Healthcare Services Group - Earnings Call - Q3 2025

Executive Summary

• Q3 delivered headline beats with revenue $464.3M (+8.5% YoY; +1.3% QoQ) and diluted EPS $0.59; EPS was boosted by a $0.361 per-share benefit primarily from Employee Retention Credit (ERC) items, partially offset by the Genesis charge, while revenue modestly topped consensus. Versus S&P Global consensus, EPS materially beat ($0.59 vs $0.20*) and revenue was slightly ahead ($464.3M vs $460.4M*).
• Mix/quality: Cost of services (79.2% of sales) included a 6.8% benefit tied to ERC (net of Genesis charge), and other income included $5.3M of ERC interest; operating cash flow of $71.3M ($87.1M ex-payroll accrual) included $31.8M from ERC.
• Management cited sustained new-client wins and 90%+ retention as drivers of a sixth consecutive sequential revenue increase; Q4 revenue estimated at $460–$470M, consistent with ongoing momentum.
• Capital allocation: $27.3M of buybacks in Q3 (YTD $42.0M) under the $50M plan announced in July; cash and marketable securities ended Q3 at $207.5M with an undrawn $500M revolver (LCs only).
• Watch items: outsized EPS beat from ERC benefits, ongoing Genesis restructuring process and timing, and August disclosures and legal actions around a 2024 data breach affecting ~624K individuals.

What Went Well and What Went Wrong

What Went Well

• Momentum and execution: “We delivered strong third quarter results – marked by year-over-year and sequential increases in revenue, earnings, and cash flow” with positive momentum into Q4.
• Organic growth durability: New client wins and high retention (90%+) drove topline; Q3 marked the sixth consecutive sequential revenue increase, “our highest rate of growth since Q1 2018”.
• Liquidity and buybacks: Cash and marketable securities $207.5M; undrawn revolver; repurchased $27.3M of stock in Q3 under the $50M 12‑month plan.

What Went Wrong

• Earnings quality/one‑offs: Reported EPS includes a $0.361 per-share benefit primarily from ERC ($0.392) offset by the Genesis charge ($0.033), inflating headline profitability; cost of services also had a 6.8% ERC-related benefit.
• Genesis restructuring overhang: While operations and payments remain normal course, the process runs through bid deadlines/sale hearing and likely closing into late spring/summer, creating timeline uncertainty.
• Cyber/data breach exposure: August releases indicate cybercriminal access (Sept 27–Oct 3, 2024) impacting ~624,496 individuals, spawning investigations/class-action solicitations—creating potential legal and reputational risk.

Transcript

Speaker 1

Hello, and welcome to the HCSG 2025 third quarter earnings call. The matters discussed on today's conference call include forward-looking statements about the business prospects of Healthcare Services Group, Inc. For Healthcare Services Group, Inc.'s most recent forward-looking statement notice, please refer to the press release issued this morning, which can be found on our website, www.hcsg.com. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties, and important factors, including those discussed in the risk factors and DNA and other sections of the annual report on Form 10-K and Healthcare Services Group, Inc.'s other SEC filings, and as indicated in our most recent forward-looking statements notice. Additionally, management will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in this morning's press release.

I would now like to turn the conference over to Ted Wahl, CEO. You may begin.

Speaker 5

Good morning, everyone, and welcome to HCSG's third quarter 2025 earnings call. With me today are Matt McKee, our Chief Communications Officer, and Vikas Singh, our Chief Financial Officer. Earlier this morning, we released our third quarter results and plan on filing our 10-Q by the end of the week. Today, in my opening remarks, I'll discuss our Q3 highlights, share our perspective on the overall business environment, and discuss our strategic priorities for Q4. Matt will then provide a more detailed discussion on our Q3 results, and Vikas will provide an update on our balance sheet and capital allocation progression. We will then open up the call for Q&A. With that overview, I'd like to now discuss our Q3 highlights. We delivered strong third quarter results, marked by year-over-year and sequential increases in revenue, earnings, and cash flow, and we have carried that positive momentum into the fourth quarter.

New client wins and high retention rates drove our top-line growth, and our field-based team's operational excellence led to quality service outcomes and consistent margins. Cash collection trends remain positive, and our balance sheet is strong. I'd now like to share our perspective on the overall business environment. Current headlines are shaped by partisan discourse regarding the government shutdown and speculation about the potential impacts of the ABBA. However, mandatory spending programs like Medicare and Medicaid remain insulated from the federal shutdown disruption, and the foundational benefits of the ABBA for the industry, specifically the exemption from provider tax cuts, the elimination of the minimum staffing requirement, and the $50 billion Rural Health Transformation Fund remain intact.

While these headlines may generate sentiments of economic uncertainty, the underlying fundamentals of our core market of long-term and post-acute care continue to gain strength, highlighted by the multi-decade demographic tailwind that is now beginning to work its way into the system. The most recent operating trends are positive as well, evidenced by steady occupancy, increasing workforce availability, and a stable reimbursement environment. Looking ahead, we are optimistic that the administration and Congress will continue to prioritize the changing and expanding needs of our nation's most vulnerable, with a shared focus on the modernization and rationalization of regulations and the potential for policy that better aligns with the operational realities of the industry and provider community we service.

As we enter Q4, our top three strategic priorities remain: driving growth by developing management candidates, converting sales pipeline opportunities, and retaining our existing facility business; managing costs through field-based operational execution and prudent spend management at the enterprise level; and optimizing cash flow with increased customer payment frequency, enhanced contract terms, and disciplined working capital management. We are confident that continuing to execute on our strategic priorities, supported by our robust business fundamentals, will enable us to drive growth while delivering sustainable, profitable results. With those introductory comments, I'll turn the call over to Matt for a more detailed discussion on the quarter.

Speaker 2

Thanks, Ted, and good morning, everyone. Revenue was reported at $464.3 million, an 8.5% increase over the prior year. Segment revenues for environmental was reported at $211.8 million. Dietary services was reported at $252.5 million. We estimate Q4 revenue in the range of $460 to $470 million. Cost of services was reported at $367.9 million, or 79.2%. The cost of services includes a benefit of $34.2 million, or 7.4%, primarily related to the ERC. That is partially offset by the previously announced Genesis charge of $2.7 million, or 60 basis points. When you combine those two items, cost of services includes a $31.5 million, or 6.8% benefit. Our goal is to manage cost of services in the 86% range. SG&A was reported at $50.5 million. After adjusting for the $3.7 million increase in deferred compensation, SG&A was $46.8 million, or 10.1%.

SG&A includes $2.1 million, or 50 basis points of professional fees related to the ERC. We expect to manage SG&A in the 9.5% to 10.5% range in the near term, based on investments that we've made and spoken about in previous quarters, with the longer-term goal of managing those costs into the 8.5% to 9.5% range. Segment margins for environmental and dining services were reported at 10.7% and 5.1%, respectively. Segment margin for environmental services included $1.2 million, or 60 basis points, related to the previously announced Genesis charge. Segment margins for the dietary services include $1.5 million, or 60 basis points, related to the previously announced Genesis charge. Other income was reported at $11.4 million. After adjusting for the $3.7 million increase in deferred compensation, other income was $7.7 million. Other income includes $5.3 million of interest income related to the ERC.

Net income and diluted earnings per share were reported at $43.59 per share. Diluted earnings per share includes a $0.39 benefit, primarily related to the ERC, partially offset by the previously announced Genesis charge of $0.03 per share. All told, diluted earnings per share includes a $0.36 per share benefit. Cash flow from operations was reported at $71.3 million. After adjusting for the $15.8 million decrease in the payroll accrual, cash flow from operations was $87.1 million. Cash flow from operations includes a $31.8 million benefit related to ERC. I'd now like to turn the call over to Vikas for a discussion on our balance sheet and capital allocation progression.

Speaker 0

Thank you, Matt, and good morning, everyone. We ended the third quarter with cash and marketable securities of $207.5 million and an undrawn credit facility with utilization limited to LCs only. The strength in our balance sheet and liquidity position have been driven by two significant trends this year. First and foremost is sustained collections in the current quarter, as well as the last few quarters. Secondly, during the quarter, the company received $31.8 million in ERC receipts. Year to date, this amount stands at $51.8 million. There were no such receipts in 2024. As Matt referenced in his remarks, this quarter, the company recognized $34.2 million of ERC receipts within cost of services and $5.3 million of interest income within investment and other income. We have also incurred $2.1 million of incremental expenses within SG&A associated with ERC-related professional fees that are paid on a contingent basis.

Recognition of ERC receipts on the income statement is contingent upon what time period the receipts pertain to. As a result, we continue to record deferred ERC liability of $12.3 million within other accrued expenses and current liabilities on the balance sheet related to the quarter ended September 30, 2021. Future ERC receipts will either be recognized on the income statement or recorded as a liability on the balance sheet based on the historical time period they pertain to. Future ERC receipts for Q3 2021 will be recorded on the balance sheet, whereas all prior periods from Q1 2020 through Q2 2021 will flow through the income statement. On the capital allocation front, our priorities are to direct investment towards organic growth, strategic acquisitions, and opportunistic share repurchases. During the third quarter, we repurchased $27.3 million of our common stock. This takes our year-to-date buybacks to $42 million.

Third quarter purchases were made under the share repurchase plan we announced in July in conjunction with our Q2 earnings. This $50 million share repurchase plan is valid through June 2026 and is intended to accelerate the pace of our share buybacks. We have 3.1 million shares remaining under the February 2023 share repurchase authorization for 7.5 million shares. While there were no completed acquisitions in the quarter, we continue to actively evaluate M&A opportunities. With that, we will conclude our opening remarks and open up the call for Q&A.

Speaker 1

Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, simply press star one again. Please ensure that your phone is not on mute when called upon. Thank you. Your first question comes from Albert J. William Rice of UBS Investment Bank. Your line is open.

Speaker 3

Hi, everybody. I just maybe have to expand a little bit on the pipeline of new client wins, what you're seeing now, and how you see that progressing as you look ahead into 2026. Is it mostly going to be cross-selling of existing housekeeping clients into dining, or are you seeing a lot of opportunities for new customers completely?

Speaker 5

Hey, good morning, AJ. I would say overall, the third quarter was our sixth consecutive sequential revenue increase and really our highest rate of growth since Q1 of 2018. Certainly, just to pause for a moment and take stock in that accomplishment, we continue to have positive momentum really across the entire spectrum of growth opportunities. We continue to successfully execute on that organic growth strategy we've talked about before and emphasized at the beginning of the call with management development, converting sales pipeline opportunities, and retaining our existing facility business. I'd say to get to the heart of your question, the majority of that quarter-over-quarter top-line growth increase was really driven by new business wins more heavily weighted towards the front end of the quarter, along with 90% and strengthening client retention rates. I think looking ahead to Q4, we estimate revenue in that $460 to $470 million range.

Beyond Q4 in 2025, all of our growth strategies continue to be oriented towards that mid-single-digit top-line growth target. With more 2026-specific details, we expect to come as part of our fourth quarter earnings call. I think specific, AJ, to the segments you referenced, the new business pipeline is really, really pretty fairly evenly split between EVS and dietary. Although from a revenue contribution perspective, as you're all too familiar with, the dietary business accounts for 2x of that of an EVS account on a same-store basis. As we're onboarding a comparable number of accounts, dietary and EVS revenue will both increase proportionately. We're still 50% or so penetrated in dining. Within our EVS customer base, that cross-selling opportunity does remain the ultimate low-hanging fruit from a growth perspective as we head into the new year.

Speaker 3

Okay, maybe then a follow-up question. Just update us on how education effort is trending, and I know there's a reference to continue to look at acquisitions. Would those principally be where you're looking or anywhere else?

Speaker 2

Yeah, AJ, this is Matt. I'll speak maybe just to sort of current state of that end market and then allow the cost to weigh in as far as pipeline and acquisition targets within that space specifically. We're actually internally now referring to this segment of our business more generally as campuses. We feel that referring to it strictly as education is a bit limiting. As long as it fits within our operational profile and footprint, and we're allowing for the possibility of servicing other campus-like environments that may fall outside the bounds of technically what might be considered healthcare or education per se.

It's a subtle shift, but we're consciously choosing those words to really empower our leadership teams operating in those adjacent markets to be really unencumbered when they're assessing new business opportunities, whether that relates to an organically generated opportunity or perhaps even inorganic targets and acquisition targets that may surface within that broader campus environment. Still a relatively small base at less than 5% of total company revenues, but continue to see growth of that base. At this point, we're really starting to appreciate some of the synergies that exist between our environmental offering and our dining brand offering. We did make that conscious decision to operate under separate banners within this end market. Like I said, we're really starting to see some of the payoff in the cross-selling opportunities and the referrals that can exist between those two sister brands.

Speaker 0

Yeah, and AJ, on the M&A acquisition front, I would say education, or as Matt characterized it, our campus initiative, is absolutely our number one target in terms of acquisitions that we're going after. Obviously, we're still in the process of building out that pipeline. As we think about the approach we'll take to M&A going forward, education is top of the list.

Speaker 3

Okay, thanks a lot.

Speaker 1

The next question comes from Bill Sutherland with William Blair. Your line is open.

Speaker 6

Thanks. Hey, good morning, everybody. I'm wondering on the labor front, how things are looking. I know they're strong, Ted, you mentioned, as far as the nursing home availability and increases in hiring. From your perspective, as far as either hiring the facility managers, training them up, or your people, do you see anything that might impact this ability to grow at this level or maybe even a little higher? Thanks.

Speaker 2

Yeah, I would say, Bill, certainly the labor market is strong. You know, the healthcare sector continues to lead all sectors in hiring. There were some impressive job gains in the skilled nursing industry posted in Q1 that were ultimately revised down a bit, but year-to-date job gains are still significantly outpacing what we saw in 2024. As a total industry, the skilled nursing space is still about 30,000 jobs short relative to where it was at pre-pandemic levels. That's relative to a peak of almost a quarter of a million jobs lost through the early stages of the pandemic. Ultimately, those are chipping away. The expectation is that at the current levels of hiring, the industry should be at pre-pandemic levels at some point around the middle of 2026.

That certainly bodes well with respect to Ted's comments regarding the availability of staffing and the impact that has directly upon the opportunity for clients to admit new residents and to build census within their facility for a while. Ultimately, when you drill it down into Healthcare Services Group and what it means for us, we're in a really good spot, Bill. We've seen wage growth that has stabilized, and that's a good thing. Our applications are at record levels and continue to be high and certainly sufficient to be able to fill any job openings that we have down to the facility level and within the management ranks. There are still some markets that have ongoing challenges, but I would say that's back to sort of normal course, where there are given markets that may creep up that have, for any number of reasons, their own specific challenges.

That's the benefit of having the resources of Healthcare Services Group and that we're able to allocate resources and manpower to be able to focus and address those situations as they arise. We wouldn't view the availability of labor or the hiring environment, Bill, as anything that would in any way hinder our growth prospects. As a matter of fact, I would flip it and say that any challenges that prospective clients are facing would only be bolstered via the value proposition that Healthcare Services Group brings, as I mentioned, that we are able to much better apply our resources to both hire and retain employees.

Speaker 6

Makes sense. Thanks. Ted, on the ABBA, as you called it, I like that. The $50 billion, you know, Rural Health Transformation Fund allocation, I've been reading kind of like it's very, it's still very indetermined kind of where things, where the money goes. Have you had any sense of what flows to post-acute and specifically SNF? I guess it'll depend state by state.

Speaker 5

It'll vary state by state, Bill, and it's really empowering the entire healthcare continuum to participate on some level. There will be a formal application process, and that'll all be revealed through implementation guidance in the coming months and years.

Speaker 6

Okay, that's all I've got. Thanks, guys.

Speaker 1

The next question comes from Ryan Daniels with William Blair. Your line is open.

Speaker 4

Hello, this is Matthew Mardula. I'm for Ryan Daniels, and thank you for taking our question. My first question, this is more of a kind of high-level question, are you seeing an increase in the number of facilities choosing to outsource their Environmental or Dietary Services? I understand you already hold a significant share of the outsourced market, but are you noticing any acceleration or the same level in outsourcing trends from facilities? When looking at this kind of trend longer term, how much of it can develop?

Speaker 5

If you think about just for the broadest of context, for us, inclusive of long-term and post-acute care facilities, specifically skilled nursing, we've identified over 23,000 candidates for the types of services we offer. Here we are nearly five decades into our company-wide journey, and less than 15% of those facilities use a third-party contract company for environmental services, less than 8% for dining and nutrition services, and we have over 80% of that outsourced market. I think the way to think about the demand for the services, which continues to be stronger than what we're capable of satisfying, is that we really are the market maker in that respect. As we grow, so does the penetration within those facilities and those candidates for the types of services that we offer.

I would just add that additionally, maybe in a broader context, outsourcing does and has become more acceptable than ever before. When you think about environmental services, there certainly has always been an inclination to outsource, if you could find a reliable, trusted partner like Healthcare Services Group, Inc. to work together on those departments. Even more in dining, where a decade or so ago, there may have been some, not even reluctance, but maybe a partialness towards wanting to partner or wanting to keep those facilities insourced or in-house, because it is more akin to and more directly related to patient care. We believe more than ever before, and part of it is because of our value proposition and the managerial expertise and capabilities we're bringing to the table, our purpose, vision, values, and all of the elements, including the 24/7 mindset we're bringing to support that department specifically.

Also, generally speaking, the market has become much more open to outsourcing, not just environmental services, but dietary as well. Broadly speaking, we don't see any limitations on how deeply we can grow within that targeted market we've identified in the coming months and years. It's really going to be dependent upon our continued ability to execute on our management development strategy. That's where the majority of our time and effort from an operational perspective is spent, along with tending to the rest of the operational imperative that we've set forth.

Speaker 4

Great. Thank you for that. Can you provide an update on Genesis Healthcare and whether you're seeing any facility closures as part of their bankruptcy process? Additionally, have you seen any transitions of Genesis-operated facilities to new ownership? If so, how have those conversations been, and are the new owners receptive to continuing to use your services?

Speaker 5

Overall, we're continuing to provide services to the Genesis Healthcare facilities we were servicing prior to the petition date, and it's really being done without disruption in operational outcomes or payments. It's a very normal course of business within the four walls of each community at Genesis Healthcare, in spite of the activity regarding the bankruptcy considerations outside of those four walls. We expect that to be the case, Matthew, throughout the rest of this matter and through the duration of the post-petition period. I think specific to the process, the only real notable recent developments are that in late August, both the DIP loan and bid procedures were approved. The DIP loan provides additional capital for operations during the reorg process and ultimately some additional capital if needed to facilitate an eventual sale. The bid procedures really establish a formal process for that potential sale.

You alluded to it, but from a timing perspective, you know, the way that bid procedures are outlined, it's really looking for early November-ish bid deadline, an early November bid deadline, a mid-November sale hearing, and in all likelihood, a potential close in late spring once a potential buyer is selected. That could be pushed out, you know, as far as the summer, depending on the cadence of the matter. Again, from a Healthcare Services Group, Inc. perspective and even from a Genesis Healthcare and most importantly, each individual community perspective, it really is operating in a normal course of business where the providers are focused on patient care and, you know, the partners like Healthcare Services Group, Inc. are focused on their, you know, related responsibilities.

Speaker 4

Great. Thank you so much for all that.

Speaker 1

This concludes the question and answer session. I'll turn the call to Ted Wahl for closing remarks.

Speaker 5

Okay, great, Sarah. Thank you. As we look to finish the year strong and carry that positive momentum into 2026, the company's underlying fundamentals are more robust than ever. Our leadership and management team, our enhanced value proposition, our business model, and the visibility we have into that model, our training and learning platforms, KPIs, and other key business trends, and our strong balance sheet, with the industry at the beginning of a multi-decade demographic tailwind, we are incredibly well positioned to capitalize on the abundance of opportunities that lie ahead and deliver meaningful long-term shareholder value. On behalf of Matt, Vikas, and all of us at Healthcare Services Group, Sarah, thank you for hosting the call today, and thank you to everyone for joining.

Speaker 1

Thank you. This concludes today's conference call. Thank you for joining. You may now disconnect.