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 the Company does not directly participate in any government reimbursement programs, the Company’s clients receive government reimbursements related to Medicare and Medicaid. Therefore, they are directly affected by any legislation relating to Medicare and Medicaid reimbursement programs.
The Company provides services primarily pursuant to full service agreements with our clients. In such agreements, the Company is responsible for the day-to-day management of employees located at the clients’ facilities. The Company also provides services on the basis of management-only agreements for a limited number of clients. The 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.
The Company is organized into
two
reportable segments: housekeeping, laundry, linen and other services (“Housekeeping”), and dietary department services (“Dietary”).
Housekeeping consists of managing the clients’ housekeeping departments, which are principally responsible for the cleaning, disinfecting and sanitizing of resident rooms and common areas of a client’s facility, as well as the laundering and processing of the bed linens, uniforms, resident personal clothing and other assorted linen items utilized at a client facility.
Dietary consists of managing the clients’ dietary departments which are principally responsible for food purchasing, meal preparation and dietitian professional services, which includes the development of menus that meets residents’ 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 (“U.S. 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 are necessary for a fair presentation have been reflected in these consolidated financial statements. The balance sheet shown in this report as of
December 31, 2016
has been derived from, and does not include, all of the disclosures contained in the financial statements for the year ended
December 31, 2016
. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
. The results of operations for the three and
six months ended June 30, 2017
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. Revenues are reported net of sales taxes that are collected from customers and remitted to taxing authorities.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current period. The Company accrues for probable tax obligations as required by facts and circumstances in various regulatory environments. In addition, deferred tax assets and liabilities are recognized for expected future tax consequences of temporary differences between the financial reporting and tax 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 the Company’s financial statements based on a recognition and measurement process.
Earnings per Common Share
Basic earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated using the weighted-average number of common shares outstanding and dilutive common shares, such as those issuable upon exercise of stock options and upon the vesting of restricted stock and restricted stock units.
Share-Based Compensation
The Company estimates the fair value of share-based awards on the date of grant using the Black-Scholes valuation model for stock options and using the share price on the date of grant for restricted stock and restricted stock units. The value of the award is recognized ratably as an expense in the Company’s Consolidated Statements of Comprehensive Income over the requisite service periods, with adjustments made for forfeitures as they occur.
Use of Estimates in Financial Statements
In preparing financial statements in conformity with U.S. GAAP, estimates and assumptions are made that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Significant estimates are used in determining, but are not limited to, the Company’s allowance for doubtful accounts, accrued insurance claims, valuations, deferred taxes and reviews for potential impairment. The estimates are based upon various factors including current and historical trends, as well as other pertinent industry and regulatory authority information. Management regularly evaluates this information to determine if it is necessary to update the basis for its estimates and to adjust for known changes.
Concentrations of Credit Risk
The financial instruments that are subject to concentrations of credit risk are cash and cash equivalents, marketable securities, deferred compensation funding and accounts and notes receivable. The Company’s marketable securities are fixed income investments which are highly liquid and can be readily purchased or sold through established markets. At
June 30, 2017
and
December 31, 2016
, substantially all of the Company’s cash and cash equivalents and marketable securities were held in
one
large financial institution located in the United States.
The Company’s clients are concentrated in the health care industry and are primarily providers of long-term care. The revenues of many of our clients are highly reliant on Medicare, Medicaid and third party payors’ reimbursement funding rates. New legislation or changes in existing regulations could be made which could directly impact the governmental reimbursement programs in which
the clients participate. As a result, the full effect of such programs may not be realized until these laws are fully implemented and governmental agencies issue applicable regulations or guidance.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-09,
Stock Compensation: Improvements to Employee Share-Based Payment Accounting.
ASU 2016-09 is intended to simplify several aspects of the accounting for share-based payments. The Company adopted the standard beginning January 1, 2017. The impact of adopting the standard includes the recognition of excess tax benefits related to share-based payments as a component of income tax expense, as opposed to additional paid-in capital; an amendment to the calculation of diluted earnings per share to exclude windfall tax benefits from assumed proceeds when calculating diluted shares outstanding; as well as accounting for forfeitures of share-based awards as they occur, as opposed to reserving for estimated forfeitures.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations: Clarifying the Definition of a Business
. The guidance changes the definition of a business to assist entities in evaluating whether a set of transferred assets and activities constitutes a business under Topic 805. The guidance is effective for annual periods beginning after December 15, 2017, with early adoption permitted. The Company plans to adopt the standard effective January 1, 2018.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, which was subsequently amended and updated throughout 2015 and 2016. The standard provides guidance on revenue recognition, among other topics such as the accounting for compensation and costs to obtain a contract. The standard requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Adoption is required for reporting periods beginning after December 15, 2017, with early adoption prohibited. The Company 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. Management’s analysis has consisted of reviewing the nature and terms of existing contracts under the provisions of the new guidance and assessing any operational changes and process updates required for compliance. Currently, Management does not expect a material impact to the Company's accounting for the revenue earned related to its Housekeeping and Dietary department services. Management anticipates that the most significant impact of the new standard will relate to additional disclosure obligations.
In February 2016, the FASB issued ASU 2016-02,
Leases
. ASU 2016-02 requires lessees to recognize assets and liabilities on their balance sheet related to the rights and obligations created by most leases, while continuing to recognize expenses on their income statements over the lease term. It will also require disclosures designed to give financial statement users information regarding the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted for all entities. The Company will adopt the new guidance as of January 1, 2019. Management is continuing to evaluate the expected impact of the requirements, however it is expected that the primary impact will relate to the capitalization of operating leases of office space, vehicles and equipment.
Note 2—Changes in Accumulated Other Comprehensive Income by Component
Accumulated other comprehensive income consists of unrealized gains and losses from the Company’s available-for-sale marketable securities. The following table provides a summary of the changes in accumulated other comprehensive income for the
six months ended June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Unrealized Gains and Losses on Available-for-Sale Securities
(1)
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
(in thousands)
|
Accumulated other comprehensive income (loss) — beginning balance
|
$
|
(319
|
)
|
|
$
|
543
|
|
Other comprehensive income before reclassifications
|
963
|
|
|
1,286
|
|
Losses (gains) reclassified from other comprehensive income
|
118
|
|
|
(153
|
)
|
Net current period other comprehensive income
(2)
|
1,081
|
|
|
1,133
|
|
Accumulated other comprehensive income — ending balance
|
$
|
762
|
|
|
$
|
1,676
|
|
|
|
(1)
|
All amounts are net of tax.
|
|
|
(2)
|
For the
six months ended June 30, 2017
and
2016
, these changes in other comprehensive income were net of tax effects of
$0.6 million
.
|
Amounts reclassified from accumulated other comprehensive income (loss) represent realized gains or losses on the sale of the Company’s available-for-sale securities. Realized gains and losses are recorded pre-tax within “Other income - Investment and interest” in the Consolidated Statements of Comprehensive Income. Refer to Note 5 - Fair Value Measurements for further information. The table below shows the reclassification adjustments out of accumulated other comprehensive income (loss) for the
three and six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Amounts Reclassified from Accumulated Other Comprehensive Income
|
|
2017
|
|
2016
|
|
(in thousands)
|
Three Months Ended March 31,
|
|
|
|
Gains (losses) from the sale of available-for-sale securities
|
$
|
(48
|
)
|
|
$
|
62
|
|
Tax expense (benefit)
|
$
|
15
|
|
|
$
|
(23
|
)
|
Net amount reclassified from accumulated other comprehensive income
|
$
|
(33
|
)
|
|
$
|
39
|
|
Three Months Ended June 30,
|
|
|
|
Gains (losses) from the sale of available-for-sale securities
|
$
|
(125
|
)
|
|
$
|
181
|
|
Tax expense (benefit)
|
$
|
40
|
|
|
$
|
(67
|
)
|
Net amount reclassified from accumulated other comprehensive income
|
$
|
(85
|
)
|
|
$
|
114
|
|
Six Months Ended June 30,
|
|
|
|
Gains (losses) from the sale of available-for-sale securities
|
$
|
(173
|
)
|
|
$
|
243
|
|
Tax expense (benefit)
|
55
|
|
|
(90
|
)
|
Net amount reclassified from accumulated other comprehensive income
|
$
|
(118
|
)
|
|
$
|
153
|
|
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 asset, 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 asset as of
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Housekeeping and Dietary equipment
|
$
|
21,783
|
|
|
$
|
21,136
|
|
Computer hardware and software
|
12,241
|
|
|
11,750
|
|
Other
(1)
|
1,154
|
|
|
1,133
|
|
Total property and equipment, at cost
|
35,178
|
|
|
34,019
|
|
Less accumulated depreciation
|
21,779
|
|
|
20,564
|
|
Total property and equipment, net
|
$
|
13,399
|
|
|
$
|
13,455
|
|
|
|
(1)
|
Includes furniture and fixtures, leasehold improvements and autos and trucks.
|
Depreciation expense for the
three months ended June 30, 2017
and
2016
was
$1.3 million
respectively. Depreciation expense for the
six months ended June 30, 2017
and
2016
was
$2.6 million
and
$2.4 million
, 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 - Segment Information, was approximately
$42.4 million
and
$8.1 million
for Housekeeping and Dietary, respectively, as of
June 30, 2017
. At
December 31, 2016
, goodwill by reportable operating segment was
$42.3 million
and
$2.1 million
for Housekeeping and Dietary, respectively. The increase in goodwill is related to the acquisition of certain Dietary-related assets during the second quarter 2017.
Intangible Assets
The Company’s intangible assets consist of customer relationships which 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
9.9 years
. As of
June 30, 2017
, certain customer relationship intangible assets were fully amortized and the respective balances were written off. The increase from year-end is related to the acquisition of certain Dietary-related assets during the second quarter 2017.
The following table sets forth the estimated amortization expense for intangibles subject to amortization for the remainder of
2017
, the following five fiscal years and thereafter:
|
|
|
|
|
|
Period/Year
|
|
Total Amortization Expense
|
|
|
(in thousands)
|
July 1 to December 31, 2017
|
|
$
|
2,143
|
|
2018
|
|
$
|
4,188
|
|
2019
|
|
$
|
3,990
|
|
2020
|
|
$
|
3,990
|
|
2021
|
|
$
|
3,990
|
|
2022
|
|
$
|
3,990
|
|
Thereafter
|
|
$
|
9,039
|
|
Amortization expense for the
three months ended June 30, 2017
and
2016
was
$1.1 million
and
$0.7 million
, respectively. Amortization expense for the
six months ended June 30, 2017
and
2016
was
$1.7 million
and
$1.5 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. The Company’s financial assets that are measured at fair value on a recurring basis are its marketable securities and deferred compensation funding. The recorded values of all of the financial instruments approximate their current fair values because of their nature, stated interest rates and respective maturity dates or durations.
The Company’s marketable securities consist of tax-exempt municipal bonds, which are classified as available-for-sale and are reported at fair value. Unrealized gains and losses associated with these investments are included in other comprehensive income (net of tax) within the Consolidated Statements of Comprehensive Income. The fair value of these marketable securities is classified within Level 2 of the fair value hierarchy, as these securities are measured using quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable. Such valuations are determined by a third-party pricing service. For each of the
three months ended June 30, 2017
and
2016
, the Company recorded unrealized
gains
on marketable securities of
$0.6 million
. For each of the
six months ended June 30, 2017
and
2016
, the Company recorded unrealized
gains
on marketable securities of
$1.1 million
.
For the
three months ended June 30, 2017
and
2016
, the Company received total proceeds, less the amount of interest received, of
$7.0 million
and
$3.1 million
, respectively, from sales of available-for-sale municipal bonds. For the
three months ended June 30, 2017
, these sales resulted in realized
losses
of
$125 thousand
which were recorded in “Other income, net – Investment and interest” in the Consolidated Statements of Comprehensive Income. The basis for the sale of these securities was the specific identification of each bond sold during the period. For the
three months ended June 30, 2016
, there were
$181 thousand
in realized
gains
.
For the
six months ended June 30, 2017
and
2016
, the Company received total proceeds, less the amount of interest received, of
$14.5 million
and
$5.2 million
, respectively, from sales of available-for-sale municipal bonds. For the
six months ended June 30, 2017
, these sales resulted in realized
losses
of
$173 thousand
which were recorded in “Other income, net – Investment and interest” in the Consolidated Statements of Comprehensive Income. The basis for the sale of these securities was the specific identification of each bond sold during the period. For the
six months ended June 30, 2016
, there were
$243 thousand
in realized
gains
.
The investments under the funded deferred compensation plan are accounted for as trading securities and unrealized gains or losses are included in earnings. The fair value of these investments are determined based on quoted market prices (Level 1).
The following tables provide fair value measurement information for our marketable securities and deferred compensation fund investments as of
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2017
|
|
|
|
|
|
Fair Value Measurement Using:
|
|
Carrying Amount
|
|
Total Fair Value
|
|
Quoted Prices in Active Markets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
(in thousands)
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
Municipal bonds — available-for-sale
|
$
|
70,082
|
|
|
$
|
70,082
|
|
|
$
|
—
|
|
|
$
|
70,082
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation fund
|
|
|
|
|
|
|
|
|
|
Money Market
(1)
|
$
|
2,362
|
|
|
$
|
2,362
|
|
|
$
|
—
|
|
|
$
|
2,362
|
|
|
$
|
—
|
|
Balanced and Lifestyle
|
7,897
|
|
|
7,897
|
|
|
7,897
|
|
|
—
|
|
|
—
|
|
Large Cap Growth
|
6,852
|
|
|
6,852
|
|
|
6,852
|
|
|
—
|
|
|
—
|
|
Small Cap Growth
|
3,189
|
|
|
3,189
|
|
|
3,189
|
|
|
—
|
|
|
—
|
|
Fixed Income
|
3,009
|
|
|
3,009
|
|
|
3,009
|
|
|
—
|
|
|
—
|
|
International
|
1,379
|
|
|
1,379
|
|
|
1,379
|
|
|
—
|
|
|
—
|
|
Mid Cap Growth
|
1,638
|
|
|
1,638
|
|
|
1,638
|
|
|
—
|
|
|
—
|
|
Deferred compensation fund
|
$
|
26,326
|
|
|
$
|
26,326
|
|
|
$
|
23,964
|
|
|
$
|
2,362
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
—
|
|
|
|
(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)
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
Type of security:
|
|
|
|
|
|
|
|
|
|
Municipal bonds — available-for-sale
|
$
|
68,910
|
|
|
$
|
1,258
|
|
|
$
|
(86
|
)
|
|
$
|
70,082
|
|
|
$
|
—
|
|
Total debt securities
|
$
|
68,910
|
|
|
$
|
1,258
|
|
|
$
|
(86
|
)
|
|
$
|
70,082
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
Type of security:
|
|
|
|
|
|
|
|
|
|
Municipal bonds — available-for-sale
|
$
|
68,220
|
|
|
$
|
178
|
|
|
$
|
(668
|
)
|
|
$
|
67,730
|
|
|
$
|
—
|
|
Total debt securities
|
$
|
68,220
|
|
|
$
|
178
|
|
|
$
|
(668
|
)
|
|
$
|
67,730
|
|
|
$
|
—
|
|
The following table summarizes the contractual maturities of debt securities held at
June 30, 2017
and
December 31, 2016
, which are classified as marketable securities in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Bonds — Available-for-Sale
|
Contractual maturity:
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
(in thousands)
|
Maturing in one year or less
|
|
$
|
960
|
|
|
$
|
973
|
|
Maturing in second year through fifth year
|
|
18,260
|
|
|
28,671
|
|
Maturing in sixth year through tenth year
|
|
22,980
|
|
|
21,651
|
|
Maturing after ten years
|
|
27,882
|
|
|
16,435
|
|
Total debt securities
|
|
$
|
70,082
|
|
|
$
|
67,730
|
|
Note 6— Share-Based Compensation
A summary of stock-based compensation expense for the
six months ended June 30, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
(in thousands)
|
Stock options
|
$
|
2,040
|
|
|
$
|
1,605
|
|
Restricted stock and restricted stock units
|
584
|
|
|
273
|
|
Employee Stock Purchase Plan
|
249
|
|
|
213
|
|
Total pre-tax stock-based compensation expense charged against income
(1)
|
$
|
2,873
|
|
|
$
|
2,091
|
|
|
|
(1)
|
Stock-based compensation expense is recorded in selling, general and administrative expense in our Consolidated Statements of Comprehensive Income.
|
At
June 30, 2017
, the unrecognized compensation cost related to unvested stock options and awards was
$13.7 million
. The weighted average period over which these awards will vest is approximately
3.2
years.
2012 Equity Incentive Plan
The Company’s 2012 Equity Incentive Plan (the “Plan”) provides that current or prospective officers, employees, non-employee directors and advisors can receive share-based awards such as stock options, restricted stock, restricted stock units and other stock awards. The Plan seeks to promote the highest level of performance by providing an economic interest in the long-term success of the Company.
As of
June 30, 2017
,
3.6 million
shares of common stock were reserved for issuance under the Plan, including
0.7 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 terms of the grants in accordance with the Plan.
Stock Options
A summary of stock options outstanding under the Plan as of
December 31, 2016
and changes during the
six months ended June 30, 2017
is as follows:
|
|
|
|
|
|
|
|
|
Stock Options Outstanding
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
|
(in thousands)
|
|
|
December 31, 2016
|
2,615
|
|
|
$
|
24.61
|
|
Granted
|
544
|
|
|
$
|
39.38
|
|
Canceled
|
(61
|
)
|
|
$
|
33.96
|
|
Exercised
|
(334
|
)
|
|
$
|
22.14
|
|
June 30, 2017
|
2,764
|
|
|
$
|
27.61
|
|
The weighted average grant-date fair value of stock options granted during the
six months ended June 30, 2017
and
2016
was
$8.52
and
$7.46
per common share, respectively. The total intrinsic value of options exercised during the
six months ended June 30, 2017
and
2016
was
$7.0 million
and
$3.9 million
, respectively.
The fair value of stock option awards granted in
2017
and
2016
was estimated on the date of grant using the Black-Scholes option valuation model using the following assumptions:
|
|
|
|
|
|
|
|
Six Months Ended
|
|
2017
|
|
2016
|
Risk-free interest rate
|
2.0
|
%
|
|
2.0
|
%
|
Weighted average expected life (years)
|
5.8 years
|
|
|
5.8 years
|
|
Expected volatility
|
25.1
|
%
|
|
26.0
|
%
|
Dividend yield
|
1.9
|
%
|
|
2.0
|
%
|
The following table summarizes other information about the stock options at
June 30, 2017
:
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
(in thousands, except per share data)
|
Outstanding:
|
|
|
Aggregate intrinsic value
|
|
$
|
53,140
|
|
Weighted average remaining contractual life (years)
|
|
6.5 years
|
|
Exercisable:
|
|
|
Number of options
|
|
1,305
|
|
Weighted average exercise price
|
|
$
|
20.51
|
|
Aggregate intrinsic value
|
|
$
|
34,338
|
|
Weighted average remaining contractual life (years)
|
|
4.5 years
|
|
Restricted Stock
During the
six months ended June 30, 2017
, the Company did
no
t grant any restricted stock. During the
six months ended June 30, 2016
, the Company granted
44 thousand
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.
A summary of the outstanding restricted stock awards as of
December 31, 2016
and changes during the
six months ended June 30, 2017
is as follows:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
(in thousands)
|
|
|
December 31, 2016
|
74
|
|
|
$
|
32.09
|
|
Granted
|
—
|
|
|
$
|
—
|
|
Vested
|
(18
|
)
|
|
$
|
31.41
|
|
Forfeited
|
—
|
|
|
$
|
—
|
|
June 30, 2017
|
56
|
|
|
$
|
32.30
|
|
Restricted Stock Units
During the
six months ended June 30, 2017
, the Company granted
81 thousand
restricted stock units with a weighted average grant date fair value of
$39.38
per unit. Fair value is determined based on the market price of the underlying shares on the date of grant. During the
six months ended June 30, 2016
, there were
no
grants of restricted stock units.
A summary of the outstanding restricted stock units as of
December 31, 2016
and changes during the
six months ended June 30, 2017
is as follows:
|
|
|
|
|
|
|
|
|
Units
|
|
Weighted Average Grant Date Fair Value
|
|
(in thousands)
|
|
|
December 31, 2016
|
—
|
|
|
$
|
—
|
|
Granted
|
81
|
|
|
$
|
39.38
|
|
Vested
|
—
|
|
|
$
|
—
|
|
Forfeited
|
—
|
|
|
$
|
—
|
|
June 30, 2017
|
81
|
|
|
$
|
39.38
|
|
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan ("ESPP") is currently available through 2021 to all eligible employees. All full-time and 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
4.1 million
shares of its common stock to our employees. Pursuant to such authorization, there are
2.3 million
shares available for future grant at
June 30, 2017
.
The stock-based compensation expense associated with the options granted under the ESPP during the
six months ended June 30, 2017
and
2016
was estimated on the date of grant using the Black-Scholes option valuation model using the following assumptions:
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
Risk-free interest rate
|
1.05%
|
|
0.58%
|
Weighted average expected life (years)
|
1.0
|
|
1.0
|
Expected volatility
|
21.2%
|
|
19.7%
|
Dividend yield
|
1.9%
|
|
2.0%
|
Deferred Compensation Plan
The Company offers a Supplemental Executive Retirement Plan (“SERP”) for certain key executives and employees. The SERP allows participants to defer a portion 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 match of a portion of their deferral in the form of the Company’s Common Stock based on the then-current market value. Under the SERP, the Company is authorized to issue
1.0 million
shares of its common stock to its employees. Pursuant to such authorization, the Company has
0.4 million
shares available for future grant at
June 30, 2017
. At the time of issuance, such shares are accounted for at cost as treasury stock.
The following table summarizes information about the SERP during the
six months ended June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
(in thousands)
|
SERP expense
(1)
|
$
|
308
|
|
|
$
|
309
|
|
Unrealized gain recorded in SERP liability account
|
$
|
2,313
|
|
|
$
|
218
|
|
(1)
Both the SERP match and the deferrals are included in the selling, general and administrative caption in the consolidated statements of comprehensive income.
Note 7— Dividends
During the
six months ended June 30, 2017
, the Company paid regular quarterly cash dividends totaling approximately
$27.4 million
as follows:
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
March 31, 2017
|
|
June 30, 2017
|
|
(in thousands, except per share amounts)
|
Cash dividends paid per common share
|
$
|
0.18625
|
|
|
$
|
0.18750
|
|
Total cash dividends paid
|
$
|
13,624
|
|
|
$
|
13,750
|
|
Record date
|
February 17, 2017
|
|
|
May 19, 2017
|
|
Payment date
|
March 24, 2017
|
|
|
June 23, 2017
|
|
Additionally, on
July 11, 2017
, the Company’s Board of Directors declared a regular quarterly cash dividend of
$0.18875
per common share, which will be paid on
September 22, 2017
, to shareholders of record as of the close of business on
August 18, 2017
.
Cash dividends declared on the outstanding weighted average number of basic common shares for the periods presented were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30, 2017
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Cash dividends declared per common share
|
$
|
0.18875
|
|
|
$
|
0.18375
|
|
|
$
|
0.37625
|
|
|
$
|
0.36625
|
|
Note 8— Income Taxes
The
2017
estimated annual effective tax rate is expected to be approximately
33.7%
. Due to the adoption of ASU 2016-09, the tax effects of option exercises or vested awards should be treated as discrete items in the reporting period in which they occur, and therefore cannot be considered in the calculation of the estimated annual effective tax rate. Excluding the impact of ASU 2016-09, the estimated annual effective tax rate would be
35.7%
.
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, share-based compensation and tax credits available to the Company. The actual
2017
effective tax rate will likely vary from the estimate depending on the availability of tax credits and the exercises of stock options and vesting of share-based awards.
The Company accounts 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, the Company regularly evaluates the tax positions taken or expected to be taken resulting from financial statement recognition of certain items. Based on the evaluation, there are
no
significant uncertain tax positions requiring recognition in the Company’s financial statements. The evaluation was performed for the tax years ended December 31, 2013 through 2016 (with regard to U.S. federal income tax returns) and December 31, 2012 through 2016 (with regard to various state and local income tax returns), the tax years which remain subject to examination by major tax jurisdictions as of
June 30, 2017
.
The Company may from time to time be assessed interest or penalties by taxing jurisdictions, although any such assessments historically have been minimal and immaterial to its financial results. When the Company has received an assessment for interest and/or penalties, it will be classified in the financial statements as selling, general and administrative expense. In addition, any interest or penalties relating to recognized uncertain tax positions would also be recorded in selling, general and administrative expense.
Note 9—Related Party Transactions
A director is a member of a law firm retained by the Company. In each of the
six months ended June 30, 2017
and
2016
, fees paid to such firm by the Company 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
The Company manages and evaluates its operations in
two
reportable segments: Housekeeping (housekeeping, laundry, linen and other services) and Dietary (dietary department services). Although both segments serve the same client base and share many operational similarities, they are managed separately due to distinct differences in the type of services provided, as well as the specialized expertise required of the professional management personnel responsible for delivering each segment’s services. Such services are rendered pursuant to discrete service agreements, specific to each reportable segment.
The Company’s accounting policies for the segments are generally the same as described in the Company’s significant accounting policies. Differences between the reportable segments’ operating results and other disclosed data and the information in the consolidated financial statements relate primarily to corporate level transactions and recording of transactions at the reportable segment level 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 in the consolidated financial statements. In addition, most corporate expenses such as corporate salary and benefit costs, certain legal costs, information technology costs, depreciation, amortization of finite-lived intangible assets, share based compensation costs and other corporate-specific costs, are not allocated to the operating segments. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Revenues
|
|
|
|
|
|
|
|
Housekeeping
|
$
|
242,919
|
|
|
$
|
238,291
|
|
|
$
|
486,342
|
|
|
$
|
476,570
|
|
Dietary
|
227,957
|
|
|
148,265
|
|
|
389,024
|
|
|
294,793
|
|
Total
|
$
|
470,876
|
|
|
$
|
386,556
|
|
|
$
|
875,366
|
|
|
$
|
771,363
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
Housekeeping
|
$
|
21,474
|
|
|
$
|
22,821
|
|
|
$
|
44,676
|
|
|
$
|
45,321
|
|
Dietary
|
13,142
|
|
|
9,071
|
|
|
23,367
|
|
|
18,219
|
|
Corporate and eliminations
(1)
|
(1,538
|
)
|
|
(2,209
|
)
|
|
(2,686
|
)
|
|
(4,253
|
)
|
Total
|
$
|
33,078
|
|
|
$
|
29,683
|
|
|
$
|
65,357
|
|
|
$
|
59,287
|
|
|
|
(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.
|
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 outstanding stock options and unvested restricted stock and restricted stock units. The table below reconciles the weighted-average basic and diluted common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Weighted average number of common shares outstanding - basic
|
73,276
|
|
|
72,568
|
|
|
73,176
|
|
|
72,466
|
|
Effect of dilutive securities
(1)
|
993
|
|
|
748
|
|
|
932
|
|
|
699
|
|
Weighted average number of common shares outstanding - diluted
|
74,269
|
|
|
73,316
|
|
|
74,108
|
|
|
73,165
|
|
|
|
(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
six months ended June 30, 2017
, options to purchase
0.5 million
shares having a weighted average exercise price of
$39.38
per share were excluded. During the three and
six months ended June 30, 2016
, options to purchase
0.6 million
shares having a weighted average exercise price of
$34.14
per share were excluded.
|
Note 12— Other Contingencies
Line of Credit
At
June 30, 2017
the Company had a
$200 million
bank line of credit on which to draw for general corporate purposes. Amounts drawn under the line of credit are payable upon demand and at
June 30, 2017
, there were
$16.2 million
in borrowings under the line of credit. The line of credit requires the Company to satisfy
one
financial covenant, with which the Company is in compliance as of
June 30, 2017
and expects to remain in compliance. The line of credit expires on
December 18, 2018
.
At
June 30, 2017
, the Company also had outstanding
$70.7 million
in irrevocable standby letters of credit, which relate to payment obligations under the Company's insurance programs. In connection with the issuance of the letters of credit, the amount available under the line of credit was
reduced by
$70.7 million
to
$129.3 million
at
June 30, 2017
. The letters of credit were
increased to
$74.2 million
on
July 3, 2017
, which resulted in a corresponding
decrease
of the amount available under the line of credit to
$125.8 million
.
Tax Jurisdictions and Matters
The Company provides services throughout the continental United States and is subject to numerous state and local taxing jurisdictions. In the ordinary course of business, a jurisdiction may contest 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.
The Company has tax matters with various taxing authorities. Because of the uncertainties related to both the probable outcomes and amount of probable assessments due, the Company is unable to make a reasonable estimate of a liability. The company does not expect the resolution of any of these matters, taken individually or in the aggregate, to have a material adverse effect on the consolidated financial position or results of operations based on the Company’s best estimate of the outcomes of such matters.
Legal Proceedings
The Company is subject to various claims and legal actions in the ordinary course of business. Some of these matters include payroll and employee-related matters and examinations by governmental agencies. As the Company becomes aware of such claims and legal actions, the Company records accruals for any exposures that are probable and estimable. If adverse outcomes of such claims and legal actions are reasonably possible, Management assesses materiality and provides financial disclosure, as appropriate. The Company believes it is not a party to, nor are any of its properties the subject of, any pending legal proceeding or governmental examination that would have a material adverse effect on the Company’s consolidated financial condition or liquidity.
Government Regulations
The Company’s clients are concentrated in the health care industry and are primarily providers of long-term care. The revenues of many of our clients are highly reliant on Medicare, Medicaid and third party payors’ reimbursement funding rates. New legislation or additional changes in existing regulations could directly impact the governmental reimbursement programs in which the clients participate. As a result, the Company may not realize the full effects of such programs until these laws are fully implemented and government agencies issue applicable regulations or guidance.
Note 13—Subsequent Events
On
July 11, 2017
, the Company entered into an Amended and Restated Committed Line of Credit Note to increase the existing bank line and letter of credit availability to
$300 million
. There were no other changes to the terms of the line of credit and amounts drawn under the line of credit remain payable upon demand. The proceeds available under the facility will be used for general corporate purposes.
The Company evaluated all other subsequent events through the filing date of this Form 10-Q. There were no other events or transactions occurring during this subsequent reporting period which require recognition or additional disclosure in these financial statements.