Exceeds Earnings and Cash Flow Expectations, Revenue In-Line

• Revenue of $423.8 million; adjusted revenue⁽¹⁾ of $425.0 million, in-line with expectations.
• Net income and diluted EPS of $22.6 million and $0.31; adjusted net income⁽¹⁾ and adjusted diluted EPS⁽¹⁾ of $14.6 million and $0.20.
• Adjusted EBITDA⁽¹⁾ of $26.5 million, a 14.2% increase over Q4 2022.
• Cash flow from operations of $49.5 million; adjusted cash flow from operations⁽¹⁾ of $27.9 million, a 7.1% increase over Q4 2022.

Healthcare Services Group, Inc. (NASDAQ:HCSG) today reported results for the three months ended December 31, 2023.

Ted Wahl, Chief Executive Officer, stated, “Our team delivered strong fourth quarter results, building on our momentum throughout 2023. Against the backdrop of an ongoing industry recovery, we achieved 98% cash collections, managed adjusted cost of services under 86%, and exceeded our cash flow projections for the quarter and second half of 2023. We also continued to grow our new business and manager-in-training pipelines, and remain confident that we will deliver on our goal of year-over-year growth in 2024.”

Mr. Wahl continued, “Industry operating metrics continue to improve, and a stabilizing labor market and solid reimbursement environment have contributed to the steady occupancy recovery, which now sits at 79.2%, only 100 basis points below pre-pandemic levels. On the regulatory front, there remains uncertainty as to what a final minimum staffing rule may look like and when a decision will be published. We remain hopeful that CMS will fully consider the significant impact on operators before finalizing a rule, and if one is ultimately implemented, have confidence in our customers’ ability to manage in a prudent manner.”

Mr. Wahl concluded, “It’s an incredibly exciting time for the Company, as we’re rounding the turn of what has been a prolonged recovery for the industry. The challenges we navigated the past few years have further solidified our value proposition, the durability of our business model and market leading position. As we enter 2024, the Company’s underlying fundamentals are stronger than ever. With the industry at the beginning of a multi-decade demographic tailwind, we are favorably positioned to capitalize on the opportunities ahead and deliver meaningful, long-term shareholder value.”

Fourth Quarter Highlights

• Revenue was $423.8 million; adjusted revenue was $425.0 million, in-line with the Company’s expectations of $420.0 million to $430.0 million. The Company estimates Q1 revenue in the range of $420.0 million to $430.0 million.
• Housekeeping & laundry and dining & nutrition segment revenues were $191.4 million and $232.4 million, respectively; adjusted housekeeping & laundry and dining & nutrition segment revenues were $191.7 million and $233.3 million, respectively.
• Housekeeping & laundry and dining & nutrition segment margins were 7.5% and 6.2%, respectively; adjusted housekeeping & laundry and dining & nutrition segment margins were 7.7% and 6.6%, respectively.
• Cost of services was $350.4 million; adjusted cost of services was $362.6 million, or 85.3%. The Company’s goal is to continue to manage adjusted cost of services in the 86% range.
• SG&A was $46.2 million; adjusted SG&A was $42.2 million, or 9.9%. The Company’s goal continues to be achieving adjusted SG&A in the 8.5% to 9.5% range.
• Diluted EPS was $0.31 per share; adjusted diluted EPS was $0.20 per share.

Balance Sheet and Liquidity

The Company’s primary sources of liquidity are cash and cash equivalents, its revolving credit facility, and cash flow from operating activities. As of the end of the fourth quarter, the Company had a current ratio of 2.6 to 1, cash and marketable securities of $147.5 million, and a $500.0 million credit facility, which expires in November 2027. Additionally, Q4 cash flow and adjusted cash flow from operations were $49.5 million and $27.9 million, respectively. During the second half of 2023, cash flow from operations was $52.4 million, exceeding the previously raised expected range of $35.0 million to $45.0 million.

The Company repurchased over one million shares, or $11.2 million, of its common stock during 2023, including over 0.5 million shares, or $5.0 million, of its common stock during the fourth quarter. The Company has 6.5 million shares remaining under its outstanding share repurchase authorization.

Conference Call and Upcoming Events

The Company will be attending and participating in the Oppenheimer 34th Annual Healthcare MedTech & Services Conference, which will be conducted virtually on March 13, 2024.

The Company will host a conference call on Wednesday, February 14, 2024, at 8:30 a.m. Eastern Time to discuss its results for the three months ended December 31, 2023. The call may be accessed via phone at 1 (888) 330-3451, Conference ID: 4431380. The call will be simultaneously webcast under the “Events & Presentations” section of the Investor Relations page on the Company’s website, www.hcsg.com. A replay of the webcast will also be available on the website for one year following the date of the earnings call.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This release and any schedules incorporated by reference into it may contain forward-looking statements within the meaning of federal securities laws, which are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, and our beliefs and assumptions. Words such as “believes,” “anticipates,” “plans,” “expects,” “estimates,” “will,” “goal,” and similar expressions are intended to identify forward-looking statements. The inclusion of forward-looking statements should not be regarded as a representation by us that any of our plans will be achieved. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Such forward-looking information is also subject to various risks and uncertainties. Such risks and uncertainties include, but are not limited to, risks arising from our providing services to the healthcare industry and primarily providers of long-term care; the impact of and future effects of the COVID-19 pandemic or other potential pandemics; having a significant portion of our consolidated revenues contributed by one customer during the year ended December 31, 2023; credit and collection risks associated with the healthcare industry; the impact of bank failures; our claims experience related to workers’ compensation and general liability insurance (including any litigation claims, enforcement actions, regulatory actions and investigations arising from personal injury and loss of life related to COVID-19); the effects of changes in, or interpretations of laws and regulations governing the healthcare industry, our workforce and services provided, including state and local regulations pertaining to the taxability of our services and other labor-related matters such as minimum wage increases; the Company's expectations with respect to selling, general and administrative expense; and the risk factors described in Part I of our Form 10-K for the fiscal year ended December 31, 2022 under “Government Regulation of Clients,” “Service Agreements and Collections,” and “Competition” and under Item 1A. “Risk Factors” in such Form 10-K.

These factors, in addition to delays in payments from customers and/or customers in bankruptcy, have resulted in, and could continue to result in, significant additional bad debts in the near future. Additionally, our operating results have been, and would continue to be, adversely affected by continued inflation particularly if increases in the costs of labor and labor-related costs, materials, supplies and equipment used in performing services (including the impact of potential tariffs and COVID-19) cannot be passed on to our customers.

In addition, we believe that to improve our financial performance we must continue to obtain service agreements with new customers, retain and provide new services to existing customers, achieve modest price increases on current service agreements with existing customers and/or maintain internal cost reduction strategies at our various operational levels. Furthermore, we believe that our ability to sustain the internal development of managerial personnel is an important factor impacting future operating results and the successful execution of our projected growth strategies. There can be no assurance that we will be successful in that regard.

USE OF NON-GAAP FINANCIAL INFORMATION

To supplement HCSG’s consolidated financial information, which are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), the Company believes that certain non-GAAP financial measures are useful in evaluating operating performance and comparing such performance to other companies.

The Company is presenting adjusted revenues, adjusted segment revenues, adjusted segment margins, adjusted costs of services provided, adjusted selling, general and administrative expense, adjusted net income, adjusted diluted earnings per share, adjusted cash flows provided by (used in) operations, earnings before interest, taxes, depreciation and amortization ("EBITDA"), and EBITDA excluding items impacting comparability ("Adjusted EBITDA"). We cannot provide a reconciliation of forward-looking non-GAAP measures to GAAP due to the inherent difficulty in forecasting and quantifying certain amounts that are necessary for such reconciliation. The presentation of non-GAAP financial measures is not meant to be considered in isolation or as a substitute for financial statements prepared in accordance with GAAP.

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