Healthcare Services Group, Inc. Aktie

Hello, everyone. Thank you for joining us, and welcome to the Healthcare Services Group 2026 Second Quarter Earnings Call. [Operator Instructions] The matters discussed on today's conference call include forward-looking statements about the business prospects of Healthcare Services Group, Inc. For Healthcare Services Group, Inc.'s most recent forward-looking statement notice, please refer to the press release issued this morning, which can be found on our website, www.hcsgcorp.com. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties and important factors, including those discussed in the Risk Factors, MD&A and other sections of the annual report on Form 10-K and Healthcare Services Group's other SEC filings, and as indicated in our most recent forward-looking statements notice.

Additionally, management will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in this morning's press release.

I will now hand the conference over to Ted Wahl, Chief Executive Officer. Please go ahead.

Good morning, everyone, and welcome to HCSG's Second Quarter 2026 Earnings Call. With me today are Matt McKee, our Chief Communications Officer; and Vikas Singh, our Chief Financial Officer. Earlier this morning, we released our second quarter results and plan on filing our 10-Q by the end of the week. Today, in my opening remarks, I'll discuss our Q2 highlights, share our perspective on the general business environment and discuss our strategic priorities for Q3.

Matt will then provide a more detailed discussion on our Q2 results, and then Vikas will provide an update on our liquidity position and capital allocation progression. We will then open up the call for Q&A. So with that overview, I'd like to now discuss our Q2 highlights. I am pleased with our second quarter results, which underscore the strength of our business model and the continued disciplined execution across our operations. For the 3 months ended June 30, we reported revenue of $470.8 million, net income and diluted EPS of $22.7 million and $0.32 and cash flow from operations of $21.9 million and cash flow from operations, excluding the change in payroll accrual of $27.9 million.

I'd like to now share our perspective on the general business environment. Industry fundamentals continue to gain strength, highlighted by the multi-decade demographic tailwind that is now beginning to work its way into the long-term and post-acute care system. In 2026, the first of the baby boomers are turning 80 years old. And by the year 2030, all 70 million-plus boomers will be over the age of 65, with the oldest being in their mid-80s, the primary age cohort for long-term and post-acute care utilization. We expect that the demand and opportunity for service providers in this space, especially for those with compelling value propositions, durable business models and market-leading positions to only increase in the months and years ahead.

The most recent industry operating trends remain positive as well, highlighted by steady occupancy, a growing industry workforce that has now recovered to its pre-pandemic baseline and a stable reimbursement environment. We are also very encouraged by the administration's ongoing efforts to rationalize regulations and policy, highlighted by recent announcements on deregulation, payment rules and survey processes, which better align with the changing and expanding needs of our nation's most vulnerable and the provider communities we service. Beyond our core industry trends, we are closely monitoring the broader macro landscape, including sustained volatility in global energy and supply markets resulting from the ongoing geopolitical conflicts.

Our role as financial stewards for our clients remains a nonnegotiable priority and serves as our North Star as we navigate this environment. To that end, our purchasing and procurement teams are actively monitoring the landscape and surveying our supply chain to stay ahead of any developing trends. Fundamental to these efforts is the depth of our long-standing vendor partnerships, which provide the critical visibility and stability necessary to navigate market volatility with confidence. In the event that specific supplies or food items experience outsized inflationary or cost pressure, we are prepared to pivot our sourcing strategies to mitigate direct exposure.

Ultimately, the rigorous work we have done to enhance our contractual frameworks allow us to pass through unavoidable cost increases, ensuring we preserve our margins while continuing to deliver market-leading service. Looking ahead to Q3, our top 3 strategic priorities remain driving growth by developing management candidates, converting sales pipeline opportunities and retaining our existing facility business alongside the continued cultivation of strategic acquisition and investment opportunities, managing cost through field-based operational execution and prudent spend management at the enterprise level and optimizing cash flow with increased customer payment frequency, enhanced contract terms and disciplined working capital management. We are reaffirming our 2026 mid-single-digit growth outlook with a focus on realizing the substantial growth opportunities in the second half of the year and beyond.

So with those introductory comments, I'll turn the call over to Matt.

Thanks, Ted, and good morning, everyone. Revenue was reported at $470.8 million. Segment revenues and margins for Environmental Services were reported at $213.2 million and 13.3%. Segment revenues and margins for Dietary Services were reported at $257.6 million and 7.5%. Our 2026 growth plans continue to be oriented around mid-single-digit revenue growth with third quarter revenue expectations in the $475 million to $485 million range.

Cost of services was reported at $396 million or 84.1%. Cost of services benefited from strong service execution and lower bad debt expense. Our goal is to manage cost of services in the 86% range. SG&A was reported at $52.6 million. After adjusting for the $6.9 million increase in deferred compensation, SG&A was $45.7 million or 9.7%. Our goal is to manage SG&A in the 9.5% to 10.5% range with the longer-term goal of managing those costs into the 8.5% to 9.5% range.

Other income was reported at $8.8 million. After adjusting for the $6.9 million increase in deferred compensation, other income was $1.9 million. Our effective tax rate was reported at 26.8%, and we expect our 2026 effective tax rate to be approximately 25%. The net income and diluted earnings per share were reported at $22.7 million and $0.32 per share.

I'd now like to turn the call over to Vikas.

Thank you, Matt, and good morning, everyone. Starting with our liquidity and cash flows. Our primary sources of liquidity are cash flow from operating activities, cash and cash equivalents and our revolving credit facility. Cash flow from operations was reported at $21.9 million. After adjusting for the $6 million decrease in the payroll accrual, cash flow from operations was $27.9 million. We wrapped up the second quarter with cash and marketable securities of $200.9 million, and our credit facility of $300 million was undrawn with utilization limited to LCs only.

We continue to execute on our capital allocation priorities across organic growth, M&A and share repurchases. Our approach continues to be grounded and disciplined, and our current liquidity provides us the flexibility to pursue all of these priorities in tandem. On the M&A front, we closed a small strategic acquisition within our Campus business during the second quarter.

With regards to share repurchase, we announced plans in February 2026 to further accelerate the pace of our share buybacks and target $75 million of our common stock over 12 months. In the second quarter, we repurchased $20.9 million of our common stock, bringing our year-to-date total to $44.9 million. We now have 8.3 million shares remaining under our share repurchase authorization.

With that, we will conclude our opening remarks and open up the call for Q&A.

[Operator Instructions] Your first question comes from the line of A.J. Rice with UBS.

Just thought I'd ask about looking at the top line performance that you're expecting for the back half of the year, it sounds like modest growth in the third quarter and then maybe an acceleration in the fourth quarter. Can you comment on what you're seeing in terms of new business opportunities, housekeeping versus dining, cross-selling versus new customer builds? And is, I guess, the gating factor, the demand on the part of the clients? Or is it your ability to get managers to take on new business?

A.J., thank you for the question. I would start with the fact that the demand for the services remains as strong as ever. We have a robust and growing pipeline of new business opportunities that are at various stages of development. But that pipeline is managed in a highly structured sales process from cultivation through closing. So we have significant visibility into that pipeline.

We also continue to execute on the organic growth strategy by developing management candidates to fund new business opportunities, all the while retaining greater than 90% of our base business. I know we've talked about this in previous conversations, but the key driver for us in delivering mid-single-digit growth, either at the higher end or the lower end of the range in any given year is timing. The timing of HCSG management capacity and then the timing of client start date preference. And timing can be fluid quarter-to-quarter, knowing there's always going to be a subset of intra-quarter opportunities that may be pushed out or pulled forward depending on those key drivers.

I would also add that, that timing dynamic applies to our corporate development efforts as well. Over the past couple of years, we have put forth significant effort in building a pipeline of strategic acquisition opportunities that align with our long-term vision, our strategic plan and perhaps most importantly, our culture. And we continue to cultivate those opportunities, and we remain excited about the future growth opportunities they'll provide. So more than anything else, what gives us conviction and confidence in that back half of the year ramp is grounded in the robustness of our collective pipelines and then our assessment of the timing considerations I highlighted.

I think specifically to the segments you mentioned, our new business pipeline is split fairly evenly between EVS and dietary, although from a revenue contribution perspective, a dietary account is typically 2x that of an EVS account on a same-store basis. So even if we're onboarding a comparable number of accounts, dietary and EVS revenue would increase proportionately. And just as a reminder, we're just still 50% or so penetrated in dietary services within EVS, the EVS customer base. So that cross-sell opportunity remains the ultimate low-hanging fruit from a growth perspective.

Okay. Great. And then maybe just a follow-up question. I know your costs are getting passed through, but I'm just curious, have you seen any change in underlying hourly wage rates versus the trajectory you've been on? And how about any comment on food inflation?

Yes. A.J., I'd say the CPI food at home inflation for the second quarter did step up to 1%. So that was actually the first sequential quarter-to-quarter increase that we've seen after 3 consecutive sequential quarterly step-downs going back to the third quarter of last year. So certainly, continue to keep an eye on that. And then on the wage side, we're seeing ongoing stabilization and then improvement within the labor market. And certainly, we're -- that's manifesting itself in our ability to both hire and ultimately retain employees as well.

Specific to the BLS ECI data, those Q2 data won't be released until next week. But we did see a nice downward trend in the wage inflation through the full year of 2025. And one of the trends we've seen more recently is that the first quarters in the past several years have had the highest wage inflation. So the data showed an uptick sequentially in Q1 to 1.1%. And we'll certainly keep an eye on what those Q2 print data look like. But ultimately, to bring it all home, I would just remind everyone that whatever the data show, and certainly, we're acting as stewards on behalf of our clients to mitigate any and all exposure to food inflation, wage inflation. But ultimately, in as much as we experience those cost increases, we do have contractual rights to pass through both food and wage inflationary increases to our clients.

Your next question comes from the line of Sean Dodge with BMO. .

Maybe just staying on the cost for a moment. Your COGS in the quarter came in well below your 86% target. Matt, I think you mentioned cost control and lower bad debt contributing to that. Just any more color you can give on the bad debt piece, how much did that benefit in the quarter? And I know you said longer term managing to 86%, but just how we should think about kind of, I don't know, cadence or how that looks over the back half of the year?

Yes. So as Matt mentioned in his opening remarks, cost of services benefited from strong service execution and lower bad debt expense. Those were the key contributors for making this quarter come out the way it did. With respect to bad debt, the bad debt expense for the quarter was $4.3 million, which is relatively flat versus where we were last quarter, which was $3.8 million. And when you think about where that number stacks up compared to our historical average, historically, we've been about 1% to 1.5% of revenue.

The last 2 quarters have been less than 1%. So that is definitely favorable with respect to our cost of sales outcome. And it's a result of our collections initiatives, the contract enhancements, and that is contributing several millions of dollars versus the historical norm. The other aspect here is just service execution, which is the primary reason why we continue to deliver the kind of results we do. I know we briefly talked about the cost backdrop with respect to food prices and wages. But as you think about what we are experiencing there is, to date, we've seen minimal direct impact from higher food supply or material costs flowing through our invoices. And that is continuing to benefit our cost of sales.

I know there is chatter around what's happening in the broader economy, and we do operate within the broader economy. So we are not completely immune from inflationary pressures, but we've done a pretty good job of mitigating those pressures and not seeing a direct impact in our cost of sourcing, whether it's food or material costs, where we've seen some anecdotal evidence of inflation is in elements like discretionary spending like travel. But again, those elements are a small percentage -- insignificant percentage of our cost base and the fact that we've continued to execute on the bigger sourcing items, along with the bad debt piece have definitely benefited us.

The one factor we've talked about in the past, which was not really material this quarter is the benefit we tend to accrue from workers' comp and general liability. That number was in excess of $4.5 million in Q1. That number has come down. It's a much smaller number this quarter. It's $1.3 million benefit. And again, as we've said about that number in the past, that number can be lumpy. It could be lower or absent in the subsequent quarters. So from our perspective, the outperformance this quarter is really dependent on service execution and the bad debt piece.

Okay. Great. And then just on cash from operations, yet another great quarter there. How should we be thinking about that for the year? I guess, in context of your other targets for revenue growth that you gave, the margins that you supplied, how should we think about kind of overall the outlook for cash from operations with or without the payroll accruals. And then the ERC payments, are there any more of those out on the horizon? Or are those pretty much done now?

So starting with the ERC receipts, we got a few receipts last year across Q1, Q2 and Q3. We did not get any receipts in Q4 of '25. And year-to-date, we've received no further receipts on that end. That said, some of our claims are still pending, but the timing of those is very uncertain, and there is no way to figure out when the next payment will come through if it does come through. So we are not seeing any benefit in our cash flows from ERC this year, and we're not building that into how we think about the business and the liquidity go forward.

In terms of thinking about cash flows for the rest of the year and what that will look like, I think from our perspective, the modeling continues to hinge upon the overall guidance we give on our cost structure, which is cost of sales at 86%, SG&A in the short term at 9.5% to 10.5%, so call it 10% at the midpoint, which leads you to a 4% pretax margin add back 1.5% for D&A and stock-based comp if you're doing EBITDA math. But ultimately, net income derived on that math is the best proxy for cash flows from our perspective. Now as you can imagine, Sean, there will be quarters where we outperform or underperform that broad metric, but we've seen historically that proxy tends to work really well for us.

Okay. Great. Congratulations on the quarter.

Your next question comes from the line of Andy Wittmann with Baird.

Sorry, Vikas, I wanted to just dig in a little bit more on the comments that you had on insurance to understand the quarter better. I think I heard you say that the first quarter benefit was $4.5 million. That was actually a benefit. That wasn't the year-over-year delta. That was actually a benefit last quarter. And did I hear you say that you had a $1.1 million benefit this year? Again, I wanted to confirm that, that was the actual benefit from the actuarial review rather than the year-over-year change. Is that right?

Correct. So I was talking about the benefit numbers. The benefit this quarter is $1.3 million. And you're right, the benefit in Q1 was in excess of $4.5 million. And from our perspective, the number coming down is just a reflection of the actual estimates getting closer and closer to a steady state. I think we've talked about the dynamic there that when we set up the captive self-insurance entity, we had put in reserves which were on the conservative side.

And as we've gathered more data over the last decade, we've enhanced our best practices around educating our workforce, keeping them incident-free. We've seen some benefits accrue from those reserves. And our expectation is over a period of time, that benefit will have a soft landing and tend towards 0. Now there will be quarters depending on the number of recent claims and the severity of those claims that the number may bounce up or down. But our ultimate goal would be to take this benefit down to 0 and create a steady state such that the expenses we associate with our self-insurance are completely in line with the payouts we make over time.

Yes. Okay. I think that makes sense. I want to just ask one more clarifying question and this one for my benefit, and I think the benefit of everyone. This is the actuarial review accounting true-up that you're talking about for the benefit. I mean there are -- obviously, the company has general liability costs, workers' compensation costs that are actual cash costs that have to get paid out.

What I'm hearing from you is that even net of those costs, these items this quarter on a GAAP basis were positive to you. You want to get the adjustments on the actuarial side down to 0 and talk about that soft landing, but there will still be typically a cost. I want to make sure I understood that correctly. And then just maybe to sum it all up. Okay. So I got that right. Okay.

Yes.

So then for the benefit of everyone, though, maybe just one other way to asking this one. I'll just ask this, then you can address the whole thing. I just want -- this is obviously because of the actuarial adjustments and the unpredictable nature of those actuarial adjustments, this is always a little bit of a tough number for us to get at. What do you think, Vikas, is the best way for the investment community to think about modeling this? This has been a pretty big variable in the last few quarters. And I know there's not a lot you can do about it, but I thought I'd maybe give you a little bit of form as to what do you think the best guess way to think about this is.

Yes. So let me first clarify how it's set up, how it's working. And you're absolutely right. Even after attaining the steady state, we will have an expense every year. And that is the premium we are paying into our self-insurance captive entity only because we do have payouts we have to make for workers' comp, general liability and auto each year, right? So -- and what we've seen in the recent past is the premium we are putting into our captive entity has, by and large, matched the cash outflows that we've paid to settle any claims that come up.

So I think we've got that spot on that the premium we pay matches the cash outgo, give or take in any given year. The benefit we are accruing is really because of the fact that when we set up reserves for this entity going years back, we because we did not have all the historical data. It is a new entity. You start conservative, one. And two, our best practices have evolved over time such that our incident rates, both in terms of number and severity have gone down. So when we talk about this benefit coming our way, it's really a function of the actuaries looking at our data, this is an external provider, not us looking at our data. They look at our data and say your number of claims and the severity has come down, you do not need as much reserves go forward.

And as those reserves come down, we accrue this benefit. Now there will be a limit to our ability to improve our safety standards. And ultimately, there will be a steady state and this benefit coming from reduction in reserves will go away. What will stay forever is premium into the entity and the payout. With respect to modeling, it's a little challenging to precisely predict this number. Again, while we might do everything that we are supposed to, there can always be unfortunate incidents such that we see a spike up in the number of claims next quarter or our claims might go down, but the claims that do come in are more severe. And that just depends on any unfortunate incident that might happen across our very large workforce.

So predicting it has been a little bit of a challenging task. Again, we're saying that over time, it should trend down towards 0 if we get our actuarial model right. What I'll say is the best way to think about what the numbers might be would be to look at the average that has prevailed in the last few quarters. So if you go back over the span of mid-'23 to mid-'25, the average quarterly number coming our way was about $3 million. The previous 2 quarters here, Q4 of '25 and Q1 were slightly higher than that number. And now we've ended up with a number that's lower than $3 million, but $3 million has been our average going back 2 to 3 years, but we do expect that number to come down.

So look, if you had to model something, it will be hard for me to point to a number, but the range we've seen in the last 2 to 3 years is 1.5% all the way to 4.5%, call it. And I think you'll have to work with a bit of a range there in terms of how to best predict any given quarter.

I've obviously asked about this lots over the years, and that was the most comprehensive answer for it. So I appreciate that, Vikas. Ted, just on the 4Q implied ramp in your growth outlook, obviously, you're kind of guided now through the first 3 quarters and 3 or just above range, at least at this midpoint that you've got here for 3Q. To get to the midpoint, obviously, that's a big ramp in 4Q. I'm just wondering, is that because that's when the school year starts and you're expecting to take a bunch more business in that kind of upstart business on the campus side. Is that to what you can attribute the 4Q ramp? And maybe another way of asking the same question would be, do you have the start dates on the calendar already for that 4Q ramp to give you confidence to have that acceleration in 4Q.

Yes. without pointing to a specific division, whether it be the campus division or geographically a division within HCSG Healthcare, I -- the core health care market, I would point first and foremost to the pipeline, and I alluded to it in one of the previous answers, but it's a mix of -- in terms of stages of development, there's a mix of groups that are signed and started. There is a mix of groups that are signed and not yet started. And of course, there's in our lexicon high probability.

And then you look at that alongside the other components that we consider, including strategic acquisition and investment opportunities. So without pointing to a specific one, Andy, it really comes down to timing. So I talked about it earlier. Ultimately, what gives us confidence in the back half of the year ramp is the timing as we assess it within our pipelines and the composition of the groups that we're set to grow with.

Your next question comes from the line of Ryan Daniels with William Blair. .

This is Matthew Mardula on for Ryan. Is there any update on the Genesis bankruptcy? I know you have previously talked about it, but I just want to make sure we are not missing anything or we should be expecting anything in the second half from Genesis? And are you still doing business with them on a normal cadence?

We are. Overall, we continue to provide services to the Genesis facilities without disruption in operations or operational outcomes or payments, and we continue to expect that to be the case through the duration of the post-petition period. I think in terms of updates, I highlighted this previously, but in January, the bankruptcy court did approve the sale of Genesis to 101 West State Street, which is a group of well-known operators in the space with whom we have an existing relationship.

From a timing perspective, the closing of that transaction appears to be on track with an expectation that late Q3 or early Q4, it would, in fact, close. But again, in the meantime, our priority is providing quality services to the Genesis facilities, and we do not expect any disruption in operations between now and the sale date.

Great. And then given your strong cash balance, could you update us on the M&A pipeline and just overall environment that you're seeing? I understand that potential acquisitions are focused on smaller deals and on that education segment. But are you seeing more actionable opportunities today than you were maybe 6 to 12 months ago or still a more relative selective environment?

No, I think we're definitely seeing a bigger pipeline of transactions, and we have been selectively proceeding with the M&A transactions that fit our goals. So if you think about our execution last year, we did one small transaction last year. We finished one deal in Q2 of this year. Again, small deals, but we are continuing to look for further opportunities. And we do have a pipeline that is today more robust than what it was 6, 12, 18 months ago. And we feel that as we think about all our strategic priorities, organic growth, M&A and share repurchases, we want to have the elevated enhanced liquidity that shows up on our balance sheet because it is allowing us the flexibility to go after all strategic growth avenues without having to do any trade-off or offset one versus the other.

So we continue to make progress on all fronts and our balance sheet, our liquidity is letting us do it in a manner that is to our liking. So yes, the pipeline is continuing to build up, and we are prepared to execute on those opportunities with cash at hand.

Great. And then one very quick follow-up. You talked about that one deal in Q2 of this year. Kind of what impact did that have on the quarter?

So we closed this acquisition in mid-April and the revenue contribution from the acquisition, frankly, in this quarter or in subsequent quarters is insignificant given the size of the acquisition. From our perspective, it's a niche acquisition within our campus business, and it enhances our footprint and offering capabilities, frankly, in a business that is, at this point of time, 5 years old and is still ramping up. So it's more about the strategic fit than creating any day 1 top line boost for us.

Your next question comes from the line of Ryan Halsted with RBC.

Maybe just a quick follow-up on the campus services. Can you just update us on just the contribution overall of the campus services business from a top line perspective?

Yes. Ryan, we talked previously about the campus business achieving that $100 million revenue threshold in 2025, but it is still a relatively small base, less than 10% of total company revenues. And certainly, we see continued growth opportunities from that base. And we've talked about the synergies that exist between our environmental offering brand and our dining brand. Another element that I think is worth noting for purposes of this call that relative to the academic calendar year, and Sean Dodge alluded to this in his comments, but many, if not most, of our campus clients right now are schools. And obviously, we're in kind of the slowest season here in the summer as far as their operations go, although our operational teams are planning and working ahead to be ready for next year's academic year.

And one thing that we've really tried to introduce into this vertical, if you will, would be really trying to break out of the typical cyclicality of the strict academic year calendar and are really pushing for more of a year-round focus on selling and even initiating new client engagements rather than what had historically been an end market that was very rigidly cyclical. And then as Vikas noted, we are actively scanning the campus landscape to identify businesses that might be attractive acquisition targets for us, either to establish a stronger presence in a given market via a regional well-respected brand, that sort of land-and-expand strategy, if you will, or by capturing additional services that would fit neatly under that campus offering.

Great. That's helpful. And then I just wanted to follow up on the -- just the dietary segment and the cross-selling opportunity. I know that's still a big opportunity for you. Just any progress on that? Or just how are you thinking about being able to execute on that opportunity in kind of the back half of the year.

Yes, it's a great question. And I would say on the heels of the answer that I just provided, it applies in that campus offering in addition to the legacy health care, skilled nursing and long-term and post-acute care segment. So I would say that the demand for our services remains robust. And certainly, as Ted alluded to, that dining cross-sell is the ultimate low-hanging fruit for us. And as it relates to the pipeline and growth opportunities, I would call out really COVID was certainly a time that we would never want to repeat.

But if there was a silver lining, it did offer us an opportunity to really bolster the resonance of our value proposition within our respective end markets, and that applies both to our dining offering and our environmental services offering. It really offered an opportunity to reintroduce the company and our services to the market and remind folks of the myriad benefits that come with partnering with Healthcare Services Group. And that resonance has carried through today, and we continue to see inbound interest in our services and obviously, an opportunity to continue to build out that pipeline. So there is that split in the dining offering relative to health care -- I'm sorry, to the environmental services offering.

As Ted noted, there's only about 50% penetration in providing dining services within the Environmental Services customer base in long-term and post-acute care and that same cross-sell opportunity exists in campuses, where we have our Campus Services Group brand offering environmental services and Meriwether Godsey, our blue-chip premium dining offering in that space, and there's plenty of opportunities for team play and introductions and the opportunity to co-introduce and offer services within that vertical as well.

Great. And if I can just squeeze one more in. You talked about the managerial staffing opportunity. I guess, in this labor market, just curious to hear if you are -- if you're finding more success in terms of recruitment and/or retention, where do you think you're really seeing the most, I guess, progress in terms of getting the managerial candidates?

Yes. It's interesting, Ryan, if you look -- I mean, the labor market is strong and the health care sector continues to drive most of the job gains. So that's a favorable backdrop against which we are recruiting and positioning our company. If you look at BLS since 2023, education and health services super sector is how they qualify it, has accounted for more than 3 in 4 of all private sector job gains. And that growth is really powered by health care, which accounts for about 88% of that super sector's total employment.

There was another interesting analysis done by ADP that if the current trends continue, health care alone could become the largest private sector employment category in the U.S. in about 10 years. So looking specifically at nursing care facilities data, employee counts have now surpassed pre-pandemic levels, and that's definitely a marker that the industry has been watching for years now, and that was against a loss of nearly 0.25 million employees at its peak. So as Cliff Porter, the President and CEO of AHCA noted, it's not a magic number, but it certainly demonstrates the industry's resilience and recovery.

So all of that is to suggest that health care as -- within the labor market context continues to build strength and momentum. And as far as Healthcare Services Group, we're in a really good spot relative to that strength. And our wage growth has remained stable, applications are high, and that's across the spectrum of both line staff employees and for our management opportunities. Now there's always going to be markets that have specific ongoing challenges, but we're able to allocate our resources to focus and address those situations as they arise.

And the way that I would characterize ultimately, the labor market and our ability to both hire, train, develop and ultimately retain employees at both the line staff levels and that critical management training level that you noted in your question, Ryan, we would describe it as business as usual. And that's a really strong spot for us to be in, whereby the assessments and the hiring are all executed locally within our district structure. So business as usual and certainly, we look like -- we look forward to a very continued strong labor market and hiring and development opportunity and environment.

There are no further questions at this time. I will now turn the call back to Ted for closing remarks.

Okay. Great. Thank you. As we enter the back half of 2026, our 50th anniversary, the company's underlying fundamentals are more robust than ever. And with the industry at the beginning of a multi-decade demographic tailwind, we are incredibly well positioned to capitalize on the abundance of opportunities that lie ahead and deliver meaningful long-term shareholder value. So on behalf of Matt, Vikas and all of us at Healthcare Services Group, Ben, thank you for hosting the call today, and thank you, everyone, for joining.

This concludes today's call. Thank you for attending. You may now disconnect.

Thank you for standing by. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to the HCSG 2026 First Quarter Earnings Call. [Operator Instructions] Thank you.

The matters discussed on today's conference call include forward-looking statements about the business prospects of Healthcare Services Group, Inc. For Healthcare Services Group, Inc.'s most recent forward-looking statement notice, please refer to the press release issued this morning, which can be found on our website, www.hcsg.com. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties and important factors, including those discussed in the Risk Factors, MD&A and other sections of the annual report on Form 10-K and Healthcare Services Group, Inc.'s other SEC filings, and as indicated in our most recent forward-looking statements notice.

Additionally, management will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in this morning's press release.

I would now like to turn the call over to Ted Wahl, CEO. Please go ahead.

Good morning, everyone, and welcome to HCSG's First Quarter 2026 Earnings Call. With me today are Matt McKee, our Chief Communications Officer; and Vikas Singh, our Chief Financial Officer. Earlier this morning, we released our fourth (sic) [ first ] quarter results and plan on filing our 10-Q by the end of the week.

Today, in my opening remarks, I'll discuss our Q1 highlights, share our perspective on the general business environment and discuss our strategic priorities for Q2. Matt will then provide a more detailed discussion on our Q1 results, and then Vikas will provide an update on our liquidity position and capital allocation progression. We will then open up the call for Q&A.

So with that overview, I'd like to now discuss our Q1 highlights. We delivered strong first quarter results across revenue, earnings and cash flow, and we have carried that positive momentum into the second quarter. New client wins and high retention rates drove our year-over-year top line growth and our field-based team's operational excellence led to quality service outcomes and consistent margins. We also returned $24 million of capital through our share repurchase program and ended the quarter with a strong balance sheet and ROIC profile, underscoring our focus on value-creating capital deployment.

I'd like to now share our perspective on the general business environment. Industry fundamentals continue to gain strength, highlighted by the multi-decade demographic tailwind that is now beginning to work its way into the long-term and post-acute care system. In 2026, the first baby boomers will turn 80 years old. And by the year 2030, all 70 million-plus boomers will be over the age of 65, with the oldest being in their mid-80s, the primary age cohort for long-term and post-acute care utilization. We expect that the demand and opportunities for service providers in this space, especially for those with compelling value propositions, durable business models and market-leading positions to only increase in the months and years ahead.

The most recent industry operating trends remain positive as well, highlighted by steady occupancy, increasing workforce availability and a stable reimbursement environment. We remain optimistic that the administration will continue to prioritize the rationalization of regulations and policy to better align with the changing and expanding needs of our nation's most vulnerable and the provider communities we service.

Beyond our core industry trends, we are closely monitoring the broader macro landscape, including the volatility in global energy and supply markets resulting from ongoing geopolitical conflicts. Our role as financial stewards for our clients remains a nonnegotiable priority and serves as our North Star as we navigate this environment. To that end, while we have not observed direct on-invoice impact from these global events, our purchasing and procurement teams are actively monitoring the landscape and surveying our supply chain to stay ahead of any developing trends.

Fundamental to these efforts is the depth of our long-standing vendor partnerships, which provide critical visibility and stability necessary to navigate market volatility with confidence. In the event that specific supplies or food items experience outsized inflationary or cost pressure, we are prepared to pivot our sourcing strategies to mitigate direct exposure. Ultimately, the rigorous work we have done to enhance our contractual frameworks allows us to pass through unavoidable cost increases, ensuring we preserve our margins while continuing to deliver market-leading service.

Looking ahead to Q2, our top 3 strategic priorities remain driving growth by developing management candidates, converting sales pipeline opportunities and retaining our existing facility business. Managing cost through field-based operational execution and prudent spend management at the enterprise level and optimizing cash flow with increased customer payment frequency, enhanced contract terms and disciplined working capital management. We are confident that continuing to execute on our strategic priorities, supported by our robust business fundamentals will enable us to drive growth while delivering sustainable, profitable results.

So with those introductory comments, I'll turn the call over to Matt.

Thanks, Ted, and good morning, everyone. Revenue was reported at $462.8 million, a 3.4% increase over the prior year. Segment revenues and margins for Environmental Services were reported at $208.3 million and 12.1%. Segment revenues and margins for dietary services were reported at $254.5 million and 9%.

Our 2026 growth plans are oriented around mid-single-digit revenue growth with Q2 revenue in the $465 million to $475 million range and sequential revenue growth in the second half of the year compared to the first half of the year. Cost of services was reported at $386.9 million or 83.6%. Cost of services benefited from strong service execution, workers' comp and general liability efficiencies and lower bad debt expense. Our goal is to manage cost of services in the 86% range.

SG&A was reported at $42 million. After adjusting for the $1.6 million decrease in deferred compensation, SG&A was $43.6 million or 9.4%. Our goal is to manage SG&A in the 9.5% to 10.5% range based on investments that we've made and spoken about in previous quarters with the longer-term goal of managing those costs into the 8.5% to 9.5% range.

Our effective tax rate was reported at 24.6%. We expect our 2026 effective tax rate to be approximately 25%. Net income and diluted earnings per share were reported at $26.1 million and $0.37 per share.

I'd now like to turn the call over to Vikas.

Thank you, Matt, and good morning, everyone. Starting with our liquidity and cash flows. Our primary sources of liquidity are cash flow from operating activities, cash and cash equivalents and our revolving credit facility. Cash flow from operations was reported at $43.7 million. After adjusting for the $20.3 million increase in the payroll accrual, cash flow from operations was $23.4 million. We wrapped up the first quarter with cash and marketable securities of $214.6 million, and our credit facility of $300 million was undrawn with utilization limited to LCs only.

On April 7, we amended our existing credit agreement to extend the maturity of our $300 million revolving credit facility to 2031. In tandem, the SOFR-based pricing grid has been favorably modified and covenant flexibility has been enhanced.

Our capital allocation plans remain unchanged from what we outlined last year, and we are on track to execute. Our capital allocation across organic growth, M&A and share repurchases continues to be grounded in discipline and consistency. Our enhanced liquidity provides us the flexibility to pursue all of these priorities without trade-offs.

In February 2026, we announced plans to further accelerate the pace of our share buybacks and repurchase $75 million of our common stock over 12 months. In the first quarter, we repurchased $24 million of our common stock. We now have 9.2 million shares remaining under our current share repurchase authorization.

With that, we will conclude our opening remarks and open up the call for Q&A.

[Operator Instructions] And your first question comes from the line of Ryan Daniels with William Blair.

This is Matthew Mardula on for Ryan. So in your prepared remarks, you touched up on this, but I want to dive deeper into it. So we saw strong results in cost of services as a percentage of revenue being at 83.6% this quarter, better than the guidance. Was there any one-time benefits this quarter? And what exactly drove that strong performance in the first quarter? Also, as we look for the rest of the year, with you reiterating the 86% cost of services as a percentage of revenue, how should we think about the rest of the quarter given the strong Q1 performance?

Matt, this is Matt McKee. As we've previously discussed, the primary driver of managing cost of services within that targeted range and overall margin consistency for us is really service execution. And the recent positive service execution trends in customer experience, systems adherence, regulatory compliance and budget discipline, all of which are near-term margin drivers carried over into Q1. And the expectation is that, that carries forward throughout 2026 as well. So that's why we remain confident in our ability to continue to manage costs in that 86% range.

And it's worth noting, Matt, that service execution is not something that happens on autopilot, right? There are no elements of it that are given. Our field-based management teams are working very diligently to deliver on our expectations, and they deserve a lot of credit for that execution. So that said, there are always going to be some movement month-to-month, quarter-to-quarter and the timing of certain items can have a positive impact, and that was the case in Q1 results as well in that work comp and general liability efficiencies continue to be driven by our focus and commitment to training and safety protocol that we've implemented in the facilities and lower bad debt expense. That's been favorably impacted by our strong cash collection efforts and the scarcity of bankruptcies or reorgs during Q1.

Yes. And Matt, this is Vikas. If you want to unpack the outperformance in different buckets, what we would say is, look, we've outperformed the 86% by, call it, 2%. Out of that, 1% is coming from workers' comp and general liability. Those efficiencies contributed about $4.7 million to the favorable cost of sales outcome for the quarter. Now while that reflects the ongoing efforts that Matt just talked about, what I would remind you is that this impact can be lumpy. And the fact that we got that number in one quarter may not necessarily lead to similar benefits in subsequent quarters because that benefit is based on the frequency and the size of claims. It's based on the insurance and actuarial model.

And while it's indicative of how we've been performing, it does not guarantee similar repeat performances in subsequent quarters. So that's about 1% of that 2% outperformance. I would say the remaining outperformance this quarter, as Matt has already alluded to, came from bad debt and service execution. On the bad debt front, you'll see this number in the Q that we'll file later this week, but that number for the quarter is $3.8 million. That's less than 1% of revenue.

If you look at where we've been in the recent past, we've been at 2% plus. If you look at a more normalized historical average, we are between 1% to 1.5%. So it's really those two factors plus the operational excellence that's driving the number this quarter. But that said, we still feel that 86% is the right way to go because these events, while favorable, can be lumpy and are not guaranteed to be repeated in subsequent quarters, although we'll try our best to do what we can. But I think it takes us back to 86% being the goal and the target for us.

Great. That's extremely helpful. Now how has the development of managerial candidates trended recently? And with the continued addition of new clients this quarter and with expectations of that continuing in the upcoming quarters, how are you planning to be able to keep pace with having enough managerial candidates? And I know it probably varies by region, but any updates on growth and I'm ensuring you have enough manager candidates would be great to hear about.

Yes, that's exactly right, Matt. The benefit that we have is that our expectations relative to management development are all grounded in the localized efforts within not only our regions, but more specifically down to the district level, where we have our 12 facility districts and the expectation is that each district will be executing their own management development efforts through their certified training facilities. So the expectation is that the recruiting efforts, the hiring, the training, the development, ultimately, the retention and placement of those management candidates is very much an exercise that's executed within that district structure. So it's very much those bottoms-up ground-up efforts that aggregate to total company top line growth opportunities. And it is that marriage of management development with business development, but again, executed locally that when it's rolled up and executed properly, yields that mid-single-digit growth for the company.

Correctly noted as well, Matt, in the way that you asked the question is that, of course, there are regional variabilities, whether that's a market dynamic or it's simply a management issue. Some folks are further ahead of that curve. Others will struggle because, of course, we don't compromise our standards relative to service execution and performance per our previous comments relative to cost of services if there is a local team that's not executing on client satisfaction, delivering that customer experience, adhering to our operational systems, delivering regulatory compliance and, of course, executing with budget discipline as stewards -- financial stewards for our clients, we won't let them grow the business in their area. They have to demonstrate that they're capable of appropriately managing their business in their current portfolio before we'll allow them to grow.

So there will always be problem children, and that's the beauty of having invested in that middle management structure is that, number one, we can quickly identify areas of concern and some folks who may need extra attention and then quickly be able to insert those management resources, appropriately reskill, train, develop those managers such that they can get back on track and then reengage into that critical focus for us, which would be management development, very much tied to business development efforts. But when you roll it all up when we look at that landscape right now, Matt, we're very pleased with where we are, and we don't have any limitations or obstacles relative to achieving total company growth objectives in light of the strong environment relative to management development.

Your next question comes from the line of A.J. Rice with UBS.

This is James on for A.J. First of all, congrats on the strong start to the year. Could you potentially give us an update on how the campus segment did in terms of year-over-year growth? And then I think you've also expressed interest around potentially exploring more M&A opportunities, particularly potentially in campus. And maybe just an update on the capital deployment as it relates to M&A.

Yes. James, as we discussed last quarter, the campus business represents over $100 million of annualized revenue in 2025 and still a relatively small base at less than 10% of total company revenues, but we do see continued growth of that base. We're not going to report or call out specific growth in that segment at this point. But we've mentioned the synergies that exist between the environmental offering or the brand that we're executing for environmental services and our dining brand and those offerings. So as we sit here, if you think about the academic calendar, as many, if not most, of our campus clients right now are schools, we're in the selling season, right, as administrators begin to plot out their plans for the end of this academic year, the summer and then thinking ahead to next year's academic year. So from a business development and a pipeline development perspective, those folks are very much in the thick of orienting towards growth objectives from an organic perspective. And perhaps Vikas would make a comment or two just as far as how the inorganic opportunities could potentially supplement that in the campus opportunity.

Yes. And as we've talked about, we remain focused on building that M&A pipeline. We continue to evaluate incremental opportunities every quarter. And as I said earlier, our approach will continue to be grounded in discipline and consistency. And we are looking for deals that will be small, $20 million, $25 million, $30 million of purchase price such that while they look and feel like inorganic growth on day 1, they serve as an organic growth platform on day 2, so more of a land and expand. So we are busy looking at opportunities and evaluating the right fit that we will move forward with over the course of the year, but that continues to be an ongoing focus area for us.

Got it. Appreciate the color there. Maybe just one more on adjusted EBITDA, it was a really strong quarter at almost $39 million. I know you don't guide to that, and I appreciate some of the comments around the benefits you saw the cost of services this quarter. But is there any directional color you can give us with the starting point of $39 million just on seasonality considerations or how to consider or view that from a quarter-to-quarter basis from here?

Yes. You're right. Look, we've not been getting into projecting out EBITDA. But as we've mentioned in the past, the model remains very consistent and in some ways, easy to understand, which is, from our perspective, 86% cost of sales, SG&A short-term target of 9.5% to 10.5%, so call it 10% at the midpoint. And we've got a 25% tax rate, right? That puts you in the ZIP code of 4% pretax income. Our stock-based compensation and D&A typically runs at about 1.5%. I think that's the best we can do in terms of providing you a sense of where it will be. Now this quarter, EBITDA was strong, as we talked about. The results, cost of sales came out more favorable than the 86%. SG&A came out more favorable than the 10%. That said, that's not what we are projecting as the overall year outcome. So I'll let you project out EBITDA within those metrics, and there will be quarters where we do better than those and maybe not. But I think if you look at how we look at the business on an annual or a 3- to 5-year growth trajectory basis, those are the metrics that we are holding ourselves accountable to.

Your next question comes from the line of Sean Dodge with BMO Capital Markets.

Maybe just going back to the cost of services, Vikas, you mentioned the benefits in the quarter from workers' comp, general liability, bad debt. I know you've also been working on some initiatives aimed at improving engagement with employees at the hourly level and using that to improve retention and lower turnover. Maybe if you could just share some more on what specifically you're doing there? And then any impact you've seen from that yet on margins and maybe how much runway is left from initiatives like that, that have a little bit more kind of durability over the long term?

Yes. Sean, I would say, without a doubt, that continues to be an area of focus for us engaging with our employees at every level within the organization, right? It's a newer area of focus for us to identify with and engage with our line staff employees who historically, we would have thought associated more with the facility rather than with Healthcare Services Group. But as we've formalized and really kind of adopted as a North Star, our company's purpose, our vision and our values in order for us to achieve all of those, we have to have high levels of buy-in and engagement with the employees throughout the continuum.

And as you can imagine, being a service-based sort of decentralized organization with the bulk of our employees executing those line staff level positions such as housekeepers and pot washers and dishwashers, food service employees, it is rather challenging to communicate with them. They're not users of e-mail, and we have limited opportunities to connect with them. So we have really explored and identified creative ways to connect with them via company intranet, establishing a proprietary app technology through which we can communicate with folks leveraging our time clocks to be able to push messages to our employees and to better understand where they are in their company experience and journey such that we can really connect with them and drive improved connectivity and outcomes.

So qualitatively, without a doubt, we are seeing improved connectivity, higher levels of employee satisfaction. And from a quantitative perspective, Sean, harder to pinpoint it running through cost of services explicitly. But without a doubt, we are seeing improvement in employee retention as a result of those levels of engagement and ultimately satisfaction. So obviously, that yields greater operational outcomes by way of the customer experience, having longer-term employees in the facility. It reduces the management's requirement to be out there conducting interviews and trying to hire and replace employees who are turning over. So there's a cascade of benefits that come from that, some of which are qualitative, but without a doubt, quantitatively yielding improved employee retention data.

Okay. Great. And then on the revenue outlook, your guidance for the first half of the year implies kind of low single-digit year-on-year growth. I guess the mid-singles for the full year means you got to do something kind of like high singles year-over-year for the back half. Just anything on what's driving that? Is it just simply implementing more facilities over the year and those kind of ramping? And then just any more color on how much is coming from new clients on the housekeeping side versus dining cross-sells?

Thank you for the question, Sean. Look, I would start with the fact that the demand for our services is stronger than it's ever been. You look at our pipeline, it's robust. It's growing in terms of new business opportunities, each of which are at various stages of development, but we have a highly managed sales -- highly managed and structured sales process from the beginning stages of cultivation all the way through closing. So I think that bodes well for future, not just over the next 6 to 12 months, but beyond. And we continue in the current year to successfully execute on the organic growth strategy by developing management candidates, as Matt highlighted, that fund new business opportunities, all while retaining our base business.

To the question you asked, the key drivers for us in delivering mid-single-digit growth at either the higher end of the range like we saw in 2025 or even the lower end of the range like we saw this past quarter is timing. It's the timing of HCSG management capacity and the timing of client start date preference. And I know we've talked about this before, but timing can be fluid quarter-to-quarter, knowing there's always going to be a subset of intra-quarter opportunities that may be pushed out or pulled forward depending on those two key drivers. And to help put that dynamic in perspective or context, the difference between us starting a new opportunity on April 1 as opposed to September 1 is insignificant in the context of the 3- to 5-year growth outlook we put forth, but could be impactful in a given quarter or even in a year depending on the size and scale of the opportunity. So again, our 2026 growth outlook is a range that's based on annual growth expectations, whereas the quarter-to-quarter estimates are really intended to provide additional near-term visibility.

In terms of the segment breakdown, our new business pipeline is split fairly evenly between EVS and dietary, although from a revenue contribution perspective, a dietary account is typically 2x or so of that of an EVS account on a same-store basis. So as we're onboarding a comparable number of facilities, dietary and EVS revenue will increase proportionately. And just as a reminder for you and for the group, we're still 50% or so penetrated in dietary services. So you have the remainder of that to pursue relative to our EVS customer base. So that cross-selling of dietary to our existing EVS customer base remains that ultimate low-hanging fruit.

Okay. And then just last on Genesis. Any updates you can share there? Are you still providing services to them? And then just any better visibility you have at this point into where those facilities end up kind of from an operator standpoint?

Yes, continuing to provide services to the Genesis facilities without operational or payment disruption. And we continue to expect that to be the case throughout the duration of the post-petition period. In terms of updates, in January, the bankruptcy court did approve the sale of Genesis to 101 West State Street, which is a group of well-organized, well-known operators in the space who we have a relationship with. From a timing perspective, those revised bid procedures from the second auction called for a late April financing commitment letter. So that process is unfolding as we speak. And then an early summer close, although from a practical standpoint, I think there's a strong belief that, that will likely be pushed out. I know there's an option at either the buyer or the seller, purchaser or the debtor to exercise that option. So we're likely looking at a closing date later in the summer, assuming 101 West State Street can provide that financing commitment. But again, in the meantime, our priority is providing the high-quality services to Genesis, and we don't expect any disruption in operations or payment between now and the sale date.

Your next question comes from the line of Ryan Halsted with RBC Capital Markets.

I guess I know you mentioned that the industry fundamentals remain strong. But I was curious if you had seen any shift or any change in the occupancy trends with your SNF customers, especially those with kind of the shorter stay Medicare residents starting in 2026. And I think just the basis of my question is one of the large managed care companies talked about increasing their clinical reviews on SNF admissions. So I was just wondering if you had any comments or visibility on kind of those trends.

Ryan, look, overall, and I mentioned it in my opening remarks, the industry fundamentals continue to gain strength and that demographic tailwind really is beginning, at least the early stages of it are working its way into the long-term and post-acute care system. So that fundamentally is a huge positive for today and for the next few decades. It's really that continued interplay that we see at the local level between staffing availability and occupancy that remains the key for any facility success. I think more than any other factor, labor availability is the key to occupancy growth and occupancy growth is the key to consistent financial outcomes. And the most recent occupancy data are positive. They continue to be in and around 80%. And what we're seeing, to your question, is really steady across not just geographies, urban, suburban, rural, but also facility types and population, long-term short stay, et cetera. So from our perspective, we haven't relative to occupancy, seen anything other than stability and generally speaking, upward trend.

Got it. That's helpful. And then you made comments about strong momentum carrying over into Q2. And looking at your guidance for the quarter, the midpoint to the low end are for low single-digit growth. Can you maybe just help to square those comments in terms of what is the momentum you're seeing and maybe how that could be swing factors into your guide?

Yes. And look, from a momentum perspective, the most significant indicator we look at is pipeline and then obviously assessing the various stages of development of that pipeline. And our pipeline continues to grow. It continues to be robust, meaning strength across all different segments and business lines, inclusive of the campus division. And that's a real positive. And so we feel good about not just the next 6 months, but the next 3 to 5 years.

From a variability perspective quarter-to-quarter, I touched on this earlier, Ryan, but it's really the timing. And it's difficult to be able to pinpoint with precision what a specific quarter will look like, not because we don't have fantastic visibility into the pipeline and the stages of development, but because it's that timing of HCSG management capacity and the timing of client start date, which can be fluid up until a scheduled or originally scheduled start date. So that is -- that's always been the case. That's not a new dynamic for HCSG or the industry for that matter. But we have an organization that's built to be highly nimble, to be able to react when we need to, be able to be proactive when we need to in those situations. So it really does come down to timing in terms of what puts us at the higher end or the lower end of that mid-single-digit range in any given quarter or in any given year.

Got it. That's very clear. Maybe just last one for me on your capital allocation priorities. You've obviously put forth a strong share repurchase authorization and have been aggressive with that so far. How should we think about how aggressive you expect to be on the repurchases, certainly as your shares further strengthen?

Yes. So from our perspective, the approach would be to maintain a more uniform cadence. And as you think about the $24 million number, not all of it this quarter falls under the program, right? If you think about the split of that $24 million because we made the announcement of our $75 million program in tandem with our Q4 earnings, that was middle of Feb. Only $15.3 million of these repurchases were made after the new program was announced. So from our perspective, we're trying to spread it out. We are not trying to front-load it. We are not trying to time the market or be selective. We want to be consistent. And I think that's the approach we'll take over the entire duration of the 12-month program.

Your last and final question comes from the line of Rohan Vasudeva with Baird.

I think most of my questions have been asked, so I'll keep this brief. But I just wanted to confirm that there was no ERC benefit to cost of sales in this quarter, correct?

That is correct. There were no ERC receipts and no ERC impact to our P&L and financial statements this quarter.

Okay. And then you briefly touched on it in the last question to keep a consistent cadence for repurchases. It looks like you'll run through your authorization or finish your authorization in about two quarters. Can we expect that you'll re-up your authorization after that? Or would you guys consider another way of returning capital to shareholders?

Yes. So Rohan, what we were doing, again, just going back to that $24 million number, as I said, $15 million and change, so to be precise, $15.3 million of those repurchases were made after the announcement of the new program in middle of Feb. So if you think about what we spent under the program, it's $15 million. You do an annualization of that, and it is under the $75 million number. The additional numbers within that $24 million were pertaining to the previous program and our regular open market repurchases. So yes, the number of $24 million seems elevated in that context. It's elevated in the context of our total repurchases last year being $61 million, but we are not trying to rush through the program by any stretch. From our perspective, we want to keep it uniform and present over the course of the year. Now if there are any reasons to accelerate down the road, we will be open to that, but that's not the intent and that's not how we will -- we've structured the program at this point of time. So we would rather be consistent than lumpy.

I will now turn the call back over to Ted Wahl for closing remarks.

Thank you. As we prepare for the remainder of 2026, our 50th anniversary, the company's underlying fundamentals are more robust than ever. Our leadership and management team, our enhanced value proposition, our business model and visibility we have into that business model, our training and learning platforms, our KPIs and key business trends and our strong balance sheet and ROIC profile. And with the industry at the beginning stages of a multi-decade demographic tailwind, we are incredibly well positioned to capitalize on the abundance of opportunities that lie ahead and deliver meaningful long-term shareholder value.

So on behalf of Matt, Vikas and all of us at Healthcare Services Group, thank you, Rebecca, for hosting the call today, and thank you, everyone, for joining.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Thank you for standing by, and welcome to the Healthcare Services Group, Inc.'s Fourth Quarter 2025 Earnings Conference Call. The matters discussed on today's conference call include forward-looking statements about the business prospects of Healthcare Services Group Inc.

For Healthcare Services Group, Inc.'s most recent forward-looking statement notice, please refer to the press release issued this morning, which can be found on our website, www.hcsg.com.

Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties and important factors, including those discussed in the risk factors, MD&A and other sections of the annual report on Form 10-K and Healthcare Services Group, Inc.'s other SEC filings and as indicated in our most recent forward-looking statements notice.

Additionally, management will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in this morning's press release. [Operator Instructions] I'd now like to turn the call over to Ted Wahl, President and CEO. You may begin.

Good morning, everyone, and welcome to HCSG's Fourth Quarter 2025 Earnings Call. With me today are Matt McKee, our Chief Communications Officer; and Vikas Singh, our Chief Financial Officer.

Earlier this morning, we released our fourth quarter results and plan on filing our 10-K by the end of the week. Today, in my opening remarks, I'll discuss our 2025 highlights, share our perspective on the general business environment, discuss our strategic priorities for the year ahead and provide details on our new $75 million share repurchase plan.

Matt will then provide a more detailed discussion on our Q4 results, and then Vikas will provide an update on our more recent contract enhancements, liquidity position and capital allocation progression. We will then open up the call for Q&A.

So with that overview, I'd like to now discuss our 2025 highlights. I am extremely pleased with our fourth quarter performance, which capped a strong year for Healthcare Services Group. Against the backdrop of solid industry fundamentals, we exceeded our initial 2025 expectations for revenue, earnings and cash flow, driven by disciplined execution of our strategic priorities.

Year-over-year revenue was up over 7% with our campus division reaching a significant milestone in its growth journey, achieving over $100 million in revenue. We successfully managed cost of services and SG&A within our targeted ranges, and we generated significant free cash flow. We also returned over $60 million of capital through our share repurchase program and ended the year with a strong balance sheet and ROIC profile, underscoring our focus on value-creating capital deployment.

I'd like to now share our perspective on the general business environment. Industry fundamentals continue to gain strength, highlighted by the multi-decade demographic tailwind that is now beginning to work its way into the long-term and post-acute care system.

In 2026, the first baby boomers will turn 80 years old. And by the year 2030, all 70 million-plus boomers will be over the age of 65, with the oldest being in their mid-80s, the primary age cohort for long-term and post-acute care utilization. We expect that the demand and opportunities for service providers in this space, especially for those with compelling value propositions, durable business models and market-leading positions to only increase in the months and years ahead.

The most recent industry operating trends remain positive as well, highlighted by steady occupancy, increasing workforce availability and a stable reimbursement environment. We remain optimistic that the administration will continue to prioritize the rationalization of regulations and policy to better align with the changing and expanding needs of our nation's most vulnerable and the provider communities we service.

Looking ahead to 2026, our top 3 strategic priorities remain: driving growth by developing management candidates, converting sales pipeline opportunities and retaining our existing facility business, managing cost through field-based operational execution and prudent spend management at the enterprise level and optimizing cash flow with increased customer payment frequency, enhanced contract terms and disciplined working capital management.

We are optimistic about our trajectory and expect mid-single-digit revenue growth in the year ahead. We remain confident that continuing to execute on our strategic priorities, supported by our robust business fundamentals will enable us to drive growth, while delivering sustainable, profitable results.

Finally, in conjunction with our earnings release, we announced the completion of our $50 million 12-month share repurchase plan, 5 months ahead of schedule. We also announced plans to further accelerate the pace of our share buybacks in 2026 and intend to repurchase $75 million of our common stock over the next 12 months. Over the past few years, we have continued to strengthen our balance sheet and expect strong cash flow generation over the next 12 months and beyond.

We have demonstrated a prudent and balanced approach to capital allocation, including, first and foremost, investing in our growth initiatives. The current valuation of our shares relative to our long-term growth potential presents a compelling opportunity to return meaningful capital to shareholders through the buyback. So with those introductory comments, I'll turn the call over to Matt.

Thanks, Ted, and good morning, everyone. Revenue was reported at $466.7 million, a 6.6% increase over the prior year. Segment revenues and margins for Environmental Services were reported at $210.8 million and 12.6%. Segment revenues and margins for Dietary Services were reported at $255.9 million and 7.2%.

As far as the cadence of our 2026 growth, while we don't provide full year revenue guidance broken out by quarter, our 2026 growth plans are oriented as follows: Q1 revenue in the $460 million to $465 million range with a step-up in Q2 revenue and then sequential revenue growth in the second half of the year compared to the first half of the year, culminating in mid-single-digit revenue growth for the full year 2026.

Cost of services was recorded at $394.6 million or 84.6%. Cost of services benefited from strong service execution, workers' comp and general liability efficiencies and lower bad debt expense. Our 2026 goal is to manage the cost of services in the 86% range. SG&A was reported at $46.2 million, but after adjusting for the $0.4 million increase in deferred compensation, SG&A was $45.8 million or 9.8%.

Our 2026 goal is to manage SG&A in the 9.5% to 10.5% range based on investments that we've made and spoken about in previous quarters with the longer-term goal of managing those costs into the 8.5% to 9.5% range. The effective tax rate for the fourth quarter was reported as a 9.4% benefit and the effective tax rate for the year was reported as a 13% expense.

The effective tax rates include an $8.3 million or $0.12 per share benefit related to the treatment of certain ERC receipts recognized in the third quarter. The company, in consultation with third-party experts has determined its tax position with respect to these receipts. We expect our 2026 effective tax rate to be approximately 25%.

Net income and diluted earnings per share were reported at $31.2 million and $0.44 per share. Net income and diluted earnings per share included an $8.3 million or $0.12 per share benefit related to the tax treatment of certain ERC receipts as previously mentioned. Cash flow from operations was reported at $17.4 million. After adjusting for the $19 million decrease in the payroll accrual, cash flow from operations was $36.4 million.

I'd now like to turn the call over to Vikas.

Thank you, Matt, and good morning, everyone. Before reviewing our liquidity position and capital allocation priorities, I'll first highlight the favorable evolution of our contracts and the resulting impact on the business.

Over the past few years, we have deliberately and systematically upgraded our contracts to improve both pricing mechanics and cash flow. These changes were designed to pass through cost increases with greater certainty and speed, increase payment frequency relative to monthly collections and shift from fixed monthly billings to billings based on the number of service days, the last being a particular area of focus over the past 12 months.

As a result, we've seen several meaningful benefits, including improved margin visibility and stronger collection trends, which have contributed to lower days sales outstanding. One implication of the move to service day-based billing is that revenue is now more directly influenced by the number of days in a given quarter. While this has been largely beneficial, it has introduced a Q4 to Q1 dynamic that was not as pronounced historically.

For example, Q4 2025 had 92 service days, while Q1 2026 has 90 days. Applied to our Q4 2025 revenue base, that difference would equate to more than $10 million. Our Q1 revenue range reflects performance above what the day count dynamic alone would imply. That's fueled by sustained momentum across the business. This outlook extends our pattern of consistent year-over-year quarterly growth and reinforces our conviction in delivering full year growth in the mid-single digits for 2026.

The service day impact is not expected to be a factor in the remaining quarters of the year. Given the number of days per quarter are more evenly distributed, they're also balanced by offsetting events. So overall, while the Q4 to Q1 dynamic is a relatively recent result of contract changes that have been a strategic priority for us, we are very pleased with the overall impact these actions have had on the business and believe they position us well with a more durable and sustainable model going forward.

Our primary sources of liquidity are cash flow from operating activities, cash and cash equivalents and our revolving credit facility. We wrapped up 2025 with cash and marketable securities of $203.9 million, and our credit facility of $300 million was undrawn with utilization limited to LCs only. This strong position was driven by top line growth combined with robust collections throughout the year that enabled us to reduce our receivable balance and bring down our DSOs.

The increase in our cash position also reflects ERC receipts received during the year. However, we did not receive or recognize any ERC proceeds in the fourth quarter. Moreover, there can be no certainty regarding future receipts. On the capital allocation front, our 2026 priorities remain unchanged. We will continue to prioritize direct investments towards organic growth, strategic acquisitions and opportunistic share repurchases.

As Ted referenced earlier, we completed our $50 million share repurchase program in January 2026, well ahead of the original 12-month time line. Those share repurchases included $19.6 million of buybacks during the fourth quarter, which contributed to our $61.6 million of share repurchases in 2025.

Additionally, in February 2026, our Board of Directors authorized the repurchase of up to 10 million outstanding shares of common stock. Alongside that authorization, we announced plans to accelerate our share repurchase activity and expect to repurchase $75 million of our common stock over the next 12 months.

With that, we will conclude our opening remarks and open up the call for Q&A.

[Operator Instructions] Your first question today comes from the line of A.J. Rice from UBS.

This is James on for A.J. Maybe if I could just start with how you guys are potentially thinking about the revenue upside opportunity. I know mid-single digits you've been talking about for a while for this year. But just given the strong underlying fundamentals of the nursing home sector plus the cross-sell opportunities and also the growth opportunity in campus, just wanted to get your thoughts there.

Sure, James. Overall, we continued to successfully execute on our organic growth strategy, largely by developing management candidates, converting sales pipeline opportunities and retaining our existing facility business. That's really our growth algorithm.

Since we operate in a largely untapped market, where the demand for the services is greater than what we're capable of managing, our growth out is largely execution based. So we do, in many respects, retain control of that growth. Our pipeline is robust and growing. We have a highly structured sales process from prospecting all the way through closing and the demand for the services is as strong as ever.

So for us, as we look out over the next 12 to 18 months, James, the growth rate limiting factor is really our ability to successfully hire, develop and retain the next generation of management candidates. More than any other factor, that's going to be the catalyst for us in sustaining the new business momentum we've seen over the past year or 2 as well as related to any potential upside opportunity.

Got it. That's helpful. Maybe just one more, if I could. It looked like margins in both segments had some nice expansion. Maybe just what are your thoughts on where those could end up in 2026?

Yes. James, you're right. Certainly, we saw a nice output in margins, and obviously, that was reflected in cost of services as well. And really, that comes down to what we've talked about consistently and previously, which is the primary driver being overall service execution and the recent positive service execution trends in customer experience, systems adherence, regulatory compliance, budget discipline, all of those are near-term margin drivers, and they carried into Q4, and the expectation is that they'll carry forward into 2026 as well.

So that's why we're confident in our ability to continue managing cost of services in that 86% range. That said, there's always going to be month-to-month and quarter-to-quarter movement and the timing of certain items certainly had a positive impact on Q4 results in cost of services. And of course, that feeds through into the segment margins as well.

You think about workers' comp and general liability efficiencies that continue to be driven by our focus and commitment to training and safety protocol that have been implemented out in the facilities, lower bad debt expense, which we've noted will likely be a bit inconsistent in the near term, but is favorably impacted by the strong cash collection efforts and the scarcity of customer bankruptcies and reorgs during the quarter.

But ultimately, you bring it back and it's ultimately far outweighed by that operational execution and some of those other factors. So we've got a firm commitment to 86% as the right cost of service target. And as we mentioned, that will ultimately feed into the segment margins as well.

Your next question comes from the line of Sean Dodge from BMO Capital Markets.

Congratulations on the quarter and on the year. Ted, you mentioned campus Services reaching $100 million of revenue. How is that split between Environmental Services and the Meriwether Godsey side? And just how should we be thinking about -- you've been incubating this, you've gotten comfortable with it. Is there anything left to do there before you can really begin to accelerate and scale it? And I guess what's the time line around when we start to see campus services really become kind of a more meaningful factor in your growth?

It's split pretty evenly, Sean, between our CSG brand and the Meriwether Godsey brand you referenced. So we're pleased with that. It provides a strong platform for future growth. And the organic growth element is going to be critical for us. We continue to see accelerated organic growth in both of those brands.

And with the concentration primarily in the Northeast, Southeast through the Mid-Atlantic and the beginning stages of a Midwest expansion, that will be, we anticipate, fueled over the next 12 to 18 months by very strategic, very intentional M&A to be able to land and expand. So to find those brands that we've talked about before that meet our criteria in a specific market, complement the growth strategy that we've laid out and then organically grow those brands with the support and the supplementation from the home office here.

So we're very well positioned. That milestone is a critical milestone as we think about it, reinforces our conviction in the model and the niche we've carved out. So we're expecting continued accelerated growth in the year ahead. And then beyond, really the possibilities are very compelling and powerful.

Okay. And then on cash from operations, you had a great performance in 2025, even after you strip out the ERC payments. How should we be thinking about cash from ops trajectory for 2026? You said mid-single revenue growth, you gave some margin targets. You've talked before about cash from ops approximating net income. Is that still kind of the message, the expectation for 2026?

Yes, Sean, that's spot on. I think our expectation continues to be that net income is the best proxy for cash flow from operations, excluding the change in payroll accrual. And again, I think it goes back to the indication we are suggesting for the year to follow, which is mid-single-digit revenue growth, margins consistent with what we've said in the past, which is 86% cost of sales. 10% SG&A at the midpoint of our short-term target range and an effective tax rate of, give or take, 25%, which is what we've done historically and overall collections matching revenue. And that leads to an outcome, where net income will be the best proxy for what our cash flows will be going forward.

Okay. And then just last on the buyback, the plan to purchase or repurchase $75 million of stock over the next 12 months. Maybe just balancing that against the M&A opportunity, buying back that amount of stock, how much does that or how much room does that give you to still do M&A?

Yes. So Sean, what we've done over the last few quarters is prime our balance sheet for all our capital allocation priorities. So you would see in 2025, we've gone through the year without drawing on our line of credit. We've built up our cash balance, and now we are sitting at a balance of $200 million plus in terms of securities and cash, which is substantial.

We have an undrawn line of credit. And as we think about all the priorities, focusing on organic growth, M&A, share buyback, we feel very comfortable with our liquidity position and feel confident and comfortable that we can go after all the 3 priorities without having to worry about liquidity. I think we've put our balance sheet in a spot where all those priorities can be moved forward without one compromising the other.

Now that said, if we ever find ourselves in the happy spot of finding a substantial M&A, the line of credit gives us a lot of cushion. So long way of saying that we don't really see a conflict between the priorities and our liquidity.

Your next question comes from the line of Ryan Daniels from William Blair.

This is Matthew Mardula on for Ryan Daniels. And I know new business adds were a large part of the growth in 2025. But when thinking about the setup for this year, do you believe or maybe even anticipate an even larger amount of new businesses added throughout the year?

And I know the timing of new businesses can vary between even months or quarters. But given the improvement in the industry and the potential of continuing, any color into how you are thinking about new business adds and the drivers of that throughout this year?

Sure, Matthew. We highlighted that in 2026, we're expecting mid-single-digit revenue growth along the lines of the cadence that Matt described in his opening remarks, and you referenced timing, but as always is the case, the timing of new business adds is a factor, and that can be fluid quarter-to-quarter, knowing there's always a subset of opportunities intra-quarter that could be pushed out or pulled forward.

You think about the difference between starting a new opportunity on March 1 as opposed to April 1, maybe insignificant on a year-over-year basis, but that could be meaningful to a given quarter. Again, that's why our mid-single-digit guidance is really based off annual growth expectations, whereas our quarter-to-quarter estimates are ranges that are intended to provide that additional near-term visibility.

So again, in terms of driving that organic growth, I referenced it earlier, but our growth algorithm is very straightforward. It's execution-based. And with the pipeline that we've built, which is robust and the retention trends that we're seeing in that 90% plus range, the key for us in driving organic growth is going to be executing on that management development strategy, hiring, developing, retaining and then making sure that there's balance throughout the organization.

Each of those components I referenced is supported by best-in-class leadership, systems, procedures in each of the divisions as well as the service center providing administrative support here, but the execution is region by region, area by area. And we're more convinced than ever that the decentralized approach puts us in the best position to -- in a very bottoms-up type of way, deliver on that mid-single-digit growth expectation certainly over the next 12 months, but perhaps most importantly, over the next 3 to 5 years as we think about the longer-term outlook.

Got it. And then how have the services you have performed in the skilled nursing facilities compared to the other facilities you have performed at this year? Were just all types of facilities performing better than expectations? Or are there any certain ones performing better than others that need to call out from last year?

And then also just kind of looking ahead to 2026, do you expect similar trends to persist or any changes in growth regarding facility types, especially with any color with the skilled nursing facilities?

Yes. I would say, Matthew, from the previous comments that I made with respect to the strong performance in cost of services and the impact that, that's had on gross margin, our service execution across really all service segments and customer types, inclusive of facility types remained remarkably consistent throughout the course of 2025.

That's absolutely our expectation going forward in 2026 as well. We certainly don't take that for granted. There's a heck of a lot of effort that goes into implementing our systems and most importantly, adhering to our systems at the facility level to not only deliver relative to budget and to deliver the margin and cost of services that we're anticipating.

But more importantly, to do so within a framework that allows for a high degree of operational execution, client satisfaction and all of those other really important elements that are critical to our success at the facility level. So really strong performance across all verticals and segments, and the expectation is absolutely that, that continues throughout the course of 2026 and beyond as well.

And we have reached the end of our question-and-answer session. I will now turn the call back over to Ted Wahl for closing remarks.

Okay. Great. Thank you, Rob. As we enter 2026, our 50th anniversary, the company's underlying fundamentals are more robust than ever. Our leadership and management team, our enhanced value proposition, our business model and the visibility we have into that model, our training and learning platforms, our KPIs and key business trends and our strong balance sheet.

And with the industry at the beginning of a multi-decade demographic tailwind, we are incredibly well positioned to capitalize on the abundance of opportunities that lie ahead and deliver meaningful long-term shareholder value. So on behalf of Matt, Vikas and all of us at Healthcare Services Group, Rob, thank you for hosting the call today, and thank you again, everyone, for participating.

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Hello, and welcome to the HCSG 2025 Third Quarter Earnings Call. The matters discussed on today's conference call include forward-looking statements about the business prospects of Healthcare Services Group, Inc. For Healthcare Services Group Inc.'s most recent forward-looking statement notice, please refer to the press release issued this morning, which can be found on our website, www.hcsg.com.

Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties and important factors, including those discussed in the risk factors, MD&A and other sections of the annual report on Form 10-K and Healthcare Services Group, Inc., other SEC filings and is indicated in our most recent forward-looking statements notice. Additionally, management will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in this morning's press release.

I would now like to turn the conference over to Ted Wahl, CEO. You may begin.

Good morning, everyone, and welcome to HCSG's Third Quarter 2025 Earnings Call. With me today are Matt McKee, our Chief Communications Officer; and Vikas Singh, our Chief Financial Officer. Earlier this morning, we released our third quarter results and plan on filing our 10-Q by the end of the week.

Today, in my opening remarks, I'll discuss our Q3 highlights, share our perspective on the overall business environment and discuss our strategic priorities for Q4. Matt will then provide a more detailed discussion on our Q3 results and Vikas will provide an update on our balance sheet and capital allocation progression. We will then open up the call for Q&A. So with that overview, I'd like to now discuss our Q3 highlights.

We delivered strong third quarter results marked by year-over-year and sequential increases in revenue, earnings and cash flow, and we have carried that positive momentum into the fourth quarter. New client wins and high retention rates drove our top line growth and our field-based teams operational excellence led to quality service outcomes and consistent margins. Cash collection trends remain positive and our balance sheet is strong.

I'd now like to share our perspective on the overall business environment. Current headlines are shaped bipartisan discourse regarding the government shutdown and speculation about the potential impacts of the ABA. However, mandatory spending programs like Medicare and Medicaid remain insulated from the federal shutdown disruption and the foundational benefits of the ABA for the industry, specifically the exemption from provider tax cuts, the elimination of the minimum staffing requirement and the $50 billion World Health Transformation fund remain intact.

So while these headlines may generate sentiments of economic uncertainty, the underlying fundamentals of our core market of long-term and post-acute care continue to gain strength highlighted by the multi-decade demographic tailwind that is now beginning to work its way into the system.

The most recent operating trends are positive as well, evidenced by steady occupancy, increasing workforce availability and a stable reimbursement environment. Looking ahead, we are optimistic that the administration and Congress will continue to prioritize the changing and expanding needs of our nation's most vulnerable with a shared focus on the modernization and rationalization of regulations and the potential for policy that better aligns with the operational realities of the industry and provider community we service.

As we enter Q4, our top 3 strategic priorities remain: driving growth, by developing management candidates, converting sales pipeline opportunities and retaining our existing facility business, managing costs through field-based operational execution and prudent spend management at the enterprise level and optimizing cash flow with increased customer payment frequency, enhanced contract terms and disciplined working capital management. We are confident that continuing to execute on our strategic priorities, supported by our robust business fundamentals will enable us to drive growth while delivering sustainable profitable results.

So with those introductory comments, I'll turn the call over to Matt for a more detailed discussion on the quarter.

Thanks, Ted, and good morning, everyone. Revenue was reported at $464.3 million, an 8.5% increase over the prior year. Segment revenues for Environmental was reported at $211.8 million, Dietary Services was reported at $252.5 million. We estimate Q4 revenue in the range of $460 million to $470 million. Cost of services was reported at $367.9 million or 79.2%. The cost of services includes a benefit of $34.2 million or 7.4%, primarily related to the ERC. That's partially offset by the previously announced Genesis charge of $2.7 million or 60 basis points. So when you combine those 2 items, cost of services includes a $31.5 million or 6.8% benefit, and our goal is to manage cost of services in the 86% range.

SG&A was reported at $50.5 million after adjusting for the $3.7 million increase in deferred compensation, SG&A was $46.8 million or 10.1%. And SG&A includes $2.1 million or 50 basis points of professional fees related to the ERC. We expect to manage SG&A in the 9.5% to 10.5% range in the near term based on investments that we've made and spoken about in previous quarters, with the longer-term goal of managing those costs into the 8.5% to 9.5% range.

Segment margins for environmental and dining services were reported at 10.7% and 5.1%, respectively. Segment margin for Environmental Services included $1.2 million or 60 basis points related to the previously announced Genesis charge. The segment margins for the Dietary Services includes $1.5 million or 60 basis points related to the previously announced Genesis charge.

Other income was reported at $11.4 million after adjusting for the $3.7 million increase in deferred compensation, other income was $7.7 million and other income includes $5.3 million of interest income related to the ERC. Net income and diluted earnings per share were reported at $43 million and $0.59 per share. Diluted earnings per share includes a $0.39 benefit primarily related to the ERC, again, partially offset by the previously announced Genesis charge of $0.03 per share. So all told, diluted earnings per share includes a $0.36 per share benefit.

Cash flow from operations was reported at $71.3 million. After adjusting for the $15.8 million decrease in the payroll accrual, cash flow from operations was $87.1 million. Cash flow from operations includes a $31.8 million benefit related to ERC.

I'd now like to turn the call over to Vikas for a discussion on our balance sheet and capital allocation progression.

Thank you, Matt, and good morning, everyone. We ended the third quarter with cash and marketable securities of $207.5 million and an undrawn credit facility with utilization limited to LCs only. The strength in our balance sheet and liquidity position have been driven by 2 significant trends this year.

First and foremost is sustained collections in the current quarter as well as the last few quarters. Secondly, during the quarter, the company received $31.8 million in ERC receipts. Year-to-date, this amount stands at $51.8 million. There were no such receipts in 2024. As Matt referenced in his remarks, this quarter, the company recognized $34.2 million of ERC receipts within cost of services and $5.3 million of interest income within investment and other income.

We have also incurred $2.1 million of incremental expenses within SG&A associated with ERC related professional fees that are paid on a contingent basis. Recognition of ERC receipts on the income statement is contingent upon what time period the receipts pertain to. As a result, we continue to record deferred ERC liability of $12.3 million within other accrued expenses and current liabilities on the balance sheet related to the quarter ended September 30, 2021.

Future ERC receipts will either be recognized on the income statement or recorded as a liability on the balance sheet based on the historical time period they pertain to. Future ERC receipts for Q3 2021 will be recorded on the balance sheet, whereas all prior periods from Q1 2020 through Q2 2021 will flow through the income statement.

On the capital allocation front, our priorities are to direct investment towards organic growth, strategic acquisitions and opportunistic share repurchases. During the third quarter, we repurchased $27.3 million of our common stock. This takes our year-to-date buybacks to $42 million. Third quarter purchases were made under the share repurchase plan we announced in July in conjunction with our Q2 earnings. This $50 million share repurchase plan is valid through June 2026 and is intended to accelerate the pace of our share buybacks. We have 3.1 million shares remaining under the February 2023 share repurchase authorization for 7.5 million shares. And while there were no completed acquisitions in the quarter, we continue to actively evaluate M&A opportunities.

With that, we will conclude our opening remarks and open up the call for Q&A.

[Operator Instructions] Your first question comes from A.J. Rice of UBS.

I just maybe have just expand a little bit on the pipeline of new client wins, what you're seeing now and how you see that progressing as you look ahead into 2026? Is it mostly going to be cross-selling of existing housekeeping clients into dining? Or are you seeing a lot of opportunities for new customers completely?

A.J., I would say overall, the third quarter was our sixth consecutive sequential revenue increase and really our highest rate of growth since Q1 of 2018. So certainly, just to pause for a moment and take stock in that accomplishment, we continue to have positive momentum really across the entire spectrum of growth opportunities. We continue to successfully execute on that organic growth strategy we talked about before and emphasized at the beginning of the call with management development converting sales pipeline opportunities and retaining our existing facility business. I'd say to get to the heart of your question, the majority of that quarter-over-quarter top line growth increase was really driven by new business wins more heavily weighted towards the front end of the quarter, along with 90% and strengthening client retention rates.

I think looking ahead to Q4, we estimate revenue in that $460 million to $470 million range. And then beyond Q4 in 2025, all of our growth strategies continue to be oriented towards that mid-single-digit top line growth target. With more 2026 specific details, we expect to come as part of our fourth quarter earnings call. I think specific, A.J., to the segments you referenced, the new business pipeline is really pretty fairly evenly split between EVS and Dietary, although from a revenue contribution perspective, as you're all too familiar with the Dietary business accounts for 2x of that of an EVS account on a same-store basis.

So as we're onboarding, a comparable number of accounts, dietary and EVS revenue will both increase proportionately. And we're still 50% or so penetrated in dining. So within our EVS customer base and that cross-selling opportunity does remain the ultimate low-hanging fruit from a growth perspective as we head into the new year.

Okay. Maybe and then a follow-up question. Just update us on how education effort is trending? And I know there's a reference to continue to look at acquisitions with those principally be where you're looking or anywhere else.

Yes, A.J., this is Matt. I'll speak maybe just to sort of current state of that end market and then allow the cost to weigh in as far as pipeline and acquisition targets within that space specifically. But we're actually internally now referring to this segment of our business more generally as campuses. We feel that referring to it strictly as education is a bit limiting. So as long as it fits within our operational profile and footprint, and we're allowing for the possibility of servicing other campus-like environments that may fall outside the bounds of technically what might be considered health care or education per se. So it's a subtle shift, but we're consciously choosing those words to really empower our leadership teams operating in those adjacent markets to be really unencumbered when they're assessing new business opportunities, whether that relates to an organically generated opportunity or perhaps even inorganic targets and acquisition targets that may surface within that broader campus environment.

So still a relatively small base at less than 5% of total company revenues. But continue to see growth of that base. So at this point, we're really starting to appreciate some of the synergies that exist between our environmental offering and our dining brand offering. So we did make that conscious decision to operate under separate banners within this end market. And like I said, we're really starting to see some of the payoff in the cross-selling opportunities and the referrals that can exist between those 2 sister brands.

Yes. And A.J., on the M&A acquisition front, I would say education or as Matt characterized it our campus initiative is absolutely our #1 target in terms of acquisitions that we're going after. Obviously, we're still in the process of building out that pipeline. But as we think about the approach we'll take to M&A go forward, education is top of the list.

The next question comes from Bill Sutherland with Benchmark.

Wondering on the labor front, how things are looking? I know they're strong, Ted, you mentioned as far as the nursing home availability and increases in hiring. But from your perspective, as far as either hiring the facility managers, training them up or your people, do you see anything that might impact this ability to grow at this level or maybe even a little higher?

Yes. I would say, Bill, certainly, the labor market is strong, and the health care sector continues to lead all sectors in hiring. So there were some impressive job gains in the skilled nursing industry posted in Q1 that were ultimately revised down a bit. But year-to-date, job gains are still significantly outpacing what we saw in 2024. So as a total industry, the skilled nursing space is still about 30,000 jobs short relative to where it was pre-pandemic levels. But that's relative to a peak of almost 0.25 million jobs lost through the early stages of the pandemic.

So ultimately, those are chipping away. And the expectation is that the current levels of hiring, the industry should be at pre-pandemic levels at some point around the middle of 2026. So that certainly bodes well with respect to Ted's comments regarding the availability of staffing and the impact that, that has directly upon the opportunity for clients to admit new residents and to build census within their facility 4 walls. So ultimately, when you drill it down into the Healthcare Services Group and what it means for us, we're in a really good spot, Bill.

We've seen wage growth that has stabilized, and that's a good thing. Our applications are at record levels and continue to be high and certainly sufficient to be able to fill any job openings that we have down to the facility level and within the management ranks. There are still some markets that have ongoing challenges, but I would say that, that's back to sort of normal course where there are given markets that may creep up that have for any number of reasons, their own specific challenges, but that's the benefit of having the resources of Healthcare Services Group and that we're able to allocate resources and manpower to be able to focus and address those situations as they arrive.

So we wouldn't view the availability of labor or the hiring environment, Bill, as anything that would, in any way, hinder our growth prospects. As a matter of fact, I would flip it and say that any challenges that would be prospective clients are facing would only be bolstered via the value proposition that Healthcare Services Group brings, as I mentioned, that we are able to much better apply our resources to both hire and retain employees.

Makes sense. Ted, on the OBBA as you called it, I like that, the $50 billion is the rural health allocation, I've been reading kind of like it's very -- still very indetermined kind of where things -- where the money goes. Have you had any sense of what flows to post-acute and specifically SNF? I guess it will depend state by state.

It will vary state by state, Bill, and it's really empowering the entire health care continuum to participate on some level, but there will be a formal application process, and that will all be revealed through implementation guidance in the coming months and years.

The next question comes from Ryan Daniels with William Blair.

This is Matthew Mardula on for Ryan Daniel, and my first question, and this is more of a kind of a high-level question. But are you seeing an increase in the number of facilities choosing to outsource their Environmental or Dietary services and I understand you already hold a significant share of the outsourced market, but are you noticing any acceleration or the same level in outsourcing trends from facilities? And when you're looking at this kind of trend longer term, how much it can develop?

If you think about just for the broadest of context for us, inclusive of long-term and post-acute care facility, specifically skilled nursing, we've identified over 23,000 candidates for the types of services we offer. And here, we are nearly 5 decades into our company wide journey and less than 15% of those facilities use a third-party contract company for Environmental Services, less than 8% for Dining & Nutrition Services, and we have over 80% of that outsourced market. So I think the way to think about the demand for the services, which continues to be stronger than what we're capable of satisfying is that we really are the market maker in that respect. So as we grow so does the penetration within those facilities and those candidates for the types of services that we offer.

I would just add that additionally, just maybe in a broader context, outsourcing does and has become more acceptable than ever before. When you think about Environmental Services, there certainly has always been an inclination to outsource. If you could find a reliable, trusted partner like Healthcare Services Group to work together on those departments, but even more in Dining where a decade or so ago, there may have been some not even reluctant but maybe a partial mess towards wanting to partner or wanting to keep those facilities in-sourced or in-house because it is more akin to and more directly related to patient care.

We believe more than ever before. And part of it is because of our value proposition and the managerial expertise and capabilities we're bringing to the table, our purpose, vision, values and all of the elements, including the 24/7 mindset we're bringing to support that department specifically, but also just generally speaking, the market has become much more open to outsourcing, not just EVS, but Dietary as well.

So broadly speaking, we don't see any limitations on how deeply we can -- how deeply we can grow within that targeted market we've identified in the coming months and years. It's really going to be dependent upon our continued ability to execute on our management development strategy. And that's where the majority of our time and effort from an operational perspective is spent along with tending to the rest of the operational imperative that we've set forth.

Great. And can you provide an update on Genesis Healthcare and whether you're seeing any facility closures as part of their bankruptcy process. Additionally, have you seen any transition of Genesis-operated facilities to new ownership? And if so, how have those conversations been? And are the new owners receptive to continuing to use your services?

Overall, we're continuing to provide services to the Genesis facilities we were servicing prior to the petition date and it's really being done without disruption in operational outcomes or payments. It's a very normal course of business within the 4 walls of each community at Genesis in spite of the activity regarding the bankruptcy considerations outside of those 4 walls. And we expect that to be the case, Matthew, throughout the rest of this matter and through the duration of the post-petition period.

I think specific to the process, the only real notable recent developments or that in late August, both the DIP loan and bid procedures were approved. The DIP loan provides additional capital for operations during the reorg process and ultimately, some additional capital if needed to facilitate an eventual sale. And the bid procedures really established a formal process for that potential sale. And you alluded to it but from a timing perspective, the way that bid procedures are outlined. It's really looking for early November-ish -- an early November bid deadline, a mid-November sale hearing.

And in all likelihood, potential close in late spring once a potential buyer is selected. But that could be pushed out as far as the summer depending on the cadence of the matter. But again, from a HCSG perspective and even from a Genesis and most importantly, each individual community perspective, it really is operating in a normal course of business where the providers are focused on patient care and the partners like HCSG, our partner are focused on their related responsibilities.

This concludes the question-and-answer session. I'll turn the call to Ted Wahl for closing remarks.

Great, Sarah. Thank you. As we look to finish the year strong and carry that positive momentum into 2026, the company's underlying fundamentals are more robust than ever. Our leadership and management team, our enhanced value proposition, our business model and the visibility we have into that model, our training and learning platforms, KPIs and other key business trends and our strong balance sheet. .

And with the industry at the beginning of a multi-decade demographic tailwind, we are incredibly well positioned to capitalize on the abundance of opportunities that lie ahead and deliver meaningful long-term shareholder value. So on behalf of Matt, Vikas and all of us at Healthcare Services Group, Sarah, thank you for hosting the call today, and thank you to everyone for joining.

Thank you. This concludes today's conference call. Thank you for joining. You may now disconnect.