Healthcare Services Group, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The company provides housekeeping, laundry, linen, maintenance and dietary services primarily to long-term and post-acute care facilities. It reports Housekeeping and Dietary segments and served more than 3,000 facilities in 48 states.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $273.6 million | $267.1 million | $547.5 million | $527.7 million |
| Income before taxes | $19.9 million | $18.3 million | $38.8 million | $32.1 million |
| Net income | $12.9 million | $11.3 million | $27.9 million | $19.9 million |
| Diluted EPS | $0.19 | $0.17 | $0.40 | $0.29 |
| Operating cash flow | Not presented separately | Not presented separately | $14.0 million | $27.4 million |
- Revenue rose 2.4% in Q2 and 3.8% in the first half. Dietary segment revenue grew 7.1% in Q2 and 7.9% year to date, mainly from expanding service to existing Housekeeping clients. Housekeeping revenue grew 0.3% in Q2 and 1.9% year to date, mainly from new clients.
- Net income increased approximately 14% in Q2 and 40% in the first half. Net margin was 4.8% in Q2 versus 4.3%; for the first half it was 5.1% versus 3.8%. Cost of services declined to 85.7% of revenue in Q2 from 86.2%, and to 85.8% for the first half from 86.7%.
- First-half cash from operations declined to $14.0 million from $27.4 million. The company cited a $26.8 million increase in accounts and notes receivable as a principal cash use, partly offset by higher payables and other accruals.
- At June 30, cash and equivalents were $63.2 million and marketable securities were $22.0 million, totaling $85.2 million. Working capital was $214.0 million; the current ratio was 3.8, versus 4.0 at year-end 2012.
- No bank-line borrowings were outstanding. The $57.0 million facility had $43.52 million committed to a standby letter of credit, reducing available capacity accordingly. The facility expires June 30, 2014; the company reported covenant compliance and expected renewal.
- There was no reported funded debt balance apart from the subsequent acquisition’s assumed debt. Accrued insurance claims totaled $23.7 million, including $16.6 million long term.
Changes, outlook and risks
- Management attributed margin improvement to lower bad-debt and insurance costs, favorable claims experience, and labor efficiencies. Higher Housekeeping supply costs partly offset these benefits. SG&A excluding deferred-compensation valuation changes rose 2.8% in Q2 and 1.9% for the first half.
- The first-half effective tax rate was approximately 28%, versus 38% in 2012, reflecting renewed Work Opportunity Tax Credits, including credits for 2012. Management expected the full-year 2013 rate to be approximately 32%, absent significant changes; it anticipated a higher rate in subsequent 2013 periods.
- Management said Dietary could represent a larger share of revenue during the remainder of 2013; expected organic growth sources were Dietary expansion within existing Housekeeping clients and new-client wins in Housekeeping. No quantified revenue or earnings guidance was provided.
- The company expected $1.5 million to $2.5 million of capital expenditures for the remainder of 2013 and said existing liquidity, operating cash and the credit line should meet foreseeable needs. It expected to continue regular quarterly dividends, while noting continuation and amount were not assured. A $0.16875 per-share dividend was declared for payment in September.
- After quarter-end, on July 12, the company acquired substantially all operating assets of Platinum Health Services. Consideration included approximately $3.8 million cash, $1.2 million assumed debt and 1.2 million shares, with potential additional shares tied to financial and retention targets. Integration, client retention and realization of expected benefits were identified as risks.
- Key exposures include client concentration, slow collections and bad debts, clients’ reliance on Medicare and Medicaid funding, reimbursement reductions including sequestration, labor and supply cost increases, and self-insured workers’ compensation and general-liability claims. Management disclosed ordinary-course legal and tax matters, but did not expect them to have a material adverse effect.
Investor verification priorities
- Track receivables, collection delays, promissory notes and allowance adequacy: net accounts and notes receivable rose to $165.7 million from $140.2 million at year-end.
- Assess whether the lower first-half operating cash flow and dividends exceeding operating cash flow are sustainable; first-half dividends were $22.9 million.
- Verify Platinum’s integration, client retention, assumed debt and any contingent share issuance, and how the acquisition affects reported results.
- Monitor the expected 2013 tax-rate normalization and whether tax-credit benefits recur.
- Review client reimbursement trends, insurance-claim estimates and renewal of the credit facility before its June 2014 expiry.