Healthcare Services Group, Inc. — Q2 2016 Form 10-Q
Business and period. The company provides housekeeping, laundry, linen, facility maintenance and dietary services to healthcare facilities, primarily long-term-care providers. This filing covers the quarter and six months ended June 30, 2016; financial statements are unaudited. It served more than 3,500 facilities in 48 states, with Housekeeping at essentially all facilities and Dietary at more than 1,000.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $386.6m | $355.4m | $771.4m | $710.6m |
| Income before taxes | $29.7m | $26.3m | $59.3m | $51.3m |
| Net income | $18.8m | $16.3m | $37.4m | $31.8m |
| Diluted EPS | $0.26 | $0.23 | $0.51 | $0.44 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $20.2m | $33.5m |
- Q2 revenue grew 8.8%; net income rose 15.2%. Six-month revenue grew 8.6%; net income rose 17.5%.
- Costs of services were 85.9% of revenue in both Q2 and the first half, versus 85.6% in the comparable 2015 periods. Q2 pretax margin was 7.8% versus 7.4%, and net margin was 5.0% versus 4.6%. For the first half, pretax margin was 7.7% versus 7.2%, and net margin was 4.9% versus 4.5%.
- Revenue growth came from new Housekeeping clients (5.0% growth in Q2; 5.1% first half) and expansion of Dietary services among existing Housekeeping clients (15.5% Q2; 14.7% first half). Housekeeping generated about 62% of revenue and Dietary about 38%.
Financial position and liquidity
- At June 30, cash and cash equivalents were $21.7m and marketable securities were $78.9m, together $100.6m. Working capital was $301.4m; the current ratio was 3.8 to 1.
- Accounts and notes receivable, net, increased to $255.8m from $214.9m at year-end 2015. The allowance for doubtful accounts rose to $5.4m from $4.6m. Six-month bad-debt provision was $2.2m versus $1.7m, or 0.3% versus 0.2% of revenue.
- Six-month operating cash flow was $20.2m versus $33.5m. The principal cash use was a $43.2m increase in accounts and notes receivable. Investing used $11.2m, including net marketable-security purchases and $3.0m of capital expenditures. Financing used $20.5m, primarily for $26.5m of dividends.
- No borrowings were outstanding under the $200m line of credit. A $73.4m standby letter of credit reduced available capacity; it increased to $78.1m on July 1. The company was compliant with its covenant, with funded debt to EBITDA of 0.69 to 1.00 against a maximum of 3.00 to 1.00. No material long-term borrowings were reported.
- Six-month cash dividends were $0.36 per share. After quarter-end, the board declared a regular quarterly dividend of $0.18375 per share, payable September 23, 2016.
Outlook, risks and notable items
- Management said second-half 2016 revenue performance may be comparable to historical ranges, without providing a specific revenue or earnings target. It expected Dietary growth primarily from current Housekeeping clients and Housekeeping growth primarily from new clients.
- Management estimated remaining 2016 capital expenditures of $2.25m–$3.0m and said cash, operating cash flow and the credit line should meet foreseeable needs. It expected to continue regular quarterly dividends, subject to board review and no assurance.
- Key risks include client concentration in long-term care and dependence on clients’ Medicare, Medicaid and other reimbursement-related cash flows; delayed collections, bankruptcies and litigation could increase bad debts. One client contributed as much as 9% of Q2 revenue, and several contributed at least 3% each.
- Labor and labor-related costs, supplies, minimum-wage changes, insurance claims, and state and local tax treatment of services may pressure results. Workers’ compensation and general-liability costs declined as a share of revenue, while labor costs increased in several segment measures.
- The company reported ordinary-course legal and tax matters, but no pending proceeding or examination expected to materially affect consolidated financial condition or liquidity. Accrued legal expenses were $4.3m. It could not reasonably estimate liabilities for certain tax matters, but did not expect their resolution to have a material adverse effect.
- The estimated 2016 effective tax rate was about 37%; Q2 and first-half rates were 37%, versus 38% in 2015, partly reflecting tax credits recognized in Q2. Favorable investment-value changes increased investment and interest income. The 2015 corporate restructuring and transition to a captive insurance subsidiary are relevant to period comparisons.
Important facts for investors to verify
- Whether the sharp first-half receivables increase and lower operating cash flow reflect timing alone or a deterioration in collections; monitor bad-debt provisions and client payment delays.
- Whether revenue growth converts to improved margins as labor costs and cost of services remain significant, and whether Dietary expansion continues.
- Actual second-half results against management’s qualitative outlook, including client retention, new contracts, and expected capital expenditures.
- Available credit capacity after the increased insurance-related letter of credit, covenant compliance, and the sustainability of dividends relative to cash generation.
- Effects of reimbursement, labor, insurance, tax and legal developments, including the concentration of revenue among major clients.