Healthcare Services Group, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports unaudited fourth-quarter results. The company provides housekeeping, laundry, linen, facility maintenance and dietary services to U.S. healthcare facilities. It served more than 3,000 facilities, employed over 51,000 people and reported Housekeeping and Dietary as its two segments.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $1,840.8 million | $2,002.6 million |
| Income before income taxes | $85.1 million | $99.9 million |
| Net income | $64.6 million | $83.5 million |
| Diluted earnings per share | $0.87 | $1.12 |
| Net cash provided by operating activities | $93.6 million | $80.0 million |
| Working capital | $367.1 million | $344.7 million |
- Revenue declined 8.1% year over year; net income declined 22.7%. Pretax margin was 4.6% of revenue versus 5.0%; net margin was 3.5% versus 4.2%.
- Costs of services were 87.6% of revenue, down from 88.3%; selling, general and administrative expense rose to 8.2% of revenue from 6.8%.
- Housekeeping generated $909.5 million of revenue, down 6.0%; Dietary generated $931.3 million, down 10.0%. Segment pretax income was $94.2 million for Housekeeping and $43.3 million for Dietary.
- Fourth-quarter revenue was $447.0 million and net income was $18.9 million, compared with $495.0 million and $31.6 million, respectively, in fourth-quarter 2018. Fourth-quarter diluted EPS was $0.25 versus $0.42.
- Cash, cash equivalents and marketable securities totaled $118.0 million, including $90.7 million of marketable securities held by the captive insurer and subject to insurance-related restrictions. Net accounts and notes receivable were $387.9 million.
- The company had $10.0 million outstanding under its $475 million revolving credit facility; $402.3 million was available after letters of credit. It reported compliance with covenants. The facility expires December 21, 2023.
- Capital expenditures were $4.4 million. Cash dividends paid were $59.0 million; the Board declared a quarterly dividend of $0.20125 per share payable in March 2020.
Material changes versus 2018
- Revenue fell in both segments. Housekeeping declines were partly associated with customer terminations during facility-operator transitions. Dietary revenue was particularly affected by changes to the Genesis contract: from December 2018, Genesis paid food suppliers directly, reducing reported dining revenue while HCSG continued managing procurement.
- Genesis revenue declined to $287.8 million, or 15.6% of consolidated revenue, from $386.7 million, or 19.3%.
- Bad-debt provision decreased to $25.5 million from $51.4 million, while net write-offs increased to $30.3 million from $6.2 million. Self-insurance costs were 2.7% of revenue versus 1.9%.
- Dietary labor costs rose to 63.6% of segment revenue from 57.2%; Dietary supplies fell to 29.3% from 34.4%, primarily reflecting the Genesis arrangement. Housekeeping labor costs rose to 80.2% from 79.4%.
- The effective tax rate increased to 24.1% from 16.4%, principally due to lower Work Opportunity Tax Credit benefits. Investment and other income increased to $10.7 million, including favorable market movements in deferred-compensation investments.
- The company adopted lease accounting standard ASC 842 in 2019, recording lease right-of-use assets and liabilities; it reported $16.9 million of lease liabilities at year-end.
Outlook, risks and unusual items
- Management said 2020 consolidated financial performance may be comparable to historical financial ratios, absent adjustments to bad-debt expense, self-insurance reserves and income-tax provision. It expects Dietary to increase as a share of revenue by expanding services to current Housekeeping clients; Housekeeping growth is expected primarily from new clients. No specific revenue or earnings guidance was provided.
- Management estimated 2020 capital expenditures of $3.0–$5.5 million. It expected to continue regular quarterly dividends, subject to Board review and financial conditions.
- Adoption of the expected-credit-loss standard ASC 326 on January 1, 2020 was expected to increase the allowance for credit losses by approximately $36–$44 million, with a one-time, after-tax reduction to retained earnings. Management said adoption would not change cash flows or breach debt covenants.
- The SEC investigation into EPS calculation practices remained ongoing, and a shareholder securities class action sought unspecified damages. The company was cooperating with the SEC and vigorously defending the lawsuit; it said possible losses could not then be reasonably estimated.
- Key risks include customer concentration and credit/collection exposure, reliance of clients on Medicare and Medicaid reimbursements, short-cancelable service agreements, labor and supply-cost inflation, self-insurance reserve estimation, and legal and regulatory matters. Sysco distributed approximately 50% of food and non-food dining supplies in 2019.
- The auditor issued an unqualified opinion on the financial statements and internal controls; management and the auditor concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- Whether Genesis revenue, payment behavior and the post-contract-change Dietary cost mix stabilize or continue to weigh on results.
- Receivable quality and collection outcomes, including the $30.3 million of 2019 net write-offs and the expected ASC 326 allowance increase.
- Developments in the SEC investigation and class action, including any change in the company’s ability to estimate exposure.
- Actual 2020 operating results versus management’s qualitative outlook, particularly labor costs, self-insurance reserves and tax-credit benefits.
- Liquidity available after insurance-related letters of credit and whether dividend payments remain supported by operating cash flow.