Healthcare Services Group (NASDAQ:HCSG), an outsourcing company focused on housekeeping and nutritional services, reported its fourth-quarter and full-year results on Wednesday.

Customer challenges weighed on the company's operations in 2018. In response, management has focused its time on renegotiating its customer contracts with the goal of getting paid faster and streamlining operations. That focus is weighing on the company's near-term revenue growth but is expected to stabilize its business over the long haul.

Male service provider bringing a meal to an elderly man.

Image Source: Getty Images.

Healthcare Services Group fourth-quarter results: The raw numbers

Metric

Q4 2018

Q4 2017

Year-Over-Year Change (Decline)

Sales

$496 million

$499 million

(1%)

Net income

$31.5 million

$20.1 million

57%

Earnings per share

$0.42

$0.27

56%

Data source: Healthcare Services Group.

What happened with Healthcare Services Group this quarter?

  • The big jump in net income looks impressive, but it is largely attributable to a one-time reduction in overhead expenses and a significantly reduced tax bill. 
  • Management made adjustments to a number of its customer contracts during the quarter. The most significant change was made with Genesis HealthCare (NYSE:GEN), one of its largest customers. The new contract calls for Genesis to pay suppliers directly for food while Healthcare Services Group continues to provide its services on top. This change results in lower revenue for the company up front but higher margins. This change is expected to hurt revenue by about $20 million per quarter and explains a significant part of the year-over-year drop in sales.
  • Direct cost of services was 85.7% of revenue during the period, which was about 30 basis points below management's target. This figure was helped by a number of one-time costs.
  • Overhead costs were only 6.4% of sales during the quarter. This was mostly attributable to a one-time $4.1 million benefit related to deferred compensation. Management now expects overhead spending to be about 7% of total revenue.
  • The company's effective tax rate dropped 650 basis points to just 9.9% during the quarter. This change provided a big boost to net income. This number is expected to rise to 21% to 23% in 2019.
  • The dividend was boosted for the 63rd quarter in a row, and is now $0.19625 per share.

What management had to say

CEO Ted Wahl kept his comments brief but was happy to report on the progress that has been made with customer contracts: 

We exited the year with good operating momentum and expect cost of services and margins to return to historical levels in 2019. Strengthening customer payment terms and conditions, which includes increasing customer payment frequency from monthly to semimonthly or weekly. To date, we have now successfully transitioned over 40% of our customers to an accelerated payment model and expect to further that trend in the year ahead.

Check out the latest Healthcare Services Group earnings call transcript.

Looking forward

Management doesn't provide specific guidance to Wall Street. However, Matthew McKee, Healthcare Services Group's vice president for strategy, did reaffirm the company's targets: "Overall, our near-term goal remains to manage direct costs at or below 86% in the year ahead, and ultimately to continue working our way closer to 85% direct cost of services."

McKee also said that the company's tax rate is expected to rise to roughly 22% in 2019 and that the company's capital return program will continue to emphasize dividend growth.

Wahl closed out his commentary on the conference call with investors by restating that the company is focused on building on the work that was completed in 2018: "We enter the new year having significantly grown over the past few months, and expect to continue our heightened focus on hiring and development management candidates through at least the first half of '19. In the year ahead, we're very excited to continue to build upon the significant progress we've made on these priorities, which have laid the groundwork for a successful 2019 and beyond."