Healthcare Services Group, Inc. (NASDAQ:HCSG) (the “Company”)
reported for the three months ended March 31, 2019 revenue of $476
million and net income of $9.2 million or $0.12 per basic and $0.12
per diluted common share. The Company also reported cash flow from
operations for the quarter of $18 million.
First Quarter Results
Revenue for the quarter was down $19 million
sequentially to $476 million. Dining & nutrition revenue
decreased $14 million to $243 million, primarily related to the
previously announced 4Q18 contract modifications with Genesis
Healthcare®. The contract changes decreased segment revenue and
food-related purchases by approximately $20 million per quarter,
with one-third of the impact reflected in 4Q18 and the full run
rate reflected in 1Q19. Additionally, housekeeping & laundry
revenue decreased $5 million sequentially to $233 million,
primarily due to the Company cancelling its service agreements with
a privately held, California-based operator over payment related
concerns. The majority of that revenue step down is reflected in
the current quarter.
Direct cost of services was reported at $427
million, or 89.7%, and included $18 million of increased accounts
receivable reserves, the majority of which relates to the out of
court restructuring of a privately held, Northeast-based operator
as well as the aforementioned California-based operator. Although
the timing and amounts of recovery are unknown at this point, the
Company intends to pursue outstanding claims related to these
matters. Direct cost for the quarter was also impacted by
approximately $3 million of elevated payroll costs related to the
Company’s ongoing investment in its training and development
ramp-up.
Selling, general and administrative (“SG&A”)
was reported at $41.1 million, or 8.6%, but after adjusting for the
$3.4 million change in deferred compensation, actual SG&A was
7.9%. During the quarter, SG&A was also impacted by
approximately $6 million of legal and professional fees related to
the previously announced SEC matter, the majority of which related
to the Company’s internal investigation completed in mid-March.
The Company reported an effective tax rate of
23% in the first quarter and expects its 2019 tax rate to
approximate 21% to 23%, including the Worker Opportunity Tax
Credit, but excluding other discrete items that impacted its 2018
rate.
Cash flow from operations for the quarter was
$18 million, inclusive of the $16 million increase in accrued
payroll. DSO for the quarter is reported at 68 days, an increase of
five days from the previous quarter. Approximately three days of
the increase relates to customer payments due at the end of March
but received in early April. The remainder of the DSO increase
primarily relates to customer payment schedule changes made in
conjunction with the Company’s increased payment frequency
initiative (from one payment due at the end of the month, to
multiple payments due intra-month).
CEO Comments
Ted Wahl, Chief Executive Officer, stated, “This
past quarter was eventful yet very productive. Eventful in that the
industry continued to work through a challenging cycle that has
negatively impacted some of our customers, leading in some cases to
restructurings or payment issues that required us to increase AR
reserves, which impacts reported earnings, or reduce services,
which creates a temporary step down in revenue growth. We saw some
of these dynamics playout in Q1 and Q4 of last year as well.
Productive in that our management team and field based leaders
demonstrated expertise and capability in proactively managing these
difficult situations, as well as innovation in identifying
solutions to set the Company up for future success, a prime example
being the increased payment frequency initiative.”
Mr. Wahl also noted that industry fundamentals
are “showing early signs of improvement,” adding that in 2020, the
Company “expects to return to its historical growth
profile.”
Mr. Wahl concluded, “Our longer term outlook,
over the next three to five years, is very positive, as the
opportunity for continued expansion is as great as it’s ever been.
The demand for our services remains strong and there’s plenty of
white space to more than support the next decades worth of growth,
with over 23,000 facilities in our target market, and presently
less than 18% of those facilities outsourcing housekeeping and less
than 8% outsourcing dining.”
Other Recent Developments and Highlights
During the first quarter, the Company continued
to make progress on its near-term priorities of:
- Implementing and adhering to its facility level operating
systems, highlighted by 1Q19 normalized cost of services returning
to its historical levels of below 86% and segment margins in
housekeeping & laundry and dining & nutrition of 11.4% and
6.3%, respectively.
- Strengthening customer payment terms and conditions, which
includes increasing customer payment frequency from monthly to
semimonthly or weekly. To date, the Company has successfully
transitioned over 55% of its customers to an accelerated payment
model, up from 40% at the end of December, and expects to further
that trend in 2019.
- Growing the management pipeline, to ensure it is well prepared
for future growth and expansion. The Company continued to increase
the quality and quantity of management candidates, in both segments
and across the majority of divisions.
Additionally, during the quarter, the Company
successfully completed the implementation of its Workday® financial
management module, a cloud-based financial & accounting ERP
platform that is scalable for our future growth and allows for best
in class finance and accounting processes, controls, as well as
enhanced visibility into key operational areas like purchasing and
procurement.
Expectations for Rest of Year
The Company will continue to prioritize building
out its management pipeline over the next few months and expects
modest sequential growth in the second half of the year, as it
selectively adds new business and replaces some of the recent
revenue stepdowns. Beginning in 2020 and longer term, the Company
expects to return to its historical growth profile.
On the cost side, exclusive of any one time or
non-recurring items, the Company expects its 2019 direct cost of
services to be below 86%, SG&A to approximate 7% and its
effective tax rate to be between 21-23%.
Additionally, with the continued success of the
increased payment frequency initiative, the Company expects a
stable, if not decreasing DSO trend for the remainder of the
year.
Dividend
The Company’s Board of Directors declared a
quarterly cash dividend of $0.1975 per common share, payable on
June 28, 2019 to shareholders of record at the close of business on
May 24, 2019. This represents the 64th consecutive quarterly cash
dividend payment, as well as the 63rd consecutive increase since
the initiation of quarterly cash dividend payments in 2003.
Conference Call and Upcoming Events
The Company will host a conference call on
Wednesday, May 1, 2019, at 8:30 a.m. Eastern Time to discuss its
results for the three months and year ended December 31, 2018. The
call may be accessed via phone at 800-893-5360. The call will be
simultaneously webcast under the “Events & Presentations”
section of the Investor Relations page on the Company’s website,
www.hcsg.com. A replay of the webcast will also be available on our
website for one year following the date of the earnings call.
The Company also announced that it will be
attending and presenting at the Bank of America Merrill Lynch
Healthcare Conference on May 15, 2019 at Encore at the Wynn, Las
Vegas, the Berenberg USA Conference on May 21, 2019 at the
Tarrytown House Estate and Conference Center in Tarrytown, NY, the
Jefferies 2019 Global Healthcare Conference on June 5, 2019 at the
Grand Hyatt New York, New York and the Baird 2019 Global Consumer,
Technology & Services Conference at the InterContinental New
York Barclay Hotel in New York on June 6, 2019.
Cautionary Statement Regarding
Forward-Looking Statements
This release and any schedules incorporated by
reference into it may contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended,
which are not historical facts but rather are based on current
expectations, estimates and projections about our business and
industry, and our beliefs and assumptions. Words such as
“believes,” “anticipates,” “plans,” “expects,” “will,” “goal,” and
similar expressions are intended to identify forward-looking
statements. The inclusion of forward-looking statements should not
be regarded as a representation by us that any of our plans will be
achieved. We undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new
information, future events or otherwise. Such forward-looking
information is also subject to various risks and uncertainties.
Such risks and uncertainties include, but are not limited to, risks
arising from our providing services exclusively to the healthcare
industry, primarily providers of long-term care; having a
significant portion of our consolidated revenues contributed by one
customer during the three months ended March 31, 2019; credit and
collection risks associated with the healthcare industry; risks
associated with the ongoing Securities and Exchange Commission
investigation into our earnings per share calculation practices and
related litigation; our claims experience related to workers’
compensation and general liability insurance; the effects of
changes in, or interpretations of laws and regulations governing
the healthcare industry, our workforce and services provided,
including state and local regulations pertaining to the taxability
of our services and other labor-related matters such as minimum
wage increases; the Company's expectations with respect to selling,
general, and administrative expense; continued realization of tax
benefits arising from our corporate reorganization and self-funded
health insurance program; risks associated with the reorganization
of our corporate structure; realization of our expectations
regarding the impact of the Tax Cuts and Jobs Act on our tax rates
and financial results; and the risk factors described in Part I of
our Form 10-K for the fiscal year ended December 2018 under
“Government Regulation of Clients,” “Service Agreements and
Collections,” “Competition,” and under Item IA. “Risk Factors” in
such Form 10-K.
These factors, in addition to delays in payments
from clients and/or clients in bankruptcy or clients with which we
are in litigation to collect payment, have resulted in, and could
continue to result in, significant additional bad debts in the near
future. Additionally, our operating results would be adversely
affected if unexpected increases in the costs of labor and
labor-related costs, materials, supplies and equipment used in
performing services (including the impact of potential tariffs)
could not be passed on to our clients.
In addition, we believe that to improve our
financial performance we must continue to obtain service agreements
with new clients, retain and provide new services to existing
clients, achieve modest price increases on current service
agreements with existing clients and maintain internal cost
reduction strategies at our various operational levels.
Furthermore, we believe that our ability to sustain the internal
development of managerial personnel is an important factor
impacting future operating results and the successful execution of
our projected growth strategies.
Healthcare Services Group, Inc. is the largest
national provider of professional housekeeping, laundry and dietary
services to long-term care and related health care facilities.
|
Company Contacts: |
|
|
Theodore Wahl |
Matthew J. McKee |
President and Chief Executive Officer |
Chief
Communications Officer |
|
|
215-639-4274 |
investor-relations@hcsgcorp.com |
HEALTHCARE SERVICES GROUP, INC. |
CONSOLIDATED STATEMENTS OF INCOME |
(Unaudited) |
(in thousands, except per share
data) |
|
|
|
For the Three Months Ended |
|
2019 |
|
2018 |
|
Revenues |
$ |
476,111 |
|
$ |
500,562 |
|
Operating costs and
expenses: |
|
|
|
Cost of
services provided |
427,265 |
|
469,252 |
|
Selling,
general and administrative |
41,101 |
|
33,777 |
|
Income (loss) from
operations |
7,745 |
|
(2,467 |
) |
Other income, net: |
|
|
|
Investment and other income 1 |
4,147 |
|
1,072 |
|
Income before income
taxes |
11,892 |
|
(1,395 |
) |
Income tax expense
(benefit) |
2,736 |
|
(1,467 |
) |
|
|
|
|
Net income |
$ |
9,156 |
|
$ |
72 |
|
|
|
|
|
Basic earnings per
common share |
$ |
0.12 |
|
$ |
0.00 |
|
|
|
|
|
Diluted earnings per
common share |
$ |
0.12 |
|
$ |
0.00 |
|
|
|
|
|
Cash
dividends declared per common share |
$ |
0.19750 |
|
$ |
0.19250 |
|
|
|
|
|
Basic weighted average
number of common shares outstanding |
74,301 |
|
73,913 |
|
|
|
|
|
Diluted weighted
average number of common shares outstanding |
74,719 |
|
74,725 |
|
- Includes the net impact
of the premiums and costs related to the voluntary benefits
program, administered by the Company's wholly-owned captive
insurance subsidiary, for the periods ended March 31, 2019 and 2018
of $0.4 million and $0.5 million, respectively. Historically, the
premiums were recorded as revenues with the related costs included
as part of cost of services provided.
HEALTHCARE SERVICES GROUP, INC. |
CONDENSED CONSOLIDATED BALANCE
SHEETS |
(Unaudited) |
(in thousands) |
|
|
March 31, 2019 |
|
December 31, 2018 |
Cash and cash
equivalents |
$ |
28,362 |
|
$ |
26,025 |
Marketable securities,
at fair value |
78,508 |
|
76,362 |
Accounts and notes
receivable, net |
353,106 |
|
341,838 |
Other current
assets |
65,030 |
|
63,911 |
Total
current assets |
525,006 |
|
508,136 |
|
|
|
|
Property and equipment,
net |
30,077 |
|
12,900 |
Notes receivable -
long-term |
39,291 |
|
43,043 |
Goodwill |
51,084 |
|
51,084 |
Other intangible
assets, net |
25,477 |
|
26,518 |
Deferred compensation
funding |
31,812 |
|
29,113 |
Other assets |
20,177 |
|
21,809 |
Total Assets |
$ |
722,924 |
|
$ |
692,603 |
|
|
|
|
Accrued insurance
claims - current |
$ |
21,719 |
|
$ |
20,696 |
Other current
liabilities |
153,763 |
|
142,695 |
Total
current liabilities |
175,482 |
|
163,391 |
|
|
|
|
Accrued insurance
claims - long-term |
60,680 |
|
58,904 |
Deferred compensation
liability |
31,909 |
|
29,528 |
Lease liability -
long-term portion |
12,304 |
|
— |
|
|
|
|
Stockholders'
equity |
442,549 |
|
440,780 |
Total Liabilities and
Stockholders' Equity |
$ |
722,924 |
|
$ |
692,603 |
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