Healthcare Services Group, Inc. — Q2 2020 Form 10-Q
Business and period: The company provides housekeeping, laundry, linen, facility-maintenance and dietary services to U.S. healthcare facilities. This unaudited report covers the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $452.0 million | $462.1 million | $901.2 million | $938.2 million |
| Income before taxes | $30.4 million | $23.6 million | $57.2 million | $35.5 million |
| Net income | $23.1 million | $18.2 million | $43.3 million | $27.3 million |
| Diluted EPS | $0.31 | $0.24 | $0.58 | $0.37 |
| Operating cash flow | Not separately provided | Not separately provided | $92.4 million | $20.3 million |
- Q2 revenue declined 2.2%, while net income increased about 27%. Net margin was 5.1% versus 3.8%; costs of services were 85.7% of revenue versus 86.7%.
- First-half revenue declined 3.9%, while net income rose about 58%. Costs of services were 86.0% of revenue versus 88.2%; net margin was 4.8% versus 2.9%.
- First-half Housekeeping revenue fell 2.2% and Dietary revenue fell 5.7%. Dietary segment pretax income rose to $33.0 million from $25.1 million, while Housekeeping pretax income fell to $49.2 million from $51.3 million.
- At June 30, cash and equivalents were $78.1 million and marketable securities were $92.3 million, totaling $170.4 million. Working capital was $354.0 million; the current ratio was 3.1, down from 3.5 at year-end 2019.
- No line-of-credit borrowings remained at quarter-end, versus $10.0 million at December 31, 2019. The $475 million facility had $410.1 million available after $64.9 million of letters of credit. The company reported compliance with its covenants.
- First-half investing cash use was $2.7 million and financing cash use was $38.9 million, including $30.2 million of dividends. Cash increased $50.8 million during the half.
Changes, outlook and notable items
- Management said COVID-19 had no material net impact on Q2 consolidated operating results. Q2 revenue included $17.2 million of supplemental COVID-related billings, mainly employee pay premiums passed through to customers, offset by lower recurring billings as census-driven staffing and purchasing declined.
- Revenue declines reflected facility exits associated with operator transitions where the company could not agree on terms, including payment and credit terms. Management said the full pandemic impact remained uncertain and could affect customer census, collections, labor, supplies and operations.
- Operating cash flow rose substantially year over year, but included a $15.4 million benefit from deferred payroll taxes under the CARES Act, along with timing effects. Management said it had not changed its expectations for future operating cash flows.
- Effective January 1, 2020, adoption of expected-credit-loss guidance produced a $42.2 million increase in the allowance for doubtful accounts and a $32.1 million after-tax reduction to opening retained earnings. The June 30 allowance for accounts and notes receivable totaled $84.0 million.
- Management estimated 2020 capital expenditures of $5 million to $6 million; $1.8 million had been spent through June 30. It expected to continue regular quarterly dividends, but future payments are not assured. A $0.20375-per-share dividend was declared in July for payment in September.
- Investment and deferred-compensation-related market movements affected reported results; Q2 investment and other income was $7.7 million, compared with $1.4 million a year earlier. The filing provides no specific earnings or revenue guidance.
- The SEC investigation into EPS calculation practices and a related shareholder class action remained unresolved. The company could not reasonably estimate potential losses. It also cited possible COVID-related insurance claims and adverse changes in customer credit quality.
Key facts for investors to verify
- Whether supplemental COVID billings and any related customer reimbursements continue, and how census-driven reductions affect recurring revenue.
- Whether customer payment delays, write-offs and credit-loss reserves worsen; note receivables past due by more than 181 days totaled $8.9 million.
- How much of the strong first-half operating cash flow reflects payroll-tax deferrals and other timing effects, and the timing of repayment of deferred taxes.
- Whether investment-related gains and losses materially affect future reported earnings, and whether segment cost improvements are sustainable.
- Developments in the SEC investigation, shareholder litigation and COVID-related insurance exposures, none of which had a reasonably estimable loss in the filing.