Healthcare Services Group, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also presents unaudited fourth-quarter results. Healthcare Services Group provides housekeeping, laundry, linen, facility maintenance and dietary services to U.S. healthcare facilities.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $2,008.8 million | $1,866.1 million |
| Income before taxes | $99.9 million | $133.0 million |
| Net income | $83.5 million | $88.2 million |
| Diluted EPS | $1.12 | $1.19 |
| Operating cash flow | $80.0 million | $7.6 million |
| Working capital | $344.7 million | $343.2 million |
- Revenue rose 7.6%; costs of services rose 9.9% to $1,772.0 million. Costs of services were 88.2% of revenue, versus 86.4% in 2017. Net margin declined to 4.2% from 4.7%.
- The effective tax rate was 16.4%, compared with 33.6%, reflecting the lower federal corporate tax rate and tax effects including a $13.0 million deferred tax benefit.
- Cash, cash equivalents and marketable securities totaled $102.4 million at year-end. The company reported a 3.1-to-1 current ratio.
- Year-end borrowings under its $475 million revolving credit facility were $30.0 million. Availability was $379.1 million after outstanding letters of credit; the company was in compliance with its financial covenants.
- Dividends paid totaled $57.2 million. Capital expenditures were $4.9 million; the company estimated 2019 capital expenditures of $5.0–$7.0 million.
Material changes versus prior periods
- Dietary revenue grew 16.7% to $1,035.0 million, mainly from expanding services to existing housekeeping clients. Housekeeping revenue decreased 0.6% to $973.8 million, reflecting adjustments to certain customer relationships.
- Bad-debt provision increased sharply to $51.4 million from $6.3 million, or 2.6% of revenue versus 0.3%. The company attributed the increase to restructurings of privately held, multi-facility operators. Year-end allowance for doubtful accounts was $57.2 million.
- Genesis Healthcare accounted for $386.7 million, or 19.3%, of consolidated revenue, up from 17.5% in 2017.
- Operating cash flow increased from $7.6 million to $80.0 million; cash flows are affected by collection and payment timing. The company also converted approximately $24.8 million of receivables into long-term notes.
- FY 2018 diluted EPS was $1.12. Unaudited Q4 revenue was $496.4 million, net income $31.6 million, and diluted EPS $0.42; Q4 2017 figures were $499.4 million, $20.2 million, and $0.27, respectively.
Outlook, risks and unusual items
- Management said 2019 consolidated financial performance may be comparable to historical ratios, absent adjustments to bad-debt expense, self-insurance reserves and the income-tax provision. It expected Dietary to increase as a share of revenue through expanded services to existing clients; Housekeeping growth was expected primarily from new clients.
- Key risks include customer credit and collections, reliance on healthcare clients exposed to Medicare and Medicaid reimbursement changes, and customer concentration. Client agreements are generally renewable for one year and can be canceled on 30–90 days’ notice after an initial period.
- Labor, food and other supply costs, minimum-wage changes, tariffs, insurance claims and state or local regulation may pressure costs; the company seeks to pass through many increases but cannot assure it can do so promptly or fully.
- The SEC’s formal investigation into EPS calculation, rounding and reporting practices remained ongoing. The company’s Audit Committee-directed internal investigation was completed in March 2019; potential regulatory action, costs or related litigation could affect results.
- The company reported ordinary-course legal and governmental matters, but said it knew of no pending matter expected to materially affect consolidated financial condition or liquidity. Management and the auditor reported effective internal controls; the auditor issued an unqualified opinion on the financial statements.
- The company adopted lease accounting guidance on January 1, 2019, recognizing an $11.4 million lease liability and corresponding right-of-use asset; it did not expect a material income-statement impact.
Important facts for investors to verify
- Progress in collecting or recovering receivables tied to customer restructurings, including the $51.4 million bad-debt charge, $57.2 million allowance and long-term notes.
- Genesis’s financial condition, payment behavior and share of company revenue, as well as developments among other large customers.
- Subsequent SEC investigation developments, any related litigation, and the implications for EPS reporting and controls.
- Whether management’s 2019 outlook assumptions hold, particularly bad debt, self-insurance reserves, tax expense, segment growth and cost pass-through.
- Cash conversion, revolving-credit availability and covenant compliance, while accounting for insurance-related letters of credit and dividend commitments.