Healthcare Services Group, Inc. — Q3 2010 Form 10-Q
Business context and reporting period. The unaudited filing covers the three and nine months ended September 30, 2010; balance-sheet comparisons are against December 31, 2009. The company provides housekeeping, laundry, linen, facility-maintenance and dietary services, primarily to long-term-care facilities. It served about 2,450 facilities in 47 states. Housekeeping accounted for about 77% of nine-month revenue and Dietary about 23%.
Financial performance
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Revenue, 2010 | $195.1 million | $571.9 million |
| Revenue, 2009 | $178.8 million | $510.1 million |
| Revenue growth | 9.1% | 12.1% |
| Net income, 2010 | $9.2 million | $25.3 million |
| Net income, 2009 | $8.2 million | $23.8 million |
| Diluted EPS, 2010 / 2009 | $0.21 / $0.19 | $0.57 / $0.54 |
| Income before taxes, 2010 | $13.4 million | $39.7 million |
| Costs of services as % of revenue, 2010 / 2009 | 86.3% / 86.8% | 86.1% / 86.0% |
| Net income as % of revenue, 2010 / 2009 | 4.7% / 4.6% | 4.4% / 4.7% |
- Housekeeping segment revenue increased 10.8% in Q3 and 12.3% for nine months; Dietary increased 3.4% and 11.6%, respectively. Management attributed growth mainly to new Housekeeping clients and adding Dietary services for existing clients. The CES acquisition contributed to nine-month year-over-year growth, as 2009 results included CES only from May 1.
- Q3 pretax income was nearly flat year over year despite revenue growth. SG&A rose 21.4% in the quarter; excluding deferred-compensation investment gains, it increased 24.0%, chiefly due to payroll and related costs. Nine-month SG&A excluding those gains rose 17.7%, faster than revenue growth.
- The nine-month effective tax rate fell to 36.2% from 38.5%, primarily reflecting tax credits realized when the 2009 tax return was filed in Q3. Q3 rate was 31.7%, versus 38.5% a year earlier.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $15.7 million, down from $35.2 million in 2009. The filing cites working-capital needs, including receivables and inventory growth associated with higher revenue, and lower accrued payroll balances. Investing activities provided $4.3 million, versus $8.3 million used in 2009; financing activities used $25.2 million, mainly for $29.0 million of dividends.
- Cash and cash equivalents were $26.1 million and marketable securities $44.5 million at September 30, for combined liquidity of $70.6 million, compared with $83.9 million at year-end 2009. Working capital was $179.1 million and the current ratio 8.4:1, versus $177.5 million and 6.1:1 at year-end.
- No borrowings were outstanding under the $36 million demand credit line. A $35.42 million standby letter of credit for insurance obligations reduced availability; the line expires June 30, 2011. The company said it complied with its financial covenants and expected renewal. Reported covenant measures were a 2.0x commitment coverage ratio and $186 million tangible net worth against a $180 million minimum.
- No material off-balance-sheet arrangements were reported other than the standby letter of credit. Capital expenditures were $2.5 million for the nine months; management estimated another $0.5–$1.5 million for the remainder of 2010.
Outlook, risks and notable items
- Management expected remaining-2010 financial performance to be broadly comparable to the reported revenue percentages and anticipated the segment revenue mix to remain similar. It expected Dietary growth mainly from existing Housekeeping clients and Housekeeping growth mainly from new clients. These are expectations, not guarantees.
- Management expected an effective tax rate of about 36.7% for the remainder of 2010, absent significant tax-law changes, and said cash, operating cash flow and the credit line should support operations and anticipated growth.
- Key risks include client dependence on Medicare and Medicaid reimbursement, state budget pressures and potential reimbursement reductions or payment delays; bad debts and client liquidity; labor and supply cost increases; workers’ compensation and general-liability claims; and regulatory, tax and collection uncertainty. A few states had indicated they might lack cash to pay Medicaid providers. The company said the full effect of 2010 health-care legislation was not yet known.
- One nursing-home-chain client generated 11% of nine-month revenue (13% in 2009); its loss or a significant revenue reduction could materially harm results. Amounts due from this client were less than 1% of receivables at September 30.
- Q3 workers’ compensation and general-liability expense increased as a share of revenue, attributed to unfavorable claims experience. The company reported $5.5 million of doubtful-account reserves against $10.3 million of accounts identified as potentially impaired or at risk; actual collections may differ from estimates.
- The board declared a $0.2325-per-share quarterly cash dividend payable November 5, 2010, and a three-for-two stock split in the form of a 50% stock dividend payable November 12. The filing’s per-share figures are not adjusted for the split.
- The company reported no material change in its previously disclosed risk factors, no material adverse effect expected from ordinary-course legal matters, and effective disclosure controls as of September 30, 2010.
Important facts for investors to verify
- Whether operating cash flow recovers as revenue growth continues, particularly given receivables, notes receivable and inventory needs.
- Whether SG&A and payroll growth can be controlled and whether segment-level labor and supply efficiencies persist.
- Developments in Medicaid and Medicare reimbursement, state payment capacity, client collections and the major-client relationship.
- Actual insurance-claim outcomes and changes in reserves, as well as the adequacy of the doubtful-account allowance.
- Renewal of the credit line before June 30, 2011, available capacity after the insurance letter of credit, and continued covenant compliance.
- Dividend sustainability and the effect of the announced stock split on share counts and per-share comparisons.