Healthcare Services Group, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. The company provides housekeeping, laundry and linen, maintenance, and dietary management services to healthcare facilities, primarily long-term-care providers. It served approximately 3,000 facilities in 47 states.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $260.6 million | $208.4 million | +25.1% |
| Income before taxes | $13.8 million | $12.3 million | +11.7% |
| Net income | $8.6 million | $7.8 million | +10.4% |
| Diluted EPS | $0.13 | $0.12 | Up $0.01 |
| Operating cash flow | $9.4 million | $5.9 million | Higher |
- Net margin declined to 3.2% from 3.6%; pretax margin declined to 5.2% from 5.8%, as reported by the company.
- Costs of services rose to 87.3% of revenue from 86.4%. Segment service costs also increased as a share of revenue: Housekeeping to 90.4% from 89.0%, and Dietary to 94.9% from 93.3%.
- Revenue growth was strongest in Dietary: reportable-segment revenue increased 52.8%, primarily from adding the service at existing Housekeeping clients. Housekeeping segment revenue rose 15.8%, primarily from new clients.
- SG&A increased 25.0% to $21.0 million. Excluding deferred-compensation fund market-value changes, it rose 20.4%, slower than revenue growth; management cited higher payroll-related costs, travel, and professional fees.
Cash, liquidity, and obligations
- Cash and cash equivalents were $48.3 million at March 31, 2012; marketable securities were $21.4 million. Combined, they totaled $69.6 million, versus $70.0 million at year-end 2011. Working capital was $186.4 million and the current ratio was 5.0:1.
- Operating cash flow was $9.4 million. Cash from investing activities was $8.9 million, including net marketable-security sales; financing used $8.7 million, mainly for $10.8 million in dividends. Cash increased $9.6 million during the quarter.
- The company reported no borrowings. Its $57 million demand line of credit expires June 30, 2012; a $40.4 million standby letter of credit for insurance obligations reduced availability. The company said it believed the line would be renewed. It was in compliance with the stated financial covenants.
- Accrued insurance claims totaled $19.3 million, including $13.5 million long term. The company uses self-insurance or high deductibles for workers’ compensation and general liability.
- The quarterly dividend was $0.16125 per share, paid March 16. A $0.16250-per-share dividend was declared for payment May 18, 2012.
Changes, outlook, and risks
- Revenue growth outpaced profit growth, with higher labor and supply costs contributing to lower margins. Management attributed some Housekeeping labor-cost pressure to facility-level inefficiencies; Dietary supply-cost pressure was partly offset by vendor pricing programs.
- Management expected Dietary to represent a larger share of revenue during the remainder of 2012. It anticipated Dietary growth primarily from existing Housekeeping clients and Housekeeping growth primarily from new clients. These expectations were not guaranteed.
- Management estimated $3 million to $5 million of capital expenditures for the remainder of 2012 and said cash, operating cash flow, and the credit line were expected to fund operations and anticipated growth. It expected to continue regular quarterly dividends, subject to board review.
- Healthcare reimbursement and client credit are material risks. The filing cites an 11.1% Medicare payment reduction to nursing centers effective October 1, 2011, possible further reimbursement changes, and state Medicaid funding pressure. Adverse effects on clients could impair their ability to pay the company.
- One nursing-home-chain client contributed 7% of Q1 revenue, down from 10% a year earlier; several other clients individually contributed at least 3%. The company warned that losing significant clients or changes in payment terms could materially affect results or cash flows.
- Net promissory notes receivable, after reserves, rose to $9.4 million from $6.7 million at year-end. The allowance for doubtful accounts was $5.1 million; management identified $7.6 million of balances associated with clients in bankruptcy or collection/litigation.
- The $57 million credit facility was due to expire June 30, 2012; renewal was management’s expectation, not a completed renewal. The company also disclosed tax matters for which it could not reasonably estimate a liability, but did not expect their resolution to materially harm results or financial position.
- The effective tax rate increased to approximately 38% from 37%, mainly because certain tax credits were unavailable or had expired; renewal of the Work Opportunity Tax Credit could reduce the rate.
- Healthcare Staff Leasing Solutions, formed to offer PEO services, had no service contracts as of March 31, 2012. No material change to the prior annual report’s risk factors was reported; no legal proceedings were listed as applicable.
Important facts for investors to verify
- Whether the credit facility was renewed after its June 30, 2012 expiration, and the resulting borrowing availability and terms.
- Whether client reimbursement pressures affected collections, bad-debt expense, notes receivable, or client retention in subsequent periods.
- Whether service-cost growth and facility-level labor and supply inefficiencies persisted, particularly in Dietary.
- Actual Dietary and Housekeeping growth relative to management’s stated expectations, and whether client concentration changed.
- Capital expenditures, dividend payments, and the realization of tax credits compared with management’s expectations.