Healthcare Services Group, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Healthcare Services Group, Inc. 2020 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. At this time, I would like to hand the call over to your host today, Mr. Ted Wall, President and Chief Executive Officer. The matters discussed today on today's conference call include forward-looking statements about the business prospects of Healthcare Services Group, Inc., within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often preceded by words such as believes, expects, anticipates, plans, will, goal, may, intends, assumes, or similar expressions. Forward-looking statements reflect management's current expectations as of the date of this conference call and involve certain risks and uncertainties. Forward-looking statements are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends, current conditions, expected future developments, and other factors that we believe are appropriate under the circumstances. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in the circumstances. Health Care Services Group thinks actual results could differ materially from those anticipated in each forward-looking statement as a result of various factors, and the forward-looking statements are not guarantees of performance. Some of the factors that could cause future results to materially differ from recent results or those projected in the forward-looking statements are included in our earnings press release issued prior to this call and our filings with the Securities and Exchange Commission, including the SEC's ongoing investigation. There can be no assurance that the SEC or another regulatory body will not make further regulatory inquiries or pursue further action that could result in significant costs and expenses, including potential sanctions or penalties, as well as distraction to management. The ongoing SEC investigation and or any related litigation could adversely affect or cause variability in our financial results. We are under no obligation and expressly disclaim any obligation to update or alter the forward-looking statements, whether as a result of such changes, new information, subsequent events, or otherwise. And presenters, you may begin.

Thank you, Sharon, and good morning, everyone. Matt McKee and I appreciate all of you joining us for today's conference call. This morning we released outstanding third quarter results and plan on filing our 10Q by the end of the week. During the quarter, our customers and their caregivers continue to meet the challenges of the pandemic with innovation, resolve, and compassion. Our HCSG heroes have been right there with them, on the front line since the beginning, tirelessly supporting our customers and helping to ensure the well-being of America's most vulnerable. The health and safety of our employees and the communities we serve will remain our highest priority. Our strong financial results underscore our ability to thrive in even the most challenging environments. We were particularly pleased with our service execution during the quarter as our relentless focus on customer satisfaction systems adherence, and regulatory compliance delivered extraordinary operational outcomes. While the pandemic continues to create uncertainty around near-term occupancy and cost trends, the industry is much better prepared for the fall and winter months with increased access to PPE, point-of-care testing, and enhanced operating protocols. Additionally, we continue to be encouraged by the government's ongoing financial support of the industry, which we view as a necessary bridge from the short-term challenges to a more stable operating environment and ultimately a vaccine and census recovery. As the industry continues to adjust to the new normal, we maintain our sharp focus on delivering strong operational and financial results in Q4. While the current environment necessitates a cautious view on growth, longer term, our outlook remains positive as our value proposition is more compelling than ever before. Above all, we remain committed to making decisions that best position us to deliver shareholder value. With those introductory comments, I'll turn the call over to Matt for a more detailed discussion on the quarter.

Thanks, Ted. Good morning, everyone. Revenue for the quarter was $435.9 million, with housekeeping and laundry and dining and nutrition segment revenues of $223.4 million and $212.5 million, respectively. Revenue included $9.3 million of COVID-related supplemental billings, primarily related to employee pay premiums, which were initiated by and passed through to customers. Net income for the quarter came in at $27.6 million, and earnings was 37 cents per share. Direct cost of services was $365.4 million, or 83.8%. The Q3 decrease in direct cost of services compared to Q2 was driven by lower levels of CECL bad debt expense as a result of our continued strong cash collections and more efficient management of labor and food purchasing as a result of census-driven cost reductions, the benefit of which was passed along to our customers as a credit to recurring billings. Overall, our goal remains to manage direct cost at or below 86%. Housekeeping and laundry and dining and nutrition segment margins were 11.1% and 9.2% respectively. SG&A was reported at $37.3 million, or 8.6%. After adjusting for the $3.2 million increase in deferred compensation, actual SG&A was $34.1 million, or 7.8%. And we expect SG&A to remain in the 7.5% to 8% range in the near term, as those costs are largely fixed, but continue to ultimately target SG&A of 7.5%, excluding any COVID or SEC-related costs, with the primary pathway to leverage that existing and top-line growth. Investment and other income for the quarter was reported at $4 million, but again, after adjusting for the $3.2 million change in deferred compensation, actual investment income was around $800,000. We reported an effective tax rate of 25.6% for the quarter and expect our tax rate for 2020 to be in the 24% to 26% range, including WOTC benefits. Cash flow from operations was $49.2 million. This includes an $18.7 million decrease in the accrued payroll, offset by a $17 million increase in deferred payroll taxes under the CARES Act. And because we previously called out the quarter-to-quarter impact of the 2020 payroll accruals, for Q4, we're expecting a payroll accrual of 12 days. Ultimately, that payroll accrual only relates to timing with the impact washing out through the full year. Additionally, we expect an incremental $15 million or so for payroll accrual in Q4, resulting from the payroll tax deferrals under the CARES Act to be paid back at the end of 2021 and 2022. As such, this amount is now classified under other long-term liabilities rather than other current liabilities. DSO for the quarter was 58 days, down two days from the previous quarter. And we are pleased with the ongoing strength of the balance sheet and the ability to support the business while continuing to return capital to our HCSG shareholders. We announced that the Board of Directors approved an increase in the dividend to $0.205 per share, payable on December 24, 2020. The cash flows and cash balance is supported, and with the tax rate in place for the foreseeable future, the cash dividend program continues to be the most tax-efficient way to get free cash flow and ultimately maximize return to shareholders. This will mark the 70th consecutive cash dividend payment since the program was instituted in 2003, and now the 69th consecutive quarterly increase, which is now a 17-year period that's included four three-for-two stock splits. We recognize the dividend is important to our shareholders, and we have increased it in line with our performance track record. With those opening remarks, we'd now like to open the call up for questions.