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Operator
Good day, everyone, and welcome to the Healthcare Services Group 2012 third-quarter conference call. The discussion to be held and any schedules incorporated by reference into it will contain forward-looking statements within the meaning of Section 27 A of the Securities Act of 1933 as amended, and Section 21-E of the Securities Exchange Act of 1934, the Exchange Act, as amended, which are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, our beliefs and assumptions. Words such as believes, anticipates, plans, expects, will, goals and similar expressions are intended to identify forward-looking statements. The inclusion of forward-looking statements should not be regards as a representation by us that any of our plans will be achieved. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Such forward-looking information is also subject to various risks and uncertainties.
Such risks and uncertainties include but are not limited risks arising from our providing services exclusively to the healthcare industry, primarily providers of long term care, credit and collection risks associated with this industry from having several significant clients who each individually contributed to at least 3%, with one as high as 7%, to our total consolidated revenues in the three and/or nine month period ended September 30, 2012. Our claims experience related to Workers Compensation and general liability insurance, the effects of changes in or interpretations of laws and regulations governing the industry, our workforce and services provided, including State and local regulations pertaining to the taxability of our services, and the Risk Factors described in our Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2011 in Part 1 thereof, under government regulation of clients, competition, and service agreements and collections, and under Item IA, Risk Factors.
Many of our clients revenues are highly contingent on Medicare and Medicaid reimbursement funding rates, which Congress and related agencies have affected through the enactment of a number of major laws and regulations during the past decade, including the March 2010 enactment of the Patient Protection and Affordable Care Act, and the Healthcare and Education Reconciliation Act of 2010. Most recently on July 29, 2011, the United States Center for Medicare Services issued final rulings, which among other things, reduced Medicare payments to nursing centers by 11.1% and changed the reimbursement for the provision of group rehabilitation therapy services to Medicare beneficiaries. Currently the US Congress is considering further changes or revising legislation relating to healthcare in the United States, which among other initiatives, may impose cost containment measures impacting our clients. These laws and proposed laws and forthcoming regulations have significantly altered or threatened to significantly alter overall government reimbursement funding rates and mechanisms. The overall effect of these laws and trends in the long term care industry has affected and could adversely affect the liquidity of our clients, resulting in their inability to make payments to us on agreed upon payment terms. These factors, in addition to delays in payments from our clients have resulted in and could continue to result in significant additional bad debts in the near future.
Additionally, our operating results would be adversely affected if unexpected increases in the cost of labor and labor-related costs, materials, supplies and equipment used in performing services could not be passed on to our clients. In addition, we believe that to improve our financial performance we must continue to obtain service agreements with our new clients, provide new services to existing clients, achieve modest price increases on current service agreements with existing clients, and maintain internal cost reduction strategies in our various operational levels. Furthermore, we believe that our ability to sustain the internal development of managerial personnel is an important factor impacting future operating results and successfully executing projected growth strategies. Also, as a reminder, today's call is being recorded, and at this time I'd like to turn the conference over to Mr. Daniel McCartney, Chairman and CEO of Healthcare Services Group. Please go ahead, sir.
- Chairman & CEO
Okay, thank you and good morning, everybody. Thank you for joining us. We released our third-quarter results yesterday after the close, and will be filing our 10-Q the week of the 23rd, but for the third quarter, our revenues were up 24% to $272 million. For the nine-month period, revenues increased 25% to $800 million. Housekeeping and laundry grew at about 14%, and foodservice better than 58% for the quarter, and 14% and 56% for the nine-month period. As we discussed in previous calls, we continue to execute the expansion, the accelerated expansion of foodservice due to the investment we had made in the regional and district management people over the past few years, and their continued improvement in development has allowed us to serve as new foodservice clients within the existing operational structure and to expand more rapidly. In addition, our housekeeping and laundry services continued to grow within our 10% to 15% targeted range.
Quarterly and nine month revenues were all Company records. Our net income increased over 15% for the quarter to $11.5 million or $0.17 a share compared to $0.15 a share in 2011 in the third quarter, when our tax rate was 34% in 2011. Net income increased 14% to $31 million or $0.47 a share for the nine-month period. Again, all Company records. The direct costs for the third quarter were modestly below 86%, as new business we started and the new districts and regions kept making progress in implementing the changes, getting the jobs, running on budget more timely, without taking their eye off the ball with the existing clients. We expect to continue that progress with the new business margin improvement, while giving the proper attention to the older clients, and we expect to work towards keeping our direct costs below 86% and working our way down over the next few quarters, closer to 85%.
The SG&A costs were reported at 7.6% for the third quarter, due to a gain of $774,000 in the deferred compensation accounts that we hold for our Management people, increased SG&A expense, about 30 basis points, so the real or adjusted SG&A expense was about 7.3%, slightly above our range of 7% to 7.25%. We expect the SG&A expense to stay in the 7% to 7.25% range going forward. And as discussed in past quarters, the SG&A also includes the changes in some states like Ohio, Michigan and Texas to a gross receipts tax rather than in our tax provision. It also reflects the additional resources we added to the payroll and benefits department, which allows us to meet the new higher personnel record keeping requirements in this regulatory environment, and be more efficient in the insurance areas and employee benefits, and to be prepared to benefit from certain job tax credits that we previously benefited from, when and if the credits are approved from Washington again.
Our earnings from operation are reported as $17.6 million, but adjusting for the deferred compensation, our earnings and pre-tax income was up over 21%. Investment income is reported at $962,000 but again, with the adjustment from the SG&A, our real Company investment income was about $200,000 for the quarter. As I previously mentioned, our tax rate was 38%, up from 34% in the third quarter of 2011, as the worker opportunity and other tax credits just haven't been finalized for fiscal year 2012. On the balance sheet, we ended the quarter with about $74 million in cash and securities, still no debt. A current ratio are better than 4 to 1 and the receivables remained in good shape, well below our target of 60 days, and finally the Board approved an increase to the dividend to $0.165 a share split adjusted. The cash flow, cash balances and earnings per share for the quarter more than support it, and since the tax law is still in place, at least for 2012, we still feel it's the most tax efficient way to get the free cash flow back to the shareholders. It's our 37th increase in the dividend since it was recently instituted in 2003, and that's after four, three-for-two stock splits, so with that abbreviated summary, I'll open it up for questions.
Operator
(Operator Instructions)
We'll take our first question from Ryan Daniels with William Blair.
- Analyst
Let me start, the first one on the forward outlook. Obviously, the big question here on the revenue line is you start going into some very difficult comparisons, given the huge new business you took on in the fourth quarter, and I know you've always stuck with a double-digit top line growth rate. Could we see that dip a bit over the next quarter or two, just given the bolus of business you had in Q4 and the difficult comp that creates?
- Chairman & CEO
We think as long as -- housekeeping and laundry is really unaffected, so their target is still 10% to 15%. We think we'll be at a more accelerated rate than even prior to the expansion in the fourth-quarter 2011 in foodservice, although it's not going to be at the 50% rate that we benefited, but we still think it will be higher than our average rate. And as long as we digest the new business, keep demonstrating we continue to operate effectively financially and operationally, I'd say by the middle of next year we'll be able to more confidently say -- okay, we think our sustained growth is going to be at 15% to 20% instead of the 10% to 15% historically, with primarily foodservice being the more ambitious driver. But I think we'll do better than our historical rates, maybe not each quarter, but certainly at the high end of the range for the next quarter or two. And the pay-off will be going forward when we have the management depth, play a little catch up, and be able to demonstrate what the sustained growth rate will be, but it will be no less than we experienced in double digits historically.
- Analyst
Okay, that's very helpful color. And maybe as a follow on to that, can you talk a little bit about your management capacity and utilization specifically in the foodservices division? I know you've had a little bit of excess capacity in some regions. Do you still feel pretty good about taking on that new business, or maybe an update on the talent pool there and how that's progressed?
- Chairman & CEO
Yes, I think foodservice, in our basic model, 8 to 12 facilities per district, 4 to 6 districts per region, for example, a cookie cutter that we use, in foodservice it's still under-utilized, although nowhere near what it's been with the recent expansion that we've had. But some areas are a little more sparse than others, some areas have needed more time to absorb the new business and operate effectively. So we've really calibrated it more district- and region-specific, as opposed to across the board, but they're nowhere near at maximum capacity as housekeeping and laundry is. So that's why we're confident we'll keep accelerating the foodservice expansion, because the management resources are still, in our method, underutilized.
- Analyst
Okay, great, and then two more quick ones. The first -- just curious if you have the current metric of how penetrated the core housekeeping linen and laundry client base is with foodservices at this point, still under 25% or so?
- Chairman & CEO
Yes. We're still doing maybe about 700 of the 3,400 or so clients' foodservice, so there's still pent-up demand within our existing client base. And frankly, the controlling factor is how well our districts and regions can operate effectively, as to how quickly we expand that within the client base.
- Analyst
Okay, perfect. I'll hop off and let some others get in. Thanks, Dan.
- Chairman & CEO
Thanks, Ryan.
Operator
Next we'll hear from Michael Gallo with CL King.
- Analyst
A couple questions. Dan, you have really digested now the foodservice additions, from Q4 to Q1, seen the margins improve there significantly. Are we at the point where you can get ready to tuck in a significant number again, maybe not as many as the fourth quarter, but I know you had kind of slowed things down a little bit as you digested some of that new business?
- Chairman & CEO
I think it will be more -- it will be on the higher end of the ranges. It won't be what we've experienced the fourth and first quarter of 2012, and the fourth quarter of 2011, but it will be at the higher range, because, not only of the demand, but our ability to manage it effectively. But it won't be at the rate of 50% that we've enjoyed, especially when we started those new buildings, and primarily in the fourth and first quarter.
- Analyst
Okay, great. Second question, Dan. You seemed to express maybe a little more confidence on this call, as we have seen the margins improve, at getting the direct cost down to 85%. How much of that is just getting more comfortable with the foodservice versus just some further improvements or better management of the housekeeping, linen and laundry business, and how quickly do you think you can get there?
- Chairman & CEO
The margin improvement has primarily been improvement in the foodservice. We were eating the cost of the middle management people for years, while they improved, got better in our structure, became more solidified throughout the country. And we were eating that cost, wanted to spread it out over the right amount of properties, and there's still room for us to improve that.
And then, at the facility level with the start-up costs being out of the way, where we're the most inefficient with additional labor or start-up costs for inventory or food inventory, and address that, our margin improvement in foodservice came from both. Utilization at district and regional management people with the right complement of properties, and then without the significant start-ups, getting those new jobs on budget more timely after the initial inefficiencies usually takes us 30 to 60 days. Sometimes, like the first quarter this year, took us 90 days to get the new business on budget, but now it's done in a more business-as-usual fashion like housekeeping and laundry, and we think we'll keep chipping away and get the direct costs closer to 85% over the next few quarters.
- Analyst
Thanks very much, Dan.
Operator
Next we'll hear from James Terwilliger with The Benchmark Company.
- Analyst
Real quick, when I look at your bottom-line growth, you're putting up great numbers, you had a nice quarter, right in line with everyone's estimates, but the bottom-line growth probably isn't as robust because of this tax rate issue. We're going from a 38% tax in 2012 back to a 34% tax in 2011. Can you update me and everyone on the worker opportunity tax credit? Is there any visibility with that, and what should we be looking for our tax rate in 2013?
- Chairman & CEO
Well, we wrote our Congressman, but we don't know if we have that much juice. In all seriousness, we're optimistic it's going to pass, and every part of the long-term care lobby indicates that it will, but probably not until after the election. And in the meantime, we're providing our tax rate as if it's not going to pass. And if it does, we'll be in good shape, and certainly the beneficiary, as we were in 2011. But I'd be reluctant to predict anything, frankly.
- Analyst
So for 2013 then, it would be conservative to assume the current tax rate going forward?
- Chairman & CEO
Yes, and that's what we're doing, until it is changed.
- Analyst
Okay, and then real quick, if we look at housekeeping, and laundry and linen, you're in that 10% to 15% historical growth rate. The foodservice has been absolutely on fire. Did you say 58% foodservice revenue growth this quarter?
- Chairman & CEO
Yes.
- Analyst
And you're doing a fantastic job there. You are going to come up against maybe some more difficult comps as we move into next year. If we look at the foodservice, do you think that business can grow 20% to 25%, and then maybe for the Company as a whole, a blended average would be more like 15% revenue growth in 2013?
- Chairman & CEO
That's what we're anticipating, but as I tried to caution everybody, I just want to make sure we absorb the new business and the growth that we've experienced effectively, without some of the Company's operational metrics being compromised. And then I'd say by the middle of next year, we'll say what the sustainable growth rate could be going forward. But certainly, it will be higher than our historical average the next few quarters, just because of what we've been doing, and capacity we had in the foodservice organization, and the pent-up demand. I think by the middle of next year, it will be more -- start-ups will be done, we'll have solidified the operational performance and the operational personnel throughout the country, and throughout the 10 divisions. And then we'll be able to more confidently say -- okay, this is what we think our sustained growth rate will be going forward, but it will be at a more accelerated rate, not as high as 50%, but at a more accelerated rate the next few quarters without doing anything exciting.
- Analyst
Okay, excellent. Well, thanks for taking my question, and great job with foodservice, and nice quarter, Dan. Take care.
Operator
Next we'll hear from AJ Rice with UBS.
- Analyst
First, maybe just on the housekeeping. Obviously in the quarter, you came in toward the high end of your targeted growth rate, and I think generally the feeling has been that housekeeping would be more toward the lower end. Can you comment on what you saw that ended up driving the stronger performance there, than maybe has been trend line?
- Chairman & CEO
I think with the housekeeping and laundry, I would say two things, and I don't have any empirical data to support this. But I think with foodservice expansion, frankly, the competitive juices in housekeeping and laundry, guys were maybe a little bit more attentive than they would have been otherwise, as far as the growth opportunities were concerned. The demand for the services, even in housekeeping and laundry, although recently foodservice got most of the attention because of the dramatic change in expansion, the demand for housekeeping and laundry services has been as great as it's ever been, too. The constraint on how quickly we can expand that is the development of management people. We were able to do it in foodservice more aggressively because we had built-in capacity of management people that were underutilized, but housekeeping and laundry, it's much less the case.
But we think that housekeeping and laundry, it's sometimes quarter to quarter the luck of the draw. That's why we have such a wide range of the revenue impact. And not to get too far in the weeds, but for example, you add properties in the higher-wage states, it has a bigger impact on revenue because it's so wage-rate driven. So facilities in the Northeast with higher wages, a 200-bed facility could be 3 times the revenue that the same-size property staffed exactly the same way in Omaha with a lower wage rate would be. So depending on where we get the new properties, it impacts the effect on revenue.
But I think housekeeping and laundry, I think it's safe and conservative to say it will stay in the 10% to 15% range; hopefully on the higher end, but certainly within that range. And foodservice will still grow at a more dramatic rate because of the management capacity, not because of any difference in demand for the services.
- Analyst
Okay, and then maybe I'll just ask you about commodities. Obviously you're expressing some optimism about gross-margin trends potentially, but the commodity price, particularly in dietary, continue to bounce around. Can you comment on where you stand there, and what new opportunities to manage that may be presenting themselves?
- Chairman & CEO
I think, first of all, as we become more attractive to the food distributors as a client, the [custom, more] volume purchasers, and more educated purchasers as well, to tell you the truth, as far as some of the national account status we've been able to achieve with different rebate programs, et cetera, we think we're in much better shape as far as being impacted less than our clients, as far as commodity cost changes. But a few years ago, some of you might remember, our trigger in our service agreements typically had been triggered by the wage rate increase, because we match and mirror the wage rate and benefits that if a customer gave a 3% increase, that would trigger an increase to our contract price, and we really did foodservice the same way. In 2008 and 2009, the last time commodity costs were going up more dramatically, the commodity cost increases were going up more rapidly than the wage rate accelerated or allowed us to, but then we went back to the client to get those costs covered.
The argument is -- had we not been there, they would be experiencing the same increase. They're all at-will contracts, and we're only there because we're in the clients' best interest, so we aren't going to be trapped with commodity costs outstripping our contract price. Now, some of the contracts also are more explicit with a CPA accelerator in the service agreements on top of the labor trigger, so if the commodity costs go up, we pass the cost to the client, we sit down and meet them, go over what the impact will be. They would be experiencing the same impact. We are not making it up, and we feel that we're in good shape to cover ourself on both areas.
- Analyst
Okay, thanks a lot.
Operator
That is all the time that we do have for questions. I would like to turn the conference back over to Mr. McCartney for any additional or closing remarks.
- Chairman & CEO
Okay, thank you again. Thanks, everybody, for joining us. But going into the fourth quarter and the remainder of the year, we expect to continue to expand our client base in housekeeping and laundry. In this environment, even though we've been doing it a long time, the demand for the service is still as great as it's ever been. We'll continue to control our growth, and attempt to balance the expansion with our ability to manage it effectively and timely.
It remains of utmost importance to us to balance the clients' satisfaction measurements as we digest the increased amount of new business, and operate it all satisfactorily to the customer, and on budget. We look to make certain the recent expansion continues to operate, improve the margins, primarily, again, in foodservice, and expand the foodservice margins as we grow the client base, but in a controlled way.
Since we're now more confident in the consistency of the newest regional- and district-management people in dining services and all areas, we'll more fully utilize the management capacity, get them closer to our model, and that's where the bulk of the margin improvement is going to come from. We have to keep the attention on the start-ups, but not take our eye off the ball with the existing client base.
We'll look to keep the direct costs below 86%, work our way down to 85%. And the SG&A costs are going to stay in the 7% to 7.25% range. We may get some efficiencies, but if I were going to be conservatively modeling it, that's where I'd expect us to be, excluding any deferred-compensation impact. Our tax provision is going to remain at about 38% until Congress finalizes the tax credit programs we've discussed, but in our business, frankly, the demand for the services is as strong as ever, in all services.
We believe we never had better management people and a better, more consistent management structure in both divisions in the history of the Company. All of the other trends are still in our favor -- cost containment, demographics, et cetera, so, for us, these are pretty good times. Thank you for joining us, and onward and upward.
Operator
That does conclude today's teleconference. Thank you all for joining.