Healthcare Services Group, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. The company provides housekeeping, laundry, linen, facility-maintenance and dietary services, primarily to U.S. healthcare facilities.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $417.2 million | $426.8 million | Down 2.2% |
| Costs of services | $361.0 million | $373.3 million | Down 3.3% |
| SG&A | $40.0 million | $35.7 million | Up 12.1% |
| Income before taxes | $17.6 million | $15.8 million | Up 11.2% |
| Net income | $12.7 million | $11.3 million | Up 12.0% |
| Diluted EPS | $0.17 | $0.15 | Up $0.02 |
| Operating cash flow | $(16.3) million | $(30.2) million | Less cash used |
Costs of services were 86.5% of revenue, versus 87.5% a year earlier; pretax and net margins were approximately 4.2% and 3.0%, respectively, compared with 3.6% and 2.6%. SG&A was 9.6% of revenue versus 8.4%. The company attributed improved segment cost ratios partly to contract renegotiations and labor-cost management, offset by higher supply prices.
Housekeeping revenue declined 4.1% to $193.5 million; Dietary revenue declined 0.6% to $223.7 million. Management attributed both declines to fewer facilities served year over year. Segment pretax income was $20.1 million for Housekeeping and $14.7 million for Dietary; corporate and eliminations were $(17.2) million.
Liquidity, debt and capital
- At March 31, cash and cash equivalents were $16.2 million and marketable securities were $96.0 million. Combined cash and securities were $112.1 million, down from $121.5 million at year-end 2022.
- Working capital was $347.9 million and the current ratio was 3.1:1, compared with $330.0 million and 2.8:1 at December 31, 2022.
- Borrowings under the $300 million revolving credit facility were $35.0 million, up from $25.0 million at year-end. The company reported $179.3 million available after $85.7 million of standby letters of credit. It was in compliance with its financial covenants.
- Operating cash use reflected higher receivables and payment timing for payroll, including deferred-compensation-related employee payments. Investing cash use was $0.7 million; capital expenditures were $1.0 million.
- The board suspended the quarterly dividend and authorized repurchases of up to 7.5 million shares as part of a capital-rebalancing strategy. The company repurchased 169,300 shares for $2.2 million during the quarter; 7.3 million shares remained authorized.
Material changes, outlook and risks
- Bad-debt provision rose to $6.9 million from $2.9 million and equaled 1.7% of revenue versus 0.7%. A customer’s assignment for the benefit of creditors added approximately $4.7 million to provision expense; management also cited higher and older receivables.
- Interest expense increased to $1.8 million from $0.5 million, reflecting increased borrowings and higher interest rates. Investment and other income was a $3.1 million gain versus a $1.5 million loss, primarily due to deferred-compensation investment fluctuations. These market-related items affected reported results.
- Management estimated 2023 capital expenditures of $4 million to $6 million and said existing cash, operating cash flow and credit capacity should meet foreseeable needs, while noting there can be no assurance. No specific material capex commitments were disclosed.
- Management described continuing labor shortages, wage growth, inflation and supply-chain disruption, with nursing-home occupancy and workforce participation still recovering. Risks include customer concentration, collection and customer-credit issues, Medicare/Medicaid reimbursement changes, increased labor and supply costs, and potential adverse effects from COVID-19 or other disruptions.
- The company disclosed pending litigation for which it could not reasonably estimate possible losses or determine the likelihood of an unfavorable outcome. It did not expect identified tax matters to materially affect results or financial position, based on its best estimate.
Important facts for investors to verify
- Whether receivable aging, customer payment timing and the elevated bad-debt allowance improve, particularly regarding the customer in creditor proceedings.
- Whether revenue stabilizes as facility counts change, and whether labor and supply costs continue to affect segment margins.
- Whether operating cash flow turns positive and the company maintains adequate liquidity, credit-facility availability and covenant compliance.
- How the dividend suspension and share-repurchase authorization affect capital allocation, and whether repurchases continue at a material pace.
- Future results of pending legal matters, customer reimbursement conditions and other risks highlighted in the filing.