A Reduced Tax Bill Helps Healthcare Services Group Bounce Back

Healthcare Services Group (NASDAQ: HCSG), a provider of housekeeping and nutritional services, reported its second-quarter results on Tuesday, July 17. Last quarter the company’s profits evaporated after two key customers went through major restructurings. This quarter Healthcare Services Group returned to robust bottom-line growth. However, the big boost is largely attributable to a reduced tax bill.

Is this company’s growth trajectory back on track? Let’s dig into the details to find out.

Image source: Getty Images.

Healthcare Services Group second-quarter results: The raw numbers


Q2 2018

Q2 2017

Year-Over-Year Change


$503.7 million

$470.9 million


Net income

$25.8 million

$22.6 million


Earnings per share




Data source: Healthcare Services Group.

What happened with Healthcare Services Group this quarter?

  • Housekeeping and laundry revenue ticked up 1% to $246 million. Dining and nutrition revenue grew at a far more robust 13% during the period and came in at $258 million.
  • Gross margin declined slightly sequentially to 13.1%. Management blamed the downtick on the timing of insurance payments.
  • Adjusted selling, general, and administrative (SG&A) costs were 6.6% of revenue. This remains comfortably under management’s target of 7%.
  • The double-digit increase in net income was driven in large part by a reduction in the company’s tax rate, which came in at 22.5% for the period. Management expects this rate to persist for the remainder of the year.
  • The dividend was boosted to $0.19375 per share. This is the 61st consecutive quarterly dividend payment.

What management had to say

CEO Ted Wahl kept his commentary focused on the macro operating environment:

The healthcare industry continues to face regulatory challenges and reimbursement uncertainties but, in our view, a bit less so than a year ago. Many providers have expressed cautious optimism about [Centers for Medicare and Medicaid Services’] proposed reimbursement system, the patient-driven payment model, and the possibility of PDPM being a meaningful step toward a more predictable and sustainable reimbursement framework for the future.

Looking forward

HCSG management doesn’t provide investors with guidance. However, it did share some of its near- and long-term financial goals with shareholders:

  • Cash collections and cash flow will be a major area of focus in light of the recent industry stress. The company has set a goal of collecting what it is owed in the next 12 to 18 months.
  • Gross margin is expected to reach 14% by the end of 2018. The long-term goal remains to get this number trending toward 15%.
  • SG&A is expected to remain below 7% of revenue.
  • The company’s tax rate is expected to hover around 23% for the remainder of the year.

CEO Wahl remained adamant in his belief that the company remains well-positioned to drive continued growth for the foreseeable future:

We entered the second half of 2018 having digested the new business brought on during the prior year and over the next couple of quarters, we’ll look to selectively expand and continue to replenish the management pipeline. So we’re prepared for the next wave of growth in 2019 and beyond.

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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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