Healthcare Services Group, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. The company provides housekeeping, laundry, linen, facility maintenance and dietary services to U.S. healthcare facilities, primarily long-term-care providers.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $404.5 million | $384.8 million | +5.1% |
| Income before taxes | $32.3 million | $29.6 million | +9.0% |
| Net income | $22.0 million | $18.6 million | +18.2% |
| Diluted EPS | $0.30 | $0.26 | +15.4% |
| Operating cash flow | $34.6 million | $9.7 million | +$24.9 million |
- Housekeeping revenue was $243.4 million, up 2.2%; Dietary revenue was $161.1 million, up 9.9%. Dietary growth mainly reflected adding services for existing Housekeeping clients.
- Costs of services rose 4.7%, slower than revenue growth. They were 85.4% of revenue versus 85.8% a year earlier; management attributed the improvement partly to lower workers’ compensation and general liability costs as a share of revenue.
- SG&A increased 11.3% to $28.2 million. Excluding deferred compensation investment changes, it rose 5.4%. Investment and interest income increased to $1.6 million from $0.2 million, primarily due to favorable investment-market fluctuations.
- Reported net margin was 5.5% versus 4.7%; pretax margin was 8.0% versus 7.6%. The effective tax rate fell to 31.8% from 37.1%, partly because adoption of share-based-payment accounting guidance put excess tax benefits through income tax expense.
- Operating cash flow improved substantially, with timing of receipts and payments a key driver. Accrued payroll and payroll taxes increased during the quarter. Investing cash use was $1.4 million; financing cash use was $8.9 million, including $13.6 million of dividends.
Financial position and liquidity
- At March 31, cash and cash equivalents were $48.2 million and marketable securities were $68.3 million, totaling $116.5 million. Working capital was $334.1 million, up from $313.8 million at year-end; the current ratio was 3.8 versus 4.1.
- There were no borrowings under the $200 million credit line. Availability was $132.8 million after a $67.2 million insurance-related standby letter of credit; the letter increased to $70.7 million on April 3. The company reported covenant compliance.
- Accounts and notes receivable, net, were $281.1 million, up from $271.3 million at year-end. The allowance for doubtful accounts was $7.7 million, compared with $6.9 million. Net promissory notes outstanding were $18.4 million.
- Quarterly dividends paid were $0.18625 per share. A subsequent quarterly dividend of $0.1875 per share was declared, payable June 23, 2017.
Outlook, developments and risks
- Management expected consolidated revenue for the remainder of 2017 to continue improving compared with historical ranges. It expected Dietary to grow as a share of revenue, mainly through existing Housekeeping clients, and Housekeeping growth primarily through new clients. No specific earnings or EPS guidance was provided.
- New service agreements expected to generate more than $160 million in annualized revenue were scheduled to begin in Q2 2017. The expansion included an existing national, multi-state customer; the company also acquired certain dietary assets, inventory and intellectual property in connection with it.
- Estimated 2017 capital expenditures were $4.5 million to $6.0 million. Management said operating cash, existing liquidity and the credit line should fund foreseeable operating needs and anticipated growth.
- Key risks include client dependence on Medicare, Medicaid and other reimbursement funding; collection delays, client financial distress and bad debts; labor, wage and insurance costs; regulatory or tax changes; and customer concentration. Several clients each contributed over 4% of quarterly revenue, with one contributing as much as 9.9%.
- The company reported ordinary-course legal, employment, insurance and tax matters, but did not expect them to materially adversely affect its financial condition or liquidity. It disclosed no material change to the risk factors in its 2016 Form 10-K.
Important facts for investors to verify
- Whether the new agreements, particularly the large existing-customer expansion, commence on schedule and convert to recognized revenue.
- Whether receivable growth, collection delays and the increased doubtful-account allowance indicate worsening client credit quality.
- Whether the strong operating cash flow is repeatable, given management’s emphasis on payment timing and working-capital movements.
- Whether labor costs, client reimbursement conditions and customer concentration affect margins or retention.
- How the share-based-payment tax benefit affects comparability of the quarter’s effective tax rate and whether the company sustains its dividend and capital-spending plans.