Healthcare Services Group, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The company provides housekeeping, laundry, linen, facility maintenance and dietary services to healthcare facilities, principally long-term-care providers. Figures are in millions except per-share data.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $415.6 | $435.9 | $1,221.5 | $1,337.1 |
| Income before taxes | $12.1 | $37.1 | $60.1 | $94.3 |
| Net income | $9.5 | $27.6 | $43.8 | $70.9 |
| Diluted EPS | $0.13 | $0.37 | $0.58 | $0.95 |
| Net margin | 2.3% | 6.3% | 3.6% | 5.3% |
- Revenue and segments: Q3 revenue declined 4.7%; nine-month revenue declined 8.6%. For nine months, Housekeeping revenue was $621.3 million (down 8.0%) and Dietary was $600.2 million (down 9.3%).
- Costs and profitability: Q3 costs of services were 87.8% of revenue, versus 83.8% a year earlier; SG&A was 9.3%, versus 8.6%. Nine-month costs of services were 85.0% of revenue versus 85.3%, while SG&A rose to 10.5% from 8.1%. Q3 segment costs reflected higher labor rates and premium pay, plus inflation in Dietary supplies.
- Cash flow: Nine-month operating cash flow was $5.7 million, compared with $141.5 million in 2020. The company cited lower net income, timing of receipts and payments, and the prior-year $32.3 million payroll-tax deferral as key drivers. Investing cash flow was negative $14.3 million and financing cash flow negative $51.2 million. Cash and cash equivalents fell to $79.6 million from $139.3 million at year-end 2020.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $205.2 million; working capital was $412.2 million and the current ratio was 3.7. There were no borrowings on the $475 million credit facility; $410.1 million remained available after standby letters of credit. The company reported compliance with its covenants. Marketable securities were $125.6 million.
- Other balance-sheet items: Net accounts and notes receivable totaled $320.4 million, up from $289.9 million at year-end; the allowance for doubtful accounts was $68.0 million. Total assets were $793.6 million and stockholders’ equity was $480.2 million.
Material changes and notable items
- Revenue pressure principally reflected census-related reductions in customer staffing and purchasing, fewer facilities served, and modified pricing and payment terms with a customer. Bad-debt expense increased; nine-month provision was $10.8 million versus $6.8 million in 2020.
- SG&A excluding deferred-compensation investment gains increased 19.1% for the nine months, driven by payroll, business-development travel and entertainment, and legal and professional costs. These included the $6.0 million SEC settlement penalty and $3.0 million for a negotiated California labor and employment settlement.
- The company acquired a business on April 26, 2021 for stated consideration of $16.5 million, including $6.0 million cash and $10.5 million accrued variable consideration; purchase-price allocation was not final.
- Cash dividends paid during the first nine months totaled $46.7 million. The company repurchased 193,250 shares for $5.4 million.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management estimated 2021 capital expenditures of $5–$7 million, with $4.2 million spent through September, and expected to continue regular quarterly dividends, subject to Board review. Management considered available cash and credit capacity adequate for the foreseeable future.
- Management said COVID-19 had no material net impact on consolidated Q3 results, but cited uncertainty around future demand, workforce disruption and supply chains. Wage and supply inflation may pressure margins, particularly if costs cannot be passed through to customers. Customers’ dependence on Medicare, Medicaid and other reimbursement, customer credit quality, and concentration in one customer are additional risks.
- A $16.8 million shareholder class-action settlement was preliminarily approved in September and paid by D&O insurers on October 15, 2021; final court approval was scheduled for January 10, 2022. The SEC investigation into historical EPS practices concluded with a $6.0 million company penalty; the company and individuals neither admitted nor denied the findings. Other ordinary-course legal and tax matters remain.
- The filing states that disclosure controls were effective and that no material change in internal control over financial reporting occurred in the period. The SEC order nevertheless cited historical failures to timely record certain loss contingencies and maintain accurate records and sufficient controls.
Important facts for investors to verify
- The filing’s COVID-19 billing disclosures are inconsistent: the overview says Q3 included $5.2 million of supplemental billings, while the detailed Q3 discussion says $0.5 million; the nine-month discussion reports $5.2 million. Confirm the correct quarterly figure.
- The nine-month financial statements report income-tax expense of $16.4 million for 2021 and $23.4 million for 2020, but the MD&A describes the 2020 amount as $13.9 million. Confirm the intended comparative disclosure.
- Monitor collections, receivables aging and bad-debt provisions, as well as customer concentration and the financial health of long-term-care customers.
- Assess whether labor availability, wage increases, food and supply inflation, and COVID-related staffing or supply disruptions continue to affect segment margins.
- Track final court approval of the insured class-action settlement, completion of the acquisition purchase-price allocation, and cash generation relative to dividends, repurchases and planned capital spending.