
,
2015
and
2014
was
$2.7 million
,
$3.2 million
and
$3.3 million
, respectively.
Note 5—Fair Value Measurements
The Company’s current assets (other than marketable securities and inventories) and current liabilities are financial instruments and most of these items 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. Our financial assets that are measured at fair value on a recurring basis are our marketable securities and our deferred compensation funding.
The Company’s marketable securities consist of tax-exempt municipal bonds, which we classify as available-for-sale and which are reported at fair value. Unrealized gains and losses associated with these investments are included in other comprehensive income (net of tax) within our 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.
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).
We believe recorded values of all of our financial instruments approximate their current fair values because of their nature, stated interest rates and respective maturity dates or durations.
The following tables provide fair value measurement information for our marketable securities and deferred compensation fund investment assets as of
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Growth
|
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
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
(in thousands)
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
Municipal bonds — available for sale
|
$
|
69,496
|
|
|
$
|
69,496
|
|
|
$
|
—
|
|
|
$
|
69,496
|
|
|
$
|
—
|
|
Deferred compensation fund
|
|
|
|
|
|
|
|
|
|
Money Market
(1)
|
$
|
3,896
|
|
|
$
|
3,896
|
|
|
$
|
—
|
|
|
$
|
3,896
|
|
|
$
|
—
|
|
Balanced and Lifestyle
|
9,136
|
|
|
9,136
|
|
|
9,136
|
|
|
—
|
|
|
—
|
|
Large Cap Growth
|
5,218
|
|
|
5,218
|
|
|
5,218
|
|
|
—
|
|
|
—
|
|
Small Cap Value
|
2,275
|
|
|
2,275
|
|
|
2,275
|
|
|
—
|
|
|
—
|
|
Fixed Income
|
2,624
|
|
|
2,624
|
|
|
2,624
|
|
|
—
|
|
|
—
|
|
International
|
1,025
|
|
|
1,025
|
|
|
1,025
|
|
|
—
|
|
|
—
|
|
Mid Cap Growth
|
1,217
|
|
|
1,217
|
|
|
1,217
|
|
|
—
|
|
|
—
|
|
Deferred compensation fund
|
$
|
25,391
|
|
|
$
|
25,391
|
|
|
$
|
21,495
|
|
|
$
|
3,896
|
|
|
$
|
—
|
|
(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, 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
|
|
|
$
|
—
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
Municipal bonds — available for sale
|
$
|
11,758
|
|
|
$
|
48
|
|
|
$
|
(7
|
)
|
|
$
|
11,799
|
|
|
$
|
—
|
|
Total debt securities
|
$
|
11,758
|
|
|
$
|
48
|
|
|
$
|
(7
|
)
|
|
$
|
11,799
|
|
|
$
|
—
|
|
For the years ended
December 31, 2016
,
2015
and
2014
, we received total proceeds, less the amount of interest received, of
$28.1 million
,
$16.4 million
and
$3.9 million
, respectively, from sales of available-for-sale municipal bonds. These sales resulted in realized
losses
of
$0.2 million
recorded in other income – investment and interest caption on our statement of comprehensive income for the year ended
December 31, 2016
, and gains of less than
$0.1 million
in both
2015
and
2014
. The basis for the sale of these securities was a specific identification of each bond sold during this period.
The following table summarizes the contractual maturities of debt securities held at
December 31, 2016
and
2015
, which are classified as marketable securities in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
Municipal Bonds — Available for Sale
|
|
December 31,
|
|
2016
|
|
2015
|
|
(in thousands)
|
Contractual maturity:
|
|
|
|
Maturing in one year or less
|
$
|
973
|
|
|
$
|
774
|
|
Maturing in second year through fifth year
|
28,671
|
|
|
13,852
|
|
Maturing in sixth year through tenth year
|
21,651
|
|
|
36,273
|
|
Maturing after ten years
|
16,435
|
|
|
18,597
|
|
Total debt securities
|
$
|
67,730
|
|
|
$
|
69,496
|
|
Note 6— Accounts and Notes Receivable
Many of our clients participate in programs funded by federal and state governmental agencies. Because our clients’ revenues are generally dependent on Medicare and Medicaid reimbursement funding rates and mechanisms, changes in regulations and trends in the long term care industry have affected and could adversely affect our clients’ cash flows, resulting in their inability to make payments to us on agreed upon payment terms. These factors, in addition to other delays in payments from clients, have resulted in and could continue to result in significant additional bad debts in the near future. Whenever possible, when a client falls behind in making agreed-upon payments, we convert the unpaid accounts receivable to interest bearing promissory notes. The promissory notes provide a means to better evidence the amounts owed, materially enhance our ability to defend the validity of the debt, and memorialize a definitive repayment plan, each of which may enhance our ability to collect the amounts due. Accounts and notes receivable are stated net of an allowance for doubtful accounts. At
December 31, 2016
and
2015
, we had $
19.2 million
and $
16.8 million
, net of reserves, respectively, of such promissory notes outstanding. Additionally, we consider restructuring service agreements from full service to management-only service in the case of certain clients experiencing significant financial difficulties. We believe that such restructurings may provide us with a means to maintain a relationship with the client while at the same time minimizing collection exposure.
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 earnings and is included in the costs of services provided caption in our consolidated statements of comprehensive income. The allowance for doubtful accounts is evaluated based on our 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.
We have had varying collections experience with respect to our accounts and notes receivable. We have sometimes been required to extend 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, we have recorded the following bad debt provisions (in an Allowance for Doubtful Accounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
Bad debt provision
|
$
|
4,629
|
|
|
$
|
4,335
|
|
|
$
|
4,470
|
|
In making our credit evaluations, in addition to analyzing and anticipating, where possible, the specific cases described above, we consider the general collection risk associated with trends in the long-term care industry. We establish credit limits, perform ongoing credit evaluation and monitor accounts to minimize the risk of loss. Despite our efforts to minimize credit risk exposure, our clients could be adversely affected if future industry trends change in such a manner as to negatively impact their cash flows. If our clients experience a negative impact on their cash flows, it could have a material adverse effect on our results of operations and financial condition.
Impaired Notes Receivable
We evaluate our 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 our evaluation results in a determination that a note receivable is impaired, it is valued at the present value of expected 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, 2016
,
2015
and
2014
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)
|
2016
|
|
$
|
6,471
|
|
|
$
|
—
|
|
|
$
|
786
|
|
|
$
|
5,685
|
|
|
$
|
6,078
|
|
2015
|
|
$
|
10,208
|
|
|
$
|
395
|
|
|
$
|
4,132
|
|
|
$
|
6,471
|
|
|
$
|
8,340
|
|
2014
|
|
$
|
2,892
|
|
|
$
|
9,124
|
|
|
$
|
1,808
|
|
|
$
|
10,208
|
|
|
$
|
6,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for Impaired Notes Receivable
|
Year Ended December 31,
|
|
Balance Beginning of Year
|
|
Additions
|
|
Deductions
|
|
Balance End of Year
|
|
|
(in thousands)
|
2016
|
|
$
|
2,139
|
|
|
$
|
280
|
|
|
$
|
—
|
|
|
$
|
2,419
|
|
2015
|
|
$
|
3,031
|
|
|
$
|
99
|
|
|
$
|
991
|
|
|
$
|
2,139
|
|
2014
|
|
$
|
2,019
|
|
|
$
|
2,489
|
|
|
$
|
1,477
|
|
|
$
|
3,031
|
|
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. We follow an income recognition policy on all other notes receivable that does 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
We lease office facilities, equipment and autos 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, 2016
:
|
|
|
|
|
|
Period/Year
|
|
Operating Leases
|
|
|
(in thousands)
|
2017
|
|
$
|
2,424
|
|
2018
|
|
1,838
|
|
2019
|
|
915
|
|
2020
|
|
755
|
|
2021
|
|
740
|
|
Thereafter
|
|
2,438
|
|
Total minimum lease payments
|
|
$
|
9,110
|
|
Certain property leases provide for scheduled rent escalations. We do not consider the scheduled rent escalations to be material to our operating lease expenses individually or in the aggregate. Total expense for all operating leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
Operating lease expense
|
$
|
2,615
|
|
|
$
|
2,003
|
|
|
$
|
1,210
|
|
Note 9— Share-Based Compensation
A summary of stock-based compensation expense and related tax benefits for the years ended
December 31, 2016
,
2015
and
2014
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
Stock options
|
$
|
3,193
|
|
|
$
|
2,781
|
|
|
$
|
2,596
|
|
Restricted stock
|
550
|
|
|
252
|
|
|
109
|
|
Employee Stock Purchase Plan ("ESPP")
|
509
|
|
|
508
|
|
|
375
|
|
Total pre-tax stock-based compensation expense charged against income
(1)
|
$
|
4,252
|
|
|
$
|
3,541
|
|
|
$
|
3,080
|
|
|
|
|
|
|
|
Total recognized tax benefit related to stock-based compensation
|
$
|
2,773
|
|
|
$
|
1,873
|
|
|
$
|
2,626
|
|
|
|
(1)
|
Stock-based compensation expense is recorded in the selling, general and administrative caption in our consolidated statements of comprehensive income.
|
At
December 31, 2016
, the unrecognized compensation cost related to unvested stock options and awards was
$8.5 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 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, 2016
,
3.9 million
shares of common stock were reserved for issuance under the Plan, including
1.3 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 our stock options outstanding under the Plan as of
December 31, 2016
and changes during
2016
is as follows:
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
|
(in thousands)
|
|
|
Outstanding at December 31, 2015
|
2,461
|
|
|
$
|
22.16
|
|
Granted
|
569
|
|
|
$
|
34.14
|
|
Exercised
|
(294
|
)
|
|
$
|
20.46
|
|
Forfeited
|
(116
|
)
|
|
$
|
29.80
|
|
Expired
|
(5
|
)
|
|
$
|
23.82
|
|
Outstanding at December 31, 2016
|
2,615
|
|
|
$
|
24.61
|
|
The weighted average grant-date fair values and intrinsic values of options vested during
2016
,
2015
and
2014
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands, except per share data)
|
Weighted average grant-date fair value of options granted
|
$
|
7.46
|
|
|
$
|
6.64
|
|
|
$
|
8.24
|
|
Total intrinsic value of options exercised
|
$
|
4,886
|
|
|
$
|
6,497
|
|
|
$
|
9,303
|
|
During
2016
, the Company received
$6.0 million
in cash and realized
$1.2 million
in tax benefits from the exercise of stock options.
The fair values of the stock option awards granted during
2016
,
2015
and
2014
were estimated on the dates of grant using the Black-Scholes option valuation model and the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Risk-free interest rate
|
2.0
|
%
|
|
1.9
|
%
|
|
1.9
|
%
|
Weighted average expected life (years)
|
5.8 years
|
|
|
5.8 years
|
|
|
5.9 years
|
|
Expected volatility
|
26.0
|
%
|
|
27.2
|
%
|
|
36.9
|
%
|
Dividend yield
|
2.0
|
%
|
|
2.2
|
%
|
|
2.4
|
%
|
The following table summarizes other information about our stock options at
December 31, 2016
:
|
|
|
|
|
|
December 31, 2016
|
|
(in thousands, except per share data)
|
Outstanding:
|
|
Number of options
|
2,615
|
|
Weighted average exercise price
|
$
|
24.61
|
|
Aggregate intrinsic value
|
$
|
38,072
|
|
Weighted average remaining contractual life (years)
|
6.2 years
|
|
Exercisable:
|
|
Number of options
|
1,172
|
|
Weighted average exercise price
|
$
|
18.39
|
|
Aggregate intrinsic value
|
$
|
24,350
|
|
Weighted average remaining contractual life (years)
|
4.4 years
|
|
Restricted Stock
A summary of our restricted stock outstanding under the Plan as of
December 31, 2016
and changes during
2016
is as follows:
|
|
|
|
|
|
|
|
|
Number of Restricted Shares
|
|
Weighted Average Grant-Date Fair Value
|
|
(in thousands)
|
|
|
Unvested at December 31, 2015
|
40
|
|
|
$
|
29.10
|
|
Granted
|
44
|
|
|
$
|
34.14
|
|
Vested
|
(9
|
)
|
|
$
|
28.76
|
|
Forfeited
(1)
|
—
|
|
|
$
|
34.14
|
|
Unvested at December 31, 2016
|
74
|
|
|
$
|
32.09
|
|
|
|
(1)
|
Number of restricted shares rounds to less than a thousand.
|
The weighted average grant-date fair values and total fair values of restricted stock vested during
2016
,
2015
and
2014
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands, except per share data)
|
Weighted average grant-date fair value of restricted stock granted
|
$
|
34.14
|
|
|
$
|
30.30
|
|
|
$
|
28.02
|
|
Total fair value of restricted stock vested
|
$
|
311
|
|
|
$
|
123
|
|
|
$
|
34
|
|
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
3.4 years
.
Employee Stock Purchase Plan
The Company offers an Employee Stock Purchase Plan (“ESPP”) to all eligible employees. All full-time and certain part-time employees who have completed
two years
of continuous service with us are eligible to participate. The ESPP was scheduled to expire after
2016
, however the Board of Directors extended the ESPP for an additional
five
offerings through 2021. 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 our common stock to our employees. Pursuant to such authorization, we have
2.3 million
shares available for future grant at
December 31, 2016
(after deducting the
2016
funding of the
53 thousand
shares delivered in
2017
). 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 our ESPP annual offerings for the years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands, except per share data)
|
Common shares purchased
|
53
|
|
|
59
|
|
|
55
|
|
Per common share purchase price
|
$
|
29.64
|
|
|
$
|
26.29
|
|
|
$
|
24.11
|
|
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 our Common Stock based on the then-current market value. SERP participants fully vest in our matching contribution
three years
from the first day of the initial year of participation. The income deferred and our matching contributions are unsecured and subject to the claims of our general creditors.
Under the SERP, we are authorized to issue up to
1.0 million
shares of our common stock to our employees. Pursuant to such authorization, we have
0.4 million
shares available for future grant at
December 31, 2016
(after deducting the
2016
funding of
13 thousand
shares delivered in
2017
). At the time of issuance, such shares were accounted for at cost as treasury stock. At
December 31, 2016
, approximately
0.3 million
such shares are vested and remain in the respective active participants’ accounts with the trustee.
The following table summarizes information about our SERP for the plan years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
Supplemental Executive Retirement Plan ("SERP") expense
(1)
|
$
|
511
|
|
|
$
|
538
|
|
|
$
|
497
|
|
Treasury shares issued to fund SERP expense
(2)
|
13
|
|
|
15
|
|
|
16
|
|
SERP trust account balance at December 31
(3)
|
$
|
34,599
|
|
|
$
|
37,765
|
|
|
$
|
35,310
|
|
Unrealized gain (loss) recorded in SERP liability account
|
$
|
1,495
|
|
|
$
|
(62
|
)
|
|
$
|
1,211
|
|
|
|
(1)
|
Both the SERP match and the deferrals are included in the selling, general and administrative caption in our 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 our Consolidated Balance Sheets represent the value of our Common Stock held in the Plan participants’ trust accounts and reported by us as treasury stock in our Consolidated Balance Sheets.
|
Note 10— Other Employee Benefit Plans
Retirement Savings Plan
Since October 1, 1999, we have 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
We have paid regular quarterly cash dividends since the second quarter of 2003. During
2016
, we paid regular quarterly cash dividends totaling
$53.3 million
as detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
March 31, 2016
|
|
June 30, 2016
|
|
September 30, 2016
|
|
December 31, 2016
|
|
(in thousands, except per share amounts)
|
Cash dividends paid per common share
|
$
|
0.18125
|
|
|
$
|
0.18250
|
|
|
$
|
0.18375
|
|
|
$
|
0.18500
|
|
Total cash dividends paid
|
$
|
13,158
|
|
|
$
|
13,293
|
|
|
$
|
13,398
|
|
|
$
|
13,493
|
|
Record date
|
February 19, 2016
|
|
|
May 20, 2016
|
|
|
August 19, 2016
|
|
|
November 18, 2016
|
|
Payment date
|
March 25, 2016
|
|
|
June 24, 2016
|
|
|
September 23, 2016
|
|
|
December 23, 2016
|
|
Additionally, on
January 31, 2017
, our Board of Directors declared a regular quarterly cash dividend of
$0.18625
per common share, which will be paid on
March 24, 2017
to shareholders of record as of the close of business on
February 17, 2017
.
Cash dividends on our outstanding weighted average number of basic common shares for the years ended
December 31, 2016
,
2015
and
2014
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Cash dividends declared per common share
|
$
|
0.73750
|
|
|
$
|
0.71750
|
|
|
$
|
0.69750
|
|
Our Board of Directors reviews our dividend policy on a quarterly basis. Although there can be no assurance that we will continue to pay dividends or the amount of the dividend, we expect to continue to pay a regular quarterly cash dividend. In connection with the establishment of our dividend policy, we adopted a Dividend Reinvestment Plan in 2003.
Note 12— Income Taxes
The following table summarizes the provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
Current:
|
|
|
|
|
|
Federal
|
$
|
33,032
|
|
|
$
|
11,917
|
|
|
$
|
21,030
|
|
State
|
6,958
|
|
|
2,173
|
|
|
4,095
|
|
|
$
|
39,990
|
|
|
$
|
14,090
|
|
|
$
|
25,125
|
|
Deferred:
|
|
|
|
|
|
Federal
|
$
|
2,163
|
|
|
$
|
13,646
|
|
|
$
|
(12,708
|
)
|
State
|
838
|
|
|
4,004
|
|
|
(2,559
|
)
|
|
$
|
3,001
|
|
|
$
|
17,650
|
|
|
$
|
(15,267
|
)
|
Tax provision
|
$
|
42,991
|
|
|
$
|
31,740
|
|
|
$
|
9,858
|
|
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.
Significant components of our federal and state deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
(in thousands)
|
Deferred tax assets:
|
|
|
|
Allowance for doubtful accounts
|
$
|
2,672
|
|
|
$
|
1,819
|
|
Deferred compensation
|
8,532
|
|
|
9,191
|
|
Accrued insurance claims
|
5,862
|
|
|
5,786
|
|
Non-deductible reserves
|
1,257
|
|
|
4,490
|
|
Amortization of intangibles
|
624
|
|
|
971
|
|
Other
|
858
|
|
|
10
|
|
|
$
|
19,805
|
|
|
$
|
22,267
|
|
Deferred tax liabilities:
|
|
|
|
Expensing of housekeeping supplies
|
$
|
(6,752
|
)
|
|
$
|
(6,463
|
)
|
Depreciation of property and equipment
|
(2,568
|
)
|
|
(3,237
|
)
|
Other
|
(663
|
)
|
|
—
|
|
|
$
|
(9,983
|
)
|
|
$
|
(9,700
|
)
|
|
|
|
|
Net deferred tax assets
|
$
|
9,822
|
|
|
$
|
12,567
|
|
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 tables below provide 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,
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
Income tax expense computed at statutory rate
|
$
|
42,136
|
|
|
$
|
31,418
|
|
|
$
|
11,098
|
|
Increases (decreases) resulting from:
|
|
|
|
|
|
State income taxes, net of federal tax benefit
|
5,064
|
|
|
4,015
|
|
|
998
|
|
Federal jobs credits
|
(4,550
|
)
|
|
(3,900
|
)
|
|
(2,925
|
)
|
Tax exempt interest
|
(457
|
)
|
|
(132
|
)
|
|
(13
|
)
|
Other, net
|
798
|
|
|
339
|
|
|
700
|
|
Income tax expense
|
$
|
42,991
|
|
|
$
|
31,740
|
|
|
$
|
9,858
|
|
Management 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, 2011. Based on our evaluation, management has concluded that there are no significant uncertain tax positions requiring recognition in our financial statements. Therefore, the table reporting on the change in the liability for unrecognized tax benefits during the year ended
December 31, 2016
is omitted as there is no activity to report in such account for the year ended
December 31, 2016
, and there was
no
balance of unrecognized tax benefits at the beginning of the year.
We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. In the event we have received an assessment for interest and/or penalties, it has been classified in the financial statements as selling, general and administrative expense.
Note 13—Related Party Transactions
A director is a member of a law firm which was retained by us. During the years ended
December 31, 2016
,
2015
and
2014
, fees paid by us to such firm did not exceed
$120 thousand
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
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 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. We consider the various services provided within each reportable segment to comprise an identifiable reportable operating segment since such services are rendered pursuant to a single service agreement, specific to that reportable segment, as well as the fact that the delivery of the respective reportable segment’s services are managed by management personnel exclusive to the particular reportable segment.
The Company’s accounting policies for the segments are generally the same as 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 expense is not allocated to the operating segments, and such expenses include corporate salary and benefit costs, certain legal costs, information technology costs, depreciation, amortization of finite lived intangibles, 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. Segment amounts disclosed are prior to any elimination entries made in consolidation.
All revenues and net income are earned in
one
geographic area, the United States.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housekeeping services
|
|
Dietary services
|
|
Corporate and eliminations
|
|
Total
|
|
(in thousands)
|
Year Ended December 31, 2016
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
957,148
|
|
|
$
|
605,514
|
|
|
$
|
—
|
|
|
|
$
|
1,562,662
|
|
Income before income taxes
|
$
|
90,756
|
|
|
$
|
34,641
|
|
|
$
|
(5,010
|
)
|
(1)
|
|
$
|
120,387
|
|
Depreciation and amortization
|
$
|
6,535
|
|
|
$
|
439
|
|
|
$
|
522
|
|
|
|
$
|
7,496
|
|
Total assets
|
$
|
266,464
|
|
|
$
|
127,187
|
|
|
$
|
134,795
|
|
(2)
|
|
$
|
528,446
|
|
Capital expenditures
|
$
|
4,612
|
|
|
$
|
410
|
|
|
$
|
420
|
|
|
|
$
|
5,442
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
909,709
|
|
|
$
|
527,140
|
|
|
$
|
—
|
|
|
|
$
|
1,436,849
|
|
Income before income taxes
|
$
|
84,471
|
|
|
$
|
31,612
|
|
|
$
|
(26,319
|
)
|
(1)
|
|
$
|
89,764
|
|
Depreciation and amortization
|
$
|
6,488
|
|
|
$
|
685
|
|
|
$
|
487
|
|
|
|
$
|
7,660
|
|
Total assets
|
$
|
228,116
|
|
|
$
|
104,797
|
|
|
$
|
148,036
|
|
(2)
|
|
$
|
480,949
|
|
Capital expenditures
|
$
|
3,586
|
|
|
$
|
336
|
|
|
$
|
1,076
|
|
|
|
$
|
4,998
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2014
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
846,610
|
|
|
$
|
446,573
|
|
|
$
|
—
|
|
|
|
$
|
1,293,183
|
|
Income before income taxes
|
$
|
70,390
|
|
|
$
|
26,343
|
|
|
$
|
(65,025
|
)
|
(1)
|
|
$
|
31,708
|
|
Depreciation and amortization
|
$
|
6,114
|
|
|
$
|
662
|
|
|
$
|
493
|
|
|
|
$
|
7,269
|
|
Total assets
|
$
|
223,440
|
|
|
$
|
95,861
|
|
|
$
|
150,278
|
|
(2)
|
|
$
|
469,579
|
|
Capital expenditures
|
$
|
4,375
|
|
|
$
|
391
|
|
|
$
|
1,029
|
|
|
|
$
|
5,795
|
|
|
|
(1)
|
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. Additionally, during 2014, the Company recorded a one-time, non-cash change in estimate related to our self-insurance liability which was not allocated to the reportable segments.
|
|
|
(2)
|
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 unvested, unexercised stock options and unvested restricted stock. The table below reconciles the weighted-average basic and diluted common shares outstanding for
2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
Weighted average number of common shares outstanding - basic
|
72,754
|
|
|
71,826
|
|
|
70,616
|
|
Effect of dilutive securities
(1)
|
720
|
|
|
686
|
|
|
725
|
|
Weighted average number of common shares outstanding - diluted
|
73,474
|
|
|
72,512
|
|
|
71,341
|
|
(1)
Certain outstanding stock options awards are anti-dilutive and were therefore excluded from the calculation of the weighted average number of diluted common shares outstanding. For the years ended
December 31, 2016
,
2015
and
2014
, the computation excluded options to purchase
0.5 million
,
0.9 million
and
0.5 million
shares, having weighted average exercise prices of
$34.14
,
$29.34
and
$27.97
, respectively.
Note 16—Other Contingencies
Line of Credit
We have a $
200 million
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
December 31, 2016
, there were
no
borrowings under the line of credit. However, at such date, we had outstanding a
$63.7 million
irrevocable standby letter of credit, which relates to payment obligations under our insurance programs. As a result of the letter of credit issued, the amount available under the line of credit was reduced by
$63.7 million
at
December 31, 2016
. The line of credit requires us to satisfy
one
financial covenant. We are in compliance with our financial covenant at
December 31, 2016
and expect to continue to remain in compliance with such financial covenant. This line of credit expires on
December 18, 2018
. We believe the line of credit will be renewed at that time.
On
January 3, 2017
, the letter of credit
increased to
$67.2 million
and the amount available under the line of credit was reduced by
$3.5 million
.
Tax Jurisdictions and Matters
We provide our services throughout the continental United States and are subject to numerous local taxing jurisdictions. 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 also 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 governmental agencies issue applicable regulations or guidance.
Note 17—Accrued Insurance Claims
We currently have a Paid Loss Retrospective Insurance Plan for general liability and workers’ compensation insurance, which comprise approximately
46.2%
of our liabilities at
December 31, 2016
. Under our insurance plans for general liability and workers’ compensation, predetermined loss limits are arranged with our insurance company to limit both our per occurrence cash outlay and annual insurance plan cost. Our 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 our claims experience and/or industry trends result in an unfavorable change in our assumptions or outcomes, it would have an adverse effect on our results of operations and financial condition.
For workers’ compensation and general liability, we record 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 our historical data and open claims.
Note 18—Subsequent Events
We evaluated all subsequent events through the date these financial statements are being filed with the SEC. 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)
|
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
|
|
2015
|
|
|
|
|
|
|
|
Revenues
|
$
|
355,246
|
|
|
$
|
355,356
|
|
|
$
|
360,165
|
|
|
$
|
366,082
|
|
Operating costs and expenses
|
$
|
330,699
|
|
|
$
|
329,341
|
|
|
$
|
332,090
|
|
|
$
|
355,667
|
|
Income before income taxes
|
$
|
25,054
|
|
|
$
|
26,257
|
|
|
$
|
26,741
|
|
|
$
|
11,712
|
|
Net income
|
$
|
15,516
|
|
|
$
|
16,288
|
|
|
$
|
17,086
|
|
|
$
|
9,134
|
|
Basic earnings per common share
|
$
|
0.22
|
|
|
$
|
0.23
|
|
|
$
|
0.24
|
|
|
$
|
0.13
|
|
Diluted earnings per common share
|
$
|
0.22
|
|
|
$
|
0.23
|
|
|
$
|
0.24
|
|
|
$
|
0.13
|
|
Cash dividends declared per common share
|
$
|
0.17750
|
|
|
$
|
0.17875
|
|
|
$
|
0.18000
|
|
|
$
|
0.18125
|
|