Healthcare Services Group, Inc. — Q2 2021 Form 10-Q
Business context and period: The company provides housekeeping, laundry, linen, facility maintenance and dietary services to healthcare facilities, primarily long-term-care providers. This unaudited quarterly report covers the three and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $398.2 million | $452.0 million | $805.9 million | $901.2 million |
| Income before taxes | $15.1 million | $30.4 million | $48.0 million | $57.2 million |
| Net income | $9.6 million | $23.1 million | $34.2 million | $43.3 million |
| Diluted EPS | $0.13 | $0.31 | $0.45 | $0.58 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $28.8 million | $92.4 million |
- Q2 revenue fell 11.9% year over year; net income fell 58.6%. Six-month revenue declined 10.6%, and net income declined 21.0%.
- Q2 costs of services were 84.5% of revenue versus 85.7% a year earlier; SG&A was 12.6% versus 9.2%. Net margin was approximately 2.4% versus 5.1%. For the six months, costs of services were 83.5% of revenue versus 86.0%, SG&A was 11.2% versus 7.9%, and net margin was approximately 4.2% versus 4.8%.
- At June 30, cash and cash equivalents were $124.6 million and marketable securities were $125.8 million. Working capital was $413.9 million and the current ratio was 3.3:1. The company reported no line-of-credit borrowings; $410.1 million remained available after letters of credit.
- Six-month investing cash outflow was $11.1 million and financing cash outflow was $32.5 million. Cash declined $14.7 million from year-end. Operating cash flow was substantially below the prior year, with management citing cash-receipt and payment timing and lower net income.
Material changes and management commentary
- Both segments had lower Q2 revenue: Housekeeping declined 10.9% to $202.8 million and Dietary declined 12.9% to $195.3 million. Management attributed the declines mainly to census-driven staffing and purchasing reductions, fewer facilities served, and modified pricing and payment terms for a customer.
- Six-month revenue declines were 7.5% in Housekeeping and 13.6% in Dietary. COVID-19 supplemental billings, primarily employee pay premiums passed through to customers, were $4.7 million for the half-year and $0.8 million for Q2.
- Q2 SG&A increased 20.7% to $50.1 million. Excluding deferred-compensation investment gains, it rose $12.2 million, or 34.8%, primarily from payroll and legal and professional fees. The filing identifies a $6.0 million charge relating to a potential SEC investigation settlement and $3.0 million for a negotiated California labor and employment settlement.
- Management said COVID-19 had no material net impact on Q2 consolidated operating results and had not materially impaired assets or liquidity through June 30. It cautioned that the pandemic could affect customer census, demand, workforce availability and the supply chain; its full future revenue impact remained uncertain.
Outlook, liquidity and contingencies
- No revenue or earnings forecast is provided. Management expects 2021 capital expenditures of approximately $4 million to $6 million; $2.1 million had been spent through June 30. It expects cash, operating cash flow and credit-line capacity to meet foreseeable operating and growth needs.
- Management expects to continue regular quarterly dividends, subject to Board review and with no assurance of future payments. Q2 dividends were approximately $0.2075 per share; the company repurchased 60,500 shares for $1.8 million during the quarter.
- A $475 million revolving credit facility expires December 21, 2023. The company was in compliance with its financial covenants. Standby letters of credit totaled $64.9 million. The filing notes that LIBOR discontinuation could affect borrowing rates, although the agreement provides for a replacement-rate process.
- The SEC investigation concerns historical EPS calculation practices, primarily periods before 2018. The company recorded a $6.0 million potential settlement charge but could not predict timing, final resolution or settlement amount. A shareholder class action settlement was submitted for preliminary court approval; insurers agreed to pay the entire settlement amount upon court approval.
- Other key exposures include collection risk from healthcare customers reliant on government reimbursement, workers’ compensation and general-liability claims, labor costs and regulation, inflation, and COVID-19 effects. Management reported no material changes to the risk factors in its 2020 Form 10-K.
- On April 26, 2021, the company acquired a business. Management reported a transaction value of $11.7 million and said purchase-price allocation was not finalized; the cash-flow statement reports $6.0 million cash paid and $5.7 million of accrued variable consideration.
Important facts for investors to verify
- Whether revenue and margins stabilize as customer census, facility counts, staffing and purchasing recover or change.
- Whether the working-capital movements and collections pressures that reduced first-half operating cash flow reverse, and whether the allowance for doubtful accounts remains adequate.
- The status and final cost of the SEC investigation, including any settlement approval, and the court approval and insurance coverage of the shareholder class action settlement.
- The completed acquisition accounting, including final consideration and any effects on future results.
- Whether labor, supply and inflation costs can be controlled or passed through to customers, and whether the company sustains its dividend while funding operations and growth.