Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2010
Commission File Number 0-12015
HEALTHCARE SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
|
|
|
Pennsylvania
|
|
23-2018365 |
|
|
|
(State or other jurisdiction of
|
|
(IRS Employer Identification number) |
incorporation or organization)
|
|
|
3220
Tillman Drive-Suite 300, Bensalem, Pennsylvania 19020
(Address of principal executive office) (Zip code)
Registrants telephone number, including area code: 215-639-4274
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 Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such returns), (2) has been subject to such
filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
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 and post such files). YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one)
|
|
|
|
|
|
|
Large accelerated filer þ
|
|
Accelerated filer o
|
|
Non-accelerated filer o
|
|
Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). YES o NO þ
Number of shares of common stock, issued and outstanding as of April 16, 2010 is 43,777,000
Total of 38 Pages
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
Assets |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
28,648,000 |
|
|
$ |
31,301,000 |
|
Marketable securities, at fair value |
|
|
43,901,000 |
|
|
|
52,648,000 |
|
Accounts and notes receivable, less allowance for doubtful accounts of $4,796,000 in 2010 and $4,640,000 in 2009 |
|
|
105,065,000 |
|
|
|
104,356,000 |
|
Inventories and supplies |
|
|
17,456,000 |
|
|
|
16,974,000 |
|
Deferred income taxes |
|
|
391,000 |
|
|
|
115,000 |
|
Prepaid expenses and other |
|
|
5,900,000 |
|
|
|
6,776,000 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
201,361,000 |
|
|
|
212,170,000 |
|
|
|
|
|
|
|
|
|
|
Property and Equipment: |
|
|
|
|
|
|
|
|
Laundry and linen equipment installations |
|
|
1,733,000 |
|
|
|
1,695,000 |
|
Housekeeping equipment and office furniture |
|
|
17,470,000 |
|
|
|
16,905,000 |
|
Autos and trucks |
|
|
278,000 |
|
|
|
278,000 |
|
|
|
|
|
|
|
|
|
|
|
19,481,000 |
|
|
|
18,878,000 |
|
Less accumulated depreciation |
|
|
14,907,000 |
|
|
|
14,487,000 |
|
|
|
|
|
|
|
|
|
|
|
4,574,000 |
|
|
|
4,391,000 |
|
GOODWILL, Less accumulated amortization of $1,743,000 in 2010 and 2009 |
|
|
16,955,000 |
|
|
|
17,087,000 |
|
OTHER INTANGIBLE ASSETS, Less accumulated amortization of $4,535,000 in 2010 and $4,038,000 in 2009 |
|
|
8,665,000 |
|
|
|
8,862,000 |
|
NOTES RECEIVABLE long term portion, net of discount |
|
|
5,080,000 |
|
|
|
4,623,000 |
|
DEFERRED COMPENSATION FUNDING, at fair value |
|
|
11,553,000 |
|
|
|
10,783,000 |
|
DEFERRED INCOME TAXES long term portion |
|
|
8,481,000 |
|
|
|
7,907,000 |
|
OTHER NONCURRENT ASSETS |
|
|
68,000 |
|
|
|
69,000 |
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
256,737,000 |
|
|
$ |
265,892,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
8,074,000 |
|
|
$ |
9,134,000 |
|
Accrued payroll, accrued and withheld payroll taxes |
|
|
6,374,000 |
|
|
|
17,647,000 |
|
Other accrued expenses |
|
|
2,629,000 |
|
|
|
3,057,000 |
|
Income taxes payable |
|
|
724,000 |
|
|
|
35,000 |
|
Accrued insurance claims |
|
|
5,161,000 |
|
|
|
4,844,000 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
22,962,000 |
|
|
|
34,717,000 |
|
ACCRUED INSURANCE CLAIMS long term portion |
|
|
12,042,000 |
|
|
|
11,302,000 |
|
DEFERRED COMPENSATION LIABILITY |
|
|
11,680,000 |
|
|
|
11,099,000 |
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 100,000,000 shares authorized, 45,926,000 shares issued in 2010 and 45,792,000 shares in 2009 |
|
|
459,000 |
|
|
|
458,000 |
|
Additional paid-in capital |
|
|
94,960,000 |
|
|
|
92,339,000 |
|
Retained earnings |
|
|
134,040,000 |
|
|
|
135,837,000 |
|
Accumulated other comprehensive loss, net of taxes |
|
|
(60,000 |
) |
|
|
|
|
Common stock in treasury, at cost, 2,154,000 shares in 2010 and 2,211,000 shares in 2009 |
|
|
(19,346,000 |
) |
|
|
(19,860,000 |
) |
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
210,053,000 |
|
|
|
208,774,000 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
256,737,000 |
|
|
$ |
265,892,000 |
|
|
|
|
|
|
|
|
See accompanying notes
-2-
Consolidated Statements of Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
183,801,000 |
|
|
$ |
160,409,000 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
Costs of services provided |
|
|
158,573,000 |
|
|
|
137,892,000 |
|
Selling, general and administrative |
|
|
13,901,000 |
|
|
|
10,876,000 |
|
Other Income: |
|
|
|
|
|
|
|
|
Investment and interest |
|
|
750,000 |
|
|
|
937,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
12,077,000 |
|
|
|
12,578,000 |
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
4,649,000 |
|
|
|
4,842,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
7,428,000 |
|
|
$ |
7,736,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.17 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
0.17 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share |
|
$ |
0.21 |
|
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of common shares outstanding |
|
|
43,899,000 |
|
|
|
43,457,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of common shares outstanding |
|
|
44,659,000 |
|
|
|
44,073,000 |
|
|
|
|
|
|
|
|
See accompanying notes
-3-
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
For the Three Months
Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net Income |
|
$ |
7,428,000 |
|
|
$ |
7,736,000 |
|
Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
923,000 |
|
|
|
692,000 |
|
Bad debt provision |
|
|
600,000 |
|
|
|
700,000 |
|
Deferred income tax benefits |
|
|
(850,000 |
) |
|
|
(273,000 |
) |
Stock-based compensation expense |
|
|
264,000 |
|
|
|
257,000 |
|
Amortization of premium on marketable securities |
|
|
230,000 |
|
|
|
230,000 |
|
Unrealized
(gain) loss on marketable securities |
|
|
597,000 |
|
|
|
(645,000 |
) |
Unrealized (gain) loss on deferred compensation fund investments |
|
|
(394,000 |
) |
|
|
258,000 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts and notes receivable |
|
|
(1,310,000 |
) |
|
|
(2,356,000 |
) |
Inventories and supplies |
|
|
(481,000 |
) |
|
|
669,000 |
|
Notes receivable long term portion |
|
|
(457,000 |
) |
|
|
(2,404,000 |
) |
Deferred compensation funding |
|
|
(375,000 |
) |
|
|
(225,000 |
) |
Accounts payable and other accrued expenses |
|
|
(1,169,000 |
) |
|
|
396,000 |
|
Accrued payroll, accrued and withheld payroll taxes |
|
|
(10,619,000 |
) |
|
|
7,149,000 |
|
Accrued insurance claims |
|
|
1,057,000 |
|
|
|
800,000 |
|
Deferred compensation liability |
|
|
898,000 |
|
|
|
53,000 |
|
Income taxes payable |
|
|
689,000 |
|
|
|
4,931,000 |
|
Prepaid expenses and other assets |
|
|
708,000 |
|
|
|
(1,026,000 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(2,261,000 |
) |
|
|
16,942,000 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Disposals of fixed assets |
|
|
6,000 |
|
|
|
15,000 |
|
Additions to property and equipment |
|
|
(614,000 |
) |
|
|
(419,000 |
) |
Purchases of marketable securities, net |
|
|
(14,623,000 |
) |
|
|
(2,778,000 |
) |
Sales of marketable securities, net |
|
|
22,481,000 |
|
|
|
660,000 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
7,250,000 |
|
|
|
(2,522,000 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Dividends paid |
|
|
(9,225,000 |
) |
|
|
(7,388,000 |
) |
Reissuance of treasury stock pursuant to Dividend Reinvestment Plan |
|
|
27,000 |
|
|
|
21,000 |
|
Tax benefits (expense) transactions in equity compensation plans |
|
|
708,000 |
|
|
|
(96,000 |
) |
Proceeds from the exercise of stock options |
|
|
848,000 |
|
|
|
18,000 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(7,642,000 |
) |
|
|
(7,445,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(2,653,000 |
) |
|
|
6,975,000 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of the period |
|
|
31,301,000 |
|
|
|
37,501,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the period |
|
$ |
28,648,000 |
|
|
$ |
44,476,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary Cash Flow Information: |
|
|
|
|
|
|
|
|
Income taxes cash payments, net of refunds |
|
$ |
4,103,000 |
|
|
$ |
281,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 49,000 shares of Common Stock in both 2010 and 2009 pursuant to Employee Stock Plans |
|
$ |
1,047,000 |
|
|
$ |
777,000 |
|
|
|
|
|
|
|
|
See accompanying notes
-4-
Consolidated Statements of Stockholders Equity and Comprehensive Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Accumulated Other |
|
|
Total |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Comprehensive |
|
|
Retained |
|
|
Treasury |
|
|
Stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Income (Loss) |
|
|
Earnings |
|
|
Stock |
|
|
Equity |
|
Balance, December 31, 2009 |
|
|
45,792,000 |
|
|
$ |
458,000 |
|
|
$ |
92,339,000 |
|
|
$ |
|
|
|
$ |
135,837,000 |
|
|
$ |
(19,860,000 |
) |
|
$ |
208,774,000 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,428,000 |
|
|
|
|
|
|
|
7,428,000 |
|
Unrealized
loss on available for sale marketable securities, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60,000 |
) |
|
|
|
|
|
|
|
|
|
|
(60,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,368,000 |
|
Exercise of stock options and other stock-based compensation, net of 2,000 shares tendered for payment |
|
|
134,000 |
|
|
|
1,000 |
|
|
|
838,000 |
|
|
|
|
|
|
|
|
|
|
|
9,000 |
|
|
|
848,000 |
|
Tax benefit arising from stock option transactions |
|
|
|
|
|
|
|
|
|
|
708,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
708,000 |
|
Share-based compensation expense stock options |
|
|
|
|
|
|
|
|
|
|
190,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190,000 |
|
Treasury shares issued for Deferred Compensation Plan funding and redemptions (6,000 shares) |
|
|
|
|
|
|
|
|
|
|
260,000 |
|
|
|
|
|
|
|
|
|
|
|
56,000 |
|
|
|
316,000 |
|
Shares issued pursuant to Employee Stock Plans (49,000 shares) |
|
|
|
|
|
|
|
|
|
|
609,000 |
|
|
|
|
|
|
|
|
|
|
|
438,000 |
|
|
|
1,047,000 |
|
Cash dividends $.21 per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,225,000 |
) |
|
|
|
|
|
|
(9,225,000 |
) |
Shares issued pursuant to Dividend Reinvestment Plan (1,000 shares) |
|
|
|
|
|
|
|
|
|
|
16,000 |
|
|
|
|
|
|
|
|
|
|
|
11,000 |
|
|
|
27,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2010 |
|
|
45,926,000 |
|
|
$ |
459,000 |
|
|
$ |
94,960,000 |
|
|
$ |
(60,000 |
) |
|
$ |
134,040,000 |
|
|
$ |
(19,346,000 |
) |
|
$ |
210,053,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 Basis of Reporting
The accompanying financial statements are unaudited and do not include certain information and note
disclosures required by accounting principles generally accepted in the United States for complete
financial statements. However, in our opinion, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included. The balance sheet
shown in this report as of December 31, 2009 has been derived from, and does not include, all the
disclosures contained in the financial statements for the year ended December 31, 2009. The
financial statements should be read in conjunction with the financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2009. The results of
operations for the quarter ended March 31, 2010 are not necessarily indicative of the results that
may be expected for the full fiscal year.
As of March 31, 2010, we operate one wholly-owned subsidiary, Huntingdon Holdings, Inc.
(Huntingdon). Huntingdon invests our cash and cash equivalents, as well as manages our portfolio
of marketable securities. On March 1, 2009, we sold our wholly-owned subsidiary HCSG Supply, Inc.
(Supply) for approximately $1,100,000, financed principally through our acceptance of a secured
promissory note which is recorded in our notes receivable in the accompanying March 31, 2010
balance sheet. As a result of the Supply sale, we recorded an immaterial gain in our 2009 first
quarter consolidated statements of income.
In preparing financial statements in conformity with accounting principles generally accepted in
the United States of America (U.S. GAAP), we make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements, as well as the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates. Significant
estimates are used for, but not limited to, our allowance for doubtful accounts, accrued insurance
claims, asset valuations and review for potential impairment, stock-based compensation, and
deferred tax benefits. The estimates are based upon various factors including current and
historical trends, as well as other pertinent industry and regulatory authority information. We
regularly evaluate this information to determine if it is necessary to update the basis for our
estimates and to compensate for known changes.
Inventories and supplies include housekeeping, linen and laundry supplies, as well as dietary
provisions and supplies. Inventories and supplies are stated at cost to approximate a first-in,
first-out (FIFO) basis. Linen supplies are amortized over a 24 month period.
Revenues from services provided and equipment sales are recorded net of sales taxes.
-6-
Note 2 Acquisition
On April 30, 2009, we executed an Asset Purchase Agreement to acquire essentially all of the assets
of Contract Environmental Services, Inc (CES), a South Carolina based corporation which is a
provider of professional housekeeping, laundry and dietary department services to long-term care
and related facilities. We believe the acquisition of CES expands and compliments our position of
being the largest provider of such services to long-term care and related facilities in the United
States. The aggregate consideration was approximately $13,825,000 consisting of approximately: (i)
$4,613,000 in cash, (ii) a current issuance of approximately 66,000 shares of our common stock
(valued at approximately $1,183,000) and a future issuance of approximately 265,000 shares (valued
at approximately $3,311,000) contingent upon the achievement of certain financial targets, and
(iii) the repayment of approximately $4,718,000 of certain debt obligations of CES. The final
allocation of such consideration resulted in our recording of the following: (i) approximately
$8,998,000 of tangible assets consisting primarily of accounts receivable, (ii) $5,700,000 of
amortizable intangible assets, (iii) $1,936,000 of goodwill and (iv) current liabilities of
approximately $2,809,000. The CES results of operations are not included in our consolidated
results of operations for quarter ended March 31, 2009, which was prior to the close of the
transaction. Effective January 1, 2010, all of CES operations were fully integrated with our
operations.
Note 3 Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net assets acquired of
businesses and is not amortized. Goodwill is evaluated for impairment on an annual basis, or more
frequently if impairment indicators arise, using a fair-value-based test that compares the fair
value of the asset to its carrying value.
The following table sets forth goodwill by reportable operating segment, as described in Note 6
herein, and the changes in the carrying amounts of goodwill for the quarter ended March 31, 2010.
The goodwill associated with the CES acquisition is deductible for tax purposes over a fifteen year
period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housekeeping |
|
|
Dietary |
|
|
|
|
|
|
Segment |
|
|
Segment |
|
|
Total |
|
Balance as of December 31, 2009 |
|
$ |
14,913,000 |
|
|
$ |
2,174,000 |
|
|
$ |
17,087,000 |
|
Goodwill adjusted for final
purchase price adjustments |
|
|
(19,000 |
) |
|
|
(113,000 |
) |
|
|
(132,000 |
) |
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2010 |
|
$ |
14,894,000 |
|
|
$ |
2,061,000 |
|
|
$ |
16,955,000 |
|
|
|
|
|
|
|
|
|
|
|
The cost of intangible assets is based on fair values at the date of acquisition. Intangible
assets with determinable lives are amortized on a straight-line basis over their estimated useful
life (between 7 and 8 years).
-7-
The following table sets forth the amounts of our identifiable intangible assets subject to
amortization, which were acquired in acquisitions.
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Customer Relationships |
|
$ |
12,400,000 |
|
|
$ |
12,100,000 |
|
Non-compete Agreements |
|
|
800,000 |
|
|
|
800,000 |
|
|
|
|
|
|
|
|
Total other intangibles, gross |
|
$ |
13,200,000 |
|
|
$ |
12,900,000 |
|
Less accumulated amortization |
|
|
(4,535,000 |
) |
|
|
(4,038,000 |
) |
|
|
|
|
|
|
|
Other intangibles, net |
|
$ |
8,665,000 |
|
|
$ |
8,862,000 |
|
|
|
|
|
|
|
|
The customer relationships have a weighted-average amortization period of seven years and the
non-compete agreements have a weighted-average amortization period of eight years. The following
table sets forth the estimated amortization expense for intangibles subject to amortization for the
following five fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer |
|
|
Non-Compete |
|
|
|
|
Period/Year |
|
Relationships |
|
|
Agreements |
|
|
Total |
|
April 1 to December 31, 2010 |
|
$ |
1,350,000 |
|
|
$ |
75,000 |
|
|
$ |
1,425,000 |
|
2011 |
|
$ |
1,771,000 |
|
|
$ |
100,000 |
|
|
$ |
1,871,000 |
|
2012 |
|
$ |
1,771,000 |
|
|
$ |
100,000 |
|
|
$ |
1,871,000 |
|
2013 |
|
$ |
1,452,000 |
|
|
$ |
100,000 |
|
|
$ |
1,552,000 |
|
2014 |
|
$ |
814,000 |
|
|
$ |
67,000 |
|
|
$ |
881,000 |
|
2015 |
|
$ |
814,000 |
|
|
$ |
|
|
|
$ |
814,000 |
|
Amortization expense for the quarter ended March 31, 2010 was $497,000.
Note 4 Fair Value Measurements and Marketable Securities
We, in accordance with U.S. GAAP, define 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 (exit price). Effective January 1, 2008, we elected the fair value option for
certain of our marketable securities purchased since such adoption. Management initially elected
the fair value option for certain of our marketable securities because it views such investment
securities as highly liquid and available to be drawn upon for working capital purposes making them
similar to its cash and cash equivalents. Accordingly, we record net unrealized gain or loss in
the other income, investment and interest caption in our consolidated income statements for such
investments. We have not elected the fair value option for marketable securities acquired after
December 31, 2009. While, these assets continue to be highly liquid and available, we do not
believe these assets are representative of our operating activities. These assets are
representative of our investing activities, and they will be available for future needs of the
Company to support our current and projected growth.
-8-
Certain of our assets and liabilities are reported at fair value in the accompanying balance
sheets. Such assets and liabilities include cash and cash equivalents, marketable securities,
accounts and notes receivable, and accounts payable (including income taxes payable and accrued
expenses). Additionally, the following tables provide fair value measurement information for our
marketable securities and deferred compensation fund investment assets as of March 31, 2010 and
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using: |
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
|
|
|
|
|
|
|
|
Markets |
|
|
Observable Inputs |
|
|
Inputs |
|
|
|
Carrying Amount |
|
|
Total Fair Value |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Financial Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds |
|
$ |
43,901,000 |
|
|
$ |
43,901,000 |
|
|
$ |
|
|
|
$ |
43,901,000 |
|
|
$ |
|
|
Equity securities Deferred comp fund |
|
$ |
11,553,000 |
|
|
$ |
11,553,000 |
|
|
$ |
7,740,000 |
|
|
$ |
3,813,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using: |
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
|
|
|
|
|
|
|
|
Markets |
|
|
Observable Inputs |
|
|
Inputs |
|
|
|
Carrying Amount |
|
|
Total Fair Value |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Financial Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds |
|
$ |
52,648,000 |
|
|
$ |
52,648,000 |
|
|
$ |
|
|
|
$ |
52,648,000 |
|
|
$ |
|
|
Equity securities Deferred comp fund |
|
$ |
10,783,000 |
|
|
$ |
10,783,000 |
|
|
$ |
7,195,000 |
|
|
$ |
3,588,000 |
|
|
$ |
|
|
The other income, investment and interest caption on our consolidated statements of income includes
unrealized losses from marketable securities of $597,000 for the quarter ended March 31, 2010 and
unrealized gains of $645,000 for the quarter ended March 31, 2009 for investments recorded under
the fair value option. For the quarter ended March 31, 2010, the accumulated other comprehensive
income on our consolidated balance sheet and stockholders equity includes unrealized losses from
marketable securities of $60,000 related to marketable securities that are not recognized under the
fair value option in accordance with U.S. GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Other-than- |
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated Fair |
|
|
temporary |
|
March 31, 2010 |
|
Amortized Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Impairments |
|
Type of security: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds |
|
$ |
33,254,000 |
|
|
$ |
1,054,000 |
|
|
$ |
|
|
|
$ |
34,308,000 |
|
|
$ |
|
|
Municipal bonds Available for Sale |
|
|
9,653,000 |
|
|
|
|
|
|
|
(60,000 |
) |
|
|
9,593,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
$ |
42,907,000 |
|
|
$ |
1,054,000 |
|
|
$ |
(60,000 |
) |
|
$ |
43,901,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Other-than- |
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated Fair |
|
|
temporary |
|
December 31, 2009 |
|
Amortized Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Impairments |
|
Type of security: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds |
|
$ |
50,997,000 |
|
|
$ |
1,651,000 |
|
|
$ |
|
|
|
$ |
52,648,000 |
|
|
$ |
|
|
Municipal bonds Available for Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
$ |
50,997,000 |
|
|
$ |
1,651,000 |
|
|
$ |
|
|
|
$ |
52,648,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-9-
The contractual maturities of available for sale investments held at March 31, 2010 and December
31, 2009.
|
|
|
|
|
|
|
|
|
Contractual maturity: |
|
March 31, 2010 |
|
|
December 31, 2009 |
|
Maturing in one year or less |
|
$ |
33,000 |
|
|
$ |
|
|
Maturing after one year through three years |
|
|
2,215,000 |
|
|
|
|
|
Maturing after three years |
|
|
7,345,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale debt securities |
|
$ |
9,593,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Note 5 Other Contingencies
We have a $36,000,000 bank line of credit on which we may draw to meet short-term liquidity
requirements in excess of internally generated cash flow. Amounts drawn under the line of credit
are payable upon demand. At March 31, 2010, there were no borrowings under the line of credit.
However, at such date, we had outstanding a $35,420,000 irrevocable standby letter of credit which
relates to payment obligations under our insurance programs. As a result of the letters of credit
issued, the amount available under the line of credit was reduced by $35,420,000 at March 31, 2010.
The line of credit requires us to satisfy two financial covenants. We are in compliance with the
financial covenants at March 31, 2010 and expect to continue to remain in compliance with such
financial covenants. This line of credit expires on June 30, 2011. We believe the line of credit
will be renewed at that time.
We provide our services in 47 states and we are subject to numerous local taxing jurisdictions
within those states. Consequently, the taxability of our services is subject to various
interpretations within these jurisdictions. In the ordinary course of business, a jurisdiction may
contest our reporting positions with respect to the application of its tax code to our services,
which may result in additional tax liabilities.
We have tax matters with various taxing authorities. Because of the uncertainties related to both
the probable outcome and amount of probable assessment due, we are unable to make a reasonable
estimate of a liability. We do not expect the resolution of any of these matters, taken
individually or in the aggregate, to have a material adverse affect on our consolidated financial
position or results of operations based on our best estimate of the outcomes of such matters.
We are also subject to various claims and legal actions in the ordinary course of business. Some
of these matters include payroll and employee-related matters and examinations by governmental
agencies. As we become aware of such claims and legal actions, we provide accruals if the
exposures are probable and estimable. If an adverse outcome of such claims and legal actions is
reasonably possible, we assess materiality and provide such financial disclosure, as appropriate.
We believe that these matters, taken individually or in the aggregate, would not have a material
adverse affect on our financial position or results of operations.
-10-
As a result of the current economic crisis, many states have significant budget deficits.
State Medicaid programs are experiencing increased demand, and with lower revenues than projected,
they have fewer resources to support their Medicaid programs. In addition, during March 2010,
comprehensive health care reform legislation under the Patient Protection and Affordable Care Act
and the Health Care and Education Reconciliation Act of 2010 (together, the Act) were signed into
law. The Act will significantly impact the governmental healthcare programs our clients participate
in, and reimbursements received there under from governmental or third-party payors. Furthermore,
in the coming year, new proposals or additional changes in existing regulations could be made to
the Act which could directly impact the governmental reimbursement programs in which our clients
participate. As a result, some state Medicaid programs are reconsidering previously approved
increases in nursing home reimbursement or are considering delaying those increases. A few states
have indicated it is possible they will run out of cash to pay Medicaid providers, including
nursing homes. Any negative changes in our clients reimbursements may negatively impact our
results of operations. Although we are currently evaluating the Acts effect on our client base, we
may not know the full effect until such a time as these laws are fully implemented and the Centers
for Medicare and Medicaid Services and other agencies issue applicable regulations or guidance.
Note 6 Segment Information
Reportable Operating Segments
We manage and evaluate our operations in two reportable segments. The two reportable segments
are Housekeeping (housekeeping, laundry, linen and other services), and Dietary (dietary department
services). Although both segments serve the same client base and share many operational
similarities, they are managed separately due to distinct differences in the type of service
provided, as well as the specialized expertise required of the professional management personnel
responsible for delivering the respective segments services. We consider the various services
provided within each reportable segment to compromise an identifiable reportable operating segment
since such services are rendered pursuant to a single service agreement, specific to that
reportable segment, as well as that the delivery of the respective reportable segments services
are managed by the same management personnel of the particular reportable segment.
Differences between the reportable segments operating results and other disclosed data and
our consolidated financial statements relate primarily to corporate level transactions and
recording of transactions at the reportable segment level which use methods other than generally
accepted accounting principles, and for the three month period ended March 31, 2009, transactions
between reportable segments and our warehousing and distribution subsidiary that was sold on March
1, 2009. Prior to disposition, the subsidiarys transactions with reportable segments were made on
a basis intended to reflect the fair market value of the goods transferred. Additionally, included
in the differences between the reportable segments operating results and other disclosed data are
amounts attributable to our investment holding company subsidiary. This subsidiary does not
transact any business with the reportable segments. Segment amounts disclosed are prior to any
elimination entries made in consolidation.
-11-
Housekeeping provides services in Canada, although essentially all of its revenues and net
income, 99% in both categories, are earned in one geographic area, the United States. Dietary
provides services solely in the United States.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housekeeping |
|
|
|
|
|
|
Corporate and |
|
|
|
|
|
|
Services |
|
|
Dietary Services |
|
|
Eliminations |
|
|
Total |
|
Quarter Ended March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
140,896,000 |
|
|
$ |
42,954,000 |
|
|
$ |
(49,000 |
)(1) |
|
$ |
183,801,000 |
|
Income before income taxes |
|
|
14,858,000 |
|
|
|
2,190,000 |
|
|
|
(4,971,000 |
)(1) |
|
|
12,077,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
123,913,000 |
|
|
$ |
34,359,000 |
|
|
$ |
2,137,000 |
(1) |
|
$ |
160,409,000 |
|
Income before income taxes |
|
|
12,327,000 |
|
|
|
1,312,000 |
|
|
|
(1,061,000 |
)(1) |
|
|
12,578,000 |
|
|
|
|
(1) |
|
represents primarily corporate office cost and related overhead, recording of
transactions at the reportable segment level which use methods other than generally
acceptable accounting principles and consolidated subsidiaries operating expenses that are
not allocated to the reportable segments, net of investment and interest income. |
Total Revenues from Clients
The following revenues earned from clients differ from segment revenues reported above due to
the inclusion of adjustments used for segment reporting purposes by management. We earned total
revenues from clients in the following service categories:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
Housekeeping services |
|
$ |
94,655,000 |
|
|
$ |
86,730,000 |
|
Laundry and linen services |
|
|
45,535,000 |
|
|
|
38,906,000 |
|
Dietary services |
|
|
43,087,000 |
|
|
|
34,227,000 |
|
Maintenance services and other |
|
|
524,000 |
|
|
|
546,000 |
|
|
|
|
|
|
|
|
|
|
$ |
183,801,000 |
|
|
$ |
160,409,000 |
|
|
|
|
|
|
|
|
Major Client
We have one client, a nursing home chain (Major Client), which accounted for the respective
percentages of our revenues as detailed below:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
Total revenues |
|
|
11 |
% |
|
|
14 |
% |
Housekeeping |
|
|
12 |
% |
|
|
14 |
% |
Dietary services |
|
|
10 |
% |
|
|
13 |
% |
-12-
Additionally, at both March 31, 2010 and December 31, 2009, amounts due from such client
represented less than 1% of our accounts receivable balance. The loss of such client, or a
significant reduction in revenues from such client, would have a material adverse effect on the
results of operations of our two operating segments. In addition, if such client changes its
payment terms it would increase our accounts receivable balance and have a material adverse effect
on our cash flows and cash and cash equivalents.
Note 7 Earnings Per Common Share
A reconciliation of the numerator and denominator of basic and diluted earnings per common
share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2010 |
|
|
|
Income |
|
|
Shares |
|
|
Per-share |
|
|
|
(Numerator) |
|
|
(Denominator) |
|
|
Amount |
|
Net income |
|
$ |
7,428,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
7,428,000 |
|
|
|
43,899,000 |
|
|
$ |
.17 |
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
|
|
|
|
760,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
7,428,000 |
|
|
|
44,659,000 |
|
|
$ |
.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2009 |
|
|
|
Income |
|
|
Shares |
|
|
Per-share |
|
|
|
(Numerator) |
|
|
(Denominator) |
|
|
Amount |
|
Net income |
|
$ |
7,736,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
7,736,000 |
|
|
|
43,457,000 |
|
|
$ |
.18 |
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
|
|
|
|
616,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
7,736,000 |
|
|
|
44,073,000 |
|
|
$ |
.18 |
|
|
|
|
|
|
|
|
|
|
|
No outstanding options were excluded from the computations of diluted earnings per common
share for the three month period ended March 31, 2010 as none have an exercise price in excess of
the average market value of our common stock at March 31, 2010.
Options to purchase 762,000 shares of common stock having an average exercise price ranging
from $15.58 to $20.89 per common share were outstanding during the three month period ended March
31, 2009 but not included in the computation of diluted earnings per common share because the
options exercise prices were greater than the average market price of the common shares, and
therefore, would be antidilutive.
-13-
Note 8 Dividends
On March 5, 2010 we paid, to shareholders of record on February 12, 2010, a regular quarterly
cash dividend of $.21 per common share. Such regular quarterly cash dividend payment in the
aggregate was $9,225,000. Additionally, on April 13, 2010, our Board of Directors declared a
regular cash dividend of $.22 per common share to be paid on May 14, 2010 to shareholders of record
as of April 23, 2010.
Note 9 Share-Based Compensation
Stock Options
During the three months ended March 31, 2010, the stock option activity under our 2002 Stock
Option Plan, 1995 Incentive and Non-Qualified Stock Option Plan for key employees, and 1996
Non-Employee Directors Stock Option Plan (collectively the Stock Option Plans), was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Remaining |
|
|
Aggregate |
|
|
|
Average |
|
|
Number of |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Price |
|
|
Shares |
|
|
Life (In Years) |
|
|
Value |
|
Outstanding, January 1, 2010 |
|
$ |
11.33 |
|
|
|
2,049,000 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
21.46 |
|
|
|
445,000 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
17.37 |
|
|
|
(4,000 |
) |
|
|
|
|
|
|
|
|
Exercised |
|
|
6.47 |
|
|
|
(137,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2010 |
|
$ |
13.51 |
|
|
|
2,353,000 |
|
|
|
5.91 |
|
|
$ |
20,999,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of March 31, 2010 |
|
|
|
|
|
|
1,373,000 |
|
|
|
3.70 |
|
|
$ |
18,008,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value of options granted during the 2010 and 2009 first quarters was
$5.97 and $4.14, respectively. The following table summarizes information about stock options
outstanding at March 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
Number |
|
|
Contractual |
|
|
Average |
|
|
Number |
|
|
Average |
|
Exercise Price Range |
|
Outstanding |
|
|
Life |
|
|
Exercise price |
|
|
Exercisable |
|
|
Exercise Price |
|
$1.50 2.74 |
|
|
163,000 |
|
|
|
1.65 |
|
|
$ |
2.70 |
|
|
|
163,000 |
|
|
$ |
2.70 |
|
3.01 5.53 |
|
|
466,000 |
|
|
|
3.30 |
|
|
|
4.84 |
|
|
|
466,000 |
|
|
|
4.84 |
|
9.10 9.10 |
|
|
275,000 |
|
|
|
4.74 |
|
|
|
9.10 |
|
|
|
275,000 |
|
|
|
9.10 |
|
13.81 15.58 |
|
|
655,000 |
|
|
|
5.71 |
|
|
|
14.90 |
|
|
|
330,000 |
|
|
|
14.23 |
|
$20.89 21.46 |
|
|
794,000 |
|
|
|
8.88 |
|
|
|
21.21 |
|
|
|
139,000 |
|
|
|
20.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,353,000 |
|
|
|
5.91 |
|
|
$ |
13.51 |
|
|
|
1,373,000 |
|
|
$ |
9.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-14-
Other information pertaining to option activity during the three month periods ended March 31,
2010 and 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
Weighted average grant-date fair value of stock options granted: |
|
$ |
2,176,000 |
|
|
$ |
1,545,000 |
|
Total fair value of stock options vested: |
|
$ |
681,000 |
|
|
$ |
447,000 |
|
Total intrinsic value of stock options exercised: |
|
$ |
2,048,000 |
|
|
$ |
122,000 |
|
Total pre-tax stock-based compensation expense charged against income: |
|
$ |
190,000 |
|
|
$ |
177,000 |
|
Total unrecognized compensation expense related to non-vested options: |
|
$ |
4,181,000 |
|
|
$ |
2,970,000 |
|
Under our Stock Option Plans at March 31, 2010, in addition to the 2,353,000 shares issuable
pursuant to outstanding option grants, an additional 1,396,000 shares of our Common Stock are
available for future grants. Options outstanding and exercisable were granted at stock option
prices which were not less than the fair market value of our Common Stock on the date the options
were granted and no option has a term in excess of ten years. Additionally, with the exception of
the options granted in 2010 and 2009, options became vested and exercisable either on the date of
grant or commencing six months after the option grant date. The options granted in 2010 and 2009
become vested and exercisable ratably over a five year period on each anniversary date of the
option grant.
At March 31, 2010, the total unrecognized compensation expense related to non-vested options,
as reported above, was expected to be recognized through the fourth quarter of 2014 for the options
granted in 2010 and the fourth quarter of 2013 for the options granted in 2009. The fair value of
options granted in 2010 and 2009 was estimated on the date of grant using the Black-Scholes
valuation model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Risk-free interest rate |
|
|
2.5 |
% |
|
|
2.5 |
% |
Expected volatility |
|
|
42.1 |
% |
|
|
41.0 |
% |
Weighted average expected life in years |
|
|
4.5 |
|
|
|
4.5 |
|
Dividend yield |
|
|
3.5 |
% |
|
|
3.6 |
% |
Employee Stock Purchase Plan
Total pre-tax share-based compensation expense charged against income for the three month
periods ended March 31, 2010 and 2009 for options granted under our Employee Stock Purchase Plan
(ESPP) was $74,000 and $80,000, respectively. It is estimated, at this time, that the expense
attributable to such share-based payments in each of the subsequent quarters of 2010 will
approximate the amount recorded in the 2010 first quarter. However, such future expense related to
our ESPP will be impacted by, and be dependent on the change in our stock price over the remaining
period up to the December 31, 2010 measurement date.
-15-
Such expense was estimated on the date of grant using the Black-Scholes valuation model with
the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Risk-free interest rate |
|
|
0.2 |
% |
|
|
0.2 |
% |
Expected volatility |
|
|
34.0 |
% |
|
|
62.9 |
% |
Weighted average expected life in years |
|
|
1.0 |
|
|
|
1.0 |
|
Dividend yield |
|
|
3.5 |
% |
|
|
3.6 |
% |
We may issue new common stock or re-issue common stock from treasury to satisfy our
obligations under any of our share-based compensation plans.
Note 10 Related Party Transactions
One of our former directors, as well as the brother of an officer and a director (collectively
Related Parties), have separate ownership interests in several different client facilities which
have entered into service agreements with us. In the three month periods ended March 31, 2010 and
2009, the service agreements with the client facilities in which the Related Parties have ownership
interests resulted in revenues of approximately $1,096,000 and $1,346,000, respectively. At March
31, 2010 and December 31, 2009, accounts and notes receivable from such facilities of $1,169,000
(net of reserves of $1,666,000) and $1,309,000 (net of reserves of $1,666,000), respectively, are
included in the accompanying consolidated balance sheets.
Another of our directors is a member of a law firm which was retained by us. In each of the
three month periods ended March 31, 2010 and 2009, fees received from us by such firm
did not exceed $100,000. Additionally, such fees did not exceed, in either three month period, 5%
of such firms revenues.
Note 11 Income Taxes
For the three month periods ended March 31, 2010 and 2009, our effective tax rate was 38.5%.
Such differences between the effective tax rates and the applicable U.S. federal statutory rate
primarily arise from the effect of state and local income taxes and estimated tax credits available
to the Company.
We account for income taxes using the asset and liability method, which results in recognizing
income tax expense based on the amount of income taxes payable or refundable for the current year.
Additionally, we evaluate regularly the tax positions taken or expected to be taken resulting from
financial statement recognition of certain items. Based on our evaluation, we have concluded that
there are no significant uncertain tax positions requiring recognition in our financial statements.
Our evaluation was performed for the tax years ended December 31, 2006 through 2009 (with regard to
U.S. federal income tax returns) and December 31, 2005 through 2009 (with regard to various state
and local income tax returns), the tax years which remain subject to examination by major tax
jurisdictions as of March 31, 2010.
-16-
We may from time to time be assessed interest or penalties by major tax jurisdictions,
although any such assessments historically have been minimal and immaterial to our financial
results. When we have received an assessment for interest and/or penalties, it has been classified
in the financial statements as selling, general and administrative expense.
Note 12 Recently Issued Accounting Pronouncements
In February 2010, the Financial Accounting Standards Board (the FASB) issued amended
guidance on subsequent events. Under this amended guidance, SEC filers are no longer required to
disclose the date through which subsequent events have been evaluated in originally issued and
revised financial statements. This guidance was effective immediately and the Company adopted
these new requirements upon issuance of this guidance.
In January 2010, the FASB issued updated standards related to additional requirements and
guidance regarding disclosures of fair value measurements. The guidance require the gross
presentation of activity within the Level 3 fair value measurement roll forward and details of
transfers in and out of Level 1 and 2 fair value measurements. In addition, companies will be
required to disclose quantitative information about the inputs used in determining fair values.
These standards were adopted in the first quarter of 2010. The adoption of these standards had no
impact on the Companys financial position or results of operations as it only amends required
disclosures.
In September 2009, the FASB issued Accounting Standards Update 2009-13 (ASU 2009-13),
Multiple Element Arrangements. ASU 2009-13 addresses the determination of when the individual
deliverables included in a multiple arrangement may be treated as separate units of accounting. ASU
2009-13 also modifies the manner in which the transaction consideration is allocated across
separately identified deliverables and establishes definitions for determining fair value of
elements in an arrangement. This standard must be adopted by us no later than January 1, 2011 with
earlier adoption permitted. We are currently evaluating the impact, if any, that this standard
update will have on our consolidated financial statements.
Note 13 Subsequent Event
We evaluated all subsequent events through the date these financial statements are being filed
with the SEC. There were no events or transactions occurring during this subsequent event reporting
period which require recognition or disclosure in the financial statements.
-17-
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Cautionary Statement Regarding Forward Looking Statements
This report and documents incorporated by reference into this report 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 (the Exchange Act), as amended, are not
historical facts but rather based on current expectations, estimates and projections about our
business and industry, 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 health care industry, primarily providers of long-term care;
proposed legislation to reform the U.S. healthcare system in an effort to contain healthcare costs;
credit and collection risks associated with this industry; one client accounting for approximately
11% of revenues in the three month period ended March 31, 2010 (see note 6, Major Client in the
accompanying Notes to Consolidated Financial Statements); risks associated with our acquisition of
Contract Environmental Services, Inc., including integration risks and costs, or such business not
achieving expected financial results or synergies or failure to otherwise perform as expected; our
claims experience related to workers compensation and general liability insurance; the effects of
changes in, or interpretations of laws and regulations governing the industry, including state and
local regulations pertaining to the taxability of our services; and the risk factors described in
Part I in this report under Government Regulation of Clients, Competition, Service
Agreements/Collections, and under Item IA Risk Factors. Many of our clients revenues are highly
contingent on Medicare and Medicaid reimbursement funding rates, which Congress has affected
through the enactment of a number of major laws during the past decade, most recently the March
2010 enactment of the Patient Protection and Affordable Care Act and the Health Care and Education
Reconciliation Act of 2010 (together, the Act). These laws have significantly altered, or
threatened to alter, overall government reimbursement funding rates and mechanisms. In addition,
the current economic crises could adversely affect such funding. The overall effect of these laws
and trends in the long-term care industry has affected and could adversely affect the liquidity of
our clients, resulting in their inability to make payments to us on agreed upon payment terms.
These factors, in addition to delays in payments from clients, 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 could not be passed on to our
clients.
In addition, we believe that to improve our financial performance we must continue to obtain
service agreements with new clients, provide new services to existing clients, achieve modest price
increases on current service agreements with existing clients and 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 successfully executing projected growth strategies.
-18-
RESULTS OF OPERATIONS
The following discussion is intended to provide the reader with information that will be
helpful in understanding our financial statements including the changes in certain key items in
comparing financial statements period to period. We also intend to provide the primary factors that
accounted for those changes, as well as a summary of how certain accounting principles affect our
financial statements. In addition, we are providing information about the financial results of our
two operating segments to further assist in understanding how these segments and their results
affect our consolidated results of operations. This discussion should be read in conjunction with
our financial statements as of March 31, 2010 and December 31, 2009 and the periods then ended and
the notes accompanying those financial statements.
Overview
We provide management, administrative, and operating expertise to the housekeeping, laundry,
linen, facility maintenance and dietary service departments to the health care industry, including
nursing homes, retirement complexes, rehabilitation centers and hospitals located throughout the
United States.
We believe that we are the largest provider of housekeeping and laundry services to the
long-term care industry in the United States, rendering such services to approximately 2,400
facilities in 47 states as of March 31, 2010. Although we do not directly participate in any
government reimbursement programs, our clients reimbursements are subject to government
regulation. Therefore, they are directly affected by any legislation relating to Medicare and
Medicaid reimbursement programs.
We provide our services primarily pursuant to full service agreements with our clients. In
such agreements, we are responsible for the management and hourly employees located at our clients
facilities. We also provide services on the basis of a management-only agreement for a very limited
number of clients. Additionally, we also provide, individually or as a combination thereof, the
specialized services of Dietary (dietary department management and consulting services and food
purchasing) on a stand-alone basis to certain clients. Our agreements with clients typically
provide for a one year service term, cancelable by either party upon 30 to 90 days notice after the
initial 90-day period.
We are organized into two reportable segments; housekeeping, laundry, linen and facility
maintenance (Housekeeping), and dietary department services (Dietary). Housekeeping is
being provided at all of our approximately 2,400 client facilities, generating approximately 77% or
$140,714,000 of 2010 first quarter total revenues. Dietary is being provided to approximately 350
client facilities and contributed approximately 23% or $43,087,000 of 2010 first quarter total
revenues.
Housekeeping consist primarily of the cleaning, disinfecting and sanitizing of patient rooms
and common areas of a clients facility, as well as the laundering and processing of the personal
clothing belonging to the facilitys patients. Also within the scope of this segments service is
the laundering and processing of the bed linens, uniforms and other assorted linen items utilized
by a client facility.
-19-
Dietary consists of food purchasing, meal preparation and providing dietician consulting
professional services, which includes the development of a menu that meets the patients dietary
needs.
We currently operate one wholly-owned subsidiary, Huntingdon Holdings, Inc. (Huntingdon).
Huntingdon invests our cash and cash equivalents, as well as managing our portfolio of
available-for-sale marketable securities. On March 1, 2009, we sold our wholly-owned subsidiary
HCSG Supply, Inc. (Supply) for approximately $1,100,000 financed principally through our
acceptance of a secured promissory note which is recorded in our notes receivable in the
accompanying March 31, 2010 balance sheet. As a result of the Supply sale, we recorded an
immaterial gain in our 2009 consolidated statements of income in the three month period ended March
31, 2009.
On April 30, 2009, we executed an Asset Purchase Agreement to acquire essentially all of the
assets of Contract Environmental Services, Inc (CES), a South Carolina based corporation which is
a provider of professional housekeeping, laundry and dietary department services to long-term care
and related facilities. We believe the acquisition of CES expands and compliments our position of
being the largest provider of such services to long-term care and related facilities in the United
States. The aggregate consideration was approximately $13,825,000 consisting of approximately: (i)
$4,613,000 in cash, (ii) a current issuance of approximately 66,000 shares of our common stock
(valued at approximately $1,183,000) and a future issuance of approximately 265,000 shares (valued
at approximately $3,311,000) contingent upon the achievement of certain financial targets, and
(iii) the repayment of approximately $4,718,000 of certain debt obligations of CES. The final
allocation of such consideration resulted in our recording of the following: (i) approximately
$8,998,000 of tangible assets consisting primarily of accounts receivable, (ii) $5,700,000 of
amortizable intangible assets, (iii) $1,936,000 of goodwill and (iv) current liabilities of
approximately $2,809,000. The CES results of operations are not included in our consolidated
results of operations for quarter ended March 31, 2009, which was prior to the close of the
transaction. Effective January 1, 2010, all of CES operations were fully integrated with our
operations.
-20-
Consolidated Operations
The following table sets forth, for the periods indicated, the percentage which certain items
bear to consolidated revenues:
|
|
|
|
|
|
|
|
|
|
|
Relation to Consolidated Revenues |
|
|
|
For the Quarter Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
Revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
Operating costs and expenses: |
|
|
|
|
|
|
|
|
Costs of services provided |
|
|
86.3 |
|
|
|
86.0 |
|
Selling, general and administrative |
|
|
7.6 |
|
|
|
6.8 |
|
Investment and interest |
|
|
0.4 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
6.5 |
|
|
|
7.8 |
|
Income taxes |
|
|
2.5 |
|
|
|
3.0 |
|
|
|
|
|
|
|
|
Net Income |
|
|
4.0 |
% |
|
|
4.8 |
% |
|
|
|
|
|
|
|
Subject to the factors noted in the Cautionary Statement Regarding Forward Looking Statements
included in this report, we anticipate our financial performance for the remainder of 2010 may be
comparable to the percentages presented in the above table as they relate to consolidated revenues.
Housekeeping is our largest and core reportable segment, representing approximately 77% of
consolidated revenues for the three months ended March 31, 2010. Dietary revenues represented
approximately 23% of consolidated revenues for such quarter.
Although there can be no assurance thereof, we believe that for the remainder of 2010 each of
Housekeepings and Dietarys revenues, as a percentage of consolidated revenues, will remain
approximately the same as their respective percentages noted above. Furthermore, we expect the
sources of organic growth for the remainder of 2010 for the respective operating segments will be
primarily the same as historically experienced. Accordingly, although there can be no assurance
thereof, the growth in Dietary is expected to come from our current Housekeeping client base,
while growth in Housekeeping will primarily come from obtaining new clients.
-21-
2010 First Quarter Compared with 2009 First Quarter
The following table sets forth 2010 first quarter income statement key components that we use
to evaluate our financial performance on a consolidated and reportable segment basis, as well as
the percentage increases of each compared to 2009 first quarter amounts. The difference between the
reportable segments operating results and other disclosed data and our consolidated financial
statements relate primarily to corporate level transactions and recording of transactions at the
reportable segment level which use methods other than generally accepted accounting principles.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments |
|
|
|
|
|
|
|
% inc./ |
|
|
Corporate and |
|
|
Housekeeping |
|
|
|
|
|
|
Dietary |
|
|
|
|
|
|
Consolidated |
|
|
(dec.) |
|
|
Eliminations |
|
|
Amount |
|
|
% inc. |
|
|
Amount |
|
|
% inc. |
|
Revenues |
|
$ |
183,801,000 |
|
|
|
14.6 |
% |
|
$ |
(49,000 |
) |
|
$ |
140,896,000 |
|
|
|
13.7 |
% |
|
$ |
42,954,000 |
|
|
|
25.0 |
% |
Cost of services provided |
|
|
158,573,000 |
|
|
|
15.0 |
|
|
|
(8,229,000 |
) |
|
|
126,038,000 |
|
|
|
13.0 |
|
|
|
40,764,000 |
|
|
|
23.4 |
|
Selling, general and
administrative |
|
|
13,901,000 |
|
|
|
27.8 |
|
|
|
13,901,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and interest income |
|
|
750,000 |
|
|
|
(20.0 |
) |
|
|
750,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
12,077,000 |
|
|
|
(4.0 |
)% |
|
|
(4,971,000 |
) |
|
$ |
14,858,000 |
|
|
|
20.5 |
% |
|
$ |
2,190,000 |
|
|
|
66.9 |
% |
Revenues
Consolidated
Consolidated revenues increased 14.6% to $183,801,000 in the 2010 first quarter compared to
160,409,000 in the 2009 first quarter as a result of the factors discussed below under Reportable
Segments.
Our Major Client accounted for 11% and 14%, respectively of consolidated revenues in the three
month periods ended March 31, 2010 and 2009, respectively. The loss of such client would have a
material adverse effect on the results of operations of our two operating segments. In addition, if
such client changes its payment terms it would increase our accounts receivable balance and have a
material adverse effect on our cash flows and cash and cash equivalents.
Reportable Segments
Housekeepings 13.7% net growth in reportable segment revenues resulted primarily from an
increase in revenues attributable to service agreements entered into with new clients. CES
accounted for approximately 3.8% of such quarters net growth in reportable segment revenue.
Dietarys 25% net growth in reportable segment revenues is primarily a result of the CES
acquisition along with providing this service to existing Housekeeping clients. CES accounted for
approximately 20.2% of such quarters net growth in reportable segment revenue.
We derived 12% and 10%, respectively, of Housekeeping and Dietarys 2010 first quarter
revenues from our Major Client.
-22-
Costs of services provided
Consolidated
Cost of services provided, on a consolidated basis, as a percentage of consolidated revenues
for the 2010 first quarter increased to 86.3% from 86.0% in the corresponding 2009
quarter. The following table provides a comparison of the primary cost of services
provided-key indicators that we manage on a consolidated basis in evaluating our financial
performance. In addition, see the discussion below on Reportable Segments which provides additional
details to explain the .3% increase in consolidated costs of services provided.
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Services Provided-Key Indicators |
|
2010 % |
|
|
2009 % |
|
|
(Decr) % |
|
Bad debt provision |
|
|
0.3 |
|
|
|
0.4 |
|
|
|
(0.1 |
) |
Workers compensation and general liability insurance |
|
|
3.7 |
|
|
|
3.8 |
|
|
|
(0.1 |
) |
The bad debt provision, workers compensation and general liability insurance expense is consistent
with prior periods.
Reportable Segments
Cost of services provided for Housekeeping, as a percentage of Housekeeping revenues, for the
2010 first quarter slightly decreased to 89.5% from 90.1% compared to the corresponding 2009
quarter. Cost of services provided for Dietary, as a percentage of Dietary revenues, for the 2010
first quarter decreased to 94.9% from 96.2% in the corresponding 2009 quarter.
The following table provides a comparison of the primary cost of services provided-key
indicators, as a percentage of the respective segments revenues, which we manage on a reportable
segment basis in evaluating our financial performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Services Provided-Key Indicators |
|
2010 % |
|
|
2009 % |
|
|
Incr (Decr) % |
|
Housekeeping labor and other labor costs |
|
|
80.3 |
|
|
|
81.2 |
|
|
|
(0.9 |
) |
Housekeeping supplies |
|
|
6.6 |
|
|
|
6.2 |
|
|
|
0.4 |
|
Dietary labor and other labor costs |
|
|
53.1 |
|
|
|
52.5 |
|
|
|
0.6 |
|
Dietary supplies |
|
|
39.1 |
|
|
|
41.5 |
|
|
|
(2.4 |
) |
The decrease in Housekeeping labor and other labor costs, as a percentage of Housekeeping
revenues, resulted primarily from efficiencies recognized in managing labor at the facility level.
The increase in Housekeeping supplies, as a percentage of Housekeeping revenues, resulted primarily
from an increase in linen supplies due to the growth in laundry and linen revenue compared to
overall housekeeping revenues.
The increase in Dietary labor and other labor costs, as a percentage of Dietary revenues,
resulted from inefficiencies in managing these costs at the facility level. The decrease in Dietary
supplies, as a percentage of Dietary revenues, is a result of improved management of these costs
and more favorable vendor prices obtained through further consolidation of dietary supply vendors.
-23-
Consolidated Selling, General and Administrative Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
% Growth |
|
Selling, general and administrative expense w/o
deferred compensation change |
|
(a) |
|
$ |
13,507,000 |
|
|
$ |
11,134,000 |
|
|
|
21.3 |
% |
Gain/(Loss) Deferred Compensation fund |
|
|
|
|
394,000 |
|
|
|
(258,000 |
) |
|
|
252.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated selling, general and administrative expense |
|
(b) |
|
$ |
13,901,000 |
|
|
$ |
10,876,000 |
|
|
|
27.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Selling, general and administrative expense excluding the
change in the market value of the Deferred Compensation Fund. |
|
(b) |
|
Consolidated selling, general and administrative expense reported for the period
presented. |
Although our growth in consolidated revenues was 14.6%, 2010 first quarter selling, general
and administrative expenses excluding gain/(loss) of deferred compensation fund increased 21.3% or
$2,373,000 compared to the 2009 first quarter. Consequently, 2010 first quarter selling, general
and administrative expenses (excluding impact of deferred compensation fund), as a percentage of
consolidated revenues, increased to 7.3% as compared to 6.9% in the 2009 first quarter. This
percentage increase resulted primarily from an increase in our payroll and payroll related
expenses.
Consolidated Investment and Interest Income
Investment and interest income, as a percentage of consolidated revenues, decreased to .4% in
the 2010 first quarter compared to .6% in the 2009 first quarter. The net decrease is primarily
attributable to the decrease in returns on our cash and cash equivalents and marketable securities
in the 2010 first quarter compared to returns on such accounts in the 2009 first quarter.
Additionally, the 2010 first quarter increase in consolidated investment and interest income was
favorably impacted by a net amount of $652,000 in comparing the increases in market value of the
investments held in our Deferred Compensation Fund in the 2010 first quarter compared to the
decrease recognized in the 2009 first quarter.
Income before Income Taxes
Consolidated
As a result of the discussion above related to revenues and expenses, consolidated income
before income taxes for the 2010 first quarter decreased to 6.6%, as a percentage of consolidated
revenues, compared to 7.8% in the 2009 first quarter.
Reportable Segments
Housekeepings 20.5% increase in income before income taxes is primarily attributable to the
gross profit earned on the 13.7% increase in reportable segment revenues.
Dietarys income before income taxes increased 66.9% on a reportable segment basis is
primarily attributable to the gross profit earned on the 25% increase in reportable segment
revenues.
-24-
Consolidated Income Taxes
Our effective tax rate for both of the quarters ended March 31, 2010 and 2009 was 38.5%.
Absent any significant change in federal, or state and local tax laws, we expect our effective tax
rate for the remainder of 2010 to approximate 38.5%. Our 38.5% effective tax rate differs from the
federal income tax statutory rate principally because of the effect of state and local income
taxes.
Consolidated Net Income
As a result of the matters discussed above, consolidated net income for the 2010 first quarter
decreased to 4.0%, as a percentage of consolidated revenues, compared to 4.8% in the 2009 first
quarter.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting standards generally
accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
We consider the three policies discussed below to be critical to an understanding of our
financial statements because their application places the most significant demands on our judgment.
Therefore, it should be noted that financial reporting results rely on estimating the effect of
matters that are inherently uncertain. Specific risks for these critical accounting policies and
estimates are described in the following paragraphs. For these estimates, we caution that future
events rarely develop exactly as forecasted, and the best estimates routinely require adjustment.
Any such adjustments or revisions to estimates could result in material differences to previously
reported amounts.
The three policies discussed are not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular transaction is
specifically dictated by accounting standards generally accepted in the United States, with no need
for our judgment in their application. There are also areas in which our judgment in selecting
another available alternative would not produce a materially different result. See our audited
consolidated financial statements and notes thereto which are included in our Annual Report on Form
10-K for the year ended December 31, 2009, which contain accounting policies and estimates and
other disclosures required by accounting principles generally accepted in the United States.
Allowance for Doubtful Accounts
The Allowance for Doubtful Accounts (the Allowance) is established as losses are estimated
to have occurred through a provision for bad debts charged to earnings. The Allowance is evaluated
based on our periodic review of accounts and notes receivable and is inherently subjective as it
requires estimates that are susceptible to significant revision as more information becomes
available.
-25-
We have had varying collection experience with respect to our accounts and notes receivable.
When contractual terms are not met, we generally encounter difficulty in collecting amounts due
from certain of our clients. Therefore, we have sometimes been required to extend the period of
payment for certain clients beyond contractual terms. These clients include those who have
terminated service agreements and slow payers experiencing financial difficulties. In making credit
evaluations, in addition to analyzing and anticipating, where possible, the specific
cases described above, we consider the general collection risks associated with trends in the
long-term care industry. We also establish credit limits, perform ongoing credit evaluations, and
monitor accounts to minimize the risk of loss.
In accordance with the risk of extending credit, we regularly evaluate our accounts and notes
receivable for impairment or loss of value and when appropriate, will provide in our Allowance for
such receivables. We generally follow a policy of reserving for receivables due from clients in
bankruptcy, clients with which we are in litigation for collection and other slow paying clients.
The reserve is based upon our estimates of ultimate collectability. Correspondingly, once our
recovery of a receivable is typically determined through litigation, bankruptcy proceedings or
negotiation to be less than the recorded amount on our balance sheet, we will charge-off the
applicable amount to the Allowance.
Our methodology for the Allowance is based upon a risk-based evaluation of accounts and notes
receivable associated with a clients ability to make payments. Such Allowance generally consists
of an initial amount established based upon criteria generally applied if and when a client account
files bankruptcy, is placed for collection/litigation and/or is considered to be pending
collection/litigation. The initial Allowance is adjusted either higher or lower when additional
information is available to permit a more accurate estimate of the collectability of an account.
Summarized below for the three month period ended March 31, 2010 and year ended December 31,
2009 are the aggregate account balances for the three Allowance criteria noted above, net
write-offs of client accounts, bad debt provision and allowance for doubtful accounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Account |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Balances of Clients |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Bankruptcy or in/or |
|
|
|
|
|
|
|
|
|
|
Allowance for |
|
|
|
Pending Collection/ |
|
|
Net Write-offs of |
|
|
Bad Debt |
|
|
Doubtful |
|
Period Ended |
|
Litigation |
|
|
Client Accounts |
|
|
Provision |
|
|
Accounts |
|
March 31, 2010 |
|
$ |
10,058,000 |
|
|
$ |
444,000 |
|
|
$ |
600,000 |
|
|
$ |
4,796,000 |
|
December 31, 2009 |
|
|
9,874,000 |
|
|
|
978,000 |
|
|
|
2,404,000 |
|
|
|
4,640,000 |
|
At March 31, 2010, we identified accounts totaling $10,058,000 that require an Allowance based
on potential impairment or loss of value. An Allowance totaling $4,796,000 was provided for these
accounts at such date. Actual collections of these accounts could differ from that which we
currently estimate. If our actual collection experience is 5% less than our estimate, the related
increase to our Allowance would decrease net income by $162,000.
Notwithstanding our efforts to minimize credit risk exposure, our clients could be adversely
affected if future industry trends, as more fully discussed under Liquidity and Capital Resources
below, and as further described in our 2009 Annual Report on Form
10-K in Part I under Risk
Factors, Government Regulation of
Clients and Service Agreements/Collections, change in
such a manner as to negatively impact the cash flows of our clients. If our clients experience a
negative impact in their cash flows, it would have a material adverse effect on our results of
operations and financial condition.
-26-
Accrued Insurance Claims
We currently have a Paid Loss Retrospective Insurance Plan for general liability and workers
compensation insurance, which comprise approximately 37% of our liabilities at March 31, 2010. Our
accounting for this plan is affected by various uncertainties because we must make
assumptions and apply judgment to estimate the ultimate cost to settle reported claims and
claims incurred but not reported as of the balance sheet date. We address these uncertainties by
regularly evaluating our claims pay-out experience, present value factor and other factors related
to the nature of specific claims in arriving at the basis for our accrued insurance claims
estimate. Our evaluations are based primarily on current information derived from reviewing our
claims experience and industry trends. In the event that our claims experience and/ or industry
trends result in an unfavorable change, it would have a material adverse effect on our consolidated
results of operations and financial condition. Under these plans, predetermined loss limits are
arranged with an insurance company to limit both our per-occurrence cash outlay and annual
insurance plan cost.
For workers compensation, we record a reserve based on the present value of future payments,
including an estimate of claims incurred but not reported, that are developed as a result of a
review of our historical data and open claims. The present value of the payout is determined by
applying an 8% discount factor against the estimated value of the claims over the estimated
remaining pay-out period. Reducing the discount factor by 1% would reduce net income by
approximately $62,000. Additionally, reducing the estimated payout period by six months would
result in an approximate $122,000 reduction in net income.
For general liability, we record a reserve for the estimated ultimate amounts to be paid for
known claims. The estimated ultimate reserve amount recorded is derived from the estimated claim
reserves provided by our insurance carrier reduced by an historical experience factor.
Asset Valuations and Review for Potential Impairment
We review our fixed assets, goodwill and other intangible assets at least annually or whenever
events or changes in circumstances indicate that its carrying amount may not be recoverable. This
review requires that we make assumptions regarding the value of these assets and the changes in
circumstances that would affect the carrying value of these assets. If such analysis indicates that
a possible impairment may exist, we are then required to estimate the fair value of the asset and,
as deemed appropriate, expense all or a portion of the asset. The determination of fair value
includes numerous uncertainties, such as the impact of competition on future value. We believe that
we have made reasonable estimates and judgments in determining whether our long-term assets have
been impaired; however, if there is a material change in the assumptions used in our determination
of fair value or if there is a material change in economic conditions or circumstances influencing
fair value, we could be required to recognize certain impairment charges in the future. As a result
of our most recent reviews, no changes in asset values were required.
-27-
Liquidity and Capital Resources
At March 31, 2010, we had cash and cash equivalents, and marketable securities of $72,549,000
and working capital of $178,399,000 compared to December 31, 2009 cash and cash equivalents, and
marketable securities of $83,949,000 and working capital of $177,453,000. We view our cash and cash
equivalents, and marketable securities as our principal measure of liquidity. Our current ratio at
March 31, 2010 increased to 8.8 to 1 compared to 6.1 to 1 at December 31, 2009. This increase
resulted primarily from the timing of payments for accrued payroll, accrued and withheld payroll
taxes, which was offset by the decrease in cash and cash equivalents and marketable securities. On
an historical basis, our operations have generally produced consistent cash flow and have required
limited capital resources. We believe our current and near term cash flow positions will enable us
to fund our continued anticipated growth.
Operating Activities
The net cash required by our operating activities was $2,261,000 for the three month period
ended March 31, 2010. The principal sources of net cash flows from operating activities for the
three month period ended March 31, 2010 were net income, and non-cash charges to operations for bad
debt provisions, depreciation and amortization. Additionally, operating activities cash flows
increased by $3,352,000 as a result of the increase in accrued insurance claims, deferred
compensation liability and income taxes payable and the decrease in prepaid expenses for the three
month period. These operating cash inflows were offset primarily by the cash outflow of $10,619,000
related to the timing of accrued payroll, accrued and withheld payroll taxes. The operating
activity that used the largest amount of cash during the three month period ended March 31, 2010
was a net increase of $1,767,000 in accounts and notes receivable and long-term notes receivable
resulting primarily from the 14.6% growth in the Companys 2010 first quarter revenues.
Investing Activities
Our principal source of cash in investing activities for the three month period ended March
31, 2010 was $7,858,000 for the net sales of marketable securities. The net sales of marketable
securities occurred to increase cash and equivalents to support the current and expected increase
in client facilities. Additionally, we expended $614,000 for the purchase of housekeeping
equipment, computer software and equipment, and laundry equipment installations. Under our current
plans, which are subject to revision upon further review, it is our intention to spend an aggregate
of $3,000,000 to $3,500,000 during the remainder of 2010 for such capital expenditures.
Financing Activities
On
March 5, 2010 we paid, to shareholders of record on
February 12, 2010, a regular quarterly
cash dividend of $.21 per common share. Such regular quarterly cash dividend payment in the
aggregate was approximately $9,225,000. Additionally, on
April 13, 2010, our Board of
Directors
declared a regular cash dividend of $.22 per common share to be paid on May 14, 2010 to
shareholders of record as of April 23, 2010.
Our Board of Directors review our dividend policy on a quarterly basis. Although there can be
no assurance that we will continue to pay dividends or the amount of the dividend, we expect to
continue to pay a regular quarterly cash dividend. In connection with the establishment of our
dividend policy, we adopted a Dividend Reinvestment Plan in 2003.
-28-
During the first quarter of 2010, we received proceeds of $848,000 from the exercise of stock
options by employees. Additionally, as a result of deductions derived from the stock option
exercises, we recognized an income tax benefit of $708,000.
Line of Credit
We have a $36,000,000 bank line of credit on which we may draw to meet short-term liquidity
requirements in excess of internally generated cash flow. Amounts drawn under the line of credit
are payable upon demand. At March 31, 2010, there were no borrowings under the line. However, at
such date, we had outstanding a $35,420,000 irrevocable standby letter of credit which relate to
payment obligations under our insurance programs. As a result of the letter of
credit issued, the amount available under the line of credit was reduced by $35,420,000 at
March 31, 2010.
The line of credit requires us to satisfy two financial covenants. Such covenants, and their
respective status at March 31, 2010, were as follows:
|
|
|
|
|
Covenant Description and Requirement |
|
Status at March 31, 2010 |
|
Commitment coverage ratio: cash and cash
equivalents plus marketable securities must equal
or exceed outstanding obligations under the line
by a multiple of 2 |
|
|
2.05 |
|
|
|
|
|
|
Tangible net work: must exceed $171,000,000 |
|
$ |
184,000,000 |
|
As noted above, we complied with the financial covenants at March 31, 2010 and expect to
continue to remain in compliance with such financial covenants. This line of credit expires on June
30, 2011. We believe the line of credit will be renewed at that time.
Accounts and Notes Receivable
We expend considerable effort to collect the amounts due for our services on the terms agreed
upon with our clients. Many of our clients participate in programs funded by federal and state
governmental agencies which historically have encountered delays in making payments to its program
participants. Congress has enacted a number of laws during the past decade that have significantly
altered, or may alter, overall government reimbursement for nursing home services. Because our
clients revenues are generally reliant on Medicare and Medicaid reimbursement funding rates and
mechanisms, the overall effect of these laws and trends in the long term care industry have
affected and could adversely affect the liquidity of our clients, resulting in their inability to
make payments to us on agreed upon payment terms. These factors, in addition to delays in payments
from clients, have resulted in and could continue to result in significant additional bad debts in
the near future. Whenever possible, when a client falls behind in making agreed-upon payments, we
convert the unpaid accounts receivable to interest bearing promissory notes. The promissory notes
receivable provide a means by which to further evidence the amounts owed and provide a definitive
repayment plan and therefore may ultimately enhance our ability to collect the amounts due. At
March 31, 2010 and December 31, 2009, we had $8,816,000 and $9,257,000, net of reserves,
respectively, of such promissory notes outstanding. Additionally, we consider restructuring service
agreements from full service to management-only service in the case of certain clients experiencing
financial difficulties. We believe that such restructurings may provide us with a means to maintain
a relationship with the client while at the same time minimizing collection exposure.
-29-
As a result of the current economic crisis, many states have significant budget deficits.
State Medicaid programs are experiencing increased demand, and with lower revenues than projected,
they have fewer resources to support their Medicaid programs. In addition, during March 2010,
comprehensive health care reform legislation under the Patient Protection and Affordable Care Act
and the Health Care and Education Reconciliation Act of 2010 (together, the Act) were signed into
law. The Act will significantly impact the governmental healthcare programs our clients participate
in, and reimbursements received there under from governmental or third-party payors. Furthermore,
in the coming year, new proposals or additional changes in existing regulations could be made to
the Act which could directly impact the governmental reimbursement programs in which our clients
participate. As a result, some state Medicaid
programs are reconsidering previously approved increases in nursing home reimbursement or are
considering delaying those increases. A few states have indicated it is possible they will run out
of cash to pay Medicaid providers, including nursing homes. Any negative changes in our clients
reimbursements may negatively impact our results of operations. Although we are currently
evaluating the Acts effect on our client base, we may not know the full effect until such a time
as these laws are fully implemented and the Centers for Medicare and Medicaid Services and other
agencies issue applicable regulations or guidance.
We have had varying collection experience with respect to our accounts and notes receivable.
When contractual terms are not met, we generally encounter difficulty in collecting amounts due
from certain of our clients. Therefore, we have sometimes been required to extend the period of
payment for certain clients beyond contractual terms. These clients include those who have
terminated service agreements and slow payers experiencing financial difficulties. In order to
provide for these collection problems and the general risk associated with the granting of credit
terms, we have recorded bad debt provisions (in an Allowance for Doubtful Accounts) of $600,000 in
the three month period ended March 31, 2010 and $700,000 in the three month period ended March 31,
2009. These provisions represent approximately .3% and .4%, as a percentage of total revenues for
such respective periods. In making our credit evaluations, in addition to analyzing and
anticipating, where possible, the specific cases described above, we consider the general
collection risk associated with trends in the long-term care industry. We also establish credit
limits, perform ongoing credit evaluation and monitor accounts to minimize the risk of loss.
Notwithstanding our efforts to minimize credit risk exposure, our clients could be adversely
affected if future industry trends change in such a manner as to negatively impact their cash
flows. If our clients experience a negative impact in their cash flows, it would have a material
adverse effect on our results of operations and financial condition.
At March 31, 2010, amounts due from our Major Client represented less than 1% of our accounts
receivable balance. However, such client changes its payments terms, it would increase our accounts
receivable balance and have a material adverse affect on our cash flows and cash and cash
equivalents.
-30-
Insurance Programs
We have a Paid Loss Retrospective Insurance Plan for general liability and workers
compensation insurance. Under these plans, pre-determined loss limits are arranged with an
insurance company to limit both our per-occurrence cash outlay and annual insurance plan cost.
For workers compensation, we record a reserve based on the present value of future payments,
including an estimate of claims incurred but not reported, that are developed as a result of a
review of our historical data and open claims. The present value of the payout is determined by
applying an 8% discount factor against the estimated value of the claims over the estimated
remaining pay-out period.
For general liability, we record a reserve for the estimated ultimate amounts to be paid for
known claims. The estimated ultimate reserve amount recorded is derived from the estimated claim
reserves provided by our insurance carrier reduced by an historical experience factor.
We regularly evaluate our claims pay-out experience, present value factor and other factors
related to the nature of specific claims in arriving at the basis for our accrued insurance claims
estimate. Our evaluation is based primarily on current information derived from reviewing our
claims experience and industry trends. In the event that our claims experience and/
or industry trends result in an unfavorable change, it would have an adverse effect on our
results of operations and financial condition.
Capital Expenditures
The level of capital expenditures is generally dependent on the number of new clients
obtained. Such capital expenditures primarily consist of housekeeping equipment purchases, laundry
and linen equipment installations, and computer hardware and software. Although we have no specific
material commitments for capital expenditures through the end of calendar year 2010, we estimate
that for the remainder of 2010 we will have capital expenditures of approximately $3,000,000 to
$3,500,000 in connection with housekeeping equipment purchases and laundry and linen equipment
installations in our clients facilities, as well as expenditures relating to internal data
processing hardware and software requirements. We believe that our cash from operations, existing
cash and cash equivalents balance and credit line will be adequate for the foreseeable future to
satisfy the needs of our operations and to fund our anticipated growth. However, should these
sources not be sufficient, we would, if necessary, seek to obtain necessary working capital from
such sources as long-term debt or equity financing.
Material Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements, other than our irrevocable standby letter
of credit previously discussed.
Effects of Inflation
Although there can be no assurance thereof, we believe that in most instances we will be able
to recover increases in costs attributable to inflation by passing through such cost increases to
our clients.
-31-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
At March 31, 2010 and December 31, 2009 we had $72,549,000 and $83,949,000, respectively, in
cash, cash equivalents and marketable securities. In accordance with U.S. GAAP, the fair value of
all of our cash, cash equivalents and marketable securities is determined based on Level 1 or
Level 2 inputs, which consist of quoted prices whose value is based upon 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 in the market. We place our cash
investments in instruments that meet credit quality standards, as specified in our investment
policy guidelines.
Investments in both fixed rate and floating rate investments carry a degree of interest rate
risk. Fixed rate securities may have their market value adversely impacted due to an increase in
interest rates, while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, our future investment income may fall short of
expectations due to changes in interest rates or if there is a decline in the fair value of our
investments.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Disclosure controls are procedures that are designed with the objective of ensuring that
information required to be disclosed in our reports under the Securities Exchange Act of 1934 (the
Exchange Act), such as this Form 10-Q, is reported in accordance with Securities and Exchange
Commission (SEC) rules. Disclosure controls are also designed with the objective of ensuring that
such information is accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
Based on their evaluation as of March 31, 2010, pursuant to Exchange Act Rule 13a-15(b), our
management, including our Chief Executive Officer and Chief Financial Officer, believe our
disclosure controls and procedures (as defined in Exchange Act 13a-15(e) are effective.
In connection with the evaluation pursuant to Exchange Act Rule 13a-15(d) of our internal
control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) by our management,
including our Chief Executive Officer and Chief Financial Officer, no changes during the quarter
ended March 31, 2010, were identified that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Certifications
Certifications of the Principal Executive Officer and Principal Financial Officer regarding,
among other items, disclosure controls and procedures are included as exhibits to this Form 10-Q.
-32-
PART II. OTHER INFORMATION
ITEM
1. Legal Proceedings.
Not Applicable
ITEM
1A. Risk Factors.
There has been no material change in the risk factors set forth in Part I, Item 1A, Risk Factors
in our Annual Report on Form 10-K for the year ended December 31, 2009.
ITEM
2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
ITEM 3. Defaults under Senior Securities.
Not Applicable
ITEM
4. (Removed and Reserved).
ITEM 5. Other Information.
|
a) |
|
On January 4, 2010, certain executive officers and directors were granted stock options
for 108,000 shares, in the aggregate, at the then current fair market value of $21.46 per
share. |
ITEM
6. Exhibits.
|
|
|
|
|
|
31.1 |
|
|
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
31.2 |
|
|
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
32.1 |
|
|
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 |
|
32.2 |
|
|
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 |
-33-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant had duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
HEALTHCARE SERVICES GROUP, INC. |
|
|
|
|
|
|
|
|
|
/s/ Daniel P. McCartney
DANIEL P. McCARTNEY, Chief
Executive Officer
|
|
|
|
|
|
|
|
|
|
/s/ Richard W. Hudson
RICHARD W. HUDSON, Chief
Financial Officer and Secretary
|
|
|
-34-