HCSG Reports Q3 2023 Results; Raises Cash Flow Expectations

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  • Revenue of $411.4 million; adjusted revenue(1) of $424.0 million, in line with expectations.

  • Net income and diluted EPS of ($5.5) million and ($0.07); adjusted net income(1) and adjusted diluted EPS(1) of $12.5 million and $0.17, a 13.7% and 13.3% increase, respectively, over Q3 2022.

  • Adjusted EBITDA(1) of $23.2 million, a 10.2% increase over Q3 2022.

  • Cash flow from operations of $2.9 million; adjusted cash flow from operations(1) of $18.0 million, a 208.9% increase over Q3 2022.

  • Raises expectations for second half of 2023 cash flow from operations from a range of $20.0 million to $30.0 million, to $35.0 million to $45.0 million.

BENSALEM, Pa., October 25, 2023--(BUSINESS WIRE)--Healthcare Services Group, Inc. (NASDAQ:HCSG) today reported results for the three months ended September 30, 2023.

Ted Wahl, Chief Executive Officer, stated, "We entered the second half of the year with three clear priorities and made substantial progress on all three during the quarter. The first was continuing to manage adjusted costs of services at 86%, which we did. The second was collecting what we bill, building on the strong momentum that we gained in May and June. In Q3 we delivered our strongest cash collections of the year, collecting over 98% of what we billed, with the modest shortfall primarily related to the timing of new business adds during the quarter. The third priority was executing on our organic growth strategy. Adjusted revenue for the quarter was up sequentially, our sales pipeline is growing, and our recruiting and management development efforts are ramping up as we ready ourselves for growth. We look forward to ending the year on a strong note and expect these positive operating, cash collection, and new business trends to continue into 2024."

Mr. Wahl continued, "We also had two long-term clients initiate restructurings during the quarter. And while the resulting non-cash charges created some noise in Q3 revenue and earnings, I believe that, longer term, these restructuring actions will result in stronger, healthier clients with significant opportunities for future growth. The other positive takeaway is that with the impact of these two legacy issues behind us and the operating landscape continuing to improve, our visibility to deliver consistent results only increases."

Mr. Wahl concluded, "As we look toward 2024, industry fundamentals continue to improve, and a stabilizing labor market and select state-based reimbursement increases have contributed to the gradual but steady occupancy recovery. On the regulatory front, there remains uncertainty as to what a final minimum staffing rule may look like. We remain hopeful that CMS will fully consider the impact on operators before finalizing a rule, and if one is ultimately implemented, have confidence in our customers’ ability to manage any such rule."

Third Quarter Highlights

GAAP

Adjusted(1)

Revenue

$411.4

$424.0

Costs of services

$377.6

$366.2

Selling, general and administrative

$39.0

$40.3

Diluted (loss) earnings per share

$(0.07)

$0.17

Cash flows provided by operations

$2.9

$18.0

  • Revenue was $411.4 million; adjusted revenue was $424.0 million, in line with the Company’s expectations of $420.0 million to $430.0 million. The Company estimates Q4 revenue in the range of $420.0 million to $430.0 million.

  • Housekeeping & laundry and dining & nutrition segment revenues were $190.9 million and $220.5 million, respectively; adjusted housekeeping & laundry and dining & nutrition segment revenues were $194.6 million and $229.4 million, respectively.

    • Housekeeping & laundry and dining & nutrition segment margins were 5.4% and 0.9%, respectively; adjusted housekeeping & laundry and dining & nutrition segment margins were 7.2% and 4.7%, respectively.

  • Costs of services was $377.6 million; adjusted costs of services was $366.2 million, or 86.4%, in line with the Company’s target of 86%. The Company’s goal is to continue to manage adjusted costs of services in the 86% range.

  • SG&A was $39.0 million; adjusted SG&A was $40.3 million or 9.5%, within the Company’s targeted range of 8.5% to 9.5%. The Company expects to continue to manage adjusted SG&A within its targeted range.

  • Diluted EPS was ($0.07) per share; adjusted diluted EPS was $0.17 per share, an increase of 13.3% over Q3 2022.

Balance Sheet and Liquidity

The Company’s primary sources of liquidity are cash and cash equivalents, its revolving credit facility, and cash flow from operating activities. As of the end of the third quarter, the Company had a current ratio of 2.8 to 1, cash and marketable securities of $121.3 million, and a $500.0 million credit facility, which expires in November 2027. Additionally, Q3 cash flow and adjusted cash flow from operations were $2.9 million and $18.0 million, respectively. The Company raised its expectations for the second half of 2023 cash flow from operations from a range of $20.0 to $30.0 million, to $35.0 to $45.0 million.

The Company has repurchased over 0.5 million shares, or $6.2 million, of its common stock during 2023, including over 0.3 million shares or $4.0 million of its common stock during the third quarter. The Company has 7.0 million shares remaining under its outstanding share repurchase authorization.

Conference Call and Upcoming Events

The Company will host a conference call on Wednesday, October 25, 2023, at 8:30 a.m. Eastern Time to discuss its results for the three months ended September 30, 2023. The call may be accessed via phone at 1 (888) 330-3451, Conference ID: 4431380. 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 the website for one year following the date of the earnings call.

(1)

Adjusted results are non-GAAP financial measures and exclude the impact of certain items. See the tables within "Reconciliations of Non-GAAP Financial Measures" for more information.

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 federal securities laws, 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," "estimates," "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 to the healthcare industry and primarily providers of long-term care; the impact of and future effects of the COVID-19 pandemic or other potential pandemics; having a significant portion of our consolidated revenues contributed by one customer during the nine months ended September 30, 2023; credit and collection risks associated with the healthcare industry; the impact of bank failures; our claims experience related to workers’ compensation and general liability insurance (including any litigation claims, enforcement actions, regulatory actions and investigations arising from personal injury and loss of life related to COVID-19); 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; and the risk factors described in Part I of our Form 10-K for the fiscal year ended December 31, 2022 under "Government Regulation of Customers," "Service Agreements and Collections," and "Competition" and under Item 1A. "Risk Factors" in such Form 10-K.

These factors, in addition to delays in payments from customers and/or customers in bankruptcy, 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 by continued inflation particularly if increases in the costs of labor and labor-related costs, materials, supplies and equipment used in performing services (including the impact of potential tariffs and COVID-19) cannot be passed on to our customers.

In addition, we believe that to improve our financial performance we must continue to obtain service agreements with new customers, retain and provide new services to existing customers, achieve modest price increases on current service agreements with existing customers and/or 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. There can be no assurance that we will be successful in that regard.

USE OF NON-GAAP FINANCIAL INFORMATION

To supplement HCSG’s consolidated financial information, which are prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP"), the Company believes that certain non-GAAP financial measures are useful in evaluating operating performance and comparing such performance to other companies.

The Company is presenting adjusted revenues, adjusted segment revenues, adjusted segment margins, adjusted costs of services provided, adjusted selling, general and administrative expense, adjusted net income, adjusted diluted earnings per share, adjusted cash flows provided by (used in) operations, earnings before interest, taxes, depreciation and amortization ("EBITDA"), and EBITDA excluding items impacting comparability ("Adjusted EBITDA"). We cannot provide a reconciliation of forward-looking non-GAAP measures to GAAP due to the inherent difficulty in forecasting and quantifying certain amounts that are necessary for such reconciliation. The presentation of non-GAAP financial measures is not meant to be considered in isolation or as a substitute for financial statements prepared in accordance with GAAP.

HEALTHCARE SERVICES GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)

(in thousands, except per share data)

For the Three Months Ended

For the Nine Months Ended

September 30,

September 30,

2023

2022

2023

2022

Revenue

$

411,388

$

414,488

$

1,247,549

$

1,266,156

Operating costs and expenses:

Costs of services

377,554

376,894

1,106,260

1,129,526

Selling, general and administrative

39,047

35,803

120,523

100,820

(Loss) income from operations

(5,213

)

1,791

20,766

35,810

Other (expense) income, net

(1,738

)

(798

)

1,249

(10,786

)

(Loss) income before income taxes

(6,951

)

993

22,015

25,024

Income tax (benefit) provision

(1,457

)

671

6,227

6,553

Net (loss) income

$

(5,494

)

$

322

$

15,788

$

18,471

Basic (loss) earnings per common share

$

(0.07

)

$

0.00

$

0.21

$

0.25

Diluted (loss) earnings per common share

$

(0.07

)

$

0.00

$

0.21

$

0.25

Basic weighted average number of common shares outstanding

74,364

74,340

74,446

74,334

Diluted weighted average number of common shares outstanding

74,364

74,348

74,446

74,346

HEALTHCARE SERVICES GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands)

September 30, 2023

December 31, 2022

Cash and cash equivalents

$

31,313

$

26,279

Marketable securities, at fair value

90,004

95,200

Accounts and notes receivable, net

367,807

336,777

Other current assets

44,239

50,376

Total current assets

533,363

508,632

Property and equipment, net

29,145

22,975

Notes receivable — long-term, net

28,770

32,609

Goodwill

75,529

75,529

Other intangible assets, net

12,799

15,946

Deferred compensation funding

36,408

33,493

Other assets

34,702

29,150

Total assets

$

750,716

$

718,334

Accrued insurance claims — current

$

25,160

$

23,166

Other current liabilities

162,614

155,453

Total current liabilities

187,774

178,619

Accrued insurance claims — long-term

69,755

65,541

Deferred compensation liability — long-term

36,686

33,764

Lease liability — long-term

11,645

8,097

Other long term liabilities

3,123

6,141

Stockholders' equity

441,733

426,172

Total liabilities and stockholders' equity

$

750,716

$

718,334

HEALTHCARE SERVICES GROUP, INC.

RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES

(Unaudited)

Reconciliation of GAAP revenue to adjusted revenue (in thousands)

For the Three Months Ended

For the Nine Months Ended

September 30,

September 30,

2023

2022

2023

2022

GAAP revenue

$

411,388

$

414,488

$

1,247,549

$

1,266,156

Client restructurings(1)

12,629

10,000

12,629

10,000

Adjusted revenue

$

424,017

$

424,488

$

1,260,178

$

1,276,156

Reconciliation of GAAP costs of services to adjusted costs of services (in thousands)

For the Three Months Ended

For the Nine Months Ended

September 30,

September 30,

2023

2022

2023

2022

GAAP costs of services

$

377,554

$

376,894

$

1,106,260

$

1,129,526

Client restructurings(1)

9,093

—

9,093

—

Bad debt expense adjustments(2)

2,308

4,586

14,722

18,092

Adjusted costs of services

$

366,153

$

372,308

$

1,082,445

$

1,111,434

Adjusted costs of services as a percentage of Adjusted revenues

86.4%

87.7%

85.9%

87.1%

Reconciliation of GAAP selling, general and administrative ("SG&A") to adjusted SG&A (in thousands)

For the Three Months Ended

For the Nine Months Ended

September 30,

September 30,

2023

2022

2023

2022

GAAP SG&A

$

39,047

$

35,803

$

120,523

$

100,820

(Gain)/loss on deferred compensation in SG&A(3)

(1,242)

(1,160)

2,629

(11,324)

Adjusted SG&A

$

40,289

$

36,963

$

117,894

$

112,144

Adjusted SG&A as a percentage of adjusted revenues

9.5%

8.7%

9.4%

8.8%

Reconciliation of GAAP net (loss) income to adjusted net income (in thousands) and (loss) earnings per share to adjusted diluted earnings per share

For the Three Months Ended

For the Nine Months Ended

September 30,

September 30,

2023

2022

2023

2022

GAAP net (loss) income

$

(5,494)

$

322

$

15,788

$

18,471

(Gain)/loss on deferred compensation, net

(16)

(335)

66

121

Bad debt expense adjustments(2)

2,308

4,586

14,722

18,092

Client restructurings(1)

21,722

10,000

21,722

10,000

Tax effect of adjustments(4)

(6,004)

(3,563)

(9,128)

(7,053)

Adjusted net income

$

12,516

$

11,010

$

43,170

$

39,631

Adjusted net income as a percentage of adjusted revenues

3.0 %

2.6 %

3.4 %

3.1 %

GAAP diluted earnings per share

$

(0.07)

$

0.00

$

0.21

$

0.25

Adjusted diluted earnings per share

$

0.17

$

0.15

$

0.58

$

0.53

Weighted-average shares outstanding - diluted

74,364

74,348

74,446

74,346

Reconciliation of GAAP net (loss) income to EBITDA and adjusted EBITDA (in thousands)

For the Three Months Ended

For the Nine Months Ended

September 30,

September 30,

2023

2022

2023

2022

GAAP net (loss) income

$

(5,494)

$

322

$

15,788

$

18,471

Income tax (benefit) provision

(1,457)

671

6,227

6,553

Interest, net

529

(353)

1,119

(1,386)

Depreciation and amortization(5)

3,250

3,795

10,565

11,560

EBITDA

$

(3,172)

$

4,435

$

33,699

$

35,198

Share-based compensation

2,384

2,388

6,793

7,156

Gain/loss on deferred compensation, net

(16)

(335)

66

121

Bad debt expense adjustments(2)

2,308

4,586

14,722

18,092

Client restructurings(1)

21,722

10,000

21,722

10,000

Adjusted EBITDA

$

23,226

$

21,074

$

77,002

$

70,567

Adjusted EBITDA as a percentage of adjusted revenue

5.5 %

5.0 %

6.1 %

5.5 %

Reconciliation of GAAP cash flows provided by (used in) operations to adjusted cash flows provided by (used in) operations (in thousands)

For the Three Months Ended

For the Nine Months Ended

September 30,

September 30,

2023

2022

2023

2022

GAAP cash flows provided by (used in) operations

$

2,939

$

(9,896)

$

(5,947)

$

(31,060)

Accrued payroll(6)

15,039

15,717

17,377

21,240

Adjusted cash flows provided by (used in) operations

$

17,978

$

5,821

$

11,430

$

(9,820)

Reconciliation of GAAP segment margins to adjusted segment revenue and segment margins (in thousands)

For the Three Months Ended

For the Nine Months Ended

September 30,

September 30,

2023

2022

2023

2022

GAAP revenue - housekeeping

$

190,920

$

196,941

$

575,256

$

597,710

Client restructurings(1) - housekeeping

3,716

2,289

3,716

2,289

Adjusted revenue - housekeeping

$

194,636

$

199,230

$

578,972

$

599,999

GAAP revenue - dietary

$

220,468

$

217,547

$

672,293

$

668,446

Client restructurings(1) - dietary

8,913

7,711

8,913

7,711

Adjusted revenue - dietary

$

229,381

$

225,258

$

681,206

$

676,157

Segment margins:

GAAP housekeeping

5.4 %

8.9 %

8.2 %

9.3 %

GAAP dietary

0.9 %

(0.2) %

4.3 %

2.9 %

Adjusted housekeeping

7.2 %

10.0 %

8.8 %

9.7 %

Adjusted dietary

4.7 %

3.3 %

5.6 %

4.0 %

(1)

Client restructurings include changes to contracts with existing customers for which the Company has either recorded a reduction to revenue or an increase to bad debt expense due to clients entering bankruptcy, receivership, or out-of-court workouts.

(2)

The bad debt expense adjustment reflects the difference between GAAP bad debt expense (CECL) and historical write-offs as a percentage of adjusted revenues, both of which are based on the same seven year look-back period.

(3)

Represents the changes in fair market value on deferred compensation investments. The impact of offsetting investment portfolio gains are included in the "Other (expense) income, net" caption on the Consolidated Statements on Income (Loss).

(4)

The tax impact of adjustments is calculated using a 25% effective tax rate.

(5)

Includes right-of-use asset depreciation of $1.8 million and $4.6 million for the three and nine months ended September 30, 2023, respectively, and $1.5 million and $4.6 million for the three and nine months ended September 30, 2022, respectively.

(6)

The accrued payroll adjustment reflects changes in accrued payroll for the three and nine months ended September 30, 2023 and 2022. The Company processes payroll on set weekly and bi-weekly schedules, and the timing of payments may result in operating cash flow increases or decreases which are not indicative of the Company’s quarterly cash flow performance.

View source version on businesswire.com: https://www.businesswire.com/news/home/20231025314233/en/

Contacts

Theodore Wahl
President and Chief Executive Officer

Matthew J. McKee
Chief Communications Officer

215-639-4274
investor-relations@hcsgcorp.com

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