Healthcare Services Group, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The company provides housekeeping, laundry, linen, facility maintenance, and dietary management services, primarily to U.S. healthcare facilities. Results are unaudited.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $360.2 million | $320.1 million | $1,070.8 million | $951.6 million |
| Income before taxes | $26.7 million | $(35.1) million | $78.1 million | $10.1 million |
| Net income (loss) | $17.1 million | $(22.2) million | $48.9 million | $6.4 million |
| Diluted EPS | $0.24 | $(0.31) | $0.68 | $0.09 |
| Operating cash flow | Not separately stated | Not separately stated | $52.5 million | $23.7 million |
Revenue grew 12.5% in both the quarter and nine-month period. Dietary revenue growth was faster than Housekeeping growth: Q3 increased 22.0% and 7.7%, respectively; nine-month growth was 20.2% and 8.5%. Management attributed Housekeeping growth mainly to new clients and Dietary growth mainly to adding services for existing Housekeeping clients.
Q3 operating costs were 85.7% of revenue versus 98.6% a year earlier; SG&A was 6.5% versus 12.3%. For the nine-month periods, those ratios were 85.6% versus 90.3% and 7.0% versus 8.8%. Net margin was 4.7% in Q3 and 4.6% for the nine months, compared with a Q3 loss margin of 6.9% and a nine-month margin of 0.6% in 2014.
The company reported cash and cash equivalents of $44.4 million and marketable securities of $59.2 million at September 30, 2015, totaling $103.6 million, up from $87.1 million at year-end 2014. Working capital was $269.1 million and the current ratio was 3.9, compared with $216.9 million and 2.8 at year-end. There were no bank-line borrowings. The $200 million credit line was reduced by a $76.0 million standby letter of credit, leaving approximately $124.0 million available at quarter-end; the letter of credit increased to $78.3 million on October 1.
Cash used in investing activities was $51.2 million, principally reflecting net purchases of marketable securities; financing activities used $32.3 million, primarily for $38.3 million of dividends. Capital expenditures were $4.0 million for the nine months. The filing reports no borrowings, but does not present a conventional total-debt balance in the supplied text. The company’s insurance-claim liabilities totaled $79.6 million, including current and long-term portions.
Material changes and unusual items
- The sharp year-over-year earnings improvement is partly a comparison against Q3 2014, when the company recorded a one-time, non-cash change in estimate for self-insurance claims, along with corporate reorganization-related and legal costs. The filing does not give a clear standalone amount for the reserve estimate adjustment.
- In July 2015, the company completed a corporate restructuring, transferring facility-based employees to three new operating entities and shifting workers’ compensation and certain health and welfare programs to its wholly owned captive insurance subsidiary.
- For the nine months, operating cash flow rose to $52.5 million from $23.7 million. Working-capital movements included higher receivables and lower accrued payroll-related balances, partly offset by an increase in accrued insurance claims.
- The effective tax rate was 36% in Q3 and 37% for the nine months. Management estimated an annual 2015 rate of approximately 37%, subject to tax-credit availability, versus 31% for 2014.
Outlook, risks, and contingencies
Management said remaining-2015 financial performance may be comparable to historical ranges for consolidated revenue, without providing a specific revenue or earnings target. It expected Dietary growth primarily from current Housekeeping clients and Housekeeping growth primarily from new clients. The company estimated remaining-2015 capital expenditures of $1.5 million to $2.5 million and expected current cash flows and resources to fund anticipated growth. It expected to continue regular quarterly dividends, subject to Board review; a $0.18-per-share dividend was declared for payment in December 2015.
Key risks include client concentration and collection exposure, since clients rely substantially on government and third-party reimbursement and some clients are slow payers or financially distressed. Several clients each contributed at least 3% of revenue, with one contributing as much as 8%. Other risks include labor and supply cost increases, workers’ compensation and general liability claims estimates, reimbursement or regulatory changes, and state Medicaid funding pressures. The company noted that CMS’s FY2016 rule, effective October 1, 2015, was estimated to increase aggregate skilled-nursing-facility payments by 1.2%.
The company was involved in ordinary-course legal and administrative matters, including employment, contract, personal-injury, and insurance matters; it did not expect pending proceedings to materially affect consolidated financial condition or liquidity, though outcomes could affect a particular period. It could not reasonably estimate liabilities for certain tax matters, but did not expect their resolution to have a material adverse effect. The company reported compliance with its credit-line covenant and effective disclosure controls; no material change in internal control over financial reporting was identified during the quarter.
Most important facts for investors to verify
- How much of the earnings recovery reflects recurring operating improvement versus the 2014 non-cash insurance-reserve adjustment and other prior-year charges.
- Whether the faster Dietary growth and Housekeeping client additions continue, and how segment labor costs and margins develop.
- Receivables collectability, client concentration, and the adequacy of the $5.3 million doubtful-account allowance and insurance-claim reserves.
- Cash generation after dividends, the effect of the insurance letter of credit on available credit capacity, and the sustainability of the dividend.
- Effects of government reimbursement, state Medicaid funding, labor-cost inflation, and the July 2015 corporate and captive-insurance restructuring.