Healthcare Services Group, Inc. — Q1 2021 Form 10-Q
Business and period: The company provides housekeeping, laundry, linen, facility maintenance and dietary services to U.S. healthcare facilities, primarily long-term-care providers. This unaudited report covers the three months ended March 31, 2021, compared with the same quarter of 2020. Its reportable segments are Housekeeping and Dietary.
Financial results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $407.8 million | $449.2 million | Down 9.2% |
| Operating costs of services | $336.6 million | $387.2 million | Down 13.1% |
| SG&A | $40.0 million | $30.0 million | Up 33.2% |
| Income before taxes | $33.0 million | $26.8 million | Up 23.0% |
| Net income | $24.7 million | $20.2 million | Up 22.1% |
| Diluted EPS | $0.33 | $0.27 | Up $0.06 |
| Operating cash flow | $3.5 million | $12.7 million | Down $9.2 million |
Net margin increased to 6.0% from 4.4%; costs of services declined to 82.6% of revenue from 86.2%, while SG&A rose to 9.8% from 6.7%. The improved net income also reflected investment and other income of $2.2 million, versus an expense of $4.8 million a year earlier, largely from deferred-compensation investment fluctuations. The effective tax rate was 25.2%, compared with 24.6%.
Housekeeping revenue fell 4.1% to $215.1 million; Dietary revenue fell 14.3% to $192.7 million. Management attributed declines mainly to census-related reductions in staffing and purchasing and fewer facilities served. Q1 revenue included $3.9 million of COVID-19 supplemental billings, primarily employee pay premiums passed through to customers, offset by lower recurring billings.
Liquidity, debt and cash flow
At March 31, cash and cash equivalents were $123.7 million and marketable securities were $125.8 million, totaling $249.4 million. Working capital was $425.3 million and the current ratio was 3.9:1. Cash and marketable securities totaled $264.3 million at year-end 2020. Operating cash flow was lower year over year, with cash uses including payroll-related payments and prepaid expenses. Investing activities used $3.7 million; financing activities used $15.5 million, including $15.5 million of dividends paid.
The company had no borrowings on its $475 million credit facility; $410.1 million remained available after $64.9 million of standby letters of credit. It reported covenant compliance. The quarterly dividend paid was $0.20625 per share. Management said it expects to continue regular quarterly dividends, subject to Board review. Estimated 2021 capital expenditures are $4 million to $6 million; $0.9 million had been spent through March 31.
Outlook, risks and unusual items
- Management said COVID-19 had no material net impact on consolidated operating results in Q1. It cited continuing uncertainty around customer census and demand, employee and supply-chain disruption, and customer reimbursement and collections. It expects most qualifying COVID-related costs outside contracted obligations to be reimbursed, but this is not assured.
- Management expects long-term demand for its essential services to remain strong, but provided no specific revenue or earnings guidance. Results depend on winning and retaining customers, expanding services, modest pricing increases and cost controls.
- Bad-debt provision was $3.4 million, up from $2.1 million; management cited receivable aging, elevated write-offs and customers’ repayment challenges. Net accounts and notes receivable were $284.6 million, with a $61.1 million allowance. Customer concentration is identified as a risk, but the filing text does not provide a clear customer name or concentration percentage.
- A shareholder class action relating to historical EPS calculation practices reached an agreement in principle to settle on March 17, 2021, subject to final documentation and court approval. Insurers agreed to pay the full settlement amount upon approval. Separately, the SEC investigation remains ongoing; the company disclosed a reasonably possible loss range of up to $10 million.
- The company noted the expected phaseout of LIBOR after 2021 and uncertainty about replacement-rate effects. It reported no other material changes to the risk factors in its 2020 Form 10-K.
Investor verification priorities
- Track revenue recovery by segment, facility count, customer census and the level of COVID-related supplemental billings.
- Monitor collections, receivable aging, bad-debt expense and customer credit quality, including any concentration disclosures.
- Assess whether operating cash generation can sustain dividends, planned capital spending and liquidity needs.
- Confirm court approval and insurer payment of the class-action settlement, and follow developments in the SEC investigation and its potential loss exposure.
- Review future SG&A, labor and supply costs, and the effects of the LIBOR transition and healthcare reimbursement changes.