Healthcare Services Group, Inc. (NASDAQ:HCSG) Q3 2020 Earnings Conference Call October 21, 2020 8:30 AM ET Company Participants Ted Wahl - President and Chief Executive Officer Matt McKee - Chief Communications Officer Conference Call Participants Andrew Wittmann - Baird A.J. Rice - Credit Suisse Sean Dodge - RBC Capital Markets Nick Spiekhout - RBC Brian Tanquilut - Jefferies James Terwilliger - Northland Capital Mitra Ramgopal - Sidoti Operator Ladies and gentlemen, thank you for standing by and welcome t ...

Financial Data and Key Metrics Changes - Revenue for Q2 2020 was $452 million, including $17.2 million of COVID-19 related supplemental billings, which were offset by temporary decreases in recurring billings due to census-driven cost reductions [16][18] - Net income for the quarter was $24.3 million, with earnings per share at $0.31 [18] - Direct cost of services was $387.5 million, representing 85.7% of revenue, with a near-term goal to manage direct costs at or below 86% [18][19] - Cash flow from operations was $79.7 million, with a current ratio better than 3:1 and cash and marketable securities exceeding $170 million [21][24] Business Line Data and Key Metrics Changes - Housekeeping and laundry segment revenue was $227.6 million, while dining and nutrition segment revenue was $224.4 million [16] - Margins for housekeeping and laundry and dining and nutrition segments were 11.1% and 8.3% respectively [19] Market Data and Key Metrics Changes - The company entered Q3 with a recurring billing run rate of approximately $430 million, expecting temporary reductions in costs and recurring billings to remain until census recovers [17] - Days Sales Outstanding (DSO) for the quarter was 60 days, down 2 days from the previous quarter [23] Company Strategy and Development Direction - The company remains committed to supporting customers in patient care while ensuring employee safety, focusing on operational impacts of COVID-19 [11][12] - Future growth is viewed cautiously, with a focus on innovation and flexibility in response to client needs [14] - The company aims to leverage existing growth opportunities while maintaining a robust pipeline for future business [76] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the return of favorable operating trends post-pandemic, citing demographic tailwinds and needs-based nature of the industry [13] - There is a belief that government support will continue until recovery is achieved, with a focus on targeted stimulus for the most impacted providers [52][54] Other Important Information - The Board of Directors approved an increase in the dividend to $0.20375 per share, marking the 68th consecutive quarterly increase [24][25] - The company has seen a significant increase in cash collection frequency, with over 60% of customers paying more frequently than monthly [33] Q&A Session Summary Question: Demand for new outsourcing and facilities - Management indicated a cautious view on growth due to uncertainty in the current environment, with stronger demand than ever but timing considerations for onboarding new facilities [30][32] Question: Cash collections and future expectations - Management highlighted strong cash flow driven by increased payment frequency from customers, with expectations for Q3 and Q4 cash collections to be impacted by payroll accruals [34][35] Question: Revenue trends and supplemental billings - Supplemental billings related to COVID-19 have no margin, and lower occupancy has driven a need for less labor, impacting revenues [40][42] Question: Government support and future funding - Management believes more government support is needed, with significant opportunities for clarity around testing and potential COVID-related immunity [52][53] Question: Long-term behavior changes in healthcare preferences - Management expressed reluctance to forecast long-term changes but noted that the need for 24/7 care in long-term facilities remains a significant factor [62][63] Question: Recruitment and turnover in the current environment - Management reported continued applications for positions, indicating a commitment to the industry despite challenges posed by the pandemic [80][82] Question: Visibility into census-driven adjustments - Management noted that most adjustments were outside the contract and made in collaboration with customers, with no indications of troubled waters ahead [88][90]

Call Start: 08:30 January 1, 0000 9:14 AM ET Healthcare Services Group, Inc. (NASDAQ:HCSG) Q1 2020 Earnings Conference Call April 22, 2020, 8:30 am ET Company Participants Ted Wahl - President & CEO Matt McKee - CCO Conference Call Participants Andrew Wittmann - Baird Sean Dodge - RBC Capital Markets Nick Spiekhout - William Blair A.J. Rice - Credit Suisse Mitra Ramgopal - Sidoti Jason Plagman - Jefferies Operator Ladies and gentlemen, thank you for standing by, and welcome to the HCSG Q1 Earnings Call. The ...

Part I [Business](index=6&type=section&id=Item%201.%20Business) Healthcare Services Group, Inc. provides management and operating services for housekeeping, laundry, and dietary departments in over 3,000 U.S. healthcare facilities, with significant revenue from Genesis Healthcare, Inc. and renewable one-year service agreements - The company operates through two main segments: **Housekeeping** and **Dietary**[16](index=16&type=chunk) 2019 Revenue Breakdown by Segment | Segment | 2019 Revenue ($ million) | % of Total | | :--- | :--- | :--- | | Housekeeping | $909.5 million | 49.4% | | Dietary | $931.3 million | 50.6% | - **Genesis Healthcare, Inc.** accounted for **15.6%** of consolidated revenues in 2019, a decrease from 19.3% in 2018[25](index=25&type=chunk) - Service agreements are typically for a renewable one-year term, cancellable with 30 to 90 days' notice after an initial period[18](index=18&type=chunk) Bad Debt Provisions (2017-2019) | Year | Bad Debt Provision ($ million) | % of Total Revenues | | :--- | :--- | :--- | | 2019 | $25.5 million | 1.4% | | 2018 | $51.4 million | 2.6% | | 2017 | $6.3 million | 0.3% | [Risk Factors](index=11&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from customer concentration, healthcare industry reimbursement changes, self-funded insurance liabilities, an ongoing SEC investigation, and the short-term nature of service agreements - **Genesis** contributed **15.6%** of total consolidated revenues in 2019, posing a material risk if revenue is lost or significantly reduced[47](index=47&type=chunk) - Client reliance on **Medicare** and **Medicaid** reimbursement exposes the company to changes in government healthcare regulations and funding[48](index=48&type=chunk) - Substantial risk is retained through high-deductible general liability and workers' compensation insurance plans, potentially causing significant operating result fluctuations[54](index=54&type=chunk) - An ongoing **SEC investigation** into EPS calculation practices, initiated in November 2017, could lead to sanctions, penalties, and litigation, adversely affecting financial results[71](index=71&type=chunk)[72](index=72&type=chunk) - A shareholder class action lawsuit filed in March 2019, related to the SEC investigation, could incur significant expenses and divert management's attention[73](index=73&type=chunk) [Unresolved Staff Comments](index=17&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[78](index=78&type=chunk) [Properties](index=17&type=section&id=Item%202.%20Properties) The company leases its corporate headquarters and regional offices, also utilizing client facilities for space, deeming current properties sufficient for operations - The company leases its corporate offices in **Bensalem, PA**, and other regional offices across various states[79](index=79&type=chunk) - Owned assets, including office furniture, vehicles, and equipment at corporate and client facilities, are deemed sufficient for current operations[81](index=81&type=chunk) [Legal Proceedings](index=17&type=section&id=Item%203.%20Legal%20Proceedings) The company is cooperating with an ongoing SEC investigation into EPS calculation practices and defending against a related shareholder class action lawsuit, with potential losses currently inestimable - The **SEC** is investigating the company's **EPS calculation practices**, initiated with an inquiry in November 2017 and a formal subpoena in March 2018[83](index=83&type=chunk) - A shareholder class action lawsuit related to EPS calculation practices was filed on March 22, 2019, and amended in September 2019 to extend the class period and include additional defendants[84](index=84&type=chunk) - Due to the early stage of litigation, the company cannot reasonably estimate possible losses or determine the probability of an unfavorable outcome[85](index=85&type=chunk) [Mine Safety Disclosures](index=17&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[87](index=87&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=18&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on NASDAQ under 'HCSG', with 74.4 million shares outstanding as of February 2020, and its five-year cumulative return underperformed major indices in 2019 - The company's common stock trades on the **NASDAQ Global Select Market** under the symbol **'HCSG'**[89](index=89&type=chunk) 5-Year Cumulative Total Return Comparison | Company/Index | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Healthcare Services Group, Inc. | $100.00 | $115.15 | $131.93 | $180.44 | $140.04 | $87.18 | | S&P 500 | $100.00 | $101.38 | $113.51 | $138.29 | $132.23 | $173.86 | | Russell 2000 | $100.00 | $95.59 | $115.95 | $132.94 | $118.30 | $148.49 | | NASDAQ Composite | $100.00 | $106.96 | $116.45 | $150.96 | $146.67 | $200.49 | [Selected Financial Data](index=20&type=section&id=Item%206.%20Selected%20Financial%20Data) This section summarizes five years of key financial data (2015-2019), highlighting trends in revenues, net income, EPS, assets, equity, and cash dividends, with notable decreases in revenues and net income in 2019 Selected Financial Data (2017-2019) | Metric | 2019 ($M) | 2018 ($M) | 2017 ($M) | | :--- | :--- | :--- | :--- | | **Revenues** | $1,840.8 | $2,002.6 | $1,861.2 | | **Net income** | $64.6 | $83.5 | $88.2 | | **Diluted EPS** | $0.87 | $1.12 | $1.19 | | **Total assets** | $722.6 | $692.6 | $676.0 | | **Stockholders' equity** | $460.3 | $440.8 | $399.9 | | **Cash dividends declared per share** | $0.7975 | $0.7775 | $0.7575 | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=20&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses 2019 financial results, critical accounting policies, and liquidity, noting an 8.1% revenue decrease to $1.8 billion and a decline in net income, with cash from operations as the primary liquidity source [Results of Operations](index=20&type=section&id=Results%20of%20Operations) Consolidated revenues decreased 8.1% to $1.84 billion in 2019, with net income falling to $64.6 million, driven by declines in both Housekeeping and Dietary segments and increased legal fees Consolidated Financial Performance Comparison (2019 vs. 2018) | Metric | 2019 ($M) | 2018 ($M) | % Change | | :--- | :--- | :--- | :--- | | **Revenues** | $1,840.8 | $2,002.6 | (8.1)% | | Housekeeping Revenues | $909.5 | $967.6 | (6.0)% | | Dietary Revenues | $931.3 | $1,035.0 | (10.0)% | | **Income before income taxes** | $85.1 | $99.9 | (14.8)% | - The decline in **Dietary revenue** was primarily due to a modified contract with **Genesis**, effective December 1, 2018, where Genesis assumed direct payment for food purchases[117](index=117&type=chunk) Key Cost Indicators as % of Consolidated Revenue | Indicator | 2019 (%) | 2018 (%) | | :--- | :--- | :--- | | Bad debt provision | 1.4% | 2.6% | | Self-insurance costs | 2.7% | 1.9% | - Selling, general and administrative expenses increased by **$4.6 million (3.3%)** in 2019, primarily due to increased legal and professional fees related to the **SEC inquiry**[121](index=121&type=chunk) - The effective tax rate increased to **24.1%** in 2019 from 16.4% in 2018, mainly due to reduced **Worker Opportunity Tax Credit (WOTC)** program credits[125](index=125&type=chunk) [Critical Accounting Policies and Estimates](index=26&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Management identifies critical accounting estimates including Allowance for Doubtful Accounts, Accrued Insurance Claims, and Income Taxes, all requiring significant judgment and susceptible to revision Allowance for Doubtful Accounts Activity (2017-2019) | Year | Bad Debt Provision ($M) | Net Write-offs ($M) | Ending Balance ($M) | | :--- | :--- | :--- | :--- | | 2019 | $25.5 | $30.3 | $52.4 | | 2018 | $51.4 | $6.2 | $57.2 | | 2017 | $6.3 | $1.2 | $12.0 | Accrued Insurance Claims Activity (2017-2019) | Year | Beginning Balance ($M) | Claim Payments ($M) | Current Year Accruals ($M) | Prior Year Adj. ($M) | Ending Balance ($M) | | :--- | :--- | :--- | :--- | :--- | :--- | | 2019 | $79.6 | ($35.8) | $45.9 | ($2.1) | $87.6 | | 2018 | $84.7 | ($34.9) | $45.5 | ($15.7) | $79.6 | | 2017 | $87.7 | ($41.1) | $49.7 | ($11.6) | $84.7 | [Liquidity and Capital Resources](index=30&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity primarily stems from cash from operations, with $118.0 million in cash and equivalents and $367.1 million in working capital as of December 2019, supported by a $475 million credit facility and ongoing dividend payments Cash Flow Summary (2017-2019) | Cash Flow Activity | 2019 ($M) | 2018 ($M) | 2017 ($M) | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $93.6 | $80.0 | $7.6 | | Net cash used in investing activities | ($16.5) | ($9.6) | ($15.0) | | Net cash used in financing activities | ($75.8) | ($54.0) | ($7.0) | - The company paid **$59.0 million** in cash dividends in 2019 and declared a subsequent quarterly dividend of **$0.20125 per share** in February 2020[146](index=146&type=chunk) - The company maintains a **$475 million** bank line of credit expiring in December 2023, with **$10.0 million** drawn and **$402.3 million** available as of December 31, 2019[151](index=151&type=chunk)[155](index=155&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=33&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate fluctuations affecting its **$90.7 million** municipal bond portfolio, where rising rates could adversely impact fixed-rate security values - As of December 31, 2019, the company held **$90.7 million** in municipal bonds, which are subject to interest rate risk[165](index=165&type=chunk) [Financial Statements and Supplementary Data](index=34&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the company's audited consolidated financial statements for 2017-2019, including auditor's report, management's internal control report, balance sheets, income statements, cash flows, equity statements, and detailed notes [Consolidated Financial Statements](index=40&type=section&id=Consolidated%20Financial%20Statements) Consolidated financial statements show 2019 revenues decreased to **$1.84 billion** and net income to **$64.6 million**, while total assets increased to **$722.6 million**, stockholders' equity to **$460.3 million**, and operating cash flow improved to **$93.6 million** Consolidated Balance Sheet Highlights (as of Dec 31) | Account | 2019 ($M) | 2018 ($M) | | :--- | :--- | :--- | | Total current assets | $515.7 | $508.1 | | Total assets | $722.6 | $692.6 | | Total current liabilities | $148.7 | $163.4 | | Total stockholders' equity | $460.3 | $440.8 | Consolidated Income Statement Highlights (Year Ended Dec 31) | Account | 2019 ($M) | 2018 ($M) | 2017 ($M) | | :--- | :--- | :--- | :--- | | Revenues | $1,840.8 | $2,002.6 | $1,861.2 | | Income before income taxes | $85.1 | $99.9 | $133.0 | | Net income | $64.6 | $83.5 | $88.2 | | Diluted EPS | $0.87 | $1.12 | $1.19 | [Notes to Consolidated Financial Statements](index=45&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Notes detail accounting policies, revenue recognition, segment data, legal contingencies, and share-based compensation, including ASC 842 adoption, Genesis client concentration, ongoing SEC investigation, and the anticipated **$36 million to $44 million** impact of ASC 326 adoption on credit losses - The company adopted **ASC 842** on January 1, 2019, capitalizing existing operating leases[224](index=224&type=chunk) - The company expects to adopt **ASC 326** on January 1, 2020, projecting an increase in allowance for credit losses by approximately **$36 million to $44 million**, with a corresponding reduction to retained earnings[245](index=245&type=chunk) - As of December 31, 2019, remaining performance obligations totaled **$696.1 million**, with approximately **24%** expected to be recognized as revenue within the next 12 months[255](index=255&type=chunk) - The company offers a **Supplemental Executive Retirement Plan (SERP)** and an **Employee Stock Purchase Plan (ESPP)** for eligible employees[303](index=303&type=chunk)[306](index=306&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=71&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure - None reported[340](index=340&type=chunk) [Controls and Procedures](index=71&type=section&id=Item%209A.%20Controls%20and%20Procedures) As of December 31, 2019, the CEO and CFO concluded the company's disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the period - The **CEO** and **CFO** concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[341](index=341&type=chunk) - No material changes to internal control over financial reporting occurred during the period[343](index=343&type=chunk) [Other Information](index=71&type=section&id=Item%209B.%20Other%20Information) This item is not applicable - Not applicable[344](index=344&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=72&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the 2020 proxy statement, and the company maintains a code of ethics for all employees - Information is incorporated by reference from the **2020 proxy statement**[346](index=346&type=chunk) - The company has a code of ethics available on its website[347](index=347&type=chunk) [Executive Compensation](index=72&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the company's 2020 proxy statement - Information is incorporated by reference from the **2020 proxy statement**[348](index=348&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=72&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information regarding security ownership is incorporated by reference from the company's 2020 proxy statement - Information is incorporated by reference from the **2020 proxy statement**[349](index=349&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=72&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information regarding related party transactions and director independence is incorporated by reference from the company's 2020 proxy statement - Information is incorporated by reference from the **2020 proxy statement**[350](index=350&type=chunk) [Principal Accountant Fees and Services](index=72&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information regarding principal accountant fees and services is incorporated by reference from the company's 2020 proxy statement - Information is incorporated by reference from the **2020 proxy statement**[351](index=351&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=73&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including Schedule II—Valuation and Qualifying Accounts and Reserves, corporate documents, and certifications - Lists all financial statements, schedules, and exhibits filed with the report[354](index=354&type=chunk) Schedule II - Allowance for Doubtful Accounts | Year | Beginning Balance ($M) | Additions (Charged to Costs) ($M) | Deductions ($M) | Ending Balance ($M) | | :--- | :--- | :--- | :--- | :--- | | 2019 | $57.2 | $25.5 | $30.3 | $52.4 | | 2018 | $12.0 | $51.4 | $6.2 | $57.2 | | 2017 | $6.9 | $6.3 | $1.2 | $12.0 | [Form 10-K Summary](index=73&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company indicates that no Form 10-K summary is provided - None provided[356](index=356&type=chunk)

Healthcare Services Group, Inc. (NASDAQ:HCSG) Q4 2019 Earnings Conference Call February 12, 2020 8:30 AM ET Company Participants Ted Wahl - President & Chief Executive Officer Matt McKee - Vice President, Strategy Conference Call Participants Andrew Wittmann - Baird Sean Dodge - RBC Capital Markets Jason Plagman - Jefferies Ryan Daniels - William Blair Mitra Ramgopal - Sidoti Bill Sutherland - The Benchmark Company Chad Vanacore - Stifel A.J. Rice - Credit Suisse Operator Ladies and gentlemen, thank you for ...

Financial Data and Key Metrics Changes - Revenue for Q3 was reported at $455 million, with Dining & Nutrition at $230 million and Housekeeping & Laundry at $225 million [18] - Net income for the quarter was $18.3 million, with earnings per share at $0.25 [19] - Direct cost of services was reported at 87.4%, with segment margins of 9.6% for Housekeeping and 3.8% for Dining [19][20] - Selling, general and administrative expenses were $33 million, or 7.3% of revenue [21] - Cash flow from operations for the quarter was $60 million, with a current ratio better than 3:1 [24] Business Line Data and Key Metrics Changes - Incremental revenue impact from facility exits in Q4 is expected to be about $15 million, with $10 million in Dining and $5 million in Housekeeping & Laundry [18] - Temporary cost increases of about $4 million were related to payroll for account managers and $2 million for start-up costs and inefficiencies [19][20] Market Data and Key Metrics Changes - Days Sales Outstanding (DSO) increased to 70 days due to a decrease in long-term notes receivable now classified as current [25] - The company has over $120 million in cash and marketable securities [24] Company Strategy and Development Direction - The company aims to manage the base business efficiently while selectively assigning managers to new opportunities [15] - A cautious view on growth is maintained as the industry transitions to a patient-driven payment model [15][36] - The company remains committed to long-term growth and delivering shareholder value [16][36] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism regarding the implementation of the patient-driven payment model (PDPM), noting positive experiences from customers [31][36] - Industry fundamentals are improving, with occupancy trends and reimbursement programs showing positive signs [36][98] - Management emphasized the importance of disciplined decision-making, especially regarding credit-related matters [38] Other Important Information - The Board approved an increase in the dividend to $0.20 per share, marking the 66th consecutive dividend payment [25][26] - The company is under an ongoing SEC investigation, which could impact financial results [5][6][7] Q&A Session Summary Question: Early read on PDPM implementation - Management reported positive experiences from customers regarding PDPM implementation so far [31] Question: Revenue growth expectations - Management advised a cautious view on revenue growth, suggesting a wait-and-see approach for Q4 and Q1 [34][36] Question: Credit quality monitoring - Management detailed a multi-pronged strategy for monitoring credit quality, including payment frequency and facility-level insights [42][50] Question: New business signed in Q3 - Approximately $50 million in annualized revenue was added in Q3, with about $12 million recognized during the period [52] Question: Excess facility managers - Management indicated that the number of excess managers is fluid, with confidence in placing them within 6 to 12 months [68] Question: Impact of PDPM on client implementations - Management acknowledged that PDPM is a primary focus for clients, which may delay new business opportunities [64] Question: Cash flow expectations - Management expects cash flow for the year to be around $80 million, with potential for additional cash flow in Q4 [74][105]

[PART I - FINANCIAL INFORMATION](index=5&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements (Unaudited)](index=6&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section presents the unaudited consolidated financial statements for Q1 2019, highlighting a revenue decrease but a significant net income increase [Consolidated Balance Sheets](index=6&type=section&id=Consolidated%20Balance%20Sheets) Total assets increased to **$722.9 million** by March 31, 2019, driven by receivables and property & equipment, while stockholders' equity remained stable at **$442.5 million** Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | **Total current assets** | $525,006 | $508,136 | | **Total assets** | $722,924 | $692,603 | | **Total current liabilities** | $175,482 | $163,391 | | **Total liabilities** | $280,375 | $251,823 | | **Total stockholders' equity** | $442,549 | $440,780 | [Consolidated Statements of Comprehensive Income](index=8&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) Q1 2019 revenues decreased by **4.9%** to **$476.1 million**, but net income significantly increased to **$9.2 million** due to reduced bad debt provision Q1 2019 vs Q1 2018 Performance (in thousands, except per share data) | Metric | Three Months Ended Mar 31, 2019 | Three Months Ended Mar 31, 2018 | | :--- | :--- | :--- | | **Revenues** | $476,111 | $500,562 | | **Costs of services provided** | $427,265 | $469,252 | | **Income (loss) before income taxes** | $11,892 | $(1,395) | | **Net income** | $9,156 | $72 | | **Diluted earnings per common share** | $0.12 | $0.00 | [Consolidated Statements of Cash Flows](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operations decreased to **$17.6 million** in Q1 2019, with **$2.0 million** used in investing and **$13.2 million** in financing activities Cash Flow Summary (in thousands) | Activity | Three Months Ended Mar 31, 2019 | Three Months Ended Mar 31, 2018 | | :--- | :--- | :--- | | **Net cash provided by operating activities** | $17,577 | $23,931 | | **Net cash used in investing activities** | $(2,010) | $(4,202) | | **Net cash used in financing activities** | $(13,230) | $(18,797) | | **Net change in cash and cash equivalents** | $2,337 | $932 | [Notes to Consolidated Financial Statements](index=12&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Notes detail accounting policies, segment reporting, new accounting standard adoptions, a **$18.5 million** bad debt provision, and ongoing SEC investigation and related lawsuit - The company operates through two reportable segments: Housekeeping (cleaning, laundry, linen services) and Dietary (food purchasing, meal preparation, dietitian services)[28](index=28&type=chunk)[29](index=29&type=chunk)[30](index=30&type=chunk) - The company adopted the new lease accounting standard (ASC 842) on January 1, 2019, resulting in the recognition of right-of-use assets of **$18.1 million** and corresponding lease liabilities[42](index=42&type=chunk)[72](index=72&type=chunk)[75](index=75&type=chunk) - A bad debt provision of **$18.5 million** was recorded in Q1 2019, primarily due to the restructuring of a Northeast-based operator, compared to **$37.1 million** in Q1 2018[66](index=66&type=chunk) - The company is under an ongoing SEC investigation regarding its earnings per share (EPS) calculation practices, with a related shareholder class action lawsuit filed in March 2019, and cannot currently estimate potential losses[123](index=123&type=chunk)[124](index=124&type=chunk)[125](index=125&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=34&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the **4.9%** Q1 2019 revenue decrease due to contract adjustments, increased SG&A from legal fees, and strong liquidity with **$106.9 million** in cash Q1 2019 vs Q1 2018 Segment Revenue (in thousands) | Segment | Q1 2019 | Q1 2018 | % Change | | :--- | :--- | :--- | :--- | | Housekeeping | $233,134 | $245,161 | (4.9)% | | Dietary | $242,977 | $255,401 | (4.9)% | | **Consolidated** | **$476,111** | **$500,562** | **(4.9)%** | - The decrease in Dietary revenue and costs was primarily due to a modified contract with Genesis Healthcare®, effective December 1, 2018, where Genesis assumed direct payment responsibility for food purchases[143](index=143&type=chunk)[148](index=148&type=chunk) - Selling, general and administrative (SG&A) expense increased by **$4.1 million** (**12.3%**), excluding deferred compensation changes, primarily due to increased legal and professional fees related to the SEC inquiry[150](index=150&type=chunk)[151](index=151&type=chunk) - The company maintains a **$475 million** bank line of credit, with **$30.0 million** drawn as of March 31, 2019, and was in compliance with all financial covenants[165](index=165&type=chunk)[166](index=166&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=43&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate risk on its **$106.9 million** portfolio of cash and marketable securities, managed through diversification and high credit quality investments - As of March 31, 2019, the company had **$106.9 million** in cash, cash equivalents, and marketable securities[180](index=180&type=chunk) - The main market risk is interest rate risk, where fixed-rate securities are impacted by rising rates and floating-rate securities by falling rates[181](index=181&type=chunk) [Item 4. Controls and Procedures](index=43&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls were effective as of March 31, 2019, following the implementation of a new ERP system and related internal control modifications - Management concluded that disclosure controls and procedures were effective as of the end of the period[183](index=183&type=chunk) - During Q1 2019, the company implemented a new ERP system, resulting in modifications to existing internal controls and the implementation of new ones[184](index=184&type=chunk) [PART II - OTHER INFORMATION](index=45&type=section&id=PART%20II%20-%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=45&type=section&id=Item%201.%20Legal%20Proceedings) This section details the ongoing SEC investigation into EPS calculation practices and a related shareholder lawsuit, with uncertain outcomes and financial impacts - The SEC is conducting an investigation into the company's EPS calculation practices, which began with an inquiry in November 2017[189](index=189&type=chunk) - A shareholder class action lawsuit was filed on March 22, 2019, against the company and its CEO, alleging federal securities law violations related to the EPS calculation matters[190](index=190&type=chunk) - Due to the early stage of the litigation, the company is unable to reasonably estimate possible losses or judge whether an unfavorable outcome is probable or remote[191](index=191&type=chunk) [Item 1A. Risk Factors](index=45&type=section&id=Item%201A.%20Risk%20Factors) The company highlights risks from the SEC investigation and related litigation, including potential sanctions, legal costs, management distraction, and reputational harm - The SEC investigation into EPS calculation practices could lead to potential sanctions, penalties, and significant costs, distracting management and adversely affecting financial results[193](index=193&type=chunk)[194](index=194&type=chunk) - The related shareholder lawsuit poses risks of significant expenses, diversion of management resources, and potential damages that could harm the business and financial condition[195](index=195&type=chunk) - There have been no other material changes in risk factors from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018[196](index=196&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=46&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This item is not applicable for the current reporting period - Not applicable[197](index=197&type=chunk) [Item 3. Defaults Upon Senior Securities](index=46&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This item is not applicable for the current reporting period - Not applicable[198](index=198&type=chunk) [Item 4. Mine Safety Disclosures](index=46&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable for the current reporting period - Not applicable[199](index=199&type=chunk) [Item 5. Other Information](index=46&type=section&id=Item%205.%20Other%20Information) This item is not applicable for the current reporting period - Not applicable[200](index=200&type=chunk) [Item 6. Exhibits](index=46&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including SOX certifications from key officers and financial data in iXBRL format - The report includes certifications from the Principal Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[201](index=201&type=chunk) - Financial information from the Form 10-Q is also provided in iXBRL (Inline eXtensible Business Reporting Language) format as an exhibit[201](index=201&type=chunk) [Signatures](index=47&type=section&id=Signatures)

Healthcare Services Group, Inc. (NASDAQ:HCSG) Q1 2019 Earnings Conference Call May 1, 2019 8:30 AM ET Company Participants Ted Wahl - President & Chief Executive Officer Matt McKee - Vice President, Strategy Conference Call Participants Caleb Harris - Credit Suisse Andrew Wittmann - Robert W. Baird Jacob Johnson - Stephens Nick Spiekhout - William Blair Chad Banneker – Stifel Sean Dodge - Jefferies Mitra Ramgopal – Sidoti Operator Good day, ladies and gentlemen and welcome to the Healthcare Services Group, ...