HCSG Reports Q2 2024 Results

Raises Second Half 2024 Revenue Estimates,

Reaffirms Full-Year 2024 Cash Flow Forecast

• Revenue of $426.3 million, in line with expectations.
• Net income and diluted EPS of ($1.8) million and ($0.02); includes $0.22 impact of client restructuring charges.
• Reported and adjusted cash flow from operations of $16.3 million and ($2.4) million.
• Raises Q3 and Q4 revenue estimates to $425.0 to $435.0 million and $430.0 to $440.0 million.
• Reaffirms 2024 adjusted cash flow range of $40.0 to $55.0 million.

Healthcare Services Group, Inc. (NASDAQ:HCSG) today reported results for the three months ended June 30, 2024.

Ted Wahl, Chief Executive Officer, stated, "Our field-based team delivered strong service execution leading to another successful quarter of managing cost of services, excluding CECL, within our targeted range. Additionally, we achieved over 96% cash collections during the quarter, which, while short of our target, showed improvement compared to last quarter and the same period last year, and importantly, keeps us on track to meet our 2024 cash flow objectives."

Mr. Wahl continued, "Our second quarter results also include the impact of the previously announced LaVie Care Centers' Chapter 11 filing. The recent restructuring activity we've seen, including LaVie's, is the result of conditions and events that occurred over the course of the past few years, as opposed to a reflection of the sector's ‘current state.' And while this restructuring impacts our second quarter results, longer term, it only further strengthens the financial health of our customer base."

Mr. Wahl concluded, "As we head into the second half of the year, our three strategic priorities remain unchanged. First is continuing to manage cost of services within our 86% targeted range, building on the operational momentum achieved in the second quarter. Second is driving growth. We're raising our Q3 and Q4 revenue estimates to $425.0 to $435.0 million and $430.0 to $440.0 million, respectively, to reflect our second half of year topline expectations. Third is collecting what we bill. We expect cash collections to continue to gain strength over the next six months and further still into 2025, and reaffirm our 2024 adjusted cash flow forecast of $40.0 to $55.0 million. Our strong business fundamentals and strategic priorities position us to boost profitability, growth, and cash flow in the second half of the year, and we remain confident in our ability to deliver meaningful, long-term shareholder value."

Second Quarter Analytics⁽¹⁾

(dollar amounts in millions)

• Revenue was reported at $426.3 million, in line with the Company's expectations of $420.0 million to $430.0 million.
  • Housekeeping & laundry and dining & nutrition segment revenues and margins were $191.0 million and 8.9% and $235.3 million and 6.3%, respectively.
  • The Company's Q3 and Q4 expected revenue ranges are $425.0 to $435.0 million and $430.0 to $440.0 million, respectively.
• Cost of services was reported at $384.7 million or 90.3%.
  • Cost of services includes $31.7 million or 7.4% of bad debt expense. $21.9 million or 5.1% related to client restructuring activity and $9.8 million or 2.3% related to other aging-related expenses.
  • Cost of services also included a $5.1 million or 1.2% benefit related to favorable workers' compensation and general liability loss development trends.
  • The Company's goal is to continue to manage cost of services in the 86% range.
• SG&A was reported at $44.4 million or 10.4%.
  • SG&A includes a $1.3 million or 0.3% increase in deferred compensation.
  • The Company's goal continues to be achieving SG&A in the 8.5% to 9.5% range.
• Other income was reported at $0.9 million or 0.2%.
  • Other income includes a $1.3 million or 0.3% increase in deferred compensation.
• Cash flow from operations was reported at $16.3 million.
  • Cash flow from operations includes an $18.7 million increase in the payroll accrual.
  • The Company reaffirmed its 2024 adjusted cash flow from operations range of $40.0 million to $55.0 million.

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 second quarter, the Company had a current ratio of 2.7 to 1, cash and marketable securities of $130.7 million, and a $500.0 million credit facility, which expires in November 2027. Additionally, the Company repurchased 263,500 shares, or $3.0 million, of its common stock during the second quarter and has 6.2 million shares remaining under its outstanding share repurchase authorization.

Conference Call and Upcoming Events

The Company will be attending and participating in the Baird 2024 Global Healthcare Conference on September 11, 2024 at the InterContinental Barclay NY.

The Company will host a conference call on Wednesday, July 24, 2024, at 8:30 a.m. Eastern Time to discuss its results for the three months ended June 30, 2024. The call may be accessed via phone at 1 (800) 715-9871, Conference ID: 9951274. 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 six months ended June 30, 2024; 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, 2023 under "Government Regulation of Customers," "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 would 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 cash flows 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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