Healthcare Services Group, Inc. — 2017 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2017. Healthcare Services Group provides housekeeping, laundry, linen, facility maintenance and dietary management services to healthcare facilities across the United States. It served more than 3,500 facilities in Housekeeping and more than 1,500 in Dietary. The company reports two segments: Housekeeping and Dietary.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $1.866 billion | $1.563 billion |
| Income before taxes | $133.0 million | $120.4 million |
| Net income | $88.2 million | $77.4 million |
| Diluted earnings per share | $1.19 | $1.05 |
| Net income margin | 4.7% | 5.0% |
| Operating cash flow | $7.6 million | $41.4 million |
| Working capital | $343.2 million | $313.8 million |
| Cash, cash equivalents and marketable securities | $82.8 million | $91.6 million |
- Revenue increased 19.4%; Dietary revenue rose 46.4% to $886.5 million, while Housekeeping revenue grew 2.3% to $979.6 million. Management attributed Dietary growth primarily to extending services to more existing Housekeeping clients.
- Costs of services increased 20.4% to $1.613 billion and rose to 86.4% of revenue from 85.7%. Pretax margin declined to 7.1% from 7.8%; net income rose 14.0%, slower than revenue growth.
- Housekeeping pretax segment income was $95.5 million, up 5.2%; Dietary pretax segment income was $46.0 million, up 32.8%. Segment figures are prepared on a basis that differs from consolidated GAAP results.
- Operating cash flow fell sharply, primarily reflecting a $121.6 million use of cash from accounts and notes receivable, compared with a $65.6 million use in 2016. Net receivables increased to $378.7 million from $271.3 million. Net promissory notes outstanding rose to $36.6 million from $19.2 million.
- Cash and cash equivalents were $9.6 million; municipal-bond marketable securities were $73.2 million. Line-of-credit borrowings were $35.4 million. The $300 million facility had $187.0 million available after borrowings and letters of credit; the funded-debt-to-EBITDA covenant was 0.79 against a maximum of 3.00. The facility expires December 18, 2018.
- Total assets were $676.0 million and stockholders’ equity was $400.0 million. Current ratio was 2.9, down from 4.1. The filing reports no separate total-debt figure beyond line-of-credit borrowings.
- Dividends paid totaled $55.2 million; dividends declared were $0.7575 per share for the year. Capital expenditures were $5.4 million. The company reported no 2017 share repurchases.
Material changes and unusual items
- Revenue growth accelerated, driven mainly by Dietary expansion; the company also paid $4.6 million for acquisitions during 2017 and reported increased Dietary goodwill and customer-relationship intangibles.
- Bad-debt provision rose to $6.3 million from $4.6 million, while remaining about 0.3% of revenue. The allowance for doubtful accounts increased to $12.0 million from $6.9 million; aggregate receivables associated with clients in bankruptcy or in/pending collection or litigation reached $30.0 million.
- Self-insurance costs declined to 2.4% of revenue from 3.0%. A favorable $11.6 million adjustment to prior-year insurance-claim estimates contributed to the year’s reserve movement; accrued insurance claims ended at $84.7 million versus $87.7 million.
- The effective tax rate was 33.6%, versus 35.7%. The Tax Cuts and Jobs Act remeasurement reduced net deferred tax assets by approximately $4.5 million and increased tax expense. Adoption of ASU 2016-09 reduced 2017 tax expense by $5.7 million.
- In fourth-quarter 2017 unaudited results, revenue was $499.4 million and net income was $20.2 million, compared with $398.6 million and $20.3 million in fourth-quarter 2016. Fourth-quarter diluted EPS was $0.27 versus $0.28.
Outlook, risks and contingencies
- Management said 2018 consolidated performance may be comparable to historical financial ratios, absent non-recurring charges. It expects Dietary to grow as a share of revenue through added services for Housekeeping clients; Housekeeping growth is expected primarily from new clients. Expected 2018 effective tax rate: approximately 21%–23%. Estimated 2018 capital expenditures: $4.5–$6.0 million.
- Key risks include customer concentration (one client contributed 17.6% of revenue, or $327.5 million, and several each contributed more than 3%), clients’ dependence on Medicare and Medicaid reimbursement, collection delays, and short-notice termination rights in service agreements.
- Labor, food and other supply-cost inflation may not be passed through promptly or fully to clients. The company also bears substantial retained risk under workers’ compensation and general-liability insurance plans, with reserves dependent on actuarial estimates.
- The company disclosed ordinary-course legal and administrative proceedings, including employment-related matters, and tax matters with taxing authorities for which it could not reasonably estimate liability. Management did not expect these matters to have a material adverse effect on consolidated financial position or results. It reported no pending legal proceeding or governmental examination expected to materially adversely affect financial condition or liquidity.
- Management and Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting. Management expects to continue quarterly dividends, but payment and amount remain subject to board approval.
Important facts for investors to verify
- Whether the large increase in receivables and promissory notes converts to cash, and whether the allowance adequately reflects customer credit deterioration.
- The concentration and payment status of the largest client and other significant customers, particularly given clients’ reliance on government reimbursement.
- Whether Dietary growth can be sustained without further margin pressure, and whether labor and supply costs can be passed through to clients.
- The assumptions supporting insurance reserves and the durability of favorable claims experience and prior-year reserve releases.
- The 2018 tax-rate outlook and the continuing availability of Work Opportunity Tax Credits; the filing says the program was then scheduled to expire December 31, 2019.
- Renewal or replacement of the credit facility before its December 2018 expiration, and the implications of letters of credit for borrowing availability.