Business context and reporting period
Healthcare Services Group, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. It provides housekeeping, laundry and linen, maintenance, and dietary services to healthcare facilities, primarily long-term-care providers. At quarter-end, it served approximately 2,670 facilities in 47 states; housekeeping was its largest segment.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue, 2011 | $218.9 million | $638.8 million |
| Revenue, 2010 | $195.1 million | $571.9 million |
| Revenue growth | 12.2% | 11.7% |
| Net income, 2011 | $10.0 million | $27.6 million |
| Net income, 2010 | $9.2 million | $25.3 million |
| Diluted EPS, 2011 | $0.15 | $0.41 |
| Diluted EPS, 2010 | $0.14 | $0.38 |
- Third-quarter pretax margin was 6.9%, unchanged year over year; net margin was 4.6% versus 4.7%. For the nine-month period, pretax margin was 6.6% versus 6.9%, and net margin was 4.3% versus 4.4%.
- Costs of services were 85.9% of revenue in Q3 versus 86.3%; for the nine months they were 86.1% in both years. More favorable insurance claims experience helped, while labor efficiencies and supply costs varied by segment.
- Q3 housekeeping segment revenue increased 8.5%, principally from new clients; dietary revenue rose 24.7%, mainly from existing housekeeping clients. Nine-month increases were 8.5% and 22.3%, respectively.
- Operating cash flow was $19.4 million for the nine months, up from $15.7 million. Capital expenditures were $4.4 million; management estimated a further $0.5–$1.0 million for the remainder of 2011.
- Cash and marketable securities totaled $68.3 million at September 30, down from $83.1 million at December 31, 2010. Working capital was $186.0 million and the current ratio 7.3:1. The company reported no borrowings.
- A $57.0 million demand credit line had $40.4 million committed to an insurance standby letter of credit, leaving approximately $16.6 million available. It expires June 30, 2012; the company expected renewal and reported covenant compliance.
- Dividends paid in the first nine months totaled $31.5 million, or $0.47 per share. The board declared a further $0.16 per-share dividend payable in November 2011.
Material changes, outlook and risks
- SG&A excluding deferred-compensation fund valuation changes grew 16.4% in Q3 and 16.0% for the nine months, faster than revenue, reflecting added management capacity, payroll, travel, and professional fees. Investment and interest results were a loss of $1.4 million in Q3 and $0.2 million for the nine months, mainly reflecting deferred-compensation investment value changes.
- Management said it anticipated remaining-2011 financial performance to be comparable to the revenue percentages shown in its results discussion. It expected housekeeping and dietary revenue shares to remain broadly similar, with dietary growth largely from existing clients and housekeeping growth mainly from new clients. These statements are forward-looking, not a guarantee.
- CMS’s July 2011 final rule reduced Medicare payments to nursing centers by 11.1% and changed group rehabilitation therapy reimbursement, effective October 1, 2011. Management warned that reimbursement pressure, state Medicaid funding constraints, and further regulatory changes could weaken clients’ liquidity and ability to pay.
- One nursing-home-chain client contributed 9% of revenue in the nine months (11% in the prior-year period); the filing says its loss or a significant reduction in business could materially harm results. Client receivables were $117.3 million, with a $4.8 million doubtful-account allowance; management cited collection delays and client financial stress.
- Accrued insurance claims totaled $19.5 million current and long-term combined. Results depend on estimates of workers’ compensation and general-liability claims; adverse claims experience could increase costs. Management also identified labor and supply inflation, tax-credit estimates, and interest-rate movements as risks.
- The nine-month effective tax rate fell to 34.7% from 36.2%, primarily due to estimated credits, including the New Hire Retention Credit available through December 31, 2011. An adverse change in projected credits could affect results. The filing reported no material change in previously disclosed risk factors, no material off-balance-sheet arrangements apart from the letter of credit, and no legal proceedings listed as applicable.
Important facts for investors to verify
- How the Medicare payment reduction and state Medicaid pressures affect client finances, contract retention, and collections after October 1, 2011.
- Whether revenue growth and segment margins persist, especially as SG&A has grown faster than revenue and the company adds management capacity.
- Receivables aging, doubtful-account provisioning, and the outcome of client notes and collection matters.
- Insurance-claim development and the assumptions underlying accrued claims and related costs.
- Renewal of the credit line before its June 2012 expiry, available borrowing capacity after the letter of credit, and dividend sustainability relative to operating cash flow.
- Realization of estimated tax credits and the effect of investment-value changes on reported earnings.