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Healthcare Services Group's Revenue Falls as Profits Grow

By Brian Feroldi – May 1, 2019 at 4:13PM

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Recent changes to its business practices are causing the top and bottom lines to head in the opposite direction.

Healthcare Services Group (HCSG -0.33%), a provider of housekeeping and dining services to the healthcare industry, reported its first-quarter results on Tuesday.

Last quarter the company said it made significant changes to its contract with one of its biggest customers, Genesis HealthCare (GEN). Those changes call for Genesis to pay for its supplies directly and for Healthcare Services Group to provide services on top of that. The net result of this maneuver is lower revenue for the company but higher profitability.

Healthcare Services Group first-quarter results: The raw numbers

Metric

Q1 2019

Q1 2018

Year-Over-Year Change (Decline)

Sales

$476 million

$501 million

(5%)

Net income

$9.2 million

$0.0 million

N/A

Earnings per share

$0.12

$0.00

N/A

Data source: Healthcare Services Group.

What happened with Healthcare Services Group this quarter?

  • The bulk of the revenue decline is attributable to the contract changes with Genesis. However, the company also gave up some revenue after it canceled its service agreement with a privately held healthcare company due to collection concerns.
  • Direct cost of service jumped substantially to 89.7%. This figure includes an $18 million increase to its accounts receivable reserve related to a troubled customer account. Training costs were also elevated related to the company's internal investigation that was completed in March.
  • Cash flow for the quarter was $18 million.
  • The dividend was boosted for the 64th quarter in a row. The new quarterly payout was increased by about 1% to $0.1975 per share.
Calfateria plate with a variety of foods and drinks on it

Image source: Getty Images.

What management had to say

CEO Ted Wahl stated that the quarter was "very productive" as it works through challenges with specific customers:

"Our management team and field-based leaders demonstrated expertise and capability in proactively managing these difficult situations, as well as innovation in identifying solutions to set the company up for future success, a prime example being the increased payment frequency initiative."

Wahl also stated that the industry as a whole is improving and that the company expects to return to its historic growth rates next year.

Looking forward

Healthcare Services Group's management team doesn't provide Wall Street with quarterly guidance. However, the company did shed some light on its top priorities and expectations for the remainder of the year:

  • Building out its management pipeline 
  • "Modest sequential growth" is expected in the back half of 2019
  • Direct cost of services is expected to fall below 86% in 2019
  • SG&A is expected to be approximately 7% and its effective tax rate to be between 21% and 23% 

Wahl ended his commentary by reminding investors of the large opportunity ahead: 

"The demand for our services remains strong and there's plenty of white space to more than support the next decade's worth of growth, with over 23,000 facilities in our target market, and presently less than 18% of those facilities outsourcing housekeeping and less than 8% outsourcing dining."

Brian Feroldi has no position in any of the stocks mentioned. The Motley Fool recommends Healthcare Services Group. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Healthcare Services Group, Inc. Stock Quote
Healthcare Services Group, Inc.
HCSG
$12.09 (-0.33%) $0.04
Genesis Healthcare, Inc. Stock Quote
Genesis Healthcare, Inc.
GEN
$0.01 (%)

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