UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

Form 10-K
 þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20132016
 ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                    
Commission file number: 0-12015
 
 
 HEALTHCARE SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2018365
(State or other jurisdiction of
incorporated incorporation or organization)
 (IRSI.R.S. Employer Identification No.)
  
3220 Tillman Drive, Suite 300, Bensalem, PA 19020
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code:
(215) 639-4274

Securities registered pursuant to Section 12(b) of the 1934 Act:
Common Stock ($.01 par value) The NASDAQ Global Select Market
Title of Classeach class Name of each exchange on which securities registered
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES  þ    NO  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES  ¨    NO  þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES  þ    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES  þ    NO  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer  ¨ Smaller reporting company  ¨
      
(Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES  ¨    NO  þ
The aggregate market value of the voting stock (Common Stock, $.01 par value) held by non-affiliates of the Registrant as of the close of business on June 30, 20132016 was approximately $1,183,606,0002.15 billion based on the closing sale price of the Common Stock on the NASDAQ National Global Select Market on that date. The determination of affiliate status is not a determination for any other purpose. The Registrant does not have any non-voting common equity authorized or outstanding.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock (Common Stock, $.01 par value) as of the latest practicable date (February 19, 2014)(February 21, 2017). 70,110,00072,812,000

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Registrant’s Annual Meeting of Shareholders to be held on May 27, 201430, 2017 have been incorporated by reference into Parts II and III of this Annual Report on Form 10-K.

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Healthcare Services Group, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 20132016

TABLE OF CONTENTS

PART I 
PART II 
PART III 
PART IV 



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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E 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,” “goal,” and similar expressions are intended to identify forward-looking statements. The inclusion of forward-looking statements should not be regarded 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 to, risks arising from our providing services exclusively to the health care industry, primarily providers of long-term care; credit and collection risks associated with this industry; from having several significant clients who each individually contributed at least 3%over 5%, with one as high as 5% to9.5%, of our total consolidated revenues for the year ended December 31, 2013; risks associated with our acquisition of Platinum Health Services, LLC,2016; 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 other labor related matters such as minimum wage increases; continued realization of tax benefits arising from our corporate reorganization and self-funded health insurance program; risks associated with the reorganization of our corporate structure; and the risk factors described in Part I in this report under “Government Regulation of Clients,” “Competition” and “Service Agreements/Agreements and Collections,” and under Item IA “Risk Factors.” Many of our clients’ revenues are highly contingent on Medicare, Medicaid and other payors’ 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 Health Care and Education Reconciliation Act of 2010. In July 2011, the United States Center for Medicare Services (“CMS”) issued final rulings which, among other things, reduced (effective October 1, 2011) Medicare payments to nursing centers by 11.1% and changed the reimbursement for the provision of group rehabilitation therapy services to Medicare beneficiaries. In January 2013, the U.S. Congress enacted the American Taxpayer Relief Act of 2012, which delayed automatic spending cuts of $1.2 trillion, including reduced Medicare payments to plans and providers up to 2%. These discretionary spending caps were originally enacted under provisions in the Budget Control Act of 2011, an initiative to reduce the federal deficit through the year 2021, also known as “sequestration.” The sequestration went into effect starting March 2013. In December 2013, the U.S. Congress enacted the Bipartisan Budget Act of 2013, which reduces the impact of the sequestration over the next two years, beginning in fiscal year 2014 and extended the reduction in Medicare payments to plans and providers for two years through the year 2023. In addition, the U.S. Congress and the executive branch of the government may consider further changes or revising legislation relating to health care in the United States which, among other initiatives, may impose cost containment measures impacting our clients. These enacted laws, proposed laws and forthcoming regulations have significantly altered, or threaten to 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 clients and/or clients in bankruptcy or clients for which we are in litigation to collect payment, 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 costs 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 new clients, retain and provide new services to existing clients, achieve modest price increases on current service agreements with existing clients and maintain internal cost reduction strategies at 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 executingthe successful execution of our projected growth strategies.


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PART I

References made herein to “we,” “our,” “us”, orIn this Annual Report on Form 10-K for the “Company” includeyear ended December 31, 2016, Healthcare Services Group, Inc. and(together with its wholly ownedwholly-owned subsidiaries, Huntingdon Holdings, Inc. and Healthcare Staff Leasing Solutions, LLC.included in Exhibit 21 which has been filed as part of this Report) is referred to using terms such as the “Company,” “we,” “us” or “our.”

Item I.  Business.

General

The Company is a Pennsylvania corporation, incorporated on November 22, 1976. We provide management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary service departments of the health care industry, including nursing homes, retirement complexes, rehabilitation centers and hospitals located throughout the United States. Based on the nature and similarities of the services provided, our business operations consist of two business segments (Housekeeping and Dietary). We believe that we are the largest provider of our services to the long-term care industry in the United States, rendering such services to over 3,0003,500 facilities in 48 statesthe continental United States as of December 31, 2013.2016. We provide our Housekeeping services to essentially all of our client facilities and we provide Dietary services to approximately 800 of suchover 1,000 facilities. Although we do not directly participate in any government reimbursement programs, our clients’clients receive government reimbursements are subjectrelated to government regulation.Medicare and Medicaid. Therefore, they are directly affected by any legislation and regulations relating to Medicare and Medicaid reimbursement programs.

As of December 31, 2013, we operate two wholly-owned subsidiaries, Huntingdon Holdings, Inc. (“Huntingdon”) and Healthcare Staff Leasing Solutions, LLC (“Staff Leasing”). Huntingdon invests our cash and cash equivalents and manages our portfolio of marketable securities. Staff Leasing is an entity formed in 2011 to offer professional employer organization (“PEO”) services to potential clients in the health care industry. As of December 31, 2013, we have PEO service contracts in several states.

Segment Information

The information called for herein is discussed below in Description of Services, and within Item 8 of this Annual Report on Form 10-K under Note 14 of Notes to Consolidated Financial Statements for the years ended December 31, 2013, 20122016, 2015 and 2011.2014.

Description of Services

We provide management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary service departments of the health care industry.

We are organized into, and provide our services through two reportable segments: housekeeping, laundry, linen and other services (“Housekeeping”), and dietary department services (“Dietary”). The operating results from our PEO service contracts are included in our Housekeeping segment as these services include housekeeping and laundry personnel. The Company’s corporate headquarters provides centralized financial management and support, legal services, human resources management and other administrative services to the Housekeeping and Dietary business segments.

Housekeeping consists of the managing of the client’s housekeeping department which is principally responsible for the cleaning, disinfecting and sanitizing of patient rooms and common areas of a client’s facility, as well as the laundering and processing of the personal clothing belonging to the facility’s patients. Also within the scope of this segment’s service is the responsibility for laundering and processing of the bed linens, uniforms and other assorted linen items utilized by a client facility.

Dietary consists of managing the client’s dietary department which is principally responsible for food purchasing, meal preparation and providing professional dietitian consulting services, which includes the development of a menu that meets the patient’s dietary needs. We began Dietary operations in 1997.

Both segments provide our services primarily pursuant to full service agreements with our clients. In such agreements, we are responsible for the management and hourly employeesof the department serviced, employing the Housekeeping or Dietary personnel located at our clients’ facilities.facilities and providing certain supplies. We also provide services on the basis of a management-only agreementagreements for a very limited number of clients. Under a management-only agreement, we provide management and supervisory services while the client facility retains payroll responsibility for the non-supervisory staff. Our agreements with clients typically provide for renewable one year service terms, cancelable by either party upon 30 to 90 days’ notice after an initial period of 60 to 120 days.

We typically adopt and follow our clients’ employee wage structure, including policies of wage rate increases, and pass through to the initial 90-day period.client any labor cost increases associated with such wage rate adjustments.

Our labor force is interchangeable with respect to each of the services within Housekeeping. OurHousekeeping, while our Dietary labor force with respect to Dietary is specific to it. There are many similarities in the nature of the services performed by each segment. However,Dietary operations. In addition, there are some differences in the specialized expertise required of the professional management personnel responsible for delivering the services of the respective segments. We believe the services of each segment provide opportunityopportunities for growth.

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An overview of each of our segments follows:

Housekeeping

Housekeeping services.  Housekeeping services is our largest service sector, representingrepresented approximately 45%61.3%, or $514,180,000$957.1 million, of consolidated revenues in 2013. This service involves the management of2016. The services provided under this segment include managing the client’s housekeeping department which is principally responsible for the cleaning, disinfecting and sanitizing of resident rooms and common areas in our clients’ facilities. In providing services to any givenof a client’s facility, as well as the laundering and processing of the bed linens, uniforms, resident personal clothing and other assorted linen items utilized at a client facility. Upon beginning service with a client facility, we typically hire and train the hourly employees that were previously employed by such facility. We normallyfacility and assign twoan on-site managers to each facilitymanager to supervise and train hourlythe front line personnel and coordinate housekeeping services with other facility support functions in accordance with the direction provided by the client facility’s administrator.request. Such management personnel also oversee the execution of a varietyvarious of quality and cost-control procedures including continuous training and employee evaluation, and on-site testing for infection control. The on-site management team also assists the facility in complying with federal, state and local regulations.

Laundry and linen services.  Laundry and linen services represent approximately 21% or $241,540,000 of consolidated revenues in 2013. Laundry services are under the responsibilities of the housekeeping department and involve the laundering and processing of the residents’ personal clothing. We provide laundry services to mostly all of our housekeeping clients. Linen services involve providing, laundering and processing of the sheets, pillow cases, blankets, towels, uniforms and assorted linen items used by our clients’ facilities. At some facilities that utilize our laundry and linen services, we install our own equipment. Such installation generally requires an initial capital outlay by us ranging from $5,000 to $100,000 depending on the size of the facility, installation and construction costs, and the cost of equipment required. We could incur relocation or other costs in the event of the cancellation of a linen service agreement where there was an investment by us in a corresponding laundry installation. The hiring, training and supervision of the hourly employees who perform laundry and linen services are similar to, and performed by the same management personnel who oversee the housekeeping services hourly employees located at the respective client facility. In some instances we own linen supplies utilized at our clients’ facilities and therefore, maintain a sufficient inventory of linen supplies to ensure their availability.

Maintenance and other services.  Maintenance services consist of repair and maintenance of laundry equipment, plumbing and electrical systems, as well as carpentry and painting. This service sector’s total revenues of $3,373,000 represent less than 1% of consolidated revenues.

Laundry installation sales.  We (as a distributor of laundry equipment) sell laundry installations to our clients, which typically represents the construction and installation of a turn-key operation. We generally offer payment terms, ranging from 36 to 60 months. During the years 2011 through 2013, laundry installation sales were not material to our operating results as we prefer to own such laundry installations in connection with performance of our service agreements.

HousekeepingHousekeeping’s operating performance is significantly impacted by our management of our costs of labor. Such costs of labor accountcosts. Labor accounted for approximately 80% of operating costs incurred at a facility service location, as a percentage80.2% of Housekeeping revenues. Changes in employee compensation resulting from legislative or other

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governmental actions, anticipated staffing levels, and other unforeseen variations in our use of labor at a client service location will result in volatility ofmay adversely impact these costs. Additionally,Similarly, an increase in the costs of supplies, including linen costs, consumed in performing Housekeeping services including linen costs, are affectedmay impact Housekeeping’s operating performance. In 2016, the cost of Housekeeping supplies as a percentage of Housekeeping revenues was 7.8%. Generally, the cost of such supplies is dictated by specific product specific market conditions, and thereforewhich are subject to price volatility. Generally, this volatility isfluctuations influenced by factors outside of our control and is unpredictable.control. Where possible, we try to obtainnegotiate fixed pricing from vendors for an extended period of time on certain supplies to mitigate such pricing volatility. Although we endeavor to pass on such increases in our costs of labor and supplies to our clients, the inability to attain such increases may negatively impact Housekeeping’s profit margins.price fluctuations.

Dietary

Dietary services.  We began providing dietary services in 1997. Dietary services represented approximately 34%38.7%, or $390,797,000$605.5 million, of consolidated revenues in 2013.2016. Dietary consists of managing the client’s dietary department which is principally responsible for food purchasing, meal preparation and providing professional dietitian consulting services, which includes the development of a menumenus that meetsmeet the patient’s dietary needs.needs of residents. On-site management is responsible for all daily dietary department activities, with regular support being provided by a district managerDistrict Manager specializing in dietaryDietary services, as well as a registered dietitian. We also offer clinical consulting services to facilities to assist them in cost containment and to promote improvement in their dietary department service operations.

Dietary operating performance is also impacted by price volatilityfluctuations in costs of labor and suppliessupply costs resulting from similar factors discussed above in Housekeeping. The primary difference in impact on Dietary operations from price volatility inIn 2016, the costs of labor

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and food-related supplies is that such costs representrepresented approximately 52%53.8% and 40%38.0% of Dietary revenues, respectively. In contrast, labor is approximately 80% of operating costs as a percentage of Housekeeping revenue.

Operational Management Structure

By applying our professional management techniques, we generally can contain or controloffer our clients the ability to manage certain housekeeping, laundry, linen, facility maintenance and dietary service costs on a continuing basis.services and costs. We manage and provide our services through a network of management personnel, as illustrated below.

      CEO & President/Chief Operating OfficerDivisional Manager      
      å
Executive Vice President & Senior Vice President
å
Divisional Vice President
(10 Divisions)
å      
      Regional Vice President/Manager/Manager and Director      
      (71 Regions)
å      
      District Manager      
      (338 Districts)
å
Training Manager
å      
      Facility Manager and
Assistant Facility Manager      

Each facility is generallyFacilities are managed by an on-site Facility Manager, an Assistant Facility Manager, and if necessary, additional supervisory personnel. Such facility-level management personnel are responsible for the management of staff, scheduling, procurement, customer service, quality control and overall day-to-day management of the Housekeeping or Dietary function.

Districts typically consistingconsist of eight to twelve facilities are supported by a District Manager and a Training Manager. District Managers bear overall responsibility foroversee the operations of the facilities within their districts. TheyTheir responsibilities include oversight of Facility Managers through management of personnel, operational performance, quality control monitoring, customer satisfaction and adherence to our systems and budgets.

Districts are generally based in close proximityorganized into regions, which are headed by Regional Managers who oversee approximately four to each facility. These managerssix districts. Regional Managers provide activemanagement support, to clients in addition to the support provided by our on-site management team. Training Managers are responsible for the recruitment, training and development of Facility Managers. A division consists of a number of regions within a specific geographical area. Divisional Vice Presidents manage each division. At December 31, 2013 we maintained 71 regions within 10 divisions. Each region is headed by apersonnel management, while ensuring operational performance consistent with our systems and budgets. Regional Vice President/Manager. Most regions also have a Regional Director who assumes primary responsibilityDirectors are primarily responsible for marketing our services within their regions, which involves industry outreach, overseeing and participation in contract negotiation, and working closely with Regional Managers to ensure customer satisfaction and promote retention and growth.

Divisions generally consist of four to six regions and are overseen by Divisional Managers, who are ultimately responsible for all aspects of the respective region. Regional Vice Presidents/Managersoperational, compliance and Directors provide management support to a numberfinancial-based performance of districts within a specific geographical area. Regional Vice Presidents/Managers and Directors report to Divisional Vice Presidents who in turn report to Senior Vice Presidents and/or Executive Vice Presidents. their divisions.

We believe that our divisional, regional and district organizational structure facilitates our ability to best serve and/or sell additional servicesour clients, expand our service offerings to our existing clients as well asand obtain new clients.


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Market

The market for our services consists of a large number of facilities involved in various aspects of the health care industry, including long-term and post-acute care facilities (skilled nursing facilities, residential care and assisted living facilities, etc.) and hospitals (acute care, critical access, psychiatric, etc.).

These facilities primarily range in size from small privatesmaller facilities to facilities with over 500 beds. Such facilities may be specialized or general, privately owned or public, profit or not-for-profit, and may serve patientsresidents on a long-term or short-term basis. We market our services to such facilities after consideration of a variety of factors including facility type, size, location, and service opportunities (Housekeeping or Dietary). The market for our services, particularly in long-term and post-acute care, is expected to continue to grow as the elderly population increases as a percentage of the United States populationages and as government reimbursement policies require increased cost control or containment by the constituents that comprise our target market.


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Marketing and Sales

Our services are marketed at four levels of our organization: at the corporate level by the Chief Executive Officer, President & Chief OperatingExecutive Officer, Executive Vice Presidents and Senior Vice Presidents; at the divisional level by Divisional Vice Presidents; at the regional level by the Regional Vice Presidents/Divisional Managers and Directors; and at the district level by District Managers. We provide incentive compensation to our operational personnel based on achieving financial and non-financial goals and objectives which are aligned with the key elements the Company believes are necessary for it to achieve overall improvement in its financial results, along with continued business development.

Our services are marketed primarily through referrals and in-person solicitation of target facilities. We also utilize direct mail campaigns and participate in industry trade shows, health care trade associations and healthcarehealth care support service seminars that are offered in conjunction with state or local health authorities in many of the states in which we conduct our business. OurSuch programs have been approved for continuing education credits by state nursing home licensing boards in certain states, and are typically attended by facility owners, administrators and supervisory personnel, thus presenting marketing opportunities for us. Indications of interest in our services arising from initial marketing efforts are followed up with a presentation regarding our services and an assessment of the service requirements of the facility. Thereafter, a formal proposal including operational recommendations and recommendations for proposed savings,costs is submitted to the prospective client. Once the prospective client accepts the proposal and signs theexecutes our service agreement, we can set upare structured to timely and efficiently establish our operations on-site within days.and systems at the client facilities.

Government Regulation of Clients

Our clients are subject to government regulation. Congress has enacted a number of major laws during the past several years that have significantly altered or will alter government reimbursement for nursing home services, including the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010. In July 2011, Centers for Medicare and Medicaid Services (“CMS”) issued a final rule that reduced Medicare payments to nursing centers by 11.1% and changed the reimbursement for the provision of group rehabilitation therapy services to Medicare beneficiaries. This new rule was effective as of October 1, 2011. Furthermore, in the coming year and beyond, new proposals or additional changes in existing regulations could be made which could directly impact the governmental reimbursement programs in which our clients participate. As a result, some state Medicaid programs are reconsidering previously approved increases in nursing home reimbursement or are considering delaying or foregoing those increases. A few states have indicated it is possible they will run out of cash to pay Medicaid providers, including nursing homes.

In January 2013, the U.S. Congress enacted the American Taxpayer Relief Act of 2012, which delayed automatic spending cuts of $1.2 trillion, including reduced Medicare payments to plans and providers up to 2%. These discretionary spending caps were originally enacted under provisions in the Budget Control Act of 2011, an initiative to reduce the federal deficit through the year 2021, also known as “sequestration.” The sequestration went into effect starting March 2013. In December 2013, the U.S. Congress enacted the Bipartisan Budget Act of 2013, which reduces the impact of the sequestration over the next two years, beginning in fiscal year 2014 and extended the reduction in Medicare payments to plans and providers for two years through the year 2023.

Although laws and rulings directly affect how clients are paid for certain services, we do not directly participate in any government reimbursement programs. Accordingly, all of our contractual relationships with our clients continue to determine the clients’ payment obligations to us. However, because clients’ revenues are generally highly reliant on Medicare and Medicaid reimbursement funding rates, the overall effect of these laws and trends in the long term care industry have affected and could adversely affect the liquidity of our clients,clients’ cash flows, resulting in their inability to make payments to us on agreed upon payment terms (See(see “Liquidity and Capital Resources” included in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations”).

The prospects for legislative action, both on the federal and state level, (particularly in light of current economic environment affecting government budgets), regarding funding for nursing homes are uncertain. We are unable to predict or to estimate the ultimate impact of any further changes in reimbursement programs affecting our clients’ future results of operations and/or their impact on our cash flows and operations.


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Environmental Regulation

The Company’s operations are subject to various federal, state and/or local laws concerning emissions into the air, discharges into the waterways and the generation, handling and disposal of waste and hazardous substances. The Company’s past expenditures relating to environmental compliance have not had a material effect on the Company and are included in normal operating expenses. These laws and regulations are constantly evolving, and it is impossible to predict accurately the effect they may have upon the capital expenditures, earnings and competitive position of the Company in the future. Based upon information currently available, management believes that expenditures relating to environmental compliance will not have a material impact on the financial position of the Company.


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Service Agreements and Collections

We provide our services primarily pursuant to full service agreements with our clients. In such agreements, we are responsible for ourthe management and hourly employeesof the department serviced, employing the Housekeeping or Dietary personnel located at our clients’ facilities.facilities and providing certain supplies. We also provide services on the basis of a management agreementmanagement-only agreements for a very limited number of clients. In such agreements, our services are comprised ofinvolve providing on-site management personnel, while the hourly andnon-supervisory staff personnel remain employees of the respective client.

We typically adopt and follow the client’s employee wage structure, including its policy Although many of wage rate increases, and pass through to the client any labor cost increases associated with wage rate adjustments. Under a management agreement, we provide management and supervisory services while the client facility retains payroll responsibility for its hourly employees. Substantially all of our agreements are full service agreements. These agreements typically provide for renewable one year terms, cancelable by either party upon 30 to 90 days’ notice after the initial 90-day period. As of December 31, 2013, we provided services to over 3,000 client facilities.

Although the service agreements are cancelable on short notice, we have historically had a favorable client retention rate and expect to continue to maintain satisfactory relationships with our clients. The risks associated with short-term service agreements have not materially affected either our linen and laundry services, which may from time-to-time require capital investment, or our laundry installation sales, which may require us to finance the sales price. Such risks are often mitigated by certain provisions set forth in the agreements entered into with our clients.

As a result of the current economic crisis, many states have significant budget deficits. State Medicaid programs are experiencing increased demand, and with lower revenues than projected, they have fewer resources to support their Medicaid programs. In addition, Federal health reform legislation has been enacted that would significantly expand state Medicaid programs. As a result, some state Medicaid programs are reconsidering previously approved increases in nursing home reimbursement or are considering delaying those increases. A few states have indicated it is possible they will run out of cash to pay Medicaid providers, including nursing homes. Any of these changes would adversely affect the liquidity of our clients, resulting in their inability to make payments to us as agreed upon.

In 2009 and 2010, Federal economic stimulus legislation was enacted to counter the impact of the economic crisis on state budgets. The legislation included the temporary provision of additional federal matching funds to help states maintain their Medicaid programs. This legislation provided states with an extension of this fiscal relief through June 2011, but at a reduced reimbursement rate. In July 2011, CMS issued a final rule that reduced Medicare payments to nursing centers by 11.1% and changed the reimbursement for the provision of group rehabilitation therapy services to Medicare beneficiaries. This new rule was effective as of October 1, 2011. In January 2013, the U.S. Congress enacted the American Taxpayer Relief Act of 2012, which delayed automatic spending cuts of $1.2 trillion, including reduced Medicare payments to plans and providers up to 2%. These discretionary spending caps were originally enacted under provisions in the Budget Control Act of 2011, an initiative to reduce the federal deficit through the year 2021, also known as “sequestration.” The sequestration went into effect starting March 2013. In December 2013, the U.S. Congress enacted the Bipartisan Budget Act of 2013, which reduces the impact of the sequestration over the next two years, beginning in fiscal year 2014 and extended the reduction in Medicare payments to plans and providers for two years through the year 2023. Even if federal or state legislation is enacted to provide additional funding to Medicaid providers, given the volatility of the economic environment, it is difficult to predict the impact of this legislation on our clients’ liquidity and their ability to make payments to us as agreed upon.

We have had varying collection experiencecollections experiences with respect to our accounts and notes receivable. When contractual terms are not met, we generally encounter difficulty in collecting amounts due from certain of our clients. Therefore, weWe have sometimes been required to extend the period of payment for certain clients beyond contractual terms. TheseSuch clients include those who have terminated service agreements and slow payers experiencing financial difficulties. In orderRelated to provide for these collection problems, and the general risk associated with the granting of credit terms, we have recorded bad debt provisions (in an Allowance for Doubtful Accounts) of $1,990,000, $2,160,000$4.6 million, $4.3 million and $2,450,000$4.5 million in the years ended December 31, 2013, 20122016, 2015 and 2011,2014, respectively (See

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(see Schedule II - Valuation and Qualifying Accounts and Reserves for year-end balances). As a percentage of total revenues, these provisions representrepresented approximately 0.2%0.3% for each of the years ended December 31, 20132016, 2015 and 2012 and 0.3% for the year ended December 31, 2011.2014. In making our credit evaluations, in addition to analyzing and anticipating, where possible, the specific cases described above, we consider customer-specific risks as well as the general collection risk associated with trends in the long-term care industry. We also establish credit limits, perform ongoing credit evaluationevaluations and monitor accounts to minimize the risk of loss. NotwithstandingDespite our efforts to minimize credit risk exposure, our clients could be adversely affected if future industry trends change in such a manner as to negatively impact their cash flows, as discussed in “Government Regulation of Clients” and “Risk Factors” in this report. If our clients experience a negative impact in their cash flows, it wouldcould have a material adverse effect on our consolidated results of operations and financial condition.

Competition

We compete primarily with the in-house support service departments of our potential clients. Most healthcarehealth care facilities perform their own support service functions without relying upon outside management firms. In addition, a number of local firms compete with us in the regional markets in which we conduct business. Several national service firms are larger and have greater financial and marketing resources than us, although historically such firms have concentrated their marketing efforts primarily on hospitals, rather than the long-term care facilities typically serviced by us. Although the competition to provide service to health care facilities is strong, we believe that we compete effectively for new agreements, as well as renewals of existing agreements, based upon the quality and dependability of our services and the cost savings we believe we can usually implementsecure for existing and new clients.

Employees

At December 31, 2013,2016, we employed approximately 7,60048,900 people, of which 5,800 were corporate and field management office support and supervisory personnel. Of these employees, approximately 600 held executive, regional/district management and office support positions, and approximately 7,000
Approximately 11% of these employees were on-site management personnel. On such date, we employed approximately 33,000 hourly employees. Many of our hourly employees were previously support employees of our clients. We manage, for a very limited number of our client facilities, the hourly employees who remain employed by those clients.

Approximately 19% of our hourly employees are unionized. The majority of these union employees are subject to collective bargaining agreements that are negotiated by individual client facilities and are assented toby us, so as to bind us as an “employer” under the agreements. In other cases, we are direct parties to the agreements. We may be adversely affected by relations between our client facilities and the employee unions or between us and such unions. We are also a direct party to negotiated collective bargaining agreements covering a limited number of employees at a few facilities serviced by us. We consider our relationship with our employees to be good.

Financial Information about Geographic Areas

Our Housekeeping segment provides services in Canada, although essentially all of its revenues and net income, 99% in each category, are earned in one geographic area, the United States. The Dietary segment provides services only in the United States.

Available Information

Healthcare Services Group, Inc. is a reporting company under the Securities Exchange Act of 1934, as amended, and files reports, proxy statements and other information with the Securities and Exchange Commission (the “Commission” or “SEC”). The public may read and copy any of our filings at the Commissioner’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. Additionally, because we make filings to the Commission electronically, you may access this information at the Commission’s internet site: www.sec.gov. This site contains reports, proxies and information statements and other information regarding issuers that file electronically with the Commission.

Website Access

Our website address is www.hcsg.com. Our filings with the Commission, as well as other pertinent financial and Company information are available at no cost on our website as soon as reasonably practicable after the filing of such reports with the Commission.


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Item 1A.  Risk Factors.

You should carefully consider the risk factors we have described below, as well as other related information contained within this annual report on Form 10-K becauseas these factors could cause the actualmaterially and adversely affect our business, results and ourof operations, financial condition to differ materially from those projected in forward-looking statements.and cash flows. We believe that the risks described below are our most significant risk factors but there may be risks and uncertainties that are not currently known to us or that we currently deemeddeem to be immaterial. Therefore, any such unknown or deemed immaterial risks and uncertainties, as well as those noted below could materially adversely affect our business, financial condition or results of operations and cash flows.

We provide services to several clients which contribute significantly, on an individual as well as aggregate basis, to our total revenues.

We have several clients who each have made a contribution toindividually contributed over 5%, with one as high as 9.5%, of our total consolidated revenues ranging from 3% to 5%.for the year ended December 31, 2016. Although we expect to continue the relationship with these clients, there can be no assurance thereof. The loss, individually or in combination,aggregate, of such clients, or a significant reduction in the revenues we receive from such clients, could have a material adverse effect on the results of operations of our two operating segments. In addition, if any of these clients change or alter current payment terms it could increase our accounts receivable balance and have a material adverse effect on our cash flows and cash and cash equivalents.flows.

Our clients are concentrated in the health care industry which is currently facing considerable legislative proposalssubject to reform it.changes in government regulation. Many of our clients rely on reimbursement from Medicare, Medicaid and other third-party payors. Rates from such payors may be altered or reduced, thus affecting our Clients’clients’ results of operations and cash flows.

We provide our services primarily to providers of long-term and post-acute care. In March 2010, the U.S. Congress enacted the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, and is considering further legislation to reform healthcare in the United States which could significantly impact our clients. In July 2011, CMS issued final rulings which, among other things, reduced, effective October 1, 2011, Medicare payments to nursing centers by 11.1% and changed the reimbursement for the provision of group rehabilitation therapy services to Medicare beneficiaries. In January 2013, the U.S. Congress enacted the American Taxpayer Relief Act of 2012, which delayed automatic spending cuts of $1.2 trillion, including reduced Medicare payments to plans and providers up to 2%. These discretionary spending caps were originally enacted under provisions in the Budget Control Act of 2011, an initiative to reduce the federal deficit through the year 2021, also known as “sequestration.” The sequestration went into effect starting March 2013. In December 2013, the U.S. Congress enacted the Bipartisan Budget Act of 2013, which reduces the impact of the sequestration over the next two years, beginning in fiscal year 2014 and extended the reduction in Medicare payments to plans and providers for two years through the year 2023. Some states have enacted or are considering enacting measures designed to reduce their Medicaid expenditures. We cannot predict what efforts, and to what extent, such legislation and proposals to contain healthcarehealth care costs will ultimately impact our clients’ revenues through reimbursement rate modifications. Congress has enacted a number of major laws during the past decade that have significantly altered, or may alter, overall government reimbursement for nursing home services. Because many of our clients’ revenues are generally highly reliant on Medicare, Medicaid and other third-party payors’ reimbursement funding rates and mechanisms, the overall effect of these laws and trends in the long term care industry have affected and could adversely affect the liquidity of our clients,clients’ cash flows, resulting in their inability to make payments to us on agreed upon payment terms. These factors, in addition to delays in payments from clients have resulted in, and could continue to result in, significant additional bad debts in the future.

FederalChanges to federal health care reform legislation’s eventual impact, including requiring most individuals to have health insurance and establish new regulation on health plans,legislation may adversely affect our operating costs and results of operations.

The Act includes a large number of health-related provisions that become effective overContinued changes to the next several years, including requiring most individualshealth care structure and regulations related to havethe health insurance and establishing new regulations on health plans, effective January 2014. While much ofindustry in the cost of the recent healthcare legislation enacted will occur on or after January 1, 2015 due to provisions of the legislation being phased in over time, changes to our healthcare cost structureUnited States could have ana continuing impact on our operating costs. Providing suchAny requirements to provide additional health insurance benefits to our employees or the payment of penalties if such coverage isbenefits are not provided, would increase our expense. If we are unable to pass-through these charges to our clients to cover this expense, such increases in expense could adversely impact our operating costs and results of operations.


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In addition, often new regulations result in additional reporting requirements for businesses. These and other requirements could result in increased costs, expanded liability exposure, and other changes in the way we provide health care insurance and other benefits to our employees.



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We have clients located in many states which have had and may continue to experience significant budget deficits and such deficits may result in reduction of reimbursements to nursing homes.

Many states in which our clients are located have significant budget deficits as a result of lower than projected revenue collections and increased demand for the funding of entitlements. As a result of these and other adverse economic factors, state Medicaid programs are reconsidering previously approved increases inhave and may continue to revise reimbursement structures for nursing home reimbursement or are considering delaying those increases. Some states have over the past year indicated they may be unable to make entitlement payments, including Medicaid payments to nursing homes.services. Any disruption or delay in the distribution of Medicaid and related payments to our clients will adversely affect their liquiditycash flows and impact their ability to pay us as agreed upon for the services provided.


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The Company has substantial investment in the creditworthiness and financial condition of our customers.

The largest current asset on our balance sheet is our accounts and notes receivable balancesbalance from our customers. We grant credit to substantially all of our customers. Deterioration in the financial condition acrossof a significant component of our customer base could hinder our ability to collect amounts from our customers. The potential causes of such decline include national or local economic downturns, customers’ dependence on continued Medicare and Medicaid funding and the impact of additional regulatory actions. When contractual terms are not met, we generally encounter difficulty in collecting amounts due from certain of our clients. Therefore, weWe have sometimes been required to extend the period of payment for certain clients beyond contractual terms. TheseSuch clients include those who have terminated service agreements and slow payers experiencing financial difficulties. In making our credit evaluations, in addition to analyzing and anticipating where possible the specific cases described above, we consider the general collection risk associated with trends in the long-term care industry. We also establish credit limits, perform ongoing credit evaluationevaluations and monitor accounts to minimize the risk of loss. NotwithstandingDespite our efforts to minimize credit risk exposure, our clients could be adversely affected if future industry trends change in such a manner as to negatively impact their cash flows. If our clients experience a negative impact in their cash flows, it wouldcould have a material adverse effect on our consolidated results of operations, financial condition and cash flows.

We have a Paid Loss Retrospective Insurance Plan for general liability and workers’ compensation insurance.

We self-insure or carry a high deductible general liability and workers’ compensation program and therefore retain a substantial portion of the risk associated with the expected losses under our general liability and workers compensationsuch programs. Under our insurance plans for general liability and workers’ compensation, predetermined loss limits are arranged with our insurance company to limit both our per occurrence cash outlay and annual insurance plan cost. We regularly evaluate our claims pay-out experience present value factor and other factors related to the nature of specific claims in arriving at the basis for our accrued insurance claims estimate. Our evaluation is based primarily on current information derived from reviewing our claims experience and industry trends. In the event that our known claims experience and/or industry trends result in an unfavorable change in initial estimates of costs to settle such claims resulting from, among other factors, the severity levels of reported claims and medical cost inflation, it would have an adverse effect on our consolidated results of operations, financial condition and cash flows. During 2014, the Company recorded a one-time, non-cash adjustment of $37.4 million related to a change in estimate and reserve methodology through the utilization of a third party actuary. Although we engage third-party experts to assist us in estimating appropriate insurance accounting reserves, the determination of the required reserves is dependent upon significant actuarial judgments that have a material impact on our reserves. Changes in our insurance reserves as a result of our periodic evaluation of the related liabilities may cause significant fluctuations in our operating results.

Federal, Statestate and Locallocal tax rules can adversely impact our results of operations and financial position.

We are subject to Federal, Statestate and Locallocal taxes in the United States and Canada.States. Significant judgment is required in determining the provision of income taxes. We believe our income tax estimates are reasonable. Although, if the Internal Revenue Service or other taxing authority disagrees with a taken tax position and upon final adjudication we are unsuccessful, we could incur additional tax liability, including interest and penalty.penalties. Such costs and expenses could have a material adverse impact on our results of operations and financial position. Additionally, the taxability of our services is subject to various interpretations within the taxing jurisdictions of our markets. Consequently, in the ordinary course of business, a jurisdiction may contest our reporting positions with respect to the application of its tax code to our services. A jurisdiction’s conflicting position taken by a state or local taxation authority on the taxability of our services could result in additional tax liabilities which we may not be able to pass on to our clients orand could negatively impact our competitive position in the respective location.that jurisdiction. Additionally, if we or one of our employees fail to comply with applicable tax laws and regulations, we could suffer civil or criminal penalties in addition to the delinquent tax assessment. In the taxing jurisdictions where our services have been determined to be subject to tax, the jurisdiction may increase the tax rate assessed on such services. We endeavorseek to pass-through to our clients such tax increases. In the event we are not able to pass-through any portion of the tax increase, it may have an adverse impact on our gross margin.margin could be adversely impacted.


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Our business and financial results could be adversely affected by unfavorable results of material litigation or governmental inquiries.

We are currently involved in civil litigations and government inquiries which arise in the ordinary course of business. These matters are relatedrelate to, among other things, general liability, payroll or employee-related matters, as well as inquiries from governmental agencies. Legal actions could result in substantial monetary damages as well asand expenses and may adversely affect our reputation and business status with our clients, whether we are ultimately determined to be liable or not. The outcome of litigation, particularly class action and collective action lawsuits and regulatory actions, is difficult to assess or quantify. The plaintiffs in these types of actions may seek recovery of very large or indeterminate amounts, and such amountsestimates may remain unknown for substantial periods of time.

We assess contingencies to determine the degree of probability and range of possible loss offor potential accrual in our financial statements. We would accrue an estimated loss contingency in our financial statements if it were probable that a liability had been incurred and the amount of the loss could be reasonably estimated. Due to the unpredictable and unfavorable nature of litigation, assessing contingencies is highly subjective and requires judgments about future events. The amount of actual losses may differ from our current assessment. As a result of the costs and expenses of defending ourselves against lawsuits or claims, and risks and consequences of legal actions, regardless of merit, our results of operations and financial position could be adversely affected or cause variability in our results compared to expectations.

We primarily provide our services pursuant to agreements which have a one year term, cancelable by either party upon 30 to 90 days’ notice after thean initial90-day 60 to 120 day service agreement period.

We do not enter into long-term contractual agreements with our clients for the rendering of our services. Consequently, our clients can unilaterally decrease the amount of services we provide or terminate all services pursuant to the terms of our service agreements. Any loss of a significant number of clients during the first year of providing services, for which we have incurred significant start-up costs or have invested in an equipment installation, could in the aggregate materially adversely affect our consolidated results of operations and financial position.

We are dependentThe Company’s business success depends on the management experience of our key personnel.

We manage and provide our services through a network of management personnel, from the on-site facility manager upmanagers to our executive officers. Therefore, we believe that our ability to recruit and sustain the internal development of managerial personnel is an important factor impacting future operating results and our ability to successfully execute projected growth strategies. Our professional management personnel are the key personnel in maintaining and selling additional services to current clients and obtaining new clients.

Governmental regulations related to labor, employment, immigration and health and safety could adversely impact our results of operations and financial condition.

Our business is subject to various federal, state, and local laws and regulations, in areas such as labor, employment, immigration, and health and safety. These laws frequently evolve through case law, legislative changes and changes in regulatory interpretation, implementation and enforcement. Our policies and procedures and compliance programs are subject to adjustments in response to these changing regulatory and enforcement environments, which could increase our cost of services provided. Although we have contractual rights to pass cost increases we incur to our clients due to regulatory changes, our delay in, or inability to pass such costs of our compliance with legislative changes and changes in regulatory interpretation or enforcement in general, through to our clients, could have a material adverse effect on our financial condition, results of operations and cash flows.

In addition, if we fail to comply with applicable laws, we may be subject to lawsuits, investigations, criminal sanctions or civil remedies, including fines, penalties, damages, reimbursement, or injunctions. Also, our clients’ facilities are subject to periodic inspection by federal, state, and local authorities for compliance with state and local departments of health requirements. Expenses resulting from failed inspections of the departments that we service could result in our clients being fined and seeking recovery from us, which could also adversely impact our financial condition, results of operations and cash flows.


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We may be adversely affected by inflationary or market fluctuations in thecost of products consumed in providing our services or our cost of labor. Additionally, we rely on certain vendors for housekeeping, laundry and dietary supplies.

The prices we pay for the principal items we consume in performing our services are dependent primarily on current market prices. We have consolidated certain supply purchases with national vendors through agreements containing negotiated prospective pricing. In the event such vendors are not able to comply with their obligations under the agreements and we are required to seek alternative suppliers, we may incur increased costs of supplies.

Dietary supplies, to a much greater extent than Housekeeping supplies, are impacted by commodity pricing factors, which in many cases are unpredictable and outside of our control. Although we endeavorWe seek to pass on to clients such increased costs but sometimes we are unable to do so. Even when we are able to pass on the incremental costs to our clients, from time to time, sporadic unanticipated increases in the costs of certain supply items due to market economic conditions may result in a timing delay in passing on such increases to our clients. It is this type of spike in Dietary supplies’supplies costs that could most adversely affect Dietary’s operating performance. The adverse effect would be realized if we delay in passing on such costs to our clients or in instances where we may not be able to pass such increase on to our clients until the time of our next scheduled service billing review. We endeavorseek to mitigate the impact of an unanticipated increase in such supplies’ costs through consolidation of vendors, which increases our ability to obtain reduced pricing.

Our cost of labor may be influenced by unanticipated factors in certain market areas or increases in the respective collective bargaining agreements of our clients, to whichthat we assent.are a party to. A substantial number of our employees are hourly employees whose wage rates are affected by increases in the federal or state minimum wage rate. We are subject to the Fair Labor Standards Act, which governs such matters as minimum wages, overtime and other working conditions.rates. As collective bargaining agreements are renegotiated, or minimum wage rates increase, which will occur in at least thirteen states in 2014, we may need to increase the wages paid to employees. This may be applicable to not only minimum wagebargaining unit employees but also to employees at wage rates

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which are currently above the minimum wage.covered by such collective bargaining agreements. Although we have contractual rights to pass such union and minimum wage increases through to our clients, our delay in, or inability to pass such wage increases through to our clients could have a material adverse effect on our financial condition, results of operations and cash flows.

Any perceived or real health risks related to the food industry could adversely affect our Dietary segment.

We are subject to risks affecting the food industry generally, including food spoilage and food contamination. Our products are susceptible to contamination by disease-producing organisms, or pathogens, such as listeria monocytogenes, salmonella, campylobacter, hepatitis A, trichinosis and generic E. coli. Because these pathogens are generally found in the environment, there is a risk that these pathogens could be introduced to our products as a result of improper handling at the manufacturing, processing or food service level. Our suppliers'suppliers’ manufacturing facilities and products are subject to extensive laws and regulations relating to health, food preparation, sanitation and safety standards. Difficulties or failures by these companies in obtaining any required licenses or approvals or otherwise complying with such laws and regulations could adversely affect our revenue that is generated from these companies. Furthermore, there can be no assurance that compliance with governmental regulations by our suppliers will eliminate the risks related to food safety.

Additionally, the Company may be subject to liability if the consumption of our food products causes injury, illness or death. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that the Company'sCompany’s products caused injury or illness could adversely affect the Company'sCompany’s reputation.

Events reported in the media, such as incidents involving food-borne illnesses or food tampering, whether or not accurate, can cause damage to the reputation of our dietary segment. In addition, to the extent there is an outbreak of food related illness in any of our client facilities, it could materially harm our business, results of operations and financial condition.

Our investmentsChanges in interest rates and changes in financial market conditions may besubject toresult in fluctuating and even negative returns depending upon interest ratemovementsin our investments, and financial market conditions.could increase the cost of the borrowings under our borrowing agreements.

Although management believes we have a prudent investment policy, we are exposed to fluctuations in interest rates and in the market values of our investment portfolio which could adversely impact our financial condition and results of operations. Our marketable securities are primarily invested in municipal bonds. We believe that our investment criteria, which includes reducinginclude limiting our exposure toconcentrations of investments in individual states,locations’ bonds, requiring certain credit ratings and limitingmonitoring our investments’ duration period, reducesreduce our exposure related to the financial duressdistress and budget shortfalls that many state and local governments currently face. Increases in market interest rates in our borrowing agreements that have variable interest rates could adversely affect our payment obligations and adversely affect our liquidity and earnings.


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MarketInvestor and market expectations regarding our financial performance are high and rely greatly on execution of our growth strategy and related increases in financial performance.

Management believes the historical price increasesperformance of our Common Stock reflect high market expectations for our future operating results. In particular, ourOur ability to attract new clients through organic growth or acquisitions, and retain existing clients, has enabled us to execute our growth strategy and increase market share.share historically, however this cannot be guaranteed in the future. Our business strategy focuses on growth and improving profitability through obtaining service agreements with new clients, providing new services to existing clients, obtaining modest price increases on service agreements with clients and maintaining internal cost reduction strategies at our various operational levels. In respect to providing new services to new or existing clients, our strategy is to achieve corresponding profit margins in each of our segments. If in the event we are not ableunable to continue either historical client revenue and profitability growth rates or projected improvement, in such factors, our operating performance may be adversely affected and the high expectations for our market performance may not be met. Any failure to meet the market’s high expectations for our revenue and operating results may have an adverse effect on the market price of our Common Stock.

Failure to maintain effective internal control over financial reporting could have a material adverse effect on our ability to report our financial results on a timely and accurate basis.

We are required to maintain internal control over financial reporting pursuant to Rule 13a-15 under the Exchange Act. Failure to maintain suchappropriate and effective internal controls over our financial reporting could result in misstatements in our financial statements and potentially subject us to sanctions or investigations by the SEC or other regulatory authorities, orand could cause us to delay the filing of required reports with the SEC and our reporting of financial results. Any of these events could result in a decline in the market price of shares of our common stock.Common Stock. Although we have taken steps to maintain our internal control structure as required, we cannot assure youguarantee that control deficiencies will not result in a misstatement in the future.


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Recent government regulations may impact our ability to distribute dividends or the amount of such dividends to shareholders. Any decrease in or suspension of our dividend could cause our stock price to decline.

We expect to continue to pay a regular quarterly cash dividend. However, our dividend policy and the payment of future cash dividends under the policy are subject to the final determination each quarter by our Board of Directors that (i) the dividend will be made in compliance with laws applicable to the declaration and payment of cash dividends, including Section 1551(b) of the Pennsylvania Business Corporation Law, and (ii) the policy remains in our best interests, which determination will be based on a number of factors, including the impact of changing laws and regulations, economic conditions, our results of operations and/or financial condition, capital resources, the ability to satisfy financial covenants and other factors considered relevant by the Board of Directors. While we have continually increased the amount of our dividends, given these considerations, there can be no assurance these increases will continue and our Board of Directors may increase or decrease the amount of the dividend at any time and may also decide to suspend or discontinue the payment of cash dividends in the future. Any decrease in the amount of the dividend, or suspension or discontinuance of payment of a dividend, could cause our stock price to decline.

We may be unable to successfully integrate the operations of Platinum Health Services, LLC and Platinum Health Services PEO, LLC with our operations.

We acquired the assets of Platinum Health Services, LLC and Platinum Health Services PEO, LLC (collectively "Platinum") on July
12 2013. We have devoted significant management attention and resources to integrating the operations and business practices of Platinum with our existing operating and business practices. Potential difficulties we have or may encounter as part of the integration process include the following:

the ability to retain a substantial number of Platinum's existing clients;
the unanticipated or excessive diversion of management's resources;
the integration of new operations and personnel and the disruption of, or the loss of momentum in, ongoing operations;
the failure to achieve expected financial results;
the inability to implement effective internal controls, procedures and policies for Platinum as required by the Sarbanes-Oxley Act of 2002 within the time periods prescribed thereby;
the inability to successfully integrate Platinum in a manner that permits us to achieve the full revenue and other benefits anticipated to result from our acquisition of its assets; and
the potential unknown liabilities and unforeseen incurred expenses or delays associated with the acquisition.

These and other risks could affect our ability to achieve the anticipated benefits of our acquisition of Platinum. In addition, these and other risks related to our acquisition of Platinum could adversely affect our ability to maintain relationships with customers and employees and have a material adverse effect on our business, financial condition and results of operations. If we were unable to successfully address any of these risks, our overall business could be harmed.


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Item 1B.  Unresolved Staff Comments.

None.

Item 2.  Properties.

We lease our corporate offices, located at 3220 Tillman Drive, Suite 300, Bensalem, Pennsylvania 19020. We also lease office space at other locations in Pennsylvania, Colorado, South Carolina, Connecticut, Georgia, Illinois, California and New Jersey. TheseThe New Jersey office is the headquarters of our subsidiaries, including HCSG Insurance Corp. The other locations serve as divisional or regional offices providing management and administrative services to both of our operating segments in their respective geographical areas.

We are also provided with office and storage space at each of our client facilities.

Management does not foresee any difficulties with regard to the continued utilization of all of the aforementioned premises. We also believe that such properties are sufficient forto support our current operations.

We presently own laundry equipment, office furniture and equipment, housekeeping and laundry equipment, and vehicles. SuchThe office furniture and equipment and vehicles are primarily located at our corporate office, warehouse, and divisional and regional offices. We have housekeeping equipment at all client facilities where we provide services under a full service housekeeping agreement. Generally, the aggregate cost of housekeeping equipment located at each client facility is less than $2,500.approximately $3,000. Additionally, we have laundry installations at approximately 100certain client facilities. Our cost of such laundry installations ranges between $5,000 and $100,000. We believe that such laundry equipment, office furniture and equipment, housekeeping equipment and vehicles are sufficient forto support our current operations.

Item 3.  Legal Proceedings.

In the normal course of business, the Company is involved in various administrative and legal proceedings, including labor and employment, contracts,contractual, personal injury, workers compensation and insurance matters. The Company believes it is not a party to, nor are any of its properties the subject of, any pending legal proceeding or governmental examination that would have a material adverse effect on the Company'sCompany’s consolidated financial condition or liquidity. However, in light of the uncertainties involved in such proceedings, the ultimate outcome of a particular matter could become material to the Company’s results of operations for a particular period depending on, among other factors, the size of the loss or liability imposed and the level of the Company’s operating income for that period.

Item 4.   Mine Safety Disclosures.

Not applicable.


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PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our common stock, $.01 par value (the “Common Stock”), is traded under the symbol “HCSG” on the NASDAQ Global Select Market. As of February 19, 2014,21, 2017, there were approximately 70,110,00072,812,000 shares of our Common Stock outstanding.

The high and low sales price quotations for our Common Stock during the years ended December 31, 20132016 and 2012 ranged2015 were as follows:

 2013
Quarter EndedHigh Low
March 31, 2013$25.84
 $22.40
June 30, 2013$25.95
 $21.60
September 30, 2013$26.54
 $23.61
December 31, 2013$29.53
 $24.80
  2016
Quarter Ended High Low
March 31, 2016 $36.99
 $31.50
June 30, 2016 $41.40
 $36.47
September 30, 2016 $42.18
 $36.58
December 31, 2016 $40.88
 $34.83
 
 2012
Quarter EndedHigh Low
March 31, 2012$22.08
 $17.30
June 30, 2012$21.83
 $17.60
September 30, 2012$23.55
 $19.02
December 31, 2012$24.49
 $21.47
  2015
Quarter Ended High Low
March 31, 2015 $34.75
 $29.93
June 30, 2015 $33.90
 $29.42
September 30, 2015 $35.49
 $31.57
December 31, 2015 $38.49
 $33.10

Holders

We have been advised by our transfer agent, American Stock Transfer and Trust Company, thatAs of February 21, 2017, we had approximately 600500 holders of record of our Common Stock as of February 19, 2014.Stock. Based on reports of security position listings compiled for the 20132016 annual meeting of shareholders, we believe we may have approximately 8,0007,000 beneficial owners of our Common Stock.

Dividends

We have paid regular quarterly cash dividends since the second quarter of 2003. During 2013,2016, we paid regular quarterly cash dividends totaling $46,707,000$53.3 million as detailed below:

Quarter Ended
Quarter EndedMarch 31, 2016 June 30, 2016 September 30, 2016 December 31, 2016
March 31, 2013 June 30, 2013 September 30, 2013 December 31, 2013(in thousands, except per share data)
Cash dividend per common share$0.16625
 $0.16750
 $0.16875
 $0.17000
$0.18125
 $0.18250
 $0.18375
 $0.18500
Total cash dividends paid$11,415,000
 $11,516,000
 $11,829,000
 $11,947,000
$13,158
 $13,293
 $13,398
 $13,493
Record dateFebruary 22
 May 10
 August 16
 November 15
February 19, 2016
 May 20, 2016
 August 19, 2016
 November 18, 2016
Payment dateMarch 15
 June 14
 September 20
 December 20
March 25, 2016
 June 24, 2016
 September 23, 2016
 December 23, 2016

Additionally, on On January 28, 2014,31, 2017, our Board of Directors declared a regular quarterly cash dividend of $0.17125$0.18625 per common share, which will be paid on March 28, 201424, 2017 to shareholders of record as of the close of business on February 21, 2014.17, 2017.

Our Board of Directors reviews our dividend policy on a quarterly basis. Although there can be no assurance that we will continue to pay dividends or the amount of the dividend,dividends, we expect to continue to pay a regular quarterly cash dividend. In connection with the establishment of our dividend policy, we adopted a Dividend Reinvestment Plan in 2003.


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Performance Graph

The graph below matches Healthcare Services Group, Inc.’s ("HCSG") cumulative 5-yearfive-year total shareholder return on common stock with the cumulative total returns of the S&P 500 index, the NASDAQ Composite index and the S&P Health Care DistributorsRussell 2000 index. The graph tracks the performance of a $100 investment in our common stock and in each of the indexesindex (with the reinvestment of all dividends) from December 31, 20082011 to December 31, 2013.2016. The stock price performance included in this graph is not necessarily indicative of future stock price performance.
The Company has not defined a peer group based on either industry classification or financial characteristics. The Company believes it is unique in its service offerings and client base, and among its closest industry peers, it is unique in size and financial profile. As such, the Company opted to utilize the Russell 2000 index to compare our performance to issuers with similar market capitalization.

Comparison of 5 Year Cumulative Total Return*
Among Healthcare Services Group, Inc., the S&P 500 Index,
the NASDAQ Composite Index and the S&P Health Care DistributorsRussell 2000 Index


*$100 invested on December 31, 20082011 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.

Copyright© 2014 S&P,2017 Standard & Poor’s, a division of The McGraw-Hill Companies Inc.S&P Global. All rights reserved.

Copyright© 2017 Russell Investment Group. All rights reserved.

  December 31,
Company/Index 2011 2012 2013 2014 2015 2016
Healthcare Services Group, Inc. $100.00
 $135.33
 $169.87
 $189.76
 $218.52
 $250.36
S&P 500 $100.00
 $116.00
 $153.58
 $174.60
 $177.01
 $198.18
Russell 2000 $100.00
 $116.35
 $161.52
 $169.43
 $161.95
 $196.45
NASDAQ Composite $100.00
 $116.41
 $165.47
 $188.69
 $200.32
 $216.54

  December 31,
Company/Index 2008 2009 2010 2011 2012 2013
Healthcare Services Group, Inc. ("HCSG") $100.00
 $140.35
 $166.11
 $187.54
 $253.80
 $318.57
S&P 500 $100.00
 $126.46
 $145.51
 $148.59
 $172.37
 $228.19
S&P Health Care Distributors $100.00
 $145.55
 $173.84
 $190.14
 $222.01
 $364.04

The stock price performance included in this graph is not necessarily indicative of future stock price performance.


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Item 6.  Selected Financial Data.

The following selected condensed consolidated financial data has been derived from, and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and Notes thereto, included elsewhere in this report on Form 10-K and incorporated herein by reference.

Years Ended December 31,Years Ended December 31,
2013 2012 2011 2010 20092016 2015 2014 2013 2012
(in thousands, except per share amounts)(in thousands, except per share amounts)
Selected Operating Results                  
Revenues$1,149,890
 $1,077,435
 $889,065
 $773,956
 $692,695
$1,562,662
 $1,436,849
 $1,293,183
 $1,149,890
 $1,077,435
Net income$47,129
 $44,214
 $38,156
 $34,441
 $30,342
$77,396
 $58,024
 $21,850
 $47,129
 $44,214
Basic earnings per common share$0.68
 $0.65
 $0.57
 $0.52
 $0.46
$1.06
 $0.81
 $0.31
 $0.68
 $0.65
Diluted earnings per common share$0.67
 $0.65
 $0.56
 $0.51
 $0.46
$1.05
 $0.80
 $0.31
 $0.67
 $0.65
Selected Balance Sheet Date         
Selected Balance Sheet Data
 
 
 
 
Total assets$425,342
 $331,183
 $289,695
 $277,934
 $265,892
$528,446
 $480,949
 $469,579
 $425,342
 $331,183
Stockholders’ equity$285,143
 $229,570
 $217,726
 $213,079
 $208,774
$338,842
 $296,456
 $275,830
 $285,143
 $229,570
Selected Other Financial Data         
 
 
 
 
Working capital$210,089
 $200,182
 $186,734
 $181,244
 $177,453
$313,753
 $269,277
 $213,414
 $207,750
 $200,182
Cash dividends per common share$0.67
 $0.65
 $0.63
 $0.60
 $0.49
Weighted average number of common shares outstanding - basic EPS69,206
 67,511
 66,637
 65,917
 65,376
Weighted average number of common shares outstanding - diluted EPS70,045
 68,485
 67,585
 67,008
 66,429
Cash dividends declared per common share$0.73750
 $0.71750
 $0.69750
 $0.67750
 $0.65750
Weighted average number of common shares outstanding - basic72,754
 71,826
 70,616
 69,206
 67,511
Weighted average number of common shares outstanding - diluted73,474
 72,512
 71,341
 70,045
 68,485

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operation.

You should read the following discussion and analysis of our financial condition and results of our operations in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Our actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled "Risk“Risk Factors," and elsewhere in this report on Form 10-K. We are on a calendar year end, and except where otherwise indicated, below, "2013"“2016” refers to the year ended December 31, 2013, "2012"2016, “2015” refers to the year ended December 31, 20122015 and "2011"“2014” refers to the year ended December 31, 2011.2014.

Results of Operations

The following discussion is intended to provide the reader with information that will be helpful in understanding our financial statements, including the changes in certain key items in comparing financial statements period to period. We also intend to provide the primary factors that accounted for those changes, as well as a summary of how certain accounting principles affect our financial statements. In addition, we are providing information about the financial results of our two operating segments to further assist in understanding how these segments and their results affect our consolidated results of operations. This discussion should be read in conjunction with our financial statements as of December 31, 20132016 and the year then ended and the notes accompanying those financial statements contained herein under Item 8.statements.

Overview

We provide management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary service departments of the health care industry, including nursing homes, retirement complexes, rehabilitation centers and hospitals located throughout the United States. We believe that we are the largest provider of housekeeping and laundry management services to the long-term care industry in the United States, rendering such services to over 3,0003,500 facilities in 48 statesthroughout the continental United States as of December 31, 2013. Although we do not directly participate in any government reimbursement programs, our clients’ reimbursements are subject to government regulation. Therefore, our clients are directly affected by any legislation relating to Medicare and Medicaid reimbursement programs.2016.


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We provide our services primarily pursuant to full service agreements with our clients. In such agreements, we are responsible for the day to day management of the department managers and hourly employeesserviced, employing the Housekeeping or Dietary personnel located at our clients’ facilities.facilities and providing certain supplies. We also provide

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services on the basis of a management-only agreementagreements for a very limited number of clients. Our agreements with clients typically provide for renewable one year service terms, cancelable by either party upon 30 to 90 days’ notice after thean initial 90-day period.period of 60 to 120 days.

We are organized into two reportable segments; housekeeping, laundry, linen and other services (“Housekeeping”), and dietary department services (“Dietary”). At December 31, 2013, Housekeeping is provided at essentially all of our 3,000 client facilities, generating approximately 66% or $759,093,000 of 2013 total revenues. Dietary is provided to over 800 client facilities at December 31, 2013 and contributed approximately 34% or $390,797,000 of 2013 total revenues.

Housekeeping consists of managing the client’s housekeeping department which is principally responsible for the cleaning, disinfecting and sanitizing of patientresident rooms and common areas of a client’s facility, as well as laundering and processing of the personal clothing belonging to the facility’s patients. Also within the scope of this segment’s service is the responsibility for laundering and processing the bed linens, uniforms, resident personal clothing and other assorted linen items utilized byat a client facility.

Dietary consists of managing the client’s dietary department which is principally responsible for food purchasing, meal preparation and providing dietitian consulting professional services, which includes the development of a menumenus that meets the patient’smeet residents’ dietary needs.

At December 31, 2016, Housekeeping services were provided at essentially all of our more than 3,500 client facilities, generating approximately 61.3% or $957.1 million of 2016 total revenues. Dietary services were provided to over 1,000 client facilities at December 31, 2016 and contributed approximately 38.7% or $605.5 million of 2016 total revenues.

The Company’s workers compensation, general liability and certain employee health and welfare insurance programs are provided by HCSG Insurance Corp. (“HCSG Insurance” or the “Captive”), the Company’s wholly owned captive insurance subsidiary. HCSG Insurance provides the Company with greater flexibility and cost efficiency in meeting its insurance needs. In 2015, the Company completed a corporate restructuring by capitalizing three new operating entities and transitioning the Company’s facility-based employees to such entities based on the geography served. As a result, (i) HCSG Insurance provides workers’ compensation, general liability and other insurance coverages to such entities with respect to such transitioned workforce, (ii) such entities provide housekeeping, laundry and dietary services as a subcontracted provider to the Company, and (iii) the Company provides strategic client-service management and administrative support services to such entities.

Our ability to acquire new clients, retain existing clients and increase revenues isare affected by many factors. Competitive factors consist primarily of competing with the potential client utilizing anclients’ usage of in-house support staff, as well as local companies which provideproviding services similar to ours. We are unaware of any other companies, on a national or local level, which have a significant presence or impact on our procurement of new clients in our market. We believe the primary revenue drivers of our business are our ability to obtain new clients and to pass through, by means of service billing increases, increases in our cost of providing the services. In addition to the recoupment of costs increases, we endeavoraim to obtain modest annual revenue increases from our existing clients to preserve currentattain desired profit margins at the facility level. The primary economic factor in acquiring new clients is our ability to demonstrate the cost-effectiveness of our services. This isservices, because many of our clients’ revenues are generally highly reliant on Medicare and Medicaid reimbursement funding rates and mechanisms. Therefore, their economic decision-making process in engaging us is driven significantly by their reimbursement funding rate structure in relation to how their costs are currently being reimbursed and the financial impact on their reimbursement as a result of engaging us for the respective services. AnotherThe primary operational factor is our ability to demonstrate to potential clients the benefit of being relieved of the administrative and operational challenges related to the day-to-day management of their respective department services for which they contract with us.housekeeping and dietary operations. In addition, we must be able to assure new clients that we will be able tocan improve the quality of service whichthat they are providing to their patients and residents. We believe the factors discussed above are equally applicable to each of our segments with respect to acquiring new clients and increasing revenues.

The following table sets forth, for the years indicated, the percentage which certain items bear to consolidated revenues:
 Relation to Consolidated Revenues
Years Ended December 31,
 2016 2015 2014
Revenues100.0% 100.0% 100.0%
Operating costs and expenses:     
Costs of services provided85.7% 86.0% 89.3%
Selling, general and administrative6.7% 7.8% 8.3%
Net investment and interest income0.2% 0.0% 0.1%
Income before income taxes7.8% 6.2% 2.5%
Income taxes2.8% 2.2% 0.8%
Net income5.0% 4.0% 1.7%

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Subject to the factors noted in the Cautionary Statement Regarding Forward Looking Statements included in this report on Form 10-K, we anticipate, our financial performance in 2017 may be comparable to historical ranges, absent non-recurring charges, as they relate to consolidated revenues. The 2015 percentages were negatively impacted by mediated settlements regarding certain labor and employment related matters. The Company agreed to these mediated settlements while denying any violations. The 2014 percentages were negatively impacted by a one-time, non-cash adjustment related to a change in estimate in our self-insurance reserve methodology.

Although there can be no assurance thereof, we believe that in 2017, Dietary revenues as a percentage of consolidated revenues, will increase from its respective 2016 percentages noted above. Furthermore, we expect the sources of growth in 2017 for the respective operating segments will mirror those historically experienced: growth in Dietary is expected to come from our current Housekeeping client base, while growth in Housekeeping will primarily come from obtaining new clients.

Our costs of services can experience volatilityvary and may impact our operating performance inperformance. Management reviews two key cost indicators: costs of labor and costs of supplies.supplies, to monitor and manage such costs. The volatilityvariability of these costs impactsmay impact each segment somewhat differently due to the respective costs as a percentage of that segment’s revenues. Housekeeping is more significantly impacted than Dietary as a consequence of our management of our costs of labor. Suchby costs of labor can accountthan Dietary. Labor costs accounted for approximately 80%80.2% of Housekeeping revenues.revenues in 2016. Dietary labor costs of labor accountaccounted for approximately 52%53.8% of Dietary revenues.revenues in 2016. Changes in wage rates as a result of legislative or collective bargaining actions, anticipated staffing levels, and other unforeseen variations in our use of labor at a client service location or in management labor costs will result in volatilityvariability of these costs. Housekeeping supplies, including linen products, accounted for approximately 7.8% of Housekeeping revenues in 2016. In contrast, supplies consumed in performing our Dietary services is more significant for Dietary, accountingaccounted for approximately 40%38.0% of Dietary revenues, of total operating costs incurred at a Dietary facility service location. Housekeeping supplies, including linen products, account for approximately 8% of Housekeeping revenues. Generally, the volatility offluctuations in these expenses isare influenced by factors outside of our control and isare unpredictable. This is because Housekeeping and Dietary supplies are principally commodity products and are affected by market conditions specific to the respective products. Although we endeavor

Our clients are concentrated in the health care industry and are primarily providers of long-term care. Many of our clients’ revenues are highly reliant on Medicare, Medicaid and third-party payors’ reimbursement funding rates. Legislation can significantly alter overall government reimbursement for nursing home services and such changes, as well as other trends in the long-term care industry, have affected and could adversely affect our clients’ cash flows, resulting in their inability to pass on such increasesmake payments to us in laboraccordance with agreed-upon payment terms. The climate of legislative uncertainty has posed, and supplies costswill continue to pose, both risks and opportunities for us: the risks are related to our clients’ cash flows and solvency, while the opportunities are related to our ability to offer our clients the inability or delay in procuring service billing increases to reflect these additional costs would negatively impact our profit margins.cost stability and cost efficiencies.

As a result of the current economic crisis, many states have significant budget deficits. State Medicaid programs are experiencing increased demand, and with lower revenues than projected, they have fewer resources to support their Medicaid programs. In addition, comprehensive health care legislation under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (together, the “Act”) was signed into law in March 2010. The Act will significantly impact the governmental healthcare programs in which our clients participate, and reimbursements received thereunder from governmental or third-party payors. In July 2011, Centers for Medicare and Medicaid Services (“CMS”) issued a final rule that reduced Medicare payments to nursing centers by 11.1% and changed the reimbursement for the provision of group rehabilitation therapy services to Medicare beneficiaries. This new rule was effective as of October 1, 2011. Furthermore, in the coming year and beyond, new proposals or additional changes in existing regulations could be made to the Act which could directly impact the governmental reimbursement programs in which our clients participate. As a result, some state Medicaid programs are reconsidering previously approved increases in nursing home reimbursement or are considering delaying or foregoing those increases. A few states have

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indicated it is possible they will run out of cash to pay Medicaid providers, including nursing homes. Any negative changes in our clients’ reimbursements may negatively impact our results of operations. Although we are currently evaluating the Act’s effect on our client base, we may not know the full effect until such time as these laws are fully implemented and CMS and other agencies issue applicable regulations or guidance. Additionally, even if federal or state legislation is enacted that provides additional funding to Medicaid providers, given the volatility of the economic environment, it is difficult to predict the impact of this legislation on our clients’ liquidity and their ability to make payments to us as agreed.

In January 2013, the U.S. Congress enacted the American Taxpayer Relief Act of 2012, which delayed automatic spending cuts of $1.2 trillion, including reduced Medicare payments to plans and providers up to 2%. These discretionary spending caps were originally enacted under provisions in the Budget Control Act of 2011, an initiative to reduce the federal deficit through the year 2021, also known as “sequestration.” The sequestration went into effect starting March 2013. In December 2013, the U.S. Congress enacted the Bipartisan Budget Act of 2013, which reduces the impact of the sequestration over the next two years, beginning in fiscal year 2014 and extended the reduction in Medicare payments to plans and providers for two years through the year 2023.

As ofYears Ended December 31, 2013, we operate two wholly-owned subsidiaries, Huntingdon Holdings, Inc. (“Huntingdon”)2016 and Healthcare Staff Leasing Solutions, LLC (“Staff Leasing”). Huntingdon invests our cash and cash equivalents, and manages our portfolio of available-for-sale marketable securities. Staff Leasing is an entity formed in 2011 to offer professional employer organization (“PEO”) services to potential clients in the health care industry. As of December 31, 2013, we have PEO service contracts in several states. During the years 2011 through 2013, operating results from our PEO services contracts were not material and were included in our Housekeeping segment.

On July 12, 2013, the Company acquired substantially all of the operating assets of Platinum Health Services, LLC, a Delaware limited liability company and Platinum Health Services PEO, LLC, a Delaware limited liability company (collectively “Platinum”) pursuant to an Asset Purchase Agreement dated July 11, 2013. Platinum was a privately-held provider of professional housekeeping, laundry and maintenance services to long-term and post-acute care facilities and operated solely within the United States. The acquisition has been included within the consolidated results of operations and financial condition from the date of the acquisition.

Consolidated Operations2015

The following table sets forth for the years indicated, the percentage which certain items bear to consolidated revenues:
 Relation to Consolidated Revenues
Years Ended December 31,
 2013 2012 2011
Revenues100.0% 100.0% 100.0%
Operating costs and expenses:     
Costs of services provided86.5% 86.4% 86.3%
Selling, general and administrative8.0% 7.4% 7.3%
Investment and interest income0.3% 0.3% 0.1%
Income before income taxes5.8% 6.5% 6.5%
Income taxes1.7% 2.4% 2.2%
Net income4.1% 4.1% 4.3%

Subject to the factors noted in the Cautionary Statement Regarding Forward Looking Statements included in this report, we anticipate, although there can be no assurance thereof, our financial performance in 2014 may be comparable to the 2013 percentages presented in the above table as they relate to consolidated revenues.

Housekeeping is our largest and core reportable segment, representing approximately 66% of 2013 consolidated revenues. Dietary revenues represented approximately 34% of 2013 consolidated revenues.

Although there can be no assurance thereof, we believe that in 2014 Dietary’s revenues, as a percentage of consolidated revenues, may increase from its respective 2013 percentages noted above. Furthermore, we expect the sources of growth in 2014 for the respective operating segments will be primarily the same as historically experienced. Accordingly, although there can be no assurance thereof, the growth in Dietary is expected to come from our current Housekeeping client base, while growth in Housekeeping will primarily come from obtaining new clients.


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Fiscal 2013 Compared to Fiscal 2012

The following table sets forth 20132016 income statement key components that we use to evaluate our financial performance on a consolidated and reportable segment basis compared to 2012 amounts.2015. The differences between the reportable segments’ operating results and other disclosed data and our consolidated financial statements relate primarily to corporate level transactions and recording ofadjustments related to transactions recorded at the reportable segment level.

level which use methods other than generally accepted accounting principles.
       Reportable Segments
       Housekeeping Dietary
 Consolidated % Change Corporate and
Eliminations
 Amount % Change Amount % Change
Revenues$1,149,890,000
 6.7 % $
 $759,093,000
 2.9 % $390,797,000
 15.0%
Cost of services provided995,104,000
 6.9
 (64,670,000) 690,221,000
 3.3
 369,553,000
 15.0
Selling, general and administrative91,998,000
 16.0
 91,998,000
 
 
 
 
Investment and interest income3,701,000
 26.7
 3,701,000
 
 
 
 
Income before income taxes$66,489,000
 (5.4)% $(23,627,000) $68,872,000
 (0.8)% $21,244,000
 15.0%
  Year Ended December 31,
  2016 2015 % Change
  (in thousands)
Revenues      
Housekeeping services $957,148
 $909,709
 5.2 %
Dietary services 605,514
 527,140
 14.9 %
Consolidated $1,562,662
 $1,436,849
 8.8 %
       
Costs of services provided      
Housekeeping services $866,392
 $825,238
 5.0 %
Dietary services 570,873
 495,528
 15.2 %
Corporate and eliminations (97,773) (84,658) 15.5 %
Consolidated $1,339,492
 $1,236,108
 8.4 %
       
Selling, general and administrative expense      
Corporate and eliminations $105,417
 $111,689
 (5.6)%
       
Investment and interest income      
Corporate and eliminations $2,634
 $712
 269.9 %
       
Income (loss) before income taxes      
Housekeeping services $90,756
 $84,471
 7.4 %
Dietary services 34,641
 31,612
 9.6 %
Corporate and eliminations (5,010) (26,319) (81.0)%
Consolidated $120,387
 $89,764
 34.1 %

Revenues

Consolidated

Consolidated revenues increased 6.7%8.8% to $1,149,890,000$1.56 billion in 20132016 compared to $1,077,435,000$1.44 billion in 20122015 as a result of the factors discussed below under Reportable Segments.

Reportable Segments

Housekeeping’s 2.9% net growth5.2% increase in reportable segment revenues resulted primarily from an increase in revenues attributable to service agreements entered into with new clients and the acquisition of Platinum on July 12, 2013.clients.

Dietary’s 15.0% net growth14.9% increase in reportable segment revenues isresulted primarily a result offrom providing this servicethese services to a greater number of facilities for existing Housekeeping clients.


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Costs of services provided

Consolidated

Consolidated costs of services increased 6.9%8.4% to $995,104,000$1.34 billion in 20132016 compared to $930,814,000$1.24 billion in 2012.2015. The increase in costs of services is a direct result of growth in our consolidated revenues. Certain significant components within ourprimarily driven by higher labor and other labor related costs associated with overall growth. Such costs of services, along with the costs of supplies, are subject to fluctuation with the changes in our business and client base. The increase in such components during 2013 compared to 2012 include labor and other labor related costs, housekeeping and dietary supplies, and workers' compensation and general liability insurance, partially offset by a decrease in our bad debt provision. Historically, these significant components have accounted for approximately 97%96% to 98% of consolidated costs of services.

As a percentage of consolidated revenues, cost of services increaseddecreased to 86.5%85.7% in 20132016 from 86.4%86.0% in 2012.2015. The following table provides a comparison of the primarykey indicators we consider when managing the consolidated cost of services provided-key indicators that we manage on a consolidated basis in evaluating our financial performance.services:

Cost of Services Provided-Key Indicators as % of Consolidated Revenue2013 % 2012 % % Change
 Year Ended December 31,
Costs of Services Provided - Key Indicators as % of Consolidated Revenue 2016 2015 % Change
Bad debt provision0.2 0.2  0.3% 0.3% —%
Workers’ compensation and general liability insurance3.2 3.4 (0.2) 3.0% 3.4% (0.4)%

As a percentage of consolidated revenues, theThe bad debt provision remained constantconsistent due to our assessment of the collectability of our accounts and notes receivables. When we evaluate that there is an uncertainty associated with the collectability of amounts due from a client, we record a bad debt provision based upon our initial estimate of ultimate collectability. We revise such provision as additional information is available which we believe enables us to make a more accurate estimate of the collectability of an account. Some of our clients may experience liquidity problems because of governmental funding or operational issues. Such liquidity problems

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may cause them to not pay us as agreed upon or necessitate them filing for bankruptcy protection. In the event of additional clients filing for bankruptcy protection, we would increase our bad debt provision during the reporting period when such filing occurs. Therefore, if more clients file for bankruptcy protection or if we have to increase our current provision related to existing bankruptcies, our bad debt provision may increase from our last two years’ average as a percentage of consolidated revenues.

As a percentage of consolidated revenues, theThe decrease in workers’ compensation and general liability insurance expense decreasedas a percentage of consolidated revenue is primarily duethe result of the Company’s ongoing initiative to more favorable claims' experience duringpromote safety and accident prevention in the year ended December 31, 2013 compared to 2012.workplace, as well as proactive management of workers’ compensation claims, which have positively impacted our claims experience.

Reportable Segments

CostCosts of services provided for Housekeeping, as a percentage of Housekeeping revenues for 2013, increased slightly2016, decreased to 90.9%90.5% compared to 90.6%90.7% in 2012.2015. Cost of services provided for Dietary, as a percentage of Dietary revenues for 2013, remained constant at 94.6%2016, increased to 94.3% compared to 2012.94.0% in 2015.

The following table provides a comparison of the primarykey indicators we consider when managing cost of services provided-key indicators,at the segment level, as a percentage of the respective segment’s revenues that we manage on a reportable segment basis in evaluating our financial performance:

revenues:
Cost of Services Provided-Key Indicators as % of Segment Revenue2013 % 2012 % % Change
 Year Ended December 31,
Costs of Services Provided - Key Indicators as % of Segment Revenue 2016 2015 % Change
Housekeeping labor and other labor costs80.4 80.3 0.1 80.2% 79.4% 0.8%
Housekeeping supplies8.0 7.8 0.2 7.8% 8.3% (0.5)%
Dietary labor and other labor costs51.8 52.3 (0.5) 53.8% 52.9% 0.9%
Dietary supplies39.9 39.3 0.6 38.0% 38.7% (0.7)%

HousekeepingThe ratios of these key indicators remain relatively consistent. Variations relate to the provision of services at new facilities and changes in the mix of clients for whom we provide supplies or do not provide supplies. Management focuses on building efficiencies and managing labor and other labor costs, as a percentage of Housekeeping revenues, slightly increased due to inefficiencies recognized in managing labor at the facility level. The increase in Housekeeping supplies, as a percentage of Housekeeping revenues, resulted primarily from an increase in supplies due to the growth in housekeeping, laundry and linen revenue compared to overall Housekeeping revenues. Additionally, we have added more clients where we provide a greater amount of supplies under the terms of our service agreements compared to what we have historically provided to our client base.

Dietary labor and other labor costs, as a percentage of Dietary revenues, decreased due to increased efficiencies in managing these costs at the facility level. The increase in Dietary supplies,level, as a percentage of Dietary revenues, is a result of the inefficient management of thesewell as managing supply chain costs, partially offset by more favorable vendor pricing programs obtained through further consolidation of dietary supply vendors.for new and existing facilities.

Consolidated Selling, General and Administrative Expense
 
 Year Ended December 31,
 2013 2012 % Change
Selling, general and administrative expense w/o deferred compensation change (a)$88,993,000
 $77,559,000
 14.7%
Deferred compensation fund gain3,005,000
 1,718,000
 74.9%
Consolidated selling, general and administrative expense (b)$91,998,000
 $79,277,000
 16.0%
 Year Ended December 31,
 2016 2015 % Change
 (in thousands)
Selling, general and administrative expense excluding deferred compensation change (1)
$103,922
 $111,751
 (7.0)%
Loss / (gain) on deferred compensation plan investments (2)
(1,495) 62
 (2,511.3)%
Selling, general and administrative expense$105,417
 $111,689
 (5.6)%

(a)
(1)Selling, general and administrative expense excluding the change in the market value of the deferred compensation fund.
(b)Consolidated selling, general and administrative expense reported for the period presented.

Although our growth in consolidated revenues was 6.7% for the year ended December 31, 2013, selling, general and administrative expenses excluding the change in market value of the deferred compensation fund increased fund.
14.7%(2) or $11,434,000 comparedGains on the deferred compensation plan investments are reflected as increases to the 2012 period. Consequently, for the year ended December 31, 2013, selling, general and administrative expenses (excludingexpense, as such gains increase the impactamount of the deferred compensation fund), as a percentage of consolidated revenues, increased to 7.7% of consolidated revenues as compared to 7.2% inliability. Losses on the 2012 comparable period. This percentage increase resulted primarily from the increase in our payroll and payroll related expenses, professional fees, and legal expenses and matters as a percentage of revenues. The increase in payroll and payroll related costs resulted from the development of additional regions, districts and overall management personnel in advance of the new business. The primary increase in our legal expenses were the related costs and expenses associated with mediated settlements regarding certain employment related matters. In 2014, we expect to incur selling, general and administrative expenses as a percentage of consolidated revenues consistent with historical levels.deferred compensation plan


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Forinvestments are reflected as decreases to selling, general and administrative expense, as such losses decrease the year ended December 31, 2013,amount of the portion of ourdeferred compensation liability.

Excluding the change in the deferred compensation plan, consolidated selling, general and administrative expense attributable to deferred compensation increased $1,287,000for 2016 decreased $7.8 million or 7.0% compared to 2015, in which consolidated selling, general and administrative expense was negatively impacted by legal expenses associated with settlements regarding certain employment-related matters. The change in the 2012 period. The increase invalue of the deferred compensation liabilityplan is a result of an increasechanges in the market value on the balance of the investments held in our deferred compensation fund as noted below in plan.

Consolidated Investment and Interest Income. Consolidated selling, general and administrative expenses increased $12,721,000 or 16.0%.

Consolidated Investment andNet Interest Income

Investment and interest income, as a percentage of consolidated revenues, remained constant at 0.3%increased to 0.2% for the year ended December 31, 20132016 compared to less than 0.1% for 2015, primarily due to favorable market fluctuations in the corresponding 2012 period.value of our investments.

Income before Income Taxes

Consolidated

As a result of the discussion above related to revenues and expenses, consolidated income before income taxes for 2013 decreased to 5.8%, as a percentage of consolidated revenues, compared to 6.5% in 2012.

Reportable Segments

Housekeeping’s decrease in income before income taxes is primarily attributable to the key indicators discussed above, specifically the increase in labor and labor related costs and housekeeping supplies as a percentage of segment revenue, partially offset by an increase in reportable segment revenues.

Dietary’s increase in income before income taxes is primarily attributable to the key indicators discussed above, specifically the increase in reportable segment revenues, as well as the decrease in labor and labor related costs as a percentage of segment revenue, partially offset by the increased cost of dietary supplies.

Consolidated Income Taxes

Our effective tax rate was 29.1%35.7% for the year ended December 31, 20132016 and 37.1%35.4% for 2012. The decrease in2015. Differences between the effective tax rates and the applicable U.S. federal statutory rate wasarise primarily from the resulteffect of increasedstate and local taxes and tax credits realized in 2013.available to the Company. The Company receives credits related toparticipates in the Work Opportunity Tax Credit (“WOTC”) program, but this program expired at December 31, 2011. The WOTC was subsequently renewed, but not until January 2, 2013, asthrough which we hire and retain employees from target groups with significant barriers to employment. As part of The American Taxpayer Relief Act of 2012 (the "Relief Act"). Thethe program, the Company receives tax effect of a change in tax law is recognizedcredits, and although the Company has increased its participation in the periodprogram year-over-year, the increase in which the date of the enactment occurs. Since the WOTC was renewed during the three month period ended March 31, 2013, the total tax effect of additional expected credits for 2012 was included in this period. The Relief Act, among other tax changes, extended the WOTC and other similar wage-related credits for another two years, retroactive to January 1, 2012.

Absent any other significant change in federal or state and local tax laws, we expect our effective tax rate for 2014 to be higher than the 2013 rate and more comparableis primarily related to the 2012 rate. Sinceratio of the WOTC program expired again as of December 31, 2013 and has not yet been renewed, the 2014 income tax provision will only include any tax credits realizedto higher pre-tax book income in 2014 relating to prior year certifications, unless the WOTC program is extended in 2014. If the program is extended during 2014, the tax effect of expected 2014 credits will be included in the tax provision in the period of enactment, which should reduce our effective tax rate. Other than the effect of the WOTC, our effective tax rate differs from the federal income tax statutory rate principally because of the effect of state and local income taxes.

Consolidated Net Income

As a result of the matters discussed above, consolidated net income2016 as a percentage of revenue for 2013 remained constant at 4.1% compared to the corresponding 2012 period.prior year. This credit is currently scheduled to expire on December 31, 2019.


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Fiscal 2012 Compared to Fiscal 2011Years Ended December 31, 2015 and 2014

The following table sets forth 20122015 income statement key components that we use to evaluate our financial performance on a consolidated and reportable segment basis compared to 2011 amounts.2014. The differences between the reportable segments’ operating results and other disclosed data and our consolidated financial statements relate primarily to corporate level transactions and recording ofadjustments related to transactions recorded at the reportable segment level.
level which use methods other than generally accepted accounting principles.
       Reportable Segments
       Housekeeping Dietary
 Consolidated % Change Corporate and
Eliminations
 Amount % Change Amount % Change
Revenues$1,077,435,000
 21.2% $173,000
 $737,407,000
 12.6% $339,855,000
 45.1%
Cost of services provided930,814,000
 21.4
 (58,545,000) 667,978,000
 12.9
 321,381,000
 44.4
Selling, general and administrative79,277,000
 21.4
 79,277,000
 
 
 
 
Investment and interest income2,920,000
 188.8
 2,920,000
 
 
 
 
Income before income taxes$70,264,000
 21.5% $(17,639,000) $69,429,000
 9.5% $18,474,000
 58.2%
  Year Ended
  2015 2014 % Change
  (in thousands)
Revenues      
Housekeeping services $909,709
 $846,610
 7.5 %
Dietary services 527,140
 446,573
 18.0 %
Consolidated $1,436,849
 $1,293,183
 11.1 %

      
Costs of services provided      
Housekeeping services $825,238
 $776,220
 6.3 %
Dietary services 495,528
 420,230
 17.9 %
Corporate and eliminations (84,658) (41,157) 105.7 %
Consolidated $1,236,108
 $1,155,293
 7.0 %

      
Selling, general and administrative expense      
Corporate and eliminations $111,689
 $107,810
 3.6 %

      
Investment and interest income      
Corporate and eliminations $712
 $1,628
 (56.3)%

      
Income (loss) before income taxes      
Housekeeping services $84,471
 $70,390
 20.0 %
Dietary services 31,612
 26,343
 20.0 %
Corporate and eliminations (26,319) (65,025) (59.5)%
Consolidated $89,764
 $31,708
 183.1 %

Revenues

Consolidated

Consolidated revenues increased 21.2%11.1% to $1,077,435,000$1.44 billion in 20122015 compared to $889,065,000$1.29 billion in 20112014 as a result of the factors
discussed below under Reportable Segments.

Reportable Segments

Housekeeping’s 12.6% net growth7.5% increase in reportable segment revenues resulted primarily from an increase in revenues attributable to service agreements entered into with new clients.

Dietary’s 45.1% net growth18.0% increase in reportable segment revenues isresulted primarily a result offrom providing this servicethese services to a greater number of existing Housekeeping clients.


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Costs of services provided

Consolidated

Consolidated costs of services increased 7.0% to $1.24 billion in 2015 compared to $1.16 billion in 2014. The increase in costs of services is a result of growth in our consolidated revenues, partially offset by the one-time, non-cash change in estimate related to our self-insurance liability that occurred during 2014. Certain significant components within our costs of services are subject to fluctuation with the changes in our business and client base. The increase during 2015 compared to 2014 relates primarily to labor and other labor related costs. Historically, these significant components accounted for approximately 96% to 98% of consolidated costs of services.

As a percentage of consolidated revenues, cost of services increaseddecreased to 86.4%86.0% in 20122015 from 86.3%89.3% in 2011.2014. The following table provides a comparison of the primarykey indicators we consider when managing the consolidated cost of services provided-key indicators that we manage on a consolidated basis in evaluating our financial performance.services:
Cost of Services Provided-Key Indicators as % of Consolidated Revenue2012 % 2011 % % Change
 Year Ended December 31,
Costs of Services Provided - Key Indicators as % of Consolidated Revenue 2015 2014 % Change
Bad debt provision0.2 0.3 (0.1) 0.3% 0.3% —%
Workers’ compensation and general liability insurance3.4 3.5 (0.1) 3.4% 5.5% (2.1)%

The bad debt provision decreased primarilyremained consistent due to our assessment of the collectability of our receivables, along with the overall increase in revenues, which increased at a much more significant rate than our receivables for the year ended December 31, 2012 as compared to 2011. When we evaluate that there is an uncertainty associated with the collectability of amounts due from a client, we record a bad debt provision based upon our initial estimate of ultimate collectability. We revise such provision as additional information is available which we believe enables us to make a more accurate estimate of the collectability of an account. Some of our clients may experience liquidity problems because of governmental funding or operational issues. Such liquidity problems may cause them to not pay us as agreed upon or necessitate them filing for bankruptcy protection. In the event of additional clients filing for bankruptcy protection, we would increase our bad debt provision during the reporting period when such filing occurs. Therefore, if more clients file for bankruptcy protection or if we have to increase our current provision related to existing bankruptcies, our bad debt provision may increase from our last two years’ average as a percentage of consolidated revenues.accounts and notes receivables.

The workers’ compensation and general liability insurance expense decreased primarilyin 2015 due to more favorable claims' experience during the year ended December 31, 2012 compared2014 change in estimate which resulted in a one-time, non-cash charge to 2011.

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reflect certain costs related to the estimated current and future insurance claims projected to be paid out.



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Reportable Segments

CostCosts of services provided for Housekeeping, as a percentage of Housekeeping revenues for 2012, increased slightly2015, decreased to 90.6%90.7% compared to 90.3%91.7% in 2011. Cost2014. Costs of services provided for Dietary, as a percentage of Dietary revenues for 2012,2015, decreased slightly to 94.6% from 95.0%94.0% compared to 94.1% in 2011.2014.

The following table provides a comparison of the primarykey indicators we consider when managing cost of services provided-key indicators,at the segment level, as a percentage of the respective segment’s revenues that we manage on a reportable segment basis in evaluating our financial performance:

revenues:
Cost of Services Provided-Key Indicators as % of Segment Revenue2012 % 2011 % % Change
 Year Ended December 31,
Costs of Services Provided - Key Indicators as % of Segment Revenue 2015 2014 % Change
Housekeeping labor and other labor costs80.3 80.5 (0.2) 79.4% 81.0% (1.6)%
Housekeeping supplies7.8 7.2 0.6 8.3% 8.2% 0.1%
Dietary labor and other labor costs52.3 52.6 (0.3) 52.9% 51.0% 1.9%
Dietary supplies39.3 39.4 (0.1) 38.7% 40.7% (2.0)%

HousekeepingThe ratios of these key indicators to revenue remain relatively consistent. Variations relate to the provision of services at new facilities and changes in the mix of clients for whom we provide supplies or do not provide supplies. Management focuses on building efficiencies and managing labor and other labor costs, as a percentage of Housekeeping revenues, decreased due to increased efficiencies in managing these costs at the facility level. The increase in Housekeeping supplies,level, as a percentage of Housekeeping revenues, resulted primarily from an increase in linen supplies due to the growth in laundrywell as managing supply chain costs, for new and linen revenue compared to overall Housekeeping revenues. Additionally, we have added more clients where we provide a greater amount of supplies under the terms of our service agreements compared to what we have historically provided to our client base.existing facilities.

Dietary labor and other labor costs, as a percentage of Dietary revenues, decreased due to increased efficiencies in managing these costs at the facility level. The decrease in Dietary supplies, as a percentage of Dietary revenues, is a result of more favorable vendor pricing programs obtained through further consolidation of dietary supply vendors.

Consolidated Selling, General and Administrative Expense
 
 Year Ended December 31,
 2012 2011 % Change
Selling, general and administrative expense w/o deferred compensation change (a)$77,559,000
 $65,410,000
 18.6%
Deferred compensation fund gain/(loss)1,718,000
 (104,000) 1,752.0%
Consolidated selling, general and administrative expense (b)$79,277,000
 $65,306,000
 21.4%
 Year Ended December 31,
 2015 2014 % Change
 (in thousands)
Selling, general and administrative expense excluding deferred compensation change (1)
$111,751
 $106,599
 4.8 %
Loss / (gain) on deferred compensation plan investments (2)
62
 (1,211) (105.1)%
Selling, general and administrative expense$111,689
 $107,810
 3.6 %

(a)
(1)Selling, general and administrative expense excluding the change in the market value of the deferred compensation fund.
(b)Consolidated selling, general and administrative expense reported for the period presented.

Although our growth in consolidated revenues was 21.2% for the year ended December 31, 2012, selling, general and administrative expenses excluding the change in market value of the deferred compensation fund increased 18.6% or $12,149,000 comparedfund.

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(2) Gains on the deferred compensation plan investments are reflected as increases to the 2011 period. Consequently, for the year ended December 31, 2012, selling, general and administrative expenses (excludingexpense, as such gains increase the impactamount of the deferred compensation fund),liability. Losses on the deferred compensation plan investments are reflected as a percentagedecreases to selling, general and administrative expense, as such losses decrease the amount of consolidated revenues, decreased to 7.2% of consolidated revenues as compared to 7.4%the deferred compensation liability.

Excluding the change in the 2011 comparable period. This percentage decrease resulted primarily from the decrease in our payroll and payroll related expenses, travel related costs and professional fees as a percentage of revenues. The decrease in payroll and payroll related costs resulted from the improved leverage of our existing management structure to support the increased revenue.

The increase indeferred compensation plan, consolidated selling, general and administrative expense for 2015 increased $5.2 million or 4.8% compared to 2014, related primarily to legal expenses was primarily due toassociated with settlements regarding certain employment related matters. The change in the increase in compensation expense (reported in this financial statement item), including the increase invalue of the deferred compensation liability due to an increaseplan is a result of changes in the market value on the balance of the investments held in our deferred compensation fund as noted below in plan.

Consolidated Investment and Interest Income. Consolidated selling, general and administrative expenses increased $13,971,000 or 21.4%.


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Consolidated Investment andNet Interest Income

Investment and interest income, as a percentage of consolidated revenues, increaseddecreased to 0.3%less than 1% for the year ended December 31, 20122015 compared to 0.1% for the comparable period in 2011.2014. We recognized an increasea decrease in the market value of the investments held in our deferred compensation fund compared to a decreasean increase in the market value in the prior year. The decrease in interest income derived from our marketable securities resulted partially from a decrease in the amount of change in our marketable securities portfolio during 2012 to support our growth in our Housekeeping and Dietary revenues.

Income before Income Taxes

Consolidated

As a result of the discussion above related to revenues and expenses, consolidated income before income taxes for 2012 remained consistent at 6.5%, as a percentage of consolidated revenues, compared to 2011.

Reportable Segments

Housekeeping’s increase in income before income taxes is primarily attributable to the key indicators discussed above, specifically the increase in reportable segment revenues, as well as the decrease in labor and labor related costs as a percentage of revenue, partially offset by the increased cost of housekeeping supplies.

Dietary’s increase in income before income taxes is primarily attributable to the key indicators discussed above, specifically the increase in reportable segment revenues, as well as the decrease in labor and labor related costs as a percentage of revenue, partially offset by the increased cost of dietary supplies.

Consolidated Income Taxes

Our effective tax rate was 37.1%35.4% for 2015 and 31.1% for 2014. Such differences between the year ended December 31, 2012effective tax rates and 34.0% for 2011.the applicable U.S. federal statutory rate arise primarily from the effect of state and local taxes and tax credits available to the Company. The increase in the effective tax rate wasis primarily due to the resultgreater impact of decreased tax credits realizedas a percentage of a lower pre-tax book income in 2012.2014 as compared to the current year. The Company realized taxreceives credits in 2011 fromrelated to the New Hire Retention Credit (the “NHR Credit”), which was a one-time general business credit at the Federal level that was authorized by the Hiring Incentives to Restore Employment Act (“HIRE Act”) of 2010. The NHR Credit allowed an employer a credit on its 2011 corporate income tax return of up to $1,000 for each eligible worker that was retained for at least 52 consecutive weeks of qualified employment. In addition, there was a decrease in the amount of Work Opportunity Tax Credit (“WOTC”) and other similar wage-related credits realized in 2012 dueprogram which has had a history of expiration with short renewal periods. The WOTC expired at December 31, 2013 but was subsequently extended to the failure of Congress to renew the programs in 2012.

On January 2, 2013, the American Taxpayer Relief Act of 2012 (the "Relief Act") was signed into law. The Relief Act, among other tax changes, extended the WOTC and other similar wage-related credits for another two years, retroactive to January 1, 2012.December 31, 2019. The tax effect of a change in tax laws is recognizedthis renewal was recorded in the period in which the datefourth quarter of the enactment occurs. Therefore, even though the restoration of the WOTC program was retroactive to the beginning of 2012, the tax effect cannot be recognized for financial statement reporting purposes by the Company until the quarter ended March 31, 2013.2015.

Absent any other significant change in federal, or state and local tax laws, we expect our effective tax rate for 2013 to be lower than the 2012 and 2011 rates. The 2013 income tax provision will include any tax credits realized in 2012 as well as 2013 due to the requirement to record the tax effect of the enactment of the American Taxpayer Relief Act of 2012 during the quarter ended March 31, 2013. Although the Company is still assessing the ultimate impact of the Act on its 2013 results, it believes the Relief Act will have a favorable impact on income tax expense for the first quarter and full year ended December 31, 2013. Our effective tax rate differs from the federal income tax statutory rate principally because of the effect of state and local income taxes.

Consolidated Net Income

As a result of the matters discussed above, consolidated net income as a percentage of revenue for 2012 decreased to 4.1% compared to 4.3% in 2011.



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Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting standards generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

We consider the policies discussed below to be critical to an understanding of our financial statements because their application places the most significant demands on ourrequires judgment. Therefore, it should be noted that financial reporting results rely on estimating the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies and estimates are described in the following paragraphs. For these estimates, we caution that future events rarely developdo not always occur as forecasted, and the best estimates routinely require adjustment. Any such adjustments or revisions to estimates could result in material differences to previously reported amounts.

The policies discussed are not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting standards generally accepted in the United States,U.S. GAAP, with no need for our judgment in their application. There are also areas in which our judgment in selecting another available alternative would not produce a materially different result. See our audited consolidated financial statements and notes thereto which are included in this Annual Report on Form 10-K, which contain accounting policies and other disclosures required by accounting principles generally accepted in the United States.U.S. GAAP.

Allowance for Doubtful Accounts

The allowance for doubtful accounts (the “Allowance”) is established as losses are estimated to have occurred through a provision for bad debts charged to earnings. The Allowance is evaluated based on our periodicongoing review of accounts and notes receivable and is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

We have had varying collectioncollections experience with respect to our accounts and notes receivable. When contractual terms are not met, we generally encounter difficulty in collecting amounts due from certain of our clients. Therefore, weWe have sometimes been required to extend the period of payment for certain clients beyond contractual terms. TheseSuch clients include those who have terminated service agreements and slow payers experiencing financial difficulties. In making credit evaluations, in addition to analyzing and anticipating, where possible, the specific cases described above, we consider customer-specific risks as well as the general collection risks associated with trends in the long-term care industry. We also establish credit limits, perform ongoing credit evaluations, and monitor accounts to minimize the risk of loss.

In accordance with the risk of extending credit, weWe regularly evaluate our accounts and notes receivable for impairment or loss of value and when appropriate, will provide in ourrecord an Allowance for such receivables. We generally follow a policy of reserving for receivables due from clients in bankruptcy, clients with which we are in litigation for collection and other slow paying clients. The reserveAllowance is based upon our estimatesadjusted as additional information

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becomes available to more accurately estimate collectability. Correspondingly, onceOnce our recovery of a receivable is determined, through litigation, bankruptcy proceedings or negotiation, to be less than the recorded amount on our balance sheet, we will charge-offcharge the applicable amount to the Allowance.

Our methodology for the Allowance is based upon a risk-based evaluation of accounts and notes receivable associated with a client’s ability to make payments. Such Allowance generally consists of an initial amount established based upon criteria generally applied if and when a client account files bankruptcy, is placed for collection/litigation and/or is considered to be pending collection/litigation.

The initial Allowance is adjusted either higher or lower when additional information is available to permit a more accurate estimate of the collectability of an account.


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Summarized below for the years 20112014 through 20132016 are the aggregate account balances for the three Allowance criteria noted above, net of write-offs of client accounts, bad debt provision and allowance for doubtful accounts.

accounts:
Year EndedAggregate Account Balances of Clients in Bankruptcy or in/or Pending Collection/Litigation Net Write-offs of Client Accounts Bad Debt Provision Allowance for Doubtful Accounts
2011$7,784,000
 $2,013,000
 $2,450,000
 $4,506,000
2012$6,273,000
 $2,697,000
 $2,160,000
 $3,970,000
2013$6,047,000
 $2,041,000
 $1,990,000
 $3,919,000
Year Ended Aggregate Account Balances of Clients in Bankruptcy or in/or Pending Collection/Litigation Net Write-offs of Client Accounts Bad Debt Provision Allowance for Doubtful Accounts
  (in thousands)
2014 $14,903
 $2,253
 $4,470
 $6,136
2015 $12,073
 $5,863
 $4,335
 $4,608
2016 $15,873
 $2,326
 $4,629
 $6,911

At December 31, 2013,2016, we identified accounts totaling $6,047,000$15.9 million that require an Allowance based on potential impairment or loss of value. An Allowance totaling $3,919,000$6.9 million was provided for these accounts at such date. Actual collections of these accounts could differ from that which we currentlyour current estimate. If our actual collection experience is 5% less than our estimate, the related increase to our Allowance would decrease net income by approximately $75,000.$0.3 million.

NotwithstandingDespite our efforts to minimize credit risk exposure, our clients could be adversely affected if future industry trends, as more fully discussed under Liquidity and Capital Resources below, and as further described in this Annual Report on Form 10-K in Part I under “Risk Factors”,Factors,” “Government Regulation of Clients” and “Service Agreements/Collections”,Agreements and Collections,” change in such a manner as to negatively impact the cash flows of our clients. If our clients experience a negative impact in their cash flows, it wouldcould have a material adverse effect on our results of operations and financial condition.

Accrued Insurance Claims

We currently have a Paid Loss Retrospective Insurance Plan for general liability and workers’ compensation insurance, which comprise approximately 19%46.2% of our liabilities at December 31, 2013.2016. Under our insurance plans for general liability and workers'workers’ compensation, predetermined loss limits are arranged with our insurance company to limit both our per occurrence cash outlay and annual insurance plan cost. Our accounting for this plan is affected by various uncertainties because we must makeutilizes current valuations from a third party actuary, which include assumptions and apply judgment to estimate the ultimate cost to settle reportedbased on data such as historical claims, and claims incurred but not reported as of the balance sheet date. We address these uncertainties by regularly evaluating our claims’ pay-out experience, present value factordemographic factors, industry trends, severity factors, and other factors related to the nature of specific claims in arriving at the basis for our accrued insurance claims estimate. Our evaluations are based primarily on current information derived from reviewing our claims experience and industry trends.actuarial calculations. In the event that our claims experience and/or industry trends result in an unfavorable change resulting from, among other factors, the severity levels of reported claims and medical cost inflation, as compared to historical claim trends,in our assumptions or outcomes, it would have an adverse effect on our results of operations and financial condition. Under these plans, predetermined loss limits are arranged with an insurance company to limit both our per-occurrence cash outlay and annual insurance plan cost.

For workers’ compensation and general liability, we record both a reserve based onfor the present value of estimated future cost of claims and related expenses that have been reported but not settled, includingas well as an estimate of claims incurred but not reported. Such reserves for claims incurred but not reported that are developed asby a result of athird party actuary through review of our historical data and open claims. The present value of the payout is determined by applying an 8% discount factor against the estimated value of the claims over the estimated remaining pay-out period. Reducing the discount factor by 1% would reduce net income by approximately $34,000. Additionally, reducing the estimated payout period by six months would result in an approximate $84,000 reduction in net income.

For general liability, we record a reserve for the estimated ultimate amounts to be paid for known claims and claims incurred but not reported as of the balance sheet date. The estimated ultimate reserve amount recorded is derived from the estimated claim reserves provided by our insurance carrier reduced by an historical experience factor.


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A summary of the changes in our total self-insurance liability is as follows:

Year Ended December 31,2016 2015 2014
2013 2012 2011(in thousands)
Accrued insurance claims - January 1,$22,562,000
 $17,654,000
 $16,921,000
$82,250
 $68,262
 $26,178
Claim payments(26,091,000) (25,154,000) (24,703,000)(35,089) (27,883) (24,879)
Reserve accruals29,707,000
 30,062,000
 25,436,000
Reserve accruals:

 

 

Current year accruals40,492
 41,871
 30,642
Changes to the provision for prior years
 
 36,321
Change in accrued insurance claims3,616,000
 4,908,000
 733,000
$5,403
 $13,988
 $42,084
Accrued insurance claims - December 31,$26,178,000
 $22,562,000
 $17,654,000
$87,653
 $82,250
 $68,262

Asset Valuations and Review for Potential Impairment

We review our fixed assets, deferred income taxes, goodwill and other intangible assets at least annually or whenever events or changes in circumstances indicate that itstheir carrying amountamounts may not be recoverable. This review requires that we make assumptions regarding the value of these assets and the changes in circumstances that would affect the carrying value of these assets. If such analysis indicates that a possible impairment may exist, we are then required to estimate the fair value of the asset and, as deemed appropriate,

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expense all or a portion of the asset. The determination of fair value includes numerous uncertainties, such as the impact of competition on future value. We believe that we have made reasonable estimates and judgments in determining whether our long-term assets have been impaired; however, if there is a material change in the assumptions used in our determination of fair value or if there is a material change in economic conditions or circumstances influencing fair value, we could be required to recognize certain impairment charges in the future. As a result of our most recent reviews, no changes in asset values were required.

Income Taxes

Deferred income taxes are recognized for the tax consequences related to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for tax purposes at each year-end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is established when necessary based on the weight of available evidence, if it is considered more likely than not that all or some portion of the deferred tax assets will not be realized. Income tax expense is the sum of current income tax plus the change in deferred tax assets and liabilities.

We are subject to income taxes in the United States and numerous state and local jurisdictions. The determination of the income tax provision is an inherently complex process, requiring management to interpret continually changing regulations and to make certain significant judgments. Our assumptions, judgments and estimates relative to the amount of deferred income taxes take into account scheduled reversals of deferred tax liabilities, recent financial operations, estimates of the amount of future taxable income and available tax planning strategies. Actual operating results in future years could render our current assumptions, judgments and estimates inaccurate. No assurance can be given that the final impact of these matters will not be different from that which is reflected in the Company’s historical income tax provisions and accruals. The Company adjusts these items in light of changing facts and circumstances. To the extent that the final impact of these matters is different than the amounts recorded, such differences could have a material effect on the income tax provisions or benefits in the periods in which such determinations are made.



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Liquidity and Capital Resources

At December 31, 2013,2016, we had cash and cash equivalents, and marketable securities of $75,600,000 and working capital of $210,089,000 compared to December 31, 2012 cash, cash equivalents and marketable securities of $90,271,000$91.6 million and working capital of $200,182,000. We view our$313.8 million compared to December 31, 2015 cash, cash equivalents and marketable securities of $102.7 million and working capital of $269.3 million. Our cash, cash equivalents and marketable securities, as well as the cash flows that we generate through our operations, are our principal measuresources of liquidity. As of December 31, 2016, we had an unused line of credit of $136.3 million. Our current ratio at December 31, 2013 decreased2016 increased to 3.14.1 to 1 from 4.03.8 to 1 at December 31, 2012. This decrease resulted primarily from increases in our accounts payable, accrued payroll and other accrued expenses, primarily resulting from the timing of such payments at December 31, 2013 as compared with December 31, 2012. Our marketable securities declined at December 31, 2013 from December 31, 2012, primarily due to the working capital investment required to support our 2013 revenue growth of 6.7% and the payment of dividends to shareholders. The decrease was partially offset by the increase in accounts and notes receivables resulting from our increase in revenues.2015. On ana historical basis, our operations have produced consistent cash flow and have required limited capital resources. We believe that the combination of our current and near term cash flow positions, coupled with our existing short-term financing arrangements, will enable us to fund our continued anticipated growth. We also believe that, due to our conservative capital structure and historical and projected financial performance, other sources of liquidity would be readily available to assist in funding future growth.

For the years ended December 31, 2016, 2015 and 2014, our cash flows were as follows:
 Year Ended December 31,
 2016 2015 2014
 (in thousands)
Net cash provided by operating activities$41,400
 $63,361
 $57,730
Net cash used in investing activities$(6,452) $(62,314) $(6,460)
Net cash used in financing activities$(44,284) $(43,138) $(40,145)

Operating Activities

Our primary sources of cash are the revenues generated from our Housekeeping and Dietary services. Our primary uses of cash are the funding of our payroll and other personnel-related costs, as well as the costs of supplies used in providing our services. The timing of cash receipts and cash payments are the primary drivers of the period-over-period changes in net cash provided by our operating activities was $32,158,000 for the year ended December 31, 2013. The principal sourcesactivities.


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Investing Activities

The net cash provided by our investing activities was $605,000 for the year ended December 31, 2013. The principal sourcesuses of net cash flows fromfor investing activities for 2013 was $9,209,000 of net sales of marketable securities. The net salesare the purchases of marketable securities enabled us to increase cash and cash equivalents to support the increase in client facilities in 2013 and dividend payments. This investing cash inflow was partially offset by cash outflows related to acquisition activity and capital expenditures. We expended $5,000,000 in connection with the acquisition of Platinum Health Services, LLCexpenditures such as housekeeping and Platinum Health Services PEO, LLC on July 12, 2013. Additionally, we expended $3,762,000 for the purchase of housekeepingfood service equipment, computer software and equipment, and laundry equipment installations. Seefurniture and fixtures (see “Capital Expenditures” below.below for additional information).

Our investments in marketable securities are primarily comprised of tax-exempt municipal bonds and are intended to achieve our goal of preserving principal, maintaining adequate liquidity and maximizing returns subject to our investment guidelines. Our investment policy limits investment to certain types of instruments issued by institutions primarily with investment-grade ratings and places restrictions on concentration by type and issuer. In 2015, we increased our investments in these liquid securities in conjunction with the transfer of the Company’s workers compensation and certain employee health and welfare insurance programs to HCSG Insurance Corp. (the “Captive”).

Financing Activities

The primary use of cash for financing activities is the payment of dividends. We have paid regular quarterly cash dividends since the second quarter of 2003. During 2013,2016, we paid to shareholders regular quarterly cash dividends totaling $46,707,000$53.3 million as follows.

Quarter Ended
Quarter EndedMarch 31, 2016 June 30, 2016 September 30, 2016 December 31, 2016
March 31, 2013 June 30, 2013 September 30, 2013 December 31, 2013(in thousands, except per share data)
Cash dividend per common share$0.16625
 $0.16750
 $0.16875
 $0.17000
$0.18125
 $0.18250
 $0.18375
 $0.18500
Total cash dividends paid$11,415,000
 $11,516,000
 $11,829,000
 $11,947,000
$13,158
 $13,293
 $13,398
 $13,493
Record dateFebruary 22
 May 10
 August 16
 November 15
February 19, 2016
 May 20, 2016
 August 19, 2016
 November 18, 2016
Payment dateMarch 15
 June 14
 September 20
 December 20
March 25, 2016
 June 24, 2016
 September 23, 2016
 December 23, 2016

Additionally, on January 28, 2014,31, 2017, our Board of Directors declared a regular quarterly cash dividend of $0.17125$0.18625 per common share, which will be paid on March 28, 201424, 2017 to shareholders of record as of the close of business on February 21, 2014.17, 2017.

The dividends paid to shareholders during the year ended December 31, 2013 were in excess of cash flows during the given period, and therefore,2016 were funded by the existing cash, cash equivalents and marketable securities held by the Company. At December 31, 2013 and 2012, we had $75,600,000 and $90,271,000, respectively, in cash, cash equivalents and marketable securities. Our Board of Directors reviews our dividend policy on a quarterly basis. Although there can be no assurance that we will continue to pay dividends or the amount of the dividend, we expect to continue to pay a regular quarterly cash dividend. In connection with the establishment of our dividend policy, we adopted a Dividend Reinvestment Plan in 2003.


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During the year ended December 31, 20132016 we elected not to purchase any of our common stock but we remain authorized to purchase 1,689,0001.7 million shares of our common stock pursuant to previous Board of Directors’ approvals.

During the year ended December 31, 2013, we received proceeds of $6,428,000 from the exercise of stock options by employees and directors. Additionally, as a result of deductions derived from the stock option exercises, we recognized an income tax benefit of $2,615,000.authorization.

Contractual Obligations

Our future contractual obligations and commitments at December 31, 20132016 consist of the following:

 Payments Due by Period
Year EndingTotal Less Than 1 Year 1-3 Years 3-5 Years After 5 Years
Operating Lease Obligations$1,473,000
 $1,063,000
 $410,000
 $
 $

 Payments Due by Period
Year Ended December 31, 2016 Total Less Than 1 Year 1-3 Years 3-5 Years After 5 Years
  (in thousands)
Operating lease obligations $9,110
 $2,424
 $2,753
 $1,495
 $2,438

Line of Credit

We have a $125,000,000$200 million bank line of credit on which we may draw to meet short-term liquidity requirements in excess of internally generated cash flow.requirements. Amounts drawn under the line of credit are payable upon demand. At December 31, 2013,2016, there were no borrowings under the line of credit. However, at such date, we had outstanding a $43,520,000 (increased to $51,520,000 on January 1, 2014)$63.7 million irrevocable standby letter of credit, which relates to payment obligations under our insurance programs. As a result of the letter of credit issued, the amount available under the line of credit was reduced by $43,520,000$63.7 million at December 31, 2013.2016.


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The line of credit requires us to satisfy one financial covenant. SuchThe covenant and its respective status at December 31, 20132016 was as follows:

Covenant Description and RequirementStatus at December 31, 20132016
Funded debt(1) to EBITDA(2) ratio: less than 3.00 to 1.00
0.820.50

(1)
All indebtedness for borrowed money, including but not limited to capitalized lease obligations, reimbursement obligations in respect of letters of credit and guaranties of any such indebtedness.
(2)
Net income plus interest expense, plus income tax expense, plus depreciation, plus amortization.amortization, and extraordinary non-recurring losses/gains.

As noted above, we compliedwere in compliance with our financial covenant at December 31, 20132016 and expect to continue to remain in compliance with such financial covenant. ThisThe line of credit has a five year term and expires on December 18, 2018.

Pledged AssetsOn January 3, 2017, the letter of credit was increased to $67.2 million and Collateral

On December 30, 2013, we entered into a Security Interest, Pledge and Assignment of Deposit Account (the "Pledge") with Wells Fargo Bank, National Association (the “Bank”) as collateral for the Promissory Note (the “Note”) dated December 30, 2013. The Note is a short term non-revolvingamount available under the line of credit between the Company’s third party payroll administrator and the Bank. The Company entered into the Pledge at year end due to the timing of payroll funding and the holidays. On January 3, 2014, the Company's third party payroll administrator satisfied its payment obligation under the Note, and accordingly, the Company's Pledge was fully released and extinguished. The funds previously held as collateral were subsequently used for general operating activities.reduced by $3.5 million.

Accounts and Notes Receivable

We expend considerable effort to collect the amounts due for our services on the terms agreed upon with our clients. Many of our clients participate in programs funded by federal and state governmental agencies which historically have encountered delays in making payments to its program participants. Congress has enacted a number of laws during the past decade that have significantly altered, or may alter, overall government reimbursement for nursing home services. Becauseand such participation can affect our clients’ revenues are generally dependent on Medicare and Medicaid reimbursement funding rates and mechanisms, the overall effect of these laws and trends in the long term care industry have affected and could adversely affect the liquidity of our clients, resulting incash flows, which may impact their inabilityability to make payments to us on agreed upon payment terms. These factors, in addition to delaysother trends or regulations in payments from clients,the long-term care industry, have resulted

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in and could continue to result in significant additional bad debts in the near future. Whenever possible, when a client falls behind in making agreed-upon payments, we convert the unpaid accounts receivable to interest bearing promissory notes. The promissory notes receivable provide a means by which to furtherbetter evidence the amounts owed, materially enhance our ability to defend the validity of the debt, and providememorialize a definitive repayment plan, and thereforeeach of which may ultimately enhance our ability to collect the amounts due. At December 31, 20132016 and 2012,2015, we had $16,116,000$19.2 million and $10,730,000,$16.8 million, net of reserves, respectively, of such promissory notes outstanding. Additionally, we consider restructuring service agreements from full service to management-only service in the case of certain clients experiencing significant financial difficulties. We believe that such restructurings may provide us with a means to maintain a relationship with the client while at the same time minimizing collection exposure.

As a result of the current economic crisis, many states have significant budget deficits. State Medicaid programs are experiencing increased demand, and with lower revenues than projected, they have fewer resources to support their Medicaid programs. In addition, comprehensive health care legislation under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (together, the “Act”) was signed into law in March 2010. The Act will significantly impact the governmental healthcare programs in which our clients participate, and reimbursements received thereunder from governmental or third-party payors. In July 2011, Centers for Medicare and Medicaid Services (“CMS”) issued a final rule that reduced Medicare payments to nursing centers by 11.1% and changed the reimbursement for the provision of group rehabilitation therapy services to Medicare beneficiaries. This new rule was effective as of October 1, 2011. Furthermore, in the coming year and beyond, new proposals or additional changes in existing regulations could be made to the Act which could directly impact the governmental reimbursement programs in which our clients participate. As a result, some state Medicaid programs are reconsidering previously approved increases in nursing home reimbursement or are considering delaying or foregoing those increases. A few states have indicated it is possible they will run out of cash to pay Medicaid providers, including nursing homes. Any negative changes in our clients’ reimbursements may negatively impact our results of operations. Although we are currently evaluating the Act’s effect on our client base, we may not know the full effect until such time as these laws are fully implemented and CMS and other agencies issue applicable regulations or guidance. Additionally, even if federal or state legislation is enacted that provides additional funding to Medicaid providers, given the volatility of the economic environment, it is difficult to predict the impact of this legislation on our clients’ liquidity and their ability to make payments to us as agreed.

In January 2013, the U.S. Congress enacted the American Taxpayer Relief Act of 2012, which delayed automatic spending cuts of $1.2 trillion, including reduced Medicare payments to plans and providers up to 2%. These discretionary spending caps were originally enacted under provisions in the Budget Control Act of 2011, an initiative to reduce the federal deficit through the year 2021, also known as “sequestration.” The sequestration went into effect starting March 2013. In December 2013, the U.S. Congress enacted the Bipartisan Budget Act of 2013, which reduces the impact of the sequestration over the next two years, beginning in fiscal year 2014 and extended the reduction in Medicare payments to plans and providers for two years through the year 2023.

We have had varying collection experience with respect to our accounts and notes receivable. When contractual terms are not met, we generally encounter difficulty in collecting amounts due from certain of our clients. Therefore, we have sometimes been required to extend the period of payment for certain clients beyond contractual terms. These clients include those who have terminated service agreements and slow payers experiencing financial difficulties. In order to provide for these collection problems and the general risk associated with the granting of credit terms, we have recorded bad debt provisions (in an Allowance for Doubtful Accounts) of $1,990,000, $2,160,000$4.6 million, $4.3 million and $2,450,000$4.5 million in the years ended December 31, 2013, 20122016, 2015 and 2011,2014, respectively. As a percentage of total revenues, these provisions represent approximately 0.2%0.3% for each of the years ended December 31, 20132016, 2015 and 2012 and 0.3% for the year ended December 31, 2011. In making our credit evaluations, in addition to analyzing and anticipating, where possible, the specific cases described above, we consider the general collection risk associated with trends in the long-term care industry. We also establish credit limits, perform ongoing credit evaluation and monitor accounts to minimize the risk of loss. Notwithstanding our efforts to minimize credit risk exposure, our clients could be adversely affected if future industry trends change in such a manner as to negatively impact their cash flows. If our clients experience a negative impact in their cash flows, it would have a material adverse effect on our results of operations and financial condition.2014.

Insurance Programs

We self-insure or carry a high deductible, and therefore retain a substantial portion of the risk associated with the expected losses under our general liability and workers compensation programs. Under our insurance plans for general liability and workers’ compensation, predetermined loss limits are arranged with our insurance company to limit both our per occurrence cash outlay and annual insurance plan cost. Our accounting for this plan is affected by various uncertainties, such as historical claims, pay-out experience, demographic factors, industry trends, severity factors, and other actuarial assumptions calculated by a third party actuary. Evaluations of our accrued insurance claims estimate as of the balance sheet date are based primarily on current information derived from our actuarial valuation which assists in quantifying and valuing these trends. In the event that our claims experience and/or industry trends result in an unfavorable change resulting from, among other factors, the severity levels of reported claims and medical cost inflation, as compared to historical claim trends, it would have an adverse effect on our results of operations and financial condition. Under these plans, predetermined loss limits are arranged with an insurance company to limit both our per-occurrence cash outlay and annual insurance plan cost.

For workers’ compensation and general liability, we record a reserve based onfor the present valueestimated future cost of future payments,claims and related expenses that have been reported but not settled, including an estimate of claims incurred but not reported that are developed as a result of a review of our historical data and open claims. The present value of the payoutclaims, which is determinedbased on estimates provided by applying an 8% discount factor against the estimated value of the claims over the estimated remaining pay-out period.a third party actuary.


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For general liability, we record a reserve for the estimated ultimate amounts to be paid for known claims. The estimated ultimate reserve amount recorded is derived from the estimated claim reserves provided by our insurance carrier reduced by an historical experience factor.

We regularly evaluate our claims’ pay-out experience, present value factor and other factors related to the nature of specific claims in arriving at the basis for our accrued insurance claims’ estimate. Our evaluation is based primarily on current information derived from reviewing our claims experience and industry trends. In the event that our claims experience and/or industry trends result in an unfavorable change, it would have an adverse effect on our consolidated results of operations, financial condition and cash flows.

Capital Expenditures

The level of our capital expenditures is generally dependent on the number of new clients obtained. Such capital expenditures primarily consist of housekeeping and food service equipment purchases, laundry and linen equipment installations, and computer hardware and software.software, and furniture and fixtures. Although we have no specific material commitments for capital expenditures through the end of calendar year 2014,2017, we estimate that for the period we will have capital expenditures of $3,000,000$4.5 million to $5,000,000$6.0 million. Our capital expenditures totaled $5.4 million in connection with housekeeping equipment purchases and laundry and linen equipment installations in our clients’ facilities, as well as expenditures relating to internal data processing hardware and software requirements. We believe that our cash from operations, existing cash and cash equivalents balance and credit line will be adequate for the foreseeable future to satisfy the needs of our operations and to fund our anticipated growth. However, should these sources not be sufficient, we would, if necessary, seek to obtain necessary working capital from such sources as long-term debt or equity financing.2016.

Material Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements, other than our irrevocable standby letter of credit and pledge previously discussed.credit.

Effects of Inflation

Although there can be no assurance thereof, we believe that in most instances we will be able to recover increases in costs attributable to inflation by passing through such cost increases to our clients.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

At December 31, 2013,2016, we had $75,600,000$91.6 million in cash, cash equivalents and marketable securities. In accordance with U.S. GAAP, theThe fair valuevalues of all of our cash equivalents and marketable securities isare determined based on "Level 1"“Level 1” inputs, which are defined as observable, quoted prices for identical or similar instruments in active markets, “Level 2” inputs, which consist of quoted prices whose value is based uponare defined as quoted prices for identical or similar instruments in markets that are not active andor model-based valuation techniques for which all significant assumptions are observable in the market.observable. We place our cashmake investments in instruments that meet our credit quality standards, as specified in our investment policy guidelines.

Investments in both fixed rate and floating rate investments carry a degree of interest rate risk. FixedThe value of fixed rate securities may have their market valuebe adversely impacted due to an increase in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if there is a decline in the fair value of our investments.

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Item 8.  Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 Page
Consolidated Financial Statements 
2015
2014
2014
2014
2014


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Healthcare Services Group, Inc.

We have audited the accompanying consolidated balance sheets of Healthcare Services Group, Inc. (a Pennsylvania corporation) and Subsidiariessubsidiaries (the “Company”) as of December 31, 20132016 and 2012,2015, and the related consolidated statements of comprehensive income, stockholders'stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013.2016. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item
15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Healthcare Services Group, Inc. and Subsidiariessubsidiaries as of December 31, 20132016 and 2012,2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20132016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company'sCompany’s internal control over financial reporting as of December 31, 2013,2016, based on criteria established in the 2013 Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 21, 201424, 2017 expressed an unqualified opinion.

/s/ GRANT THORNTON LLP 
  
Edison, New JerseyYork, New York 
February 21, 201424, 2017 


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Management’s Annual Report on Internal Control Over Financial Reporting

The management of Healthcare Services Group, Inc. (“Healthcare”, “We” or the “Company”), is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles in the United States and includes those policies and procedures that:

1.Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the Company;

2.Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

3.Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013.2016. In making this assessment, the Company’s management used the criteria set forth in Internal Control — Integrated-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the "1992 Framework"“2013 Framework”).

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our internal control over financial reporting, as prescribed above, for the period covered by this report. Based on our evaluation, our principal executive officer and principal financial officer concluded that the Company’s internal control over financial reporting as of December 31, 20132016 is effective as a whole.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s independent auditors have audited, and reported on, the Company’s internal control over financial reporting as of December 31, 2013.2016.

/s/ Daniel P. McCartneyTheodore Wahl  /s/ John C. Shea
Daniel P. McCartneyTheodore Wahl  John C. Shea
Chief Executive Officer
(Principal Executive Officer)
  
Chief Financial Officer
(Principal Financial and Accounting Officer)
February 21, 201424, 2017  February 21, 201424, 2017

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Healthcare Services Group, Inc.

We have audited the internal control over financial reporting of Healthcare Services Group, Inc. (a Pennsylvania corporation) and Subsidiariessubsidiaries (the “Company”) as of December 31, 2013,2016, based on criteria established in the 2013 Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company'sCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management'sManagement’s Annual Report on Internal Control Overover Financial Reporting. Our responsibility is to express an opinion on the Company'sCompany’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013,2016, based on criteria established in the 2013 Internal Control-Integrated Framework (1992) issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2013,2016, and our report dated February 21, 201424, 2017 expressed an unqualified opinion on those financial statements.

/s/ GRANT THORNTON LLP 
  
Edison, New JerseyYork, New York 
February 21, 201424, 2017 


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Healthcare Services Group, Inc.
Consolidated Balance Sheets
(in thousands, except per share amounts)
 
December 31,December 31,
2013 20122016 2015
ASSETS:      
Current assets:      
Cash and cash equivalents$64,155,000
 $68,949,000
$23,853
 $33,189
Marketable securities, at fair value11,445,000
 21,322,000
67,730
 69,496
Accounts and notes receivable, less allowance for doubtful accounts of $3,919,000 in 2013 and $3,970,000 in 2012189,107,000
 140,218,000
Accounts and notes receivable, less allowance for doubtful accounts of $6,911 as of December 31, 2016 and $4,608 as of December 31, 2015271,276
 214,854
Inventories and supplies32,447,000
 28,675,000
37,800
 36,308
Prepaid expenses and other assets13,965
 11,495
Total current assets414,624
 365,342
Property and equipment, net13,455
 13,086
Goodwill44,438
 44,438
Other intangible assets, less accumulated amortization of $14,672 as of December 31, 2016 and $19,473 as of December 31, 201514,409
 17,108
Notes receivable — long term portion, net of reserve7,531
 2,972
Deferred compensation funding, at fair value24,119
 25,391
Deferred income taxes2,339,000
 
9,822
 12,567
Prepaid expenses and other9,699,000
 8,682,000
Total current assets309,192,000
 267,846,000
Property and equipment:   
Laundry and linen equipment installations2,516,000
 2,336,000
Housekeeping and office equipment and furniture29,182,000
 26,098,000
Autos and trucks305,000
 315,000
32,003,000
 28,749,000
Less accumulated depreciation20,699,000
 18,477,000
11,304,000
 10,272,000
Goodwill40,183,000
 16,955,000
Other intangible assets, less accumulated amortization of $12,909,000 in 2013 and $10,078,000 in 201223,372,000
 5,203,000
Notes receivable — long term portion, net of discount5,779,000
 1,823,000
Deferred compensation funding, at fair value22,200,000
 17,831,000
Deferred income taxes — long term portion13,274,000
 11,215,000
Other noncurrent assets38,000
 38,000
48
 45
Total Assets$425,342,000
 $331,183,000
$528,446
 $480,949
      
LIABILITIES AND STOCKHOLDERS’ EQUITY:      
Current liabilities:      
Accounts payable$43,682,000
 $22,810,000
$42,912
 $41,472
Accrued payroll, accrued and withheld payroll taxes37,162,000
 31,997,000
22,303
 18,062
Other accrued expenses8,528,000
 3,526,000
3,075
 3,115
Income taxes payable1,878,000
 1,906,000
7,686
 3,212
Deferred income taxes
 575,000
Accrued legal expenses1,322
 10,464
Accrued insurance claims7,853,000
 6,850,000
23,573
 19,740
Total current liabilities99,103,000
 67,664,000
100,871
 96,065
Accrued insurance claims — long term portion18,325,000
 15,712,000
64,080
 62,510
Deferred compensation liability22,771,000
 18,237,000
24,653
 25,918
Commitments and contingencies

 



 

STOCKHOLDERS’ EQUITY:      
Common stock, $.01 par value; 100,000,000 shares authorized; 71,868,000 shares issued and outstanding in 2013 and 70,036,000 shares issued and outstanding in 2012719,000
 700,000
Common stock, $.01 par value; 100,000 shares authorized; 74,204 and 73,793 shares issued, and 72,601 and 72,034 shares outstanding as of December 31, 2016 and December 31, 2015, respectively742
 738
Additional paid-in capital168,329,000
 113,495,000
217,664
 199,294
Retained earnings127,464,000
 127,042,000
130,940
 106,886
Accumulated other comprehensive income, net of taxes49,000
 127,000
Common stock in treasury, at cost, 1,892,000 shares in 2013 and 1,983,000 shares in 2012(11,418,000) (11,794,000)
Accumulated other comprehensive (loss) income, net of taxes(319) 543
Common stock in treasury, at cost, 1,603 shares as of December 31, 2016 and 1,759 shares as of December 31, 2015(10,185) (11,005)
Total stockholders’ equity285,143,000
 229,570,000
338,842
 296,456
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$425,342,000
 $331,183,000
$528,446
 $480,949

See accompanying notes.


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Healthcare Services Group, Inc.
Consolidated Statements of Comprehensive Income
(in thousands, except per share amounts)
 
Years Ended December 31,Years Ended December 31,
2013 2012 20112016 2015 2014
Revenues$1,149,890,000
 $1,077,435,000
 $889,065,000
$1,562,662
 $1,436,849
 $1,293,183
Operating costs and expenses:          
Costs of services provided995,104,000
 930,814,000
 766,958,000
1,339,492
 1,236,108
 1,155,293
Selling, general and administrative91,998,000
 79,277,000
 65,306,000
105,417
 111,689
 107,810
Other income:          
Investment and interest3,701,000
 2,920,000
 1,011,000
2,634
 712
 1,628
Income before income taxes66,489,000
 70,264,000
 57,812,000
120,387
 89,764
 31,708
Income taxes19,360,000
 26,050,000
 19,656,000
42,991
 31,740
 9,858
Net income$47,129,000
 $44,214,000
 $38,156,000
$77,396
 $58,024
 $21,850
          
Per share data:          
Basic earnings per common share$0.68
 $0.65
 $0.57
$1.06
 $0.81
 $0.31
Diluted earnings per common share$0.67
 $0.65
 $0.56
$1.05
 $0.80
 $0.31
          
Weighted average number of common shares outstanding:          
Basic69,206,000
 67,511,000
 66,637,000
72,754
 71,826
 70,616
Diluted70,045,000
 68,485,000
 67,585,000
73,474
 72,512
 71,341
          
Comprehensive income:          
Net income$47,129,000
 $44,214,000
 $38,156,000
$77,396
 $58,024
 $21,850
Other comprehensive income:          
Unrealized gain/(loss) on available for sale marketable securities, net of taxes(78,000) (216,000) 421,000
Unrealized (loss) gain on available for sale marketable securities, net of taxes(862) 518
 (24)
Total comprehensive income$47,051,000
 $43,998,000
 $38,577,000
$76,534
 $58,542
 $21,826

See accompanying notes.


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Healthcare Services Group, Inc.
Consolidated Statements of Cash Flows

(in thousands)
Years Ended December 31,Years Ended December 31,
2013 2012 20112016 2015 2014
Cash flows from operating activities:          
Net income$47,129,000
 $44,214,000
 $38,156,000
$77,396
 $58,024
 $21,850
Adjustments to reconcile net income to net cash provided by operating
activities:
          
Depreciation and amortization6,204,000
 5,116,000
 4,387,000
7,496
 7,660
 7,269
Bad debt provision1,990,000
 2,160,000
 2,450,000
4,629
 4,335
 4,470
Deferred income (benefits) tax(4,922,000) (3,493,000) 275,000
Deferred income tax (benefit) expense3,001
 17,842
 (15,059)
Stock-based compensation expense2,607,000
 2,538,000
 2,152,000
4,252
 3,541
 3,080
Tax benefit from equity compensation plans(2,981) (1,873) (2,626)
Amortization of premium on marketable securities537,000
 654,000
 999,000
1,723
 681
 354
Unrealized loss on marketable securities
 82,000
 486,000
Unrealized (gain) loss on deferred compensation fund investments(2,820,000) (1,871,000) 104,000
(1,460) 24
 (1,216)
Changes in operating assets and liabilities:          
Accounts and notes receivable(50,879,000) (11,634,000) (24,769,000)(61,051) (18,854) (13,492)
Prepaid income taxes
 405,000
 3,574,000
Inventories and supplies(3,772,000) (3,531,000) (4,531,000)(1,492) (846) (3,015)
Prepaid expenses and other assets(2,470) (1,710) (417)
Notes receivable — long term(3,956,000) (340,000) 3,572,000
(4,559) 
 600
Deferred compensation funding(4,369,000) (4,051,000) (1,804,000)2,732
 (649) (2,542)
Accounts payable and other accrued expenses25,961,000
 13,664,000
 (1,079,000)(4,251) 2,403
 492
Accrued payroll, accrued and withheld payroll taxes6,349,000
 6,142,000
 6,319,000
6,307
 (28,314) 11,813
Accrued insurance claims3,616,000
 4,908,000
 732,000
5,404
 13,987
 42,084
Deferred compensation liability7,721,000
 6,337,000
 2,145,000
(731) 1,113
 4,248
Income taxes payable(28,000) 1,906,000
 
7,455
 5,997
 (163)
Prepaid expenses and other assets790,000
 (2,830,000) (220,000)
Net cash provided by operating activities32,158,000
 60,376,000
 32,948,000
41,400
 63,361
 57,730
          
Cash flows from investing activities:          
Disposals of fixed assets158,000
 26,000
 22,000
275
 267
 83
Additions to property and equipment(3,762,000) (3,484,000) (5,545,000)(5,442) (4,998) (5,795)
Purchases of marketable securities(6,598,000) (10,833,000) (18,934,000)(29,449) (75,150) (5,140)
Sales of marketable securities15,807,000
 19,978,000
 29,971,000
28,164
 17,567
 4,392
Cash paid for acquisition(5,000,000) 
 (1,000,000)
Net cash provided by investing activities605,000
 5,687,000
 4,514,000
Net cash used in investing activities(6,452) (62,314) (6,460)
          
Cash flows from financing activities:          
Dividends paid(46,707,000) (44,093,000) (42,228,000)(53,342) (51,375) (49,077)
Reissuance of treasury stock pursuant to Dividend Reinvestment Plan107,000
 118,000
 128,000
109
 113
 110
Tax benefit from equity compensation plans2,615,000
 2,649,000
 1,222,000
2,981
 1,873
 2,626
Proceeds from the exercise of stock options6,428,000
 5,573,000
 2,363,000
5,968
 6,251
 6,196
Net cash used in financing activities(37,557,000) (35,753,000) (38,515,000)(44,284) (43,138) (40,145)
          
Net change in cash and cash equivalents(4,794,000) 30,310,000
 (1,053,000)(9,336) (42,091) 11,125
Cash and cash equivalents at beginning of the period68,949,000
 38,639,000
 39,692,000
33,189
 75,280
 64,155
Cash and cash equivalents at end of the period$64,155,000
 $68,949,000
 $38,639,000
$23,853
 $33,189
 $75,280
          
Supplementary Cash Flow Information:          
Cash paid for interest$4,000
 $3,000
 $2,000
$574
 $258
 $156
Cash paid for income taxes, net of refunds$21,694,000
 $24,681,000
 $14,614,000
$32,532
 $7,901
 $25,080

See accompanying notes.

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Healthcare Services Group, Inc.
Consolidated Statements of Stockholders’ Equity

(in thousands)
Years Ended December 31, 2013, 2012 and 2011Years Ended December 31,
Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income, net of taxes Retained Earnings Treasury Stock Stockholders’ EquityCommon Stock Additional Paid-in Capital Accumulated Other Comprehensive (Loss) Income, Net of Taxes Retained Earnings Treasury Stock Stockholders’ Equity
Shares Amount Shares Amount 
Balances, December 31, 201069,315,000
 693,000
 100,138,000
 (78,000) 130,993,000
 (18,667,000) 213,079,000
Balance, December 31, 201371,868
 $719
 $168,329
 $49
 $127,464
 $(11,418) $285,143
Comprehensive income:
 
 
 
 
 
 
Net income for the period
 
 
 
 21,850
 
 21,850
Unrealized loss on available for sale marketable securities, net of taxes
 
 
 (24) 
 
 (24)
Comprehensive income
 
 
 
 
 
 $21,826
Exercise of stock options and other stock-based compensation, net of shares tendered for payment534
 5
 6,191
 
 
 

 6,196
Tax benefit from equity compensation plans
 
 2,626
 
 
 
 2,626
Share-based compensation expense — stock options and restricted stock
 
 2,705
 
 
 
 2,705
Treasury shares issued for Deferred Compensation Plan funding and redemptions
 
 459
 
 
 57
 516
Shares issued pursuant to Employee Stock Plans
 
 1,457
 
 
 394
 1,851
Cash dividends
 
 
 
 (49,077) 
 (49,077)
Shares issued pursuant to Dividend Reinvestment Plan
 
 326
 
 
 (216) 110
Adjustment to purchase price allocation

 

 3,934
 

 

 

 3,934
Shares issued pursuant to prior year acquisition476
 5
 (5) 

 

 

 
Balance, December 31, 201472,878
 $729
 $186,022
 $25
 $100,237
 $(11,183) $275,830
Comprehensive income:             
 
 
 
 
 
 
Net income for the period        38,156,000
   38,156,000

 
 
 
 58,024
 
 58,024
Unrealized gain on available for sale marketable securities, net of taxes      421,000
     421,000

 
 
 518
 
 
 518
Comprehensive income            38,577,000

 
 
 
 
 
 $58,542
Exercise of stock options and other stock-based compensation, net of shares tendered for payment158,000
 2,000
 349,000
     2,012,000
 2,363,000
386
 4
 6,247
 
 
 

 6,251
Tax benefit from equity compensation plans    1,222,000
       1,222,000

 
 1,873
 
 
 
 1,873
Share-based compensation expense — stock options and restricted stock    1,870,000
       1,870,000

 
 3,033
 
 
 
 3,033
Treasury shares issued for Deferred Compensation Plan funding and redemptions    367,000
     35,000
 402,000

 
 418
 
 
 70
 488
Shares issued pursuant to Employee Stock Plans    782,000
     451,000
 1,233,000

 
 1,363
 
 
 338
 1,701
Cash dividends        (42,228,000)   (42,228,000)
 
 0 
 (51,375) 
 (51,375)
Shares issued pursuant to Dividend Reinvestment Plan    81,000
     47,000
 128,000

 
 343
 
 
 (230) 113
Shares issued pursuant to acquisition    918,000
     162,000
 1,080,000
Balance, December 31, 201169,473,000
 695,000
 105,727,000
 343,000
 126,921,000
 (15,960,000) 217,726,000
Shares issued pursuant to prior year acquisition529
 5
 (5) 
 
 

 
Balance, December 31, 201573,793
 $738
 $199,294
 $543
 $106,886
 $(11,005) $296,456
Comprehensive income:             

 

 

 

 

 

 

Net income for the period        44,214,000
   44,214,000


 

 

 

 77,396
 

 77,396
Unrealized loss on available for sale marketable securities, net of taxes      (216,000)     (216,000)

 

 

 (862) 

 

 (862)
Comprehensive income            43,998,000


 

 

 

 

 

 $76,534
Exercise of stock options and other stock-based compensation, net of shares tendered for payment563,000
 5,000
 4,098,000
     1,470,000
 5,573,000
301
 3
 5,965
 

 

 

 5,968
Tax benefit from equity compensation plans    2,649,000
       2,649,000


 

 2,773
 

 

 

 2,773
Share-based compensation expense — stock options and restricted stock    1,897,000
       1,897,000


 

 3,743
 

 

 

 3,743
Treasury shares issued for Deferred Compensation Plan funding and redemptions    394,000
     59,000
 453,000


 

 103
 

 

 431
 534
Shares issued pursuant to Employee Stock Plans    1,278,000
     (29,000) 1,249,000


 

 1,696
 

 

 371
 2,067
Cash dividends        (44,093,000)   (44,093,000)

 

 

 

 (53,342) 

 (53,342)
Shares issued pursuant to Dividend Reinvestment Plan    85,000
     33,000
 118,000


 

 91
 

 

 18
 109
Shares issued pursuant to acquisition    (2,633,000)     2,633,000
 
Balance, December 31, 201270,036,000
 $700,000
 $113,495,000
 $127,000
 $127,042,000
 $(11,794,000) $229,570,000
Comprehensive income:             
Net income for the period        47,129,000
   47,129,000
Unrealized loss on available for sale marketable securities, net of taxes      (78,000)     (78,000)
Comprehensive income            47,051,000
Exercise of stock options and other stock-based compensation, net of shares tendered for payment617,000
 7,000
 6,381,000
     40,000
 6,428,000
Tax benefit from equity compensation plans    2,615,000
       2,615,000
Share-based compensation expense — stock options and restricted stock    2,045,000
       2,045,000
Treasury shares issued for Deferred Compensation Plan funding and redemptions    294,000
     66,000
 360,000
Shares issued pursuant to Employee Stock Plans    1,370,000
     472,000
 1,842,000
Cash dividends        (46,707,000)   (46,707,000)
Shares issued pursuant to Dividend Reinvestment Plan    309,000
     (202,000) 107,000
Shares issued pursuant to acquisition1,215,000
 12,000
 41,820,000
     
 41,832,000
Balance, December 31, 201371,868,000
 $719,000
 $168,329,000
 $49,000
 $127,464,000
 $(11,418,000) $285,143,000
Shares issued pursuant to previous settlement113
 1
 3,999
 

 

 

 4,000
Other(3) 
 

 
 
 

 
Balance, December 31, 201674,204
 $742
 $217,664
 $(319) $130,940
 $(10,185) $338,842
See accompanying notes.

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Healthcare Services Group, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 20122016, 2015 and 20112014

Note 1— Description of Business and Significant Accounting Policies

Nature of Operations

We provide management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary service departments of the health care industry, including nursing homes, retirement complexes, rehabilitation centers and hospitals located throughout the United States. Although we do not directly participate in any government reimbursement programs, our clients’clients receive government reimbursements are subjectrelated to government regulation.Medicare and Medicaid. Therefore, they are directly affected by any legislation relating to Medicare and Medicaid reimbursement programs.

We provide our services primarily pursuant to full service agreements with our clients. In such agreements, we are responsible for the day to day management of the managers and hourly employees located at our clients’ facilities. We also provide services on the basis of a management-only agreementagreements for a very limited number of clients. Our agreements with clients typically provide for a one year service term, cancelable by either party upon 30 to 90 days’ notice, after the initial 90-day60 to 120 day period.

We are organized into two reportable segments; housekeeping, laundry, linen and other services (“Housekeeping”), and dietary department services (“Dietary”).

Housekeeping consists of the managing of the client’s housekeeping department which is principally responsible for the cleaning, disinfecting and sanitizing of patientresident rooms and common areas of a client’s facility, as well as the laundering and processing of the personal clothing belonging to the facility’s patients. Also within the scope of this segment’s service is the responsibility for laundering and processing of the bed linens, uniforms, resident personal clothing and other assorted linen items utilized byat a client facility.

Dietary consists of managing the client’s dietary department which is principally responsible for food purchasing, meal preparation and providing dietitian consulting professional services, which includes the development of a menu that meets the patient’sresidents’ dietary needs. We began the Dietary operations in 1997.

AsUse of December 31, 2013,Estimates in Financial Statements

In preparing financial statements in conformity with United States generally accepted accounting principles (“U.S. GAAP”), we operate two wholly-owned subsidiaries, Huntingdon Holdings, Inc. (“Huntingdon”)make estimates and Healthcare Staff Leasing Solutions, LLC (“Staff Leasing”). Huntingdon invests our cashassumptions that affect the reported amounts of assets and cash equivalentsliabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as managesthe reported amounts of expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are used for, but are not limited to, our portfolio of marketable securities. Staff Leasingallowance for doubtful accounts, accrued insurance claims, asset valuations and review for potential impairment, and deferred taxes. The estimates are based upon various factors including current and historical trends, as well as other pertinent industry and regulatory authority information. We regularly evaluate this information to determine if it is an entity formed in 2011necessary to offer professional employer organization (“PEO”) servicesupdate the basis for our estimates and to potential clients in the health care industry. As of December 31, 2013, we have PEO service contracts in several states. During the years 2011 through 2013, operating results from our PEO services contracts were not material and were included in our Housekeeping segment.compensate for known changes.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Healthcare Services Group, Inc. and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

Fair Value of Financial Instruments

Our financial instruments consist principally of cash and cash equivalents, marketable securities, accounts and notes receivable, deferred compensation funding and accounts payable. Our marketable securities consist of tax-exempt municipal bond investments that are reported at fair value with the unrealized gains and losses included in our consolidated statements of comprehensive income. In accordance with generally accepted accounting principles in the United States ("U.S. GAAP"), we defineWe determine fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Thedate. We utilize valuation techniques that maximize the use of observable inputs (Levels 1 and 2) and minimize the use of unobservable inputs (Level 3) within the fair value hierarchy. Assets and liabilities are classified within the fair value hierarchy based on the lowest level (least observable) input that is significant to the measurement in its entirety.

Our financial instruments that are measured at fair value on a recurring basis consist of marketable securities and our deferred compensation fund investments. Other financial instruments such as cash and cash equivalents, accounts and marketable securitiesnotes receivable and accounts payable (including income taxes payable and accrued expenses) are short-term in nature, and therefore the carrying value of these instruments is determined based on “Level 2” inputs, which consists of quoted prices for similar assets or market corroborated inputs. We believe recorded values of all of our financial instrumentsdeemed to approximate their current fair values because of their nature, stated interest rates and respective maturity dates or durations.value.


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We have certain notes receivable that either do not bear interest or bear interest at a below marketbelow-market rate. Therefore, such notes receivable of $2,892,000$5.7 million and $1,639,000$6.5 million at December 31, 20132016 and 2012,2015, respectively, have been discounted to their present value and are reported at such values of $2,880,000$5.7 million and $1,620,000$6.5 million at December 31, 20132016 and 2012,2015, respectively.


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Cash and Cash Equivalents

Cash and cash equivalents are held in U.S. financial institutions or in custodial accounts with U.S. financial institutions. Cash and cash equivalents are defined as short-term, highly liquid investments with a maturity of three months or less at time of purchase that are readily convertible into cash and have insignificant interest rate risk.

Investments in Marketable Securities

We define our marketable securities as fixed income investments which are highly liquid investments thatand can be readily purchased or sold usingthrough established markets. At December 31, 2013,2016, we had marketable securities of $11,445,000$67.7 million which were comprised primarily of tax exempt municipal bonds. These investments are accounted for as available-for-sale securities and are reported at fair value on our balance sheet. For the year ended December 31, 2013, the accumulated2016, $0.9 million of unrealized losses related to these investments were recorded in other comprehensive income on our consolidated balance sheet, statements of comprehensive income and stockholders’ equity includes unrealized gains from marketable securities of $49,000 related to marketable securities which are not recognized under the fair value option in accordance with U.S. GAAP. The unrealizedincome. Unrealized gains and losses are recorded net of income taxes.

We, in accordance with U.S. GAAP, define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Effective January 1, 2010, we have not elected the fair value option for marketable securities as we believe these assets are more representative of our investing activities. These assets are available for future needs of the Company to support our current and projected growth, if required. In accordance with U.S. GAAP, our investments in marketable securities are classified within Level 2 of the fair value hierarchy. These investment securities are valued based upon quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Our investment policy is to seekintended to manage theseour assets to achieve our goalgoals of preserving principal, maintaining adequate liquidity at all times, and maximizing returns subject to our investment guidelines. Our investment policy limits investment to certain types of instruments issued by institutions primarily with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer.

We periodically review our investments in marketable securities for other than temporary declines in fair value below the cost basis and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As of December 31, 2013,2016, we believe that the recorded value of our investments in marketable securities was recoverable in all material respects.

Inventories and Supplies

Inventories and supplies include housekeeping, linen and laundry supplies, as well as food provisions and supplies. Inventories and supplies are stated at cost to approximate a first-in, first-out (FIFO) basis. Linen supplies are amortized on a straight-line basis over their estimated useful life of 24 months.

Property and Equipment

Property and equipment are stated at cost.cost, net of accumulated depreciation. Additions, renewals and improvements are capitalized, while maintenance and repair costs are expensed when incurred. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts and any resulting gain or loss is included in income. Depreciation is provided byrecorded using the straight-line method over the following estimated useful lives: laundryHousekeeping and linenDietary equipment installations 35 to 7 years; housekeeping,computer hardware and officesoftware — 3 to 7 years; and other, consisting of furniture and equipment — 3 to 7 years;fixtures, leasehold improvements and autos and trucks — 35 to 10 years. Depreciation expense on property and equipment for the years ended December 31, 2013, 20122016, 2015 and 20112014 was $3,373,000, $2,947,000$4.8 million, $4.4 million and $2,416,000,$3.9 million respectively.

Revenue Recognition

Revenues from our service agreements with clients are recognized as services are performed. Revenues are reported net of sales taxes that are collected from customers and remitted to taxing authorities.

As a distributor of laundry equipment, we occasionally sell laundry installations to certain clients. The sales in most cases represent the construction and installation of a turn-key operation and are for payment terms ranging from 24 to 60 months. Our accounting policy for these sales is to recognize the gross profit over the life of the payments associated with our financing of the transactions. During 2013, 2012 and 2011 laundry installation sales were not material.


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Table of Contents

Income Taxes

We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. We accrue for probable tax obligations as required by facts and circumstances in the various regulatory environments. In addition, deferred tax assets and liabilities are recognized for expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. If appropriate, we would record a valuation allowance to reduce deferred tax assets to an amount for which realization is more likely than not. Deferred tax assets and liabilities are more fully described in subsequent Notes to the Consolidated Financial Statements.Note 12.

In accordance with U.S. GAAP, we account for uncertain
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Uncertain income tax positions taken or expected to be taken in tax returns are reflected within our financial statements based on a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.process.

Earnings per Common Share

Basic earnings per common share are computed by dividing income available to common shareholders by the weighted-average common shares outstanding for the period. Diluted earnings per common share reflect the weighted-average common shares outstanding and dilutive common shares, such as those issuable upon exercise of stock options.options and upon the vesting of restricted stock.

Share-Based Compensation

U.S. GAAP addresses the accounting for share-based compensation, specifically, the measurement and recognition of compensation expense, based on estimated fair values, for all share-based awards made to employees and directors, including stock options and participation in the Company’s employee stock purchase plan. We estimate the fair value of share-based awards on the date of grant using the Black-Scholes option valuation model.model for stock options and using the share price on the date of grant for restricted stock. The value of the portion of the award that is ultimately expected to vest is recognized ratably as an expense in the Company’s consolidated statements of income over the requisite service periods. We use the straight-line single option method of expensing share-based awards in our consolidated financial statements of income. Because share-based compensation expense is based on awards that are ultimately expected to vest, share-based compensation expense will be reduced to account for estimated forfeitures. Forfeitures are to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Advertising Costs

Advertising costs are expensed when incurred. Advertising costs were not material for the years ended December 31, 2013, 20122016, 2015 and 2011.2014.

Impairment of Long-Lived Assets

We account for long-lived assets in accordance with the criteria established in U.S. GAAP, which states that theThe carrying amounts of long-lived assets beare periodically reviewed to determine whether current events or circumstances warrant adjustment to such carrying amounts. Any impairment is measured by the amount that the carrying value of such assets exceeds their fair value, primarily based on estimated discounted cash flows. Considerable management judgment is necessary to estimate the fair value of assets. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value, less cost to sell.

Acquisitions

We acquire businesses and/or assets that augment and complement our operations from time to time. These acquisitions are accounted for under the purchase method of accounting. The consolidated financial statements include the results of operations from such business combinations as of the date of acquisition.


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Identifiable Intangible Assets and Goodwill

Identifiable intangible assets with finite lives are amortized on a straight-line basis over their respective lives. Goodwill represents the excess of costscost over the fair value of net assets of the acquired business.businesses. We review the carrying valuesvalue of goodwill at least annually during the fourth quarter of each year to assess for impairment, because these assets are not amortized. Additionally, we reviewor more often if events or circumstances indicate that the carrying value of any intangible asset or goodwill whenever events or changes in circumstances indicate thatmay exceeds its carrying amount may not be recoverable. We assess impairment by comparing theestimated fair value of an identifiable intangible asset or reporting unit with its carrying value. Impairments are recorded when incurred. No impairment loss was recognized on our intangible assets or goodwill for the years ended December 31, 2013, 20122016, 2015 or 2011.2014.

Treasury Stock

Treasury stock purchases are accounted for under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. Gains or losses on the subsequent reissuance of shares are credited or charged to additional paid in capital.

Reclassification

Certain prior period amounts have been reclassified to conform to current year presentation.

Use of EstimatesChange in Financial StatementsAccounting Estimate

In preparing financial statementsfiscal year 2015, the Company transitioned its workers compensation and certain employee health & welfare insurance programs to HCSG Insurance Corp. (“HCSG Insurance” or the “Captive”), its wholly owned captive insurance subsidiary which was previously providing general liability coverage to the Company. HCSG Insurance was formed in conformityJanuary 2014 to provide the Company with U.S. GAAP, we make estimatesgreater flexibility and assumptions that affectcost efficiency in meeting its property & casualty and health & welfare needs. In conjunction with the reported amounts of assetsaforementioned insurance programs being administered and liabilities and disclosures of contingent assets and liabilities atprovided by the date of the financial statements, as well as the reported amounts of expensesCaptive, during the reporting period. Actual results could differ from those estimates. Significant estimates are used for, but not limitedthird quarter 2014, management conducted a review of its self-insurance reserves to our allowance for doubtful accounts, accruedenhance its self-insurance estimation process. After analysis and consultation with insurance regulators and advisors, the Company recorded a non-cash adjustment of $37.4 million to reflect estimated current and future insurance claims asset valuationsprojected to be closed out over the next 15 to 17 years. This tax-effected adjustment

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was recorded in the third quarter 2014 and reviewis accounted for potential impairment,as a change in estimate, along with charges related to the corporate reorganization, self-funded health insurance program transition and deferred taxes. The estimates are based upon various factors including current and historical trends, as well as other pertinent industry and regulatory authority information. We regularly evaluate this information to determine if it is necessary to update the basis forrelated expenses in our estimates and to compensate for known changes.consolidated statements of comprehensive income.

Concentrations of Credit Risk

The accounting guidance requires the disclosure of significant concentrations of credit risk, regardless of the degree of such risk. FinancialOur financial instruments as defined by U.S. GAAP, which potentiallythat are subject us to concentrations of credit risk consist principally ofare cash and cash equivalents, marketable securities, deferred compensation funding and accounts and notes receivable. We define our marketable securities as fixed income investments which are highly liquid investments that can be readily purchased or sold using established markets. At December 31, 20132016 and 2012,2015, substantially all of our cash and cash equivalents, and marketable securities were held in one large financial institution located in the United States.

Our clients are concentrated in the health care industry, primarily providers of long-term care. Many of our clients’ revenues are highly contingent on Medicare, Medicaid and third partythird-party payors’ reimbursement funding rates. Congress has enacted a number of major laws during the past decade that have significantly altered, or threatened to alter, overall government reimbursement for nursing home services. These changes and lack of substantive reimbursement funding rate reformNew legislation as well as other trends in the long-term care industry have 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 clients, have resulted in, and could continue to result in, significant additional bad debts in the future.

As a result of the current economic crisis, many states have significant budget deficits. State Medicaid programs are experiencing increased demand, and with lower revenues than projected, they have fewer resources to support their Medicaid programs. In addition, comprehensive health care legislation under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (together, the “Act”) was signed into law in March 2010. The Act will significantly impact the governmental healthcare programs in which our clients participate, and reimbursements received thereunder from governmental or third-party payors. Furthermore, in the coming year and beyond, new proposals or additional changes in existing regulations could be made to the Act which could directly impact the governmental reimbursement programs in which our clients participate. As a result, some state Medicaid programs are reconsidering previously approved increases in nursing home reimbursement or are considering delaying or foregoing those increases. A few states have indicated that it is possible they will run out of cash to pay Medicaid providers, including nursing homes. Any negative changes in our clients’ reimbursements may negatively impact our results of operations. Although we are currently evaluating the Act’s effect on our client base, we may not know the full effecteffects of such programs until such time as these laws are fully implemented and Centers for Medicare and Medicaid Services (“CMS”) and othergovernmental agencies issue applicable regulations or guidance.

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In 2009 and 2010, Federal economic stimulus legislation was enacted to counter the impact of the economic crisis on state budgets. The legislation included the temporary provision of additional federal matching funds to help states maintain their Medicaid programs. This legislation to provide states with an extension of this fiscal relief was extended through June 2011, but at a reduced reimbursement rate. In July 2011, CMS issued a final rule that reduced Medicare payments to nursing centers by 11.1% and changed the reimbursement for the provision of group rehabilitation therapy services to Medicare beneficiaries. This new rule was effective as of October 1, 2011. Even if federal or state legislation is enacted that provides additional funding to Medicaid providers, given the volatility of the economic environment, it is difficult to predict the impact of this legislation on our clients’ liquidity and their ability to make payments to us as agreed.

In January 2013, the U.S. Congress enacted the American Taxpayer Relief Act of 2012, which delayed automatic spending cuts, including reduced Medicare payments to plans and providers up to 2%. These discretionary spending caps were originally enacted under provisions in the Budget Control Act of 2011, an initiative to reduce the federal deficit through the year 2021, also known as “sequestration.” The sequestration went into effect starting March 2013. In December 2013, the U.S. Congress enacted the Bipartisan Budget Act of 2013, which reduces the impact of the sequestration over the next two years, beginning in fiscal year 2014 and extended the reduction in Medicare payments to plans and providers for two years through the year 2023.

Significant Clients

We have several clients who each have made a contribution toindividually contributed over 5%, with one as high as 9.5%, of our total consolidated revenues ranging from 3% to 5% for the year ended December 31, 2013.2016. Although we expect to continue relationships with these clients, there can be no assurance thereof. The loss of such clients, or a significant reduction in the revenues we receive from these clients, would have a material adverse effect on the results of operations of our two operating segments. In addition, if such clients change their respective payment terms it could increase our accounts receivable balance and have a material adverse effect on our cash flows and cash and cash equivalents.

Recent Accounting Pronouncements

In February 2013,March 2016, the Financial Accounting Standards BoardFASB issued Accounting Standards Update (“ASU”) 2013-02, Comprehensive Income (Topic 220): ReportingASU 2016-09, Stock Compensation: Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 is intended to simplify several aspects of Amounts Reclassified Outthe accounting for share-based payments. The guidance will be effective for fiscal years beginning after December 15, 2016, including interim periods within that year. The Company will adopt the standard beginning January 1, 2017, and is not expecting a material impact to results of Accumulated Other Comprehensive Income. Thisoperations or financial position. The impacts of adopting the standard will relate to the recognition of excess tax benefits related to share-based payments as a component of income tax expense, as opposed to in additional paid-in capital; an amendment to the calculation of diluted earnings per share to exclude windfall tax benefits from assumed proceeds when calculating diluted shares outstanding; as well as accounting for forfeitures of share-based awards as they occur, as opposed to reserving for estimated forfeitures.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which was subsequently amended and updated throughout 2015 and 2016. The standard provides guidance on revenue recognition, among other topics such as the accounting for compensation and costs to obtain a contract. The standard requires that an entity recognize revenue to include additional disclosures about significant amounts reclassified outdepict the transfer of accumulated other comprehensive income by component. Anpromised goods or services to customers in an amount that reflects the consideration to which the entity has the optionexpects to present this information, either on the face of the statement where net incomebe entitled in exchange for those goods or services. Adoption is presented or in the accompanying notes. This ASU does not change current requirements for reporting net income or other comprehensive income under current accounting guidance. This ASU is effectiverequired for reporting periods beginning after December 15, 2012.2017, with early adoption prohibited. The Company plans to adopt the standard beginning on January 1, 2018. The Company is in the process of evaluating the impact of the adoption of this standard in 2013 didASU, as well as determining the transition method that will be applied. Our analysis has consisted of reviewing the nature and terms of our existing contracts under the provisions of the new guidance and assessing any operational changes and process updates required for compliance. Currently, the Company does not haveexpect a material impact to our accounting for the revenue we earn related to our Housekeeping and Dietary services. We anticipate that the most significant impact of the new standard will relate to additional disclosure obligations.

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires lessees to recognize assets and liabilities on their balance sheet related to the Company's consolidated resultsrights and obligations created by most leases, while continuing to recognize expenses on their income statements over the lease term.  It will also require disclosures designed to give financial statement users information regarding the amount, timing, and uncertainty of operations, cash flows or financial position.

Note 2—Acquisition

On July 12, 2013,arising from leases. The guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted for all entities. The Company will adopt the Company acquired substantially allnew guidance as of January 1, 2019. We are continuing to evaluate the expected impact of the operating assets of Platinum Health Services, LLC, a Delaware limited liability company and Platinum Health Services PEO, LLC, a Delaware limited liability company (collectively “Platinum”) pursuant to an Asset Purchase Agreement dated July 11, 2013. Platinum was a privately-held provider of professional housekeeping, laundry and maintenance services to long-term and post-acute care facilities and operated solely withinrequirements, however we expect the United States. The acquisition has been included within the consolidated results of operations and financial condition from the date of the acquisition.

The total purchase consideration was $46,832,000, which consisted of a cash payment of $5,000,000, the issuance of 1,215,000 shares of the Company's common stock with a fair value of $30,062,000 and contingent consideration with a fair value of $11,770,000 as of December 31, 2013. Upon the achievement of certain financial and retention targets, the selling stockholdersprimary impact will be eligible for contingent consideration paid by the future issuance of the Company's common stock.

The purchase consideration of the acquisition has been preliminarily allocatedrelate to the assets acquiredcapitalization of operating leases of office space, vehicles and liabilities assumed based on estimated fair values. The preliminary allocation is as follows:equipment.

Fair value of assets acquired, net of liabilities assumed$2,604,000
Goodwill23,228,000
Intangible assets21,000,000
Net assets acquired$46,832,000


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Goodwill, which is expected

In November 2015, the FASB issued ASU 2015-17, 
Balance Sheet Classification of Deferred Taxes. The amendment in this ASU requires that deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent in a classified statement of financial position. The guidance becomes effective for annual reporting periods beginning after December 15, 2016 with early adoption permitted. Management elected to be amortized for tax purposes, representsadopt the excessstandard in the first quarter of 2016, with retrospective application to prior period balances presented. The adoption of ASU 2015-17 merely resulted in the reclassification within the asset section of the purchase price overbalance sheet and did not have a material impact on the fair value of the net assets acquired, and is primarily attributable to the assembled workforce of the acquired business. Goodwill was allocated to our Housekeeping reportable operating segment. Intangible assets consist of customer relationships of $21,000,000 and has been assigned an estimated useful life of 10 years.Company’s working capital or consolidated financial statements.

Pro forma results are not presented as the acquisition was not deemed significant to the Company's operating results pursuant to Regulation S-X for the three months and years ended December 31, 2013 and 2012.

Note 3—2—Changes in Accumulated Other Comprehensive Income by Component

U.S. GAAP establishes standards for presenting information about significant items reclassified out of accumulated other comprehensive income by component. As of December 31, 20132016 and 2012,2015, respectively, we generated other comprehensive income from one component. This component relates to the unrealized gains and losses from our available for sale marketable securities during a given reporting period. Effective January 1, 2013, we elected to present this information in a separate disclosure.

The following table provides a summary of changes in accumulated other comprehensive income:

income, net of taxes:
 Unrealized Gains and Losses on Available for Sale Securities (1)
Accumulated other comprehensive income — December 31, 2012$127,000
Other comprehensive income before reclassifications(43,000)
Amounts reclassified from accumulated other comprehensive income (2)(3)(35,000)
Net current period change in other comprehensive income(78,000)
Accumulated other comprehensive income — December 31, 2013$49,000
 
Unrealized Gains and (Losses) on Available for Sale Securities (1)
 2016 2015 2014
 (in thousands)
Accumulated other comprehensive income - beginning balance$543
 $25
 $49
Other comprehensive (loss) income before reclassifications(1,005) 535
 (16)
Amounts reclassified from accumulated other comprehensive (loss) income (2)(3)
143
 (17) (8)
Net current period change in other comprehensive (loss) income (4)
$(862) $518
 $(24)
Accumulated other comprehensive (loss) income - ending balance$(319) $543
 $25

(1)
All amounts are net of tax.
(2)
Realized gains and losses are recorded pre-tax in the other income - investment and interest caption onin our consolidated statements of comprehensive income.
(3)
TheFor the year ended December 31, 2016, the Company recorded $49,000$0.2 million of realized losses from the sale of available for sale securities. For the years ended December 31, 2015 and 2014, the Company recorded less than $0.1 million of realized gains fromfor the sale of available for sale securities. Refer to Note 5 herein for further information.
(4)
For the years ended December 31, 2016, 2015 and 2014, these changes in other comprehensive income were net of tax effects of $0.5 million, $0.3 million and $0.1 million, respectively.

Note 3—Property and Equipment

Property and equipment are recorded at cost. Depreciation is recorded over the estimated useful life of each class of depreciable assets, and is computed using the straight-line method. Leasehold improvements are amortized over the shorter of the estimated asset life or term of the lease. Repairs and maintenance costs are charged to expense as incurred.

The following table sets forth the amounts of property and equipment by each class of depreciable assets as of December 31, 2016 and December 31, 2015:
 December 31, 2016 December 31, 2015
 (in thousands)
Housekeeping and Dietary equipment$21,136
 $19,445
Computer hardware and software11,750
 10,528
Other (1)
1,133
 1,134
Total property and equipment, at cost$34,019
 $31,107
Less accumulated depreciation20,564
 18,021
Total property and equipment, net$13,455
 $13,086

(1)
Includes furniture and fixtures, leasehold improvements and autos and trucks.

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Depreciation expense for the years ended December 31, 2016, 2015 and 2014 was $4.8 million, $4.4 million and $3.9 million, respectively.

Note 4—Goodwill and Other Intangible Assets

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net assets of acquired of businesses andbusinesses. Goodwill is not amortized. Goodwillamortized, but is evaluated for impairment on an annual basis, or more frequently if impairment indicators arise, using a fair-value-based test that compares the fair value of the reporting unit to its carrying value.arise. The carrying value of goodwill as of December 31, 20132016 and 20122015 was $40,183,000 and $16,955,000, respectively.$44.4 million.

The changes in the carrying values of goodwill by reportable operating segment, as described in Note 14 herein, were as follows:Intangible Assets

 Reportable Segments
 Housekeeping Dietary Total
December 31, 2012$14,894,000
 $2,061,000
 $16,955,000
Goodwill acquired during the year23,228,000
 
 23,228,000
December 31, 2013$38,122,000
 $2,061,000
 $40,183,000

The cost ofOur intangible assets is based onwere acquired through acquisitions and are recorded at their fair values at the date of acquisition. Intangible assets with determinable lives are amortized on a straight-line basis over their estimated useful life (between 7lives. The customer relationships have a weighted-average amortization period of 9.7 years. As of December 31, 2015, the Company’s non-compete agreements and 10 years).certain of the Company’s customer relationship intangible assets had been fully amortized and the respective balances were written-off during 2016.


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The following table sets forth the amounts of our identifiable intangible assets subject to amortization, which were acquired in acquisitions.

amortization:
December 31,
December 31,2016 2015
2013 2012(in thousands)
Customer relationships$35,481,000
 $14,481,000
$29,081
 $35,781
Non-compete agreements800,000
 800,000

 800
Total other intangibles, gross36,281,000
 15,281,000
$29,081
 $36,581
Less accumulated amortization12,909,000
 10,078,000
14,672
 19,473
Other intangibles, net$23,372,000
 $5,203,000
$14,409
 $17,108

The customer relationships have a weighted-average amortization period of eight years and the non-compete agreements have a weighted-average amortization period of eight years. The following table sets forth the estimated amortization expense for intangibles subject to amortization for the followingnext five fiscal years:

Period/YearCustomer
Relationships
 Non-Compete
Agreements
 Total Customer
Relationships
 Total
2014$3,211,000
 $67,000
 $3,278,000
20153,211,000
 
 3,211,000
20162,668,000
 
 2,668,000
 (in thousands)
20172,397,000
 
 2,397,000
 $2,427
 $2,427
20182,298,000
 
 2,298,000
 $2,328
 $2,328
2019 $2,130
 $2,130
2020 $2,130
 $2,130
2021 $2,130
 $2,130
Thereafter9,520,000
 
 9,520,000
 $3,264
 $3,264

Amortization expense for the years ended December 31, 2013, 20122016, 2015 and 20112014 was $2,831,000, $2,169,000$2.7 million, $3.2 million and $1,971,000,$3.3 million, respectively.

Note 5—Fair Value Measurements

We,The Company’s current assets (other than marketable securities and inventories) and current liabilities are financial instruments and most of these items are recorded at cost in accordance with U.S. GAAP, definethe Consolidated Balance Sheets. The estimated fair value as the priceof these financial instruments approximates their carrying value due to their short-term nature. Our financial assets that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participantsare measured at the measurement date (exit price). Effective January 1, 2010, we have not elected the fair value option foron a recurring basis are our marketable securities as we believe these assets are more representative ofand our investing activities. These assets are available for future needs of the Company to support our current and projected growth, if required. In accordance with U.S. GAAP, our investments indeferred compensation funding.

The Company’s marketable securities consist of tax-exempt municipal bonds, which we classify as available-for-sale and which are reported at fair value. Unrealized gains and losses associated with these investments are included in other comprehensive income (net of tax) within our consolidated statements of comprehensive income. The fair value of these marketable securities is

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classified within Level 2 of the fair value hierarchy. These investmenthierarchy, as these securities are valued based uponmeasured using quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.observable. Such valuations are determined by a third party pricing service.

The Company’s financial instruments consist mainly of cashinvestments under the funded deferred compensation plan are accounted for as trading securities and cash equivalents, available for sale marketable securities, accounts and notes receivable, prepaid expenses and other, and accounts payable (including income taxes payable and accrued expenses). The carrying value of these financial instruments approximates their fair value because of their short-term nature.unrealized gains or losses are included in earnings. The fair value of financial instruments is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties.


48
these investments are determined based on quoted market prices (Level 1).

We believe recorded values of all of our financial instruments approximate their current fair values because of their nature, stated interest rates and respective maturity dates or durations.


Table of Contents

The following tables provide fair value measurement information for our marketable securities and deferred compensation fund investment assets as of December 31, 20132016 and 2012:2015:
 As of December 31, 2016
     Fair Value Measurement Using:
 Carrying
Amount
 Total Fair
Value
 Quoted
Prices
in Active
Markets
(Level 1)
 Significant
Other
Observable
Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
 (in thousands)
Financial Assets:         
Marketable securities         
Municipal bonds — available for sale$67,730
 $67,730
 $
 $67,730
 $
Deferred compensation fund         
Money Market (1)
$3,147
 $3,147
 $
 $3,147
 $
Balanced and Lifestyle7,162
 7,162
 7,162
 
 
Large Cap Growth5,583
 5,583
 5,583
 
 
Small Cap Growth2,933
 2,933
 2,933
 
 
Fixed Income2,752
 2,752
 2,752
 
 
International1,132
 1,132
 1,132
 
 
Mid Cap Growth1,410
 1,410
 1,410
 
 
Deferred compensation fund$24,119
 $24,119
 $20,972
 $3,147
 $


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As of December 31, 2013As of December 31, 2015
��    Fair Value Measurement Using:
  �� Fair Value Measurement Using:
Carrying
Amount
 Total Fair
Value
 Quoted
Prices
in Active
Markets
(Level 1)
 Significant
Other
Observable
Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
Carrying
Amount
 Total Fair
Value
 Quoted
Prices
in Active
Markets
(Level 1)
 Significant
Other
Observable
Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
(in thousands)
Financial Assets:                  
Marketable securities                  
Municipal bonds$11,445,000
 $11,445,000
 $
 $11,445,000
 $
Municipal bonds — available for sale$69,496
 $69,496
 $
 $69,496
 $
Deferred compensation fund                  
Money Market$3,592,000
 $3,592,000
 $
 $3,592,000
 $
Money Market (1)
$3,896
 $3,896
 $
 $3,896
 $
Balanced and Lifestyle8,174,000
 8,174,000
 8,174,000
 
 
9,136
 9,136
 9,136
 
 
Large Cap Growth4,292,000
 4,292,000
 4,292,000
 
 
5,218
 5,218
 5,218
 
 
Small Cap Value2,173,000
 2,173,000
 2,173,000
 
 
2,275
 2,275
 2,275
 
 
Fixed Income1,962,000
 1,962,000
 1,962,000
 
 
2,624
 2,624
 2,624
 
 
International1,079,000
 1,079,000
 1,079,000
 
 
1,025
 1,025
 1,025
 
 
Mid Cap Growth928,000
 928,000
 928,000
 
 
1,217
 1,217
 1,217
 
 
Deferred compensation fund$22,200,000
 $22,200,000
 $18,608,000
 $3,592,000
 $
$25,391
 $25,391
 $21,495
 $3,896
 $

 As of December 31, 2012
     Fair Value Measurement Using:
 Carrying
Amount
 Total Fair
Value
 Quoted
Prices
in Active
Markets
(Level 1)
 Significant
Other
Observable
Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
Financial Assets:         
Marketable securities         
Municipal bonds$21,322,000
 $21,322,000
 $
 $21,322,000
 $
Deferred compensation fund         
Money Market$4,114,000
 $4,114,000
 $
 $4,114,000
 $
Balanced and Lifestyle6,311,000
 6,311,000
 6,311,000
 
 
Large Cap Growth2,724,000
 2,724,000
 2,724,000
 
 
Small Cap Value1,936,000
 1,936,000
 1,936,000
 
 
Fixed Income1,461,000
 1,461,000
 1,461,000
 
 
International785,000
 785,000
 785,000
 
 
Mid Cap Growth500,000
 500,000
 500,000
 
 
Deferred compensation fund$17,831,000
 $17,831,000
 $13,717,000
 $4,114,000
 $

(1)The fair value of the municipal bonds is measured using third party pricing service data. The fair value of equity investments in the funded deferred compensation plan are valued (Level 1) based on quoted market prices. The money market fund in the funded deferred compensation plan is valued (Level 2) atbased on the net asset value (“NAV”) of the shares held by the plan at the end of the period. As a practical expedient, the fair value of ourThe money market fund is valued atincludes short-term United States dollar denominated money-market instruments and the NAV asis determined by the custodian of the fund. The money market fund includes short-term United States dollar denominated money-market instruments. The money market fund can be redeemed at its NAV at itsthe measurement date, as there are no significant restrictions on the ability of participants to sell this investment. These assets will be redeemed by the plan participants on an as needed basis.

For the year ended December 31, 2013, there were no unrealized gains or losses recorded.

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Other-Than-Temporary Impairments
 (in thousands)
December 31, 2016         
Marketable securities         
Municipal bonds — available for sale$68,220
 $178
 $(668) $67,730
 $
Total debt securities$68,220
 $178
 $(668) $67,730
 $
December 31, 2015         
Marketable securities         
Municipal bonds — available for sale$68,640
 $869
 $(13) $69,496
 $
Total debt securities$68,640
 $869
 $(13) $69,496
 $
December 31, 2014         
Marketable securities         
Municipal bonds — available for sale$11,758
 $48
 $(7) $11,799
 $
Total debt securities$11,758
 $48
 $(7) $11,799
 $

For the years ended December 31, 20122016, 2015 and 2011, we recorded unrealized losses from marketable securities of $82,000 and $486,000 respectively, for investments recorded under the fair value option.


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Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Other-than-temporary Impairments
December 31, 2013         
Type of security:         
Municipal bonds — available for sale11,364,000
 83,000
 (2,000) 11,445,000
 
Total debt securities$11,364,000
 $83,000
 $(2,000) $11,445,000
 $
December 31, 2012         
Type of security:         
Municipal bonds — available for sale21,111,000
 220,000
 (9,000) 21,322,000
 
Total debt securities$21,111,000
 $220,000
 $(9,000) $21,322,000
 $
December 31, 2011         
Type of security:         
Municipal bonds$2,167,000
 $82,000
 $
 $2,249,000
 $
Municipal bonds — available for sale28,745,000
 352,000
 (9,000) 29,088,000
 
Total debt securities$30,912,000
 $434,000
 $(9,000) $31,337,000
 $

For the years ended December 31, 2013, 2012 and 2011,2014, we received total proceeds, less the amount of $14,985,000, $16,838,000interest received, of $28.1 million, $16.4 million and $12,507,000,$3.9 million, respectively, from sales of available for saleavailable-for-sale municipal bonds. These sales resulted in realized gainslosses of $49,000, $229,000 and $95,000$0.2 million recorded in other income – investment and interest caption on our statement of comprehensive income for the yearsyear ended December 31, 2013, 20122016, and 2011, respectively.gains of less than $0.1 million in both 2015 and 2014. The basis for the sale of these securities was a specific identification of each bond sold during this period.


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The following tables includetable summarizes the contractual maturities of debt securities held at December 31, 20132016 and 2012,2015, which are classified as marketable securities in the consolidatedConsolidated Balance Sheet.

Sheets:
Municipal Bonds — Available for Sale
December 31,
2016 2015
Municipal Bonds — Available for Sale(in thousands)
Contractual maturity:December 31, 2013 December 31, 2012   
Maturing in one year or less$1,846,000
 $5,164,000
$973
 $774
Maturing after one year through three years7,113,000
 12,134,000
Maturing after three years2,486,000
 4,024,000
Maturing in second year through fifth year28,671
 13,852
Maturing in sixth year through tenth year21,651
 36,273
Maturing after ten years16,435
 18,597
Total debt securities$11,445,000
 $21,322,000
$67,730
 $69,496

Note 6— Accounts and Notes Receivable

We expend considerable effort to collect the amounts due for our services on the terms agreed upon with our clients. Many of our clients participate in programs funded by federal and state governmental agencies which historically have encountered delays in making payments to its program participants. Congress has enacted a number of laws during the past decade that have significantly altered, or may alter, overall government reimbursement for nursing home services.agencies. Because our clients’ revenues are generally dependent on Medicare and Medicaid reimbursement funding rates and mechanisms, the overall effect of these lawschanges in regulations and trends in the long term care industry have affected and could adversely affect the liquidity of our clients,clients’ cash flows, resulting in their inability to make payments to us on agreed upon payment terms. These factors, in addition to other delays in payments from clients, have resulted in and could continue to result in significant additional bad debts in the near future. Whenever possible, when a client falls behind in making agreed-upon payments, we convert the unpaid accounts receivable to interest bearing promissory notes. The promissory notes receivable provide a means by which to furtherbetter evidence the amounts owed, materially enhance our ability to defend the validity of the debt, and providememorialize a definitive repayment plan, and thereforeeach of which may ultimately enhance our ability to collect the amounts due. Accounts and notes receivable are stated net of an allowance for doubtful accounts. At December 31, 20132016 and 2012,2015, we had $16,116,000$19.2 million and $10,730,000,$16.8 million, net of reserves, respectively, of such promissory notes outstanding. Additionally, we consider restructuring service agreements from full service to management-only service in the case of certain clients experiencing significant financial difficulties. We believe that such restructurings may provide us with a means to maintain a relationship with the client while at the same time minimizing collection exposure.



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Note 7— Allowance for Doubtful Accounts

The allowance for doubtful accounts is established as losses are estimated to have occurred through a provision for bad debts charged to earnings.earnings and is included in the costs of services provided caption in our consolidated statements of comprehensive income. The allowance for doubtful accounts is evaluated based on our periodicongoing review of accounts and notes receivable and is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

As a result of the current economic crisis, many states have significant budget deficits. State Medicaid programs are experiencing increased demand, and with lower revenues than projected, they have fewer resources to support their Medicaid programs. In addition, comprehensive health care legislation under the Act was signed into law in March 2010. The Act will significantly impact the governmental healthcare programs in which our clients participate, and reimbursements received thereunder from governmental or third-party payors. Furthermore, in the coming year and beyond, new proposals or additional changes in existing regulations could be made to the Act which could directly impact the governmental reimbursement programs in which our clients participate. As a result, some state Medicaid programs are reconsidering previously approved increases in nursing home reimbursement or are considering delaying or foregoing those increases. A few states have indicated it is possible they will run out of cash to pay Medicaid providers, including nursing homes. Any negative changes in our clients’ reimbursements may negatively impact our results of operations. Although we are currently evaluating the Act’s effect on our client base, we may not know the full effect until such time as these laws are fully implemented and CMS and other agencies issue applicable regulations or guidance.

In 2009 and 2010, Federal economic stimulus legislation was enacted to counter the impact of the economic crisis on state budgets. The legislation included the temporary provision of additional federal matching funds to help states maintain their Medicaid programs. This legislation to provide states with an extension of this fiscal relief was extended through June 2011, but at a reduced reimbursement rate. In July 2011, CMS issued a final rule that reduced Medicare payments to nursing centers by 11.1% and changed the reimbursement for the provision of group rehabilitation therapy services to Medicare beneficiaries. This new rule was effective as of October 1, 2011. Even if federal or state legislation is enacted that provides additional funding to Medicaid providers, given the volatility of the economic environment, it is difficult to predict the impact of this legislation on our clients’ liquidity and their ability to make payments to us as agreed.

In January 2013, the U.S. Congress enacted the American Taxpayer Relief Act of 2012, which delayed automatic spending cuts, including reduced Medicare payments to plans and providers up to 2%. These discretionary spending caps were originally enacted under provisions in the Budget Control Act of 2011, an initiative to reduce the federal deficit through the year 2021, also known as “sequestration.” The sequestration went into effect starting March 2013. In December 2013, the U.S. Congress enacted the Bipartisan Budget Act of 2013, which reduces the impact of the sequestration over the next two years, beginning in fiscal year 2014 and extended the reduction in Medicare payments to plans and providers for two years through the year 2023.

We have had varying collectioncollections experience with respect to our accounts and notes receivable. When contractual terms are not met, we generally encounter difficulty in collecting amounts due from certain of our clients. Therefore, weWe have sometimes been required to extend the period of payment for certain clients beyond contractual terms. TheseSuch clients include those who have terminated service agreements and slow payers experiencing financial difficulties. In order to provide for these collection problems and the general risk associated with the granting of credit terms, we have recorded the following bad debt provisions (in an Allowance for Doubtful Accounts):

 Year Ended December 31,
 2013 2012 2011
Bad debt provision$1,990,000
 $2,160,000
 $2,450,000
 Year Ended December 31,
 2016 2015 2014
 (in thousands)
Bad debt provision$4,629
 $4,335
 $4,470

In making our credit evaluations, in addition to analyzing and anticipating, where possible, the specific cases described above, we consider the general collection risk associated with trends in the long-term care industry. We also establish credit limits, perform ongoing credit evaluation and monitor accounts to minimize the risk of loss. NotwithstandingDespite our efforts to minimize credit risk exposure, our clients could be adversely affected if future industry trends change in such a manner as to negatively impact their cash flows. If our clients experience a negative impact inon their cash flows, it wouldcould have a material adverse effect on our results of operations and financial condition.


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Impaired Notes Receivable

We evaluate our notes receivable for impairment quarterly and on an individual client basis. Notes receivable considered impaired are generally attributable toevaluated for impairment when the respective clients that are either in bankruptcy, are subject to collectioncollections activity or thoseare slow payers that are experiencing financial difficulties. In the event that our evaluation results in a determination that a note receivable is impaired, it is valued at the present value of expected cash flows or at the market value of related collateral. Summary schedules of impaired notes receivable, and the related reserve, for the years ended December 31, 2013, 20122016, 2015 and 20112014 are as follows:
  Impaired Notes Receivable
Year Ended December 31, Balance Beginning of Year Additions Deductions Balance End of Year Average Outstanding Balance
  (in thousands)
2016 $6,471
 $
 $786
 $5,685
 $6,078
2015 $10,208
 $395
 $4,132
 $6,471
 $8,340
2014 $2,892
 $9,124
 $1,808
 $10,208
 $6,550

 Impaired Notes Receivable
Year ended December 31,Balance Beginning of Year Additions Deductions Balance End of Year Average Outstanding Balance
2013$1,639,000
 $1,267,000
 $14,000
 $2,892,000
 $2,266,000
2012$1,855,000
 $
 $216,000
 $1,639,000
 $1,747,000
2011$1,910,000
 $5,000
 $60,000
 $1,855,000
 $1,883,000

 Reserve for Impaired Notes Receivable
Year ended December 31,Balance Beginning of Year Additions Deductions Balance End of Year
2013$958,000
 $1,072,000
 $11,000
 $2,019,000
2012$1,066,000
 $108,000
 $216,000
 $958,000
2011$930,000
 $196,000
 $60,000
 $1,066,000
  Reserve for Impaired Notes Receivable
Year Ended December 31, Balance Beginning of Year Additions Deductions Balance End of Year
  (in thousands)
2016 $2,139
 $280
 $
 $2,419
2015 $3,031
 $99
 $991
 $2,139
2014 $2,019
 $2,489
 $1,477
 $3,031

For impaired notes receivable, interest income is recognized on a cost recovery basis only. As a result, no interest income was recognized on impaired notes receivable. We follow an income recognition policy on all other notes receivable that does not recognize interest income until cash payments are received. This policy was established, recognizing the environment of the long-term care industry, and not because such notes receivable are necessarily impaired. The difference between income recognition on a full accrual basis and cash basis, for notes receivable that are not considered impaired, is not material.

Note 8 — Lease Commitments

We lease office facilities, equipment and autos under operating leases expiring on various dates through 2016.2025. Certain office leases contain renewal options. The following is a schedule, by calendar year, of future minimum lease payments under operating leases that have remaining terms as of December 31, 2013.

2016:
Period/YearOperating
Leases
 Operating Leases
2014$1,063,000
2015340,000
201670,000
 (in thousands)
2017
 $2,424
2018
 1,838
2019 915
2020 755
2021 740
Thereafter
 2,438
Total minimum lease payments$1,473,000
 $9,110

Certain property leases provide for scheduled rent escalations. We do not consider the scheduled rent escalations to be material to our operating lease expenses individually or in the aggregate. Total expense for all operating leases was as follows:
 Year Ended December 31,
 2016 2015 2014
 (in thousands)
Operating lease expense$2,615
 $2,003
 $1,210

 Year Ended December 31,
 2013 2012 2011
Operating lease expense$1,239,000
 $1,451,000
 $1,336,000


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Note 9— Share-Based Compensation

On May 29, A summary of stock-based compensation expense and related tax benefits for the years ended December 31, 2016, 2015 and 2014 is as follows:
 Year Ended December 31,
 2016 2015 2014
 (in thousands)
Stock options$3,193
 $2,781
 $2,596
Restricted stock550
 252
 109
Employee Stock Purchase Plan ("ESPP")509
 508
 375
Total pre-tax stock-based compensation expense charged against income (1)
$4,252
 $3,541
 $3,080
      
Total recognized tax benefit related to stock-based compensation$2,773
 $1,873
 $2,626

(1)
Stock-based compensation expense is recorded in the selling, general and administrative caption in our consolidated statements of comprehensive income.

At December 31, 2016, the unrecognized compensation cost related to unvested stock options and awards was $8.5 million. The weighted average period over which these awards will vest is approximately 2.7 years.

2012 the Company's shareholders adopted and approved theEquity Incentive Plan

The Company’s 2012 Equity Incentive Plan (the "2012 Plan"“Plan”), under which provides that current or prospective officers, employees, non-employee directors and advisors can receive share-based awards such as stock options, restricted stock and other stock awards. The 2012 Plan seeks to promote the highest level of performance by providing an economic interest in the long-term success of the Company.

As of this date, no further grantsDecember 31, 2016, 3.9 million shares of common stock were permittedreserved for issuance under any previously existing stock plans (the "Pre-existing Plans"). Additionally, all remainingthe Plan, including 1.3 million shares available for future grantsgrant. No stock award will have a term in excess of ten years. All awards granted under the Pre-existing Plans became available for issuance underPlan become vested and exercisable ratably over a five year period on each yearly anniversary of the 2012 Plan.

In addition to the 2012 Plan, the Company also had two compensation plans at December 31, 2013 which are described below: the Employee Stock Purchase Plan (the “ESPP”) and the Supplemental Executive Retirement Plan (the “SERP”).

A summary of stock-based compensation expense for the years ended December 31, 2013, 2012 and 2011 is as follows:

 December 31,
 2013 2012 2011
Stock Options$2,017,000
 $1,897,000
 $1,870,000
Restricted Stock28,000
 
 
Employee Stock Purchase Plan (ESPP)562,000
 641,000
 282,000
Total pre-tax stock-based compensation expense charged against income (1)$2,607,000
 $2,538,000
 $2,152,000

(1)Stock-based compensation expense is recorded in the selling, general and administrative caption in our consolidated statements of comprehensive income.

With respect to our SERP, we recorded expense of $538,000, $560,000 and $444,000 (representing the Company’s 25% match of participants’ deferrals) for the years ended December 31, 2013, 2012 and 2011, respectively. Both the SERP match and deferrals are included in the selling, general and administrative caption in our consolidated statements of comprehensive income.

2012 Equity Incentive Plangrant date.

The Nominating, Compensation and Stock Option Committee of the Board of Directors is responsible for determining the individuals who will be granted stock awards, the number of stock awards each individual will receive and the price per share (interms of the grants in accordance with the terms of our 2012 Plan), and the exercise period of each stock award.Plan.

We have outstanding stock awards that were granted under the Pre-existing Plans to non-employee directors, officers and employees of the Company and other specified groups, depending on the Pre-existing Plan. No further grants are allowed under the Pre-existing Plans. As of December 31, 2013, 5,277,000 shares of common stock were reserved for issuance under our 2012 Plan, including 2,793,000 shares which are available for future grant. The stock price will not be less than the fair market value of the common stock on the date the award is granted. No stock grant will have a term in excess of ten years. Since 2008, all awards granted become vested and exercisable ratably over a five year period on each yearly anniversary date of the stock grant.Stock Options

A summary of our stock option activityoptions outstanding under the Plan as of December 31, 2016 and changes during 2016 is as follows:

 2013 2012 2011
 Weighted Average Exercise Price Number of Shares Weighted Average Exercise Price Number of Shares Weighted Average Exercise Price Number of Shares
Beginning of period$13.18
 2,632,000
 $10.97
 2,912,000
 $9.14
 3,002,000
Granted23.50
 564,000
 17.50
 601,000
 16.11
 510,000
Cancelled18.18
 (88,000) 14.53
 (134,000) 12.67
 (96,000)
Exercised10.37
 (625,000) 7.81
 (747,000) 4.93
 (504,000)
End of period$16.05
 2,483,000
 $13.18
 2,632,000
 $10.97
 2,912,000
 Number of Shares Weighted Average Exercise Price
 (in thousands)  
Outstanding at December 31, 20152,461
 $22.16
Granted569
 $34.14
Exercised(294) $20.46
Forfeited(116) $29.80
Expired(5) $23.82
Outstanding at December 31, 20162,615
 $24.61

The weighted average grant-date fair value of stock options granted during 2013, 2012 and 2011 was $6.81, $4.74 and $3.26 per common share, respectively.


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The weighted average grant-date fair values and intrinsic values of options vested during 2016, 2015 and 2014 are as follows:
 Year Ended December 31,
 2016 2015 2014
 (in thousands, except per share data)
Weighted average grant-date fair value of options granted$7.46
 $6.64
 $8.24
Total intrinsic value of options exercised$4,886
 $6,497
 $9,303

During 2013,2016, the Company received $6.0 million in cash and realized $1.2 million in tax benefits from the exercise of stock options.

The fair values of the stock option awards granted 6,000 sharesduring 2016, 2015 and 2014 were estimated on the dates of restricted stock with a weighted average grant date fair value of $23.50 per share.using the Black-Scholes option valuation model and the following assumptions:
 Year Ended December 31,
 2016 2015 2014
Risk-free interest rate2.0% 1.9% 1.9%
Weighted average expected life (years)5.8 years
 5.8 years
 5.9 years
Expected volatility26.0% 27.2% 36.9%
Dividend yield2.0% 2.2% 2.4%

The following table summarizes other information about our outstanding stock options at December 31, 2013.2016:
 December 31, 2016
 (in thousands, except per share data)
Outstanding: 
Number of options2,615
Weighted average exercise price$24.61
Aggregate intrinsic value$38,072
Weighted average remaining contractual life (years)6.2 years
Exercisable: 
Number of options1,172
Weighted average exercise price$18.39
Aggregate intrinsic value$24,350
Weighted average remaining contractual life (years)4.4 years

Restricted Stock

A summary of our restricted stock outstanding under the Plan as of December 31, 2016 and changes during 2016 is as follows:
 Number of Restricted Shares Weighted Average Grant-Date Fair Value
 (in thousands)  
Unvested at December 31, 201540
 $29.10
Granted44
 $34.14
Vested(9) $28.76
Forfeited (1)

 $34.14
Unvested at December 31, 201674
 $32.09

(1)
Number of restricted shares rounds to less than a thousand.


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Stock Options 2013 2012 2011
Range of exercise prices $6.07 - 23.50
 $3.68 - 17.50
 $2.41 - 16.11
Outstanding:      
Weighted average remaining contractual life (years) 6.5
 6.3
 6.0
Aggregate intrinsic value $30,599,000
 $26,472,000
 $19,639,000
Exercisable:      
Number of shares 922,000
 1,040,000
 1,383,000
Weighted average remaining contractual life (years) 4.5
 4.2
 3.9
Aggregate intrinsic value $15,053,000
 $13,934,000
 $13,925,000
Exercised:      
Aggregate intrinsic value $9,139,000
 $10,465,000
 $5,059,000

The weighted average grant-date fair values and total fair values of restricted stock vested during 2016, 2015 and 2014 are as follows:
 Year Ended December 31,
 2016 2015 2014
 (in thousands, except per share data)
Weighted average grant-date fair value of restricted stock granted$34.14
 $30.30
 $28.02
Total fair value of restricted stock vested$311
 $123
 $34

Fair Value Estimates

The fair value is determined based on the market price of stock awards granted during 2013, 2012 and 2011 was estimatedthe shares on the date of grant using the Black-Scholes option valuation model based on the following assumptions:

 2013 2012 2011
Risk-free interest rate1.50% 1.30% 2.60%
Weighted average expected life in years6.0 years 6.8 years 7.4 years
Expected volatility38.9% 39.2% 27.4%
Dividend yield2.80% 3.60% 3.66%
Forfeiture rate3.00% 2.90% 3.81%

Other Information

Other information pertaining to activity of our stock awards during the years ended December 31, 2013, 2012 and 2011 was as follows:

 2013 2012 2011
Total grant-date fair value of stock awards granted$3,412,000
 $2,438,000
 $1,477,000
Total fair value of stock awards vested during period$1,897,000
 $1,409,000
 $1,551,000
Total unrecognized compensation expense related to non-vested stock awards$4,963,000
 $3,999,000
 $3,547,000

For the years ended December 31, 2013, 2012 and 2011, the unrecognized compensation cost related to stock awards granted but not yet vested, as reported above, was expected to be recognized over agrant. The weighted average remaining vesting period of fourfor the unvested restricted stock is 3.4 years.

Employee Stock Purchase Plan

Since January 1, 2000, we have hadThe Company offers an ESPP forEmployee Stock Purchase Plan (“ESPP”) to all eligible employees. All full-time and certain part-time employees who have completed two years of continuous service with us are eligible to participate. The ESPP was implemented through five annual offerings. On January 1, 2000, the first annual offering commenced. On February 12, 2004 (effective January 1, 2004), our Board of Directors extended the ESPP for an additional eight annual offerings. On April 12, 2011,scheduled to expire after 2016, however the Board of Directors extended the ESPP for an additional five offerings through 2016.2021. Annual offerings commence and terminate on the respective year’s first and last calendar day.

Under the ESPP, we arethe Company is authorized to issue up to 4,050,0004.1 million shares of our common stock to our employees. Pursuant to such authorization, we have 2,476,0002.3 million shares available for future grant at December 31, 2013. Furthermore, under2016 (after deducting the 2016 funding of the 53 thousand shares delivered in 2017). Under the terms of the ESPP, eligible employeesparticipants may contribute through payroll deductions up to $21,250 (85%$21,250 (85% of IRS limitation) of their compensation toward the purchase of the Company'sCompany’s common stock. No employee may purchase common stock which

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exceeds $25,000$25,000 in fair market value (determined on the date of grant)option date) for each calendar year. The option price per share is equal to the lower of 85% of the fair market price on the first day of the offering period, or 85% of the fair market price on the last day of purchase.the offering period.

The following table summarizes information about our ESPP annual offerings for the years ended December 31, 2013, 20122016, 2015 and 2011:

2014:
 ESPP Annual Offering
 2013 2012 2011
Common shares purchased65,000
 79,000
 71,000
Per common share purchase price$19.75
 $15.04
 $13.83
Amount expensed under ESPP$562,000
 $641,000
 $282,000
Net proceeds from issuance$1,288,000
 $1,192,000
 $978,000
Common shares date of issueJan 3, 2014
 Jan 4, 2013
 Jan 4, 2012
 Year Ended December 31,
 2016 2015 2014
 (in thousands, except per share data)
Common shares purchased53
 59
 55
Per common share purchase price$29.64
 $26.29
 $24.11

Deferred Compensation Plan

Since January 1, 2000, we have hadThe Company offers a SERPSupplemental Executive Retirement Plan (“SERP”) for certain key executives and employees. The SERP is not qualified under Section 401 of the Internal Revenue Code. Effective in Plan year 2010, the Plan was amended to allowThe SERP allows participants to defer up to 25% of their earned income on a pre-tax basis. Asbasis and as of the last day of each plan year, each participant will receivebe credited with a 25% match of up to 15% of their deferral in the form of our Common Stock based on the then currentthen-current market value. SERP participants fully vest in our matching contribution three years from the first day of the initial year of participation. The income deferred and our matching contributions are unsecured and subject to the claims of our general creditors.

Under the SERP, we are authorized to issue up to 1,013,0001.0 million shares of our common stock to our employees. Pursuant to such authorization, we have 452,0000.4 million shares available for future grant at December 31, 20132016 (after deducting the 20132016 funding of 19,00013 thousand shares delivered in 2014)2017). In the aggregate, since initiation of the SERP, the Company’s 25% match has resulted in 560,000 shares (including the 2013 funding of shares delivered in 2014) being issued to the trustee. At the time of issuance, such shares were accounted for at cost as treasury stock. At December 31, 2013,2016, approximately 311,000 of0.3 million such shares are vested and remain in the respective active participants’ accounts. accounts with the trustee.


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The following table summarizes information about our SERP for the plan years ended December 31, 2013, 20122016, 2015 and 2011:

2014:
 SERP Plan Year
 2013 2012 2011
Amount of company match expensed under SERP$538,000
    $560,000
    $444,000
   
Treasury shares issued to fund SERP expense19,000
    24,000
    26,000
   
SERP trust account balance at December 31$31,415,000
 
(1) 
 $24,997,000
 
(1) 
 $18,942,000
 
(1) 
Unrealized gain (loss) recorded in SERP liability account$3,005,000
   $1,718,000
    $(104,000)   
 Year Ended December 31,
 2016 2015 2014
 (in thousands)
Supplemental Executive Retirement Plan ("SERP") expense (1)
$511
 $538
 $497
Treasury shares issued to fund SERP expense (2)
13
 15
 16
SERP trust account balance at December 31 (3)
$34,599
 $37,765
 $35,310
Unrealized gain (loss) recorded in SERP liability account$1,495
 $(62) $1,211
 
(1)
Both the SERP match and the deferrals are included in the selling, general and administrative caption in our consolidated statements of comprehensive income.
(2)
Shares related to the SERP match for each year are funded at the beginning of the subsequent year.
(3)
SERP trust account investments are recorded at their fair value which is based on quoted market prices. Differences between such amounts in the table above and the deferred compensation funding asset reported on our Consolidated Balance Sheets represent the value of our Common Stock held in the Plan’sPlan participants’ trust accountaccounts and reported by us as treasury stock in our Consolidated Balance Sheets.

Note 10— Other Employee Benefit Plans

Retirement Savings Plan

Since October 1, 1999, we have had a retirement savings plan for eligible employees (the “RSP”) under Section 401(k) of the Internal Revenue Code. The RSP allows eligible employees to contribute up to fifteen percent (15)%15% of their eligible compensation on a pre-tax basis. There is no match by the Company.



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Note 11— Dividends

We have paid regular quarterly cash dividends since the second quarter of 2003. During 2013,2016, we paid regular quarterly cash dividends totaling $46,707,000$53.3 million as detailed below:

Quarter EndedQuarter Ended
March 31, 2013 June 30, 2013 September 30, 2013 December 31, 2013March 31, 2016 June 30, 2016 September 30, 2016 December 31, 2016
Cash dividend per common share$0.16625
 $0.16750
 $0.16875
 $0.17000
(in thousands, except per share amounts)
Cash dividends paid per common share$0.18125
 $0.18250
 $0.18375
 $0.18500
Total cash dividends paid$11,415,000
 $11,516,000
 $11,829,000
 $11,947,000
$13,158
 $13,293
 $13,398
 $13,493
Record dateFebruary 22
 May 10
 August 16
 November 15
February 19, 2016
 May 20, 2016
 August 19, 2016
 November 18, 2016
Payment dateMarch 15
 June 14
 September 20
 December 20
March 25, 2016
 June 24, 2016
 September 23, 2016
 December 23, 2016

Additionally, on January 28, 2014,31, 2017, our Board of Directors declared a regular quarterly cash dividend of $0.17125$0.18625 per common share, which will be paid on March 28, 201424, 2017 to shareholders of record as of the close of business on February 21, 2014.17, 2017.

Cash dividends on our outstanding weighted average number of basic common shares for the years ended December 31, 2013, 20122016, 2015 and 2011 was2014 were as follows:

 December 31,
 2013 2012 2011
Cash dividends per common share$0.67
 $0.65
 $0.63
 Year Ended December 31,
 2016 2015 2014
Cash dividends declared per common share$0.73750
 $0.71750
 $0.69750

Our Board of Directors reviews our dividend policy on a quarterly basis. Although there can be no assurance that we will continue to pay dividends or the amount of the dividend, we expect to continue to pay a regular quarterly cash dividend. In connection with the establishment of our dividend policy, we adopted a Dividend Reinvestment Plan in 2003.


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Note 12— Income Taxes

The following table summarizes the provision for income taxes:

Year Ended December 31,
Year Ended December 31,2016 2015 2014
2013 2012 2011(in thousands)
Current:          
Federal$19,045,000
 $24,350,000
 $15,053,000
$33,032
 $11,917
 $21,030
State5,381,000
 5,373,000
 4,488,000
6,958
 2,173
 4,095
24,426,000
 29,723,000
 19,541,000
$39,990
 $14,090
 $25,125
Deferred:          
Federal(4,172,000) (3,048,000) 296,000
$2,163
 $13,646
 $(12,708)
State(894,000) (625,000) (181,000)838
 4,004
 (2,559)
(5,066,000) (3,673,000) 115,000
$3,001
 $17,650
 $(15,267)
Tax Provision$19,360,000
 $26,050,000
 $19,656,000
Tax provision$42,991
 $31,740
 $9,858

Deferred income taxes are recorded using the asset and liability method. Deferred tax assets and liabilities are determined based on differences between the financial reporting and income tax basis of assets and liabilities.


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Significant components of our federal and state deferred tax assets and liabilities are as follows:

Years Ended December 31,Year Ended December 31,
2013 20122016 2015
Net current deferred assets (liabilities):   
(in thousands)
Deferred tax assets:   
Allowance for doubtful accounts$1,560,000
 $1,580,000
$2,672
 $1,819
Accrued insurance claims — current3,574,000
 2,727,000
Expensing of housekeeping supplies(5,059,000) (4,432,000)
Other2,264,000
 (450,000)
$2,339,000
 $(575,000)
Net noncurrent deferred assets (liabilities):   
Deferred compensation$7,987,000
 $7,095,000
8,532
 9,191
Accrued insurance claims5,862
 5,786
Non-deductible reserves5,000
 8,000
1,257
 4,490
Depreciation of property and equipment(2,933,000) (3,028,000)
Accrued insurance claims — noncurrent6,848,000
 6,255,000
Amortization of intangibles1,015,000
 522,000
624
 971
Other352,000
 363,000
858
 10
$13,274,000
 $11,215,000
$19,805
 $22,267
Deferred tax liabilities:   
Expensing of housekeeping supplies$(6,752) $(6,463)
Depreciation of property and equipment(2,568) (3,237)
Other(663) 
$(9,983) $(9,700)
   
Net deferred tax assets$9,822
 $12,567

Realization of the Company’s deferred tax assets is dependent upon future earnings in specific tax jurisdictions, the timing and amount of which are uncertain. Management assesses the Company’s income tax positions and records tax benefits for all years subject to examination based upon an evaluation of the facts, circumstances, and information available at the reporting dates, which include historical operating results and expectations of future earnings. As such, management believes it is more likely than not that the current and noncurrent deferred tax assets recorded will be realized to reduce future income taxes and therefore no valuation allowances are necessary.

A
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Table of Contents

The tables below provide a reconciliation ofbetween the provision for income taxes and the amounttax expense computed by applying the statutory federal income tax rate to income before income taxes is as follows:

and the provision for income taxes:
Year Ended December 31,Year Ended December 31,
2013 2012 20112016 2015 2014
Tax expense computed at statutory rate$23,271,000
 $24,592,000
 $20,234,000
(in thousands)
Income tax expense computed at statutory rate$42,136
 $31,418
 $11,098
Increases (decreases) resulting from:          
State income taxes, net of federal tax benefit2,916,000
 3,086,000
 2,800,000
5,064
 4,015
 998
Federal jobs credits(7,121,000) (1,110,000) (4,196,000)(4,550) (3,900) (2,925)
Tax exempt interest(29,000) (99,000) (253,000)(457) (132) (13)
Other, net323,000
 (419,000) 1,071,000
798
 339
 700
$19,360,000
 $26,050,000
 $19,656,000
Income tax expense$42,991
 $31,740
 $9,858

Management performs an evaluation each period of its tax positions taken and expected to be taken in tax returns. The evaluation is performed on positions relating to tax years that remain subject to examination by major tax jurisdictions, the earliest of which is the tax year ended December 31, 2010.2011. Based on our evaluation, management has concluded that there are no significant uncertain tax positions requiring recognition in our financial statements. Therefore, the table reporting on the change in the liability for unrecognized tax benefits during the year ended December 31, 20132016 is omitted as there is no activity to report in such account for the year ended December 31, 2013,2016, and there was no balance of unrecognized tax benefits at the beginning of the year.

We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. In the event we have received an assessment for interest and/or penalties, it has been classified in the financial statements as selling, general and administrative expense.



57




Note 13—Related Party Transactions

A director is a member of a law firm which was retained by us. During the years ended December 31, 2013, 20122016, 2015 and 2011,2014, fees received frompaid by us byto such firm did not exceed $120,000$120 thousand in any period. Additionally, such fees did not exceed, in any period, 5% of such firm’s revenues or the Company'sCompany’s revenues.

Note 14—Segment Information

Reportable Operating Segments

U.S. GAAP establishes standards for reporting information regarding operating segments in annual financial statements. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group in making decisions on how to allocate resources and assess performance.

We manage and evaluate our operations in two reportable segments: Housekeeping (housekeeping, laundry, linen and other services), and Dietary (dietary department services). Although both segments serve the same client base and share many operational similarities, they are managed separately due to distinct differences in the type of serviceservices provided, as well as the specialized expertise required of the professional management personnel responsible for delivering the respectiveeach segment’s services. We consider the various services provided within each reportable segment to comprise an identifiable reportable operating segment since such services are rendered pursuant to a single service agreement, specific to that reportable segment, as well as the fact that the delivery of the respective reportable segment’s services are managed by the same management personnel ofexclusive to the particular reportable segment.

The Company’s accounting policies for the segments are generally the same as the Company’s significant accounting policies. Differences between the reportable segments’ operating results and other disclosed data and our consolidated financial statements relate primarily to corporate level transactions and recording of transactions at the reportable segment level which use methods other than generally accepted accounting principles. There are certain inventories and supplies that are primarily expensed when incurred within the operating segments, while they are capitalized for the consolidated financial statements. As discussed, most corporate expense is not allocated to the operating segments, and such expenses include corporate salary and benefit costs, bad debt expense, certain legal costs, information technology costs, depreciation, amortization of finite lived intangibles, share based compensation costs and other corporate specific costs. Additionally, there are allocations for workers compensation and general liability expense within the operating segments that differ from our actual expense recorded for U.S. GAAP. Additionally, included in the differences between the reportable segments’ operating results and other disclosed data are amounts attributable to Huntingdon, our investment holding company subsidiary. Huntingdon does not transact any business with the reportable segments. Segment amounts disclosed are prior to any elimination entries made in consolidation.

Housekeeping provides services in Canada, although essentially all of itsAll revenues and net income99% in both categories, are earned in one geographic area, the United States. Dietary provides services solely in the United States.


58
53




Housekeeping
Services
 Dietary
Services
 Corporate and
Eliminations
 TotalHousekeeping services Dietary services Corporate and eliminations Total
Year Ended December 31, 2013       
(in thousands)
Year Ended December 31, 2016       
Revenues$759,093,000
 $390,797,000
 $
 
 $1,149,890,000
$957,148
 $605,514
 $
 $1,562,662
Income before income taxes68,872,000
 21,244,000
 (23,627,000) 
(1) 
 66,489,000
$90,756
 $34,641
 $(5,010)
(1) 
 $120,387
Depreciation and amortization5,105,000
 693,000
 406,000
    6,204,000
$6,535
 $439
 $522
   $7,496
Total assets213,397,000
 92,424,000
 119,521,000
 
(2) 
 425,342,000
$266,464
 $127,187
 $134,795
(2) 
 $528,446
Capital expenditures$2,726,000
 $460,000
 $576,000
    $3,762,000
$4,612
 $410
 $420
   $5,442
Year Ended December 31, 2012       
       
Year Ended December 31, 2015       
Revenues$737,407,000
 $339,855,000
 $173,000
 
(1) 
 $1,077,435,000
$909,709
 $527,140
 $
 $1,436,849
Income before income taxes69,429,000
 18,474,000
 (17,639,000) 
(1) 
 70,264,000
$84,471
 $31,612
 $(26,319)
(1) 
 $89,764
Depreciation and amortization4,069,000
 676,000
 371,000
    5,116,000
$6,488
 $685
 $487
   $7,660
Total assets144,412,000
 62,263,000
 124,508,000
 
(2) 
 331,183,000
$228,116
 $104,797
 $148,036
(2) 
 $480,949
Capital expenditures$2,765,000
 $453,000
 $266,000
    $3,484,000
$3,586
 $336
 $1,076
   $4,998
Year Ended December 31, 2011       
       
Year Ended December 31, 2014       
Revenues$654,886,000
 $234,247,000
 $(68,000) 
(1) 
 $889,065,000
$846,610
 $446,573
 $
 $1,293,183
Income before income taxes63,395,000
 11,678,000
 (17,261,000) 
(1) 
 57,812,000
$70,390
 $26,343
 $(65,025)
(1) 
 $31,708
Depreciation and amortization3,428,000
 614,000
 345,000
    4,387,000
$6,114
 $662
 $493
   $7,269
Total assets135,223,000
 57,034,000
 97,438,000
 
(2) 
 289,695,000
$223,440
 $95,861
 $150,278
(2) 
 $469,579
Capital expenditures$4,697,000
 $372,000
 $476,000
    $5,545,000
$4,375
 $391
 $1,029
   $5,795

(1)
representsRepresents primarily corporate office cost and related overhead, recording of transactionscertain inventories and supplies and workers compensation costs at the reportable segment level which use accounting methods other than generally accepted accounting principles,that differ from those used at the corporate level, as well as consolidated subsidiaries’ operating expenses that are not allocated to the reportable segments, net of investment and interest income. Additionally, during 2014, the Company recorded a one-time, non-cash change in estimate related to our self-insurance liability which was not allocated to the reportable segments.
(2)
represents primarilyPrimarily consists of cash and cash equivalents, marketable securities, deferred income taxes and other current and noncurrent assets.

Total Revenues from Clients

The following revenues earned from clients differ from segment revenues reported above due to the inclusion of adjustments used for segment reporting purposes by management. We earned total revenues from clients in the following service categories:

 Year Ended December 31,
2013 2012 2011
Housekeeping services$514,180,000
 $492,319,000
 $440,924,000
Laundry and linen services241,540,000
 240,670,000
 210,896,000
Dietary services390,797,000
 339,867,000
 234,542,000
Maintenance services and other3,373,000
 4,579,000
 2,703,000
 $1,149,890,000
 $1,077,435,000
 $889,065,000



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Table of Contents

Note 15— Earnings Per Common Share

Basic netand diluted earnings per common share are computed usingby dividing net income by the weighted-average number of basic and diluted common shares outstanding, respectively. The weighted-average number of diluted common shares includes the impact of dilutive securities, including unvested, unexercised stock options and unvested restricted stock. The table below reconciles the weighted-average basic and diluted common shares outstanding for 2016, 2015 and 2014:
 Year Ended December 31, 2016
 2016 2015 2014
 (in thousands)
Weighted average number of common shares outstanding - basic72,754
 71,826
 70,616
Effect of dilutive securities (1)
720
 686
 725
Weighted average number of common shares outstanding - diluted73,474
 72,512
 71,341

(1) Certain outstanding stock options awards are anti-dilutive and were therefore excluded from the calculation of the weighted average number of diluted common shares outstanding. The dilutive effect of potential common shares outstanding is included in diluted net earnings per share. The computations of basic net earnings per share and diluted net earnings per share for 2013, 2012 and 2011 are as follows:

  Year ended December 31, 2013
 Income
(Numerator)
 Shares
(Denominator)
 Per-share
Amount
 
 Net income$47,129,000
    
 Basic earnings per common share$47,129,000
 69,206,000
 $0.68
 Effect of dilutive securities:     
 Stock options and restricted stock  839,000
 (0.01)
 Diluted earnings per common share$47,129,000
 70,045,000
 $0.67
   
  Year ended December 31, 2012
 Income
(Numerator)
 Shares
(Denominator)
 Per-share
Amount
 
 Net income$44,214,000
    
 Basic earnings per common share$44,214,000
 67,511,000
 $0.65
 Effect of dilutive securities:     
 Stock options and restricted stock  974,000
 
 Diluted earnings per common share$44,214,000
 68,485,000
 $0.65
   
  Year ended December 31, 2011
 Income
(Numerator)
 Shares
(Denominator)
 Per-share
Amount
 
 Net income$38,156,000
    
 Basic earnings per common share$38,156,000
 66,637,000
 $0.57
 Effect of dilutive securities:     
 Stock options and restricted stock  948,000
 (0.01)
 Diluted earnings per common share$38,156,000
 67,585,000
 $0.56

For the years ended December 31, 2013, 20122016, 2015 and 2011,2014, the computation excluded options to purchase 546,000, 576,0000.5 million, 0.9 million and 510,0000.5 million shares, respectively, were excluded from the computationhaving weighted average exercise prices of diluted earnings per common share as the exercise price of such options were in excess of the average market value of our common stock at the respective year end.$34.14, $29.34 and $27.97, respectively.



54




Note 16—Other Contingencies

Line of Credit

We have a $125,000,000$200 million bank line of credit on which we may draw to meet short-term liquidity requirements in excess of internally generated cash flow.requirements. Amounts drawn under the line of credit are payable upon demand. At December 31, 2013,2016, there were no borrowings under the line of credit. However, at such date, we had outstanding a $43,520,000 (increased to $51,520,000 on January 1, 2014)$63.7 million  irrevocable standby letter of credit, which relates to payment obligations under our insurance programs. As a result of the letter of credit issued, the amount available under the line of credit was reduced by $43,520,000$63.7 million at December 31, 2013.2016. The line of credit requires us to satisfy one financial covenant. We are in compliance with our financial covenant at December 31, 20132016 and expect to continue to remain in compliance with such financial covenant. This line of credit expires on December 18, 2018.2018. We believe the line of credit will be renewed at that time.

Additionally, on December 30, 2013, we entered into a Security Interest, PledgeOn January 3, 2017, the letter of credit increased to $67.2 million and Assignment of Deposit Account (the "Pledge") with Wells Fargo Bank, National Association (the “Bank”) as collateral for the Promissory Note (the “Note”) dated December 30, 2013. The Note is a short term non-revolvingamount available under the line of credit between the Company’s third party payroll administrator and the Bank. The Company entered into the Pledge at year end due to the timing of payroll funding and the holidays. On January 3, 2014, the Company's third party payroll administrator satisfied its payment obligation under the Note, and accordingly, the Company's

60
was reduced by $3.5 million.




Pledge was fully releasedTax Jurisdictions and extinguished. The funds previously held as collateral were subsequently used for general operating activities.Matters

We provide our services in 48 statesthroughout the continental United States and are subject to numerous local taxing jurisdictions within those states. Consequently, injurisdictions. In the ordinary course of business, a jurisdiction may contest our reporting positions with respect to the application of its tax code to our services. A jurisdiction’s conflicting position on the taxability of our services could result in additional tax liabilities.

We have tax matters with various taxing authorities. Because of the uncertainties related to both the probable outcomeoutcomes and amount of probable assessmentassessments due, we are unable to make a reasonable estimate of a liability. We do not expect the resolution of any of these matters, taken individually or in the aggregate, to have a material adverse effect on our consolidated financial position or results of operations based on our best estimate of the outcomes of such matters.

Legal Proceedings

We are also subject to various claims and legal actions in the ordinary course of business. Some of these matters include payroll and employee-related matters and examinations by governmental agencies. As we become aware of such claims and legal actions, we providerecord accruals if thefor any exposures that are probable and estimable. If an adverse outcome of such claims and legal actions is reasonably possible, we assess materiality and provide such financial disclosure, as appropriate. The Company believes it is not a party to, nor are any of its properties the subject of, any pending legal proceeding or governmental examination that would have a material adverse effect on the Company’s consolidated financial condition or liquidity.

As a result ofGovernment Regulations

Our clients are concentrated in the current economic crisis, many states have significant budget deficits. State Medicaid programs are experiencing increased demand, and with lower revenues than projected, they have fewer resources to support their Medicaid programs. In addition, comprehensive health care legislation under the Patient Protectionindustry and Affordable Care Actare primarily providers of long-term care. Many of our clients’ revenues are highly reliant on Medicare, Medicaid and the Health Care and Education Reconciliation Act of 2010 (together, the “Act”) was signed into law in March 2010. The Act will significantly impact the governmental healthcare programs which our clients participate, and reimbursements received thereunder from governmental or third-party payors. In July 2011, Centers for Medicare and Medicaid Services (“CMS”) issued a final rule that reduced Medicare payments to nursing centers by 11.1% and changed thepayors’ reimbursement for the provision of group rehabilitation therapy services to Medicare beneficiaries. This rule was effective as of October 1, 2011. Furthermore, in the coming year, new proposalsfunding rates. New legislation or additional changes in existing regulations could be made to the Act and/or CMS could propose additional reimbursement reductions which could directly impact the governmental reimbursement programs in which our clients participate. As a result, some state Medicaid programs are reconsidering previously approved increases in nursing home reimbursement or are considering delaying or foregoing those increases. A few states have indicated it is possible they will run out of cash to pay Medicaid providers, including nursing homes. In addition, certain state governors have recently stated that they will reject Federal Medicaid assistance under the Act. Any negative changes in our clients’ reimbursements may negatively impact our results of operations. Although we are currently evaluating the Act’s effect on our client base, we may not know the full effecteffects of such programs until such time as these laws are fully implemented and CMS and othergovernmental agencies issue applicable regulations or guidance.

In January 2013, the U.S. Congress enacted the American Taxpayer Relief Act of 2012, which delayed automatic spending cuts, including reduced Medicare payments to plans and providers up to 2%. These discretionary spending caps were originally enacted under provisions in the Budget Control Act of 2011, an initiative to reduce the federal deficit through the year 2021, also known as “sequestration.” The sequestration went into effect starting March 2013. In December 2013, the U.S. Congress enacted the Bipartisan Budget Act of 2013, which reduces the impact of the sequestration over the next two years, beginning in fiscal year 2014 and extended the reduction in Medicare payments to plans and providers for two years through the year 2023.

Note 17—Accrued Insurance Claims

We currently have a Paid Loss Retrospective Insurance Plan for general liability and workers’ compensation insurance, which comprise approximately 19%46.2% of our liabilities at December 31, 2013.2016. Under our insurance plans for general liability and workers'workers’ compensation, predetermined loss limits are arranged with our insurance company to limit both our per occurrence cash outlay and annual insurance plan cost. Our accounting for this plan is affected by various uncertainties because we must makeutilizes current valuations from a third party actuary, which include assumptions and apply judgment to estimate the ultimate cost to settle reportedbased on data such as historical claims, and claims incurred but not reported as of the balance sheet date. We address these uncertainties by regularly evaluating our claims’ pay-out experience, present value factordemographic factors, industry trends, severity factors, and other factors related to the nature of specific claims in arriving at the basis for our accrued insurance claims estimate. Our evaluations are based primarily on current information derived from reviewing our claims experience and industry trends.actuarial calculations. In the event that our claims experience and/or industry trends result in an unfavorable change resulting from, among other factors, the severity levels of reported claims and medical cost inflation, as compared to historical claim trends,in our assumptions or outcomes, it would have an adverse effect on our results of operations and financial condition. Under these plans, predetermined loss limits are arranged with an insurance company to limit both our per-occurrence cash outlay and annual insurance plan cost.

For workers’ compensation and general liability, we record both a reserve based onfor the present value of estimated future cost of claims and related expenses that have been reported but not settled, includingas well as an estimate of claims incurred but not reported. Such reserves for claims incurred but not reported that are developed asby a result of athird party actuary through review of our historical data and open claims. The present value of the payout is determined by applying an 8% discount factor


55




against the estimated value of the claims over the estimated remaining pay-out period. Reducing the discount factor by 1% would reduce net income for the year ended December 31, 2013 by approximately $34,000. Additionally, reducing the estimated payout period by six months would result in an approximate $84,000 reduction in net income.

For general liability, we record a reserve for the estimated ultimate amounts to be paid for known claims and claims incurred but not reported as of the balance sheet date. The estimated ultimate reserve amount recorded is derived from the estimated claim reserves provided by our insurance carrier reduced by an historical experience factor.

Note 18—Subsequent Events

We evaluated all subsequent events through the date these financial statements are being filed with the SEC. There were no events or transactions occurring during this subsequent reporting period which require recognition or additional disclosure in these financial statements.

Note 19—Selected Quarterly Financial Data (Unaudited)

The following tables summarize the unaudited quarterly financial data for the last two fiscal years.
 First Quarter Second Quarter Third Quarter Fourth Quarter
 (in thousands, except per share amounts)
2016       
Revenues$384,807
 $386,556
 $392,734
 $398,565
Operating costs and expenses$355,390
 $357,875
 $363,522
 $368,122
Income before income taxes$29,604
 $29,683
 $30,571
 $30,529
Net income$18,626
 $18,760
 $19,711
 $20,299
Basic earnings per common share$0.26
 $0.26
 $0.27
 $0.28
Diluted earnings per common share$0.26
 $0.26
 $0.27
 $0.28
Cash dividends declared per common share$0.18250
 $0.18375
 $0.18500
 $0.18625
2015       
Revenues$355,246
 $355,356
 $360,165
 $366,082
Operating costs and expenses$330,699
 $329,341
 $332,090
 $355,667
Income before income taxes$25,054
 $26,257
 $26,741
 $11,712
Net income$15,516
 $16,288
 $17,086
 $9,134
Basic earnings per common share$0.22
 $0.23
 $0.24
 $0.13
Diluted earnings per common share$0.22
 $0.23
 $0.24
 $0.13
Cash dividends declared per common share$0.17750
 $0.17875
 $0.18000
 $0.18125


 First Quarter Second Quarter Third Quarter Fourth Quarter
2013       
Revenues$273,904,000
 $273,604,000
 $298,549,000
 $303,833,000
Operating costs and expenses$255,981,000
 $253,965,000
 $278,540,000
 $298,616,000
Income before income taxes$18,957,000
 $19,858,000
 $21,193,000
 $6,481,000
Net income$14,954,000
 $12,933,000
 $13,790,000
 $5,452,000
Basic earnings per common share(1)
$0.22
 $0.19
 $0.20
 $0.08
Diluted earnings per common share(1)
$0.22
 $0.19
 $0.20
 $0.08
Cash dividends per common share(1)
$0.17
 $0.17
 $0.17
 $0.17
2012       
Revenues$260,607,000
 $267,108,000
 $272,681,000
 $277,039,000
Operating costs and expenses$248,477,000
 $248,730,000
 $255,070,000
 $257,814,000
Income before income taxes$13,783,000
 $18,283,000
 $18,573,000
 $19,625,000
Net income$8,579,000
 $11,320,000
 $11,517,000
 $12,798,000
Basic earnings per common share(1)
$0.13
 $0.17
 $0.17
 $0.19
Diluted earnings per common share(1)
$0.13
 $0.17
 $0.17
 $0.19
Cash dividends per common share(1)
$0.16
 $0.16
 $0.16
 $0.17
(1)Year-to-date earnings and cash dividends per common share amounts may differ from the sum of quarterly amounts due to rounding.


62
56




Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

In accordance with Exchange Act Rules 13a-15 and 15a-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2013.2016.

Design and Evaluation of Internal Control Over Financial Reporting

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we included a report of management’s assessment of the design and effectiveness of our internal controls over financial reporting as part of this Annual Report on Form 10-K for the fiscal year ended December 31, 2013.2016. Grant Thornton, LLP, our independent registered public accounting firm, also audited our internal control over financial reporting. Management’s report and the independent registered public accounting firm’s audit report are included in this Annual Report on Form 10-K within Part II, Item 8 under the captions entitled “Management’s Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm”.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the period covered by this Annual Report on Form 10-K that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.  Other Information.

Not applicable.


57




PART III

Item 10.  Directors, Executive Officers and Corporate Governance.

The information regarding directors and executive officers is incorporated herein by reference to the Company’s definitive proxy statement to be mailed to its shareholders in connection with its 20142017 Annual Meeting of Shareholders and to be filed within 120 days of the close of the year ended December 31, 2013.2016.

Code of Ethics

We have adopted a code of ethics that applies to all employees, including executive officers and directors. The code of ethics is publicly available on the Corporate Governance page of our website at www.hcsg.com. If we make any amendments or grant any waivers, including implicit waivers, from a provision of our code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or any person performing similar functions, we will disclose the nature of the amendment or waiver, its effective date and to whom it applies on our website set forth above or in a report on Form 8-K filed with the Securities and Exchange Commission.

Item 11.  Executive Compensation.

The information regarding executive compensation is incorporated herein by reference to the Company’s definitive proxy statement to be mailed to shareholders in connection with its 20142017 Annual Meeting of Shareholders and to be filed within 120 days of the close of the fiscal year ended December 31, 2013.2016.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information regarding security ownership of certain beneficial owners and management and related stockholder matters is incorporated herein by reference to the Company’s definitive proxy statement to be mailed to shareholders in connection with its 20142017 Annual Meeting of Shareholders and to be filed within 120 days of the close of the fiscal year ending December 31, 2013.2016.


63




Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth for the Company’s equity compensation plans, on an aggregated basis, the number of shares of its Common Stock subject to outstanding stock awards, the weighted-average exercise price of stock awards, and the number of shares remaining available for future award grants as of December 31, 2013.2016.

Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))  Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
Plan Category(a) (b) (c)  (a) (b) (c)
 (in thousands, except per share amounts) 
Equity compensation plans approved by security holders2,483,000
(1) 
$16.05
 5,721,000
(2) 
 2,615
(1) 
 $24.61
 4,015
(2) 
Equity compensation plans not approved by security holders
 
 
  
 
 
 
Total2,483,000
 $16.05
 5,721,000
  2,615
 $24.61
 4,015
 


(1) Represents shares of Common Stock issuable upon exercise of outstanding stock awards granted under the 2012 Equity Incentive Plan and carryover shares from pre-existing Plans.
(2) Includes stock awards to purchase 1.3 million shares available for future grant under the Company’s 2012 Equity Incentive Plan. Also includes 2.3 million and 0.4 million shares available for issuance under the Company’s 1999 Employee Stock Purchase Plan (the “1999 Plan”) as amended and the Company’s Amended and Restated Deferred Compensation Plan, respectively. Treasury shares may be issued under the 1999 Plan and the Company’s Amended and Restated Deferred Compensation Plan.



(1)Represents shares of Common Stock issuable upon exercise of outstanding stock awards granted under the 2012 Equity Incentive Plan and carryover shares from Pre-existing Plans.
(2)Includes stock awards to purchase 2,793,000 shares available for future grant under the Company’s 2012 Equity Incentive Plan and carryover shares from Pre-existing Plans. Also includes 2,476,000 and 452,000 shares available for issuance under the Company’s 1999 Employee Stock Purchase Plan as amended and 1999 Deferred Compensation Plan, respectively (collectively, the “1999 Plans”). Treasury shares may be issued under the 1999 Plans.
58




Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 13.  Certain Relationships and Related Transactions, and Director Independence.

The information regarding certain relationships and related transactions, and director independence is incorporated herein by reference to the Company’s definitive proxy statement mailed to shareholders in connection with its 20142017 Annual Meeting of Shareholders and to be filed within 120 days of the close of the fiscal year ended December 31, 2013.2016.

Item 14.  Principal Accountant Fees and Services.

The information regarding principal accountant fees and services is incorporated herein by reference to the Company’s definitive proxy statement mailed to shareholders in connection with its 20142017 Annual Meeting of Shareholders and to be filed within 120 days of the close of the fiscal year ended December 31, 2013.


64
2016.




PART IV

Item 15.  Exhibits and Financial Statement Schedules.

(a)The following financial statements, schedules and exhibits are filed as part of this report:

1.
Index to Consolidated Financial Statements — The Financial Statements required by this item are listed on the Index to Financial Statements in Part II, Item 8 of this report.
2.
Index to Financial Statement Schedules
a.Schedule II—Valuation and Qualifying Accounts and Reserves; and 
b.Other financial statement schedules are not included because they are not required or the information is otherwise shown in the financial statements or notes thereto.
3.
Index to Exhibits
a.The exhibits listed below are filed as part of, or are incorporated by reference into, this report.

(b)See Item 15(a)(3) above.

(c)See Item 15(a)(2) above.


65




Healthcare Services Group, Inc.
Schedule II — Valuation and Qualifying Accounts and Reserves

  Additions      Additions    
DescriptionBeginning Balance Charged to Costs and Expenses Charged to Other Accounts Deductions (A) Ending BalanceBeginning Balance Charged to Costs and Expenses Charged to Other Accounts 
Deductions (1)
 Ending Balance
2013         
(in thousands)
2016         
Allowance for Doubtful Accounts$3,970,000
 $1,990,000
 $
 $2,041,000
 $3,919,000
$4,608
 $4,629
 $
 $2,326
 $6,911
2012         
2015         
Allowance for Doubtful Accounts$4,506,000
 $2,160,000
 $
 $2,696,000
 $3,970,000
$6,136
 $4,335
 $
 $5,863
 $4,608
2011         
2014         
Allowance for Doubtful Accounts$4,069,000
 $2,450,000
 $
 $2,013,000
 $4,506,000
$3,919
 $4,470
 $
 $2,253
 $6,136

(A) Represents write-offs(1) Represent write-offs.


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59




Exhibit Index

The following Exhibits are filed as part of this Report (references are to Reg. S-K Exhibit Numbers):

Exhibit NumberDescription
2.1
Asset Purchase Agreement, dated July 11, 2013, among Healthcare Services Group, Inc., Platinum Health Services, LLC, Platinum Health Services PEO, LLC, Joseph Foy, Platinum SG Equities LLC, Walnut Court Capital Advisors, LLC, Z Capital LLC, Simon Ganz and Seth E. Gribetz is incorporated by reference to Exhibit 2.1 to the Company's Form 8-K filed July 16, 2013.
3.1
Articles of Incorporation of the Registrant, as amended, are incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-2 (File No. 33-35798).
3.2
Amendment to Articles of Incorporation of the Registrant as of May 30, 2000, is incorporated by reference to Exhibit 3.2 to the Company’s Form 10-K for the period ended December 31, 2001
3.3
Amendment to Articles of Incorporation of the Registrant as of May 22, 2007, is incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed May 24, 2007.
3.4
Amended and Restated By-laws of the Registrant as of July 18, 1990 are incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-2 (File No. 33-35798).
3.5
Amendment to Amended and Restated By-laws of the Registrant as of July 14, 2009 is incorporated by reference to Exhibit 99.2 to the Company’s Form 10-Q for the quarter ended June 30, 2009.
4.1
Specimen Certificate of the Common Stock, $.01 par value, of the Registrant is incorporated by reference to Exhibit 4.1 of Registrant’s Registration Statement on Form S-18 (Commission File No. 2-87625-W).
4.2(1)
Employee Stock Purchase Plan of the Registrant is incorporated by reference to Exhibit 4(a) of Registrant’s Registration Statement on Form S-8 (Commission File No. 333-92835).
4.3(1)
Amendment to Employee Stock Purchase Plan is incorporated by reference to Exhibit 4.3 to the Company’s Form 10-K for the period ended December 31, 2003.
4.4(1)
Deferred Compensation Plan is incorporated by reference to Exhibit 4(b) of Registrant’s Registration Statement on Form S-8 (Commission File No. 333-92835).
4.5(1)
Amended and Restated Deferred Compensation Plan is incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended September 30, 2012.
10.1(1)
2012 Equity Incentive Plan is incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended June 30, 2012.
10.2
Healthcare Services Group, Inc. Dividend Reinvestment Plan is incorporated by reference to the Company’s Registration Statement on Form S-3 (Commission File No. 333-108182).
10.3
Healthcare Services Group, Inc. Automatic Shelf Registration in connection with acquisition of Platinum Health Services, LLC pursuant to the Asset Purchase Agreement is incorporated by reference to the Company's Registration Statement on Form S-3ASR (Commission File No. 333-189986).
10.4
Amended and Restated Loan Agreement dated as of December 18, 2013 is incorporated by reference to Exhibit 99.2 to the Company's Form 8-K filed December 19, 2013.
10.5
Amended and Restated Committed Line of Credit Note dated as of December 18, 2013 is incorporated by reference to Exhibit 99.3 to the Company's Form 8-K filed December 19, 2013.
14
Code of Ethics and Business Conduct. Such document is available at our website www.hcsg.com
21
List of subsidiaries is filed herewith in Part I, Item I.*
23
Consent of Independent Registered Public Accounting Firm.*
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.*
31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.*
32.1
Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act.*
32.2
Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.*
EX-101
XBRL Instance Document
EX-101
XBRL Taxonomy Extension Schema Document
EX-101
XBRL Taxonomy Calculation Linkbase Document
EX-101
XBRL Taxonomy Extension Definition Linkbase Document
EX-101
XBRL Taxonomy Labels Linkbase Document
EX-101
XBRL Taxonomy Presentation Linkbase Document
    Incorporated by Reference  
Exhibit Number Description Form File No. Date of Filing Exhibit Number Filed Herewith
3.1 Amended and Restated Articles of Incorporation of the Registrant as of May 30, 2000 10-K 0-12015 3/21/2001 3.2 
3.2 Amendment to the Amended and Restated Articles of Incorporation of the Registrant as of May 22, 2007 8-K 0-12015 5/24/2007 3.1 
3.3 Second Amended and Restated Bylaws of the Registrant as of February 17, 2015 10-K 0-12015 2/19/2015 3.3 
4.1 Specimen Certificate of the Common Stock, $.01 par value, of the Registrant S-18 2-87625-W  4.1 
4.2† Healthcare Services Group, Inc. Employee Stock Purchase Plan S-8 333-92835 12/15/1999 4(a) 
4.3† Healthcare Services Group, Inc. Amendment No. 3 to Employee Stock Purchase Plan 10-Q 0-12015 10/28/2016 4.1 
4.5† Healthcare Services Group, Inc. Amended and Restated Deferred Compensation Plan 10-Q 0-12015 10/22/2012 10.1 
10.1† Healthcare Services Group, Inc. 2012 Equity Incentive Plan 10-Q 0-12015 7/27/2012 10.1 
10.2 Healthcare Services Group, Inc. Dividend Reinvestment Plan S-3D 333-108182 8/22/2003 99.0 
10.3 Amended and Restated Loan Agreement dated as of December 18, 2013 8-K 0-12015 12/19/2013 99.2 
10.4 Amended and Restated Committed Line of Credit Note dated as of December 18, 2013 8-K 0-12015 12/19/2013 99.3 
10.5 Consent and Amendment to Loan Documents, dated as of July 9, 2015 8-K 0-12015 7/14/2015 99.2 
10.6 Amended and Restated Committed Line of Credit Note, dated as of July 9, 2015 8-K 0-12015 7/14/2015 99.3 
21 Subsidiaries of Healthcare Services Group, Inc.     X
23 Consent of Independent Registered Public Accounting Firm     X
31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act     X
31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act     X
32.1 Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act     X
32.2 Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act     X
101 The following financial information from the Company's Form 10-K for the fiscal year ended December 31, 2015 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statements of Stockholders' Equity, and (v) Notes to Consolidated Financial Statements     X



*
Filed herewith.
(1) Indicates a management plan or compensatory plan or arrangement.

67
60




Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    
Dated: February 21, 201424, 2017 HEALTHCARE SERVICES GROUP, INC.
  (Registrant)
    
  By: /s/ Daniel P. McCartneyTheodore Wahl
   Daniel P. McCartneyTheodore Wahl
   President and Chief Executive Officer and Chairman of the Board

Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons and in the capacities and on the date indicated:

Signature Title Date
     
/s/ Daniel P. McCartney 
/s/ Theodore WahlDirector and President and Chief Executive Officer and Chairman February 21, 201424, 2017
Daniel P. McCartneyTheodore Wahl (Principal Executive Officer)  
     
/s/ John C. Shea Chief Financial Officer February 21, 201424, 2017
John C. Shea (Principal Financial and Accounting Officer)  
     
/s/ Theodore WahlDaniel P. McCartney Director and President and Chief Operating OfficerChairman of the Board February 21, 201424, 2017
Theodore WahlDaniel P. McCartney 
  
     
/s/ Michael E. McBryan Director and Executive Vice President February 21, 201424, 2017
Michael E. McBryan
/s/ John M. BriggsDirectorFebruary 24, 2017
John M. Briggs    
     
/s/ Robert L. Frome Director February 21, 201424, 2017
Robert L. Frome    
     
/s/ Diane S. Casey Director February 21, 201424, 2017
Diane S. Casey
/s/ John M. BriggsDirectorFebruary 21, 2014
John M. Briggs    
     
/s/ Robert J. Moss Director February 21, 201424, 2017
Robert J. Moss    
     
/s/ Dino D. Ottaviano Director February 21, 201424, 2017
Dino D. Ottaviano    
     
/s/ John J. McFadden Director February 21, 201424, 2017
John J. McFadden    
/s/ Jude ViscontoDirectorFebruary 24, 2017
Jude Visconto


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