Healthcare Services Group(HCSG) - 2019 Q4 - Annual Report

Part I Business 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] 2019 Revenue Breakdown by Segment | Segment | 2019 Revenue ($ million) | % of Total | | :--- | :--- | :--- | | Housekeeping | $909.5 million | 49.4% | | Dietary | $931.3 million | 50.6% | - Genesis Healthcare, Inc. accounted for 15.6% of consolidated revenues in 2019, a decrease from 19.3% in 2018[25] - Service agreements are typically for a renewable one-year term, cancellable with 30 to 90 days' notice after an initial period[18] Bad Debt Provisions (2017-2019) | Year | Bad Debt Provision ($ million) | % of Total Revenues | | :--- | :--- | :--- | | 2019 | $25.5 million | 1.4% | | 2018 | $51.4 million | 2.6% | | 2017 | $6.3 million | 0.3% | Risk Factors 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] - Client reliance on Medicare and Medicaid reimbursement exposes the company to changes in government healthcare regulations and funding[48] - Substantial risk is retained through high-deductible general liability and workers' compensation insurance plans, potentially causing significant operating result fluctuations[54] - An ongoing SEC investigation into EPS calculation practices, initiated in November 2017, could lead to sanctions, penalties, and litigation, adversely affecting financial results[71][72] - A shareholder class action lawsuit filed in March 2019, related to the SEC investigation, could incur significant expenses and divert management's attention[73] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[78] Properties 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] - Owned assets, including office furniture, vehicles, and equipment at corporate and client facilities, are deemed sufficient for current operations[81] Legal Proceedings 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] - 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] - Due to the early stage of litigation, the company cannot reasonably estimate possible losses or determine the probability of an unfavorable outcome[85] Mine Safety Disclosures This item is not applicable to the company - Not applicable[87] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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] 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 | $200.49 | Selected Financial Data This section summarizes five years of key financial data (2015-2019), highlighting trends in revenues, net income, EPS, assets, equity, and cash dividends, with notable decreases in revenues and net income in 2019 Selected Financial Data (2017-2019) | Metric | 2019 ($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 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 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] 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 $4.6 million (3.3%) in 2019, primarily due to increased legal and professional fees related to the SEC inquiry[121] - The effective tax rate increased to 24.1% in 2019 from 16.4% in 2018, mainly due to reduced Worker Opportunity Tax Credit (WOTC) program credits[125] Critical Accounting Policies and Estimates Management identifies critical accounting estimates including Allowance for Doubtful Accounts, Accrued Insurance Claims, and Income Taxes, all requiring significant judgment and susceptible to revision Allowance for Doubtful Accounts Activity (2017-2019) | Year | Bad Debt Provision ($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 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] - 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][155] Quantitative and Qualitative Disclosures About Market Risk 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] Financial Statements and Supplementary Data 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 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 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] - 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] - 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] - The company offers a Supplemental Executive Retirement Plan (SERP) and an Employee Stock Purchase Plan (ESPP) for eligible employees[303][306] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure - None reported[340] Controls and Procedures 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] - No material changes to internal control over financial reporting occurred during the period[343] Other Information This item is not applicable - Not applicable[344] Part III Directors, Executive Officers and Corporate Governance 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] - The company has a code of ethics available on its website[347] Executive Compensation 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] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 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] Certain Relationships and Related Transactions, and Director Independence 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] Principal Accountant Fees and Services 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] Part IV Exhibits and Financial Statement Schedules 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] 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 The company indicates that no Form 10-K summary is provided - None provided[356]