Notes to Consolidated Financial Statements
Years Ended December 31, 2021, 2020 and 2019
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 healthcare 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 customers receive government reimbursements related to Medicare and Medicaid. Therefore, they are directly affected by any legislation relating to Medicare and Medicaid reimbursement programs.
The Company provides services primarily pursuant to full service agreements with its customers. In such agreements, the Company is responsible for the day-to-day management of employees located at the customers’ facilities, as well as for the provision of certain supplies. The Company also provides services on the basis of management-only agreements for a limited number of customers. In a management-only agreement, the Company provides management and supervisory services while the customer facility retains payroll responsibility for the non-supervisory staff. The agreements with customers typically provide for a renewable one year service term, cancellable by either party upon 30 to 90 days’ notice after an initial period of 60 to 120 days.
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 customers’ housekeeping departments, which are principally responsible for the cleaning, disinfecting and sanitizing of resident rooms and common areas of a customer’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 customer facility.
Dietary consists of managing the customers’ dietary departments, which are principally responsible for food purchasing, meal preparation and dietitian professional services, which includes the development of menus that meet residents’ dietary needs.
Principles of Consolidation
The financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and with the rules and regulations of the SEC, specifically Regulation S-X and the instructions to Form 10-K. Unless otherwise indicated, all references to years are to the Company’s fiscal year, which ends on December 31.
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.
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, including the potential future effects of COVID-19. Management regularly evaluates this information to determine if it is necessary to update the basis for its estimates and to adjust for known changes.
Fair Value of Financial Instruments
The Company determines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company utilizes valuation techniques that maximize the use of observable inputs (Levels 1 and 2) and minimize the use of unobservable inputs (Level 3) within the fair value hierarchy.
Assets and liabilities are classified within the fair value hierarchy based on the lowest level (least observable) input that is significant to the measurement in its entirety.
While unobservable inputs reflect the Company’s market assumptions, preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:
Level 1 – Quoted prices for identical instruments in active markets;
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable; and
Level 3 – Significant inputs to the valuation model are unobservable
The Company’s financial instruments that are measured at fair value on a recurring basis consist of marketable securities and the deferred compensation fund investments. Other financial instruments such as cash and cash equivalents, accounts and notes receivable, accounts payable (including income taxes payable and accrued expenses) and borrowings under the Company’s line of credit are short-term in nature, and therefore the carrying value of these instruments are deemed to approximate their fair value.
See Note 6 — Fair Value Measurements for the fair value hierarchy table and for details on the measurement of fair value for assets and liabilities.
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 time of purchase that are readily convertible into cash and have insignificant interest rate risk. The Company currently has bank deposits with financial institutions in the U.S. that exceed FDIC insurance limits.
Investments in Marketable Securities
Marketable securities are defined as fixed income investments which are highly liquid and can be readily purchased or sold through established markets. As of December 31, 2021 and 2020, the Company had marketable securities of $114.4 million and $125.0 million, respectively, comprised primarily of tax-exempt municipal bonds. These investments are accounted for as available-for-sale securities and are reported at fair value on the consolidated balance sheets. For the year ended December 31, 2021, $1.6 million of unrealized losses related to these investments were recorded in other comprehensive income. For the years ended December 31, 2020 and 2019, $2.6 million and $2.8 million of unrealized gains related to these marketable securities were recorded in other comprehensive income, respectively. Unrealized gains and losses are recorded net of income taxes.
These assets are available for future needs under the Company’s self-insurance programs and are held by the Company’s wholly-owned captive subsidiary as required by state insurance regulations. The Company’s investment policy is intended to manage the assets to achieve the goals of preserving principal, maintaining adequate liquidity at all times, and maximizing returns subject to investment guidelines. The investment policy limits investment to certain types of instruments issued by institutions primarily with investment grade credit ratings and places restrictions on concentration by type and issuer.
The Company periodically reviews the investments in marketable securities for credit impairment when an investment’s fair value declines below the amortized 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, 2021, management believes that the recorded value of the Company’s investments in marketable securities was recoverable in all material respects. See Note 6 — Fair Value Measurements for credit impairment considerations.
Accounts and Notes Receivable
Accounts and notes receivable consist of Housekeeping and Dietary segment trade receivables from contracts with customers. The Company’s payment terms with customers for services provided are defined within each customer’s service agreement. All accounts receivables are considered short term assets as the Company does not grant payment terms greater than one year. Accounts receivable initially are recorded at the transaction amount, and are recorded after the Company has an unconditional right to payment where only the passage of time is required before payment is received. Each reporting period, the Company evaluates the collectability of outstanding receivable balances and records an allowance for doubtful accounts representing an estimate of future expected credit loss. Additions to the allowance for doubtful accounts are made by recording a charge to bad debt expense reported in costs of services provided.
Notes receivable are initially recorded when accounts receivable are transferred into a promissory note and are recorded as an alternative to accounts receivable to memorialize an unqualified promise to pay a specific sum, typically with interest, in accordance with a defined payment schedule. The Company’s payment terms with customers on promissory notes can vary based on several factors and the circumstances of each promissory note, however typically promissory notes mature over a 1 to 3 year period. Similar to accounts receivable, each reporting period the Company evaluates the collectability of outstanding notes receivable balances and records an allowance for doubtful accounts representing an estimate of future expected credit losses.
Refer to Note 7 — Accounts and Notes Receivable herein for further information.
Allowance for Doubtful Accounts
The guidance under the FASB Accounting Standards Codification subtopic 326 Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC 326”) became effective and was adopted by the Company prospectively as of January 1, 2020. In adopting ASC 326, the Company replaced its previous incurred loss impairment model for estimating credit losses on accounts and notes receivables for its reporting of quarterly and annual financial results with an expected loss model prepared in accordance with ASC 326. While the incurred loss impairment model had the Company recognize credit losses when it was probable that a loss had been incurred, ASC 326 requires the Company to estimate the lifetime expected credit losses on such instruments and to record an allowance to offset the receivables. ASC 326 requires the recognition of credit losses that are expected based on existing accounts and notes receivable as compared to the incurred loss approach. Accordingly, credit losses under ASC 326 generally are recognized earlier in the life cycle of a receivable than under the Company’s previous incurred loss model. Modeling must be prepared after considering historical experience, current conditions, and reasonable and supportable economic forecasts to estimate lifetime expected credit losses. Under the previous incurred loss impairment model, credit losses were recognized when Management determined that it was more likely than not that a loss had been incurred and such loss was estimable.
Refer to Note 8 — Allowance for Doubtful Accounts herein for further information.
The cumulative effect of initially applying the new ASC 326 guidance to the consolidated financial statements on January 1, 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | |
Consolidated Statement of Financial Position | | December 31, 2019 | | Cumulative Impact from Adopting ASC 326 Guidance | | January 1, 2020 |
| | (in thousands) |
Assets | | | | | | |
Short-term accounts and notes receivable, less allowance for doubtful accounts | | $ | 340,930 | | | $ | (41,100) | | | $ | 299,830 | |
Notes receivable – long–term portion, less allowance for doubtful accounts | | $ | 46,992 | | | $ | (1,136) | | | $ | 45,856 | |
Allowance for doubtful accounts on short-term accounts and notes receivables | | $ | (45,726) | | | $ | (41,100) | | | $ | (86,826) | |
Allowance for doubtful accounts on long-term notes receivables | | $ | (6,667) | | | $ | (1,136) | | | $ | (7,803) | |
Deferred income taxes | | $ | 20,364 | | | $ | 10,137 | | | $ | 30,501 | |
Stockholders’ equity | | | | | | |
Retained earnings | | $ | 195,455 | | | $ | (32,099) | | | $ | 163,356 | |
Inventories and Supplies
Inventories and supplies include housekeeping, linen and laundry supplies, as well as food provisions and supplies. Non-linen inventories and supplies are stated on a first-in, first-out (FIFO) basis, and reduced as deemed necessary to approximate the lower of cost or net realizable value. Linen supplies are amortized on a straight-line basis over their estimated useful life of 24 months.
Revenue Recognition
The Company recognizes revenue from contracts with customers when or as the promised goods and services are provided to customers. Revenues are reported net of sales taxes that are collected from customers and remitted to taxing authorities. The amount of revenue recognized by the Company is based on the consideration to which the Company is entitled in exchange for providing the contracted goods and services. Refer to Note 2 — Revenue herein for further information.
Leases
The guidance under FASB Accounting Standards Codification subtopic ASC 842 Leases (“ASC 842”) became effective and was adopted by the Company as of January 1, 2019, by applying a modified retrospective transition approach which resulted in the capitalization of the Company’s existing operating leases as of January 1, 2019. As such, the Company records assets and liabilities on the balance sheet to recognize the rights and obligations arising from leasing arrangements with contractual terms greater than 12 months, as permitted by U.S. GAAP. A leasing arrangement includes any contract which entitles the Company to the right of use of an identified tangible asset where there are no restrictions as to the direct of use of the asset, and the Company obtains substantially all of the economic benefits from the right of use. As of the years ended December 31, 2021 and 2020, the Company was only the lessee of operating lease arrangements.
Refer to Note 9 — Lease Commitments herein for further information.
Property and Equipment
Property and equipment, with the exception of those pertaining to leases, are stated at cost, net of accumulated depreciation. Additions, renewals and improvements are capitalized, while maintenance and repair costs are expensed when incurred. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts and any resulting gain or loss is included in income. Depreciation is recorded using the straight-line method over the following estimated useful lives: Housekeeping and Dietary equipment — 5 to 7 years; computer hardware and software — 3 to 7 years; and other, consisting of furniture and fixtures, leasehold improvements and vehicles — 5 to 10 years. Depreciation expense on property and equipment for the years ended December 31, 2021, 2020 and 2019 was $10.3 million, $10.1 million and $9.7 million, respectively.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, income tax expense or benefits are recognized for the amount of taxes payable or refundable for the current period. The Company accrues for probable tax obligations as required, based on facts and circumstances in various regulatory environments. In addition, deferred tax assets and liabilities are recognized for the 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. Deferred tax assets and liabilities are more fully described in Note 12 — Income Taxes.
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.
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.
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 computed 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, using a Monte Carlo simulation for performance restricted stock units, and using the share price on the date of grant for restricted stock units and deferred stock units. The value of the award is recognized ratably as an expense in the Company’s Consolidated Statements of Comprehensive Income over the requisite service periods, with adjustments made for forfeitures as they occur.
Advertising Costs
Advertising costs are expensed when incurred. Advertising costs were not material for the years ended December 31, 2021, 2020 and 2019.
Impairment of Long-Lived Assets
The carrying amounts of long-lived assets are periodically reviewed to determine whether current events or circumstances warrant adjustment to such carrying amounts. Any impairment would be measured as the amount that the carrying value of such assets exceeds their fair value, primarily based on estimated undiscounted cash flows. Considerable management judgment is necessary to estimate the fair value of assets. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value, less cost to sell. No impairment loss was recognized on the Company's long-lived assets during the years ended December 31, 2021, 2020 or 2019.
Identifiable Intangible Assets and Goodwill
Identifiable intangible assets are amortized on a straight-line basis over their respective lives. Goodwill represents the excess of cost over the fair value of net assets of acquired businesses. Management reviews the carrying value of goodwill annually during the fourth quarter to assess for impairment on a reporting unit basis, or more often if events or circumstances indicate that the carrying value may exceed its estimated fair value. No impairment loss was recognized on the Company's intangible assets or goodwill during the years ended December 31, 2021, 2020 or 2019.
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, including the presentation of income taxes receivable in the Consolidated Balance Sheets. The income taxes receivable is now reflected as a separate financial statement caption, as opposed to being included in prepaid expenses and other assets. There was no impact to the Company's financial position as a result of this reclassification.
Concentrations of Credit Risk
The Company’s financial instruments that are subject to credit risk are cash and cash equivalents, marketable securities, deferred compensation funding and accounts and notes receivable. At December 31, 2021 and 2020, 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 marketable securities are fixed income investments which are highly liquid and can be readily purchased or sold through established markets.
The Company’s customers are concentrated in the healthcare industry and are primarily providers of long-term care. The revenues of many of the Company’s customers are highly reliant on Medicare, Medicaid and third party payors’ reimbursement funding rates. New legislation or changes in existing regulations could directly impact the governmental reimbursement programs in which the customers participate. As a result, the Company may not realize the full effects of such programs until these laws are fully implemented and governmental agencies issue applicable regulations or guidance.
Although the Company negotiates the pricing and other terms for the majority of our purchases of food and dining supplies directly with national manufacturers, the Company procures more than 50% of these products and other items through Sysco Corporation (“Sysco”). Sysco, is responsible for tracking our orders and delivering products to our specific locations.
Significant Customers
For the years ended December 31, 2021, 2020 and 2019, Genesis Healthcare, Inc. (“Genesis”) accounted for $177.1 million or 10.8%, $258.7 million or 14.7% and $287.8 million or 15.6% of the Company’s consolidated revenues, respectively. Genesis commenced a restructuring effort in 2020 that continued in 2021. As part of Genesis' restructuring effort, during 2021, the Company and Genesis reached an agreement in principle to modify pricing through December 2021 (at which time the original pricing terms resumed) and payment terms through December 2022, at which point the original payment terms would resume. The Company's collection activity from Genesis has been compliant with this agreement with the Company continuing to closely monitor such Genesis accounts. As of December 31, 2021, the Company had outstanding accounts receivable and notes receivable of $29.8 million and $21.3 million, respectively, from Genesis. Although the Company expects to continue its relationship with Genesis, there can be no assurance thereof. Revenues generated from Genesis were included in both operating segments previously mentioned. Any extended discontinuance of revenues, or significant reduction, from this customer could, if not replaced, have a material impact on our operations. In addition, if Genesis fails to abide by current payment terms it could increase our accounts receivable balance and have a material adverse effect on our financial condition, results of operations, and cash flows. No other single customer or customer group represented more than 10% of consolidated revenues for the years ended December 31, 2021, 2020 and 2019.
Recent Accounting Pronouncements
Other than the adoption of FASB ASC 326, as discussed within Note 8 — Allowance for Doubtful Accounts, there have been no new accounting pronouncements that have significance, or potential significance, to our Consolidated Financial Statements.
Note 2 — Revenue
The Company presents its consolidated revenues disaggregated by reportable segment, as Management evaluates the nature, amount, timing and uncertainty of the Company’s revenues by segment. Refer to Note 14 — Segment Information herein as well as the information below regarding the Company’s reportable segments.
Housekeeping
Housekeeping accounted for $821.3 million, $895.3 million and $909.5 million of the Company’s consolidated revenues for the years ended December 31, 2021, 2020 and 2019, respectively. The Housekeeping services include managing customers’ housekeeping departments, which are principally responsible for the cleaning, disinfecting and sanitizing of resident rooms and common areas of the customers’ facilities, as well as the laundering and processing of the bed linens, uniforms, resident personal clothing and other assorted linen items utilized at the customers’ facilities. Upon beginning service with a customer facility, the Company will typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise and train the front-line personnel and coordinate housekeeping services with other facility support functions in accordance with customer requests. Such management personnel also oversee the execution of various cost and quality control procedures including continuous training and employee evaluation.
Dietary
Dietary services accounted for $820.6 million, $865.0 million and $931.3 million of the Company’s consolidated revenues for the years ended December 31, 2021, 2020 and 2019, respectively. Dietary services consist of managing customers’ dietary departments which are principally responsible for food purchasing, meal preparation and professional dietitian services, which include the development of menus that meet the dietary needs of residents. On-site management is responsible for all daily dietary department activities, with regular support provided by a District Manager specializing in dietary services. The Company also offers clinical consulting services to facilities which if contracted is a service bundled within the monthly service provided to customers. Upon beginning service with a customer facility, the Company will typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise and train the front-line personnel and coordinate dietitian services with other facility support functions in accordance with customer requests. Such management personnel also oversee the execution of various cost and quality control procedures including continuous training and employee evaluation.
Revenue Recognition
The Company’s revenues are derived from contracts with customers. The Company accounts for revenue from contracts with customers in accordance with ASC 606, and as such, the Company recognizes revenue to depict the transfer of promised goods and services to customers in amounts that reflect the consideration to which the Company is entitled in exchange for those goods and services. The Company’s costs of obtaining contracts are not material.
The Company performs services and provides goods in accordance with its contracts with its customers. Such contracts typically provide for a renewable one year service term, cancellable by either party upon 30 to 90 days’ notice, after an initial period of 60 to 120 days. A performance obligation is the unit of account under ASC 606 and is defined as a promise in a contract to transfer a distinct good or service to the customer. The Company’s Housekeeping and Dietary contracts relate to the provision of bundles of goods, services or both, which represent a series of distinct goods and services that are substantially the same and that have the same pattern of transfer to the customer. The Company accounts for the series as a single performance obligation satisfied over time, as the customer simultaneously receives and consumes the benefits of the goods and services provided. Revenue is recognized using the output method, which is based upon the delivery of goods and services to the customers’ facilities. In limited cases, the Company provides goods, services or both, before the execution of a written contract. In these cases, the Company defers the recognition of revenue until a contract is executed. The amount of such deferred revenue was $0.1 million as of both December 31, 2021 and 2020. Additionally, substantially all such revenue amounts deferred as of December 31, 2020 were subsequently recognized as revenue during the year ended December 31, 2021.
The transaction price is the amount of consideration to which the Company is entitled in exchange for transferring promised goods or services to its customers. The transaction price does not include taxes assessed or collected. The Company’s contracts detail the fees that the Company charges for the goods and services it provides. For certain contracts which contain a variable component to the transaction price, the Company is required to make estimates of the amount of consideration to which the Company will be entitled, based on variability in resident and patient populations serviced, product usage or quantities consumed. The Company recognizes revenue related to such estimates only when the Company determines that there will not be a significant reversal in the amount of revenue recognized. The Company’s contracts generally do not contain significant financing components, as payment terms are less than one year.
The Company allocates the transaction price to each performance obligation, noting that the bundle of goods, services or goods and services provided under each Housekeeping and Dietary contract represents a single performance obligation that is satisfied over time. The Company recognizes the related revenue when it satisfies the performance obligation by transferring a bundle of promised goods, services or both to a customer. Such recognition is on a monthly or weekly basis, as goods are provided and services are performed. In some cases, the Company requires customers to pay in advance for goods and services to be provided. As of December 31, 2021 and 2020, the value of the contract liabilities associated with customer prepayments was $2.5 million and $2.3 million, respectively. Additionally, all such revenue amounts deferred as of December 31, 2020 were subsequently recognized as revenue during the year ended December 31, 2021.
Transaction Price Allocated to Remaining Performance Obligations
The Company recognizes revenue as it satisfies the performance obligations associated with contracts with customers, which due to the nature of the goods and services provided by the Company, are satisfied over time. Contracts may contain transaction prices that are fixed, variable or both. The Company’s contracts with customers typically provide for an initial term of one year, with renewable one year service terms, cancellable by either party upon 30 to 90 days’ notice after an initial period of 60 to 120 days.
At December 31, 2021, the Company had $212.6 million related to performance obligations that were unsatisfied or partially unsatisfied for which the Company expects to recognize revenue. The Company expects to recognize revenue on approximately 46.1% of the remaining performance obligations over the next 12 months, with the balance to be recognized thereafter. These amounts exclude variable consideration primarily related to performance obligations that consists of a series of distinct service periods with revenues based on future performance that cannot be estimated at contract inception. The Company also has elected to apply the practical expedient that permits exclusion of information about the remaining performance obligations with original expected durations of one year or less.
Note 3 — Changes in Accumulated Other Comprehensive Income by Component
For the years ended December 31, 2021, 2020 and 2019, the Company’s accumulated other comprehensive income consisted of unrealized gains and losses from the Company’s available-for-sale marketable securities. The following tables provide a summary of the changes in accumulated other comprehensive income, net of taxes:
| | | | | | | | | | | | | | | | | |
| Unrealized Gains and (Losses) on Available-for-Sale Securities1 |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (in thousands) |
Accumulated other comprehensive income — beginning balance | $ | 5,563 | | | $ | 2,919 | | | $ | 158 | |
Other comprehensive (loss) income before reclassifications | (1,522) | | | 2,557 | | | 2,848 | |
(Gains) losses reclassified from other comprehensive income2 | (41) | | | 87 | | | (87) | |
Net current period other comprehensive (loss) income3 | (1,563) | | | 2,644 | | | 2,761 | |
Accumulated other comprehensive income — ending balance | $ | 4,000 | | | $ | 5,563 | | | $ | 2,919 | |
1.All amounts are net of tax.
2.Realized gains and losses were recorded pre-tax under “Investment and other income” in the Consolidated Statements of Comprehensive Income. For both years ended December 31, 2021 and 2019, the Company recorded $0.1 million of realized gains from the sale of available-for-sale securities. For the year ended December 31, 2020, the Company recorded $0.1 million of realized losses from the sale of available-for-sale securities. Refer to Note 6 — Fair Value Measurements herein for further information.
3.For the year ended December 31, 2021, the changes in other comprehensive income were net of a tax benefit of $0.4 million. For the years ended December 31, 2020 and 2019, the changes in other comprehensive income were both net of a tax expense of $0.7 million.
| | | | | | | | | | | | | | | | | |
| Amounts Reclassified from Accumulated Other Comprehensive Income |
| 2021 | | 2020 | | 2019 |
| (in thousands) |
Year Ended December 31, | | | | | |
Gains (losses) from the sale of available-for-sale securities | $ | 55 | | | $ | (114) | | | $ | 111 | |
Tax (expense) benefit | (14) | | | 27 | | | (24) | |
Net gain (loss) reclassified from accumulated other comprehensive income | $ | 41 | | | $ | (87) | | | $ | 87 | |
Note 4 — 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 December 31, 2021 and December 31, 2020:
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| (in thousands) |
Housekeeping and Dietary equipment | $ | 13,468 | | | $ | 13,862 | |
Computer hardware and software | 5,880 | | | 6,015 | |
Operating lease — right-of-use assets | 33,217 | | | 26,074 | |
Other1 | 1,736 | | | 1,581 | |
Total property and equipment, at cost | 54,301 | | | 47,532 | |
Less accumulated depreciation | 26,199 | | | 20,971 | |
Total property and equipment, net | $ | 28,102 | | | $ | 26,561 | |
1.Includes furniture and fixtures, leasehold improvements and autos and trucks including auto leases.
Depreciation expense for the years ended December 31, 2021, 2020 and 2019 was $10.3 million, $10.1 million, and $9.7 million, respectively. Of the depreciation expense recorded for the years ended December 31, 2021, 2020 and 2019 $6.4 million, $5.6 million and $4.9 million related to the depreciation of the Company’s operating lease - right-of-use assets (“ROU Assets”), respectively.
Note 5 — 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. To date, the Company has not recognized an impairment of its goodwill.
The following table sets forth the amounts of goodwill by reportable segment, as described in Note 14 — Segment Information, as of December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| December 31, 2020 | | Acquisitions1 | | December 31, 2021 |
| (in thousands) |
Housekeeping | $ | 42,377 | | | $ | — | | | $ | 42,377 | |
Dietary | 8,707 | | | 23,671 | | | 32,378 | |
Total Goodwill | $ | 51,084 | | | $ | 23,671 | | | $ | 74,755 | |
1.In the second quarter of 2021, the Company acquired a manufacturer of prepackaged meals for $6.0 million cash and $10.5 million of deferred variable consideration and recorded under “Other long-term liabilities” in the Consolidated Balance Sheet. The Company acquired primarily intangible assets and goodwill as part of the transaction. As of December 31, 2021, the Company has finalized its acquisition accounting for this transaction. In the fourth quarter of 2021, the Company acquired a regional dining operator for $18.0 million cash consideration. The Company acquired primarily intangible assets and goodwill as part of the acquisition. As of December 31, 2021, the Company has not finalized its acquisition accounting for this transaction.
Intangible Assets
The Company’s other intangible assets were obtained through acquisitions and are recorded at their fair values at the date of acquisition. The following table sets forth the amounts of other intangible assets as of December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Gross Amount | | Accumulated Amortization | | Net Amount | | Gross Amount | | Accumulated Amortization | | Net Amount |
| (in thousands) |
Customer relationships | $ | 45,634 | | | $ | 27,704 | | | $ | 17,930 | | | $ | 41,653 | | | $ | 23,466 | | | $ | 18,187 | |
Trade names | 1,731 | | | 55 | | | 1,676 | | | — | | | — | | | — | |
Patents | 1,086 | | | 95 | | | 991 | | | — | | | — | | | — | |
Non-compete agreements | 233 | | | 25 | | | 208 | | | — | | | — | | | — | |
Total other intangible assets | $ | 48,684 | | | $ | 27,879 | | | $ | 20,805 | | | $ | 41,653 | | | $ | 23,466 | | | $ | 18,187 | |
During the year ended December 31, 2021, the Company acquired customer relationships, trade names, patents, and non-compete agreements with values of $4.0 million, $1.7 million, $1.1 million and $0.2 million, respectively. No acquisitions occurred during the year ended December 31, 2020. Intangible assets with determinable useful lives are amortized on a straight-line basis over their estimated useful lives. The weighted-average amortization period of customer relationships, trade names, patents, and non-compete agreements are approximately 10 years, 13 years, 8 years, and 4 years, respectively.
The following table sets forth the estimated amortization expense for intangibles subject to amortization for 2022, the following four fiscal years and thereafter:
| | | | | | | | |
Period/Year | | Total Amortization Expense |
| | (in thousands) |
2022 | | $ | 4,851 | |
2023 | | $ | 3,813 | |
2024 | | $ | 2,679 | |
2025 | | $ | 2,679 | |
2026 | | $ | 2,660 | |
Thereafter | | $ | 4,123 | |
Amortization expense for the years ended December 31, 2021, 2020, and 2019 was $4.4 million, $4.2 million and $4.2 million, respectively.
Note 6 — Fair Value Measurements
The Company’s current assets and current liabilities are financial instruments and most of these items (other than marketable securities and inventories) are recorded at cost in the Consolidated Balance Sheets. The estimated fair value of these financial instruments approximates their carrying value due to their short-term nature. The carrying value of the Company’s line of credit represents the outstanding amount of the borrowings, which approximates fair value. 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 primarily consist of tax-exempt municipal bonds, which are classified as available-for-sale and are reported at fair value. Unrealized gains and losses associated with these investments are included in other comprehensive income (net of tax) within the Consolidated Statements of Comprehensive Income. The fair value of these marketable securities is classified within Level 2 of the fair value hierarchy, as these securities are measured using quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable. Such valuations are determined by a third-party pricing service. For the year ended December 31, 2021, the Company recorded unrealized losses, net of taxes of $1.6 million on marketable securities. For the years ended December 31, 2020 and 2019, the Company recorded unrealized gains, net of taxes of $2.6 million and $2.8 million on marketable securities, respectively.
For the years ended December 31, 2021, 2020 and 2019, the Company received total proceeds, less the amount of interest received of $26.7 million, $6.3 million and $21.3 million, respectively, from sales of available-for-sale municipal bonds. For both years ended December 31, 2021 and 2019, these sales each resulted in realized gains of $0.1 million, and realized losses of $0.1 million for the year ended December 31, 2020. Such gains and losses were recorded in “Investment and other income, net” in the Consolidated Statements of Comprehensive Income. The basis for the sale of these securities was the specific identification of each bond sold during the period.
The investments under the funded deferred compensation plan are accounted for as trading securities and unrealized gains or losses are included in earnings. The fair value of these investments are determined based on quoted market prices (Level 1). For the years ended December 31, 2021, 2020 and 2019, the Company recognized unrealized gains of $6.5 million, $9.5 million and $7.4 million, respectively, related to equity securities still held at the respective reporting dates.
The following tables provide fair value measurement information for the Company’s marketable securities and deferred compensation fund investments as of December 31, 2021 and December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| | | | | 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 | $ | 114,396 | | | $ | 114,396 | | | $ | — | | | $ | 114,396 | | | $ | — | |
| | | | | | | | | |
Deferred compensation fund | | | | | | | | | |
Money Market 1 | $ | 2,882 | | | $ | 2,882 | | | $ | — | | | $ | 2,882 | | | $ | — | |
| | | | | | | | | |
Balanced and Lifestyle | 12,578 | | | 12,578 | | | 12,578 | | | — | | | — | |
Large Cap Growth | 20,358 | | | 20,358 | | | 20,358 | | | — | | | — | |
Small Cap Growth | 6,561 | | | 6,561 | | | 6,561 | | | — | | | — | |
Fixed Income | 4,826 | | | 4,826 | | | 4,826 | | | — | | | — | |
International | 2,299 | | | 2,299 | | | 2,299 | | | — | | | — | |
Mid Cap Growth | 4,179 | | | 4,179 | | | 4,179 | | | — | | | — | |
Deferred compensation fund2 | $ | 53,683 | | | $ | 53,683 | | | $ | 50,801 | | | $ | 2,882 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| | | | | 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 | $ | 125,012 | | | $ | 125,012 | | | $ | — | | | $ | 125,012 | | | $ | — | |
| | | | | | | | | |
Deferred compensation fund | | | | | | | | | |
Money Market 1 | $ | 3,006 | | | $ | 3,006 | | | $ | — | | | $ | 3,006 | | | $ | — | |
Balanced and Lifestyle | 10,815 | | | 10,815 | | | 10,815 | | | — | | | — | |
Large Cap Growth | 17,223 | | | 17,223 | | | 17,223 | | | — | | | — | |
Small Cap Growth | 5,337 | | | 5,337 | | | 5,337 | | | — | | | — | |
Fixed Income | 4,850 | | | 4,850 | | | 4,850 | | | — | | | — | |
International | 2,250 | | | 2,250 | | | 2,250 | | | — | | | — | |
Mid Cap Growth | 3,344 | | | 3,344 | | | 3,344 | | | — | | | — | |
Deferred compensation fund | $ | 46,825 | | | $ | 46,825 | | | $ | 43,819 | | | $ | 3,006 | | | $ | — | |
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.
2.The deferred compensation fund carrying amount and total fair value amount as of December 31, 2021 is inclusive of $7.0 million of holdings expected to be paid to former employees within the next twelve months and were recorded under “Prepaid expenses and other assets” in the Consolidated Balance Sheets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | Other-than-temporary Impairments |
| (in thousands) |
December 31, 2021 | | | | | | | | | |
Type of security: | | | | | | | | | |
Municipal bonds — available-for-sale | $ | 109,331 | | | $ | 5,219 | | | $ | (154) | | | $ | 114,396 | | | $ | — | |
Total debt securities | $ | 109,331 | | | $ | 5,219 | | | $ | (154) | | | $ | 114,396 | | | $ | — | |
| | | | | | | | | |
December 31, 2020 | | | | | | | | | |
Type of security: | | | | | | | | | |
Municipal bonds — available-for-sale | $ | 117,970 | | | $ | 7,043 | | | $ | (1) | | | $ | 125,012 | | | $ | — | |
Total debt securities | $ | 117,970 | | | $ | 7,043 | | | $ | (1) | | | $ | 125,012 | | | $ | — | |
| | | | | | | | | |
December 31, 2019 | | | | | | | | | |
Type of security: | | | | | | | | | |
Municipal bonds — available-for-sale | $ | 87,016 | | | $ | 3,695 | | | $ | — | | | $ | 90,711 | | | $ | — | |
Total debt securities | $ | 87,016 | | | $ | 3,695 | | | $ | — | | | $ | 90,711 | | | $ | — | |
The following table summarizes the contractual maturities of debt securities held at December 31, 2021 and December 31, 2020, which are classified as marketable securities in the Consolidated Balance Sheets:
| | | | | | | | | | | | | | |
| | Municipal Bonds — Available-for-Sale |
Contractual maturity: | | December 31, 2021 | | December 31, 2020 |
| | (in thousands) |
Maturing in one year or less | | $ | 5,606 | | | $ | 2,927 | |
Maturing in second year through fifth year | | 23,054 | | | 26,324 | |
Maturing in sixth year through tenth year | | 52,180 | | | 55,366 | |
Maturing after ten years | | 33,556 | | | 40,395 | |
Total debt securities | | $ | 114,396 | | | $ | 125,012 | |
Note 7 — Accounts and Notes Receivable
The Company’s accounts and notes receivable balances consisted of the following as of December 31, 2021 and December 31, 2020:
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| (in thousands) |
Short-term | | | |
Accounts and notes receivable | $ | 352,659 | | | $ | 315,380 | |
Allowance for doubtful accounts | (59,271) | | | (59,906) | |
Total net short-term accounts and notes receivable | $ | 293,388 | | | $ | 255,474 | |
Long-term | | | |
Notes receivable | $ | 35,571 | | | $ | 42,312 | |
Allowance for doubtful accounts | (6,312) | | | (7,895) | |
Total net long-term notes receivable | $ | 29,259 | | | $ | 34,417 | |
Total net accounts and notes receivable | $ | 322,647 | | | $ | 289,891 | |
The Company makes credit decisions on a case-by-case basis after reviewing a number of qualitative and quantitative factors related to the specific customer as well as current industry variables that may impact that customer. There are a variety of factors that impact a customer’s ability to pay in accordance with the Company’s contracts. These factors include, but are not limited to, fluctuating census numbers, litigation costs and the customer’s participation in programs funded by federal and state governmental agencies. Deviations in the timing or amounts of reimbursements under those programs can impact the customer’s cash flows and its ability to make timely payments. However, the customer’s obligation to pay the Company in accordance with the contracts are not contingent upon the customer’s cash flow. Notwithstanding the Company’s efforts to minimize its credit risk exposure, the aforementioned factors, as well as other factors that impact customer cash flows or ability to make timely payments, could have an indirect, yet material adverse effect on the Company’s results of operations and financial condition.
Fluctuations in net accounts and notes receivable are generally attributable to a variety of factors including, but not limited to, the timing of cash receipts from customers and the inception, transition, modification or termination of customer relationships. The Company deploys significant resources and has invested in tools and processes to optimize Management’s credit and collections efforts. When appropriate, the Company utilizes interest-bearing promissory notes to enhance the collectability of amounts due, by instituting definitive repayment plans and providing a means by which to further evidence the amounts owed. In addition, the Company may amend contracts from full service to management-only arrangements, or adjust contractual payment terms, to accommodate customers who have in good faith established clearly-defined plans for addressing cash flow issues. These efforts are intended to minimize the Company’s collections risk.
Note 8 — Allowance for Doubtful Accounts
On January 1, 2020 (the “adoption date”), the Company replaced its previous incurred loss impairment model for estimating credit losses on accounts and notes receivables with an expected loss model prepared in accordance with ASC 326. While the incurred loss impairment model had the Company recognize credit losses when it was probable that a loss had been incurred, ASC 326 requires the Company to estimate future expected credit losses on such instruments before an impairment may occur. On the adoption date, the Company recorded an initial increase of $42.2 million to the Company’s allowance for doubtful accounts, with an offset recorded as an opening adjustment to retained earnings.
In making the Company’s credit evaluations, management considers the general collection risk associated with trends in the long-term care industry. The Company establishes credit limits through payment terms with customers, performs ongoing credit evaluations and monitors accounts on an aging schedule basis to minimize the risk of loss. Despite the Company’s efforts to minimize credit risk exposure, customers could be adversely affected if future industry trends, including those related to COVID-19, change in such a manner as to negatively impact their cash flows. The full effects of COVID-19 on the Company’s customers are highly uncertain and cannot be predicted. As a result, the Company’s future collection experience can differ significantly from historical collection trends. If the Company’s customers experience a negative impact on their cash flows, it could have a material adverse effect on the Company’s results of operations and financial condition.
The Company evaluates its accounts and notes receivable for expected credit losses quarterly. Accounts receivables are evaluated based on internally developed credit quality indicators derived from the aging of receivables. Notes receivable are evaluated based on internally developed credit quality indicators derived from Management’s assessment of collection risk. The Company manages note receivable portfolios using a two tiered approach by disaggregating standard notes receivables, which are promissory notes in good standing, from those who have been identified by Management as having an elevated credit risk profile due to a triggering event such as bankruptcy. At the end of each period the Company sets a reserve for expected credit losses on standard notes receivable based on the Company’s historical loss rate. Notes receivable with an elevated risk profile, which are from customers who have filed bankruptcy, are subject to collections activity or are slow payers that are experiencing financial difficulties, are aggregated and evaluated to determine the total reserve for the class of receivable.
The guidance in ASC 326 permits entities to make an accounting policy election not to measure an estimate for credit losses on accrued interest if those entities write-off accrued interest deemed uncollectible in a timely manner. The Company follows an income recognition policy on all interest earned on notes receivable. Under such policy the Company accounts for all notes receivable on a non-accrual basis and defers the recognition of any interest income until receipt of cash payments. This policy was established, recognizing the environment of the long-term care industry, and not because such notes receivable are necessarily impaired. Accordingly, the Company does not record a credit loss adjustment for accrued interest. For the years ended December 31, 2021, 2020 and 2019, the Company recognized $1.2 million, $1.7 million and $0.9 million in interest income from notes receivables, respectively.
As part of the Company’s adoption of ASC 326, there are additional disclosures required to be made on a class of financing receivable basis. The following table presents the Company’s two tiers of notes receivable further disaggregated by year of origination, as well as write-off activity for the years ended December 31, 2021 and 2020, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Notes Receivable as of December 31, 2021 |
| | Amortized Cost Basis by Origination Year |
| | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total |
| | (in thousands) |
Notes Receivable | | | | | | | | | | | | | | |
Standard notes receivable | | $ | 16,558 | | | $ | 6,862 | | | $ | 401 | | | $ | 18,738 | | | $ | 21,288 | | | $ | 1,560 | | | $ | 65,407 | |
Elevated risk notes receivable | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 406 | | | $ | 1,374 | | | $ | 1,780 | |
| | | | | | | | | | | | | | |
Current-period gross write-offs | | $ | — | | | $ | — | | | $ | 541 | | | $ | 489 | | | $ | 2,494 | | | $ | — | | | $ | 3,524 | |
Current-period recoveries | | — | | | — | | | (1) | | | — | | | — | | | (38) | | | (39) | |
Current-period net write-offs | | $ | — | | | $ | — | | | $ | 540 | | | $ | 489 | | | $ | 2,494 | | | $ | (38) | | | $ | 3,485 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Notes Receivable as of December 31, 2020 |
| | Amortized Cost Basis by Origination Year |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Total |
| | (in thousands) |
Notes Receivable | | | | | | | | | | | | | | |
Standard notes receivable | | $ | 12,592 | | | $ | 10,474 | | | $ | 19,185 | | | $ | 22,566 | | | $ | 28 | | | $ | 1,573 | | | $ | 66,418 | |
Elevated risk notes receivable | | $ | — | | | $ | 617 | | | $ | — | | | $ | 3,969 | | | $ | — | | | $ | 1,374 | | | $ | 5,960 | |
| | | | | | | | | | | | | | |
Current-period gross write-offs | | $ | — | | | $ | — | | | $ | 1,748 | | | $ | 1,540 | | | $ | 1,970 | | | $ | 67 | | | $ | 5,325 | |
Current-period recoveries | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Current-period net write-offs | | $ | — | | | $ | — | | | $ | 1,748 | | | $ | 1,540 | | | $ | 1,970 | | | $ | 67 | | | $ | 5,325 | |
The following table provides information as to the status of payment on the Company’s gross notes receivable which were past due as of December 31, 2021 and 2020, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Age Analysis of Past-Due Notes Receivable as of December 31, 2021 |
| | 0-90 Days | | 91 - 180 Days | | Greater than 181 Days | | Total |
| | (in thousands) |
Notes Receivable | | | | | | | | |
Standard notes receivable | | $ | 953 | | | $ | 5,676 | | | $ | 6,536 | | | $ | 13,165 | |
Elevated Risk Notes Receivable | | — | | | — | | | 1,780 | | | 1,780 | |
| | $ | 953 | | | $ | 5,676 | | | $ | 8,316 | | | $ | 14,945 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Age Analysis of Past-Due Notes Receivable as of December 31, 2020 |
| | 0-90 Days | | 91 - 180 Days | | Greater than 181 Days | | Total |
| | (in thousands) |
Notes Receivable | | | | | | | | |
Standard notes receivable | | $ | 1,001 | | | $ | 3,794 | | | $ | 3,712 | | | $ | 8,507 | |
Elevated Risk Notes Receivable | | 253 | | | 330 | | | 5,377 | | | 5,960 | |
| | $ | 1,254 | | | $ | 4,124 | | | $ | 9,089 | | | $ | 14,467 | |
The following tables provide a summary of the changes in the Company’s allowance for doubtful accounts on a portfolio segment basis for the years ended December 31, 2021 and 2020, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Allowance for doubtful accounts |
Portfolio Segment: | | December 31, 2020 | | Write-Offs | | Bad Debt Expense | | December 31, 2021 |
| | (in thousands) |
Accounts receivable | | $ | 51,052 | | | $ | (9,215) | | | $ | 8,957 | | | $ | 50,794 | |
| | | | | | | | |
Notes receivable | | | | | | | | |
Standard notes receivable | | $ | 13,258 | | | $ | (183) | | | $ | 532 | | | $ | 13,607 | |
Elevated risk notes receivable | | 3,491 | | | (3,302) | | | 994 | | | 1,183 | |
Total notes receivable | | $ | 16,749 | | | $ | (3,485) | | | $ | 1,526 | | | $ | 14,790 | |
Total accounts and notes receivable | | $ | 67,801 | | | $ | (12,700) | | | $ | 10,483 | | | $ | 65,584 | |
1.Write-offs are shown net of recoveries. During the year ended December 31, 2021, the Company collected $0.2 million of accounts receivables that were recovered subsequent to being written-off.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Allowance for doubtful accounts |
Portfolio Segment: | | December 31, 2019 | | Cumulative effect of ASC 326 adoption1 | | Write-Offs2 | | Bad Debt Expense | | December 31, 2020 |
| | (in thousands) |
Accounts receivable | | $ | 39,903 | | | $ | 36,709 | | | $ | (31,139) | | | $ | 5,579 | | | $ | 51,052 | |
| | | | | | | | | | |
Notes receivable | | | | | | | | | | |
Standard notes receivable | | $ | 6,667 | | | $ | 5,236 | | | $ | (2,238) | | | $ | 3,593 | | | $ | 13,258 | |
Elevated risk notes receivable | | 5,823 | | | 291 | | | (3,087) | | | 464 | | | 3,491 | |
Total notes receivable | | $ | 12,490 | | | $ | 5,527 | | | $ | (5,325) | | | $ | 4,057 | | | $ | 16,749 | |
Total accounts and notes receivable | | $ | 52,393 | | | $ | 42,236 | | | $ | (36,464) | | | $ | 9,636 | | | $ | 67,801 | |
1.Represents the pre-tax one-time adjustment to the Company’s 2020 opening retained earnings balance in accordance with the adoption of the CECL accounting guidance.
2.Write-offs are shown net of recoveries. During the year ended December 31, 2020, the Company collected $1.0 million of accounts receivables and notes receivables which had previously been written-off as uncollectible.
Prior to the adoption date, the allowance for doubtful accounts was established when the Company had determined that receivables have been impaired and the Company could reasonably estimate the amount of the incurred loss. The allowance for doubtful accounts was evaluated based on the Company’s ongoing review of accounts and notes receivable and was inherently subjective as it required estimates susceptible to significant revision as more information became available. For the year ended, December 31, 2019 the Company recorded bad debt provisions (in an Allowance for Doubtful Accounts) of $25.5 million.
Note 9 — Lease Commitments
The Company recognizes ROU Assets and Lease Liabilities for automobiles, office buildings, IT equipment, and small storage units for the temporary storage of operational equipment. The Company’s leases have remaining lease terms ranging from less than 1 year to 7 years, and have extension options ranging from 1 year to 5 years. Most leases include the option to terminate the lease within 1 year.
Upon adopting ASC 842, the Company made accounting policy elections using practical expedients offered under the guidance to combine lease and non-lease components within leasing arrangements and to recognize the payments associated with short-term leases in earnings on a straight-line basis over the lease term, with the cost associated with variable lease payments recognized when incurred. These accounting policy elections impact the value of the Company’s ROU Assets and Lease Liabilities. The value of the Company’s ROU Assets is determined as the non-depreciated fair value of its leasing arrangements and is recorded to Property and Equipment, net on the Company’s Consolidated Balance Sheets. The value of the Company’s Lease Liabilities is the present value of fixed lease payments not yet paid, discounted using either the rate implicit in the lease contract if that rate can be determined, or the Company’s incremental borrowing rate (“IBR”). As of December 31, 2021 and 2020, the Company’s short-term portion of lease obligations were $6.5 million and $5.3 million, respectively, and are recorded in Other accrued expenses with the remaining balance recognized under the Lease liability — long-term portion captions on the Company’s Consolidated Balance Sheets. Any future lease payments that are not fixed based on the terms of the lease contract, or fluctuate based on a factor other than an index or rate, are considered variable lease payments and are not included in the value of the Company’s ROU Assets or Lease Liabilities. The Company’s IBR is determined as the rate of interest that the Company would incur to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
Components of lease expense required by ASC 842 are presented below for the years ended December 31, 2021, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in thousands) |
Lease cost | | | | | | |
Operating lease cost | | $ | 6,210 | | | $ | 5,381 | | | $ | 4,699 | |
Short-term lease cost | | 747 | | | 738 | | | 830 | |
Variable lease cost | | 973 | | | 464 | | | 591 | |
Total lease cost | | $ | 7,930 | | | $ | 6,583 | | | $ | 6,120 | |
Supplemental information required by ASC 842 is presented below for the years ended December 31, 2021, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (dollar amounts in thousands) |
Other information | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities | | | | | | |
Operating cash flows from operating leases | | $ | 6,609 | | $ | 5,690 | | $ | 4,908 |
ROU Assets obtained in exchange for lease obligations1 | | $ | 7,143 | | 5,410 | | 21,366 |
Weighted-average remaining lease term — operating leases | | 4.5 years | | 5.4 years | | 6.2 years |
Weighted-average discount rate — operating leases | | 4.2 | % | | 4.5 | % | | 4.7 | % |
1.ROU Assets obtained in exchange for lease obligations for the year ended December 31, 2019 includes the amount initially capitalized in conjunction with the adoption of ASC 842.
During the years ended December 31, 2021 and 2020, the Company’s ROU Assets and Lease Liabilities were reduced by $0.8 million and $0.6 million, respectively due to lease cancellations.
The following is a schedule by calendar year of future minimum lease payments under operating leases that have remaining terms as of December 31, 2021:
| | | | | | | | |
Period/Year | | Operating Leases |
| | (in thousands) |
2022 | | 6,470 | |
2023 | | 4,822 | |
2024 | | 2,699 | |
2025 | | 1,311 | |
2026 | | 1,337 | |
Thereafter | | 2,867 | |
Total minimum lease payments | | $ | 19,506 | |
Less: imputed lease payments | | $ | 1,702 | |
Present value of lease liabilities | | $ | 17,804 | |
Note 10 — Share-Based Compensation
The components of the Company’s shared-based compensation expense for the years ended December 31, 2021, 2020 and 2019 are as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (in thousands) |
Stock options | $ | 1,832 | | | $ | 2,134 | | | $ | 2,623 | |
Restricted stock, restricted stock units and deferred stock units | 6,367 | | | 5,195 | | | 3,967 | |
Performance stock units | 401 | | | — | | | — | |
Employee Stock Purchase Plan | 227 | | | 543 | | | 275 | |
Total pre-tax share-based compensation expense charged against income1 | $ | 8,827 | | | $ | 7,872 | | | $ | 6,865 | |
| | | | | |
Total recognized tax (deficiency) benefit related to share-based compensation | $ | (217) | | | $ | (293) | | | $ | 196 | |
1.Share-based compensation expense is recorded in cost of services and selling, general and administrative expense in the Company’s Consolidated Statements of Comprehensive Income.
At December 31, 2021 and 2020, the unrecognized compensation cost related to unvested stock options and awards was $17.5 million and $16.7 million, respectively. The weighted average period over which these awards will vest was approximately 2.6 years as of December 31, 2021 and 2020.
2020 Omnibus Incentive Plan
On May 26, 2020, the Company adopted the 2020 Omnibus Incentive Plan (the “2020 Plan”) after approval by the Company’s Shareholders. The 2020 Plan provides that current or prospective officers, employees, non-employee directors and advisors can receive share-based awards such as stock options, performance stock units, restricted stock units and other stock awards. The 2020 Plan seeks to encourage profitability and growth of the Company through short-term and long-term incentives that are consistent with the Company’s operating objectives.
As of December 31, 2021, there were 4.9 million shares of common stock reserved for issuance under the 2020 Plan, of which, 2.1 million are available for future grant. The amount of shares available for issuance under the 2020 Plan will increase when outstanding awards under the Company’s Second Amended and Restated 2012 Equity Incentive Plan (the “2012 Plan”) are subsequently forfeited, terminated, lapsed, or satisfied thereunder in cash or property other than shares. No stock award will have a term in excess of 10 years. The Nominating, Compensation and Stock Option Committee (the “NCSO”) of the Board of Directors is responsible for determining the terms of the grants in accordance with the 2020 Plan.
Stock Options
A summary of stock options outstanding under the 2020 Plan and the 2012 Plan as of December 31, 2021 and changes during 2021 are as follows:
| | | | | | | | | | | |
| Stock Options Outstanding |
| Number of Shares | | Weighted Average Exercise Price |
| (in thousands) | | |
December 31, 2020 | 2,098 | | | $ | 33.35 | |
Granted | 207 | | | $ | 28.45 | |
Exercised | (109) | | | $ | 22.38 | |
Forfeited | (3) | | | $ | 39.38 | |
Expired | (12) | | | $ | 33.96 | |
December 31, 2021 | 2,181 | | | $ | 33.42 | |
The weighted average grant-date fair value of stock options granted during the years ended December 31, 2021, 2020, and 2019 was $7.01, $4.66 and $8.18 per common share, respectively. The total intrinsic value of stock options exercised during the years ended December 31, 2021, 2020 and 2019 was $0.7 million, $1.3 million and $5.5 million, respectively. The total fair value of stock options vested during the years ended December 31, 2021, 2020 and 2019 were $2.1 million, $2.6 million and $3.0 million, respectively.
For the year ended December 31, 2021 the tax deficiency realized from stock options exercised was immaterial. For the years ended December 31, 2020 and 2019, the tax benefit realized from stock options exercised was $0.1 million and $0.2 million, respectively.
The fair value of stock option awards granted in 2021, 2020 and 2019 were estimated on the dates of grant using the Black-Scholes option valuation model with the following assumptions:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Risk-free interest rate | 0.6 | % | | 1.8 | % | | 2.5 | % |
Weighted average expected life | 6.6 years | | 6.6 years | | 5.7 years |
Expected volatility | 34.7 | % | | 26.5 | % | | 22.6 | % |
Dividend yield | 2.9 | % | | 3.2 | % | | 1.9 | % |
The following table summarizes other information about the stock options at December 31, 2021:
| | | | | |
| December 31, 2021 |
| (amounts in thousands, except per share data) |
Outstanding: | |
Aggregate intrinsic value | $ | 18 | |
Weighted average remaining contractual life | 4.9 years |
Exercisable: | |
Number of options | 1,538 | |
Weighted average exercise price | $ | 33.43 | |
Aggregate intrinsic value | $ | 18 | |
Weighted average remaining contractual life | 3.7 years |
Restricted Stock Units
The fair value of outstanding restricted stock units and restricted stock was determined based on the market price of the shares on the date of grant. During the years ended December 31, 2021, 2020 and 2019 the Company granted 0.3 million, 0.3 million, and 0.2 million restricted stock units with weighted average grant date fair values of $28.53, $24.43, and $40.49 per unit, respectively.
During the years ended December 31, 2021, 2020 and 2019, the Company did not grant any restricted stock.
A summary of the outstanding restricted stock units and restricted stock as of December 31, 2020 and changes during the year ended December 31, 2021 is as follows:
| | | | | | | | | | | |
| Restricted Stock Units and Restricted Stock |
| Number | | Weighted Average Grant Date Fair Value |
| (in thousands) | | |
December 31, 2020 | 561 | | | $ | 33.31 | |
Granted | 262 | | | $ | 28.53 | |
Vested | (149) | | | $ | 35.32 | |
Forfeited | (22) | | | $ | 30.24 | |
December 31, 2021 | 652 | | | $ | 31.03 | |
The weighted average remaining vesting period for the unvested restricted stock units and restricted stock is 2.9 years.
The weighted average grant-date fair values and total fair values of restricted stock units and restricted stock vested during 2021, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in thousands, except per share data) |
Weighted average grant-date fair value of restricted stock units granted | | $ | 28.53 | | | $ | 24.43 | | | $ | 40.49 | |
Total fair value of restricted stock units and restricted shares vested | | $ | 4,185 | | | $ | 2,287 | | | $ | 2,399 | |
Performance Stock Units
On January 4, 2021, the NCSO granted 35,000 Performance Stock Units (“PSUs”) to the Company’s executive officers. Such PSUs are contingent upon the achievement of certain total shareholder return (“TSR”) targets as compared to the TSR of the S&P 400 MidCap Index and the participant’s continued employment with the Company for the three year period ending December 31, 2023, the date at which such awards vest. The unrecognized share-based compensation cost of the TSR-based PSU awards at December 31, 2021 is $0.8 million and is expected to be recognized over a weighted-average period of 2.1 years
A summary of the outstanding PSUs as of December 31, 2020 and changes during the year ended December 31, 2021 is as follows:
| | | | | | | | | | | |
| Performance Stock Units |
| Number | | Weighted Average Grant Date Fair Value |
| (in thousands) | | |
December 31, 2020 | — | | | $ | — | |
Granted | 35 | | | $ | 34.52 | |
Vested | — | | | $ | — | |
Forfeited | — | | | $ | — | |
December 31, 2021 | 35 | | | $ | 34.52 | |
Deferred Stock Units
On June 4, 2021, the NCSO granted an aggregate of 10,000 Deferred Stock Units (“DSUs”) to the Company’s non-employee directors. Each DSU award vests in one year. Once vested, the recipient shall be entitled to receive a lump sum payment of a number of shares equal to the total number of DSUs issued to such recipient upon the first to occur of (i) the five year anniversary of the date of grant, (ii) the recipient’s death, disability or separation of service from the Board, or (iii) a change of control (as defined by the 2020 Plan). The unrecognized share-based compensation cost of the DSU awards at December 31, 2021 is $0.1 million and is expected to be recognized over a weighted-average period of 0.4 years.
Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plan (“ESPP”) is currently available through 2026 to all eligible employees. All full-time and part-time employees who work an average of 20 hours per week and have completed two years of continuous service with the Company are eligible to participate. Annual offerings commence and terminate on the respective year’s first and last calendar day.
Under the ESPP, the Company is authorized to issue up to 4.1 million shares of its common stock to its employees. Pursuant to such authorization, there are 2.0 million shares available for future grant at December 31, 2021. Under the terms of the ESPP, participants may contribute through payroll deductions up to $21,250 (85% of IRS limitation) of their compensation toward the purchase of the Company’s common stock. No employee may purchase common stock which exceeds $25,000 in fair market value (determined on the option date) for each calendar year. The option price per share is equal to the lower of 85% of the fair market price on the first day of the offering period, or 85% of the fair market price on the last day of the offering period.
The following table summarizes information about the Company’s ESPP annual offerings for the years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (in thousands, except per share data) |
Common shares purchased | 85 | | | 73 | | | 75 | |
Per common share purchase price | $ | 15.12 | | | $ | 20.67 | | | $ | 20.67 | |
The expense associated with the options granted under the ESPP during the year ended December 31, 2021 and 2020 was estimated on the date of grant using the Black-Scholes option valuation model with the following assumptions:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
Risk-free interest rate | 0.1% | | 1.6% |
Weighted average expected life (years) | 1.0 | | 1.0 |
Expected volatility | 61.7% | | 42.0% |
Dividend yield | 2.9% | | 3.3% |
Deferred Compensation Plan
The Company offers a Supplemental Executive Retirement Plan (“SERP”) for executives and certain key 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 earnings deferred in the form of the Company’s common stock based on the then-current market value. SERP participants fully vest in the Company’s matching contribution three years from the first day of the initial year of participation. The income deferred and the matching contributions are unsecured and subject to the claims of the Company’s general creditors.
Under the SERP, the Company is authorized to issue 1.0 million shares of its common stock to its employees. Pursuant to such authorization, the Company has 0.3 million shares available for future grant at December 31, 2021. At the time of issuance, such shares are accounted for at cost as treasury stock. At December 31, 2021, approximately 0.3 million of such shares are vested and remain in the respective active participants’ accounts with the trustee.
The following table summarizes information about the SERP during the plan years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (in thousands) |
SERP expense 1 | $ | 531 | | | $ | 512 | | | $ | 539 | |
Treasury shares issued to fund SERP expense2 | 30 | | | 18 | | | 22 | |
Year end SERP trust account balance3 | $ | 59,086 | | | $ | 54,729 | | | $ | 43,952 | |
Unrealized gain recorded in SERP liability account | $ | 6,676 | | | $ | 9,200 | | | $ | 7,353 | |
1.Both the SERP match and the deferrals are included in the selling, general and administrative caption in the Consolidated Statements of Comprehensive Income.
2.Shares related to the SERP match for each year are funded at the beginning of the subsequent year.
3.SERP trust account investments are recorded at their fair value which is based on quoted market prices. Differences between such amounts in the table above and the deferred compensation funding asset reported on the Consolidated Balance Sheets represent the value of Company common stock held in the Plan participants’ trust accounts and reported by the Company as treasury stock in the Consolidated Balance Sheets.
Note 11 — Other Employee Benefit Plans
Retirement Savings Plan
Since October 1, 1999, the Company has had a retirement savings plan for eligible employees (the “RSP”) under Section 401(k) of the Internal Revenue Code. The RSP allows eligible employees to contribute up to 15% of their eligible compensation on a pre-tax basis.
Note 12 — Income Taxes
The following table summarizes the provision for income taxes:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (amounts in thousands) |
Current: | | | | | |
Federal | $ | 9,120 | | | $ | 28,833 | | | $ | 15,041 | |
State | 3,766 | | | 7,564 | | | 6,158 | |
| $ | 12,886 | | | $ | 36,397 | | | $ | 21,199 | |
Deferred: | | | | | |
Federal | $ | 2,118 | | | $ | (4,903) | | | $ | (824) | |
State | 956 | | | (990) | | | 140 | |
| $ | 3,074 | | | $ | (5,893) | | | $ | (684) | |
| | | | | |
Tax provision | $ | 15,960 | | | $ | 30,504 | | | $ | 20,515 | |
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 the Company’s federal and state deferred tax asset and liability balances were as follows:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| (in thousands) |
Deferred tax assets: | | | |
Allowance for doubtful accounts | $ | 16,124 | | | $ | 16,672 | |
Deferred compensation | 9,587 | | | 8,239 | |
Deferred payroll taxes under the CARES Act | 6,220 | | | 11,914 | |
Accrued insurance claims | 6,252 | | | 5,189 | |
Non-deductible reserves | 521 | | | 309 | |
Leases | 247 | | | 181 | |
Other | 1,854 | | | 1,466 | |
| $ | 40,805 | | | $ | 43,970 | |
Deferred tax liabilities: | | | |
Expensing of housekeeping supplies | $ | (3,085) | | | $ | (3,322) | |
Amortization of intangibles1 | (2,118) | | | (574) | |
Depreciation of property and equipment | (1,915) | | | (1,725) | |
| | | |
Other | (2,152) | | | (2,795) | |
| $ | (9,270) | | | $ | (8,416) | |
| | | |
Net deferred tax assets | $ | 31,535 | | | $ | 35,554 | |
1.The amortization of intangibles deferred tax liability includes less than $0.1 million of amortization of the goodwill recognized from the Company's acquisition of a prepackaged meal manufacturer. The goodwill related to the fourth quarter 2021 acquisition of a regional dining operator is not tax-deductible.
Realization of the Company’s deferred tax assets is dependent upon future earnings in specific tax jurisdictions, the timing and amount of which are uncertain. Management assesses the Company’s income tax positions and records tax benefits for all years subject to examination based upon an evaluation of the facts, circumstances, and information available at the reporting dates, which include historical operating results and expectations of future earnings. As such, management believes it is more likely than not that the deferred tax assets recorded will be realized to reduce future income taxes and therefore no valuation allowances are necessary.
The table below provides a reconciliation between the tax expense computed by applying the statutory federal income tax rate to income before income taxes and the provision for income taxes:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (in thousands) |
Income tax expense computed at statutory rate | $ | 12,983 | | | $ | 27,129 | | | $ | 17,872 | |
Increases (decreases) resulting from: | | | | | |
State income taxes, net of federal tax benefit | 3,931 | | | 4,985 | | | 4,902 | |
Federal jobs credits | (3,177) | | | (3,089) | | | (3,164) | |
Tax exempt interest | (324) | | | (323) | | | (399) | |
Share-based compensation | 1,072 | | | 1,323 | | | 298 | |
Fines and penalties1 | 1,294 | | | 20 | | | 20 | |
Other, net | 181 | | | 459 | | | 986 | |
Income tax expense | $ | 15,960 | | | $ | 30,504 | | | $ | 20,515 | |
1.For both the years ended December 31, 2020 and 2019, the Company presented less than $0.1 million of fines and penalties within the Other, net caption. Such amounts have been reclassified to the Fines and penalties caption for comparative purposes.
The Company performs an evaluation each period of its tax positions taken and expected to be taken in tax returns. The evaluation is performed on positions relating to tax years that remain subject to examination by major tax jurisdictions, the earliest of which is the tax year ended December 31, 2016. Based on the evaluation, the Company concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements. Therefore, the table reporting on the change in the liability for unrecognized tax benefits during the years ended December 31, 2021 and 2020 is omitted as there is no activity to report in such account for the years ended December 31, 2021 or 2020.
Note 13 — Related Party Transactions
For the years ended December 31, 2021, 2020 and 2019, the Company did not have any related party transactions.
Note 14 — 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 a similar customer 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 contracts, specific to each reportable segment.
The Company’s accounting policies for the segments are generally the same as described in the Company’s significant accounting policies. Differences between the reportable segments’ operating results and other disclosed data and the information in the consolidated financial statements relate primarily to corporate level transactions and recording of transactions at the reportable segment level using other than generally accepted accounting principles. There are certain inventories and supplies that are primarily expensed when incurred within the operating segments, while they are capitalized in the consolidated financial statements. In addition, most corporate expenses such as corporate salary and benefit costs, certain legal costs, debt expense, information technology costs, depreciation, amortization of finite-lived intangible assets, share based compensation costs and other corporate-specific costs, are not fully allocated to the operating segments. There are also allocations for workers’ compensation and general liability expense within the operating segments that differ from the actual expense recorded by the Company under U.S. GAAP. Segment amounts disclosed are prior to elimination entries made in consolidation.
All revenues and net income are earned in the United States.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in thousands) |
Revenues1 | | | | | | |
Housekeeping | | $ | 821,329 | | | $ | 895,267 | | | $ | 909,499 | |
Dietary | | 820,630 | | | 865,036 | | | 931,279 | |
Total | | $ | 1,641,959 | | | $ | 1,760,303 | | | $ | 1,840,778 | |
| | | | | | |
Income before income taxes | | | | | | |
Housekeeping | | $ | 79,380 | | | $ | 95,723 | | | $ | 94,173 | |
Dietary | | 45,758 | | | 68,293 | | | 43,269 | |
Corporate2 | | (63,315) | | | (34,830) | | | (52,346) | |
Total | | $ | 61,823 | | | $ | 129,186 | | | $ | 85,096 | |
| | | | | | |
Depreciation and amortization | | | | | | |
Housekeeping | | $ | 5,399 | | | $ | 5,722 | | | $ | 5,945 | |
Dietary | | 2,611 | | | 2,394 | | | 2,422 | |
Corporate | | 6,657 | | | 6,152 | | | 5,573 | |
Consolidated | | $ | 14,667 | | | $ | 14,268 | | | $ | 13,940 | |
| | | | | | |
Total assets | | | | | | |
Housekeeping | | $ | 225,531 | | | $ | 214,500 | | | $ | 265,096 | |
Dietary | | 221,911 | | | 174,866 | | | 236,075 | |
Corporate3 | | 330,087 | | | 395,665 | | | 221,421 | |
Consolidated | | $ | 777,529 | | | $ | 785,031 | | | $ | 722,592 | |
| | | | | | |
Capital expenditures | | | | | | |
Housekeeping | | $ | 5,005 | | | $ | 3,710 | | | $ | 3,188 | |
Dietary | | 451 | | | 393 | | | 68 | |
Corporate | | 231 | | | 238 | | | 1,112 | |
Consolidated | | $ | 5,687 | | | $ | 4,341 | | | $ | 4,368 | |
1.For the years ended December 31, 2021 and 2020, both the Housekeeping and Dietary segments earned revenue from several significant customers, although Genesis was the only customer to contribute more than 10% of consolidated revenue. For the years ended December 31, 2021, 2020 and 2019, Genesis accounted for $177.1 million or 10.8%, $258.7 million or 14.7% and $287.8 million or 15.6% of the Company’s consolidated revenues, respectively.
2.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 other income and interest expense.
3.Primarily consists of cash and cash equivalents, marketable securities, deferred income taxes and other current and noncurrent assets.
Note 15 — Earnings Per Common Share
Basic and diluted earnings per common share are computed by dividing net income by the weighted-average number of basic and diluted common shares outstanding, respectively. The weighted-average number of diluted common shares includes the impact of dilutive securities, including outstanding stock options and unvested restricted stock and restricted stock units. The table below reconciles the weighted-average basic and diluted common shares outstanding for 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| |
Numerator for basic and diluted earnings per share: | | | | | |
Net income | $ | 45,863 | | | $ | 98,682 | | | $ | 64,581 | |
| | | | | |
Denominator: | | | | | |
Weighted average number of common shares outstanding - basic | 74,816 | | | 74,696 | | | 74,362 | |
Effect of dilutive securities1 | 146 | | | 89 | | | 228 | |
Weighted average number of common shares outstanding - diluted | 74,962 | | | 74,785 | | | 74,590 | |
| | | | | |
Basic earnings per share: | $ | 0.61 | | | $ | 1.32 | | | $ | 0.87 | |
| | | | | |
Diluted earnings per share: | $ | 0.61 | | | $ | 1.32 | | | $ | 0.87 | |
1.Certain outstanding equity awards are anti-dilutive and therefore were excluded from the calculation of the weighted average number of diluted common shares outstanding.
Anti-dilutive outstanding equity awards under share-based compensation plans were as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (in thousands) |
Anti-dilutive stock options and restricted stock units | 1,980 | | | 2,121 | | | 1,682 | |
Note 16 — Contractual Obligations and Other Contingencies
Line of Credit
At December 31, 2021, the Company had a $475 million bank line of credit on which to draw for general corporate purposes. Amounts drawn under the line of credit are payable upon demand and generally bear interest at a floating rate, based on the Company’s leverage ratio, and starting at LIBOR plus 115 basis points (or if LIBOR becomes unavailable, the higher of the Overnight Bank Funding Rate, plus 50 basis points and the Prime Rate). As of December 31, 2021 and 2020, there were no borrowings under the line of credit. The line of credit requires the Company to satisfy two financial covenants, with which the Company is in compliance as of December 31, 2021. The line of credit expires on December 21, 2023.
At December 31, 2021, the Company also had outstanding $64.9 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 $64.9 million to $410.1 million at December 31, 2021. On November 22, 2021, the letters of credit were renewed and expire on January 4, 2023.
Tax Jurisdictions and Matters
The Company provides services throughout the continental United States and is subject to numerous state and local taxing jurisdictions. In the ordinary course of business, a jurisdiction may contest the Company’s reporting positions with respect to the application of its tax code to the Company’s services, which could result in additional tax liabilities.
The Company has tax matters with various taxing authorities. Because of the uncertainties related to both the probable outcomes and amount of probable assessments due, the Company is unable to make a reasonable estimate of a liability. The Company does not expect the resolution of any of these matters, taken individually or in the aggregate, to have a material adverse effect on the consolidated financial position or results of operations based on the Company’s best estimate of the outcomes of such matters.
Legal Proceedings
The Company is subject to various claims and legal actions in the ordinary course of business. Some of these matters include payroll and employee-related matters and examinations by governmental agencies. As the Company becomes aware of such claims and legal actions, the Company records accruals for any exposures that are probable and estimable. If adverse outcomes of such claims and legal actions are reasonably possible, Management assesses materiality and provides financial disclosure, as appropriate.
At this time, the Company is unable to reasonably estimate possible losses or form a judgment that an unfavorable outcome is either probable or remote with respect to certain pending litigation claims asserted and it is not currently possible to assess whether or not the outcome of these proceedings may have a material adverse effect on the Company.
On October 15, 2021 the Company’s directors’ and officers’ liability insurance carriers paid a $16.8 million settlement to resolve a putative shareholder class action lawsuit originally filed against the Company and its Chief Executive Officer in the U.S. District Court for the Eastern District of Pennsylvania on March 22, 2019.
Government Regulations
The Company’s customers are concentrated in the healthcare industry and are primarily providers of long-term care many of whom have been significantly impacted by COVID-19. The revenues of many of the Company’s customers 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 customers participate.
Note 17 — Accrued Insurance Claims
The Company currently has a Paid Loss Retrospective Insurance Plan for general liability, workers’ compensation insurance and other self-insurance programs, which comprised approximately 27.5% and 27.1% of the Company’s liabilities at December 31, 2021 and 2020, respectively. The increase in our self-insurance liabilities was primarily impacted by an adjustment to the Company’s self-insurance liability during 2020 in which the Company’s provision for prior year claims was favorably adjusted by $14.0 million as the Company’s expected future payment obligations had been reduced. Under the Company’s insurance plans, predetermined loss limits are arranged with the Company’s insurance company to limit both per occurrence cash outlay and annual insurance plan cost. The Company’s accounting for this plan utilizes current valuations from a third party actuary, which include assumptions based on data such as historical claims, pay-out experience, demographic factors, industry trends, severity factors, and other actuarial calculations. In the event that the Company’s claims experience and/or industry trends result in an unfavorable change in the assumptions or outcomes, it would have an adverse effect on the Company’s results of operations and financial condition.
For general liability, workers’ compensation and other self-insurance programs, the Company records both a reserve for the estimated future cost of claims and related expenses that have been reported but not settled, as well as an estimate of claims incurred but not reported. General liability and workers’ compensation reserves for claims incurred but not reported are developed by a third party actuary through review of the Company’s historical data and open claims.
Note 18 — Treasury Stock
During the year ended December 31, 2021, the Company's Board of Directors authorized and the Company entered into a 10b5-1 plan (the “Plan”). The Plan was adopted under the safe harbor provided by rule 10b5-1and Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in order to assist the Company in implementing its share repurchase plans. Pursuant to the Company’s share repurchase program and as authorized by the Board of Directors on March 12, 2021, the Company has purchased 1.0 million shares of the Company’s common stock during the year ended December 31, 2021 for a total cost of $21.5 million inclusive of transaction costs. The number of shares and value of shares repurchased were immaterial for the year ended December 31, 2020.
Note 19 — Subsequent Events
The Company evaluated all subsequent events through the filing date of this Annual Report on Form 10-K. On February 8, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.21125 per common share, payable on March 25, 2022 to shareholders of record at the close of business on February 25, 2022.
There were no additional events or transactions occurring during this subsequent reporting period which require recognition or additional disclosure in these financial statements.