Healthcare Services Group(HCSG) - 2024 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements (Unaudited) The unaudited consolidated financial statements as of March 31, 2024, detail the company's financial position and performance Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total current assets | $580,414 | $571,696 | | Total assets | $803,880 | $790,652 | | Total current liabilities | $209,375 | $216,928 | | Total liabilities | $329,299 | $334,036 | | Total stockholders' equity | $474,581 | $456,616 | Consolidated Income Statement Highlights (in thousands, except per share data) | Metric | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Revenues | $423,433 | $417,230 | | Income before income taxes | $21,314 | $16,155 | | Net income | $15,309 | $11,671 | | Diluted earnings per common share | $0.21 | $0.16 | Consolidated Cash Flow Highlights (in thousands) | Cash Flow Activity | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | $(26,033) | $(16,290) | | Net cash from (used in) investing activities | $11,716 | $(743) | | Net cash from financing activities | $13,970 | $6,907 | | Net decrease in cash | $(347) | $(10,126) | Note 1: Business Description and Accounting Policies The company provides housekeeping and dietary services to the healthcare industry through two reportable segments - The company is organized into two reportable segments: Housekeeping (housekeeping, laundry, linen) and Dietary (food purchasing, meal preparation, dietitian services)[24][25][26] - For Q1 2024, a single customer, Genesis Healthcare, Inc, accounted for 9.2% of consolidated revenues ($38.8 million), down from 11.5% ($48.1 million) in Q1 2023[48] - The company has filed for the Employee Retention Credit (ERC) but has not recognized any related amounts in its financial statements due to uncertainty of receipt[50] Note 3: Revenue Revenue is disaggregated by the Dietary (55.0%) and Housekeeping (45.0%) segments and recognized over time Revenue by Segment (in millions) | Segment | Q1 2024 Revenue | % of Total | Q1 2023 Revenue | % of Total | | :--- | :--- | :--- | :--- | :--- | | Housekeeping | $190.6 | 45.0% | $193.5 | 46.4% | | Dietary | $232.9 | 55.0% | $223.7 | 53.6% | - Revenue is recognized using the output method based on the delivery of goods and services, with contracts typically for a renewable one-year term[59] Note 5: Allowance for Doubtful Accounts The allowance for doubtful accounts increased to $95.6 million due to a bad debt expense of $4.9 million in Q1 2024 Changes in Allowance for Doubtful Accounts (in thousands) | Portfolio Segment | Dec 31, 2023 Balance | Bad Debt Expense Q1 2024 | Write-Offs Q1 2024 | March 31, 2024 Balance | | :--- | :--- | :--- | :--- | :--- | | Accounts receivable | $80,819 | $4,301 | $(1,033) | $84,087 | | Notes receivable | $10,880 | $620 | $0 | $11,500 | | Total | $91,699 | $4,921 | $(1,033) | $95,587 | - The company evaluates receivables for expected credit losses quarterly using internally developed credit quality indicators[66] Note 13: Segment Information Dietary segment revenue and income grew in Q1 2024, while the Housekeeping segment experienced declines Segment Financial Performance (in thousands) | Metric | Segment | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | :--- | | Revenues | Housekeeping | $190,559 | $193,519 | | | Dietary | $232,874 | $223,711 | | Income before income taxes | Housekeeping | $18,442 | $20,053 | | | Dietary | $17,627 | $14,666 | Note 15: Other Contingencies The company maintains a $300.0 million line of credit, with $187.6 million available for borrowing as of March 31, 2024 - As of March 31, 2024, the company had a $300.0 million line of credit with $40.0 million in borrowings[126] - The amount available under the line of credit was reduced by $72.4 million for outstanding letters of credit, leaving $187.6 million available for borrowing[127] Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue increased 1.5% in Q1 2024, driven by Dietary segment growth, while operating cash flow was negative Results of Operations Consolidated revenue grew 1.5% in Q1 2024, driven by a 4.1% increase in the Dietary segment Segment Revenue and Income Change (Q1 2024 vs Q1 2023) | Segment | Revenue % Change | Income Before Taxes % Change | | :--- | :--- | :--- | | Housekeeping | (1.5)% | (8.0)% | | Dietary | 4.1% | 20.2% | | Consolidated | 1.5% | 31.9% | - Costs of services provided as a percentage of revenue decreased from 86.9% in Q1 2023 to 84.8% in Q1 2024[148] - The decrease in the bad debt provision was impacted by a non-recurring $4.7 million charge in Q1 2023[152] Liquidity and Capital Resources The company had $104.9 million in cash and marketable securities, with negative operating cash flow of $26.0 million - Negative operating cash flow in Q1 2024 was driven by an increase in accounts receivable, partly due to a cybersecurity incident at a third-party claims processor[164] - On February 14, 2023, the Board authorized a repurchase of up to 7.5 million shares; no shares were repurchased in Q1 2024[167] - The company was in compliance with its two financial covenants (Funded debt to EBITDA and EBITDA to Interest Expense) as of March 31, 2024[169] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is interest rate risk on its $129.6 million in cash and investments - The company's primary market risk exposure is interest rate risk on its fixed-rate and floating-rate investments[178] - As of March 31, 2024, the company had $129.6 million in cash, cash equivalents, and marketable securities subject to this risk[177] Controls and Procedures Management concluded that internal control over financial reporting was not effective due to a material weakness - Management concluded that as of March 31, 2024, the company's internal control over financial reporting was not effective[180] - A material weakness was identified related to controls over accrued payroll liabilities for employee vested vacation[182] - A remediation plan is underway, which includes instituting enhanced controls and review processes related to the vacation accrual[184] PART II - OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings for which potential losses cannot be reasonably estimated at this time - The company is subject to various claims and legal actions in the ordinary course of business[188] - For certain pending litigation, the company is unable to reasonably estimate possible losses or determine if an unfavorable outcome is probable[189] Risk Factors There have been no material changes to the risk factors previously disclosed in the 2023 Annual Report on Form 10-K - No material changes have occurred in the risk factors from those set forth in the company's 2023 Form 10-K[191] Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased in Q1 2024 under the existing 7.5 million share repurchase authorization - The Board of Directors authorized the repurchase of up to 7.5 million shares on February 14, 2023[192] - No shares were repurchased during the three months ended March 31, 2024, and 6.5 million shares remain authorized for purchase[192] Defaults Upon Senior Securities Not applicable Mine Safety Disclosures Not applicable Other Information No directors or officers adopted, terminated, or modified a Rule 10b5-1 trading arrangement in Q1 2024 - No directors or officers modified trading arrangements during the three months ended March 31, 2024[195] Exhibits This section lists the exhibits filed as part of the Form 10-Q report, including officer certifications and iXBRL data