Healthcare Services Group, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This annual filing reports full-year results, not a standalone fourth quarter. The company provides housekeeping, laundry, linen, facility-maintenance and dietary services to U.S. healthcare facilities, primarily long-term-care providers. It served approximately 3,000 facilities; its Housekeeping and Dietary segments each generated about half of revenue.
Key financial metrics
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $1,642.0 million | $1,760.3 million |
| Income before taxes | $61.8 million | $129.2 million |
| Net income | $45.9 million | $98.7 million |
| Diluted earnings per share | $0.61 | $1.32 |
| Net cash from operations | $37.1 million | $217.2 million |
| Cash, cash equivalents and marketable securities at year-end | $185.2 million | $264.3 million |
| Working capital / current ratio | $355.3 million / 2.9 | $410.1 million / 3.5 |
Net margin was approximately 2.8%, versus 5.6% in 2020. Costs of services were 86.2% of revenue (84.8% in 2020); SG&A was 10.5% (8.6%). The company reported $1.4 million of interest expense. It had no borrowings on its $475 million revolving credit facility at year-end; $410.1 million remained available after letters of credit.
Material changes versus FY2020
- Revenue declined 6.7%. Housekeeping revenue fell 8.3% to $821.3 million, and Dietary revenue fell 5.1% to $820.6 million.
- Management attributed lower revenue mainly to census-driven reductions in staffing and purchasing, fewer facilities served, and modified pricing with a significant customer. COVID-19 supplemental billings declined to $5.7 million from $32.3 million.
- Net income fell approximately 53.5%. Segment income before tax decreased to $79.4 million in Housekeeping and $45.8 million in Dietary; corporate and eliminations expense increased to $63.3 million from $34.8 million.
- SG&A excluding deferred-compensation investment changes increased 17.6%, mainly from payroll, travel, legal and professional costs. These included $6.0 million related to the SEC inquiry settlement and $3.0 million for a California labor and employment settlement.
- Operating cash flow decreased substantially, reflecting lower net income, payment of $22.1 million in previously deferred payroll taxes, and a $37.2 million increase in accounts and notes receivable.
- The company completed two acquisitions, including a prepackaged-meal manufacturer and a regional dining operator; cash paid for acquisitions was $23.9 million.
Outlook, risks and unusual items
- Management provided no quantified revenue or earnings guidance. It estimated 2022 capital expenditures of $4 million to $6 million and said cash, operating cash flow and credit capacity should fund operations and anticipated growth for the foreseeable future.
- Management said COVID-19 had no material net impact on FY2021 operating results, but future effects remain uncertain. Labor availability and costs, inflation in food and other supplies, and customers’ ability to pass through cost increases remain risks.
- Genesis Healthcare represented 10.8% of FY2021 revenue, down from 14.7% in 2020. At year-end, receivables from Genesis included $29.8 million of accounts receivable and $21.3 million of notes receivable. Modified pricing ended in December 2021; modified payment terms were scheduled to continue through December 2022.
- Customer concentration and collection risk are material considerations: net accounts and notes receivable totaled $322.6 million, and the allowance for doubtful accounts was $65.6 million. The auditor identified the allowance estimate as a critical audit matter.
- Sysco distributed approximately 50% of food and non-food dining supplies. Disruption could affect supply availability and costs. Most customer contracts are renewable annually and cancellable on 30–90 days’ notice after an initial period.
- Self-insurance liabilities totaled $89.4 million and depend on actuarial estimates. The filing also describes pending ordinary-course litigation for which possible losses could not be reasonably estimated in certain matters.
- On October 15, 2021, directors’ and officers’ insurers paid a $16.8 million settlement of a shareholder class action. The company also disclosed resolution of an SEC inquiry concerning earnings-per-share calculation practices.
The company paid $62.2 million in dividends and repurchased $21.5 million of shares during 2021. The board declared a quarterly dividend of $0.21125 per share in February 2022. Management and the auditor reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and controls.
Important facts for investors to verify
- Whether Genesis meets modified payment terms and whether its receivable balances are collected as expected.
- How the allowance for doubtful accounts, including past-due notes and customer credit exposures, develops in subsequent filings.
- Whether labor, food and supply inflation can be passed through to customers without further margin pressure.
- Whether cash generation recovers after the FY2021 decline and supports dividends, acquisitions and repurchases while maintaining liquidity.
- Whether acquisition performance, remaining purchase consideration and integration outcomes support the company’s growth plans.
- Developments in self-insurance reserves, pending litigation and regulatory matters that could affect earnings or cash flows.