Healthcare Services Group, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparative period is Q1 2010 unless otherwise noted. Financial statements are unaudited. The company provides housekeeping, laundry, linen, maintenance and dietary services primarily to long-term-care facilities.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 / prior date | Change or context |
|---|---|---|---|
| Revenue | $208.390 million | $183.801 million | Up 13.4% |
| Costs of services | $179.985 million | $158.573 million | Up 13.5%; 86.4% of revenue versus 86.3% |
| Selling, general and administrative expense | $16.780 million | $13.901 million | Up 20.7%; 8.1% of revenue versus 7.6% |
| Income before income taxes | $12.339 million | $12.077 million | Up 2.2%; pretax margin 5.8% versus 6.5% |
| Net income | $7.767 million | $7.428 million | Up 4.6%; net margin 3.6% versus 4.0% |
| Diluted EPS | $0.12 | $0.11 | Cash dividends per share were $0.16 versus $0.14 |
| Operating cash flow | $5.942 million | $(2.261) million | Turned positive |
| Cash and cash equivalents | $36.692 million | $39.692 million at Dec. 31, 2010 | Quarter-end cash decreased $3.000 million |
| Marketable securities | $41.199 million | $43.437 million at Dec. 31, 2010 | Cash and securities totaled $77.891 million |
| Working capital | $182.171 million | $181.244 million at Dec. 31, 2010 | Current ratio 6.3:1 versus 5.5:1 |
| Debt and credit availability | No line borrowings | — | $42.0 million facility; $40.420 million standby letter of credit reduced availability |
Business trends and changes from prior period
- Housekeeping segment revenue increased 11.0% to $156.462 million, primarily from new client agreements. Dietary segment revenue increased 20.3% to $51.657 million, primarily from serving existing housekeeping clients. Segment income before taxes rose 15.7% for Housekeeping and 58.4% for Dietary.
- Management cited improved labor efficiencies in both segments and better Dietary supply pricing. These benefits were offset by higher Housekeeping supply costs and other service costs, leaving consolidated service-cost margin essentially unchanged.
- Bad-debt provision rose to $1.160 million from $0.600 million, primarily due to write-offs associated with nursing homes completing bankruptcy proceedings. SG&A excluding deferred-compensation fund gains rose 21.1%, faster than revenue, reflecting payroll and management structure, travel, business development and facility start-up costs.
- Cash flow improved to positive $5.942 million, but was affected by timing of payroll and payroll-tax payments and higher receivables. Dividends paid were $10.402 million, exceeding quarterly operating cash flow.
Outlook, risks and unusual items
- Management said Q1 financial performance as a percentage of revenue may be comparable for the remainder of 2011, subject to stated risks. It expected segment revenue mix to remain approximately 75% Housekeeping and 25% Dietary, with Dietary growth mainly from existing Housekeeping clients and Housekeeping growth mainly from new clients.
- Planned capital expenditures for the remainder of 2011 were approximately $1 million to $2 million. Management said cash, securities, operating cash flow and the credit line should fund operations and anticipated growth; it also expected to continue regular quarterly dividends, without assurance.
- Medicaid and other government reimbursement pressure, state budget shortfalls and healthcare-law implementation could weaken clients’ finances, delay payments or increase bad debts. The full effect of the 2010 healthcare legislation was not yet known.
- One nursing-home chain represented 10% of Q1 revenue, down from 11% in Q1 2010. Its loss or changed payment terms could materially affect results or cash flow. Client receivables overall were also exposed to credit and collection risk; net promissory notes outstanding were $8.715 million at quarter-end.
- Insurance claims estimates are significant: accrued insurance claims were $18.781 million, and management noted that adverse claims experience or assumptions could affect results. Other risks include labor and supply cost inflation, regulation and tax interpretations, interest-rate exposure on investments, and potential asset impairment.
- The company reported no material off-balance-sheet arrangements other than the standby letter of credit. It stated that it was in compliance with credit covenants; the facility expires June 30, 2012, and management believed it would be renewed. A potential federal new-hire retention tax credit could lower the effective tax rate, but the company could not estimate the amount; Q1 impact was immaterial.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material change to the risk factors in the 2010 Form 10-K was reported.
Investor verification points
- Review whether revenue growth and segment margins persist, particularly as SG&A and bad-debt expense have grown faster than revenue.
- Monitor client collections, bankruptcy-related write-offs, receivables and promissory notes, and the financial health of the major client and long-term-care customers.
- Check cash generation against dividends, capital spending and the remaining availability under the credit facility after the insurance-related letter of credit.
- Track Medicaid reimbursement developments, healthcare-law implementation, insurance-claim estimates and any changes in the company’s expected 2011 tax credits or outlook.