Document

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, 2017
 
¨
 
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 incorporation or organization)
 
(I.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 each class
 
Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act: None
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.  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer 
þ
 
 
Accelerated filer 
o
 
 
 
 
 
 
 
 
Non-accelerated filer  
o
(Do not check if a smaller reporting company)
 
Smaller reporting company  
o
 
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
o
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
 
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, 2017 was approximately $2.49 billion based on the closing sale price of the Common Stock on the NASDAQ 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 21, 2018). 73,679,000

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Registrant’s Annual Meeting of Shareholders to be held on May 29, 2018 have been incorporated by reference into Parts II and III of this Annual Report on Form 10-K.



Healthcare Services Group, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2017

TABLE OF CONTENTS

PART I
 
PART II
 
PART III
 
PART IV
 
Item 16.
Form 10-K Summary



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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, as amended, which are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, and 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 healthcare industry, primarily providers of long-term care; having several clients who individually contributed over 3%, with one as high as 17.6%, of our total consolidated revenues for the year ended December 31, 2017; credit and collection risks associated with this industry; 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; realization of our expectations regarding the impact of the Tax Cuts and Jobs Act on our financial results; and the risk factors described in Part I in this report under “Government Regulation of Clients,” “Service Agreements and Collections” and “Competition;” and under Item IA “Risk Factors.”

These factors, in addition to delays in payments from clients and/or clients in bankruptcy or clients with 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 the successful execution of our projected growth strategies.


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PART I

In this Annual Report on Form 10-K for the year ended December 31, 2017, Healthcare Services Group, Inc. (together with its wholly-owned subsidiaries listed 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

Healthcare Service Group, Inc. (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 healthcare facilities, 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 nation, rendering such services to over 3,500 facilities throughout the continental United States as of December 31, 2017.

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 in the Notes to Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015.

Description of Services

We are organized into two reportable segments: housekeeping, laundry, linen and other services (“Housekeeping”) and dietary department services (“Dietary”). Our corporate headquarters provides centralized financial management and support, legal services, human resources management and other administrative services to the Housekeeping and Dietary business segments.

We provide Housekeeping services to essentially all of our client facilities and provide Dietary services to over 1,500 facilities. Although we do not directly participate in any government reimbursement programs, our clients receive government reimbursements related to Medicare and Medicaid and are directly affected by any legislation and regulations relating to those programs.

We provide services primarily pursuant to full service agreements with our clients. Under such agreements, we are responsible for the day-to-day management of the employees located at our clients’ facilities, as well as the provision of certain supplies. We also provide services on the basis of management-only agreements for a 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 a renewable one year service term, 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 structures, including policies of wage rate increases, and pass through to the client any labor cost increases associated with wage rate adjustments.

Our labor force is interchangeable with respect to the services within Housekeeping, while the Dietary labor force is specific to Dietary operations. In addition, there are some differences in the expertise of the professional management personnel responsible for the services of the respective segments. We believe that the services of each segment provide opportunities for growth.

Housekeeping

Housekeeping accounted for approximately 52.5%, or $979.6 million, of our consolidated revenues in 2017. The services provided under this segment include managing our clients’ housekeeping departments, which are principally responsible for the cleaning, disinfecting and sanitizing of resident rooms and common areas of the clients’ facilities, as well as the laundering and processing of the bed linens, uniforms, resident personal clothing and other assorted linen items utilized at the clients’ facilities. Upon beginning service with a client facility, we typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise and train the front-line personnel and coordinate housekeeping services with other facility support functions in accordance with client requests. Such management personnel also oversee the execution of various cost- and quality-control procedures including continuous training and employee evaluation, and on-site testing for infection control.


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Housekeeping’s operating performance is significantly impacted by our management of labor costs. Management reviews costs as a percentage of revenues, in order to normalize and evaluate such costs in the context of the Company’s growth. Housekeeping labor costs represented approximately 80.1% of Housekeeping revenues for 2017. Changes in employee compensation resulting from legislative or other governmental actions, market factors, adjustments to staffing levels, and the composition of our labor force may adversely impact these costs. Similarly, an increase in the costs of supplies consumed in performing Housekeeping services may impact Housekeeping’s operating performance. In 2017, the cost of Housekeeping supplies as a percentage of Housekeeping revenues was 8.0%. Generally, the cost of such supplies is dictated by specific product market conditions, which are subject to price fluctuations influenced by factors outside of our control. Where possible, we negotiate fixed pricing from vendors for an extended period of time on certain supplies to mitigate such price fluctuations.

Dietary

Dietary services represented approximately 47.5%, or $886.5 million, of our consolidated revenues in 2017. Dietary services consist of managing our clients’ dietary departments which are principally responsible for food purchasing, meal preparation and professional dietitian services, which include the development of menus that meet the dietary needs of residents. On-site management is responsible for all daily dietary department activities, with regular support being provided by a District Manager specializing in Dietary services, as well as a registered dietitian. We also offer clinical consulting services to facilities.

Dietary operating performance is also impacted by price fluctuations in labor and supply costs resulting from similar factors discussed above for Housekeeping. In 2017, the costs of labor and food-related supplies represented approximately 56.6% and 36.1% of Dietary revenues, respectively.

Significant Customers

For the year ended December 31, 2017, both the Housekeeping and Dietary segments earned revenue from several significant customers, including Genesis Healthcare, Inc.

Operational Management Structure

By applying our professional management techniques, we offer our clients the ability to manage certain housekeeping, laundry, linen, facility maintenance and dietary services and costs. We manage and provide our services through a network of management personnel, as illustrated below.
 
 
 
 
 
 
Vice President of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Director of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
District Manager
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Facility Manager
 
 
 
 
 
 

Facilities are managed by an on-site 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.

District Managers oversee the operations of the facilities within their districts. Their responsibilities include oversight of Facility Managers and management of personnel, operational performance, quality control and customer satisfaction, while ensuring adherence to the Company’s systems and budgets.

Directors of Operations oversee District Managers and provide management support, training and personnel management, while ensuring operational performance consistent with the Company’s systems and budgets.

Vice Presidents of Operations are ultimately responsible for all aspects of the operations, compliance and financial performance of the Directors of Operations who they oversee.


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We believe that our organizational structure facilitates our ability to best serve and expand our service offerings to existing clients, while also securing new clients.

Market

The market for our services consists of a large number of facilities involved in various aspects of the healthcare 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.). Such facilities may be specialized or general, privately owned or public, for-profit or not-for-profit, and may serve residents on a long-term or short-term basis. We market our services to 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 population of the United States ages and as government reimbursement policies require increased cost control or containment by the constituents that comprise our target market.

Marketing and Sales

Our services are primarily marketed by our Chief Revenue Officer, Vice Presidents of Sales and our Directors of Sales. These marketing and sales efforts are supported by all levels of our corporate and operational management team. We provide incentive compensation to our sales and operational personnel based on achieving financial and non-financial goals and objectives, which are aligned with the key elements we believe are necessary for us to achieve overall improvement in our financial results, along with continued business development.

Our services are marketed primarily through referrals and in-person solicitation of target facilities. We also participate in industry trade shows, healthcare trade associations and healthcare 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. Such programs 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 proposed costs, is submitted to the prospective client. Once the prospective client accepts the proposal and executes our service agreement, we are structured to timely and efficiently establish our operations and systems at the client facilities.

Government Regulation of Clients

We do not directly participate in any government reimbursement programs and our contractual relationships with our clients determine their payment obligations to us. However, our clients are subject to government regulation and laws and rulings which directly affect how they are paid for certain services they provide. Therefore, because our clients’ revenues are generally highly reliant on Medicare and Medicaid reimbursement funding rates, the overall effect of laws and trends in the long-term care industry have affected and could adversely affect our clients’ cash flows, resulting in their inability to make payments to us in accordance with agreed upon payment terms (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, 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.

Environmental Regulation

Our operations are subject to various federal, state and/or local laws concerning emissions into the air, discharges into waterways and the generation, handling and disposal of waste and hazardous substances. Our past expenditures relating to environmental compliance have not had a material effect on our cash flows or results of operations 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 our competitive position in the future. Based upon information currently available, we believe that expenditures relating to environmental compliance will not have a material impact on the financial position of the Company.

Service Agreements and Collections

We have historically had a favorable client retention rate and expect to continue to maintain satisfactory relationships with our clients, despite many of our service agreements being cancelable on short notice.


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We have had varying collections experiences with respect to our accounts and notes receivable. We have sometimes extended the period of payment for certain clients beyond contractual terms. Such clients include those who have terminated service agreements and slow payers experiencing financial difficulties. Related to these collection matters, we have recorded bad debt provisions (in an Allowance for Doubtful Accounts) of $6.3 million, $4.6 million and $4.3 million in the years ended December 31, 2017, 2016 and 2015, respectively (see Schedule II - Valuation and Qualifying Accounts and Reserves for year-end balances). As a percentage of total revenues, these provisions represented approximately 0.3% for each of the years ended December 31, 2017, 2016 and 2015. In making our credit evaluations, we consider customer-specific risks as well as the general collection risk associated with trends in the long-term care industry. We establish credit limits, perform ongoing credit evaluations and monitor accounts to minimize the risk of loss. Despite our efforts to minimize credit risk exposure, our clients could be adversely affected if future industry trends change in a way that negatively impacts their cash flows, as discussed in “Government Regulation of Clients” and “Risk Factors” in this report. If our clients experience a negative impact on their cash flows, it could have a material adverse effect on our consolidated results of operations and financial condition.

Competition

We compete primarily with the in-house service departments of our potential clients. Most healthcare 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 we do, although historically such firms have concentrated their marketing efforts primarily on hospitals, rather than the long-term care facilities typically serviced by us.

Employees

At December 31, 2017, we employed over 55,000 people, of which approximately 6,700 were corporate and field management personnel. Approximately 10% of our 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 by 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 their employee unions, or between us and such unions. We consider our relationship with our employees to be good.

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 as these factors could materially and adversely affect our business, results of operations, financial condition 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 deem to be immaterial.

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

We have several clients who individually contributed over 3%, with one as high as 17.6%, of our total consolidated revenues for the year ended December 31, 2017. Although we expect to continue the relationship with these clients, there can be no assurance thereof. The loss, individually or in 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 and the Company. 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.

Our clients are concentrated in the healthcare industry, which is subject to 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’ results of operations and cash flows.

We provide our services primarily to providers of long-term and post-acute care. We cannot predict what efforts, and to what extent, legislation and proposals to contain healthcare costs will ultimately impact our clients’ revenues through reimbursement rate modifications. Congress has enacted a number of laws during the past decade that have significantly altered, and may continue to 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 our 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.

Changes to federal healthcare legislation may adversely affect our operating costs and results of operations.

Continued changes to the healthcare structure and regulations related to the health insurance industry in the United States could impact our operating costs. Any requirements to provide additional benefits to our employees or the payment of penalties if such benefits are not provided, would increase our expenses. If we are unable to pass-through these charges to our clients to cover these expenses, such increases could adversely impact our operating costs and our results of operations.

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 healthcare insurance and other benefits to our employees.

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 have and may continue to revise reimbursement structures for nursing home services. Any disruption or delay in the distribution of Medicaid and related payments to our clients will adversely affect their cash 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 the accounts and notes receivable balance from our customers. We grant credit to substantially all of our customers. Deterioration in the financial condition of a significant component of our customer base could hinder our ability to collect amounts due from our customers. Potential causes of such declines include national or local economic downturns, customers’ dependence on continued Medicare and Medicaid funding and the impact of additional regulatory actions. We have sometimes been required to extend the period of payment for certain clients beyond contractual terms. Such 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 evaluations and monitor accounts to minimize the risk of loss. Despite 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 could 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 carry a high deductible general liability and workers’ compensation program and therefore retain a substantial portion of the risk associated with the possible losses under such 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 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. Although we engage third-party experts to assist us in estimating appropriate reserves, the determination of the required reserves is dependent upon significant actuarial judgments. 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, state and local tax rules can adversely impact our results of operations and financial position.

We are subject to federal, state and local taxes in the United States. Significant judgment is required in determining the provision for income taxes. We believe our income tax estimates are reasonable. Although, if the Internal Revenue Service or other taxing authority disagrees a tax position we’ve taken and upon final adjudication we are unsuccessful, we could incur additional tax liability, including interest and 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 in which we operate. 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 conflicting position taken by a state or local taxation authority on the taxability of our services could result in additional tax liabilities and could negatively impact our competitive position in that jurisdiction. Additionally, if we 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 seek 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, our results of operations, financial condition and cash flows 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 litigation and government inquiries which arise in the ordinary course of business. These matters relate to, among other things, general liability, payroll or employee-related matters. Legal actions could result in substantial monetary damages and expenses and may adversely affect our reputation and business status with our clients, whether or not we are ultimately determined to be liable. 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 estimates may remain unknown for substantial periods of time.

We assess contingencies to determine the degree of probability and range of possible loss for 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 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 an initial 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 equipment installations, could in the aggregate materially adversely affect our consolidated results of operations and financial position.

The 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 on-site facility managers 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 current and selling additional services to existing 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 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 the cost 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. We 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 such costs to our clients, from time to time, sporadic unanticipated increases in the costs of certain supply items due to market or 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 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 seek to mitigate the impact of an unanticipated increase in such supplies’ costs through consolidation of vendors, which increases our ability to obtain more favorable pricing.

Our cost of labor may be influenced by factors in certain market areas or changes in the respective collective bargaining agreements to which we are a party. A substantial number of our employees are hourly employees whose wage rates are affected by increases in the federal or state minimum wage rates, wage inflation or local job market adjustments. As collective bargaining agreements are renegotiated, we may need to increase the wages paid to bargaining unit employees 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’ 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 disrupt their operations which could adversely affect our operations. Furthermore, there can be no assurance that compliance with governmental regulations by our suppliers will eliminate the risks related to food safety. 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.

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 our products caused injury or illness could adversely affect the our reputation.

Changes in interest rates and changes in financial market conditions may result in fluctuating and even negative returns in our investments, and 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 value of our investment portfolio which could adversely impact our financial condition and results of operations. Our marketable securities consist of municipal bonds. We believe that our investment criteria, which include diversification among issuers of bonds, requirements regarding credit ratings and monitoring of our investments’ duration periods, reduce our exposure related to the financial distress and budget shortfalls that many state and local governments currently face. Increases in market interest rates could adversely affect our payment obligations with respect to our variable-rate borrowing agreements and adversely affect our liquidity and earnings.


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Table of Contents

Investor 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 performance of our Common Stock reflect high market expectations for our future operating results. Our 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 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. With respect to providing new services to new or existing clients, our strategy is to achieve corresponding profit margins in each of our segments. If we are unable to continue either historical client revenue and profitability growth rates or projected improvement, 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.

Failure to maintain appropriate 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, and 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 our Common Stock. Although we have taken steps to maintain our internal control structure as required, we cannot guarantee that control deficiencies will not result in a misstatement in the future.

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.

Cyber attacks and breaches could cause operational disruptions, fraud or theft of sensitive information.

Aspects of our operations are reliant upon internet-based activities, such as ordering supplies and back-office functions such as accounting and transaction processing, making and accepting payments, processing payroll and other administrative functions, etc. Although we have taken measures to protect our technology systems and infrastructure, including employee education programs regarding cybersecurity, a breach of the security surrounding these functions could result in operational disruptions, theft or fraud, or exposure of sensitive information to unauthorized parties. Such events could result in additional costs related to operational inefficiencies, or damages, claims or fines.

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Table of Contents

Item 1B.   Unresolved Staff Comments.

None.

Item 2.   Properties.

We lease our corporate offices, located at 3220 Tillman Drive, Bensalem, Pennsylvania 19020.We also lease office space at other locations in Pennsylvania, Colorado, South Carolina, Connecticut, Georgia, California and New Jersey. The 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 clients’ facilities.

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

We own office furniture and equipment, housekeeping and laundry equipment, and vehicles. The office furniture and equipment and vehicles are primarily located at the corporate office, 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 approximately $3,000. Additionally, we have laundry installations at certain client facilities. The 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 to 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, contractual, personal injury, workers compensation and insurance matters. We believe the Company 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 our 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 our results of operations for a particular period depending on, among other factors, the size of the loss or liability imposed and the level of our operating income for that period.

Item 4.   Mine Safety Disclosures.

Not applicable.


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Table of Contents

PART II

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

Market Information

The Company’s Common Stock, $.01 par value (the “Common Stock”), is traded under the symbol “HCSG” on the NASDAQ Global Select Market. As of February 21, 2018, there were approximately 73.7 million shares of our Common Stock outstanding.

The high and low sales price quotations for our Common Stock and the cash dividends declared during the years ended December 31, 2017 and 2016 were as follows:
Quarter Ended
 
High
 
Low
 
Cash Dividends Declared
March 31, 2017
 
$
43.91

 
$
37.54

 
$
0.18750

June 30, 2017
 
$
50.00

 
$
41.05

 
$
0.18875

September 30, 2017
 
$
55.68

 
$
45.10

 
$
0.19000

December 31, 2017
 
$
55.29

 
$
49.09

 
$
0.19125

 
Quarter Ended
 
High
 
Low
 
Cash Dividends Declared
March 31, 2016
 
$
36.99

 
$
31.50

 
$
0.18250

June 30, 2016
 
$
41.40

 
$
36.47

 
$
0.18375

September 30, 2016
 
$
42.18

 
$
36.58

 
$
0.18500

December 31, 2016
 
$
40.88

 
$
34.83

 
$
0.18625


Dividends

On January 30, 2018, our Board of Directors declared a regular quarterly cash dividend of $0.19125 per common share, which will be paid on March 23, 2018 to shareholders of record as of the close of business on February 16, 2018.

Our Board of Directors reviews the dividend policy on a quarterly basis. Although there can be no assurance that the Company 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 the Company’s dividend policy, the Company adopted a Dividend Reinvestment Plan in 2003.

Holders

As of February 21, 2018, we had approximately 500 holders of record of our Common Stock. Based on reports of security position listings compiled for the 2017 annual meeting of shareholders, we believe we may have approximately 7,000 beneficial owners of our Common Stock.


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Table of Contents

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 our 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, 2017.
 
 
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)
 
 
(in thousands, except per share amounts)
 
Equity compensation plans approved by security holders
 
2,374

(1) 
 
$
29.22

 
3,422

(2) 
Equity compensation plans not approved by security holders
 

 
 

 

 
Total
 
2,374

 
 
$
29.22

 
3,422

 

(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 0.8 million shares available for future grant under the Company’s 2012 Equity Incentive Plan, 2.3 million shares available for issuance under the Company’s 1999 Employee Stock Purchase Plan (the “1999 Plan”) as amended and 0.4 million shares available for issuance under the Company’s Amended and Restated Deferred Compensation Plan. Treasury shares may be issued under the 1999 Plan and the Company’s Amended and Restated Deferred Compensation Plan.

Performance Graph

The following graph matches Healthcare Services Group, Inc.’s cumulative five-year total shareholder return on Common Stock with the cumulative total returns of the S&P 500 index, the NASDAQ Composite index and the Russell 2000 index. The graph tracks the performance of a $100 investment in our Common Stock and in each index (with the reinvestment of all dividends) from December 31, 2012 to December 31, 2017. The stock price performance included in this graph is not necessarily indicative of future stock price performance.

We have not defined a peer group based on either industry classification or financial characteristics. We believe the Company 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, we opted to utilize the Russell 2000 index to compare the Company performance to issuers with similar market capitalization.

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Comparison of 5 Year Cumulative Total Return*

Among Healthcare Services Group, Inc., the S&P 500 Index, the NASDAQ Composite Index and the Russell 2000 Index
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12080898&doc=14
*$100 invested on December 31, 2012 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.

Copyright© 2017 Standard & Poor’s, a division of S&P Global. All rights reserved.
Copyright© 2017 Russell Investment Group. All rights reserved.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
Company/Index
 
2012
 
2013
 
2014
 
2015
 
2016
 
2017
Healthcare Services Group, Inc.
 
$
100.00

 
$
125.52

 
$
140.22

 
$
161.47

 
$
185.00

 
$
253.03

S&P 500
 
$
100.00

 
$
132.39

 
$
150.51

 
$
152.59

 
$
170.84

 
$
208.14

Russell 2000
 
$
100.00

 
$
138.82

 
$
145.62

 
$
139.19

 
$
168.85

 
$
193.58

NASDAQ Composite
 
$
100.00

 
$
141.63

 
$
162.09

 
$
173.33

 
$
187.19

 
$
242.29


Unregistered Sales of Equity Securities and Use of Proceeds

During the second quarter 2017, the Company issued 59,000 shares of common stock to a qualified offeree in accordance with the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended.



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Table of Contents

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,
 
2017
 
2016
 
2015
 
2014
 
2013

(in thousands, except per share amounts)
Selected Operating Results
 
 
 
 
 
 
 
 
 
Revenues
$
1,866,131

 
$
1,562,662

 
$
1,436,849

 
$
1,293,183

 
$
1,149,890

Net income
$
88,226

 
$
77,396

 
$
58,024

 
$
21,850

 
$
47,129

Basic earnings per common share
$
1.20

 
$
1.06

 
$
0.81

 
$
0.31

 
$
0.68

Diluted earnings per common share
$
1.19

 
$
1.05

 
$
0.80

 
$
0.31

 
$
0.67

Selected Balance Sheet Data

 

 

 

 

Total assets
$
676,003

 
$
528,446

 
$
480,949

 
$
469,579

 
$
425,342

Stockholders’ equity
$
399,952

 
$
338,842

 
$
296,456

 
$
275,830

 
$
285,143

Selected Other Financial Data

 

 

 

 

Working capital
$
343,238

 
$
313,753

 
$
269,277

 
$
213,414

 
$
207,750

Cash dividends declared per common share
$
0.75750

 
$
0.73750

 
$
0.71750

 
$
0.69750

 
$
0.67750

Weighted average number of common shares outstanding - basic
73,355

 
72,754

 
71,826

 
70,616

 
69,206

Weighted average number of common shares outstanding - diluted
74,348

 
73,474

 
72,512

 
71,341

 
70,045


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 Factors,” and elsewhere in this report on Form 10-K. We are on a calendar year end, and except where otherwise indicated, “2017” refers to the year ended December 31, 2017, “2016” refers to the year ended December 31, 2016 and “2015” refers to the year ended December 31, 2015.

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, 2017 and for the year then ended and the notes accompanying those financial statements.

Overview

We provide management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary service departments of healthcare facilities, 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 nation, rendering such services to over 3,500 facilities throughout the continental United States as of December 31, 2017.


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Table of Contents

We provide services primarily pursuant to full service agreements with our clients. Under such agreements, we are responsible for the day-to-day management of the employees located at our clients’ facilities, as well as the provision of certain supplies. We also provide services on the basis of management-only agreements for a 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 a renewable one year service term, cancelable by either party upon 30 to 90 days’ notice after an initial 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”).

Housekeeping consists of managing our clients’ housekeeping departments, which are principally responsible for the cleaning, disinfecting and sanitizing of resident rooms and common areas of the clients’ facilities, as well as the laundering and processing of the bed linens, uniforms, resident personal clothing and other assorted linen items utilized at the clients’ facilities.

Dietary consists of managing our clients’ dietary departments which are principally responsible for food purchasing, meal preparation and professional dietitian services, which include the development of menus that meet the dietary needs of residents.

At December 31, 2017, Housekeeping services were provided at essentially all of our more than 3,500 client facilities, generating approximately 52.5%, or $979.6 million, of 2017 total revenues. Dietary services were provided to over 1,500 client facilities at December 31, 2017 and contributed approximately 47.5%, or $886.5 million, of 2017 total revenues.

Our workers’ compensation, general liability and certain employee health and welfare insurance programs are provided by HCSG Insurance Corp. (“HCSG Insurance” or the “Captive”), our wholly owned captive insurance subsidiary. HCSG Insurance provides the Company with greater flexibility and cost efficiency in meeting our insurance needs. In 2015, we completed a corporate restructuring by capitalizing three new operating entities and transitioning our 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 are affected by many factors. Competitive factors consist primarily of competing with potential clients’ use of in-house support staff, as well as local or regional companies providing services similar to ours. We are unaware of any other companies, on a national, regional or local level, which have a significant presence or will impact our ability to secure new clients in our market. We believe the primary revenue drivers of our business are our ability to obtain new clients and to provide additional services to existing clients. In addition, we seek to pass through, by means of service billing increases, increases in our cost of providing the services, while also aiming to obtain modest annual revenue increases from our existing clients to attain 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, because many of our clients’ revenues are generally highly reliant on Medicare and Medicaid reimbursements. Therefore, our clients’ economic decision-making is driven significantly by their reimbursement funding rate structure and the financial impact on their reimbursement as a result of engaging us for the respective services. The primary operational factor is our ability to demonstrate to potential clients the benefits of being relieved of the administrative and operational challenges related to the day-to-day management of their housekeeping and dietary operations. In addition, we must be able to assure new clients that we can improve the quality of service that they are providing to their residents. We believe the factors discussed above are equally applicable to each of our segments with respect to acquiring new clients and increasing revenues.


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Table of Contents

When evaluating financial performance, we consider the ratio of certain financial items to consolidated revenues. The table below summarizes those metrics for 2017, 2016 and 2015: 
 
Relation to Consolidated Revenues
Years Ended December 31,
 
2017
 
2016
 
2015
Revenues
100.0
%
 
100.0
%
 
100.0
%
Operating costs and expenses:
 
 
 
 
 
Costs of services provided
86.4
%
 
85.7
%
 
86.0
%
Selling, general and administrative
6.8
%
 
6.7
%
 
7.8
%
Net investment and interest income
0.3
%
 
0.2
%
 
0.0
%
Income before income taxes
7.1
%
 
7.8
%
 
6.2
%
Income taxes
2.4
%
 
2.8
%
 
2.2
%
Net income
4.7
%
 
5.0
%
 
4.0
%

Subject to the factors noted in the Cautionary Statement Regarding Forward Looking Statements included in this report on Form 10-K, we expect that our consolidated financial performance in 2018 may be comparable to the historical ratios above, absent the effects of non-recurring charges, such as those that affected selling, general and administrative costs in 2015. We anticipate that for 2018, Dietary revenues will continue to increase as a percentage of consolidated revenues by expanding upon the services performed for our current Housekeeping client base. Our expected growth in Housekeeping will primarily come from obtaining new clients.

Our costs of services can vary and may impact our operating performance. Management reviews two key indicators (costs of labor and costs of supplies) to monitor and manage such costs. The variability of these costs may impact each segment differently, as Housekeeping is more significantly impacted by costs of labor than Dietary. Labor costs accounted for approximately 80.1% of Housekeeping revenues in 2017. Dietary labor costs accounted for approximately 56.6% of Dietary revenues in 2017. Changes in wage rates as a result of legislative or collective bargaining actions, market factors, adjustments to staffing levels, and other variations in our use of labor or in management labor costs can result in variability of these costs. Housekeeping supplies, including linen products, accounted for approximately 8.0% of Housekeeping revenues in 2017. In contrast, supplies consumed in performing our Dietary services accounted for approximately 36.1% of Dietary revenues. Generally, fluctuations in these expenses are influenced by factors outside of our control and are unpredictable. Housekeeping and Dietary supplies are principally commodity products and are affected by market conditions specific to the respective products.

Our clients are concentrated in the healthcare 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 make payments to us in accordance with agreed-upon payment terms. The climate of legislative uncertainty has posed, and will 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 cost stability and efficiencies.


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Table of Contents

Years Ended December 31, 2017 and 2016

The following table sets forth the 2017 income statement key components that we use to evaluate our financial performance on a consolidated and reportable segment basis compared to 2016. The differences between the reportable segments’ operating results and other disclosed data and our Consolidated Financial Statements relate primarily to corporate level transactions and adjustments related to transactions recorded at the reportable segment level which use methods other than generally accepted accounting principles.
 
 
Year Ended December 31,
 
 
2017
 
2016
 
% Change
 
 
(in thousands)
Revenues
 
 
 
 
 
 
Housekeeping
 
$
979,610

 
$
957,148

 
2.3
%
Dietary
 
886,521

 
605,514

 
46.4
%
Consolidated
 
$
1,866,131

 
$
1,562,662

 
19.4
%
 
 
 
 
 
 
 
Costs of services provided
 
 
 
 
 
 
Housekeeping
 
$
884,105

 
$
866,392

 
2.0
%
Dietary
 
840,513

 
570,873

 
47.2
%
Corporate and eliminations
 
(112,108
)
 
(97,773
)
 
14.7
%
Consolidated
 
$
1,612,510

 
$
1,339,492

 
20.4
%
 
 
 
 
 
 
 
Selling, general and administrative expense
 
 
 
 
 
 
Corporate and eliminations
 
$
126,732

 
$
105,417

 
20.2
%
 
 
 
 
 
 
 
Investment and interest income
 
 
 
 
 
 
Corporate and eliminations
 
$
6,076

 
$
2,634

 
130.7
%
 
 
 
 
 
 
 
Income (loss) before income taxes
 
 
 
 
 
 
Housekeeping
 
$
95,505

 
$
90,756

 
5.2
%
Dietary
 
46,008

 
34,641

 
32.8
%
Corporate and eliminations
 
(8,548
)
 
(5,010
)
 
70.6
%
Consolidated
 
$
132,965

 
$
120,387

 
10.4
%
 
 
 
 
 
 
 
Income taxes
 
 
 
 
 
 
Corporate and eliminations
 
$
44,739

 
$
42,991

 
4.1
%

Revenues

Consolidated

Consolidated revenues increased 19.4% to $1.87 billion in 2017 compared to $1.56 billion in 2016 as a result of the factors discussed below under Reportable Segments.

Reportable Segments

Housekeeping’s 2.3% increase in reportable segment revenues resulted primarily from service agreements entered into with new clients. Dietary’s 46.4% increase in reportable segment revenues resulted primarily from providing these services to a greater number of existing Housekeeping clients.


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Table of Contents

Costs of services provided

Consolidated

Consolidated costs of services increased 20.4% to $1.61 billion in 2017 compared to $1.34 billion in 2016, primarily related to our overall growth, as represented by our 19.4% growth in consolidated revenues for the same period. As a percentage of consolidated revenues, cost of services increased to 86.4% in 2017 from 85.7% in 2016.

Certain significant components within our costs of services are subject to fluctuation with changes in our business and client base. Labor and other labor-related costs, dining and housekeeping supplies, and self insurance costs account for most of our consolidated costs of services. See the discussion under Reportable Segments below for additional information on the changes in the components of costs of services.

The following table provides a comparison of the key indicators we consider when managing the consolidated cost of services provided:
 
 
Year Ended December 31,
Costs of Services Provided - Key Indicators as % of Consolidated Revenue
 
2017
 
2016
 
% Change
Bad debt provision
 
0.3%
 
0.3%
 
—%
Self-insurance costs
 
2.4%
 
3.0%
 
(0.6)%

The bad debt provision remained consistent due to our assessment of the collectability of our accounts and notes receivables.

The decrease in self-insurance costs as a percentage of consolidated revenue is primarily the result of the Company’s ongoing initiatives to promote safety and accident prevention in the workplace, as well as proactive management of workers’ compensation claims, which have positively impacted our claims experience.

Reportable Segments

Costs of services provided for Housekeeping, as a percentage of Housekeeping revenues for 2017, decreased to 90.3% compared to 90.5% in 2016. Cost of services provided for Dietary, as a percentage of Dietary revenues for 2017, increased to 94.8% compared to 94.3% in 2016.

The following table provides a comparison of the key indicators we consider when managing cost of services at the segment level, as a percentage of the respective segment’s revenues:
 
 
Year Ended December 31,
Costs of Services Provided - Key Indicators as % of Segment Revenue
 
2017
 
2016
 
% Change
Housekeeping labor and other labor-related costs
 
80.1%
 
80.2%
 
(0.1)%
Housekeeping supplies
 
8.0%
 
7.8%
 
0.2%
Dietary labor and other labor-related costs
 
56.6%
 
53.8%
 
2.8%
Dietary supplies
 
36.1%
 
38.0%
 
(1.9)%

The ratios of these key indicators generally remain relatively consistent. However, during this period of high-growth, the Company has experienced some inefficiencies when integrating new business and facilities. Such inefficiencies can relate to standardizing work flows and labor resources, establishing administrative structures, provisioning and other operational and logistical activities. Further, variations in these ratios can relate to changes in the mix of clients for whom we provide supplies or do not provide supplies. Management focuses on building efficiencies based on our operational expertise, managing labor and labor-related costs, as well as managing supply chain costs by leveraging economies of scale.

Consolidated Selling, General and Administrative Expense 

Excluding the change in the deferred compensation plan described below, consolidated selling, general and administrative expense for 2017 increased $18.3 million or 17.6% compared to 2016, related primarily to our overall growth.


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Table of Contents

Included in selling, general and administrative expense are gains and losses associated with changes in the value of investments under the deferred compensation plan. These investments represent the amounts held on behalf of the participating employees and changes in the value of these investments affect the amount of our deferred compensation liability. Gains on the plan investments during 2017 and 2016 increased our selling, general and administrative expense for these periods.

 
Year Ended December 31,
 
2017
 
2016
 
% Change
 
(in thousands)
Selling, general and administrative expense excluding change in deferred compensation liability
$
122,198

 
$
103,922

 
17.6
%
Gain on deferred compensation plan investments
4,534

 
1,495

 
203.3
%
Selling, general and administrative expense
$
126,732

 
$
105,417

 
20.2
%

Consolidated Investment and Net Interest Income

Investment and interest income increased 130.7% for 2017 compared to 2016, primarily due to favorable market fluctuations in the value of our trading security investments representing the funding for our deferred compensation plan.

Consolidated Income Taxes

Our effective tax rate was 33.6% for 2017 compared to 35.7% for 2016. Changes in the accounting for the effects of income taxes took place during 2017, which impacted our effective tax rate. In the first quarter 2017, the Company adopted Accounting Standards Update (“ASU”) 2016-09, under which excess tax benefits related to share-based payments were recognized as a component of income tax expense, as opposed to additional paid-in capital, resulting in a decrease in 2017 income tax expense. In addition, in December 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law, enacting significant changes to corporate tax rates, as well as business-related exclusions, deductions and credits. During the fourth quarter 2017, the Company recognized the effects of the changes in the tax law and rates on its deferred tax balances. The net result of the remeasurement was an approximate $4.5 million decrease to the Company’s net deferred tax assets balance and a corresponding increase to the Company’s provision for income taxes. Excluding the effects of ASU 2016-09 and the Act, our estimated effective tax rate would have approximated 33.9%.

Differences between our effective tax rates and the applicable U.S. federal statutory rate arise primarily from the effects of state and local taxes and tax credits available to the Company. We participate in the Work Opportunity Tax Credit (“WOTC”) program, through which the Company receives tax credits for hiring and retaining employees from target groups with significant barriers to employment. This credit is currently scheduled to expire on December 31, 2019.

The Company expects that its effective tax rate for 2018, including the impact of the Company’s continuing participation in the WOTC program, will be approximately 21% to 23%.

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Years Ended December 31, 2016 and 2015

The following table sets forth 2016 income statement key components that we use to evaluate our financial performance on a consolidated and reportable segment basis compared to 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 adjustments related to transactions recorded at the reportable segment level which use methods other than generally accepted accounting principles.
 
 
Year Ended
 
 
2016
 
2015
 
% Change
 
 
(in thousands)
Revenues
 
 
 
 
 
 
Housekeeping
 
$
957,148

 
$
909,709

 
5.2
 %
Dietary
 
605,514

 
527,140

 
14.9
 %
Consolidated
 
$
1,562,662

 
$
1,436,849

 
8.8
 %

 
 
 
 
 
 
Costs of services provided
 
 
 
 
 
 
Housekeeping
 
$
866,392

 
$
825,238

 
5.0
 %
Dietary
 
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
 
$
90,756

 
$
84,471

 
7.4
 %
Dietary
 
34,641

 
31,612

 
9.6
 %
Corporate and eliminations
 
(5,010
)
 
(26,319
)
 
(81.0
)%
Consolidated
 
$
120,387

 
$
89,764

 
34.1
 %
 
 
 
 
 
 
 
Income taxes
 
 
 
 
 
 
Corporate and eliminations
 
$
42,991

 
$
31,740

 
35.4
 %

Revenues

Consolidated

Consolidated revenues increased 8.8% to $1.56 billion in 2016 compared to $1.44 billion in 2015 as a result of the factors discussed below under Reportable Segments.

Reportable Segments

Housekeeping’s 5.2% increase in reportable segment revenues resulted primarily from service agreements entered into with new clients.

Dietary’s 14.9% increase in reportable segment revenues resulted primarily from providing these services to a greater number of existing Housekeeping clients.


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Table of Contents

Costs of services provided

Consolidated

Consolidated costs of services increased 8.4% to $1.34 billion in 2016 compared to $1.24 billion in 2015. The increase in costs of services is primarily related to our overall growth, as represented by our 8.8% growth in consolidated revenues. Certain significant components within our costs of services are subject to fluctuation with the changes in our business and client base. The increase during 2016 compared to 2015 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 decreased to 85.7% in 2016 from 86.0% in 2015. The following table provides a comparison of the key indicators we consider when managing the consolidated cost of services:
 
 
Year Ended December 31,
Costs of Services Provided - Key Indicators as % of Consolidated Revenue
 
2016
 
2015
 
% Change
Bad debt provision
 
0.3%
 
0.3%
 
—%
Self-insurance costs
 
3.0%
 
3.4%
 
(0.4)%

The bad debt provision remained consistent due to our assessment of the collectability of our accounts and notes receivables.

The decrease in self-insurance costs as a percentage of consolidated revenue is primarily the result of the Company’s ongoing initiatives to promote safety and accident prevention in the workplace, as well as proactive management of workers’ compensation claims, which positively impact our claims experience.

Reportable Segments

Costs of services provided for Housekeeping, as a percentage of Housekeeping revenues for 2016, decreased to 90.5% compared to 90.7% in 2015. Costs of services provided for Dietary, as a percentage of Dietary revenues for 2016, increased to 94.3% compared to 94.0% in 2015.

The following table provides a comparison of the key indicators we consider when managing cost of services at the segment level, as a percentage of the respective segment’s revenues:
 
 
Year Ended December 31,
Costs of Services Provided - Key Indicators as % of Segment Revenue
 
2016
 
2015
 
% Change
Housekeeping labor and other labor costs
 
80.2%
 
79.4%
 
0.8%
Housekeeping supplies
 
7.8%
 
8.3%
 
(0.5)%
Dietary labor and other labor costs
 
53.8%
 
52.9%
 
0.9%
Dietary supplies
 
38.0%
 
38.7%
 
(0.7)%

The 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 costs at the facility level, as well as managing supply chain costs, for new and existing facilities.

Consolidated Selling, General and Administrative Expense 

Excluding the change in the deferred compensation plan, consolidated selling, general and administrative expense for 2016 decreased $7.8 million or 7.0% compared to 2015, related primarily to reduced legal expenses associated with settlements regarding certain employment related matters. The change in the value of the deferred compensation plan is a result of changes in the market value on the balance of investments held in our deferred compensation plan.

Included in selling, general and administrative expense are gains and losses associated with changes in the value of investments under the deferred compensation plan. These investments represent the amounts held on behalf of the participating employees and changes in the value of these investments affect the amount of our deferred compensation liability. Gains on the plan investments during 2016 increased our selling, general and administrative expense compared to 2015.


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Table of Contents

 
Year Ended December 31,
 
2016
 
2015
 
% Change
 
(in thousands)
Selling, general and administrative expense excluding change in deferred compensation liability
$
103,922

 
$
111,751

 
(7.0
)%
Gain (loss) on deferred compensation plan investments
1,495

 
(62
)
 
(2,511.3
)%
Selling, general and administrative expense
$
105,417

 
$
111,689

 
(5.6
)%

Consolidated Investment and Net Interest Income

Investment and interest income increased 269.9% for 2016 compared to 2015, primarily due to favorable market fluctuations in the value of our trading security investments representing the funding for our deferred compensation plan.

Consolidated Income Taxes

Our effective tax rate was 35.7% for 2016 and 35.4% for 2015. Differences between the effective tax rates and 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 Company participates in the WOTC program, through which we hire and retain employees from target groups with significant barriers to employment. As part of the program, the Company receives tax credits, and although the Company increased its participation in the program year-over-year, the increase in the effective tax rate is primarily related to the ratio of the tax credits to higher pre-tax book income in 2016 as compared to the prior year. This credit is currently scheduled to expire on December 31, 2019.

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.

Financial reporting results rely on estimating the effects of matters that are inherently uncertain. An understanding of the policies discussed below is critical to the understanding of our financial statements because the application of these policies requires judgment. Specific risks for these critical accounting policies and estimates are described in the following paragraphs. For these estimates, we caution that future events do not always occur as forecasted, and the best estimates routinely require adjustment. Any such adjustments or revisions to estimates could result in material differences from 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 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 a discussion of our accounting policies and other disclosures required by 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 ongoing 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 collections experience with respect to our accounts and notes receivable. We have at times elected to extend the period of payment for certain clients beyond contractual terms. Such 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 establish credit limits, perform ongoing credit evaluations, and monitor accounts to minimize the risk of loss.

We regularly evaluate our accounts and notes receivable for impairment or loss of value and when appropriate, we will record an Allowance for such receivables. We generally follow a policy of partially reserving for receivables due from clients in bankruptcy, clients with which we are in litigation for collection and other slow paying clients. The Allowance is adjusted as additional information becomes available to more accurately estimate collectability. If the amount of our recovery of a receivable is determined,

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Table of Contents

through litigation, bankruptcy proceedings or negotiation, to be less than the amount recorded on our balance sheet, we will charge the applicable amount to the Allowance.

Summarized below for the years 2017, 2016 and 2015 are the aggregate account balances against which reserves were recorded, as well as net write-offs, the bad debt provision and the balance of the allowance for doubtful accounts:
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)
2017
 
$
30,035

 
$
1,176

 
$
6,250

 
$
11,985

2016
 
$
15,873

 
$
2,326

 
$
4,629

 
$
6,911

2015
 
$
12,073

 
$
5,863

 
$
4,335

 
$
4,608


Actual collections of these accounts could differ from our 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 $0.6 million. Despite 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 in this Annual Report on Form 10-K in Part I under “Risk Factors,” “Government Regulation of Clients” and “Service 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 could 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 30.7% of our liabilities at December 31, 2017. 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 utilizes current valuations from a third party actuary, which include assumptions based on data such as historical claims and pay-out experience, demographic factors, industry trends, severity factors, and other actuarial calculations. In the event that our claims experience and/or industry trends result in an unfavorable change in our assumptions or outcomes, it would have an adverse effect on our results of operations and financial condition. Recently, our claims experiences have been favorable, as a result of our ongoing initiative to promote safety and accident prevention in the workplace, as well as proactive management of workers’ compensation claims.

For general liability and workers’ compensation, we record both a reserve for the estimated future cost of claims and related expenses that have been reported but not settled, as well as an estimate of claims incurred but not reported. Such reserves for claims incurred but not reported are developed by a third party actuary through review of our historical data and open claims.

A summary of the changes in our total self-insurance liability is as follows:
 
2017
 
2016
 
2015
 
(in thousands)
Accrued insurance claims - January 1,
$
87,653

 
$
82,250

 
$
68,262

Claim payments
(41,077
)
 
(35,089
)
 
(27,883
)
Reserve accruals:


 


 


Current year accruals
49,673

 
42,592

 
41,871

Changes to the provision for prior year claims
(11,550
)
 
(2,100
)
 

Change in accrued insurance claims
(2,954
)
 
5,403

 
13,988

Accrued insurance claims - December 31,
$
84,699

 
$
87,653

 
$
82,250


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 circumstances indicate that their carrying amounts may not be recoverable. This review requires that we make assumptions regarding the fair value of these assets and the changes in circumstances that would affect the carrying value of these assets. If the carrying value of an asset exceeds the fair value of the asset, an impairment loss would be recognized in earnings. 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

25



Table of Contents

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.

Liquidity and Capital Resources

Cash generated through operations is our primary source of liquidity. At December 31, 2017, we had cash, cash equivalents and marketable securities of $82.8 million and working capital of $343.2 million, compared to December 31, 2016 cash, cash equivalents and marketable securities of $91.6 million and working capital of $313.8 million. The increase in working capital is driven by growth in our business and by the timing of cash receipts and cash payments. In addition, as of December 31, 2017, we had an unused line of credit of $187.0 million. Our current ratio at December 31, 2017 was 2.9 to 1, versus 4.1 to 1 at December 31, 2016.

For the years ended December 31, 2017, 2016 and 2015, our cash flows were as follows:
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
(in thousands)
Net cash provided by operating activities
$
7,630

 
$
41,400

 
$
63,361

Net cash used in investing activities
$
(14,967
)
 
$
(6,452
)
 
$
(62,314
)
Net cash used in financing activities
$
(6,959
)
 
$
(44,284
)
 
$
(43,138
)

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 operating activities.

Investing Activities

The principal uses of cash for investing activities are our purchases of marketable securities and capital expenditures such as those for housekeeping and food service equipment, computer software and equipment, and furniture and fixtures (see “Capital Expenditures” below for additional information). Such uses of cash are partially offset by proceeds from sales of marketable securities.

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

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Table of Contents

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.

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 2017, we paid to shareholders regular quarterly cash dividends totaling $55.2 million, as follows:
 
Paid During the Quarter Ended
 
March 31, 2017
 
June 30, 2017
 
September 30, 2017
 
December 31, 2017
 
(in thousands, except per share data)
Cash dividend per common share
$
0.18625

 
$
0.18750

 
$
0.18875

 
$
0.19000

Total cash dividends paid
$
13,624

 
$
13,750

 
$
13,883

 
$
13,987

Record date
February 17, 2017

 
May 19, 2017

 
August 18, 2017

 
November 17, 2017

Payment date
March 24, 2017

 
June 23, 2017

 
September 22, 2017

 
December 22, 2017


Additionally, on January 30, 2018, our Board of Directors declared a regular quarterly cash dividend of $0.19125 per common share, which will be paid on March 23, 2018 to shareholders of record as of the close of business on February 16, 2018.

The dividends paid to shareholders during the year ended December 31, 2017 were funded through cash generated from operations. 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 dividends, we expect to continue to pay a regular quarterly cash dividend. Partially offsetting the cash used to pay dividends are the proceeds received from the exercise of stock options by employees and directors. In connection with the establishment of our dividend policy, we adopted a Dividend Reinvestment Plan in 2003.

The primary source of cash from financing activities is the net borrowings under our bank line of credit. We borrow for general corporate purposes as needed throughout the year. The outstanding short-term borrowings balance as of December 31, 2017 relates to cash flow requirements due to the timing of cash receipts and cash payments.

We did not repurchase any of our Common Stock during 2017, but we remain authorized to repurchase 1.7 million shares of our Common Stock pursuant to previous Board of Directors’ authorization.

Contractual Obligations

Our future contractual obligations and commitments at December 31, 2017 consist of the following:

 
Payments Due by Period
Year Ended December 31, 2017
 
Total
 
Less Than 1 Year
 
1-3 Years
 
3-5 Years
 
After 5 Years
 
 
(in thousands)
Operating lease obligations
 
$
9,118

 
$
2,482

 
$
3,457

 
$
1,469

 
$
1,710



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Table of Contents

Line of Credit

As of December 31, 2017, we had a $300 million bank line of credit on which to draw for general corporate purposes. Amounts drawn under the line of credit are payable upon demand and generally bear interest at LIBOR plus 75 basis points (or if LIBOR becomes unavailable, the higher of the Prime Rate or the Overnight Bank Funding Rate plus 50 basis points). At December 31, 2017, there were $35.4 million in borrowings under the line of credit.

The line of credit requires us to satisfy one financial covenant. The covenant and its respective status at December 31, 2017 was as follows:
Covenant Description and Requirement
 
As of December 31, 2017
Funded debt(1) to EBITDA(2) ratio: less than 3.00 to 1.00
 
0.79


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

As shown in the table above, we were in compliance with our financial covenant at December 31, 2017 and we expect to continue to remain in compliance with such financial covenant. The line of credit expires on December 18, 2018.

At December 31, 2017, we also had outstanding $77.6 million in irrevocable standby letters of credit, which relate to payment obligations under our insurance programs. The letters of credit expire on January 2, 2019. In connection with the issuance of the letters of credit, the amount available under the line of credit was further reduced by $77.6 million to $187.0 million at December 31, 2017. The letters of credit were decreased to $65.9 million on January 2, 2018.

Accounts and Notes Receivable

Any decision to extend credit is made on a case-by-case basis and is based on a number of qualitative and quantitative factors related to the particular client, as well as the general risks associated with operating within the long-term care industry.

Our net accounts and notes receivable balance increased from December 31, 2016. Such fluctuations in net accounts and notes receivable are attributable to a variety of factors including, but not limited to, the timing of cash receipts from customers and the inception, transition or termination of client relationships.

There are a variety of factors that impact our clients’ ability to pay us in accordance with our agreements. Primary among these is our clients’ participation in programs funded by federal and state governmental agencies. Deviations in the timing or amounts of reimbursements under those programs can impact our clients’ cash flows and the timing of their payments to us. The payment terms in our service agreements are not contingent upon our clients’ cash flows and notwithstanding our efforts to minimize credit risk exposure, various factors affecting our clients’ cash flows could have an indirect, yet material adverse effect on our results of operations and financial condition.

We deploy significant resources and have invested in tools and processes to optimize our credit and collections efforts. When appropriate, we utilize interest-bearing promissory notes as an alternative to accounts receivable to enhance the collectability of amounts due, by providing a definitive repayment plan and providing a means by which to further evidence the amounts owed. At December 31, 2017 and December 31, 2016, we had $36.6 million and $19.2 million, net of reserves, respectively, of such promissory notes outstanding. In addition, we may assist our clients who are adjusting to changes in their cash flows by amending our agreements from full-service to management-only arrangements, or by modifying contractual payment terms to accommodate clients who have in good faith established clearly-defined plans for addressing cash flow issues. These efforts are intended to minimize our collections risk while maintaining our relationships with our clients.

In order to provide for collections issues and the general risk associated with the granting of credit terms, we recorded a bad debt provision (in an Allowance for Doubtful Accounts) of $6.3 million, $4.6 million and $4.3 million in the years ended December 31, 2017, 2016 and 2015, respectively. As a percentage of total revenues, these provisions represent approximately 0.3% for each of the years ended December 31, 2017, 2016 and 2015.




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Table of Contents

Insurance Programs

We self-insure or carry a high deductible insurance plan and therefore we 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 general liability and workers’ compensation, we record a reserve for the estimated future cost of 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, which is based on estimates provided by a third party actuary.

Capital Expenditures

Our level of 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, computer hardware and software, and furniture and fixtures. Our capital expenditures totaled $5.4 million in 2017. Although we have no specific material commitments for capital expenditures through the end of calendar year 2018, we estimate that for that period we will have capital expenditures of approximately $4.5 million to $6.0 million. 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 seek to obtain necessary capital from such sources as long-term debt or equity financing.

Material Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements, other than our irrevocable standby letter of 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, 2017, we had investments in municipal bonds of $73.2 million. Our municipal bonds are categorized as marketable securities and are subject to interest rate risk, as changes in interest rates affect the fair values of those instruments. Investments in both fixed rate and floating rate investments carry a degree of interest rate risk. The value of fixed rate securities may be 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. We make investments in instruments that meet our credit quality standards, as specified in our investment policy guidelines.


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Table of Contents

Item 8.   Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
Page
Report of Independent Registered Public Accounting Firm
Management's Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
 
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements for the Years Ended December 31, 2017, 2016 and 2015


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Healthcare Services Group, Inc.


Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Healthcare Services Group, Inc. (a Pennsylvania corporation) and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and schedules (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 23, 2018 expressed an unqualified opinion.
Basis for opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ GRANT THORNTON LLP
 
 
 
We have served as the Company’s auditor since 1992.
 
 
New York, New York
 
February 23, 2018
 


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Table of Contents

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, 2017. In making this assessment, the Company’s management used the criteria set forth in Internal Control -Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “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, 2017 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 registered public accounting firm has audited, and reported on, the Company’s internal control over financial reporting as of December 31, 2017.

/s/ Theodore Wahl
  
/s/ John C. Shea
Theodore Wahl
  
John C. Shea
Chief Executive Officer
(Principal Executive Officer)
  
Chief Financial Officer
(Principal Financial and Accounting Officer)
February 23, 2018
  
February 23, 2018

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Healthcare Services Group, Inc.

Opinion on internal control over financial reporting

We have audited the internal control over financial reporting of Healthcare Services Group, Inc. (a Pennsylvania corporation) and subsidiaries (the “Company”) as of December 31, 2017, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2017, and our report dated February 23, 2018 expressed an unqualified opinion on those financial statements.
Basis for opinion

The Company’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’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and limitations of internal control over financial reporting

A company’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’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’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.
/s/ GRANT THORNTON LLP
 
 
 
New York, New York
 
February 23, 2018
 


33



Table of Contents

Healthcare Services Group, Inc.
Consolidated Balance Sheets
(in thousands)
 
 
As of December 31,
 
2017
 
2016
ASSETS:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
9,557

 
$
23,853

Marketable securities, at fair value
73,221

 
67,730

Accounts and notes receivable, less allowance for doubtful accounts of $11,985 and $6,911 as of December 31, 2017 and 2016, respectively
378,720

 
271,276

Inventories and supplies
42,393

 
37,800

Prepaid expenses and other assets
23,515

 
13,965

Total current assets
527,406

 
414,624

Property and equipment, net
13,509

 
13,455

Goodwill
51,084

 
44,438

Other intangible assets, less accumulated amortization of $12,853 and $14,672 as of December 31, 2017 and 2016, respectively
30,881

 
14,409

Notes receivable — long-term portion
15,476

 
7,531

Deferred compensation funding, at fair value
28,885

 
24,119

Deferred income taxes
7,498

 
9,822

Other noncurrent assets
1,264

 
48

Total Assets
$
676,003

 
$
528,446

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY:
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
74,463

 
$
42,912

Accrued payroll, accrued and withheld payroll taxes
32,139

 
22,303

Other accrued expenses
4,561

 
4,397

Borrowings under line of credit
35,382

 

Income taxes payable
15,378

 
7,686

Accrued insurance claims
22,245

 
23,573

Total current liabilities
184,168

 
100,871

Accrued insurance claims — long-term portion
62,454

 
64,080

Deferred compensation liability
29,429

 
24,653

Commitments and contingencies


 


STOCKHOLDERS’ EQUITY:
 
 
 
Common Stock, $.01 par value; 100,000 shares authorized; 74,960 and 74,204 shares issued, and 73,436 and 72,601 shares outstanding as of December 31, 2017 and 2016, respectively
750

 
742

Additional paid-in capital
244,363

 
217,664

Retained earnings
163,860

 
130,940

Accumulated other comprehensive income (loss), net of taxes
837

 
(319
)
Common Stock in treasury, at cost, 1,524 shares and 1,603 shares as of December 31, 2017 and 2016, respectively
(9,858
)
 
(10,185
)
Total stockholders’ equity
399,952

 
338,842

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
676,003

 
$
528,446


See accompanying notes.


34



Table of Contents

Healthcare Services Group, Inc.
Consolidated Statements of Comprehensive Income
(in thousands, except per share amounts)
 
 
Years Ended December 31,
 
2017
 
2016
 
2015
Revenues
$
1,866,131

 
$
1,562,662

 
$
1,436,849

Operating costs and expenses:
 
 
 
 
 
Costs of services provided
1,612,510

 
1,339,492

 
1,236,108

Selling, general and administrative
126,732

 
105,417

 
111,689

Other income:
 
 
 
 
 
Investment and interest
6,076

 
2,634

 
712

Income before income taxes
132,965

 
120,387

 
89,764

Income taxes
44,739

 
42,991

 
31,740

Net income
$
88,226

 
$
77,396

 
$
58,024

 
 
 
 
 
 
Per share data:
 
 
 
 
 
Basic earnings per common share
$
1.20

 
$
1.06

 
$
0.81

Diluted earnings per common share
$
1.19

 
$
1.05

 
$
0.80

 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
Basic
73,355

 
72,754

 
71,826

Diluted
74,348

 
73,474

 
72,512

 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
Net income
$
88,226

 
$
77,396

 
$
58,024

Other comprehensive income:
 
 
 
 
 
Unrealized gain (loss) on available-for-sale marketable securities, net of taxes
1,156

 
(862
)
 
518

Total comprehensive income
$
89,382

 
$
76,534

 
$
58,542


See accompanying notes.


35



Table of Contents


Healthcare Services Group, Inc.
Consolidated Statements of Cash Flows
(in thousands)
 
Years Ended December 31,
 
2017
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
 
Net income
$
88,226

 
$
77,396

 
$
58,024

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
8,886

 
7,496

 
7,660

Bad debt provision
6,250

 
4,629

 
4,335

Deferred income tax
1,887

 
3,001

 
17,842

Stock-based compensation expense, net of tax benefit from equity compensation plans(1)
276

 
1,271

 
1,668

Amortization of premium on marketable securities
1,296

 
1,723

 
681

Unrealized (gain) loss on deferred compensation fund investments
(4,509
)
 
(1,460
)
 
24

Changes in operating assets and liabilities:

 

 

Accounts and notes receivable
(121,639
)
 
(65,610
)
 
(18,854
)
Inventories and supplies
(1,873
)
 
(1,492
)
 
(846
)
Prepaid expenses and other assets
(9,545
)
 
(2,470
)
 
(1,710
)
Deferred compensation funding
(257
)
 
2,732

 
(649
)
Accounts payable and other accrued expenses
11,197

 
(4,251
)
 
2,403

Accrued payroll, accrued and withheld payroll taxes
11,927

 
6,307

 
(28,314
)
Accrued insurance claims
(2,954
)
 
5,404

 
13,987

Deferred compensation liability
5,061

 
(731
)
 
1,113

Income taxes payable (1)
13,401

 
7,455

 
5,997

Net cash provided by operating activities
7,630

 
41,400

 
63,361

Cash flows from investing activities:

 

 

Disposals of fixed assets
338

 
275

 
267

Additions to property and equipment
(5,397
)
 
(5,442
)
 
(4,998
)
Purchases of marketable securities
(33,861
)
 
(29,449
)
 
(75,150
)
Sales of marketable securities
28,537

 
28,164

 
17,567

Cash paid for acquisitions
(4,584
)
 

 

Net cash used in investing activities
(14,967
)
 
(6,452
)
 
(62,314
)
Cash flows from financing activities:

 

 

Dividends paid
(55,244
)
 
(53,342
)
 
(51,375
)
Reissuance of treasury stock pursuant to Dividend Reinvestment Plan
95

 
109

 
113

Tax benefit from equity compensation plans (1)

 
2,981

 
1,873

Proceeds from the exercise of stock options
12,808

 
5,968

 
6,251

Net proceeds from short-term borrowings
35,382

 

 

Net cash used in financing activities
(6,959
)
 
(44,284
)
 
(43,138
)
Net change in cash and cash equivalents
(14,296
)
 
(9,336
)
 
(42,091
)
Cash and cash equivalents at beginning of the period
23,853

 
33,189

 
75,280

Cash and cash equivalents at end of the period
$
9,557

 
$
23,853

 
$
33,189

Supplementary cash flow information:

 

 

Cash paid for interest
$
1,363

 
$
574

 
$
258

Cash paid for income taxes, net of refunds
$
35,367

 
$
32,532

 
$
7,901

(1) The Company adopted the provisions of ASU 2016-09 prospectively, and as such the amounts reflected for the years ended December 31, 2016 and 2015 have not been adjusted.

See accompanying notes.

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Table of Contents

Healthcare Services Group, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands)
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss), net of Taxes
 
Retained Earnings
 
Treasury Stock
 
Stockholders’ Equity
 
Shares
 
Amount
 
Balance, December 31, 2014
72,878

 
$
729

 
$
186,022

 
$
25

 
$
100,237

 
$
(11,183
)
 
$
275,830

Comprehensive income:

 

 

 

 

 

 

Net income for the period

 

 

 

 
58,024

 

 
58,024

Unrealized gain on available-for-sale marketable securities, net of taxes

 

 

 
518

 

 

 
518

Comprehensive income

 

 

 

 

 

 
$
58,542

Exercise of stock options and other stock-based compensation, net of shares tendered for payment
386

 
4

 
6,247

 

 

 


 
6,251

Tax benefit from equity compensation plans

 

 
1,873

 

 

 

 
1,873

Share-based compensation expense — stock options and restricted stock

 

 
3,033

 

 

 

 
3,033

Treasury shares issued for Deferred Compensation Plan funding and redemptions

 

 
418

 

 

 
70

 
488

Shares issued pursuant to Employee Stock Plans

 

 
1,363

 

 

 
338

 
1,701

Dividends paid

 

 

 

 
(51,375
)
 

 
(51,375
)
Shares issued pursuant to Dividend Reinvestment Plan

 

 
343

 

 

 
(230
)
 
113

Shares issued pursuant to prior year acquisition
529

 
5

 
(5
)
 


 


 


 

Balance, December 31, 2015
73,793

 
738

 
199,294

 
543

 
106,886

 
(11,005
)
 
296,456

Comprehensive income:


 


 


 


 


 


 


Net income for the period

 

 

 

 
77,396

 

 
77,396

Unrealized loss on available-for-sale marketable securities, net of taxes

 

 

 
(862
)
 


 

 
(862
)
Comprehensive income

 

 

 


 

 

 
$
76,534

Exercise of stock options and other stock-based compensation, net of shares tendered for payment
301

 
3

 
5,965

 

 

 

 
5,968

Tax benefit from equity compensation plans


 


 
2,773

 

 

 


 
2,773

Share-based compensation expense — stock options and restricted stock

 

 
3,743

 

 

 

 
3,743

Treasury shares issued for Deferred Compensation Plan funding and redemptions

 

 
103

 

 

 
431

 
534

Shares issued pursuant to Employee Stock Plans

 

 
1,696

 

 

 
371

 
2,067

Dividends paid

 

 


 

 
(53,342
)
 


 
(53,342
)
Shares issued pursuant to Dividend Reinvestment Plan

 

 
91

 

 


 
18

 
109

Shares issued pursuant to previous settlement
113

 
1

 
3,999

 

 

 


 
4,000

Other
(3
)
 

 


 

 

 


 

Balance, December 31, 2016
74,204

 
742

 
217,664

 
(319
)
 
130,940