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Healthcare Services Group Muddles Through Tough Times

By Brian Feroldi - Jul 24, 2019 at 12:02PM

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Sales and profits took a step backward in the second quarter as the company continues to deal with customer issues.

Healthcare Services Group ( HCSG 1.35% ), a provider of housekeeping and dining services to the healthcare industry, reported its second-quarter results on Tuesday.

Sales and profits both declined during the period. That weakness is largely attributable to customer problems that surfaced a few quarters ago and haven't been fully addressed yet. Management is laser-focused on fixing these and returning the business to growth, but it still has work to do in the near term.

Healthcare Services Group second-quarter results: The raw numbers

Metric

Q2 2019

Q2 2018

Change (Decline)

Sales

$462 million

$502 million

(8%)

Net income

$18.2 million

$25.8 million

(29%)

Earnings per share

$0.24

$0.35

(31%)

Data source: Healthcare Services Group.

What happened with Healthcare Services Group this quarter?

  • Management stated that the revenue decline is primarily a result of the previously announced bankruptcy of a few of its customers.
  • The direct cost of services came in at 86.7%. This figure remains elevated, but it represents a sequential improvement of 300 basis points. This quarter was also hurt by $4 million in extra costs from facility transitions and training.
  • Cash flow from operations was $3 million. 
  • The quarterly dividend was modestly increased for the 65th quarter in a row.
Woman with food tray in hand

Image source: Getty Images.

What management had to say

CEO Ted Wahl stated that the company continues to make progress in "a tough environment for the industry," and he shed some light on why its quarterly numbers were so poor:

We worked through hundreds of facility operator changes, sometimes under difficult circumstances, and there was an unusually high number of new facility operators with whom we were unable to come to agreeable terms and ultimately exited. We saw that reflected in the revenue step-down this past quarter. Additionally, the high number of facility operator changes also impacted some of the new business activity, as our field-based leaders focused their attention on facility operator transitions and retention, as opposed to new business opportunities.

Looking forward

Wahl did have some good news for investors. "The Patient Driven Payment Model and 2.5% increase in Medicare reimbursement, both starting in October, along with improving occupancy trends, will go a long way in strengthening the industry heading into 2020," he said.

While investors wait for that to happen, management reaffirmed that it is focused on delivering on the following near-term priorities:

  • Lowering its direct cost of services to below 86%.
  • Cash collections, and moving certain customers to an accelerated payment model.
  • Growing the quality and quantity of its management candidates.

Wahl stated that this focus will position the company well to deliver against its long-term growth opportunity, which remains "compelling."

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Healthcare Services Group, Inc. Stock Quote
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