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, "2021" refers to the year ended
December 31, 2021, and "2020" refers to the year ended December 31, 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 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, 2020.
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, 2021and for the year then ended and the notes accompanying those financial statements. 18 -------------------------------------------------------------------------------- Table of Contents COVID-19 Considerations The Company's priorities during the COVID-19 pandemic are protecting the health and safety of our employees; maximizing the impact of our main services in helping customers with the housekeeping and dietary services needs of their facilities, and deploying the talents of our employees and our resources to help the communities we serve meet and overcome the current challenges. During the year ended December 31, 2021, the COVID-19 pandemic did not have a material net impact on our consolidated operating results. Revenues for the year ended December 31, 2021included $5.7 millionof COVID-19 supplemental billings, primarily related to employee pay premiums passed through to customers, which were offset by temporary decreases in recurring billings as a result of census-driven cost reductions in staffing and purchasing. In the future, the pandemic may cause reduced demand for our services if, for example, the pandemic results in a recessionary economic environment to the long-term care and skilled nursing industries in which we serve; however since the services that we offer are essential to our customers, and although there can be no assurance, we believe that over the long term, there will continue to be strong demand for our services. The full impact that COVID-19 will have on our future revenues is not known at this time. Our ability to continue to operate without significant negative operational impact from the COVID-19 pandemic will in part depend on our ability to protect our employees and our supply chain. The Company has endeavored to follow the recommended actions of government and health authorities to protect our employees, with particular measures in place for those working in our customer facilities. For the year ended December 31, 2021, we have maintained the consistency of our operations since the onset of the COVID-19 pandemic. We will continue to innovate in managing our business, coordinating with nursing departments to do our part in the infection prevention and control continuum and remain flexible in responding to our customer-partners. However, the continued uncertainty resulting from the pandemic, and any new or additional measures required by national, state or local governments to combat COVID-19, such as a COVID-19 vaccine mandate, could result in an unforeseen disruption to our workforce and supply chain (for example, an inability of a key supplier or transportation supplier to source and transport materials) that could negatively impact our operations or employee availability. Through December 31, 2021, we continue to generate operating cash flows to meet our short-term liquidity needs, and although there can be no assurance, we expect to maintain access to the capital markets. We have also not observed any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic.
For more information on risk factors related to the pandemic or other risks that could affect our results, please refer to the “Risk Factors” section of Part I, point 1A of this Form 10-K.
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 believe we are the largest provider of housekeeping and laundry management services to the long-term care industry in the United States, rendering such services to approximately 3,000 facilities throughout the continental United Statesas of December 31, 2021. 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. Our agreements with customers typically provide for a renewable one year service term, cancellable by either party upon 30 to 90 days' notice after an initial period of 60 to 120 days.
We are organized into two reportable segments: Housekeeping, Laundry, Linen and Other Services (“Housekeeping”) and Dietary Services (“Dietary”).
Housekeeping consists 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 and train the front-line personnel and coordinate housekeeping services with other facility support functions in accordance with customer requests. Such management personnel also oversee the execution of various cost and quality control procedures including continuous training and employee evaluation. 19 -------------------------------------------------------------------------------- Table of Contents Dietary consists 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 stand-alone service, or 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 and train the front-line personnel and coordinate dietitian services with other facility support functions in accordance with customer requests. Such management personnel also oversee the execution of various cost and quality control procedures including continuous training and employee evaluation. At
December 31, 2021, Housekeeping services were provided at essentially all of our approximately 3,000 customer facilities, generating approximately 50.0% or $821.3 millionof our consolidated revenues for the year ended December 31, 2021. Dietary services were provided to over 1,500 customer facilities at December 31, 2021and contributed approximately 50.0% or $820.6 millionof our consolidated revenues for the year ended December 31, 2021. Our workers' compensation, general liability and certain employee health and welfare insurance programs are provided by HCSG Insurance Corp.(" HCSG Insurance" or the "Captive"), our wholly-owned captive insurance subsidiary. HCSG Insuranceprovides the Company with greater flexibility and cost efficiency in meeting our insurance needs. In 2015, we completed a corporate restructuring by capitalizing three new operating entities and transitioning our facility-based employees to such entities based on the geography served. HCSG Insuranceprovides workers' compensation, general liability and other insurance coverages to such entities with respect to such transitioned workforce, such entities provide housekeeping, laundry and dietary services as a subcontracted provider to the Company, and the Company provides strategic customer-service management and administrative support services to such entities. 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, 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, because many of our customers' revenues are generally highly reliant on Medicare and Medicaid reimbursements. Therefore, our customers' economic decision-making is driven significantly by their reimbursement funding rate structure and the financial impact on their reimbursement as a result of engaging us for the respective 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. 20
Table of contents When evaluating financial performance, we consider the ratio of certain financial items to consolidated revenues. The table below summarizes these measures for 2021, 2020 and 2019:
Relationship to consolidated revenue
Year Ended December 31, 2021 2020 2019 Revenues 100.0 % 100.0 % 100.0 % Operating costs and expenses: Costs of services provided 86.2 % 84.8 % 87.6 %
Selling, general and administrative expenses excluding change in deferred compensation liability
10.1 % 8.0 % 7.8 % Gain on deferred compensation plan 0.4 % 0.6 % 0.4 % Selling, general and administrative expense 10.5 % 8.6 % 8.2 % Other income (expense): Investment and other income, net 0.6 % 0.8 % 0.6 % Interest expense (0.1) % (0.1) % (0.2) % Income before income taxes 3.8 % 7.3 % 4.6 % Income tax 1.0 % 1.7 % 1.1 % Net income 2.8 % 5.6 % 3.5 % Our costs of services can vary and may impact our operating performance. Management reviews two primary indicators (costs of labor and costs of supplies as percentages of segment revenues) to monitor and manage such costs. The variability of these costs may impact each segment differently, as Housekeeping is more significantly impacted by costs of labor than Dietary. Labor costs accounted for approximately 80.9% of Housekeeping revenues in 2021. Dietary labor costs accounted for approximately 64.0% of Dietary revenues in 2021. 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 6.5% of Housekeeping revenues in 2021. In contrast, supplies consumed in performing our Dietary services accounted for approximately 27.9% 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. Our consolidated costs of services decreased 2.8% for the year ended
December 31, 2020as compared to 2019 due to higher than normal bad debt expense incurred during the year ended December 31, 2019. 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 payors' reimbursement funding rates. 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. 21 -------------------------------------------------------------------------------- Table of Contents Years Ended December 31, 2021and 2020 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, 2021and 2020. The differences between the reportable segments' operating results and other disclosed data and our consolidated financial results relate primarily to corporate level transactions and adjustments related to transactions recorded at the reportable segment level which use methods other than generally accepted accounting principles. Year Ended December 31, 2021 2020 % Change (in thousands) Revenues Housekeeping $ 821,329 $ 895,267(8.3) % Dietary 820,630 865,036 (5.1) % Consolidated $ 1,641,959 $ 1,760,303(6.7) % Costs of services provided Housekeeping $ 741,949 $ 799,544(7.2) % Dietary 774,872 796,743 (2.7) % Corporate and eliminations (101,739) (103,970) (2.1) % Consolidated $ 1,415,082 $ 1,492,317(5.2) % Selling, general and administrative expense Corporate and eliminations $ 173,108$
Investment and other income, net Corporate
$ 9,439 $ 13,352(29.3) % Interest expense Corporate $ (1,385) $ (1,374)0.8 % Income (loss) before income taxes Housekeeping $ 79,380 $ 95,723(17.1) % Dietary 45,758 68,293 (33.0) % Corporate and eliminations (63,315) (34,830) 81.8 % Consolidated $ 61,823 $ 129,186(52.1) % Income taxes Corporate $ 15,960 $ 30,504(47.7) % Revenues Consolidated Consolidated revenues decreased 6.7% to $1.6 billionfor the year ended December 31, 2021compared to the corresponding period in 2020 as a result of the factors discussed below under Reportable Segments. 22 -------------------------------------------------------------------------------- Table of Contents Reportable Segments Housekeeping and Dietary revenues decreased 8.3% and 5.1%, respectively, during the year ended December 31, 2021compared to the corresponding period in 2020, primarily driven by decreases in recurring billings as a result of census-driven reductions in staffing and purchasing, a decrease in the number of facilities serviced and an agreement with a significant customer to modify pricing and payment terms. Revenue for the year ended December 31, 2021included $5.7 millionof COVID-19 supplemental billings, as compared to $32.3 millionof COVID-19 supplemental billings for the year ended December 31, 2020, primarily related to employee pay premiums passed through to customers. The full impact that COVID-19 will have on our future revenues is not yet known at this time. Costs of services provided Consolidated
Consolidated service costs decreased by 5.2% to
The following table presents a comparison of the key indicators that we take into account in the management of the consolidated costs of the services provided:
Year Ended December 31, Costs of Services Provided - Key Indicators as a % of Consolidated Revenue 2021 2020 Change Bad debt provision 0.6% 0.5% 0.1% Self-insurance costs 3.0% 1.9% 1.1% The increase in the bad debt provision is related to our current assessment of the collectability of our accounts and notes receivable during the year ended
December 31, 2021. The increase in our self-insurance costs as a percentage of consolidated revenue was primarily impacted by an unfavorable $0.2 millionadjustment to our self-insurance liability during 2021 after considering our updated actuarial estimates for projected incurred losses on past claims as compared to the $14.0 millionfavorable adjustment recorded in 2020.
Costs of services provided for Housekeeping, as a percentage of Housekeeping revenues, increased to 90.3% for the year ended
December 31, 2021from 89.3% in the corresponding period in 2020. Costs of services provided for Dietary, as a percentage of Dietary revenues, increased to 94.4% for the year ended December 31, 2021from 92.1% in the corresponding period in 2020. The following table provides a comparison of the key indicators we consider when managing costs of services provided at the segment level, as a percentage of the respective segment's revenues: Year Ended December 31, Costs of Services Provided - Key Indicators as a % of Segment Revenue 2021 2020 Change Housekeeping labor and other labor-related costs 80.9% 80.5% 0.4% Housekeeping supplies 6.5% 6.9% (0.4)% Dietary labor and other labor-related costs 64.0% 63.7% 0.3% Dietary supplies 27.9% 26.5% 1.4% Variations within these key indicators relate to the provision of services at new facilities and changes in the mix of customers for whom we provide supplies or do not provide supplies. 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. The increase in dietary supplies spend as a percentage of dietary revenues was driven by increases to our menu costs, which are dependent on commodity pricing factors, during 2021. 23 -------------------------------------------------------------------------------- Table of Contents Consolidated Selling, General and Administrative Expense Included in selling, general and administrative expense are 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, 2021and 2020 increased our total selling, general and administrative expense for these periods. Excluding the change in the deferred compensation plan described above, consolidated selling, general and administrative expense increased $24.9 millionor 17.6% for the year ended December 31, 2021compared to the corresponding period in 2020. The increase was primarily a result of increased payroll costs, increased travel and entertainment costs and increased legal and professional fees incurred, including $6.0 millionrelated to the settlement of the SECinquiry regarding the Company's earnings per share calculation practices and $3.0 millionrelated to a negotiated settlement of Californialabor and employment matters. There is a possibility for additional increased selling, general and administrative expense related to the pandemic. The table below summarizes the changes in these components of selling, general and administrative expense: Year Ended December 31, 2021 2020 $ Change % Change (dollar amounts in thousands) Selling, general and administrative expense excluding change in deferred compensation liability $ 166,432 $ 141,578 $ 24,85417.6 % Gain on deferred compensation plan investments 6,676 9,200 (2,524) (27.4) % Selling, general and administrative expense $ 173,108 $ 150,778 $ 22,33014.8 %
Investment and other income decreased by 29.3% for
Consolidated interest expense
Consolidated interest expense increased by 0.8% to
Consolidated income taxes
Our effective tax rate was 25.8% for the year ended
24 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates The preparation of financial statements in accordance with accounting standards generally accepted in
the United States(" 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 subtopic 326 Credit Losses - Measurement of Credit Losses on Financial Instruments ("ASC 326"). ASC 326 was adopted by the Company prospectively as of January 1, 2020. In adopting ASC 326, the Company replaced its previous incurred loss impairment model for estimating credit losses on accounts and notes receivables for its reporting of quarterly and annual financial results with an expected loss model prepared in accordance with ASC 326. While the incurred loss impairment model had the Company recognize credit losses when it was probable that a loss had been incurred, ASC 326 requires the Company to estimate the lifetime expected credit losses on such instruments and to record an allowance to offset the receivables. Accordingly, credit losses under ASC 326 are generally recognized earlier in the life cycle of a receivable than under the Company's previous incurred loss model. 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 results of operations and financial condition. 25 -------------------------------------------------------------------------------- Table of Contents Accrued Insurance Claims We currently have a Paid Loss Retrospective Insurance Plan for general liability, workers' compensation insurance and other self-insurance programs, which comprise approximately 27.5% of our liabilities at December 31, 2021. 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 pay-out 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, as well as 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: 2021 2020 2019 (in thousands) Accrued insurance claims - January 1, $ 82,428 $ 87,622 $ 79,600Claim payments (29,061) (30,828) (35,834) Reserve accruals: Current year accruals 35,830 39,638 45,934
Changes in provision for claims from prior years 197 (14,004)
Change in accrued insurance claims 6,966 (5,194)
Accrued insurance claims - December 31,
$ 89,394 $ 82,428
Cash and capital resources
Cash generated through operations is our primary source of liquidity. At
December 31, 2021, we had cash, cash equivalents and marketable securities of $185.2 millionand working capital of $355.3 million, compared to December 31, 2020cash, cash equivalents and marketable securities of $264.3 millionand working capital of $410.1 million. Our current ratio was 2.9 to 1 at December 31, 2021versus 3.5 to 1 at December 31, 2020. 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 Insuranceto satisfy capital requirements of the state regulator related to captive insurance companies. As of December 31, 2021, the pandemic has not negatively impacted the Company's liquidity position. For the years ended December 31, 2021, 2020, and 2019 our cash flows were as follows: Year Ended December 31, 2021 2020 2019 (in thousands) Net cash provided by operating activities $ 37,108 $ 217,213 $ 93,581Net cash used in investing activities $ (22,990) $ (36,845) $ (16,457)Net cash used in financing activities $ (82,654) $ (68,367) $ (75,820)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, 2021cash flow from operations included a $52.8 milliondecrease in net income, a payment of $22.1 millionof payroll taxes previously deferred under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), and a $37.2 millionincrease in outstanding accounts and notes receivable. Such activity, along with the timing of cash receipts and cash payments, are the primary drivers of the period-over-period changes in net cash provided by operating activities. 26
Table of Contents We have not changed our expectations for future cash flows from operating activities due to COVID-19. We anticipate that many of our customers may experience changes in their cash flow, but we will continue to pursue collections in accordance with our service agreements.
Our principal uses of cash for investing activities are the purchases of marketable securities and capital expenditures such as housekeeping and food service equipment, computer software and equipment, and furniture and fixtures (see "Capital Expenditures" below for additional information). Such uses of cash are partially offset by proceeds from sales of marketable securities. Our investments in marketable securities are primarily comprised of tax-exempt municipal 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.
In addition, in 2021, the Company completed two business acquisitions which resulted in the investment of cash outflows of
The primary use of cash for financing activities is the payment of dividends. We have paid regular quarterly cash dividends since the second quarter of 2003. During 2021, we paid regular quarterly cash dividends to shareholders totaling
$62.2 millionas follows: Quarter Ended December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 (amounts in thousands, except per share data) Cash dividend per common share $ 0.21000 $ 0.20875 $ 0.20750$ 0.20625 Total cash dividends paid $ 15,554 $ 15,640 $ 15,560$ 15,472 Record date November 19, 2021 August 20, 2021 May 21, 2021 February 26, 2021 Payment date December 23, 2021 September 24, 2021 June 25, 2021 March 26, 2021
The dividends paid to shareholders during the year ended
December 31, 2021were funded by cash generated from operations and cash reserves. Our Board of Directors reviews our dividend policy on a quarterly basis. Although there can be no assurance that we will continue to pay dividends or regarding the amount of future dividend payments, 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.
The main source of cash from financing activities is net borrowings under our bank line of credit. We borrow for general corporate purposes as needed throughout the year.
We remain authorized to repurchase 0.6 million shares of our Common Stock pursuant to previous Board of Directors' authorization. During the year ended
December 31, 2021and 2020, we repurchased our Common Stock as part of the dividend reinvestment related to treasury shares held within the Deferred Compensation Plan. In 2021, we entered into the Plan. The Plan was adopted under the safe harbor provided by Rule 10b5-1 and Rule 10b-18 of the Exchange Act, in order to assist the Company in implementing its share repurchase plans. Pursuant to the Company's share repurchase program and as authorized by the Board of Directors on March 12, 2021, we have purchased 1.0 million shares of the Company's common stock during the year ended December 31, 2021for a total cost of $21.5 millioninclusive of transaction costs. The number of shares and value of shares repurchased were immaterial for the year ended December 31, 2020. 27 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations
Our future contractual obligations and commitments to
primarily consist of minimum payments under our operating leases, as disclosed in Note 9 – Lease Commitments. From
December 31, 2021, we had a $475 millionbank 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 LIBOR plus 115 basis points (or if LIBOR becomes unavailable, the higher of the Overnight Bank Funding Rate, plus 50 basis points and the Prime Rate). At December 31, 2021, there were no borrowings under the line of credit.
The line of credit requires us to comply with two financial covenants. Restrictive covenants and their respective status at
December 31, 2021Funded debt 1 to EBITDA 2 ratio: less than 3.50 to 1.00 0.37 EBITDA2 to Interest Expense ratio: not less than 3.00 to 1.00 58.31 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 compensation expense and extraordinary non-recurring losses/gains. As noted above, we were in compliance with our financial covenants at December 31, 2021and we expect to remain in compliance. The line of credit expires on December 21, 2023. We believe that our existing capacity under the line of credit and our favorable operating cash flows provide adequate liquidity to fund our operations for the next twelve months following the date of this report, inclusive of the potential impact of COVID-19. Our line of credit agreement provides procedures for determining a replacement or alternative rate in the event that LIBOR is unavailable (i.e., the higher of the Overnight Bank Funding Rate, plus 50 basis points and Prime Rate). However, there can be no assurances as to whether such replacement or alternative rate will be more or less favorable than LIBOR. We intend to monitor the developments with respect to the phasing out of LIBOR and will work with our lenders to ensure the transition away from LIBOR will have minimal impact on our financial condition. We however can provide no assurances regarding the impact of the discontinuation of LIBOR on the interest rate that we would be required to pay or on our financial condition. At December 31, 2021, we also had outstanding $64.9 millionin 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 amount available under the line of credit was reduced by $64.9 millionto $410.1 millionat December 31, 2021. On November 22, 2021the letters of credit were renewed and expire on January 4, 2023.
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. 28 -------------------------------------------------------------------------------- Table of Contents 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
$10.5 million, $9.6 millionand $25.5 millionin the years ended December 31, 2021, 2020 and 2019, respectively. As a percentage of total revenues, these provisions represented approximately 0.6%, 0.5% and 1.4% for the years ended December 31, 2021, 2020 and 2019, respectively.
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 and workers compensation 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 and workers' compensation, 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.
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
$5.7 millionin 2021. Although we have no specific material commitments for capital expenditures through the end of calendar year 2022, we estimate that for 2022 we will have capital expenditures of approximately $4.0 millionto $6.0 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.
Significant off-balance sheet arrangements
We have no material off-balance sheet arrangements, other than our previously mentioned irrevocable standby letter of credit.
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