Healthcare Services Group, Inc. — Q1 2018 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2018, compared with Q1 2017. The company provides housekeeping, laundry, linen, facility maintenance and dietary services to U.S. healthcare facilities, principally long-term-care providers. It reported two segments: Housekeeping and Dietary.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Revenue | $501.8 million | $404.5 million | Up 24.1% |
| Housekeeping revenue | $246.4 million | $243.4 million | Up 1.2% |
| Dietary revenue | $255.4 million | $161.1 million | Up 58.6%, primarily from expanding services to existing Housekeeping clients |
| Costs of services | $469.9 million | $345.6 million | Up 36.0%; 93.6% of revenue versus 85.4% |
| SG&A | $33.8 million | $28.2 million | Up 19.7%; 6.7% of revenue in both periods |
| Income (loss) before taxes | $(1.4) million | $32.3 million | Turned to a loss |
| Income tax benefit (expense) | $1.5 million benefit | $10.3 million expense | Q1 2018 benefit includes approximately $1.1 million from discrete stock-award tax effects |
| Net income | $0.1 million | $22.0 million | Basic and diluted EPS were $0.00 versus $0.30 |
| Operating cash flow | $23.9 million | $34.6 million | Down $10.7 million |
Margins and segment results. Net margin was approximately 0.01%, versus 5.4% in Q1 2017. The $37.1 million bad-debt provision was 7.4% of revenue, compared with $1.1 million, or 0.3%, a year earlier, and was the principal unusual factor behind the consolidated loss. Housekeeping and Dietary reported segment pretax income of $28.9 million and $14.7 million, respectively; corporate costs and eliminations were $(45.1) million, including the bad-debt charges. Housekeeping costs were 88.3% of segment revenue versus 90.5%; Dietary costs were 94.2% versus 93.7%.
Liquidity, debt and cash flows
- At March 31, cash and cash equivalents were $10.5 million and marketable securities were $74.4 million, totaling $84.9 million. Working capital was $317.5 million and the current ratio was 2.8:1.
- Borrowings under the $300 million line of credit were $26.0 million. Availability was $208.1 million after $65.9 million of insurance-related letters of credit. The funded-debt-to-EBITDA covenant ratio was 0.83, below the 3.00 maximum; the facility expires December 18, 2018.
- Cash flow from investing was $(4.2) million; financing cash flow was $(18.8) million, including $14.1 million in dividends and $9.4 million of net line-of-credit repayments. Cash ended the quarter at $10.5 million.
- Net accounts and notes receivable were $373.8 million, including $48.9 million of current allowance for doubtful accounts, up from $12.0 million at year-end. Long-term notes receivable rose to $38.8 million from $15.5 million.
Material changes, outlook and risks
- The company attributed the sharp bad-debt increase mainly to corporate restructurings at two privately held, multi-state customer operators. It also converted approximately $25 million of receivables to long-term notes related to milestones in its 2017 dining and nutrition expansion with Genesis HealthCare. Total promissory notes outstanding, net of reserves, were $60.9 million, versus $36.6 million at year-end.
- Management expected consolidated revenue to continue growing during the remainder of 2018, with Dietary expanding as a share of revenue through sales to existing Housekeeping clients and Housekeeping growth mainly from new clients. No quantified revenue or earnings forecast was provided. Estimated 2018 effective tax rate was 22%–24%.
- Management estimated 2018 capital expenditures of $4.5–$6.0 million and said cash, operations and credit availability should meet foreseeable needs. It expected the credit facility to be renewed or replaced before expiration, but gave no assurance.
- Key risks include client collection delays or insolvency, dependence of clients on Medicare and Medicaid reimbursement, customer concentration, labor and supply cost increases that may not be passed through, insurance claims, and changes in healthcare or labor-related laws and regulations. Management stated that no pending legal matter was expected to materially affect financial condition or liquidity. The filing reported no material change to the prior annual report’s risk factors.
- The company adopted ASC 606 in Q1 2018; adoption had no material revenue-accounting impact and no opening retained-earnings adjustment. Management identified lease accounting as a forthcoming change, expected primarily to put operating leases for offices, vehicles and equipment on the balance sheet upon 2019 adoption.
Important facts for investors to verify
- Whether the two customers’ restructurings lead to additional write-offs, reserve changes or delayed collections, and the collectability and repayment terms of the growing notes-receivable balance.
- How customer concentration and healthcare reimbursement developments may affect revenue, cash receipts and bad-debt expense.
- Whether the business can restore service-cost margins after the exceptional provision, while managing labor and supply costs and sustaining Dietary growth.
- Renewal or replacement of the credit facility before its December 2018 expiration, covenant compliance, and continued capacity to fund dividends.
- Actual 2018 tax rate and capital spending compared with management’s stated estimates.