Healthcare Services Group(HCSG) - 2019 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements (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 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 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 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 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][29][30] - 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][72][75] - 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] - 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][124][125] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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][148] - 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][151] - 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][166] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] - 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] Item 4. Controls and Procedures 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] - During Q1 2019, the company implemented a new ERP system, resulting in modifications to existing internal controls and the implementation of new ones[184] PART II - OTHER INFORMATION Item 1. Legal Proceedings 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] - 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] - 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] Item 1A. Risk Factors 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][194] - 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] - 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable for the current reporting period - Not applicable[197] Item 3. Defaults Upon Senior Securities This item is not applicable for the current reporting period - Not applicable[198] Item 4. Mine Safety Disclosures This item is not applicable for the current reporting period - Not applicable[199] Item 5. Other Information This item is not applicable for the current reporting period - Not applicable[200] Item 6. Exhibits 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] - Financial information from the Form 10-Q is also provided in iXBRL (Inline eXtensible Business Reporting Language) format as an exhibit[201] Signatures