Healthcare Services Group Inc (HCSG) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Healthcare Services Group Incorporated 2013 fourth quarter conference call.

(Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to read a cautionary statement regarding forward-looking statements.

The discussion to be held, and any schedules incorporated by reference into it, will contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, the Exchange Act, as amended. Which are not historical facts but rather are based on current expectations, estimates, and projections, about our business and industry, our beliefs and assumptions.

Words such as believes, anticipates, plans, expects, will, goal, and similar expressions are intended to identify forward-looking statements. The inclusion of forward-looking statements should not be regarded as a representation by us that any of our plans will be achieved. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Such forward-looking statements is also subject to various risks and uncertainties.

Such risks and uncertainties include, but are not limited to, risks arising from our providing services exclusively to the health care industry, preliminary providers of long-term care, credit and collection risks associated with this industry, from having several significant clients who each individually contribute at least 3%, with one as high as 5% of our total consolidated revenues for the 12 months ended December 31, 2013. Risk associated with our acquisition of Platinum Health Services, LLC, our claims experience related to workers' compensation and goal liability insurance.

The effect of changes in our interpretations of laws and regulations governing the industry, our work force and services provided, including state and local regulations pertaining to the taxability of our services, and the risk factors described in our Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2013, in part I thereof, under government regulations of clients, competition and service agreements, collections, and under item 1A, risk factors.

Many of our clients' revenues are highly contingent on Medicare and Medicaid reimbursement funding rates. Which Congress and related agencies have affected through the enactment of a number of major laws and regulations during the past decade, including the March 2010 enactment of the Patient Protection and Affordable Care Act and the Healthcare and Education Reconciliation Act of 2010. On July 29, 2011, the United States Center for Medicare Services issued final rulings which, among other things, reduced Medicare payments to nursing centers by 11.1% and changed the reimbursement for provision of group rehabilitation therapy services to Medicare beneficiaries.

In January 2013, the US Congress enacted the American Taxpayer Relief Act of 2012 with delayed automatic spending cuts of $1.2 trillion, including reduced Medicare payments to plans and providers up to 2%. These discretionary spending caps were originally enacted under provisions in the Budget Control Act of 2011, an initiative to reduce the federal deficit through the year 2021, also known as sequestration. The sequestration went into effect starting March, 2013.

In December, 2013, the US Congress enacted the Bipartisan Budget Act of 2013, which reduced the impact of the sequestration over the next two years. Beginning in FY14, the Bipartisan Budget Act of 2013 extended the reduction of -- extended the reduction in Medicare payments to plans and providers for two years through the year 2023. Currently the US Congress is considering further changes revising legislation relating to healthcare in the United States, which, among other initiatives, may impose cost-containment measures impacting our clients.

These laws, and proposed laws, and forthcoming regulations, have significantly altered or threatened to significantly alter overall government reimbursement funding rates and mechanisms. The overall effect of these laws and trends in the long-term care industry has affected and could adversely affect the liquidity of our clients, resulting in the ability to make payments to us on agreed-upon payment terms. These factors, in addition to delays in payments for clients, have resulted in, and could continue to result in, significant additional bad debts in the near future.

Additionally, our operating results would be adversely affected if unexpected increases in cost and labor and labor-related costs, materials, supplies, and equipment used in performing services could not be passed on to our clients. In addition, we believe that to improve our financial performance, we must continue to obtain service agreements with new clients, provide new services to existing clients, achieve modest price increases on current service agreements with existing clients, and maintain internal cost reduction strategies at our various operational levels.

Furthermore, we believe that our ability to sustain the internal development of managerial personnel is an important factor in impacting future operating results and successfully executing projected growth strategies. I would now like to introduce our host for today's conference, Mr. Daniel McCartney, CEO and Chairman. You may begin.

Okay. Thank you, Kevin. And thank you, everybody, for joining us this morning. We released our fourth quarter and year-end results yesterday after the close. And we will be filing our 10-K the week of the February 17.

As we have discussed on our earnings calls the past few quarters, the relationship modifications with two corporate clients during the first and second quarter of 2013, impacted our reported revenue growth for the year, which was below our historical targets of double-digits. Although the two clients remain customers, we modified the services provided and therefore the revenue from those clients was reduced. With the surplus capacity of Management people, those modifications created, we're able to successfully integrate an acquisition and accelerate our organic growth efforts, especially in the divisions that were more directly affected by those modifications during the third and fourth quarter.

As we head into 2014, we have a run rate of new housekeeping and laundry business under contract, that will restore the Company's growth rate to our historical double-digit pace. We expect to continue to methodically expand our client base in housekeeping and laundry, as well as food service during 2014, and sustain our controlled expansion. As we previously announced in our dividend release, net income and earnings per share were unfavorably impacted by about $0.13 a share, due to the mediated settlement of some labor-related matters in several states. Although we deny any violations, we felt -- very reluctantly, in this regulatory litigious environment, and with so many positive things going on in the Company, that needed our full focus to manage, going into the new year, it was better to agree to the settlements.

With the investment we made, in our Biometric Time Clock Payroll System, Company-wide, finalized in 2011; the expansion of our human resource department; and the recent expansion of our legal support department, announced in December; our divisional and regional people in the field will now have more resources and more support to utilize and assist in their decision making, especially in this current business environment. And with that, I will turn over the call to Ted Wahl to more specifically go over the results.

Thank you, Dan. Revenues for the quarter increased 10% to $303.8 million. For the year, revenues were up 7%, to $1.15 billion, both quarterly and annual revenue totals were Company records. Housekeeping and laundry grew 4% over the prior year's corresponding quarter to $194.2 million. Dining and nutrition was up over 21%, to $109.7 million.

Going into 2014, we have very good momentum and expect double-digit top line growth. With housekeeping and laundry at the lower end of our 10% to 15% targeted range and dining and nutrition at the higher end of that range, as the dining segment continues to have an underutilized district and regional organization, as well as a smaller base from which to grow. Including settlement-related costs, net income was $5.5 million, or $0.08 a share for the quarter and $47.1 million, or $0.67 per share for the year. Excluding settlement-related costs, earnings per share for the year would have increased over 20%, to approximately $0.80 per share.

Direct costs of services for the quarter came in at 88.6%, which includes over 2.5% of settlement-related costs. The districts and regions have done a good job of implementing our systems and procedures, in the new business we brought on, including the acquisition-related facilities, which helped minimize inefficiencies. As that new business matures, we would expect ongoing margin improvement while at the same time continuing to give proper attention and service levels to our existing customers. Going forward, our goal is to manage direct costs under 86% on a consistent basis, and work our way closer to 85% direct cost of services.

Selling, general, and administrative expense was recorded at 9.6% for the quarter. But after adjusting for 2% of settlement-related legal and administrative costs, and the $1.2 million gain in the deferred compensation investment accounts held for and by our Management people, our actual SG&A was 7.2%. We would expect our SG&A to continue to be in that 7% to 7.25% range with the ongoing opportunity to garner some modest efficiencies. As we discussed in past quarters, SG&A also includes gross receipt taxes paid to states like Ohio, Michigan, and Texas, along with investments in our Biometric Time and Attendance System and other electronic record-keeping initiatives.

In December, we announced the expansion of our legal department, which in conjunction with the personnel and technology investments made in our human resource function, will allow the divisional organizations to comply with the new hire and personnel record keeping requirements demanded by both the regulatory environment and job tax credit programs like WOTC. We also announced in December the formulation of a wholly owned captive insurance subsidiary as well as enhancements to our credit facility that will provide flexibility in addressing our various insurance needs in the upcoming years.

Investment income for the quarter was reported at $1.3 million, but again, after removing the impact of the $1.2 million gain in the deferred compensation investment accounts, our actual investment income was about $100,000. And depending on the timing of the WOTC reauthorization we expect our effective tax rate for 2014 to be between 35% and 38%.

We continue to manage the balance sheet conservatively, and at the end of the fourth quarter, had over $75 million of cash and marketable securities. No debt and a current ratio of better than 3 to 1. Our accounts receivable remained in good shape below our DSO target of 60 days. Even with the accelerated organic growth in the second half of 2013, and transition of the credit and collection function for the new clients that were part of the acquisition.

As we announced last week, the Board of Directors approved an increase in the dividend to $0.17125 per share, split adjusted and payable on March 28. The cash flow and cash balances for the quarter more than support it, and with the dividend tax rate in place for the foreseeable future, the cash dividend program continues to be the most tax efficient way to get the value and free cash flow back to the shareholders. It will be the 43rd consecutive cash dividend payment since the program was instituted in 2003, after the change in tax law. It is the 42nd consecutive quarter we increased the dividend payment over the previous quarter. That's an 11 year period that includes four, 3 for 2 stock splits.

With those opening remarks, Dan and I would like to open up the call for questions.

(Operator Instructions)

Ryan Daniels with William Blair.

Dan, let me start with a quick one on the new large account that is going to ramp up in 2014. I guess a couple of questions in that regard. Number one, how should we think about the impact on Q1 versus the second quarter, knowing that you probably will not get the full run rate of that in Q1? Is it going to be most of quarter or just a little bit of impact Q1, and then most of it Q2?

I think it will be evenly distributed. I would say it will be more, more during the first quarter, than the second quarter. In fact, we started really towards the end of the fourth quarter last week, in December, phasing the properties in.

It will be completed by the second quarter. But I would say certainly, within the first three months, we will have the lion's share of them phased in. We just won't have the full impact of the properties we added in March in the revenue numbers for the first quarter. But I think the phase-in will almost all have taken place by the end of the first quarter.

Okay. Perfect. And then I know sometimes when you do bigger contracts, there is actually some start-up costs both from supplies and also as you get these contracts on the budget that might take a month or a little bit more. Should we think of this having actually a neutral to maybe even slightly negative EPS impact in Q1? Or is this something that could add a little bit to earnings?

We think it should be accretive. A lot of it is all execution. Getting our management people to get the startups and operating on budget quickly.

There is modest upfront costs, and since primarily the new business we're discussing, disproportionately today, housekeeping and laundry doesn't have the same upfront costs as food service contracts do, where we're replacing the food inventory, and some of the consumables. So we expect it to be a accretive right away, and in a more business as usual fashion, be able to have it contribute more timely than it would otherwise. Although, the first 30 days is where we are most inefficient. If we execute properly, we don't think it will be significantly put pressure on margins.

Okay, that's helpful. And then two questions on the captive insurance. Number one, I guess it is just do you guys anticipate any material savings from that?

And then number two, I know you took up the credit line, I think to $125 million, and I assume there is some kind of balance that you have to pay to keep that open. Is there going to be any kind of increased interest expense going forward that we should think about for our models?

I think in the near term, Ryan, the way to think about the captive would be for the first 12 to 18 months. We're really going to get off to a running start. There may be an opportunity with general liability, and some selective health and welfare programs. But we're not anticipating any significant savings over the first, again year to year and a half.

Okay.

And then as far as the credit facility, to have that in place, it is going provide us with the flexibility around pursuing and funding the captive, if we decide to be more ambitious and transition more additional property in casualty or health and welfare programs into that more in the midterm.

But we are going to phase it in in a very safe and methodical way with some voluntary programs initially, and the general liability. But it gives us the flexibility to adjust in this insurance environment, as it changes, to really, most efficiently, adhere to the requirements, and the employee benefit functions within the human resources.

But we will keep everybody informed, as we change and modify the captive, as we go along quarter to quarter. But we are going to start out, as Ted said, very specialized and only two very modest starting points.

Okay. That's helpful. And then the final one and I will hop off. Just on the tax rate, I think Ted, you mentioned 35% to 38%, depending on what happens with WATSI. I thought that was extended in 2014. I should probably know this, but is there still some debate about if that is going to take place that could impact your tax rate?

Well, yes, it hasn't been formally reauthorized yet. We're somewhat comforted by the fact that the program has been in place for 17 years. And the four times it was delayed, during the 17-year history, it was not only reauthorized, but it was reauthorized retroactively to the previous expiration date.

Okay.

So there would be no break in continuity or availability to credit. So we are treating it as if it will be reauthorized, whether it is part of a tax extender's bill or some separate piece of legislation, and that's the counsel we're getting from our service provider. But as of today, it hasn't been reauthorized.

Okay. Perfect. That's helpful. Thanks, guys.

Okay, thanks.

Michael Gallo with CL King.

Can you hear me okay? Dan, a couple of questions. As a result of the labor settlement, what do you expect to save in just ongoing legal expense?

What do we expect to save?

Yes, in ongoing legal expense. I know you were spending, as you litigated that.

Well, I mean it would be difficult to quantify, but I mean it had an impact in the SG&A of almost 2%, between the accounting, professional, and legal expenses. So we expect it to be back to our normal SG&A levels. But the legal expenses were certainly a big part of the consideration as we were going through the process and decision making on whether to try to resolve this or not.

Okay. Second question I have is just on Platinum. You have had it now for six months or so. I was wondering what opportunities you see there. Have you started to look to add food service business into Platinum, or is it still kind of in the integration phase? Or where do you feel you are now in the integration?

As of mid January, the acquisition was fully folded into our existing infrastructure. And in terms of cross-selling, dining and nutrition services, really the idea is no different than how we view organic growth or existing customers, you know, PHS customers, are going to be a process, and it is not like we are separating them in terms of whether or not they would be attractive dining and nutrition candidates, and what our existing customers would have been or prior to the acquisition.

But right now, for the Platinum customers, we're still providing almost completely only housekeeping and laundry services. So the expansion, as Ted described, is even more dramatic, or the potential expansion in the food service, because right now, we are only doing housekeeping and laundry for the bulk of their clients.

Okay, great. And then final question, with the new customer business that you added here in Q1, combined with Platinum, does that completely absorb some of the inefficiencies in manager utilization that you had back from the loss of the customers a couple of, or I guess a year ago? Or is there still some areas where just geographically it didn't quite fit in where you still do have some excess management personnel?

Between the first quarter expansion and the Platinum acquisition, all of the resources have been utilized. There is no excess. From a housekeeping and laundry standpoint, there is no additional excess capacity. It is all normal course of business growth from this point forward.

And then the organic expansion, and that's why the expansion was so attractive to us as we're negotiating, because it really filled in a lot of the gaps in the divisions that were negatively impacted by those modifications the first and second quarter. So even with the Platinum integration, the organic growth really fell in and filled in those gaps in housekeeping and laundry in particular.

Okay. Great. Thanks very much.

Thanks, Mike.

AJ Rice with UBS.

A couple of questions if I might. First of all, just make sure, on the new business wins, that will roll in in the first two quarters of this year, is that -- am I right to think about that as about $50 million when it is all said and done, up and running, revenues? And have you talked about how many facilities we're talking about there?

Yes, it should be about $50 million, AJ. I think that is a fair number. And then in terms of the number facilities, when you couple what we had planned for Q1 with the additional normal course of business adds throughout the rest of the country and the other organizations, we should hit above our targets, which we've always said is about 100 per quarter.

Okay. And as you are rolling this out and it is mainly it sounds like initially at least, housekeeping, do you expect it to have any spill-over effect on the growth trajectory of dietary? Do you have to slow that down for any reason. Or does it have anything we should think about there?

No spillover effect.

Okay.

We continue to have the underutilized district and regional organization, and dining from a number of facilities, that the district manages in dining, which is 7 to 8 compared to our housekeeping and laundry average, which is 10 to 12. And at the regional level in dining, we are still averaging 3 to 4 districts per region compared to housekeeping and laundry, where we're averaging 4 to 6 districts per region.

Okay.

And although the housekeeping and laundry and food service regions all report to the same divisional officers, they really have a separate network, as far as operational capacity, and marketing and sales, as well. So the housekeeping and laundry expansion really doesn't limit how fast the food service expands. Food service is still predicated on the development of the district managers. And how we assess how many properties they can really consistently operate at that phase of the development.

Sure. Any commentary on the fourth quarter cost trends between, or margin trends between the two divisions?

Well, I'm sorry, AJ?

Just thinking about -- I don't think you said it in your prepared remarks, I know you said the growth rates. But is there anything on the margin trends between the two divisions, housekeeping and dietary, or cost trends that is worth highlighting or calling out?

No that will be in the K, and we plan on filing it the week of the 17th. The food service margins have -- they have continued to improve quarter to quarter. And we expect that to continue over the next year or two.

As Ted described, the underutilized district and regional management costs that we're eating now, as they get closer to our model, their margins should continue to improve. It will be reflected in the direct costs staying below 86%. And hopefully, if we execute properly, working our way back down to 85% to where food service margins ultimately will mirror housekeeping and laundry's.

Okay. And then the last question on Platinum, I know previously you said that that was a little bit of drag on the receivables, and cash flow, because of maybe a little different terms that they had offered historically from what have you offered. Where do -- do we still have receivables that are tied up in the Platinum contracts, as those get reworked, or have you pretty much seen that all come out at this point?

No, there is still about a $5 million or $6 million opportunity, and that is going to be a process, not an event, to have them conform with our credit expectations. And over the next six months, that's an opportunity for us.

Okay, thanks a lot.

Thanks.

Shawn Kim with RBC Capital Markets.

My first question, it is a follow-up to your commentary on dining services margins. You said your goal is to, for margins at the dining segment to approach housekeeping over the next -- is that a three-year time line?

We think over the next two to three years Shawn, as the districts and the regions in dining and nutrition manage the right complement of facilities, that there is an opportunity for the dining and nutrition margins to really mirror those of housekeeping.

Okay.

Again, that is not going to happen overnight by one group of customers being added in a particular area. But we have the national infrastructure built in dining now, where we can service any facility from Washington state to Florida, and I'm not saying it is easy, but the easier part is layering the new business onto this existing district and regional network.

Right. So, I think the margin differential between dining and housekeeping right now, it is say around 350 basis points. That means, on average, over the next three years, or so, on average, per year, you are going to see about 120 basis points improvement -- 110, 120 basis points improvement in dining margins. Is that -- but we haven't seen that yet.

I understand the underutilized operational structure in dining, but do you think we -- will we see 120 basis points this year, next year? When can we see that acceleration in the margin improvement in dining?

I think it will happen incrementally. And if you look back from 2010 to where we are in 2013, the margins have improved over 200 basis points in that segment alone.

And really, in an oversimplified way, Shawn, I think the best way to think about it is if our middle management structure, the district and regional network, in housekeeping, eats up 2%, 2.5% of our facility level margin, and dining and nutrition, it is 5% to 6%. So again, over the next two to three years as we layer in the new business, that middle management structure is going to be absorbed across a larger complement of facilities, and the margins should reflect that.

Okay. And did you have a facility count figure for dining and housekeeping at the end of the year into 2013?

It is similar. It is going to over 3,700 in housekeeping and over 800 in dining.

And that does not include the new service agreements?

Correct.

Okay. Thank you. Thanks, Shawn.

Sean Dodge with Jefferies.

Dan or Ted, without specifically quantifying this, in housekeeping and laundry, can you give me a sense of how much of your growth over the last several quarters has come through these current client expansion agreements versus signing or adding new operators?

Well, even if it is part of a corporate chain, we really still look at them as separate clients, separate service agreements, and they're really negotiated separately, as well. But I would say our client makeup is probably 35% to 40% of our clients are part of the national chains that people in the investment community may be more familiar with, and another 30%, 35% are privately owned chains, and the individual operators, religious facilities, make up maybe the other 15% or 20%.

That has changed over the years to include more of a national chain expansion than it had in years past, and the privately-owned chains have stayed relatively proportionate. But I think the more accelerated expansion has been with the national chains, although our approach is to survey each of them individually, price them individually, and not have corporate contracts, even if the decision making process is more corporately driven than it had been in the past.

Okay. And then with the SNFs being a focus in on the recent OIG work plan and the outlook for the next rate update not being so great, I'm curious from where you sit, are the SNFs more frustrated or concerned about the future than they have been historically? Have you found that -- are they closer to making decisions to outsource these functions now than they have been in the past?

For us, really the demand for the services has never been an issue from the company's inception. There has always been more demand than we can do and the constraint on how quickly we expand has always been dependent on our ability to develop a pipeline of management people at each level, and certainly as we have grown, that has become even more the case.

But the tighter in general that the operators feel pressure and get squeezed, the better opportunities there are for outsourcing companies of all kinds, including ours, who in a cost efficient way can take a piece of their business, give them a fixed price, and resources they wouldn't have otherwise, and that is certainly the case now.

In the 37 years we have been doing this, they have never been reimbursed generously enough to where they didn't have to be cost efficient and have those considerations. But in this environment, the past 4 or 5 years, it has even been more so. And I think that's why, even in a lot of the national chains, they have looked to outsourcing even more aggressively than they had in the past.

All right. That's all I've got. Thank you.

Rob Mains with Stifel.

I just want to clarify just a couple of things that came up earlier in the call. First, on the response to AJ's questions about notes receivable and AR. Am I correct that you're saying that the increase that we saw Q3 to Q4 was largely due to Platinum customers?

It was both related to Platinum, as well as the organic expansion we had in the second half of 2013.

Just the --

June and July.

Right. With Platinum, that came on in July, what would the incremental receivables be from? Is that from growth in the business, or from just the terms being on the books for a full quarter?

It would have been just like any acquisition or new customer for that matter outside of an acquisition, that there is a process involved of developing a relationship. And like any other situation, they like to test and make sure that you're going to work with them in a manner that they were worked with previously. So that is the process, Rob, of developing the relationship, making sure that we have a goal of having them conform with what our credit and collection expectations would be over the next six to nine months.

Okay and then I guess for lack of a better term, reversing that is where you see that $5 million to $6 million opportunity.

Yes, that's the opportunity to bring in whatever -- what we would describe as arrearages relative to what our credit and payment expectations would be. But there are clients, Rob, that we inherited that had 90-day, 100-day terms, and were out when we absorbed them. It is up to us and our credit collection efforts to whittle them down to the levels that historically we have. And that is going to be a process rather than happen instantaneously.

Got it. Okay. And then do I infer correctly from what you're saying that the new customers that are going to add, that you talk about through this contract get added in the current quarter, aren't going to be spread all over the country. They will be mostly in certain regions, which gives you room to grow kind of in a norm clip outside of those regions?

That's exactly right. The majority of the new contracts that we're adding at least for the first 90 days of this year are going to be in the mid Atlantic and Northeast.

Got it.

And they were the areas most impacted. They were the areas most impacted by the modifications the first two quarters, so it gave us more confidence to be more ambitious in phasing them in. But in addition to that, the far West, the midwest, the Southwest and the Southeast, should all be able to grow in a normal course of business fashion.

Okay. Fair enough. And then finally, as far as your dietary division costs go, do you have any -- I know this has still got to go through anti-trust, thoughts on the SYSCO US Foods proposed merger.

For us we have had long term relationships with both, so we're more agnostic towards what the outcome would be. But we are keeping in close contact with the leadership at both groups, just to make sure if there is any impact, we are aware of it and we're out in front of it.

Okay. That's all I had. Thank you very much.

Thanks, Rob.

James Terwilliger with Wunderlich Securities.

Hi, Dan, can you hear me?

Yes, hi, James.

Thanks for taking my questions. I got three real quick ones. First one on the balance sheet. The other current liabilities spiked up this quarter. Is that due to the legal settlement?

It is really legal settlement-related. And then normal dining and nutrition growth. That is really when accounts payable grows, it is typically tied to increases or step-ups in the dining business.

Okay. And then --

If you're looking at it quarter to quarter sequentially, it wasn't as significant of an increase as it was from the end of the year to where it is for the fourth quarter.

Yes. And my second question is really on the Platinum acquisition, it seems to me like the integration is going well. But two quick questions. Have you started cross-selling the food services to those 200 facilities? And then the second question is, I know you didn't do the acquisition in terms of cost savings initiatives, but how should we think of any type of cost savings coming from that acquisition as we move into 2014?

Well, we haven't started selling food service to Platinum's, or former Platinum's clients yet. We are still primarily doing housekeeping and laundry. There may have been one or two that we added in regionally or locally that the district or regional guys might have sold independently. But overall, our strategy has been to just get to know them, make sure the transition goes well. Which it has.

And then is there any significant cost savings with that, Dan? Or just more of a tail wind over time to be more efficient in 2014?

No, they have been folded and fully integrated into our districts and regions. We've really managed them the last 90, 120 days, no differently than any of our other customers. So whatever efficiencies we're going to get, other than execution, we can always be more efficient everywhere. It is more business as usual rather than a real significant change in our approach or to profitability.

Okay. Thanks. And my last question is, going back to the legal issues in California, and your settlement, is it true to say that you could have other litigations out there from different states? But as of today, those litigations or the potential settlement of the dollar value of those litigations aren't nearly as significant as California? How should we think about going forward, quantifying this type of state litigation issue?

We have had issues like that for 37 years. The difference here was it seemed like it was gaining more momentum and we got the opportunity to look at them in the aggregate, settle an assortment of them in one fell swoop at at least terms we could digest. I wouldn't say favorable, because I don't feel like we were favorably treated. But we put them to bed for business reasons. Because we think we did everything properly.

But we expect, as they come up, as they have come up in the past, to handle them individually. Our settlement-mediated discussions for these couple of states created an unusual opportunity to wrap them all up and be done with it. And that was really the business decisions that we made. So we will deal with issues as they come up in this environment, individually like we have for 37 years. And try to stay out of trouble.

And even with the regulatory environment being more intense than it was maybe 5 years ago, when you consider the investments we have made in the biometric time and attendance system, certainly the human resource function, both corporately and divisionally, and the more recent expansion of the legal department, we really feel we are in as good a position to try to mitigate these types of risks going forward as we have been at any time.

Thanks, guys. I know with legal issues sometimes even if you have done nothing wrong, sometimes the best course of action unfortunately is to settle. Even if you're completely in the clear. But thanks for taking my questions and I will jump back in queue. Thanks, guys.

I may need you to remind me of that. Because I don't feel that way right now (laughter).

Take care, guys. Thank you.

Thank you, James.

Toby Wann with Obsidian Research Group.

My questions have been answered. Thank you.

Thanks, Toby.

I'm not showing any further questions at this time. I would like to turn the conference back over to Dan for closing remarks.

Okay. Again, thank you for joining us today. But entering 2014, frankly, our mission hasn't changed very much. We expect to continue to expand our client base in housekeeping and laundry. With the business that we have added, we will be within our historical targets, during the first quarter of the year. We should increase our market penetration every quarter after that.

And with the right execution maintain our double digit growth rate, and improve margins, particularly in food service, as food service continues to grow, although at a faster pace than housekeeping and laundry due to the underutilized management structure and the pent-up demand within our existing client base. And, obviously, a smaller operating base, and they will be at the higher end of the range, where housekeeping and laundry will be in the lower end of the double digit range, but certainly back to double digits.

It really remains important for us to balance the client satisfaction measurements, as we continue to grow. And that's no different than it has been in years past, as we digest the increased amount of new business, and continue to operate the existing facilities on budget.

All of the divisions through our operating structure continue to perform better, but with any expansion, we need to assure that we are consistent in our execution. We have to keep the attention on the new business startups, get them on budget timely, while effectively managing the existing client base as we grow.

In recognition of today's business environment, we have expanded the human resource department, provided them the tools and personnel to better support the divisions. The biometric time clock investment that is used nationally now, has addressed and streamlined the personnel record keeping requirements more efficiently than we had in the past, when they were done manually at each of the properties by our facility managers.

The recently approved and announced captive insurance vehicle, domiciled in New Jersey, and financially supported through the company's existing credit facility, will give us the flexibility to satisfy and improve the delivery of certain insurance-related services in this changing environment during the course of the year. We will keep everybody informed as we add or delete or modify our providing those services through the captive.

And the appointment of Jason Bundick to fill in, to fill in the in company's newly established general counsel position, expansion of the legal department, should provide more timely support and advice to our management people and who are really the decision makers in the field, to more effectively manage some of the issues that created an issue for us this year.

As we start the new year, we are enthusiastic about our opportunities, demand for our services has never been greater in housekeeping and laundry as well as food service. Our management people in all the divisions continue to develop and get better at all levels. We believe we addressed the issues that we had to deal with this past year, so we're confident 2014 will be our 38th consecutive record year and that our best days still lie ahead of us.

Thank you, everybody, for joining us. And onward and upward.

Ladies and gentlemen, that does conclude today's presentation. You may now disconnect. And have a wonderful day.