Healthcare Services Group, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The company provides housekeeping, laundry, linen, facility maintenance, and dietary services to U.S. healthcare facilities, primarily long-term-care providers. Its reportable segments are Housekeeping and Dietary.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $503.7 million | $470.9 million | $1,005.5 million | $875.4 million |
| Net income | $25.8 million | $22.6 million | $25.9 million | $44.6 million |
| Diluted EPS | $0.35 | $0.30 | $0.35 | $0.60 |
| Net margin | 5.1% | 4.8% | 2.5% | 5.1% |
- Q2: Revenue grew 7.0%; income before taxes was $33.3 million, nearly flat year over year. Costs of services were 86.9% of revenue versus 86.5%, while the income tax provision fell to $7.5 million from $10.5 million, supporting higher net income.
- First half: Revenue increased 14.9%, but income before taxes fell 51.2% to $31.9 million. Costs of services rose to 90.3% of revenue from 86.0%, principally reflecting a substantial bad-debt provision. The 2018 tax provision was $6.0 million versus $20.8 million in 2017.
- Segment mix: First-half Housekeeping revenue increased 1.2% to $492.0 million; Dietary revenue increased 32.0% to $513.6 million, largely from expanding dietary services to existing housekeeping clients.
- Cash flow: First-half operating cash flow was $27.4 million, compared with cash used of $6.6 million a year earlier. Investing used $6.0 million and financing used $17.8 million. Cash and cash equivalents were $13.2 million at June 30.
- Liquidity and debt: Cash, cash equivalents, and marketable securities totaled $88.1 million; working capital was $336.4 million and the current ratio was 3.0. Line-of-credit borrowings were $40.5 million, with $193.6 million available after letters of credit. The $300 million facility expires December 18, 2018; the company expected renewal or replacement, but gave no assurance.
- Margins and other items: Q2 pretax margin was 6.6% versus 7.0%; first-half pretax margin was 3.1% versus 7.5%. First-half investment and interest income declined 41.8% to $1.8 million, partly due to market fluctuations in deferred-compensation investments and higher borrowing costs.
Material changes and notable items
- The company recorded $39.4 million of bad-debt provision in the first half, versus $2.1 million in 2017. The increase was primarily tied to restructurings at two privately held, multi-state operators. The allowance for doubtful accounts rose to $49.7 million from $12.0 million at year-end.
- Approximately $24.8 million of receivables was converted to long-term notes related to the Genesis HealthCare dining and nutrition expansion. Net promissory notes outstanding were $59.4 million, compared with $36.6 million at year-end.
- The federal statutory tax rate fell from 35% to 21% effective January 1, 2018. Management estimated a 2018 annual effective tax rate of 21%–23%; discrete tax items provided a $1.1 million first-half benefit.
- ASC 606 was adopted January 1, 2018, with no material effect on revenue accounting and no opening retained-earnings adjustment.
Outlook, risks, and contingencies
- Management expected consolidated revenue to continue growing during the remainder of 2018. Dietary was expected to grow as a share of revenue, primarily through expansion among existing Housekeeping clients; Housekeeping growth was expected mainly from new clients. No earnings guidance was provided.
- Estimated 2018 capital expenditures were $4.5 million–$6.0 million. Management said operating cash, existing liquidity, and the credit line should cover foreseeable needs.
- Key risks include customer credit and collection exposure, dependence on healthcare clients whose funding is affected by Medicare and Medicaid reimbursement, labor and related-cost inflation, regulatory changes, and the ability to pass higher costs to clients. The filing notes significant revenue contribution from one customer but does not provide a clear percentage in the supplied text.
- Letters of credit of $65.9 million support insurance-program obligations. The company reported compliance with its credit covenant (funded debt-to-EBITDA ratio of 0.96 against a limit below 3.00). It reported no pending legal matter expected to materially affect consolidated financial condition or liquidity, while noting ordinary-course legal, employment, insurance, and tax matters.
Important facts for investors to verify
- Whether the two operators’ restructurings lead to further receivable losses, and the collectability and terms of outstanding notes.
- Whether revenue growth translates into improved margins after the first-half bad-debt charge and higher service costs.
- Renewal or replacement of the credit facility before its December 2018 expiration.
- Actual 2018 tax rate, dividend continuation, and progress of Dietary expansion and Housekeeping client growth.