Healthcare Services Group(HCSG) - 2019 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Presents the company's unaudited financial statements, management's analysis, market risk disclosures, and internal controls Item 1. Financial Statements (Unaudited) Presents unaudited consolidated financial statements for Q2 2019, including balance sheets, income, cash flows, and equity Notes to Consolidated Financial Statements Detailed notes explain accounting policies, segment operations, ASC 842 adoption, and the ongoing SEC investigation - The company is organized into two reportable segments: Housekeeping (housekeeping, laundry, linen) and Dietary (dietary department services)[29] - The company adopted the new lease accounting standard ASC 842 on January 1, 2019, resulting in the capitalization of existing operating leases and the recognition of right-of-use assets and lease liabilities on the balance sheet[43] - The company is subject to an ongoing SEC investigation into its earnings per share (EPS) calculation practices, which began in November 2017, with a related shareholder class action lawsuit filed in March 2019[126][127] Segment Revenues | Segment | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2018 (in thousands) | | :--- | :--- | :--- | | Housekeeping | $462,045 | $488,563 | | Dietary | $476,167 | $513,586 | | Total | $938,212 | $1,002,149 | Consolidated Balance Sheet Highlights | Account | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $16,156 | $26,025 | | Accounts and notes receivable, net | $388,721 | $384,881 | | Total current assets | $509,003 | $508,136 | | Total assets | $710,131 | $692,603 | | Liabilities & Equity | | | | Total current liabilities | $151,391 | $163,391 | | Total stockholders' equity | $449,648 | $440,780 | | Total liabilities and stockholders' equity | $710,131 | $692,603 | Consolidated Statements of Comprehensive Income Highlights | Metric | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended June 30, 2018 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2018 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Revenues | $462,101 | $501,587 | $938,212 | $1,002,149 | | Net income | $18,186 | $25,814 | $27,342 | $25,886 | | Diluted EPS | $0.24 | $0.35 | $0.37 | $0.35 | Consolidated Statements of Cash Flows Highlights | Cash Flow Activity | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2018 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $20,339 | $27,395 | | Net cash used in investing activities | ($3,498) | ($6,028) | | Net cash used in financing activities | ($26,710) | ($17,769) | | Net change in cash and cash equivalents | ($9,869) | $3,598 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes Q2 2019 financial performance, detailing revenue decline, cost changes, reduced bad debt, increased SG&A, and liquidity - Consolidated revenues for the six months ended June 30, 2019, decreased by 6.4% to $938.2 million from $1.0 billion in the prior year, driven by decreases of 5.4% in Housekeeping and 7.3% in Dietary revenues due to customer terminations and contract adjustments[158][161][162] - The bad debt provision for the six months ended June 30, 2019, was $21.5 million (2.3% of revenue), a significant decrease from $39.4 million (3.9% of revenue) in the same period of 2018, primarily related to a Northeast-based operator's restructuring[67][164] - Selling, general and administrative (SG&A) expense for the six months ended June 30, 2019, increased by 17.4% to $79.7 million, with a 12.0% increase excluding deferred compensation impacts, mainly due to higher legal and professional fees from the SEC investigation[168][169] - The company maintained a strong liquidity position with working capital of $357.6 million and a current ratio of 3.4 to 1 as of June 30, 2019, with cash from operations as the primary source of liquidity[174] - The company paid regular quarterly cash dividends totaling $29.3 million during the first six months of 2019[179] Quantitative and Qualitative Disclosures About Market Risk Primary market risk is interest rate exposure on $95.7 million in cash, equivalents, and marketable securities - As of June 30, 2019, the company held $95.7 million in cash, cash equivalents, and marketable securities[198] - The main market risk is interest rate risk, which could impact the value and income generated from its investment portfolio of fixed-rate and floating-rate securities[199] Controls and Procedures Management affirmed effective disclosure controls as of June 30, 2019, following ERP system implementation and control modifications - Management concluded that disclosure controls and procedures were effective as of the end of the period[201] - A new Enterprise Resource Planning (ERP) system was implemented during the first quarter of 2019, leading to modifications and new internal controls over financial reporting[202] PART II OTHER INFORMATION Covers legal proceedings, risk factors, and other required disclosures for the reporting period Legal Proceedings Discloses ongoing SEC investigation into EPS calculation and related shareholder lawsuit, with potential losses currently inestimable - The SEC is conducting an ongoing investigation into the company's EPS calculation practices, with an internal investigation completed in March 2019[206] - A shareholder class action lawsuit was filed on March 22, 2019, alleging violations of federal securities laws in connection with the EPS calculation matters[207] - The company is currently unable to estimate possible losses or determine if an unfavorable outcome is probable or remote for these legal matters[208] Risk Factors Highlights material risks from SEC investigation and shareholder lawsuit, including potential sanctions, legal costs, and management distraction - The ongoing SEC investigation into EPS calculation practices could lead to potential sanctions, penalties, and management distraction, adversely affecting financial results[210][211] - The related shareholder class action lawsuit could result in significant expenses, divert management resources, and require damage payments that could harm the business and financial condition[212] - There have been no other material changes in the risk factors from those disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2018[213] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Confirms no unregistered equity sales, senior security defaults, or mine safety disclosures, and lists Form 10-Q exhibits - Item 2 (Unregistered Sales of Equity Securities), Item 3 (Defaults Upon Senior Securities), Item 4 (Mine Safety Disclosures), and Item 5 (Other Information) were all reported as 'Not applicable'[214][215][216][217] - Item 6 lists the exhibits filed with the report, including Sarbanes-Oxley certifications from the Principal Executive Officer and Principal Financial Officer[218]