Healthcare Services Group, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited consolidated results. The company provides housekeeping, laundry, linen, facility maintenance and dietary services to U.S. healthcare facilities, principally long-term-care providers. It reported two segments: Housekeeping and Dietary.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $424.9m | $398.2m | $851.7m | $805.9m |
| Costs of services | $379.4m | $336.4m | $752.6m | $673.0m |
| SG&A | $29.3m | $50.1m | $65.0m | $90.0m |
| Investment and other income (loss), net | ($7.5m) | $3.7m | ($9.0m) | $5.8m |
| Income before taxes | $8.3m | $15.1m | $24.0m | $48.0m |
| Net income | $6.8m | $9.6m | $18.1m | $34.2m |
| Diluted EPS | $0.09 | $0.13 | $0.24 | $0.45 |
| Operating cash flow | Not presented separately | Not presented separately | ($21.2m) | $28.8m |
- Revenue increased 6.7% in Q2 and 5.7% for the first half, but costs of services rose faster: 12.8% and 11.8%, respectively. Costs of services were 89.3% of Q2 revenue versus 84.5% a year earlier; first-half ratio was 88.4% versus 83.5%.
- Net margin declined to 1.6% from 2.3% in Q2 and to 2.1% from 4.2% for the first half. SG&A decreased, partly because the previously disclosed SEC inquiry was settled in 2021; lower SG&A was offset by investment losses and weaker service margins.
- Q2 segment revenue: Housekeeping $199.1m, down 1.9%; Dietary $225.8m, up 15.6%. First-half segment revenue was $400.8m for Housekeeping, down 4.1%, and $450.9m for Dietary, up 16.2%. Management attributed Housekeeping declines to fewer facilities served and Dietary growth to price increases, added facilities and a prior-year acquisition.
- Segment income before taxes fell in Q2: Housekeeping $17.8m versus $22.6m; Dietary $10.3m versus $13.8m. For the first half, Housekeeping was $38.2m versus $50.8m and Dietary $19.7m versus $33.8m.
Liquidity, cash flow and debt
- At June 30, cash and cash equivalents were $31.7m and marketable securities were $97.5m, totaling $129.2m; working capital was $337.9m and the current ratio was 2.8 to 1.
- First-half operating cash use of $21.2m compared with cash generation of $28.8m in 2021. Management cited a $58.8m increase in accounts and notes receivable, timing of receipts and payments, and $7.1m of deferred-compensation payments to former employees.
- Net accounts and notes receivable were $364.4m, up from $322.6m at year-end 2021. The allowance for doubtful accounts was $76.0m, including $62.6m for accounts receivable. First-half bad-debt provision was $17.0m versus $6.7m.
- The company had $10.0m drawn on its $475m line of credit, which expires December 2023. Availability was $384.0m after $81.0m of standby letters of credit. The company reported compliance with its financial covenants.
- First-half dividends paid were $31.5m. Management expects to continue regular quarterly dividends, subject to Board review and no assurance; estimated 2022 capital expenditures are $5m–$6m, with $2.6m spent through June 30.
Outlook, risks and notable items
- Management expects operating cash flow, existing cash and credit capacity to meet foreseeable operating and growth needs. It stated that it had not changed expectations for future operating cash flow due to COVID-19.
- Inflation in labor, labor-related costs, food and other supplies pressured margins. Dietary supply costs were 31.7% of segment revenue in Q2 versus 27.3% a year earlier; Housekeeping labor costs also rose as a share of segment revenue. The filing cautions that cost increases may hurt results if they cannot be passed to customers.
- A customer operating group entered receivership in Q2, increasing bad-debt provision by approximately $7.1m. COVID-19 had no material net impact on Q2 consolidated results; $0.3m of supplemental billings was largely offset by temporary census-related reductions in recurring billings.
- Deferred-compensation investment market fluctuations contributed to reported expense volatility. The company recorded a $7.5m net investment and other loss in Q2 and a $9.0m loss for the first half; it also recorded unrealized losses on available-for-sale securities in other comprehensive income.
- Risks include customer payment delays or bankruptcy, healthcare reimbursement and regulatory changes, labor availability and wage increases, commodity and supply-chain volatility—including risks related to the Russia-Ukraine conflict—and COVID-19 disruptions. A significant portion of first-half revenue came from one customer, but the filing text does not provide a clear value.
- The company disclosed pending litigation for which it could not reasonably estimate possible losses. It said unresolved tax matters were not expected to have a material adverse effect based on its best estimates. No subsequent events requiring disclosure were reported.
Most important facts for investors to verify
- Whether the receivership-related receivable exposure and elevated bad-debt provisions lead to further losses or additional collection delays.
- Whether labor, food and supply inflation can be offset by pricing, staffing efficiencies or other cost controls, particularly in Dietary.
- Whether receivables growth and negative operating cash flow reverse, and how collections compare with recognized revenue.
- The scale of the largest-customer concentration and any changes in that customer’s business or payment behavior.
- Continued covenant compliance, borrowing needs, dividend sustainability and the outcome of pending legal and tax matters.