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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q

(Mark One)
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to                    

Commission file number: 0-12015

HEALTHCARE SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania23-2018365
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)

3220 Tillman Drive, Suite 300, Bensalem, Pennsylvania
(Address of principal executive office)

19020
(Zip Code)

Registrant’s telephone number, including area code:
(215) 639-4274

Former name, former address and former fiscal year, if changed since last report:
Not Applicable

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $.01 par valueHCSGNASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  þ    No  ¨



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerþAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes    No  þ

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. Common Stock, $.01 par value: 74,424,000 shares outstanding as of October 22, 2020.



Healthcare Services Group, Inc.
Quarterly Report on Form 10-Q
For the Period Ended September 30, 2020

TABLE OF CONTENTS

Page




Table of Contents
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report and documents incorporated by reference into it may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, and our beliefs and assumptions. Words such as “believes,” “anticipates,” “plans,” “expects,” “will,” “goal,” and similar expressions are intended to identify forward-looking statements. The inclusion of forward-looking statements should not be regarded as a representation by us that any of our plans will be achieved. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Such forward-looking information is also subject to various risks and uncertainties. Such risks and uncertainties include, but are not limited to, risks arising from our providing services exclusively to the healthcare industry, primarily providers of long-term care; the impact of and future effects of the COVID-19 pandemic or other potential pandemics; having a significant portion of our consolidated revenues contributed by one customer during the nine months ended September 30, 2020; credit and collection risks associated with the healthcare industry; our claims experience related to workers’ compensation and general liability insurance (including any litigation claims, enforcement actions, regulatory actions and investigations arising from personal injury and loss of life related to COVID-19); the effects of changes in, or interpretations of laws and regulations governing the healthcare industry, our workforce and services provided, including state and local regulations pertaining to the taxability of our services and other labor-related matters such as minimum wage increases; the Company’s expectations with respect to selling, general, and administrative expense; continued realization of tax benefits arising from our corporate reorganization and self-funded health insurance program; the impact of the Securities and Exchange Commission investigation and related class action lawsuit; risks associated with the reorganization of our corporate structure; and the risk factors described in Part I of our Form 10-K for the fiscal year ended December 31, 2019 and under Item IA. “Risk Factors” in such Form 10-K and this Form 10-Q.

These factors, in addition to delays in payments from customers and/or customers in bankruptcy, have resulted in, and could continue to result in, significant additional bad debts in the near future. Additionally, our operating results would be adversely affected if unexpected increases in the costs of labor and labor-related costs, materials, supplies and equipment used in performing services (including the impact of potential tariffs and COVID-19) could not be passed on to our customers.

In addition, we believe that to improve our financial performance we must continue to obtain service agreements with new customers, retain and provide new services to existing customers, achieve modest price increases on current service agreements with existing customers and/or maintain internal cost reduction strategies at our various operational levels. Furthermore, we believe that our ability to sustain the internal development of managerial personnel is an important factor impacting future operating results and the successful execution of our projected growth strategies.


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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Healthcare Services Group, Inc.
Consolidated Balance Sheets
(in thousands, except per share amounts)
(Unaudited)
September 30,
2020
December 31,
2019
ASSETS:
Current assets:
Cash and cash equivalents$109,920 $27,329 
Marketable securities, at fair value94,042 90,711 
Accounts and notes receivable, less allowance for doubtful accounts of $76,751 and $45,726 as of September 30, 2020 and December 31, 2019, respectively
277,031 340,930 
Inventories and supplies32,692 36,517 
Prepaid expenses and other assets23,834 20,245 
Total current assets537,519 515,732 
Property and equipment, net27,807 28,820 
Goodwill51,084 51,084 
Other intangible assets, less accumulated amortization of $22,424 and $19,300 as of September 30, 2020 and December 31, 2019, respectively
19,229 22,353 
Notes receivable — long–term portion, less allowance for doubtful accounts of $5,342 and $6,667 as of September 30, 2020 and December 31, 2019, respectively
39,458 46,992 
Deferred compensation funding, at fair value40,969 37,247 
Deferred income taxes38,265 20,364 
Total assets$754,331 $722,592 
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable$53,940 $54,418 
Accrued payroll and related taxes16,443 36,413 
Other accrued expenses12,642 16,489 
Borrowings under line of credit 10,000 
Income taxes payable25,495 8,075 
Accrued insurance claims25,776 23,256 
Total current liabilities134,296 148,651 
Accrued insurance claims — long-term portion70,296 64,366 
Deferred compensation liability41,045 37,621 
Accrued payroll and related taxes - noncurrent32,304  
Lease liability — long-term portion11,640 11,649 
Commitments and contingencies (Note 15)
STOCKHOLDERS’ EQUITY:
Common stock, $0.01 par value; 100,000 shares authorized; 75,734 and 75,557 shares issued, and 74,423 and 74,149 shares outstanding as of September 30, 2020 and December 31, 2019, respectively
757 756 
Additional paid-in capital279,408 270,614 
Retained earnings188,578 195,455 
Accumulated other comprehensive income, net of taxes4,915 2,919 
Common stock in treasury, at cost, 1,311 and 1,408 shares as of September 30, 2020 and December 31, 2019, respectively
(8,908)(9,439)
Total stockholders’ equity464,750 460,305 
Total liabilities and stockholders’ equity$754,331 $722,592 

See accompanying notes to consolidated financial statements.
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Healthcare Services Group, Inc.
Consolidated Statements of Comprehensive Income
(in thousands, except per share amounts)
(Unaudited)


Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Revenues$435,947 $455,606 $1,337,126 $1,393,818 
Operating costs and expenses:
Costs of services provided365,443 398,404 1,140,116 1,226,154 
Selling, general and administrative expense37,337 33,479 108,819 113,189 
Other income (expense):
Investment and other income, net4,279 733 7,197 7,329 
Interest expense(314)(740)(1,062)(2,579)
Income before income taxes37,132 23,716 94,326 59,225 
Income tax provision9,488 5,372 23,391 13,539 
Net income$27,644 $18,344 $70,935 $45,686 
Per share data:
Basic earnings per common share$0.37 $0.25 $0.95 $0.61 
Diluted earnings per common share$0.37 $0.25 $0.95 $0.61 
Weighted average number of common shares outstanding:
Basic74,700 74,387 74,684 74,347 
Diluted74,777 74,507 74,768 74,615 
Comprehensive income:
Net income$27,644 $18,344 $70,935 $45,686 
Other comprehensive income:
Unrealized gain on available-for-sale marketable securities, net of taxes873 457 1,996 2,664 
Total comprehensive income$28,517 $18,801 $72,931 $48,350 




See accompanying notes to consolidated financial statements.
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Healthcare Services Group, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 Nine Months Ended September 30,
 20202019
Cash flows from operating activities:
Net income$70,935 $45,686 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization10,752 10,397 
Bad debt provision6,756 22,980 
Deferred income tax (benefit) expense(8,247)119 
Share-based compensation expense5,917 5,468 
Amortization of premium on marketable securities1,409 1,019 
Unrealized gain on deferred compensation fund investments(4,210)(5,048)
Changes in operating assets and liabilities:
Accounts and notes receivable22,440 (24,636)
Inventories and supplies3,825 2,394 
Prepaid expenses and other assets(3,588)641 
Deferred compensation funding488 (223)
Accounts payable and other accrued expenses(9,104)(9,420)
Accrued payroll, accrued and withheld payroll taxes14,356 21,197 
Income taxes payable17,420 (4,074)
Accrued insurance claims8,450 8,001 
Deferred compensation liability3,950 5,721 
Net cash provided by operating activities141,549 80,222 
Cash flows from investing activities:
Disposals of fixed assets475 127 
Additions to property and equipment(3,074)(3,384)
Purchases of marketable securities(8,242)(18,627)
Sales of marketable securities5,979 17,628 
Net cash used in investing activities(4,862)(4,256)
Cash flows from financing activities:
Dividends paid(45,383)(44,065)
Reissuance of treasury stock pursuant to Dividend Reinvestment Plan69 67 
Proceeds from the exercise of stock options1,893 3,166 
Repayments of short-term borrowings(10,000)(20,000)
Payments of statutory withholding on net issuance of restricted stock units(675)(587)
Net cash used in financing activities(54,096)(61,419)
Net change in cash and cash equivalents82,591 14,547 
Cash and cash equivalents at beginning of the period27,329 26,025 
Cash and cash equivalents at end of the period$109,920 $40,572 


See accompanying notes to consolidated financial statements.
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Healthcare Services Group, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands)
(Unaudited)
For the nine months ended September 30, 2020
Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income, net of taxesRetained EarningsTreasury StockStockholders’ Equity
SharesAmount
Balance, December 31, 201975,557 $756 $270,614 $2,919 $195,455 $(9,439)$460,305 
Adjustment to adopt credit-loss guidance1
— — — — (32,099)— (32,099)
Balance, January 1, 202075,557 $756 $270,614 $2,919 $163,356 $(9,439)$428,206 
Comprehensive income:
Net income for the period— — — — 20,190 — 20,190 
Unrealized loss on available-for-sale marketable securities, net of taxes— — — (533)— — (533)
Comprehensive income for the period$19,657 
Exercise of stock options and other share-based compensation, net of shares tendered for payment162 1 1,723 — — — 1,724 
Payment of statutory withholding on issuance of restricted stock and restricted stock units— — (661)— — — (661)
Share-based compensation expense — stock options, restricted stock and restricted stock units— — 1,822 — — — 1,822 
Treasury shares issued for Deferred Compensation Plan funding and redemptions— — 417 — — 111 528 
Shares issued pursuant to Employee Stock Plan— — 1,329 — — 506 1,835 
Dividends paid and accrued, $0.20 per share
— — — — (15,142)— (15,142)
Shares issued pursuant to Dividend Reinvestment Plan— — 16 — — 7 23 
Other6 — 187 — — — 187 
Balance, March 31, 202075,725 $757 $275,447 $2,386 $168,404 $(8,815)$438,179 
Comprehensive income:
Net income for the period— — — — 23,101 — 23,101 
Unrealized gain on available-for-sale marketable securities, net of taxes— — — 1,656 — — 1,656 
Comprehensive income for the period$24,757 
Exercise of stock options and other share-based compensation, net of shares tendered for payment7 — 138 — — — 138 
Share-based compensation expense — stock options, restricted stock and restricted stock units— — 1,830 — — — 1,830 
Treasury shares issued for Deferred Compensation Plan funding and redemptions— — 51 — — (53)(2)
Dividends paid and accrued, $0.20 per share
— — — — (15,237)— (15,237)
Shares issued pursuant to Dividend Reinvestment Plan— — 16 — — 6 22 
Balance, June 30, 202075,732 $757 $277,482 $4,042 $176,268 $(8,862)$449,687 
Comprehensive income:
Net income for the period— — — — 27,644 — 27,644 
Unrealized gain on available-for-sale marketable securities, net of taxes— — — 873 — — 873 
Comprehensive income for the period$28,517 
Exercise of stock options and other share-based compensation, net of shares tendered for payment2 — 31 — — — 31 
Payment of statutory withholding on issuance of restricted stock and restricted stock units— — (14)— — — (14)
Share-based compensation expense — stock options, restricted stock and restricted stock units— — 1,840 — — — 1,840 
Treasury shares issued for Deferred Compensation Plan funding and redemptions— — 53 — — (54)(1)
Dividends paid and accrued, $0.20 per share
— — — — (15,334)— (15,334)
Shares issued pursuant to Dividend Reinvestment Plan— — 16 — — 8 24 
Balance, September 30, 202075,734 $757 $279,408 $4,915 $188,578 $(8,908)$464,750 

1.See Note 4—Allowance for Doubtful Accounts regarding the new credit-loss guidance
See accompanying notes to consolidated financial statements.
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For the nine months ended September 30, 2019
Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income, net of taxesRetained EarningsTreasury StockStockholders’ Equity
SharesAmount
Balance, December 31, 201875,344 $753 $259,440 $158 $190,092 $(9,663)$440,780 
Comprehensive income:
Net income for the period— — — — 9,156 — 9,156 
Unrealized gain on available-for-sale marketable securities, net of taxes— — — 1,416 — — 1,416 
Comprehensive income for the period$10,572 
Exercise of stock options and other share-based compensation, net of shares tendered for payment115 2 1,911 — — — 1,913 
Payment of statutory withholding on issuance of restricted stock and restricted stock units— — (579)— — — (579)
Share-based compensation expense — stock options, restricted stock and restricted stock units— — 1,656 — — — 1,656 
Treasury shares issued for Deferred Compensation Plan funding and redemptions— — 535 — — 1 536 
Shares issued pursuant to Employee Stock Plan— — 1,781 — — 349 2,130 
Dividends paid and accrued, $0.20 per share
— — — — (14,656)— (14,656)
Shares issued pursuant to Dividend Reinvestment Plan— — 18 — — 5 23 
Other6 — 174 — — — 174 
Balance, March 31, 201975,465 $755 $264,936 $1,574 $184,592 $(9,308)$442,549 
Comprehensive income:
Net income for the period— — — — 18,186 — 18,186 
Unrealized gain on available-for-sale marketable securities, net of taxes— — — 791 — — 791 
Comprehensive income for the period$18,977 
Exercise of stock options and other share-based compensation, net of shares tendered for payment54 — 1,186 — — — 1,186 
Share-based compensation expense — stock options, restricted stock and restricted stock units— — 1,668 — — — 1,668 
Treasury shares issued for Deferred Compensation Plan funding and redemptions— — 45 — — (47)(2)
Dividends paid and accrued, $0.20 per share
— — — — (14,753)— (14,753)
Shares issued pursuant to Dividend Reinvestment Plan— — 18 — — 5 23 
Balance, June 30, 201975,519 $755 $267,853 $2,365 $188,025 $(9,350)$449,648 
Comprehensive income:
Net income for the period— — — — 18,344 — 18,344 
Unrealized gain on available-for-sale marketable securities, net of taxes— — — 457 — — 457 
Comprehensive income for the period$18,801 
Exercise of stock options and other share-based compensation, net of shares tendered for payment5 — 67 — — — 67 
Payment of statutory withholding on issuance of restricted stock and restricted stock units— — (8)— — — (8)
Share-based compensation expense — stock options, restricted stock and restricted stock units— — 1,626 — — — 1,626 
Treasury shares issued for Deferred Compensation Plan funding and redemptions— — 45 — — (47)(2)
Dividends paid and accrued, 0.20 per share
— — — — (14,854)— (14,854)
Shares issued pursuant to Dividend Reinvestment Plan— — 15 — — 6 21 
Balance, September 30, 201975,524 $755 $269,598 $2,822 $191,515 $(9,391)$455,299 

See accompanying notes to consolidated financial statements.
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Healthcare Services Group, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

Note 1—Description of Business and Significant Accounting Policies

Nature of Operations

Healthcare Services Group, Inc. (the “Company”) provides management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary service departments of the 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. The Company also provides services on the basis of management-only agreements for a limited number of customers. 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.

Unaudited Interim Financial Data

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and the requirements of Form 10-Q and Article 10 of Regulation S-X. Accordingly, these consolidated financial statements do not include all of the information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows. However, in the Company’s opinion, all adjustments which are of a normal recurring nature and are necessary for a fair presentation have been reflected in these consolidated financial statements. The balance sheet shown in this report as of December 31, 2019 has been derived from the audited financial statements for the year ended December 31, 2019. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The results of operations for the nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for any future period.

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.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Healthcare Services Group, Inc. and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

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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.

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 loss.

Refer to Note 3—Accounts and Notes Receivable herein for further information.

Allowance for Doubtful Accounts

The guidance under the Financial Accounting Standards Board ("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 4—Allowance for Doubtful Accounts herein for further information.

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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 PositionDecember 31, 2019Cumulative Impact from Adopting ASC 326 GuidanceJanuary 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 guidance under the FASB Accounting Standards Codification subtopic 606 Revenue from Contracts with Customers ("ASC 606") requires the Company to recognize revenue as the promised goods and services within the terms of the Company’s contracts are performed and satisfied. 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 September 30, 2020 and December 31, 2019, the Company was only the lessee of operating lease arrangements.
Refer to Note 7—Leases herein for further information.

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.
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Uncertain income tax positions taken or expected to be taken in tax returns are reflected within the Company’s financial statements based on a recognition and measurement process.

Earnings per Common Share

Basic earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is 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 and using the share price on the date of grant for restricted stock and restricted stock units. The value of the award is recognized ratably as an expense in the Company’s Consolidated Statements of Comprehensive Income over the requisite service periods, with adjustments made for forfeitures as they occur.

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, 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 nine months ended September 30, 2020 or 2019.

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 September 30, 2020 and December 31, 2019, 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.

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 13—Segment Information herein as well as the information below regarding the Company’s reportable segments.
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Housekeeping

Housekeeping accounted for $675.4 million and $687.4 million of the Company’s consolidated revenues for the nine months ended September 30, 2020 and 2019, respectively, which represented approximately 50.5% and 49.3% of the Company’s revenues in each respective period. 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 $661.8 million and $706.4 million of the Company’s consolidated revenues for the nine months ended September 30, 2020 and 2019, respectively, which represented approximately 49.5% and 50.7% of the Company’s revenues in each respective period. 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

All of 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 $0.4 million and $0.3 million as of September 30, 2020 and December 31, 2019, respectively. Additionally, substantially all such revenue amounts deferred as of December 31, 2019 were subsequently recognized as revenue during the nine months ended September 30, 2020.

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.

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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 September 30, 2020 and December 31, 2019, the value of the contract liabilities associated with customer prepayments was not material. Additionally, substantially all such revenue amounts deferred as of December 31, 2019 were subsequently recognized as revenue during the nine months ended September 30, 2020.