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Healthcare Services Group Earnings: Tax Reform Overshadows Strong Revenue Growth

By Brian Feroldi - Updated Feb 8, 2018 at 3:48PM

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Net income went into reverse due to recent changes to the tax code.

Healthcare Services Group (HCSG -4.32%), a leading provider of housekeeping and nutritional services to healthcare facilities, reported its fourth-quarter results on Tuesday, Feb. 6. Sales continue to grow at a rapid rate as the company succeeded at cross-selling its dining and nutrition services to its existing pool of customers. However, a one-time tax hit related to the passage of the Tax Cuts and Jobs Act caused net income growth to stall.

Healthcare Services Group fourth-quarter results: The raw numbers

Metric

Q4 2017

Q4 2016

Year-Over-Year Change

Sales

$499 million

$397 million

26%

Net income

$20.2 million

$20.3 million

(0.5%)

Earnings per share

$0.27

$0.28

(3.5%)

Data source: Healthcare Services Group.

What happened with Healthcare Services Group this quarter?

  • Revenue in the company's housekeeping and laundry business only grew 2% year over year. Dining and nutrition services continue to be the star of the show, posting growth of 60% for the quarter.
  • Gross margin was weaker than the company's long-term target because of inefficiencies related to ramping up the dining and nutrition services business. However, management believes this is a temporary problem that will resolve itself as the year progresses.
  • The company preannounced that its quarterly tax rate would jump significantly during the quarter as a result of the recent passage of the Tax Cuts and Jobs Act. The extra tax hit was estimated to be around $4.5 million for the quarter and was the primary reason why net income and EPS growth were down slightly year over year.

After the quarter ended, Healthcare Services Group announced that it was increasing its quarterly dividend payment slightly to $0.19125 per share. This represents the 58th consecutive quarter of dividend hikes.

Woman janitor standing in hospital room

Image source: Getty Images.

What management had to say

CEO Theodore Wahl noted that 2017 was a "special" year for Healthcare Services Group as it transitions to providing more services to its customers: "We're very excited to continue this journey in the year ahead as every member of the HCSG family, from our associate level right on through senior leadership, aligns around our company vision: to be the choice for our customers. As we enter 2018, the demand for our services is as strong as ever."

He also noted that the new "business-friendly" tone in Washington is providing the company with a favorable operating environment moving forward. 

Looking forward

Management doesn't provide investors with guidance, but it did state that Healthcare Services Group's effective tax rate in 2018 will be approximately 21% to 23%. For context, the company's effective tax rate in 2017 was 34%, so this change should provide a meaningful tailwind to profits. Furthermore, it expects that its margins should improve over time thanks to ongoing cost-containment efforts.

Wahl ended his prepared remarks on the investor call by stating that demand for the company's services has never been greater:

As we look toward the future, we continue to operate in a recession-proof market niche, and the demographic trends have been and continue to be in our favor. We're in an unprecedented cost-containment environment that's increased the demand for outsourcing services of all kinds, including ours, and we have the most talented management team that we've had in the history of the organization.

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Stocks Mentioned

Healthcare Services Group, Inc. Stock Quote
Healthcare Services Group, Inc.
HCSG
$16.84 (-4.32%) $0.76

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