Healthcare Services Group, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. The company provides housekeeping, laundry, linen, maintenance and dietary services to healthcare facilities, primarily long-term-care providers. It served more than 3,500 facilities in 48 states; results are reported in Housekeeping and Dietary segments.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $355.2 million | $312.2 million | +13.8% |
| Income before taxes | $25.1 million | $23.1 million | +8.3% |
| Net income | $15.5 million | $14.6 million | +6.0% |
| Diluted EPS | $0.22 | $0.21 | +4.8% |
| Operating cash flow | $(6.2) million | $18.3 million | Declined $24.5 million |
Costs of services rose 13.7% to $303.9 million. As a share of revenue, costs of services eased to 85.6% from 85.7%; pretax margin decreased to 7.0% from 7.3%, and net margin to 4.3% from 4.6%. SG&A increased 21.4% to $26.8 million, faster than revenue growth, primarily due to payroll-related costs and professional fees. The effective tax rate rose to approximately 38% from 37%, mainly reflecting fewer tax credits than in 2014.
Housekeeping revenue was $226.6 million, up 10.7%, primarily from new clients. Dietary revenue was $128.7 million, up 19.8%, mainly from expanding service to existing Housekeeping clients. Segment pretax income was $20.6 million for Housekeeping and $8.9 million for Dietary; corporate and eliminations were $(4.5) million.
Cash, liquidity and capital
- Cash and cash equivalents were $58.3 million at March 31, 2015, down from $75.3 million at year-end. Cash plus marketable securities totaled $70.1 million, versus $87.1 million.
- Working capital was $230.3 million, compared with $216.9 million at year-end; the current ratio was 3.3 to 1 versus 2.8 to 1.
- Operating cash flow was negative, chiefly reflecting working-capital outflows, including receivables and lower accrued payroll. Investing cash use was $1.5 million; financing cash use was $9.2 million, including $12.7 million in dividends.
- No borrowings were outstanding under the $125 million line of credit. A $71.4 million standby letter of credit reduced availability at quarter-end; availability was approximately $53.6 million before other potential restrictions. The letter of credit increased to $73.7 million on April 1. The company reported covenant compliance.
- The filing reports no material capital-expenditure commitments through year-end and estimates $4.5–$6.0 million of capital expenditures for the remainder of 2015. It expects to continue regular quarterly dividends, subject to board review; a $0.17750-per-share dividend was declared for payment in June.
Material changes, outlook and risks
- Revenue growth was strong, particularly in Dietary, but earnings and margins grew more slowly amid higher SG&A, insurance costs and bad-debt provision. Bad-debt provision rose to $0.9 million from $0.8 million; workers’ compensation and general liability expense increased, with the company citing less favorable claims experience.
- Management said 2015 revenue performance may be comparable to historical ranges, with segment revenue mix expected to remain broadly similar. It expects Dietary growth mainly from existing Housekeeping clients and Housekeeping growth mainly from new clients. These statements are forward-looking and not guaranteed.
- The company expected to transition workers’ compensation and certain employee health and welfare programs to its captive insurance subsidiary in the second half of 2015; the subsidiary already provided general liability coverage.
- Key exposures include client concentration and collection risk: several clients each represented at least 3% of revenue, with one as high as 8%. Clients depend substantially on Medicare, Medicaid and other reimbursement; reimbursement reductions or payment delays could weaken client liquidity and increase bad debts. Net promissory notes receivable were $17.2 million.
- The company self-insures or carries high deductibles for significant insurance exposures. Accrued insurance claims totaled $71.2 million, including current and long-term portions; claim severity, medical-cost inflation and actuarial estimates could affect results.
- Other risks include labor-cost increases that cannot be passed through, changing regulations and service-tax treatment, and interest-rate exposure on investments. Management reported no material change in the Form 10-K risk factors and no pending legal matter it believed would materially affect consolidated financial condition or liquidity.
Most important facts for investors to verify
- Whether receivables and client collections improve, given negative operating cash flow and increased bad-debt expense.
- Whether revenue growth converts into earnings, particularly as SG&A and insurance costs rise and margins contract.
- Whether insurance claims experience and the planned captive-insurance transition affect costs, reserves or credit-line usage.
- Whether client reimbursement conditions, customer concentration and state Medicaid funding create further payment or credit risk.
- Whether dividends and planned capital spending remain supported by operating cash generation and available liquidity.