# HEALTHCARE SERVICES GROUP INC (HCSG) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from HEALTHCARE SERVICES GROUP INC's 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/731012/000073101225000032/hcsg-20241231.htm
Accession: 0000731012-25-000032
Filing date: 2025-02-14
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/HCSG/
All MD&A years: /company/HCSG/mda/
Previous year: /company/HCSG/mda/fy2023/ (FY 2023)
Next year: /company/HCSG/mda/fy2025/ (FY 2025)

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of our operations in conjunction with our Consolidated Financial Statements and the related notes to those statements included elsewhere in this report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Our actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors,” and elsewhere in this report on Form 10-K. We are on a calendar year end, and except where otherwise indicated, “2024” refers to the year ended December 31, 2024, and “2023” refers to the year ended December 31, 2023. Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

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 when 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 consolidated financial statements as of December 31, 2024 and for the year then ended and the notes accompanying those financial statements.

Overview

We provide management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary service departments of healthcare facilities, including nursing homes, retirement complexes, rehabilitation centers and hospitals located throughout the United States. We provide such services to approximately 2,600 facilities throughout the continental United States as of December 31, 2024. We believe we are the largest provider of housekeeping, laundry and dietary management services to the long-term care industry in the United States.

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We provide services primarily pursuant to full-service agreements with our customers. Under such agreements, we are responsible for the day-to-day management of the employees located at our customers’ facilities, as well as for the provision of certain supplies. We also provide services on the basis of management-only agreements for a limited number of customers. Under a management-only agreement, we provide management and supervisory services while the customer facility retains payroll responsibility for the non-supervisory staff. In certain management-only agreements, the Company maintains responsibility for purchasing supplies. Our agreements with customers typically provide for a renewable service term cancellable by either party upon 30 to 90 days’ notice after an initial period of 60 to 120 days.

We are organized into two reportable segments: housekeeping, laundry, linen and other services (“Housekeeping”), and dietary department services (“Dietary”).

Housekeeping services consist of managing our customers’ housekeeping departments, which are principally responsible for the cleaning, disinfecting and sanitizing of resident rooms and common areas of the customers’ facilities, as well as the laundering and processing of the bed linens, uniforms, resident personal clothing and other assorted linen items utilized at the customers’ facilities. Upon beginning service with a customer facility, we typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise the front-line personnel and coordinate housekeeping services with other facility support functions in accordance with customer requests. Such management personnel also oversee the execution of various cost and quality control procedures including continuous training and employee evaluation. On-site management is responsible for all daily customer housekeeping department activities with regular support provided by a District Manager specializing in such services.

Dietary services consist of managing our customers’ dietary departments, which are principally responsible for food purchasing, meal preparation and professional dietitian services, which include the development of menus that meet the dietary needs of residents. On-site management is responsible for all daily dietary department activities with regular support provided by a District Manager specializing in dietary services. We also offer clinical consulting services to our dietary customers which may be provided as a standalone service or be bundled with other dietary department services. Upon beginning service with a customer facility, we typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise the front-line personnel and coordinate dietitian services with other facility support functions in accordance with customer requests. Such management personnel also oversee the execution of various cost and quality control procedures including continuous training and employee evaluation.

Housekeeping services were provided to approximately 2,200 customer facilities at December 31, 2024 and contributed approximately 44.6% or $765.4 million of our consolidated revenues for the year ended December 31, 2024. Dietary services were provided to approximately 1,600 customer facilities at December 31, 2024 and contributed approximately 55.4% or $950.3 million of our consolidated revenues for the year ended December 31, 2024.

Our ability to acquire new customers, retain existing customers and increase revenues are affected by many factors. Competitive factors consist primarily of competing with potential customers’ use of in-house support staff, as well as a number of firms which compete with us in the regional and national markets in which we conduct business. We believe the primary revenue drivers of our business are our ability to obtain new customers and to provide additional services to existing customers. In addition, although there can be no assurance, we seek to pass through, by means of service billing increases, increases in our cost of providing the services, while also aiming to obtain modest annual revenue increases from our existing customers to attain desired profit margins at the facility level. The primary economic factor in acquiring new customers is our ability to demonstrate the cost-effectiveness of our services. The primary operational factor is our ability to demonstrate to potential customers the benefits of being relieved of the administrative and operational challenges related to the day-to-day management of their housekeeping and dietary operations. In addition, we must be able to assure new customers that we can improve the quality of service that they are providing to their residents. We believe the factors discussed above are equally applicable to each of our segments with respect to acquiring new customers and increasing revenues.

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When evaluating financial performance, we consider the ratio of certain financial items to consolidated revenues. The table below summarizes those metrics for 2024, 2023 and 2022: 

[[GREPCENT_TABLE]]
[["","Relation to Consolidated Revenues"],["","Year Ended December 31,"],["","2024","","2023","","2022"],["Revenues","100.0","%","","100.0","%","","100.0","%"],["Operating costs and expenses:"],["Costs of services provided","86.7","%","","87.2","%","","88.6","%"],["Selling, general and administrative expense excluding change in deferred compensation liability","10.2","%","","9.6","%","","8.8","%"],["Gain on deferred compensation plan","0.5","%","","0.4","%","","(0.5)","%"],["Selling, general and administrative expense","10.7","%","","10.0","%","","8.3","%"],["Other income (expense):"],["Investment and other income (loss), net","0.8","%","","0.8","%","","(0.3)","%"],["Interest expense","(0.3)","%","","(0.5)","%","","(0.2)","%"],["Income before income taxes","3.1","%","","3.1","%","","2.6","%"],["Income tax","0.8","%","","0.9","%","","0.6","%"],["Net income","2.3","%","","2.2","%","","2.0","%"]]
[[/GREPCENT_TABLE]]

Our expenses can vary and may impact our operating performance. We review costs of labor, costs of supplies, bad debt expense and depreciation and amortization expense, along with other segment expenses, to evaluate our operating performance. The variability of these costs may impact each segment differently, as Housekeeping’s percentage of revenue is more significantly impacted by costs of labor than that of Dietary, while Dietary’s percentage of revenue is is more significantly impacted by costs of supplies than Housekeeping. Bad debt expense impacts costs of services provided for each segment periodically depending on specific customer matters for each segment.

In 2024, we adopted Accounting Standards Update 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which updates reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. As part of our adoption of ASU 2023-07 and the Chief Operating Decision Maker’s evaluation of segment performance for the year ended December 31, 2024, we updated certain segment information in 2024 and recast certain prior period segment information from 2022 and 2023 in order to conform with our current period segment presentation.

Housekeeping labor costs accounted for approximately 78.4% of Housekeeping revenues in 2024 while Dietary labor costs accounted for approximately 56.6% of Dietary revenues in 2024. Changes in wage rates as a result of legislative or collective bargaining actions, market factors, adjustments to staffing levels and other variations in our use of labor or managing labor costs can result in variability of these costs. Housekeeping supplies, including linen products, accounted for approximately 7.4% of Housekeeping revenues in 2024. In contrast, supplies consumed in performing our Dietary services accounted for approximately 32.5% of Dietary revenues. Generally, fluctuations in these expenses are influenced by factors outside of our control and are unpredictable. Housekeeping and Dietary supplies are principally commodity products and are affected by market conditions specific to the respective products.

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Our customers are concentrated in the healthcare industry and are primarily providers of long-term care. Many of our customers’ revenues are highly reliant on Medicare, Medicaid and third-party payers’ reimbursement funding. Legislation can significantly alter overall government reimbursement for nursing home services and such changes, as well as other trends in the long-term care industry, have affected and could adversely affect our customers’ cash flows, resulting in their inability to make payments to us in accordance with agreed-upon payment terms. The climate of legislative uncertainty has posed, and will continue to pose, both risks and opportunities for us: the risks are related to our customers’ cash flows and solvency, while the opportunities are related to our ability to offer our customers cost stability and efficiencies. A large portion of our revenues are derived from nursing home operators whose portfolio of facilities managed are in multiple states, and as such, the ultimate impact, including in terms of timing and scale, as a result of legislative changes can be difficult to predict. However, our customer’s obligation to pay the Company in accordance with the contract is not contingent upon the customer’s cash flow. Notwithstanding the Company’s efforts to minimize its credit risk exposure, the aforementioned factors, as well as other factors that impact customer cash flows or their ability to make timely payments, could have material adverse effect on the Company’s results of operations and financial condition.

Years Ended December 31, 2024 and 2023

The following table summarizes the income statement key components that we use to evaluate our financial performance on a consolidated and reportable segment basis for the years ended December 31, 2024 and 2023.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2024","","2023 1","","% Change"],["","(in thousands)"],["Revenues"],["Housekeeping","$","765,368","","","$","766,651","","","(0.2)","%"],["Dietary","950,314","","","904,738","","","5.0","%"],["Consolidated","$","1,715,682","","","$","1,671,389","","","2.7","%"],["Costs of services provided"],["Housekeeping","$","642,873","","","$","648,710","","","(0.9)","%"],["Dietary","844,719","","","807,933","","","4.6","%"],["Consolidated","$","1,487,592","","","$","1,456,643","","","2.1","%"],["Selling, general & administrative expense"],["Housekeeping","$","47,085","","","$","45,752","","","2.9","%"],["Dietary","59,574","","","52,254","","","14.0","%"],["Corporate2","68,160","","","62,082","","","9.8","%"],["Gain on deferred compensation plan investments","8,241","","","6,684","","","23.3","%"],["Consolidated","$","183,060","","","$","166,772","","","9.8","%"],["Other income (expense)3"],["Investment and other income, net","$","14,349","","","$","12,938","","","10.9","%"],["Interest expense","(6,438)","","","(7,856)","","","(18.0)","%"],["Income before taxes","$","52,941","","","$","53,056","","","(0.2)","%"],["Income tax provision3","13,470","","","14,670","","","(8.2)","%"],["Net income","$","39,471","","","$","38,386","","","2.8","%"]]
[[/GREPCENT_TABLE]]

1.Represents a recast of prior period numbers to conform with current period presentation.

2.Represents selling, general and administrative expense less amounts allocated to segments for labor and labor-related and other segment items.

3.These line items represent corporate costs not allocated to segments.

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Revenues

Consolidated

Consolidated revenues increased 2.7% to $1.7 billion for the year ended December 31, 2024 compared to the corresponding period in 2023 as a result of the factors discussed below under Reportable Segments.

Reportable Segments

Housekeeping revenues decreased 0.2% while Dietary revenues increased 5.0% during the year ended December 31, 2024 compared to the corresponding period in 2023. Housekeeping revenues decreased due to a decline in facilities serviced, offset by increases to costs which were passed on to customers. Dietary revenues increased resulting from increases to contractual pass-throughs of labor and food costs, which have increased due to inflation and market factors.

Costs of services provided

Consolidated

Consolidated costs of services provided increased 2.1% to $1.5 billion for the year ended December 31, 2024 compared to the corresponding period in 2023 as a result of the factors discussed below under Reportable Segments. Costs of services provided, as a percentage of revenues, improved to 86.7% for the year ended December 31, 2024 compared to 87.2% in the corresponding period in 2023. The Company’s goal is to manage consolidated costs of services provided as a percentage of revenues in the 86% range.

Reportable Segments

We include certain expenses classified as selling, general and administrative expenses within segment expenses. Segment expenses for Housekeeping, as a percentage of Housekeeping revenues, decreased to 90.1% for the year ended December 31, 2024 from 90.6% in the corresponding period in 2023. Segment expenses for Dietary, as a percentage of Dietary revenues, increased to 95.2% for the year ended December 31, 2024 from 95.1% in the corresponding period in 2023.

The following tables provide a comparison of the key indicators we consider when managing segment expenses as a percentage of the respective segment’s revenues:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["Key Indicators as a % of Segment Revenue - Housekeeping","","2024","","2023","","Change"],["Labor and other labor-related costs1","","78.4%","","78.2%","","0.2%"],["Supplies","","7.4%","","7.6%","","(0.2)%"],["Bad debt expense","","1.9%","","2.3%","","(0.4)%"],["Depreciation and amortization","","0.5%","","0.5%","","\u2014%"],["Other costs1","","1.9%","","2.0%","","(0.1)%"],["Total segment expenses","","90.1%","","90.6%","","(0.5)%"]]
[[/GREPCENT_TABLE]]

1.Inclusive of certain expenses reported within selling, general and administrative expense that are segment-specific.

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["Key Indicators as a % of Segment Revenue - Dietary","","2024","","2023","","Change"],["Labor and other labor-related costs1","","56.6%","","57.7%","","(1.1)%"],["Supplies","","32.5%","","32.6%","","(0.1)%"],["Bad debt expense","","3.4%","","2.0%","","1.4%"],["Depreciation and amortization","","0.3%","","0.4%","","(0.1)%"],["Other costs1","","2.4%","","2.4%","","\u2014%"],["Total segment expenses","","95.2%","","95.1%","","0.1%"]]
[[/GREPCENT_TABLE]]

1.Inclusive of certain expenses reported within selling, general and administrative expense that are segment-specific.

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Variations within these key indicators relate to the provision of services at new facilities, changes in the mix of customers for whom we provide supplies or do not provide supplies and changes in bad debt expense. Management focuses on building efficiencies and managing labor and other costs at the facility level, as well as managing supply chain costs, for new and existing facilities.

In 2024, LaVie Care Centers, LLC and certain affiliated entities (“LaVie”), several of which are customers of the Company, filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Northern District of Georgia. During the year ended December 31, 2024, bad debt provision includes an increase to the allowance for doubtful accounts of $17.6 million associated with LaVie’s bankruptcy. We continue to provide services to LaVie on current terms and are deferring recognition of revenues from ongoing services from LaVie until cash is received. During the year ended December 31, 2023, bad debt provision includes an increase to the allowance for doubtful accounts by $13.8 million arising from two customer groups, one which entered into an assignment for the benefit of creditors and one which entered into bankruptcy.

Selling, General and Administrative Expense

Selling, general and administrative expense incurred at a segment-level is discussed in the Reportable Segments section above. Also included in consolidated selling, general and administrative expense are corporate expenses and gains and losses associated with changes in the value of investments under our deferred compensation liability. These investments represent the amounts held on behalf of the participating employees as changes in the value of these investments affect the amount of our deferred compensation liability. Gains on the plan investments during the years ended December 31, 2024 and 2023 increased our total selling, general and administrative expense.

Excluding the change in the deferred compensation plan described above, consolidated selling, general and administrative expense increased $14.7 million or 9.2% for the year ended December 31, 2024 compared to the corresponding period in 2023. The increase was driven by increases in payroll, legal, travel and fleet-related expenses, all of which were impacted by inflationary measures.

The table below summarizes the changes in these components of selling, general and administrative expense:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2024","","2023","","$ Change","","% Change"],["","(dollar amounts in thousands)"],["Selling, general and administrative expense excluding change in deferred compensation liability","$","174,819","","","$","160,088","","","$","14,731","","","9.2","%"],["Gain on deferred compensation plan investments","8,241","","","6,684","","","1,557","","","23.3","%"],["Selling, general and administrative expense","$","183,060","","","$","166,772","","","$","16,288","","","9.8","%"]]
[[/GREPCENT_TABLE]]

Consolidated Investment and Interest Income, net

Investment and other income was a gain of $14.3 million for the year ended December 31, 2024 compared to a gain of $12.9 million for the corresponding 2023 period, primarily due to market fluctuations in the value of our trading security investments representing the funding for our deferred compensation plan and increased interest income on notes receivable.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2024","","2023","","$ Change","","% Change"],["","(dollar amounts in thousands)"],["Investment and other income, net excluding change in deferred compensation plan assets","$","6,056","","","$","6,293","","","$","(237)","","","(3.8)","%"],["Increase in deferred compensation plan assets","8,293","","","6,645","","","1,648","","","24.8","%"],["Investment and other income, net","$","14,349","","","$","12,938","","","$","1,411","","","10.9","%"]]
[[/GREPCENT_TABLE]]

Consolidated Interest Expense

Consolidated interest expense decreased to $6.4 million for the year ended December 31, 2024 compared to $7.9 million for the corresponding 2023 period due to decreased short-term borrowings on our line of credit during 2024 compared to 2023.

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Consolidated Income Taxes

Our effective tax rate was 25.4% for the year ended December 31, 2024 compared to 27.7% in 2023. The decrease to our 2024 tax rate compared to the corresponding 2023 period was primarily impacted by a year-over-year reduction in state and local income tax expense.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in accordance with United States generally accepted accounting standards (“U.S. GAAP”) 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.

Financial reporting results rely on estimating the effects of matters that are inherently uncertain. An understanding of the policies discussed below is critical to the understanding of our financial statements because the application of these policies requires judgment. Specific risks for these critical accounting policies and estimates are described in the following paragraphs. For these estimates, we caution that future events do not always occur as forecasted, and the best estimates routinely require adjustment. Any such adjustments or revisions to estimates could result in material differences from previously reported amounts.

The policies discussed below 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 U.S. GAAP, 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 this Annual Report on Form 10-K, which contain a discussion of our accounting policies and other disclosures required by U.S. GAAP.

Allowance for Doubtful Accounts

The allowance for doubtful accounts (the “Allowance”) is established at the origination of an account or note receivable in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) subtopic 326 Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC 326”). ASC 326 requires the Company to estimate the lifetime expected credit losses on such instruments and to record an allowance to offset the receivables.

The Allowance is evaluated quarterly based upon our financial models which consider historical collections experience, current market conditions, government funding of Medicare and Medicaid and reasonable and supportable economic forecasts to estimate lifetime expected credit losses. Portions of the Allowance are inherently more sensitive to fluctuations in management’s assumptions than others, particularly any adjustments made to reflect reasonable and supportable economic forecasts. Such qualitative assessments would be expected to have a greater effect on aged accounts receivable and notes receivable as compared to current receivables. Due to the prospective nature of the Allowance under ASC 326, Management continues to review our portfolio of accounts and notes receivable and any estimate of credit losses is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

We have had varying collections experience with respect to our accounts and notes receivable. We have at times elected to extend the period of payment for certain customers beyond contractual terms. Such customers 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 customer-specific risks as well as the general collection risks associated with trends in the long-term care industry. We establish credit limits through our payment terms, perform ongoing credit evaluations and monitor accounts to minimize the risk of loss.

Despite our efforts to minimize credit risk exposure, our customers could be adversely affected if future industry trends, as more fully discussed under “Liquidity and Capital Resources” below, and in this Annual Report on Form 10-K in Part I under “Government Regulation of Customers,” “Service Agreements and Collections” and “Risk Factors” change in such a manner as to negatively impact the cash flows of our customers. If our customers experience a negative impact in their cash flows, it could have a material adverse effect on our consolidated results of operations and financial condition.

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Accrued Insurance Claims

We self-insure or carry high deductible insurance policies and therefore retain a substantial portion of the risk associated with expected losses under our general liability, workers’ compensation and auto insurance programs, which comprise approximately 25.4% of our liabilities at December 31, 2024. Under our insurance plans predetermined loss limits are arranged with our insurance company to limit both our per occurrence cash outlay and annual insurance plan cost. Our accounting for this plan utilizes current valuations from a third-party actuary, which include assumptions based on data such as historical claims and payout experience, demographic factors, industry trends, severity factors and other actuarial calculations. In the event that our claims experience and/or industry trends result in an unfavorable change in our assumptions or outcomes, it would have an adverse effect on our results of operations and financial condition. Recently, our claims experiences have been favorable as a result of our ongoing initiative to promote safety and accident prevention in the workplace and proactive management of workers’ compensation claims.

For general liability, workers’ compensation and other self-insurance programs, we record both a reserve for the estimated future cost of claims and related expenses that have been reported but not settled as well as an estimate of claims incurred but not reported. General liability and workers’ compensation reserves for claims incurred but not reported are developed by a third-party actuary through review of our historical data and open claims.

A summary of the changes in our total self-insurance liability is as follows:

[[GREPCENT_TABLE]]
[["","2024","","2023","","2022"],["","(in thousands)"],["Accrued insurance claims - January 1,","$","84,378","","","$","88,707","","","$","89,394"],["Claim payments","(24,751)","","","(24,488)","","","(25,175)"],["Reserve accruals:"],["Current year accruals","29,015","","","32,693","","","34,293"],["Changes to the provision for prior year claims","(11,625)","","","(12,534)","","","(9,805)"],["Change in accrued insurance claims","(7,361)","","","(4,329)","","","(687)"],["Accrued insurance claims - December 31,","$","77,017","","","$","84,378","","","$","88,707"]]
[[/GREPCENT_TABLE]]

Liquidity and Capital Resources

Our primary sources of liquidity are available cash and cash equivalents, available lines of credit under our revolving credit facility and cash flows from operating activities. At December 31, 2024, we had cash, cash equivalents, restricted cash equivalents, marketable securities and restricted marketable securities of $135.8 million and working capital of $364.1 million, compared to December 31, 2023 cash, cash equivalents and marketable securities of $147.5 million and working capital of $354.8 million. Our current ratio was 2.9 to 1 at December 31, 2024 and 2.6 to 1 at December 31, 2023. Marketable securities and restricted marketable securities represent fixed income investments that are highly liquid and can be readily purchased or sold through established markets. Such securities are held by HCSG Insurance to satisfy capital requirements of the state regulator related to captive insurance companies.

For the years ended December 31, 2024, 2023 and 2022 our cash flows were as follows:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2024","","2023","","2022"],["","(in thousands)"],["Net cash provided by (used in) operating activities","$","30,802","","","$","43,498","","","$","(8,167)"],["Net cash provided by (used in) investing activities","$","6,047","","","$","(3,293)","","","$","2,580"],["Net cash used in financing activities","$","(31,048)","","","$","(12,154)","","","$","(38,928)"]]
[[/GREPCENT_TABLE]]

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Operating Activities

Our primary sources of cash from operating activities are the revenues generated from our Housekeeping and Dietary services. Our primary uses of cash from operating activities are the funding of our payroll and other personnel-related costs as well as the costs of supplies used in providing our services. For the year ended December 31, 2024 cash flow from operations included $39.5 million in net income, an increase of $1.1 million compared to 2023, non-cash add-backs to net income of $61.5 million, and a $70.2 million decrease in cash flows from changes in operating assets and liabilities, driven primarily by increased outstanding accounts and notes receivable. Such activities are the primary drivers of the period-over-period changes in net cash provided by operating activities.

Investing Activities

Our principal uses of cash for investing activities are capital expenditures such as housekeeping and food service equipment, computer software and equipment, furniture and fixtures (see “Capital Expenditures” below for additional information), and purchases of marketable securities and restricted marketable securities. Such uses of cash are offset by proceeds from sales of marketable securities.

Our investments in marketable securities and restricted marketable securities are primarily comprised of municipal bonds, treasury notes, corporate bonds, and other government bonds and are intended to achieve our goal of preserving principal, maintaining adequate liquidity and maximizing returns subject to our investment guidelines. Our investment policy limits investment to certain types of instruments issued by institutions primarily with investment-grade ratings and places restrictions on concentration by type and issuer.

Financing Activities

The primary source of cash from financing activities is the net borrowings under our bank line of credit. We borrow for general corporate purposes as needed throughout the year. The primary uses of cash for financing activities are repayments of outstanding line of credit balances and repurchases of common stock. On February 14, 2023, our Board of Directors authorized the repurchase of up to 7.5 million outstanding shares of common stock (the “Repurchase Plan”). We repurchased 0.4 million shares of our common stock for $5.0 million during the year ended December 31, 2024. We remain authorized to repurchase 6.0 million shares of our Common Stock pursuant to the Repurchase Plan.

Contractual Obligations

Our future contractual obligations and commitments at December 31, 2024 primarily consist of minimum lease payments on our operating lease agreements as discussed within Note 7 — Leases. As of December 31, 2024, the Company had no other material minimum purchase or capital expenditure commitments pertaining to our daily operations or existing financing arrangements.

Line of Credit

At December 31, 2024, we had a $300 million bank line of credit on which to draw for general corporate purposes. Amounts drawn under the line of credit are payable upon demand and generally bear interest at a floating rate, based on our leverage ratio, and starting at the Term Secured Overnight Financing Rate (“SOFR”) rate plus 165 basis points. The Company’s line of credit was amended on November 22, 2022 to, among other things, provide for a five-year unsecured revolving loan facility in the aggregate amount of $300 million with, at the Company’s option, the ability to increase the revolving loan commitments to an aggregate amount not to exceed $500 million and to change the benchmark rate from the London Interbank Offered Rate (“LIBOR”) to SOFR. At December 31, 2024, we had no borrowings under the line of credit.

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The line of credit requires us to satisfy two financial covenants. The covenants and their respective status at December 31, 2024 were as follows:

[[GREPCENT_TABLE]]
[["Covenant Descriptions and Requirements","","As of December 31, 2024"],["Funded debt1 to EBITDA2 ratio: less than 3.50 to 1.00","","0.21"],["EBITDA2 to Interest Expense ratio: not less than 3.00 to 1.00","","11.71"]]
[[/GREPCENT_TABLE]]

1.All indebtedness for borrowed money including, but not limited to, reimbursement obligations in respect of letters of credit and guarantees of any such indebtedness.

2.Net income plus interest expense, income tax expense, depreciation, amortization, share-based compensation expense and extraordinary non-recurring losses/gains.

As noted above, we were in compliance with our financial covenants at December 31, 2024 and we expect to remain in compliance. The line of credit expires on November 22, 2027. We believe that our existing capacity under the line of credit and our history of favorable operating cash flows provide adequate liquidity to fund our operations for the next twelve months following the date of this report.

At December 31, 2024 and 2023, we also had outstanding $50.8 million and $85.9 million, respectively, in irrevocable standby letters of credit, which relate to payment obligations under our insurance programs. In connection with the issuance of the letters of credit, the amounts available under the line of credit was reduced by $50.8 million to $249.2 million at December 31, 2024 and by $85.9 million to $189.1 million at December 31, 2023. On December 24, 2024, January 16, 2025 and January 22, 2025, the letters of credit were renewed, and they all expire during the first quarter of 2026.

Accounts and Notes Receivable

Decisions to grant or to extend credit to customers are made on a case-by-case basis and based on a number of qualitative and quantitative factors related to the particular customer as well as the general risks associated with operating within the healthcare industry. Fluctuations in net accounts and notes receivable are attributable to a variety of factors including, but not limited to, the timing of cash receipts from customers, the Company’s assessment of collectability and corresponding provision for bad debt expense and the inception, transition, modification or termination of customer relationships.

We deploy significant resources and have invested in tools and processes to optimize our credit and collections efforts. When appropriate, the Company utilizes interest-bearing promissory notes to enhance the collectability of amounts due, by instituting definitive repayment plans and providing a means by which to further evidence the amounts owed. In addition, the Company may amend contracts from full service to management-only arrangements, or adjust contractual payment terms, to accommodate customers who have in good faith established clearly-defined plans for addressing cash flow issues. These efforts are intended to minimize the Company’s collections risk.

In order to provide for collections issues and the general risk associated with the granting of credit terms, we recorded a bad debt provision (in an Allowance for Doubtful Accounts) of $46.8 million, $35.6 million and $32.0 million in the years ended December 31, 2024, 2023 and 2022, respectively. As a percentage of total revenues, these provisions represented approximately 2.7%, 2.1% and 1.9% for the years ended December 31, 2024, 2023 and 2022, respectively.

Insurance Programs

We self-insure or carry high deductible insurance plans and therefore retain a substantial portion of the risk associated with the expected losses under our general liability, workers’ compensation and auto insurance programs. Under our insurance plans for general liability and workers’ compensation, predetermined loss limits are arranged with our insurance company to limit both our per occurrence cash outlay and annual insurance plan cost. Our accounting for this plan is affected by various uncertainties, such as historical claims, pay-out experience, demographic factors, industry trends, severity factors and other actuarial assumptions calculated by a third-party actuary. Evaluations of our accrued insurance claims estimate as of the balance sheet date are based primarily on current information derived from our actuarial valuation which assists in quantifying and valuing these trends. In the event that our claims experience and/or industry trends result in an unfavorable change resulting from, among other factors, the severity levels of reported claims and medical cost inflation, as compared to historical claim trends, it would have an adverse effect on our results of operations and financial condition.

For general liability, workers’ compensation and auto, we record a reserve for the estimated future cost of claims and related expenses that have been reported but not settled, 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, which is based on estimates provided by a third-party actuary.

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Capital Expenditures

The level of capital expenditures is generally dependent on the number of new customers obtained. Such capital expenditures primarily consist of housekeeping and food service equipment purchases, laundry and linen equipment installations, computer hardware and software and furniture and fixtures. Our capital expenditures totaled $6.3 million in 2024. Although we have no specific material commitments for capital expenditures through the end of calendar year 2025, we estimate that for 2025 we will have capital expenditures of approximately $5.0 million to $7.0 million.

Although there can be no assurance, 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 seek to obtain necessary capital from such sources as long-term debt or equity financing. In addition, there can be no assurance of the terms thereof and any subsequent equity financing sought may have dilutive effects on our current shareholders.

Material Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements other than our irrevocable standby letters of credit previously discussed.

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