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Healthcare Services Group Inc (NASDAQ:HCSG)
Q3 2019 Earnings Call
Oct 23, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

The matters discussed on today's conference call include forward-looking statements about the business prospects of Healthcare Services Group, Inc. within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often preceded by words such as believes, expects, anticipates, plans, will goal may, intends, assumes or similar expressions. Forward-looking statements reflect management's current expectations as of the date of this conference call and involve certain risks and uncertainties.

The forward-looking information are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends, current conditions, expected future developments, and other factors that we believe are appropriate under the circumstances. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances. Healthcare Services Group's actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors and the forward-looking information -- forward-looking statements are not guarantees of performance.

Some of the factors that could cause future results to materially differ from recent results or those projected in forward-looking statements are included in our earnings press release issued prior to this call and in our filings with the Securities and Exchange Commission included -- including the SEC's ongoing investigation. There can be no assurance that the SEC or another regulatory body will not make further regulatory inquiries or pursue further action that could cause results and significant costs and expenses, including potential sanctions or penalties as well as distraction to management.

The ongoing SEC investigation and/or any related litigation could adversely affect or cause variability in our financial results. We are under no obligation and expressly disclaim any obligation to update or alter the forward-looking statements, whether as a result of such changes, new information, subsequent events or otherwise.

Ladies and gentlemen, thank you for standing by and welcome to the Healthcare Services Group Q3 Earnings Call. [Operator Instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference call over to your speaker today, Ted Wahl, President and CEO. Please go ahead.

Theodore Wahl -- President and Chief Executive Officer

Thank you Sharon, and good morning everyone. Matt McKee and I appreciate all of you joining us for today's conference call. We released our third quarter results yesterday, along with announcing the Board-approved increase in our dividend after market close. We plan on filing our 10-Q by the end of the week. As the industry works toward stabilization, we continue to take actions that position the company for long-term growth. We entered the third quarter with management capacity, which facilitated the new business additions we saw earlier in the quarter. Some of our momentum was tempered by our recent exit from around 90 facilities affiliated with a New York-based ownership group. Exiting this particular group of facilities was the right decision, as it's critical we maintain discipline in credit-related decisions, especially in what remains a challenging environment for the industry. During the quarter, we continued our solid service execution in the base business. Our Q3 direct cost of services were temporarily higher from start-up related costs, particularly early in the quarter as we inherited the inefficiencies within our new business adds, which are now on budget. We also had temporarily higher payroll cost during the quarter, as we still have management capacity from the strong recruiting and training efforts over the previous 12 months, along with the recent facility exits.

We aim to be efficient in our service execution, including management development, and feel confident in our management recruiting and training plan, as investing in managers is the most crucial element in our ability to operate and grow the Company over the long term. For the remainder of the year, we will be laser focused on managing the base business and selectively assigning our managers to new opportunities. We will also continue with a cautious view on growth, as the industry works its way through the latter stages of this challenging cycle and manages the transition to the Patient-Driven Payment Model. In the meantime, we remain committed to making decisions that best position us to take advantage of the growth opportunity that lies ahead and deliver shareholder value over the long term.

With that abbreviated overview, I'll turn the call over to Matt for a more detailed discussion on the quarter.

Matthew J. McKee -- Chief Communications Officer

Thanks, Ted. Good morning, everyone. Revenue for the quarter was $455 million, with Dining and Nutrition at $230 million and Housekeeping and Laundry segment revenues reported at $225 million. The incremental revenue impact in Q4 related to the facility exits that Ted mentioned earlier is about $15 million, and about $10 million of that will be in Dining and $5 million or so in Housekeeping and Laundry.

Net income for the quarter came in at $18.3 million and earnings per share was $0.25 per share. Direct cost of services is reported at 87.4% with Housekeeping and Dining segment margins reported at 9.6% and 3.8% respectively. The temporary cost increase of about $4 million relates to payroll for account managers who have either recently completed the management training program or transitioned out of a facility that the Company is no longer servicing. Additional costs of around $2 million were related to start-up costs and inefficiencies for new business added during the quarter. The Company expects a decreasing impact from each, as account managers continue to be assigned to new facilities at which they are budgeted, and then the new business additions operate on budget.

Overall, our goal is to manage direct cost below 86%, excluding the temporary investments in management capacity and any new business start-up efficiencies that may occur. Selling, general, and administrative was reported at $33 million or 7.3% and there was a minimal impact from the change in deferred compensation, and likewise, not much of an impact from legal or professional fees related to the SEC matter. And we expect SG&A to be in or around 7.5%, excluding any SEC related costs until revenue growth accelerates.

Other income and expense for the quarter was reported as a $7,000 expense, again minimal impact from deferred compensation, and was impacted by timing of certain captive-related expenses, as well as interest income on our notes receivable and interest expense from the line of credit. Going forward, we expect our investment income to be around $0.5 million excluding the impact of deferred comp or any other timing related items.

Our effective tax rate for the third quarter was 23%, and we expect our tax rate for the rest of the year to be in the 21% to 23% range, including WOTC, but excluding other discrete items that impacted the 2018 tax rate.

Over to the balance sheet; at the end of the third quarter, we had over $120 million of cash and marketable securities and a current ratio of better than 3:1. Cash flow from operations for the quarter came in at $60 million, primarily due to the cash collections exceeding billings, and favorably impacted by the $24 million increase in accrued payroll. And because we've called out the timing of payroll and the impact of the payroll accrual previously, we wanted to remind you that the fourth quarter payroll accrual will be lower and more comparable to the second quarter payroll accrual. But of course, that only relates to timing and ultimately that washes out through the full year. DSO was reported at 70 days, up from Q2 due to the decrease in notes receivable that were previously classified as long-term now due in less than 12 months and included as part of current accounts and notes receivable.

As announced yesterday, the Board of Directors approved an increase in the dividend of $0.20 per share payable on December 27. The cash flows and cash balances supported and with the dividend tax rate in place for the foreseeable future, the cash dividend program continues to be the most tax efficient way to get free cash flow and ultimately maximize return to the shareholders. This will mark the 66th consecutive dividend payment since the program was instituted in 2003, and we're proud that this is now the 65th consecutive quarter that we've increased the dividend payment over the previous quarter, which is now a 16-year period that's included four 3-for-2 stock splits.

So with those opening remarks, we'd now like to open up the call for questions.

Questions and Answers:

Operator

[Operator Instructions] And your first question comes from A.J. Rice with Credit Suisse.

Caleb Harris -- Credit Suisse -- Analyst

This is Caleb Harris on for A.J.

Theodore Wahl -- President and Chief Executive Officer

Good morning.

Caleb Harris -- Credit Suisse -- Analyst

Good morning. I'd just like to start on PDPM a little bit. Do you -- you have any early read from your customers on how that's going? Understanding that we're only less than a month into it, have they talked about any unexpected challenges or how it's going so far?

Theodore Wahl -- President and Chief Executive Officer

I think you made the key point in that we're only a few weeks into it, but at this point in the lead up to the implementation and then three weeks into the implementation, we continue to hear positive experiences and that so far for the majority -- for the most part, the implementation is going as expected.

Caleb Harris -- Credit Suisse -- Analyst

Okay. And I guess just in your -- in the way you're looking at your customer base with respect to PDPM, are there -- have you segmented your customer base in some way internally, and are you keeping a closer eye on some of those facilities that may have higher exposure to therapy and may be more impacted by the reimbursement change?

Theodore Wahl -- President and Chief Executive Officer

Like everything else, it's part of our holistic evaluation of any customer. I mean we -- we're looking at everything from the reimbursement environment in the state in which they're operating in their management team capability wherewithal, and of course, any other reimbursement considerations like PDPM that could impact their go-forward prospects. So that's part of our evaluation, along with many other considerations.

Caleb Harris -- Credit Suisse -- Analyst

Okay. And it was good to see some new business adds in Q3, and I understand the commentary on sort of a cautious view toward growth at this point. How do you think the street should be thinking about revenue growth over the next year? Is it -- should we be baking in something very minimal or take a sort of a wait and see approach to what happens in Q4 and Q1? How would you think about the cadence of getting back to some reaccelerated revenue growth?

Theodore Wahl -- President and Chief Executive Officer

The latter, waiting -- more cautious view as we work our way through Q4 and Q1. And you mentioned it in your question, but we continue to have a cautious view on the industry and specifically growth as the industry works toward stabilization and manages this transition to the PDPM. So for us, we -- overall industry fundamentals are improving. We do believe we're in the latter stages of this difficult cycle. Now, longer-term demographic trends aside, which all of us know are extraordinarily favorable, that data we are seeing today, are encouraging. I mean the occupancy trends, stronger reimbursement programs and trends, whether it's at the federal level with the 2.5% increase we saw kicked in October 1st, PDPM which has been cautiously optimistic, we received within the provider community and so far so good as far as implementation.

Even at the state level from a reimbursement perspective except a few outliers, there seems to be positive trends. And we're also seeing some of these improvements within our -- within our own customer base and certainly more positive sentiment first-hand within that customer base. But, as I mentioned or alluded to, we're not out of the woods just yet. And I think it's really important Caleb, that we remain disciplined in our decision making, especially when it comes to credit-related matters and we'll continue to apply that discipline in evaluating not only existing customers as well as, but also new business adds, which again, that's why we continue to take that more cautious view over the next couple of quarters.

Caleb Harris -- Credit Suisse -- Analyst

Okay. And then just one more minor thing, you mentioned the timing of the captive-related expenses, impacting other income, I think you mentioned that in the previous quarter as being a headwind on that timing. Was this similarly a headwind or did this go the other direction as a positive and can you quantify that...

Theodore Wahl -- President and Chief Executive Officer

This was similar to last quarter, but moving forward. Certainly in Q4 and then beyond, we would expect it to be in and around that. I think Matt mentioned $0.5 million or so, from a net benefit in terms of that line item.

Operator

Next question comes from Ryan Daniels with William Blair.

Ryan Daniels -- William Blair -- Analyst

I have a quick one, in regards to the credit quality of your customers, I'm curious what kind of early warning systems you have in place to kind of analyze that risk and I know payment terms or delays in collecting cash would be one, but I'm more curious about anything the site level with your facility managers if they're monitoring occupancy -- if they have the ability to report that. So you get, kind of even other leading indicators on -- what that may look like going forward.

Theodore Wahl -- President and Chief Executive Officer

It's a great question, Ryan. And it is truly an all-of-the-above strategy. As you know, most important to us is the payment coming on time and in full and certainly as we've now migrated close to 60% of our customer base to that weekly payment model, we're getting a more frequent view into the payments and we've talked about the multiple benefits to come both psychologically and just from a cash flow perspective for both the customers and for ourselves with that weekly payment model, where there's not sort of that larger end-of-month decision point that were artificially creating for the customer, "Gee, do I cut this large check to Healthcare Services Group at the end of the month?", which could be four times a year, obviously, end of quarter, "Maybe I short pay them this month, and I'll make it up to the next month or I'll sit on it for a couple of days and send it in later".

Once we get into that weekly payment frequency and cadence, they think about cutting that check to Healthcare Services Group, just like they think about cutting their payroll checks, which is exactly how we want them to think about us. So migrating to the weekly payment model has certainly been a significant move for us and that is the most significant and loudest indicator as to the creditworthiness or credit position of a customer. Secondary to that, of course, exactly as you alluded to, we are gathering boatloads of intel and data from the field some of which is gathered in the facility directly as you mentioned, we're typically attending the stand-up meetings in the morning at the facility in which we're getting a view as to, not only the current census, but generally some insight into the current payer mix in addition to expected admits in discharges.

So at the facility level we're getting a very real glimpse as to not only the current complexion of the facility resident population but also what they're anticipating in the near-term going forward. So that gives us greater visibility as well. And then really outside of that, it's connecting a lot of dots within the larger, broader vendor community. Right we're out there, we're dealing with paper and plastic vendors, chemical vendors, we're -- washing and chemical vendors, food vendors, it's -- we're taking some cues from them as well. And we've had instances and we may have shared this before, but we've had instances in which customer pays us on time in full, no issue, but our district manager picks up the phone and calls our office here in a panic saying that there's four vendors in the lobby of the facility saying they didn't get paid that month.

That in and of itself is enough for us to trigger a conversation with that customer and really require that they make us feel comfort even in spite of maybe a pristine track record of paying us. So it really is, Ryan, an aggregation of different data points and sources that we utilize, not the least of which is the payments, obviously, and that it is really that kind of multi-pronged effort with our financial services team here in the corporate office really being the champion of contract integrity, the formal credit assessment process, but very much supplemented by our field-based organization and operators.

Ryan Daniels -- William Blair -- Analyst

Okay, that's very helpful color. And then just as a follow-up, I want to talk a little bit more about, the revenue profile going forward. Can you speak to how much, and you may have mentioned this, but how much new business was signed in the third quarter? And how much of that was actually recognized during the period? So trying to make it appeal for, take the run rate, take out $15 million, how much do we want to add back in that wasn't recognized this quarter to get kind of a run rate ending in Q4.

Theodore Wahl -- President and Chief Executive Officer

Yes, Ryan. As far as the business that we added in the third quarter, nearly all of it was added in the early parts of the quarter. It was about $50 million in annualized revenue and we saw just about a $12 million impact in Q3, so nearly all of that ran through the Q3 results. Now that's offset by obviously the facilities that we exited. The exited facilities amount to out of 70 million or so in annualized business and only about 3.5 million of those exits ran through the Q3 results. So that's where we end up with about $15 million remaining to run through Q4 results, from a revenue perspective.

Ryan Daniels -- William Blair -- Analyst

Okay, that's helpful. And then last question, can you give us a proxy for, kind of, how many excess facility managers you have just so we can see the inherent capacity that's already on the system that you're not generating revenue for and maybe any color on your thoughts on how long that could take to deploy -- to get back to normal margin. Thanks.

Theodore Wahl -- President and Chief Executive Officer

Yes. It's challenging for us to really quantify explicitly, Ryan, how many managers are currently out there. Throughout the 48 states in which we operate within our field-based organization, is obviously very fluid. I would say that if you think about the various buckets, really two buckets; one being managers who recently made their way through the training program, that's a number that continues to decrease especially in geographies in which there is either an opportunity to fill vacancies or to upgrade current management positions. The other box would, of course, be managers, who are freed up as a result of having serviced or have been the manager assigned to a facility that we're no longer servicing and that's where there's much more fluidity, because certainly we freed up a number of managers as a result of the facilities we exited in the second quarter, which very much well positioned us to be able to onboard that new business in the third quarter. So you're right out of the gates in Q3 with onboarding new business absorbing some of that capacity from the second quarter. But then, unfortunately, that offset with existing facilities at the tail end of the quarter and early parts of Q4 here which again frees up additional capacity. So it's very fluid, Ryan. And I would say the benefit that we have currently is that very well geographically dispersed. So it does become very much a localized effort down to the district level as to ultimately finding a home for those managers and that could take the form of either, as I said, filling a vacancy, upgrading an existing manager, who is not performing up to snuff or ultimately assigning them to a new business opportunity.

Matthew J. McKee -- Chief Communications Officer

And that's why, Ryan, even though we have a cautious view toward growth over certainly the next three to six months, as the industry, as I mentioned, continues to stabilize and in conjunction with the PDPM implementation over the next -- over the coming year you should see a direct correlation between new business adds and then direct cost of services coming down as we're deploying and assigning those freed up managers to specific facilities into new opportunities.

Operator

Next question comes from Jason Plagman with Jefferies.

Jason Plagman -- Jefferies -- Analyst

First question. So I imagine that PDPM is absorbing a lot of management attention at your clients currently. Do you think that could have any impact on client implementation -- implementations of your services over the next two or three quarters? Just any thoughts there would be helpful.

Theodore Wahl -- President and Chief Executive Officer

We think of that as more of a Q4 dynamic. I think, the short answer would be yes. Certainly we talk about all hands on deck with certain things here in terms of a team-based effort and Matt mentioned it in the context of credit and collection, certainly on our customer side right now, that is, if not, the sole focus. The primary focus is the successful implementation of the Patient Driven Payment Model. So in terms of some new business opportunities that we otherwise would have started in the fourth quarter they would likely be pushed out into the first half of next year.

Jason Plagman -- Jefferies -- Analyst

Okay. I think that's helpful and then just one clarification. I think you gave the number -- the dollar impact of the excess managers you carried in Q3. I didn't catch that number, if you could just repeat that, that be helpful.

Theodore Wahl -- President and Chief Executive Officer

That was around $4 million, Jason.

Operator

Our next question comes from Mitra Ramgopal with Sidoti.

Mitra Ramgopal -- Sidoti -- Analyst

Yes, hi, good morning. I'm sorry if I missed this early, but as you look at the bench in terms of the managers you have from the exiting of facilities and from the ones you've trained and developed. How confident are you that you are going to be able to assign these managers to facilities over the next six, 12 months. And again it's also leading into the optimism you have in terms of bringing on new business in this environment.

Theodore Wahl -- President and Chief Executive Officer

Yes. I would say Mitra, there is a 100% confident that we will be able to place those managers. The timing is the question, as is always the case, and really kind of ties into Ted comments about revenue and adding new business, but the timeframe that you outlined, which would be six to 12 months. I'd say that we feel very confident that the managers that are currently, sort of, considered excess capacity, if you will, not specifically assigned to a facility at which they are budgeted. I think it's exceptionally reasonable to expect within a six-to-12-month period, they would all be assigned to various facilities. So there'll be puts and takes as to the revenue and facility adds but very confident that the current crop of, sort of, underutilized or unassigned managers will be placed within certainly within a six-to-12-month period.

Mitra Ramgopal -- Sidoti -- Analyst

Okay, that's great. And then as you -- again in terms of the new business, if you can give some sense in terms of the conversations you're having, are you finding potential customers taking more of a wait-and-see approach or are they more willing to listen to your proposals versus say maybe, six months ago?

Theodore Wahl -- President and Chief Executive Officer

I think, yeah, there's always been a willingness and I think it is building off of what Matt, just spoke to. We have significant visibility into the business. We have significant visibility into service execution, whether it's quality assurance at the facility level, customer satisfaction, budget versus actual. And as we've talked about before, in a consistent way, we have significant visibility into the demand for the services, new business activity and certainly our pipeline, but it is an industry that continues to be in a state of transition and I think because of that we're going to assess these new opportunities and onboard facilities over the next couple of quarters, but we're going to do so in a more controlled pace until we decide it's the right time to reaccelerate.

Mitra Ramgopal -- Sidoti -- Analyst

Okay, thanks. You have taken the questions.

Theodore Wahl -- President and Chief Executive Officer

Okay, great. Thank you, Mitra.

Next question comes from Bill Sutherland with The Benchmark Company.

Bill Sutherland -- The Benchmark Company -- Analyst

The operating cash flow was awesome in the quarter. Do you think you'll be about at the $80 million level for the year?

Theodore Wahl -- President and Chief Executive Officer

I think that's a fair number. I know that's in and around where we're at now. But when you think about cash collections and cash flow for the quarter, it will be significantly impacted similar to Q2 of this year by the change in the payroll, in the payroll accrual -- the timing of the payroll accrual, so that would be as good a number as any to use and if we overperform, we'd be able to point to specific reasons, but our goal remains the same. We want to collect what we build quarter in and quarter out, we've done that three of the last four quarters and we would point to certainly, among other things, the change in -- the change in payment frequency and that initiative as being a significant catalyst for that type of success. If we were here a couple of years ago, Bill, we're talking about how very few, if any of our customers, were paying us at a frequency greater than monthly and Matt mentioned it earlier, but here we are today and I attribute it to proactive leadership to innovation from the ops team and the financial services team, collaborating around ways to improve our experience to migrate toward this higher frequency payment model, and here we are today with damn near 60% of our customers paying us at that type of frequency. So again that leads to more visibility into the customers' financial commitment to the partnership as well as more predictable and more consistent cash flow.

Bill Sutherland -- The Benchmark Company -- Analyst

And then with the balance sheet improving and the stock where it has any incremental thoughts by the Board on returning cash to shareholders potentially like a repurchase program?

Theodore Wahl -- President and Chief Executive Officer

It's always a point of discussion. We haven't been shy about communicating to you and to others that the Board and the company's priorities in terms of capital allocation, continue to be organic growth first and foremost, which we're deeply committed to, as well as the dividend which consistency, sustainability of, is really the guidepost, but that does not preclude us from looking toward a share repurchase plan if it makes sense at a point in time. So I would never take that off the table, but again, that's how we think about capital allocation in terms of priority at least at the present time.

Bill Sutherland -- The Benchmark Company -- Analyst

And then, Ted, I guess the last one, as I think about this latest group of facilities that you've decided to exit from. When you look at around your portfolio at this point, how would you categorize facilities where you have to think about this potential; loosely, like some sort of partnership like you're dealing with here that decides to centralize billing -- you have to deal with them on a different basis at that point?

Theodore Wahl -- President and Chief Executive Officer

Yes. Look, I think just in terms of exit to a revenue step-down. I would answer it this way though, we've done a lot of work over the past year, right going back to the third quarter of last year with the housekeeping initiative, which was more, which was more margin focused. I know in the fourth quarter with some of the food transition work we did on the dining side and then the second quarter of this year with the transitions largely in Texas, but other transitions as well and exits that we had and then this quarter, I think we've done a great deal of the work, we do not foresee any, but look, if a partnership or client relationship is trending in the wrong direction or is no longer in the best interest of the company, we're prepared to make that decision, that may be somewhat painful in the short term, but best positions the company for the long term. So I know that's not a specific answer to your question, but I am sharing our thinking on it, but we've done a lot of the work and we don't anticipate any, as we look out over the next three to six months.

Matthew J. McKee -- Chief Communications Officer

Yes, I would only add to that Bill, it's interesting the way you asked the question asking about categorization which, for us is a -- it doesn't apply necessarily to a lot of what we do, because of the very specific nature of each contract and the facility relationship and ownership structure and the payment structure. So for us, we would more likely get ourselves into more trouble by attempting to categorize and sort of paint with broad strokes as it relates to our customer and payment and credit-related concerns, which is why getting back to the earlier conversation we had in response to Ryan's question about the credit assessment, it really does need to be a facility-by-facility ownership group-by-ownership group factoring in the RIET [Phonetic] relationship and the property company and how that interplays. So for us, categorization of our customers and subsequent relationships would be a dangerous game to play. So unfortunately we do need to and we are very much committed to the assessment down to the facility-specific conditions and all the resulting outflows that I mentioned as it relates to contract ownership, payment, credit etc.

Operator

Next question comes from [indecipherable].

Unidentified Participant

Hi guys, thanks for taking my question. One for Sam, first question is really on the customer exits and I guess that headwind. Is it fair to assume $50 million headwind for both Q1 and Q2 of next year, I guess all else equal?

Theodore Wahl -- President and Chief Executive Officer

No, the $50 million was -- the $50 million was the -- in and around the amount of new adds, new business during the earlier part of the quarter. I think you're probably referring to the 90 or so facilities, the $70 million or so that we exited later in the quarter into the current quarter, and that would be on a net basis, about a $15 million headwind, if you will, into next quarter.

Unidentified Participant

And -- but that had been persist into Q1 or in Q2, or it would?

Theodore Wahl -- President and Chief Executive Officer

Well, it will just become -- it just becomes the new base revenues. So no, that would -- that would carry over until the revenue is replaced as we deploy; as we utilize some of the management capacity we had in new business opportunities, similar to what we did in the current quarter, where we had freed up managers from some of the second quarter exits and were a -- as well as additional management capacity from a lot of the work we've done in building out the management pipeline over the last year, we were able to deploy and utilize those talented management people in new facility opportunities. So, that is, when we're not having a specific decision like we made in the -- at the end of the quarter this year we're -- that is the virtuous cycle. We're developing management people and then we're utilizing them and they're having opportunities in new business that we're signing. And that's a rinse and repeat effort in terms of our management development new business adds cycle.

Unidentified Participant

Okay, then maybe on just the new customer acquisition pipeline and how that is looking, and could you maybe compare that to how the trend with I guess that pipeline looks with maybe your management pipeline and how that has historically trended? Has the management pipeline kind of always been more robust than the new customer acquisition pipeline, and maybe just some color on that?

Matthew J. McKee -- Chief Communications Officer

It's interesting, the sort of juxtaposition as you frame it, because we are in a position where we're really experiencing the complete inverse of what we've seen historically. For those who have followed the company for a longer period of time, you would have heard us talk frequently and consistently about the gating factor on our growth being our ability to recruit, hire, train, develop, and ultimately retain our managers, and we've generally been able to grow as quickly as we were able to develop managers. The point -- this point in time in the company's history, for all of the reasons we've outlined, some of which are within our control as to the sort of restart and reignition of the recruiting efforts, some of which were somewhat painful and not necessarily of our primary choosing, that being exiting of facilities, has created this management excess. And that overlays into a time period in which we're really in probably the second greatest challenging industry cycle that's been in place since we've been doing this going back to 1976.

So, it's really -- having the management capacity is a -- really a luxury that we've never enjoyed to this great degree. That's of course tamped down a bit by the cautious view that we remain having as it relates to the industry and the prospects to layer in new customers or expand relationships with current customers. So, the norm is very much more so, Brett, that we would have excess demand as compared to management capacity. So, we find ourselves in a very great position right now with that management capacity coupled with essentially record levels of demand. It's just applying that caution and doing the diligence in assessing opportunities to expand the business that may, from a timing perspective, lag out a bit of the growth relative to what we might have seen in other times of having management capacity at our avail.

Unidentified Participant

Okay, thank you for taking my question. Have a good one.

Matthew J. McKee -- Chief Communications Officer

You too.

Operator

And last question comes from Chad Banneker with Stifel.

Chad Banneker -- Stifel -- Analyst

Thanks. So Matt, you mentioned that -- it's challenging point of the cycle, and you Ted had been at the helm for a couple business cycles now. So I'd like to hear from both you and Ted. What is it about this point of cycle that's different than other cycles you've seen? And why of contract turnover higher compared to the past?

Theodore Wahl -- President and Chief Executive Officer

Yeah, I don't -- I would say over the past 15 years, we haven't seen a cycle like those, Chad. And Matt referred to the -- the late -- the Balanced Budget Act, which was in the late '90s, as being maybe the other counterpart to this type of cycle. So, I think this is different for a variety of reasons, but certainly relative to the last, let's say, couple of decades, it was occupancy. Right? The low between the demographic trends -- favorable demographic trends from the baby boom being preceded by the lowest birth rates in U.S. history, and that demographic trend, that age cohort working its way through the long-term care continuum. So, I think that created significant pressure in the industry at large. Then you layer in some of the -- the wage inflationary pressures, the uncertain reimbursement environment; some of these have always been ebbs and flows. But I -- and then -- and then lease costs, right? Some of the lease cost pressures that were out there and had to be worked through. So I think this was a confluence of different factors, which made it somewhat unique, again, relative to the past couple of decades of our experiences.

Having said all of that, and I mentioned it a couple of times throughout the morning, we see industry fundamentals improving, and that is clear. To us, the data are clear in terms of directionally where we believe the space is going, and we're going to be prepared to execute on our long-term growth strategy when -- opportunistically over the coming quarters, but certainly longer term, we believe we're well positioned to do that.

Chad Banneker -- Stifel -- Analyst

So, what kind of signs or you're looking for in your client base that's going to signal that recovery?

Matthew J. McKee -- Chief Communications Officer

It really gets back to that -- the granular sort of facility level assessment, Chad, right? I mean, are the beds full? Do they have a pipeline of new admits awaiting them? Do they have healthy relationships with their local hospital and health systems to continue to feed that pipeline? So, it's really kind of that bottoms-up assessment of are the beds full, is there a plan in place to optimize their occupancy, and likewise to leverage the opportunity that PDPM presents to them. So, it's really more art than science, but ultimately the greatest indicator for us as it relates to our current customers is with respect to payment. Are the payments coming on time. Are the payments coming in full? That is the greatest indicator for us. And as to assessing the credit worthiness for the overall health of a prospective customer, unfortunately there is not a magic test that we can run or formula that we can apply; it really is that rolling up the sleeves, ground-up, bottoms-up effort to assess the local conditions, and then do the homework as it relates to ownership structure, their behavior, and reputation within the industry as it relates to other vendors and other providers within the community. So, really trying to round out our assessment both quantitatively and qualitatively as much as is possible.

Chad Banneker -- Stifel -- Analyst

All right. And then just one more from me. You talked about cash flow earlier, and it was solid in the third quarter, but you expect to give some back in the fourth quarter due to use of working capital and lower revenues. Where really should we expect free cash flow to shake out fourth quarter and full-year '19, and then how do you get back to that $80 million to $100 million in 2020 that you historically have done?

Theodore Wahl -- President and Chief Executive Officer

Well first, Chad, I appreciate you saying record cash flows, the highest cash flows he company has ever experienced in the three-month period is being solved. Thank you for that; we appreciate it.

Chad Banneker -- Stifel -- Analyst

Now you're putting words in my mouth.

Theodore Wahl -- President and Chief Executive Officer

No, I -- but no, but I -- but right -- right around, we're right around where we're at because of the timing of the payroll accrual, we'd expect it to look more like Q2. I think we had, $2 million or $3 million of cash flow as reported in the second quarter, because the second quarter was impacted in the other direction by the timing of the payroll accrual. Matt talked about how that's strictly an intra-quarter impact, not a year-over-year impact. So we would expect -- we're at over $80 million sitting here today, Chad. So any additional cash flow for the fourth quarter would, in fact, put us in that $80 million to $100 million range.

Chad Banneker -- Stifel -- Analyst

All right. I'll leave it there. Thanks for the questions.

Theodore Wahl -- President and Chief Executive Officer

Great, thank you.

Operator

And at this time, I will turn the call over to the presenters.

Theodore Wahl -- President and Chief Executive Officer

Okay. Well thank you, Sharon. We look forward to finishing the year strong and laying the groundwork for 2020, as industry fundamentals continue to improve. For the remainder of the year, we will prioritize managing the base business, assigning our new managers -- our managers to new opportunities, and exercising discipline and evaluating both existing customer relationships, as well as new business opportunities. All the while making decisions that best position the company to take advantage of the growth opportunity that lies ahead and deliver shareholder value over the long term. So on behalf of Matt and all of us at Healthcare Services Group, I wanted again to thank Sharon for hosting the call today, and thank you again everyone for participating.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Theodore Wahl -- President and Chief Executive Officer

Matthew J. McKee -- Chief Communications Officer

Caleb Harris -- Credit Suisse -- Analyst

Ryan Daniels -- William Blair -- Analyst

Jason Plagman -- Jefferies -- Analyst

Mitra Ramgopal -- Sidoti -- Analyst

Bill Sutherland -- The Benchmark Company -- Analyst

Unidentified Participant

Chad Banneker -- Stifel -- Analyst

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