Healthcare Services Group(HCSG) - 2023 Q3 - Quarterly Report

PART I Financial Statements (Unaudited) Unaudited financial statements for Q3 2023 show a net loss, while nine-month net income declined, with total assets increasing to $750.7 million Consolidated Balance Sheets As of September 30, 2023, total assets increased to $750.7 million, driven by receivables, while liabilities rose due to increased borrowings Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 (unaudited) | Dec 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $31,313 | $26,279 | | Accounts and notes receivable, net | $396,577 | $369,386 | | Total current assets | $533,363 | $508,632 | | Total assets | $750,716 | $718,334 | | Liabilities & Equity | | | | Borrowings under line of credit | $45,000 | $25,000 | | Total current liabilities | $187,774 | $178,619 | | Total liabilities | $308,983 | $292,162 | | Total stockholders' equity | $441,733 | $426,172 | Consolidated Statements of Comprehensive (Loss) Income The company reported a net loss of $5.5 million for Q3 2023, a decline from prior year, while nine-month net income decreased to $15.8 million Q3 Financial Performance (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Revenues | $411,388 | $414,488 | | Costs of services provided | $377,554 | $376,894 | | Selling, general and administrative | $39,047 | $35,803 | | Net (loss) income | $(5,494) | $322 | | Diluted (loss) earnings per share | $(0.07) | $0.00 | Nine-Month Financial Performance (in thousands, except per share data) | Metric | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | | Revenues | $1,247,549 | $1,266,156 | | Costs of services provided | $1,106,260 | $1,129,526 | | Selling, general and administrative | $120,523 | $100,820 | | Net income | $15,788 | $18,471 | | Diluted earnings per share | $0.21 | $0.25 | Consolidated Statements of Cash Flows Net cash used in operating activities significantly improved to $5.9 million for the nine months ended September 30, 2023, leading to a $5.0 million net cash increase Cash Flow Summary - Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(5,947) | $(31,060) | | Net cash (used in) from investing activities | $(1,910) | $2,872 | | Net cash from (used in) financing activities | $12,891 | $(22,973) | | Net increase (decrease) in cash | $5,034 | $(51,161) | - The company paid no dividends in the first nine months of 2023, compared to $47.4 million in the same period of 2022. Instead, it used $6.2 million for treasury stock purchases and increased short-term borrowings by $20.0 million[18] Notes to Consolidated Financial Statements The notes provide details on business segments, accounting policies, and significant customer concentration, with Dietary services contributing 53.9% of revenue - The company is organized into two reportable segments: Housekeeping (housekeeping, laundry, linen) and Dietary (dietary department services)[25] - For the nine months ended September 30, 2023, one customer, Genesis Healthcare, Inc., accounted for $141.3 million, or 11.3% of consolidated revenues[47] - In Q2 2023, the company filed a claim for the Employee Retention Credit (ERC) for wages paid in 2020 and 2021, but has not recognized any related amounts as receipt is not yet reasonably assured[49] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 2023 net loss driven by a significant bad debt provision, and a decline in nine-month net income, while liquidity is supported by cash and a credit facility Results of Operations - Three Months Ended September 30, 2023 and 2022 Q3 2023 consolidated revenues decreased by 0.7% to $411.4 million, resulting in a net loss primarily due to a $9.1 million bad debt provision Q3 Revenue by Segment (in thousands) | Segment | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | Housekeeping | $190,920 | $196,941 | (3.1)% | | Dietary | $220,468 | $217,547 | 1.3% | | Consolidated | $411,388 | $414,488 | (0.7)% | - A customer group's bankruptcy in Q3 2023 resulted in a $9.1 million increase to the bad debt provision, significantly impacting profitability[150] - Consolidated interest expense increased by 166.8% to $2.1 million due to increased short-term borrowings and higher market interest rates[157] Results of Operations - Nine Months Ended September 30, 2023 and 2022 Nine-month consolidated revenues decreased by 1.5% to $1.25 billion, with income before taxes falling 12.0% due to lower Housekeeping revenue and increased bad debt provisions Nine-Month Revenue by Segment (in thousands) | Segment | Nine Months 2023 | Nine Months 2022 | % Change | | :--- | :--- | :--- | :--- | | Housekeeping | $575,256 | $597,710 | (3.8)% | | Dietary | $672,293 | $668,446 | 0.6% | | Consolidated | $1,247,549 | $1,266,156 | (1.5)% | - Bad debt provision as a percentage of revenue increased to 2.6% from 1.8% year-over-year, driven by changes in the credit risk profile of two customer groups, which added $13.8 million to bad debt expense[165] Liquidity and Capital Resources As of September 30, 2023, the company maintained $121.3 million in liquid assets and a $300 million credit facility, while initiating a share repurchase plan after suspending dividends - The company maintains a $300 million bank line of credit, with $45.0 million in borrowings and $85.7 million in letters of credit outstanding as of September 30, 2023, leaving $169.3 million available[126][127] - On February 14, 2023, the Board of Directors suspended the quarterly dividend and authorized a repurchase of up to 7.5 million shares[180] - For the nine months ended September 30, 2023, the company repurchased 0.5 million shares for $6.2 million[181] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to interest rate risk on its $121.3 million investments, where rate fluctuations could impact fixed and floating-rate securities - The company's primary market risk is interest rate risk associated with its investments. The market value of fixed-rate securities may be negatively impacted by rising interest rates[193] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal controls during Q3 - Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2023[195] - There were no changes in internal controls over financial reporting during Q3 2023 that have materially affected, or are reasonably likely to materially affect, these controls[196] PART II — OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings in the ordinary course of business, with no expected material adverse effect on financial condition - The company is subject to various legal actions in the ordinary course of business but does not expect them to have a material adverse effect on its financial condition[200] - For certain pending litigation, the company is unable to reasonably estimate possible losses or determine if an unfavorable outcome is probable, reasonably possible, or remote[201] Risk Factors No material changes have occurred in the risk factors previously disclosed in the company's 2022 Annual Report on Form 10-K - No material changes have occurred in the risk factors from the company's 2022 Form 10-K[203] Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities The Board authorized a share repurchase plan for up to 7.5 million shares, with 345,612 shares repurchased for $4.0 million during Q3 2023 Q3 2023 Share Repurchases | Period | Shares Repurchased | Average Price Paid | Total Cost (in thousands) | | :--- | :--- | :--- | :--- | | July 2023 | 58,601 | $12.53 | $734 | | August 2023 | 102,011 | $12.34 | $1,259 | | September 2023 | 185,000 | $10.68 | $1,977 | | Total Q3 | 345,612 | $11.49 | $3,970 | - As of the end of Q3 2023, approximately 7.0 million shares remain authorized for repurchase under the current plan[204] Other Information No directors or officers adopted, terminated, or modified Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during Q3 2023 - No directors or officers adopted, terminated, or modified a Rule 10b5-1 trading arrangement during Q3 2023[208] Exhibits This section lists exhibits filed with the Form 10-Q, including required certifications from the Principal Executive Officer and Principal Financial Officer - Exhibits filed include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[209]