Healthcare Services Group, Inc.

The matters discussed 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. The 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 these circumstances. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances. Healthcare Services Group, Inc.'s actual results could differ materially from those anticipated in these forward-looking statements. As a result of various factors in the forward-looking statements are not guarantees of performance. Some of the factors that could cause future results to materially differ from recent results are those projected in forward-looking statements are included in our earnings press release issued prior to this call and in our followings with the Securities and Exchange Commission, including the SEC's ongoing investigation. There can be no assurance that the SEC or any regulatory body will make no further regulatory inquiries or and more. We are under no obligation to update or alter the forward-looking statements. whether as a result of such changes, new information, subsequent events, or otherwise. Ladies and gentlemen, thank you for standing by and welcome to the Healthcare Services Group, Inc., 2020 Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Mr. Ted Wahl, President and CEO. Thank you. Please go ahead, sir.

Okay. Thank you, Misty. And good morning, everyone. Matt McKee and I appreciate you joining us today. When I look back over the past year, I'm so grateful for how industry leaders, clients, and frontline healthcare workers, especially our HCSC heroes, have led and served through one of the most trying periods for our industry and country. In special recognition of HCSC's frontline leaders for their extraordinary leadership, courage and grit over the past year, we were beyond excited to award $1,000 leadership recognition bonuses to our great account managers, dietitians, and district managers. This special recognition was so well deserved, and again, thank you team for going beyond. I'd also like to thank you fellow shareholders for your ongoing support, trust, and confidence in the HCSG team during these unprecedented times. Our strong fourth quarter results are a testament to the passion and perseverance of our team members and our ability to execute in even the most challenging environment as we continue to control the elements of our business that are within our control exceedingly well. We will remain a laser focus on our operational imperative of customer satisfaction, systems adherence, regulatory compliance and budget discipline as the pathway to delivering strong operational and financial results in the year ahead. With the vaccine rollout currently underway, we're hopeful that the worst of the clinical nightmare in the industry is behind us. That said, we know 2021 will still have its share of pandemic-related challenges as the industry gradually shifts from crisis mode to a state of recovery. And while COVID remains a near-term headwind on revenue, our commitment to internal investment and returning capital to shareholders underscores our positive longer-term growth outlook and creates value for all stakeholders. Before we move on to the discussion on the Q4 results, I'd like to briefly touch on the SEC update we provided in this morning's release. As we highlighted, the company and the SEC have recently commenced discussions regarding a potential resolution to the investigation. We're pleased that this matter has moved into this phase and hope to continue to work with the SEC to reach a final resolution. As I'm sure you can all appreciate, beyond what we've previously disclosed, including this morning's release, we continue to be limited in what we can say about this matter, especially while resolution discussions are ongoing. So with those introductory comments, I'll turn the call over to Matt for a more detailed discussion on the quarter.

Thanks, Ted, and good morning, everybody. Revenue for the quarter was $423.2 million, with housekeeping and laundry and dining and nutrition segment revenues of $219.9 million and $203.3 million, respectively. Thank you for joining us. Direct cost of services was $352.2 million, or 83.2%, and direct cost included a $14 million benefit related to favorable workers' compensation loss development trends as the company continues to successfully execute on its strategy of managing claim frequency, scope, and severity. Direct costs also included $7 million of leadership recognition bonuses that Ted had mentioned in his remarks. And the company's goal remains to manage direct costs at or below 86%. Housekeeping and laundry and dining and nutrition segment margins were 9.9% and 7.7% respectively. SG&A was reported at $42 million, or 9.9%, but after adjusting for the $5.2 million increase in deferred compensation, actual SG&A was $36.7 million, or 8.7%. The company expects near-term SG&A around 8.5%, excluding any COVID or SEC-related costs, with the primary leverage existing in top-line growth. And longer term, the company's target remains 7.5% for SG&A. Investment and other income for the quarter was reported at $5.8 million, but after adjusting for the $5.2 million change in deferred compensation, actual investment income was around $600,000. We reported an effective tax rate of 20.4% for the fourth quarter and 23.6% for the full year 2020. We expect a 2021 tax rate of 24% to 26%, including the Worker Opportunity Tax Credit. Cash flow from operations was $75.7 million. This includes a $45.2 million increase in accrued payroll, and included in that number is $14.3 million increase in the deferred payroll taxes that we received under the CARES Act. And because we called out the timing of the payroll and the impact of the payroll accrual last year, we would point out that the 2021 payroll accruals should have a similar cadence to what we saw last year. Q1 will have the lowest payroll accrual of four days. Q2 will be 11 days. Q3, five days. And Q4, 13 days. And Q4 will also be impacted by half or $24 million or so of that CARES Act deferred payroll tax repayment, half of which will be due at the end of 2021, the other half of which will be due at the end of 2022. and those accruals compared to the 3, 10, 4 and 12 days that we had in 2020 during the corresponding quarterly periods. But of course the payroll accrual only relates to timing and the impact ultimately washes out throughout the full year. DSO for the quarter was 55 days down three days from the previous quarter and we're pleased with the ongoing strength of our balance sheet and the ability to support the business while continuing to return capital to our shareholders. We announced that the Board of Directors approved an increase in the dividend to 20.625 cents per share, payable on March 26th of this year. Cash flows and cash balances supported, and with the dividend tax rate in place for this foreseeable future, the cash dividend program continues to be the most tax-efficient way to get free cash flow and ultimately maximize return to our shareholders. This will mark the 71st consecutive cash dividend payment since the program was instituted in 2003, and a 70th consecutive quarterly increase, now an 18-year period that's included four 3-for-2 stock splits. We recognize the dividend is important to our shareholders and we've increased it in line with our performance track record. Additionally, the company remains authorized to purchase 1.7 million shares of our common stock pursuant to the previous Board of Directors authorization and expects to repurchase up to 1 million shares over the next 12 months. So with those opening remarks, we'd now like to open up the call for questions.