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Customer Woes Cause Healthcare Services Group's First-Quarter Profits to Evaporate

By Brian Feroldi - Apr 24, 2018 at 3:41PM

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A $35 million charge related to two customer restructurings causes the company's profits to fall drastically.

Housekeeping and nutritional services provider Healthcare Services Group ( HCSG 1.69% ) reported its first-quarter results on Tuesday, April 17th. As expected, the company once again posted strong revenue growth thanks to its ability to upsell its existing customer base to its dining and nutritional services. However, the company took investors by surprise by recording a large charge related to two of its customer accounts. The net result was that profits fell drastically during the period, and the company barely managed to eek out a profit.

Healthcare Services Group first-quarter results: The raw numbers

Metric

Q1 2018

Q1 2017

Year-Over-Year Change

Sales

$501.8 million

$404.5 million

24%

Net income

$0.07 million

$22.0 million

(99%)

Earnings per share

$0.00

$0.30

(100%)

Data source: Healthcare Services Group.

What happened with Healthcare Services Group this quarter?

  • Two of the company's customers reported major corporate restructurings during the period. One of them even filed Chapter 11 bankruptcy protection. Management decided to record a $35 million charge during the period to account for the possibility that it might not receive payment. The company has already begun the process to collect on what it is owed.
  • Housekeeping and laundry revenue grew 1% during the period to $246 million. Dining and nutrition services revenue grew 58% to $255 million. The combination of the two drove overall revenue growth of 24%.
  • Adjusted gross margin -- which removes the $35 million reserve charge -- came in at 13.3% for the period. The company believes it remains on plan to reach a 14% gross margin by the end of 2018 and still has long-term aspirations to hit 15% in time.
  • $25 million worth of accounts receivable from Genesis HealthCare is being converted into notes receivable. Management believes this move will strengthen its customer payment obligations. 
  • The dividend was raised to $0.19250 per share. This marks the 59th quarter in a row of dividend bumps.
Businessman With coins falling through his hands

Image source: Getty Images.

What management had to say

CEO Theodore Wahl provided shareholders with some additional details about the $35 million charge related to the two customer accounts on its call with investors:

Over the past couple of weeks, the landlord's other creditors began reaching agreements in principle and, very reluctantly, we did as well. For both groups were requiring accelerated payments and expect to continue to provide services during and after the restructuring. As a result, we don't expect any impact on future revenue, net income or EPS.

He also shared that the company has historically written off less than 1% of its accounts receivable, which is a testament to its strong operating history.

Looking forward

CEO Wahl knew that this quarter's results were going to catch investors off guard, so he ended his commentary by reminding investors that the opportunity ahead for the business remains large:

There are over 23,000 facilities we've identified as targets for our services, with only 18% of those facilities outsourcing housekeeping and laundry services and 8% outsourcing dining and nutrition. We currently contract with over 95% of that outsource market in both segments with enough pent-up demand and white space to more than support the next decade's worth of growth.

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