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 the circumstances. As with any projection or forecast, there 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 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 forward-looking statements are included in our earnings press release issued prior to this call and in 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. I would now like to turn the call over to Ted Wahl, President and CEO. Sir, you may begin.

Okay. Thank you, Phyllis, and good morning, everyone. Matt McKee and I appreciate you joining us today. We released our second quarter results this morning and plan on filing our 10Q by the end of the week. We remain encouraged by the stabilizing industry landscape, in particular, some of the recent and more positive trends for census and new COVID cases in long-term and post-acute care facilities. Having said that, we're also cognizant of the significant uncertainty related to COVID that remains. will continue to closely monitor the various interrelated factors that will play a crucial role in industry recovery, including immunization rates, occupancy trends, staffing levels, and government funding. And although we don't know exactly what the pace and pathway of recovery will be, we've learned an awful lot over the past 18 months and are confident that we are well positioned for long-term growth. Looking ahead, We're incredibly excited about the return to growth in Q3 and expect over $50 million of annualized revenue growth to be reflected in next quarter's results. Our HCSG heroes have continued their tireless efforts to protect those most vulnerable, and this significant expansion, primarily with existing customers, not only underscores the strength of our core client partnerships, but also serves as recognition of our team's extraordinary dedication and commitment to going beyond. While Q2 reported results were impacted by several temporary or non-recurring items, our underlying operational and financial performance was very strong. and in line with recent quarters as we continue to execute on our operational imperative and manage the elements of our business that are within our control. During Q2, we agreed to temporarily modify certain pricing and payment terms of our agreements with Genesis as it continues to work through its restructuring plan. We believe that these temporary adjustments in conjunction with concessions made by other stakeholders are in our best interest as Genesis facilities provide a broad platform for strategic opportunities in the future. Additionally, we were pleased with the significant progress made during the quarter towards a resolution in the SEC matter. We also anticipate resolving, through mediated settlements, California labor and employment matters. Together, the temporary or one-time adjustments related to Genesis, the SEC, and California L&E matters accounted for the majority of our sequential decreases in reported revenue, net income, and adjusted cash flow from operations. 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, everyone. Revenue for the quarter was $398.2 million, with housekeeping and laundry and dining and nutrition segment revenues of $202.9 million and $195.3 million, respectively. The majority of the sequential decrease in revenue relates to the temporary Genesis adjustments that Ted described in his opening remarks. The full run rate impact of the temporary adjustments to revenue is reflected in Q2 and expected to remain in place through December of 2021. The remainder of the sequential decrease in revenue relates to the decrease in supplemental billings for COVID-related employee pay premiums, which were initiated by and passed through to customers. These supplemental billings were down $3.1 million quarter to quarter from $3.9 million in Q1 to $800,000 in Q2. Direct cost of services was reported at $336.4 million, or 84.5%, which is below our historical target of 86%. Housekeeping and laundry and dining and nutrition segment margins were 11.2% and 7% respectively. SG&A was reported at $50.1 million, but after adjusting for the $2.9 million increase in deferred compensation, actual SG&A was $47.1 million. SG&A was also impacted by the non-recurring legal-related charges that Ted mentioned earlier, including $6 million related to the potential settlement of the SEC matter, $700,000 of SEC-related legal and professional fees, and $3 million related to the expected mediated settlement of California labor and employment matters. Investment and other income for the quarter was reported at $3.4 million, but again, after adjusting for the $2.9 million change in deferred compensation, actual investment income was about a half million dollars. Our Q2 tax rate of 36.5% was impacted by the non-deductibility of the $6 million charge related to the potential settlement of the SEC matter. For Q3 and Q4, we expect our effective tax rate to be in the 24% to 26% range. Net income for the quarter came in at $9.6 million, and earnings were $0.13 per share. Together, the temporary or non-recurrent items related to Genesis, the SEC, and the California L&E matters unfavorably impacted reported earnings by 15 cents per share. Cash flow from operations for the quarter was $25.3 million and was impacted by a $20.7 million increase in accrued payroll. DSO for the quarter was 62 days. and the majority of the sequential decrease in adjusted cash flow from operations and increase in DSO relates to the temporary Genesis adjustments. The full run rate impact of the temporary adjustments to payment terms is reflected in Q2 and expected to remain in place through December of 2022. Also, we would point out that the 2021 payroll accruals should have a similar cadence to what we saw last year. So Q3 will have five days and Q4 will have 13 days, and that compares to four and 12 days that we had in 2020 during those corresponding periods. And the payroll accrual relates only to timing, and the impact ultimately washes out through the full year. Q4 will also be impacted by one-half or about $24 million of the CARES Act deferred payroll tax repayment. We're pleased with the ongoing strength of our balance sheet and the ability to support the business while continuing to return capital to HCSG shareholders. We announced that the Board of Directors approved an increase in the dividend to $20.875 per share, payable on September 24th. The cash flows and cash balances support it, and with the dividend 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 the shareholders. This will mark the 73rd consecutive cash dividend payment since the program was instituted in 2003 and the 72nd consecutive quarterly increase. That's now an 18-year period that 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 repurchased $1.8 million of its common stock pursuant to its previous authorization during the quarter. The company remains authorized to repurchase 1.6 million shares of our common stock pursuant to the previous Board of Directors authorization. And with those opening remarks, we'd now like to open up the call for questions.