UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



	þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June 30, 2016~~March 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 ~~incorporated~~incorporation or organization)		(~~IRS~~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

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer”~~filer,” “smaller reporting company,” and ~~“smaller reporting~~“emerging growth company” in Rule 12b-2 of the Exchange Act.



	Large accelerated filer	þ		Accelerated filer	¨o		~~Non-accelerated filer~~	¨	~~Smaller reporting company~~	¨

	Non-accelerated filer	o	(Do not check if a smaller reporting company)

				Smaller reporting company	o
~~(Do not check if a smaller reporting company)~~
				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

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Common Stock, $.01 par value: ~~72,461,000~~72,989,000 shares outstanding as of ~~July 20, 2016~~April 26, 2017.

Healthcare Services Group, Inc.

Quarterly Report on Form 10-Q

For the Period Ended ~~June 30, 2016~~March 31, 2017

TABLE OF CONTENTS



PART I	FINANCIAL INFORMATION	4
Item 1.	Financial Statements (Unaudited)	4
	Consolidated Balance Sheets as of ~~June 30, 2016~~March 31, 2017 and December 31, ~~2015~~2016	4
	Consolidated Statements of Comprehensive Income for the Three ~~and Six~~ Months Ended ~~June 30,~~
	March 31, 2017 and 2016 ~~and 2015~~	5
	Consolidated Statements of Cash Flows for the ~~Six~~Three Months Ended ~~June 30,~~March 31, 2017 and 2016 ~~and 2015~~	6
	Consolidated Statement of ~~Stockholders'~~Stockholders’ Equity for the ~~Six~~Three Months Ended ~~June 30, 2016~~March 31, 2017	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2018
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2824
Item 4.	Controls and Procedures	2824

PART II	OTHER INFORMATION	2925
Item 1.	Legal Proceedings	2925
Item 1A.	Risk Factors	2925
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2925
Item 3.	Defaults Upon Senior Securities	2925
Item 4.	Mine Safety Disclosures	2925
Item 5.	Other Information	2925
Item 6.	Exhibits	2925

Signatures		3026

Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report and documents incorporated by reference into this report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, which are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, 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 health care industry, primarily providers of long-term care; credit and collection risks associated with this industry; having several ~~significant~~ clients who ~~each~~ individually contributed ~~at least 3%~~over 4.0%, with one as high as 9%9.9%, of our total consolidated revenues for the three months ended ~~June 30, 2016;~~March 31, 2017; 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 transition;~~program; risks associated with the reorganization of our corporate structure; and the risk factors ~~and other information~~ described in Part I ~~Item I.~~ of our Form 10-K for the fiscal year ended December 31, ~~2015~~2016 under “Government Regulation of Clients,” “Competition” and “Service Agreements and Collections,” 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 ~~successfully executing~~the successful execution of our projected growth strategies.

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Healthcare Services Group, Inc.

Consolidated Balance Sheets

(in thousands, except per share amounts)


	(Unaudited)						March 31, 2017			December 31, 2016
	June 30, 2016			December 31, 2015			(Unaudited)
ASSETS:
Current assets:
Cash and cash equivalents	$	21,719,000		$	33,189,000		$	48,230		$	23,853
Marketable securities, at fair value	78,919,000			69,496,000			68,260			67,730
Accounts and notes receivable, less allowance for doubtful accounts of $5,363,000 as of June 30, 2016 and $4,608,000 as of December 31, 2015	255,776,000			214,854,000
Accounts and notes receivable, less allowance for doubtful accounts of $7,698 as of March 31, 2017 and $6,911 as of December 31, 2016							281,113			271,276
Inventories and supplies	37,603,000			36,308,000			37,294			37,800
Prepaid expenses and other	16,284,000			11,495,000
Prepaid expenses and other assets							16,824			13,965
Total current assets	410,301,000			365,342,000			451,721			414,624
Property and equipment, net	13,485,000			13,086,000			13,397			13,455
Goodwill	44,438,000			44,438,000			44,438			44,438
Other intangible assets, less accumulated amortization of $13,458,000 as of June 30, 2016 and $19,473,000 as of December 31, 2015	15,623,000			17,108,000
Notes receivable - long term portion	3,090,000			2,972,000
Other intangible assets, less accumulated amortization of $15,279 as of March 31, 2017 and $14,672 as of December 31, 2016							13,802			14,409
Notes receivable — long term portion							7,056			7,531
Deferred compensation funding, at fair value	26,362,000			25,391,000			25,082			24,119
Deferred income taxes	9,206,000			12,567,000			9,564			9,822
Other noncurrent assets	44,000			45,000			48			48
TOTAL ASSETS	$	522,549,000		$	480,949,000
Total Assets							$	565,108		$	528,446

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable	$	44,863,000		$	41,472,000		$	47,952		$	42,912
Accrued payroll, accrued and withheld payroll taxes	25,303,000			18,062,000			34,334			22,303
Other accrued expenses	2,627,000			3,115,000			3,118			4,397
Income taxes payable	9,203,000			3,212,000			8,403			7,686
Accrued legal expenses	4,326,000			10,464,000
Accrued insurance claims	22,541,000			19,740,000			23,857			23,573
Total current liabilities	108,863,000			96,065,000			117,664			100,871
Accrued insurance claims - long term portion	64,156,000			62,510,000
Accrued insurance claims — long term portion							64,581			64,080
Deferred compensation liability	26,796,000			25,918,000			26,386			24,653
Commitments and contingencies
STOCKHOLDERS’ EQUITY:
Common stock, $.01 par value; 100,000,000 shares authorized; 74,151,000 and 73,793,000 shares issued, and 72,453,000 and 72,034,000 shares outstanding as of June 30, 2016 and December 31, 2015, respectively	742,000			738,000
Common stock, $.01 par value; 100,000 shares authorized; 74,423 and 74,204 shares issued, and 72,882 and 72,601 shares outstanding as of March 31, 2017 and December 31, 2016, respectively							744			742
Additional paid-in capital	213,233,000			199,294,000			226,075			217,664
Retained earnings	117,821,000			106,886,000			139,333			130,940
Accumulated other comprehensive income, net of taxes	1,676,000			543,000
Common stock in treasury, at cost; 1,698,000 shares as of June 30, 2016 and 1,759,000 shares as of December 31, 2015	(10,738,000		)	(11,005,000		)
Accumulated other comprehensive income (loss), net of taxes							160			(319		)
Common stock in treasury, at cost, 1,541 shares as of March 31, 2017 and 1,603 shares as of December 31, 2016							(9,835		)	(10,185		)
Total stockholders’ equity	322,734,000			296,456,000			$	356,477		$	338,842
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	522,549,000		$	480,949,000		$	565,108		$	528,446

See accompanying notes.

Table of Contents

Healthcare Services Group, Inc.

Consolidated Statements of Comprehensive Income

(in thousands, except per share amounts)

(Unaudited)


	For the Three Months Ended June 30,					For the Six Months Ended June 30,					Three Months Ended March 31,
	2016		2015			2016		2015			2017		2016
Revenues	$	386,556,000	$	355,356,000		$	771,363,000	$	710,602,000		$	404,490	$	384,807
Operating costs and expenses:
Costs of services provided	332,211,000		304,217,000			662,255,000		608,153,000			345,570		330,044
Selling, general and administrative expense	25,664,000		25,124,000			51,010,000		51,887,000			28,210		25,346
Other income, net:
Investment and interest	1,002,000		242,000			1,189,000		749,000			1,569		187
Income before income taxes	29,683,000		26,257,000			59,287,000		51,311,000			32,279		29,604
Income tax provision	10,923,000		9,969,000			21,901,000		19,507,000			10,262		10,978
Net income	$	18,760,000	$	16,288,000		$	37,386,000	$	31,804,000		$	22,017	$	18,626

Per share data:
Basic earnings per common share	$	0.26	$	0.23		$	0.52	$	0.44		$	0.30	$	0.26
Diluted earnings per common share	$	0.26	$	0.23		$	0.51	$	0.44		$	0.30	$	0.26

Weighted average number of common shares outstanding:
Basic	72,568,000		71,657,000			72,466,000		71,563,000			73,074		72,364
Diluted	73,316,000		72,286,000			73,165,000		72,223,000			73,946		73,014

Comprehensive income:
Net income	$	18,760,000	$	16,288,000		$	37,386,000	$	31,804,000		$	22,017	$	18,626
Other comprehensive income:
Unrealized gain (loss) on available for sale marketable securities, net of taxes	578,000		(20,000		)	1,133,000		(17,000		)
Unrealized gain on available for sale marketable securities, net of taxes											479		555
Total comprehensive income	$	19,338,000	$	16,268,000		$	38,519,000	$	31,787,000		$	22,496	$	19,181

See accompanying notes.

Table of Contents

Healthcare Services Group, Inc.

Consolidated Statements of Cash Flows

~~(Unaudited)~~(in thousands)

(Unaudited)


	For the Six Months Ended June 30,						Three Months Ended March 31,
	2016			2015			2017			2016
Cash flows from operating activities:
Net income	$	37,386,000		$	31,804,000		$	22,017		$	18,626
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	3,912,000			3,831,000			1,886			1,965
Bad debt provision	2,150,000			1,675,000			1,050			1,100
Deferred income tax (benefit) expense	2,541,000			(1,466,000		)
Stock-based compensation expense	2,091,000			1,733,000
Tax benefit from equity compensation plans, gross	(1,107,000		)	(817,000		)
Deferred income tax expense							—			3,395
Stock-based compensation expense, net of tax benefit from equity compensation plans⁽¹⁾							445			609
Amortization of premium on marketable securities	663,000			185,000			343			318
Unrealized gain on deferred compensation fund investments	(82,000		)	(482,000		)
Unrealized (gain) loss on deferred compensation fund investments							(1,209		)	278
Changes in operating assets and liabilities:
Accounts and notes receivable	(43,190,000		)	(6,879,000		)	(10,887		)	(22,899		)
Inventories and supplies	(1,295,000		)	69,000			506			(1,619		)
Prepaid expenses and other assets	(4,787,000		)	(2,199,000		)	(2,859		)	(3,277		)
Notes receivable - long term							475			—
Deferred compensation funding	(971,000		)	(243,000		)	246			(268		)
Accounts payable and other accrued expenses	552,000			(9,479,000		)	3,639			(4,100		)
Accrued payroll, accrued and withheld payroll taxes	9,329,000			(4,854,000		)	15,299			18,070
Income taxes payable⁽¹⁾							1,852			(3,618		)
Accrued insurance claims	4,448,000			6,354,000			784			1,009
Deferred compensation liability	1,473,000			952,000			1,059			100
Income taxes payable	7,098,000			13,329,000
Net cash provided by operating activities	20,211,000			33,513,000			34,646			9,689

Cash flows from investing activities:
Disposals of fixed assets	127,000			67,000			104			114
Additions to property and equipment	(2,954,000		)	(2,289,000		)	(1,325		)	(1,459		)
Purchases of marketable securities	(14,628,000		)	(3,025,000		)	(7,858		)	(4,966		)
Sales of marketable securities	6,284,000			2,813,000			7,723			2,640
Net cash used in investing activities	(11,171,000		)	(2,434,000		)	(1,356		)	(3,671		)

Cash flows from financing activities:
Dividends paid	(26,451,000		)	(25,415,000		)	(13,624		)	(13,158		)
Reissuance of treasury stock pursuant to Dividend Reinvestment Plan	57,000			54,000			24			28
Tax benefit from equity compensation plans, gross	1,107,000			817,000
Tax benefit from equity compensation plans ⁽¹⁾							—			509
Proceeds from the exercise of stock options	4,777,000			4,085,000			4,687			2,534
Net cash used in financing activities	(20,510,000		)	(20,459,000		)	(8,913		)	(10,087		)

Net change in cash and cash equivalents	(11,470,000		)	10,620,000			24,377			(4,069		)
Cash and cash equivalents at beginning of the period	33,189,000			75,280,000			23,853			33,189
Cash and cash equivalents at end of the period	$	21,719,000		$	85,900,000		$	48,230		$	29,120

Supplementary Cash Flow Information:
Cash paid for interest	$	254,000		$	35,000		$	204		$	155
Cash paid for income taxes, net of refunds	$	12,262,000		$	7,643,000		$	9,544		$	11,201

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

See accompanying notes.

Table of Contents

Healthcare Services Group, Inc.

Consolidated Statement of Stockholders’ Equity

(in thousands, except per share amounts)

(Unaudited)

For the Six Months Ended June 30, 2016
Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income, net of taxes Retained Earnings Treasury Stock Stockholders’ Equity
Shares Amount
Balance — December 31, 2015 73,793,000
$ 738,000
$ 199,294,000
$ 543,000
$ 106,886,000
$ (11,005,000 ) $ 296,456,000
Comprehensive income:

Net income for the period

37,386,000

37,386,000
Unrealized gain on available for sale marketable securities, net of taxes

1,133,000

1,133,000
Comprehensive income

38,519,000
Exercise of stock options and other stock-based compensation, net of shares tendered 245,000
3,000
4,774,000

4,777,000
Tax benefit from equity compensation plans

897,000

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

1,878,000

1,878,000
Treasury shares issued for Deferred Compensation Plan funding and redemptions

513,000

21,000
534,000
Shares issued pursuant to Employee Stock Purchase Plan

1,696,000

371,000
2,067,000
Cash dividends

(26,451,000 )
(26,451,000 )
Shares issued pursuant to Dividend Reinvestment Plan

182,000

(125,000 ) 57,000
Shares issued pursuant to settlement 113,000
1,000
3,999,000

4,000,000
Balance — June 30, 2016 74,151,000
$ 742,000
$ 213,233,000
$ 1,676,000
$ 117,821,000
$ (10,738,000 ) $ 322,734,000



	Three Months Ended March 31,
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss), net of taxes			Retained Earnings			Treasury Stock			Stockholders’ Equity
	Shares	Amount		Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss), net of taxes			Retained Earnings			Treasury Stock			Stockholders’ Equity
Balance — December 31, 2016	74,204	$	742	$	217,664	$	(319	)	$	130,940		$	(10,185	)	$	338,842
Comprehensive income:
Net income for the period									22,017						22,017
Unrealized gain on available for sale marketable securities, net of taxes						479									479
Comprehensive income															22,496
Exercise of stock options and other stock-based compensation, net of shares tendered for payment	219	2		4,685											4,687
Share-based compensation expense — stock options, restricted stock and restricted stock units				1,459											1,459
Treasury shares issued for Deferred Compensation Plan funding and redemptions				495								7			502
Shares issued pursuant to Employee Stock Plan				1,752								339			2,091
Cash dividends									(13,624		)				(13,624		)
Shares issued pursuant to Dividend Reinvestment Plans				20								4			24
Balance — March 31, 2017	74,423	$	744	$	226,075	$	160		$	139,333		$	(9,835	)	$	356,477

See accompanying notes.

Table of Contents

Healthcare Services Group, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Note 1— Description of Business and Significant Accounting Policies

Nature of Operations

Healthcare Services Group, Inc. (the “Company”) provides management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary service departments of the health care industry, including nursing homes, retirement complexes, rehabilitation centers and hospitals located throughout the United States. Although we do not directly participate in any government reimbursement programs, our ~~clients’~~clients receive government reimbursements ~~are subject~~related to ~~government regulation.~~Medicare and Medicaid. Therefore, they are directly affected by any legislation relating to Medicare and Medicaid reimbursement programs.

We provide our services primarily pursuant to full service agreements with our clients. In such agreements, we are responsible for the day-to-day management of employees located at our clients’ facilities. We also provide services on the basis of management-only agreements for a limited number of clients. Our agreements with clients typically provide for renewable one year service terms, cancelable by either party upon 30 to 90 days’ notice after the initial 60 to 120 day period.

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

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

Dietary consists of managing our clients’ dietary ~~department~~departments which isare principally responsible for food purchasing, meal preparation and ~~providing~~ dietitian ~~consulting~~ professional services, which includes the development of ~~a menu~~menus that meets ~~the patient’s~~residents’ dietary needs.

Unaudited Interim Financial Data

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“USU.S. GAAP”) for interim financial information and the requirements of Form 10-Q and Article 10 of Regulation S-X. Accordingly, these consolidated financial statements do not include all of the information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows. However, in our opinion, all adjustments which are of a normal recurring nature and are necessary for a fair presentation have been reflected in these consolidated financial statements. The balance sheet shown in this report as of December 31, ~~2015~~2016 has been derived from, and does not include, all of the disclosures contained in the financial statements for the year ended December 31, ~~2015~~.2016. These financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2015~~.2016. The results of operations for the three ~~and~~ ~~six~~ months ended ~~June 30, 2016~~March 31, 2017 are not necessarily indicative of the results that may be expected for any future period.

Certain amounts in the prior year financial statements have been reclassified to conform to current presentation.

Principles of Consolidation

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

Cash and Cash Equivalents

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

Table of Contents

Inventories and Supplies

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

Revenue Recognition

Revenues from our service agreements with clients are recognized as services are performed.

~~As a distributor~~ Revenues are reported net of ~~laundry equipment, we occasionally sell laundry installations~~sales taxes that are collected from customers and remitted to ~~certain clients. The sales in most cases represent the construction and installation of a turn-key operation and have payment terms ranging from~~ 24 to 60 ~~months. During the three and~~ ~~six months ended June 30, 2016~~ ~~and~~ ~~2015, laundry installation sales were not material.~~taxing authorities.

Income Taxes

We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current period. We accrue for probable tax obligations as required by facts and circumstances in various regulatory environments. In addition, deferred tax assets and liabilities are recognized for expected future tax consequences of temporary differences between the ~~book~~financial reporting and tax bases of assets and liabilities. When appropriate, valuation allowances are recorded to reduce deferred tax assets to amounts for which realization is more likely than not.

Uncertain income tax positions taken or expected to be taken in tax returns are reflected within our financial statements based on a recognition and measurement process.

Earnings per Common Share

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

Share-Based Compensation

~~The Company recognizes compensation expense for share-based awards and programs for employees and directors.~~ We estimate the fair value of ~~stock options as of~~share-based awards on the date of grant using athe Black-Scholes ~~option~~ valuation model ~~while share-based awards are valued based on~~for stock options and using the ~~market-price~~share price on the date of ~~grant.~~grant for restricted stock and restricted stock units. The value of the ~~portion of the~~ award ~~that is ultimately expected to vest, after accounting for estimated and actual forfeitures,~~ is recognized ratably as an expense in the Company’s ~~consolidated statements~~Consolidated Statements of ~~comprehensive income ratably~~Comprehensive Income over the requisite service ~~periods.~~periods, with adjustments made for forfeitures as they occur.

Use of Estimates in Financial Statements

In preparing financial statements in conformity with U.S. GAAP, we make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Significant estimates are used in determining, but are not limited to, our allowance for doubtful accounts, accrued insurance claims, asset valuations, deferred taxes and reviews for potential impairment. The estimates are based upon various factors including current and historical trends, as well as other pertinent industry and regulatory authority information. We regularly evaluate this information to determine if it is necessary to update the basis for our estimates and to adjust for known changes.

~~Self-Funded Captive Insurance Programs~~

In 2015, the Company transitioned its workers compensation and certain employee health & welfare insurance programs to HCSG Insurance Corp. (“HCSG Insurance”), its wholly owned captive insurance subsidiary which previously provided only general liability coverage to the Company. HCSG Insurance was formed in January 2014 to provide the Company with greater efficiency in managing its property & casualty and health & welfare programs.

~~Table of Contents~~

Concentrations of Credit Risk

Our financial instruments ~~consist principally~~that are subject to concentrations of credit risk are cash and cash equivalents, marketable securities, deferred compensation funding and accounts and notes receivable. ~~Our~~We define our marketable securities ~~are~~as fixed income investments which are highly liquid and can be readily purchased or sold through established markets. At ~~June 30, 2016~~March 31, 2017 and December 31, ~~2015~~,2016, substantially all of our cash and cash equivalents and marketable securities were held in one large financial institution located in the United States.

Our clients are concentrated in the health care industry 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~~New legislation or changes in existing regulations could be made which could directly impact the governmental reimbursement ~~for nursing home services and such changes, as well as other trends~~programs in ~~the long-term care industry, have affected and could adversely affect the liquidity of~~which our clients ~~resulting in their inability to make payments to us in accordance with agreed upon payment terms. These factors could~~participate. As a result, inwe may not know the ~~recognition~~full effects of ~~significant additional bad debts in the future.~~such programs until these laws are fully implemented and governmental agencies issue applicable regulations or guidance.

Table of Contents

Recent Accounting Pronouncements

In ~~June~~March 2016, the Financial Accounting Standards Board (“FASB”) ~~issued Accounting Standards Update (“ASU”) 2016-13,~~ ~~Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments~~. The update replaces the current incurred loss impairment methodology of recognizing credit losses with a methodology that instead reflects expected credit losses and requires consideration of a broader range of information to inform credit loss estimates. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those years, with early adoption permitted for fiscal years and interim periods beginning after December 15, 2018. The Company is in the process of evaluating the impact of the adoption of this ASU.

~~In March 2016, the FASB~~ issued ASU 2016-09, Stock Compensation: Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 is intended to simplify several aspects of the accounting for share-based payments. The Company adopted the standard beginning January 1, 2017. The impacts of adopting the standard have included the recognition of excess tax benefits related to share-based payments as a component of income tax expense, as opposed to additional paid-in capital; an amendment to the calculation of diluted earnings per share to exclude windfall tax benefits from assumed proceeds when calculating diluted shares outstanding; as well as accounting for forfeitures of share-based awards as they occur, as opposed to reserving for estimated forfeitures.

In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business. The guidance ~~will be~~changes the definition of a business to assist entities in evaluating whether a set of transferred assets and activities constitutes a business under Topic 805. The guidance is effective for ~~fiscal years~~annual periods beginning after December 15, ~~2016, including interim periods within that year.~~2017, with early adoption permitted. The Company ~~is in~~plans to adopt the ~~process of evaluating the impact of the adoption of this ASU.~~standard effective January 1, 2018.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which was subsequently amended and ~~a subsequent amendment to the standard in March 2016 with ASU 2016-08.~~updated throughout 2015 and 2016. The ~~original~~ standard provides guidance on ~~recognizing revenue, including a five step model to determine when~~ revenue recognition, ~~is appropriate.~~among other topics such as the accounting for compensation and costs to obtain a contract. The standard requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ~~The amendment to the standard clarifies implementation guidance on principal versus agent considerations.~~ Adoption ~~of the new standard~~ is ~~effective~~required for reporting periods beginning after December 15, 2017, with early adoption prohibited. The Company plans to adopt the standard beginning on January 1, 2018. The Company is in the process of evaluating the impact of the adoption of this ~~ASU.~~ASU, as well as determining the transition method that will be applied. Our analysis has consisted of reviewing the nature and terms of our existing contracts under the provisions of the new guidance and assessing any operational changes and process updates required for compliance. Currently, the Company does not expect a material impact to our accounting for the revenue we earn related to our Housekeeping and Dietary services. We anticipate that the most significant impact of the new standard will relate to additional disclosure obligations.

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires lessees to recognize assets and liabilities on their balance sheet related to the rights and obligations created by most leases, while continuing to recognize expenses on their income statements over the lease term. It will also require disclosures designed to give financial statement users information regarding the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted for all entities. The Company will adopt the new guidance as of January 1, 2019. We are ~~currently evaluating~~continuing to evaluate the expected impact ~~ASU 2016-02~~of the requirements, however we expect the primary impact will ~~have on our consolidated financial statements~~relate to the capitalization of operating leases of office space, vehicles and ~~associated disclosures.~~equipment.

~~In November 2015, the FASB issued ASU 2015-17,~~ ~~Balance Sheet Classification of Deferred Taxes~~. The amendment in this ASU requires that deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent in a classified statement of financial position. The guidance becomes effective for annual reporting periods beginning after December 15, 2016 with early adoption permitted. Management elected to adopt the standard in the first quarter of 2016, with retrospective application to prior period balances presented. The adoption of ASU 2015-17 did not have a material impact on the Company’s consolidated financial statements.

Table of Contents

Note 2—Changes in Accumulated Other Comprehensive Income by Component

~~As of~~ ~~June 30, 2016~~ ~~and~~ ~~December 31, 2015, respectively, accumulated~~Accumulated other comprehensive income ~~consisted~~consists of unrealized gains and losses from our available for sale marketable securities.

The following table provides a summary of the changes in accumulated other comprehensive income for the ~~six~~three months ended ~~June 30, 2016~~:March 31, 2017 and 2016:

Unrealized Gains and Losses on Available for Sale Securities ⁽¹⁾

For the Six Months Ended
June 30,

2016 2015
Accumulated other comprehensive income — beginning balance $ 543,000
$ 25,000
Other comprehensive income before reclassifications 980,000
(15,000 )
Amounts reclassified from accumulated other comprehensive income⁽²⁾⁽³⁾
153,000
(2,000 )
Net current period change in other comprehensive income 1,133,000
(17,000 )
Accumulated other comprehensive income — ending balance $ 1,676,000
$ 8,000



	Unrealized Gains (Losses) on Available for Sale Securities ⁽¹⁾
	Three Months Ended March 31,
	2017			2016
	(in thousands)
Accumulated other comprehensive income (loss) — beginning balance	$	(319	)	$	543
Other comprehensive income before reclassifications	446			594
Amounts reclassified from accumulated other comprehensive income (loss)⁽²⁾	33			(39		)
Net current period change in other comprehensive income⁽³⁾	479			555
Accumulated other comprehensive income — ending balance	$	160		$	1,098


⁽¹⁾	All amounts are net of tax.


⁽²⁾	Realized gains and losses are recorded pre-tax under “Other income - Investment and interest” onin our ~~consolidated statements~~Consolidated Statements of ~~comprehensive income.~~


⁽³⁾	Comprehensive Income. For the ~~six~~three months ended ~~June 30,~~March 31, 2017 and 2016, ~~and 2015,~~ the Company recorded ~~$243,000~~$48 thousand and ~~$3,000, respectively,~~$62 thousand of realized losses and gains, respectively, from the sale of available for sale securities. Refer to Note 5 herein for further information.


⁽³⁾	For the three months ended March 31, 2017 and 2016, these changes in other comprehensive income were net of tax effects of $0.3 million, respectively.

Note 3—Property and Equipment

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

The following table sets forth the amounts of property and equipment by each class of depreciable assets as of ~~June 30, 2016~~March 31, 2017 and December 31, ~~2015:~~2016:


	June 30, 2016		December 31, 2015		March 31, 2017		December 31, 2016
Housekeeping and office equipment and furniture	$	31,374,000	$	29,852,000
Laundry and linen equipment installations	1,179,000		1,117,000
Autos and trucks	138,000		138,000
					(in thousands)
Housekeeping and Dietary equipment					$	21,431	$	21,136
Computer hardware and software					11,977		11,750
Other ⁽¹⁾					1,133		1,133
Total property and equipment, at cost	32,691,000		31,107,000		34,541		34,019
Less accumulated depreciation	19,206,000		18,021,000		21,144		20,564
Total property and equipment, net	$	13,485,000	$	13,086,000	$	13,397	$	13,455


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

Depreciation expense for the three months ended ~~June 30,~~March 31, 2017 and 2016 was $1.3 million and ~~2015 was $1,272,000 and $1,109,000, respectively. Depreciation expense for the six months ended June 30, 2016 and 2015 was $2,427,000 and $2,210,000,~~$1.2 million, respectively.

Note 4—Goodwill and Other Intangible Assets

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net assets of an acquired business. Goodwill is not amortized, but is evaluated for impairment on an annual basis, or more frequently if impairment indicators arise.

Goodwill by reportable operating segment, as described in Note 10 herein, was approximately ~~$42,377,000~~$42.3 million and ~~$2,061,000~~$2.1 million for Housekeeping and Dietary, respectively, as of ~~June 30, 2016~~both March 31, 2017 and December 31, ~~2015.~~

~~Table of Contents~~

2016.

Intangible Assets

~~Intangible assets represent customer relationships and non-compete agreements related to business combinations. The cost of~~Our intangible assets ~~is based on~~were acquired through acquisitions and are recorded at their fair values at the date of acquisition. Intangible assets with determinable lives are amortized on a straight-line basis over their estimated useful lives. The customer relationships have a weighted-average amortization period of ~~nine~~9.7 years.

The following table sets forth the amounts of our identifiable intangible assets subject to ~~amortization.~~amortization:


					March 31, 2017		December 31, 2016
	June 30, 2016		December 31, 2015		(in thousands)
Customer relationships	$	29,081,000	$	35,781,000	$	29,081	$	29,081
Non-compete agreements	—		800,000
Total other intangibles, gross	29,081,000		36,581,000		29,081		29,081
Less accumulated amortization	13,458,000		19,473,000		15,279		14,672
Other intangibles, net	$	15,623,000	$	17,108,000	$	13,802	$	14,409

The following table sets forth the estimated amortization expense for intangibles subject to amortization for the remainder of ~~2016,~~2017, the following five fiscal years and thereafter:


Period/Year	Total Amortization Expense		Total Amortization Expense
July 1 to December 31, 2016	$	1,214,000
2017	$	2,427,000
			(in thousands)
April 1 to December 31, 2017			$	1,820
2018	$	2,328,000	$	2,328
2019	$	2,130,000	$	2,130
2020	$	2,130,000	$	2,130
2021	$	2,130,000	$	2,130
2022			$	2,130
Thereafter	$	3,264,000	$	1,134

Amortization expense for the three months ended ~~June 30,~~March 31, 2017 and 2016 was $0.6 million and ~~2015 was $675,000 and $810,000, respectively. Amortization expense for the six months ended June 30, 2016 and 2015 was $1,485,000 and $1,620,000,~~$0.8 million, respectively.

Note 5—Fair Value Measurements

The Company’s current assets (other than marketable securities and inventories) and current liabilities are financial instruments and most of these items are recorded at cost in the Consolidated Balance Sheets. The estimated fair value of these financial instruments approximates their carrying value due to their short-term nature. Our financial assets that are measured at fair value on a recurring basis are our marketable securities and our deferred compensation funding. We believe the recorded values of all of our financial instruments approximate their current fair values because of their nature, stated interest rates and respective maturity dates or durations.

The Company’s marketable securities consist of tax-exempt municipal bonds, which we classify as available-for-sale and which are reported at fair value. Unrealized gains and losses associated with these investments are included in other comprehensive income (net of tax) within our Consolidated Statements of Comprehensive Income. The fair value of these marketable securities is classified within Level 2 of the fair value hierarchy, as these securities are measured using quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable. Such valuations are determined by a third-party pricing service. For the three months ended March 31, 2017, we recorded unrealized gains on marketable securities of $0.5 million and for the three months ended March 31, 2016, we recorded unrealized gains on marketable securities of $0.6 million.

For the three months ended March 31, 2017 and 2016, we received total proceeds, less the amount of interest received, of $7.5 million and $2.0 million, respectively, from sales of available-for-sale municipal bonds. For the three months ended March 31, 2017, these sales resulted in realized losses of $48 thousand which were recorded in “Other income, net – Investment and interest”

Table of Contents

in our Consolidated Statements of Comprehensive Income. The basis for the sale of these securities was the specific identification of each bond sold during the period. For the three months ended March 31, 2016, there were $62 thousand in realized gains.

Table of Contents

~~Note 5—Fair Value Measurements~~

The investments under the funded deferred compensation plan are accounted for as trading securities and unrealized gains or losses are included in earnings. The fair value of these investments are determined based on quoted market prices (Level 1).

The following tables provide ~~details of our financial assets measured at~~ fair value ~~on a recurring basis~~measurement information for our marketable securities and deferred compensation fund investments as of ~~June 30, 2016~~March 31, 2017 and December 31, ~~2015~~ ~~and the basis for those measurements:~~2016:


											As of March 31, 2017
	As of June 30, 2016														Fair Value Measurement Using:
					Fair Value Measurement Using:						Carrying Amount		Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	Carrying Amount		Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(in thousands)
Financial Assets:
Marketable securities
Municipal bonds — available for sale	$	78,919,000	$	78,919,000	$	—	$	78,919,000	$	—	$	68,260	$	68,260	$	—	$	68,260	$	—

Deferred compensation fund
Money Market⁽¹⁾	$	3,168,000	$	3,168,000	$	—	$	—	$	—	$	2,903	$	2,903	$	—	$	2,903	$	—
Balanced and Lifestyle	10,098,000		10,098,000		10,098,000		—		—		7,420		7,420		7,420		—		—
Large Cap Growth	5,298,000		5,298,000		5,298,000		—		—		6,226		6,226		6,226		—		—
Small Cap Growth	2,208,000		2,208,000		2,208,000		—		—		2,983		2,983		2,983		—		—
Fixed Income	2,920,000		2,920,000		2,920,000		—		—		2,799		2,799		2,799		—		—
International	1,095,000		1,095,000		1,095,000		—		—		1,237		1,237		1,237		—		—
Mid Cap Growth	1,575,000		1,575,000		1,575,000		—		—		1,514		1,514		1,514		—		—
Deferred compensation fund	$	26,362,000	$	26,362,000	$	23,194,000	$	—	$	—	$	25,082	$	25,082	$	22,179	$	2,903	$	—


											As of December 31, 2016
	As of December 31, 2015														Fair Value Measurement Using:
					Fair Value Measurement Using:						Carrying Amount		Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	Carrying Amount		Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(in thousands)
Financial Assets:
Marketable securities
Municipal bonds — available for sale	$	69,496,000	$	69,496,000	$	—	$	69,496,000	$	—	$	67,730	$	67,730	$	—	$	67,730	$	—

Deferred compensation fund
Money Market⁽¹⁾	$	3,896,000	$	3,896,000	$	—	$	—	$	—	$	3,147	$	3,147	$	—	$	3,147	$	—
Balanced and Lifestyle	9,136,000		9,136,000		9,136,000		—		—		7,162		7,162		7,162		—		—
Large Cap Growth	5,218,000		5,218,000		5,218,000		—		—		5,583		5,583		5,583		—		—
Small Cap Growth	2,275,000		2,275,000		2,275,000		—		—		2,933		2,933		2,933		—		—
Fixed Income	2,624,000		2,624,000		2,624,000		—		—		2,752		2,752		2,752		—		—
International	1,025,000		1,025,000		1,025,000		—		—		1,132		1,132		1,132		—		—
Mid Cap Growth	1,217,000		1,217,000		1,217,000		—		—		1,410		1,410		1,410		—		—
Deferred compensation fund	$	25,391,000	$	25,391,000	$	21,495,000	$	—	$	—	$	24,119	$	24,119	$	20,972	$	3,147	$	—

⁽¹⁾

The fair value of the money market fund is based on the net asset value (“NAV”) of the shares held by the plan at the end of the period. The money market fund includes short-term United States dollar denominated ~~money-market~~money market instruments and the NAV is determined by the custodian of the fund. The money market fund can be redeemed at its NAV at the measurement date as there are no significant restrictions on the ability to sell this investment.

The Company’s marketable securities are classified as available-for-sale and unrealized gains or losses are included in accumulated other comprehensive income (net of tax), until realized. The fair value of these municipal bonds is classified within Level 2 of the fair value hierarchy as these securities are measured using third party pricing service data. The investments under the funded

Table of Contents

deferred compensation plan are accounted for as trading securities and unrealized gains or losses are included in earnings. The fair value of investments in the funded deferred compensation plan are valued based on quoted market prices (Level 1).

The Company’s financial assets and liabilities not measured at fair value on a recurring basis include cash and cash equivalents, accounts and notes receivable, prepaid expenses and accounts payable (including income taxes payable and accrued expenses). The carrying value of these financial instruments approximates their fair value because of their short-term nature.

For the three months ended June 30, 2016, we recorded unrealized gains on marketable securities of $578,000 and for the three months ended June 30, 2015, we recorded unrealized losses on marketable securities of $20,000. For the six months ended June 30, 2016, we recorded unrealized gains of $1,133,000 and for the six months ended June 30, 2015, we recorded unrealized losses of $17,000.


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Other-than-temporary Impairments		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Other-than-temporary Impairments
June 30, 2016
												(in thousands)
March 31, 2017
Type of security:
Municipal bonds — available for sale	$	76,230,000	$	2,692,000	$	(3,000	)	$	78,919,000	$	—	$	68,013	$	477	$	(230	)	$	68,260	$	—
Total debt securities	$	76,230,000	$	2,692,000	$	(3,000	)	$	78,919,000	$	—	$	68,013	$	477	$	(230	)	$	68,260	$	—

December 31, 2015
December 31, 2016
Type of security:
Municipal bonds — available for sale	$	68,640,000	$	869,000	$	(13,000	)	$	69,496,000	$	—	$	68,220	$	178	$	(668	)	$	67,730	$	—
Total debt securities	$	68,640,000	$	869,000	$	(13,000	)	$	69,496,000	$	—	$	68,220	$	178	$	(668	)	$	67,730	$	—

For the three months ended June 30, 2016 and 2015, we received total proceeds from sales of available-for-sale municipal bonds, less the amount of interest received, of $3,136,000 and $1,788,000, respectively. For the three months ended June 30, 2016, these sales resulted in realized gains of $181,000 and were recorded in other income – investment and interest in our consolidated statements of comprehensive income. The basis for the sale of these securities was the specific identification of each bond sold during the period. For the three months ended June 30, 2015, there were no realized gains or losses.

For the six months ended June 30, 2016 and 2015, we received total proceeds from sales of available-for-sale municipal bonds, less the amount of interest received, of $5,154,000 and $2,546,000, respectively. These sales resulted in realized gains of $243,000 and $3,000, respectively, and were recorded in other income – investment and interest in our consolidated statements of comprehensive income for the six months ended June 30, 2016 and 2015. The basis for the sale of these securities was the specific identification of each bond sold during the period.

The following table summarizes the contractual maturities of debt securities held at ~~June 30, 2016~~March 31, 2017 and December 31, ~~2015~~,2016, which are classified as marketable securities in the Consolidated Balance ~~Sheet.~~Sheets:


	Municipal Bonds — Available for Sale				Municipal Bonds — Available for Sale
Contractual maturity:	June 30, 2016		December 31, 2015		March 31, 2017		December 31, 2016
					(in thousands)
Maturing in one year or less	$	1,270,000	$	774,000	$	784	$	973
Maturing in second year through fifth year	16,979,000		13,852,000		18,021		28,671
Maturing in sixth year through tenth year	41,323,000		36,273,000		24,076		21,651
Maturing after ten years	19,347,000		18,597,000		25,379		16,435
Total debt securities	$	78,919,000	$	69,496,000	$	68,260	$	67,730

~~Table of Contents~~

Note 6— Share-Based Compensation

A summary of stock-based compensation expense for the ~~six~~three months ended ~~June 30,~~March 31, 2017 and 2016 ~~and~~ ~~2015~~ is as follows:


					Three Months Ended March 31,
	For the Six Months Ended June 30,				2017		2016
	2016		2015		(in thousands)
Stock options	$	1,605,000	$	1,406,000	$	1,172	$	878
Restricted stock	273,000		122,000
Restricted stock and restricted stock units					287		135
Employee Stock Purchase Plan	213,000		205,000		121		105
Total pre-tax stock-based compensation expense charged against income ⁽¹⁾	$	2,091,000	$	1,733,000	$	1,580	$	1,118


⁽¹⁾	Stock-based compensation expense is recorded in selling, general and administrative expense in our ~~consolidated statements~~Consolidated Statements of ~~comprehensive income.~~Comprehensive Income.

At ~~June 30, 2016,~~March 31, 2017, the unrecognized compensation cost related to unvested stock options and awards was ~~$10,389,000.~~$15.2 million. The weighted average period over which these awards will vest is approximately ~~3.2~~3.5 years.

~~Other information pertaining to activity of our stock awards is as follows:~~

For the Six Months Ended June 30,
2016 2015
Total grant-date fair value of stock options and awards granted $ 5,202,000
$ 4,027,000
Total fair value of stock options and awards vested during period $ 3,092,000
$ 2,719,000

2012 Equity Incentive Plan

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

Table of Contents

As of ~~June 30, 2016~~, ~~3,972,000~~March 31, 2017, 3.7 million shares of common stock were reserved for issuance under the Plan, including ~~1,245,000~~0.7 million shares available for future grant. No stock award will have a term in excess of ten years. All awards granted under the Plan become vested and exercisable ratably over a five year period on each yearly anniversary of the grant date.

The Nominating, Compensation and Stock Option Committee of the Board of Directors is responsible for determining the terms of the grants in accordance with the Plan.

Stock Options

A summary of our stock options outstanding under the Plan as of December 31, ~~2015~~2016 and changes during the ~~six~~three months ended ~~June 30, 2016~~March 31, 2017 is as follows:


	Stock Options Outstanding				Stock Options Outstanding
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
December 31, 2015	2,461,000		$	22.16
					(in thousands)
December 31, 2016					2,615		$	24.61
Granted	569,000		$	34.14	544		$	39.38
Cancelled	(66,000	)	$	29.31	(39	)	$	33.82
Exercised	(238,000	)	$	20.25	(201	)	$	23.31
June 30, 2016	2,726,000		$	24.65
March 31, 2017					2,919		$	27.33

The weighted average grant-date fair value of stock options granted during the ~~six~~three months ended ~~June 30,~~March 31, 2017 and 2016 was $8.52 and ~~2015~~ ~~was~~ ~~$7.46~~ ~~and~~ ~~$6.64~~$7.46 per common share, respectively.

~~Table~~ The total intrinsic value of ~~Contents~~

~~The following table summarizes other information about our stock~~ options ~~at June 30, 2016:~~

Stock Options
Range of exercise prices $10.39 - $34.14
Outstanding:
Weighted average remaining contractual life (years) 6.7
Aggregate intrinsic value $ 45,605,000
Exercisable:
Number of shares 1,230,000
Weighted average remaining contractual life (years) 4.9
Aggregate intrinsic value $ 28,105,000
Exercised:
Aggregate intrinsic value $ 3,874,000
exercised during the three months ended March 31, 2017 and 2016 was $3.5 million and $1.7 million, respectively.

The fair value of stock option awards granted in ~~2016~~2017 and ~~2015~~2016 was estimated on the date of grant using the Black-Scholes option valuation model using the following assumptions:


	For the Six Months Ended June 30,		Three Months Ended
	2016	2015	2017		2016
Risk-free interest rate	2.0%	1.9%	2.0	%	2.0	%
Weighted average expected life (years)	5.8	5.8	5.8 years		5.8 years
Expected volatility	26.0%	27.2%	25.1	%	26.0	%
Dividend yield	2.0%	2.2%	1.9	%	2.0	%

The following table summarizes other information about our stock options at March 31, 2017:



	March 31, 2017
	(in thousands, except per share data)
Outstanding:
Aggregate intrinsic value	$	46,007
Weighted average remaining contractual life (years)	6.7 years
Exercisable:
Number of options	1,437
Weighted average exercise price	$	20.50
Aggregate intrinsic value	$	32,464
Weighted average remaining contractual life (years)	4.8 years

Table of Contents

Restricted Stock

During the ~~six~~three months ended ~~June 30,~~March 31, 2017, the Company did not grant shares of restricted stock. During the three months ended March 31, 2016,, the Company granted ~~44,000~~44 thousand shares of restricted stock with a weighted average grant date fair value of ~~$34.14~~$34.14 per share. Fair value is determined based on the market price of the shares on the date of grant.

A summary of our outstanding restricted stock awards as of December 31, 2016 and changes during the three months ended March 31, 2017 is as follows:



	Shares		Weighted Average Grant Date Fair Value
	(in thousands)
December 31, 2016	74		$	32.09
Granted	—		$	—
Vested	(18	)	$	31.41
Forfeited	—		$	—
March 31, 2017	56		$	32.30

Restricted Stock Units

During the three months ended March 31, 2017, the Company granted 81 thousand restricted stock units with a weighted average grant date fair value of $39.38 per share. Fair value is determined based on the market price of the shares on the date of grant. During the ~~six~~three months ended ~~June 30, 2015, the Company granted 25,000 shares~~March 31, 2016, there were no grants of restricted stock ~~with a weighted average grant date fair value of $30.30 per share.~~units.

A summary of our outstanding ~~stock-based compensation~~restricted stock units as of December 31, ~~2015~~2016 and changes during the ~~six~~three months ended ~~June 30, 2016~~March 31, 2017 is as follows:


	Shares		Weighted Average Grant Date Fair Value		Units	Weighted Average Grant Date Fair Value
December 31, 2015	40,000		$	29.10
					(in thousands)
December 31, 2016					—	$	—
Granted	44,000		$	34.14	81	$	39.38
Vested	(9,000	)	$	28.76	—	$	—
June 30, 2016	75,000		$	32.10
Forfeited					—	$	—
March 31, 2017					81	$	39.38

Employee Stock Purchase Plan

The Company ~~has~~offers an Employee Stock Purchase Plan (“ESPP”) ~~for~~to all eligible employees. The ESPP ~~currently extends~~was scheduled to expire after 2016, however the Board of Directors extended the program for an additional five offerings through ~~2016.~~2021. All full-time and certain part-time employees who have completed two years of continuous service with us are eligible to participate. Annual offerings commence and terminate on the respective year’s first and last calendar day.

Under the ESPP, the Company is authorized to issue up to ~~4,050,000~~4.1 million shares of our common stock to our employees. Pursuant to such authorization, there are ~~2,362,000~~2.3 million shares available for future grant at ~~June 30, 2016~~.

~~Table of Contents~~

March 31, 2017.

The stock-based compensation expense associated with the options granted in 2017 and 2016 under our ESPP was estimated on the date of grant using the Black-Scholes option valuation model using the following assumptions:


	Six months ended June 30,		Three Months Ended March 31,
	2016	2015	2017	2016
Risk-free interest rate	0.58%	0.18%	1.05%	0.58%
Weighted average expected life (years)	1.0	1.0	1.0	1.0
Expected volatility	19.7%	19.2%	21.2%	19.7%
Dividend yield	2.0%	2.2%	1.9%	2.0%

Table of Contents

Deferred Compensation Plan

The Company offers a Supplemental Executive Retirement Plan (“SERP”) for certain key executives and employees. The SERP allows participants to defer a portion of their earned income on a pre-tax basis and as of the last day of each plan year, each participant will be credited with a match up to a portion of their deferral in the form of our Common Stock based on the then-current market value. Under the SERP, we are authorized to issue 1.0 million shares of our common stock to our employees. Pursuant to such authorization, we have 0.4 million shares available for future grant at March 31, 2017. At the time of issuance, such shares are accounted for at cost as treasury stock.

The following table summarizes information about our SERP during the three months ended March 31, 2017 and 2016:



	Three Months Ended March 31,
	2017		2016
	(in thousands)
SERP expense⁽¹⁾	$	160	$	164
Unrealized gain (loss) recorded in SERP liability account	$	1,161	$	(328	)

⁽¹⁾Both the SERP match and the deferrals are included in the selling, general and administrative caption in our consolidated statements of comprehensive income.

Note 7— Dividends

During the ~~six~~three months ended ~~June 30, 2016,~~March 31, 2017, we paid regular quarterly cash dividends oftotaling approximately ~~$26,451,000~~$13.6 million as follows:


	Quarter Ended				Three Months Ended March 31, 2017
	March 31, 2016		June 30, 2016		(in thousands, except per share amounts)
Cash dividend per common share	$	0.18125	$	0.18250
Cash dividends paid per common share					$	0.18625
Total cash dividends paid	$	13,158,000	$	13,293,000	$	13,624
Record date	February 19, 2016		May 20, 2016		February 17, 2017
Payment date	March 25, 2016		June 24, 2016		March 24, 2017

Additionally, on ~~July 12, 2016~~,April 11, 2017, our Board of Directors declared a regular quarterly cash dividend of ~~$0.18375~~$0.1875 per common share, which will be paid on ~~September~~June 23, ~~2016~~,2017, to shareholders of record as of the close of business on ~~August~~May 19, ~~2016~~.2017.

Cash dividends declared on our outstanding weighted average number of basic common shares for the ~~six months ended June 30, 2016~~ ~~and~~ ~~2015~~periods presented were ~~approximately~~ as follows:

For the Three Months Ended June 30, For the Six Months Ended June 30,
2016 2015 2016 2015
Cash dividends per common share $ 0.18
$ 0.18
$ 0.36
$ 0.36



	Three Months Ended March 31,
	2017		2016
Cash dividends declared per common share	$	0.18750	$	0.18250

Note 8— Income Taxes

The ~~2016~~2017 estimated annual effective tax rate is expected to be approximately ~~37%~~35%. Differences between the effective tax rate and the applicable U.S. federal statutory rate arise primarily from the effect of state and local income taxes, share-based compensation and tax credits available to the Company. The actual ~~2016~~2017 effective tax rate ~~could~~will likely vary from the estimate depending on the availability of tax credits. and the exercises of stock options and vesting of share-based awards. Due to the adoption of ASU 2016-09, the tax effects of option exercises or vested awards should be treated as discrete items in the reporting period in which they occur, and therefore cannot be considered in the calculation of the estimated annual effective tax rate.

We account for income taxes using the asset and liability method, which results in recognizing income tax expense based on the amount of income taxes payable or refundable for the current year. Additionally, we evaluate regularly the tax positions taken or expected to be taken resulting from financial statement recognition of certain items. Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our financial statements. Our evaluation was performed for the tax years ended December 31, ~~2012~~2013 through ~~2015~~2016 (with regard to U.S. federal income tax returns) and December 31, ~~2011~~ 2012

Table of Contents

through ~~2015~~2016 (with regard to various state and local income tax returns), the tax years which remain subject to examination by major tax jurisdictions as of ~~June 30, 2016~~.March 31, 2017.

We may from time to time be assessed interest or penalties by taxing jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. When we have received an assessment for interest and/or penalties, it has been classified in the financial statements as selling, general and administrative expense. In addition, any interest or penalties relating to recognized uncertain tax positions would also be recorded in selling, general and administrative expense.

Note 9—Related Party Transactions

A director is a member of a law firm ~~which was~~ retained by us. In each of the ~~six~~three months ended ~~June 30,~~March 31, 2017 and 2016, ~~and~~ ~~2015~~, fees received from us by such firm did not exceed ~~$120,000~~.$120,000. Additionally, such fees did not exceed, in either period, 5% of such firm’s or the Company’s revenues.

~~Table of Contents~~

Note 10—Segment Information

~~Reportable Operating Segments~~

We manage and evaluate our operations in two reportable segments: Housekeeping (housekeeping, laundry, linen and other services) and Dietary (dietary department services). Although both segments serve ~~a similar~~the same client base and share many operational similarities, they are managed separately due to distinct differences in the type of services provided, as well as the specialized expertise required of the professional management personnel responsible for delivering ~~the respective segments’~~each segment’s services. Such services are rendered pursuant to distinct service agreements, specific to each reportable segment.

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


													Three Months Ended March 31,
	Three months ended June 30,						Six months ended June 30,						2017			2016
	2016			2015			2016			2015			(in thousands)
Revenues
Housekeeping services	$	238,291,000		$	226,965,000		$	476,570,000		$	453,546,000		$	243,423		$	238,279
Dietary services	148,265,000			128,391,000			294,793,000			257,056,000			161,067			146,528
Total	$	386,556,000		$	355,356,000		$	771,363,000		$	710,602,000		$	404,490		$	384,807

Income before income taxes
Housekeeping services	$	22,821,000		$	21,752,000		$	45,321,000		$	42,369,000		$	23,202		$	22,500
Dietary services	9,071,000			7,864,000			18,219,000			16,769,000			10,225			9,148
Corporate and eliminations ⁽¹⁾	(2,209,000		)	(3,359,000		)	(4,253,000		)	(7,827,000		)	(1,148		)	(2,044		)
Total	$	29,683,000		$	26,257,000		$	59,287,000		$	51,311,000		$	32,279		$	29,604

⁽¹⁾

Primarily represents corporate office costs and related overhead, recording of certain inventories and supplies and workers compensation costs at the reportable segment level which use accounting methods that differ from those used at the corporate level, as well as consolidated subsidiaries’ operating expenses that are not allocated to the reportable segments, net of investment and interest income.

~~Total Revenues from Clients~~

~~We earned total revenues from clients in the following service categories:~~

For the Three Months Ended June 30, For the Six Months Ended June 30,
2016 2015 2016 2015
Housekeeping services $ 169,362,000
$ 157,086,000
$ 338,278,000
$ 313,673,000
Dietary services 148,265,000
128,391,000
294,793,000
257,056,000
Laundry and linen services 68,452,000
69,339,000
137,166,000
138,827,000
Maintenance services and other 477,000
540,000
1,126,000
1,046,000
$ 386,556,000
$ 355,356,000
$ 771,363,000
$ 710,602,000

~~Table of Contents~~

Note 11— Earnings Per Common Share

Basic and diluted earnings per common share are computed by dividing net income by the weighted-average number of basic and diluted common shares outstanding, respectively. The weighted-average number of diluted common shares includes the impact of dilutive securities, including unvested, unexercised stock options and unvested restricted ~~stock.~~stock and restricted stock units. The table below reconciles the weighted-average basic and diluted common shares outstanding:


					Three Months Ended March 31,
	Three months ended June 30,		Six months ended June 30,		2017	2016
	2016	2015	2016	2015	(in thousands)
Weighted average number of common shares outstanding - basic	72,568,000	71,657,000	72,466,000	71,563,000	73,074	72,364
Effect of dilutive securities⁽¹⁾	748,000	629,000	699,000	660,000	872	650
Weighted average number of common shares outstanding - diluted	73,316,000	72,286,000	73,165,000	72,223,000	73,946	73,014

⁽¹⁾

Certain outstanding stock option awards ~~have exercise prices greater than the average market price of our common stock during the periods presented. Such awards would be antidilutive~~are anti-dilutive and were therefore excluded from the calculation of the weighted average number of diluted common shares outstanding. During the three ~~and six~~ months ended ~~June 30, 2016,~~March 31, 2017, options to purchase ~~553,000 and 551,000~~0.5 million shares having a weighted average exercise price of ~~$34.14~~$39.38 per share were excluded. During the three ~~and six~~ months ended ~~June 30, 2015,~~March 31, 2016, options to purchase ~~1,015,000 and 1,014,000~~1.0 million shares having a weighted average exercise ~~prices~~price of ~~$29.25 and $29.23, respectively,~~$32.45 per share were excluded.

Note 12— Other Contingencies

Line of Credit

We have a ~~$200,000,000~~$200 million bank line of credit on which we may draw to meet short-term liquidity requirements. Amounts drawn under the line of credit are payable upon demand. At ~~June 30, 2016,~~March 31, 2017, there were no borrowings under the line of credit. At ~~June 30, 2016,~~March 31, 2017, we also had outstanding a ~~$73,428,000~~$67.2 million irrevocable standby letter of credit, which relates to payment obligations under our insurance programs. ~~The letter of credit was increased to $78,078,000 on July 1, 2016.~~ In connection with the issuance of the letter of credit, the amount available under the line of credit was reduced by ~~$73,428,000~~$67.2 million to $132.8 million at ~~June 30, 2016.~~March 31, 2017. The letter of credit was increased to $70.7 million on April 3, 2017. The line of credit requires us to satisfy one financial covenant. We are in compliance with our financial covenant at ~~June 30, 2016~~March 31, 2017 and expect to remain in compliance with such financial covenant. The line of credit expires on December 18, 2018.

Tax Jurisdictions and Matters

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

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

Legal Proceedings

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

Government Regulations

~~Table of Contents~~

changes in existing regulations could be made which could directly impact the governmental reimbursement programs in which our clients participate. As a result, we may not know the full effects of such programs until these laws are fully implemented and government agencies issue applicable regulations or guidance.

Note 13—Subsequent Events

The Company has entered into new service agreements with expected annualized revenues of over $160 million, to begin during the second quarter of 2017. The recent expansion consists of multiple customer groups including one national, multi-state provider, with whom the Company has an existing contractual relationship, that makes up a substantial portion of the aforementioned growth. In conjunction with said customer expansion, the Company acquired certain dietary-related assets, including inventory, and intellectual property.

We evaluated all subsequent events through the filing date of this Form 10-Q. We believe there were no other events or transactions occurring during this subsequent reporting period which require recognition or additional disclosure in these financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Table of Contents

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 ~~June 30, 2016~~March 31, 2017 and December 31, ~~2015~~2016 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 the health care industry, including nursing homes, retirement complexes, rehabilitation centers and hospitals located throughout the United States. We believe we are the largest provider of housekeeping and laundry management services to the long-term care industry in the United States, rendering such services to over 3,500 facilities ~~in 48 states~~throughout the continental United States as of ~~June 30, 2016.~~March 31, 2017. Although we do not directly participate in any government reimbursement programs, our clients’ reimbursements are subject to government regulation. Therefore, our clients are directly affected by any legislation relating to Medicare and Medicaid reimbursement programs.

We provide our services primarily pursuant to full service agreements with our clients. In such agreements, we are responsible for the ~~day to day~~ management of ~~employees~~the department serviced, employing Housekeeping or Dietary personnel located at our clients’ ~~facilities.~~facilities and providing certain supplies. We also provide services on the basis of management-only agreements for a limited number of clients. Our agreements with clients typically provide for renewable one year service terms, cancelable by either party upon 30 to 90 days’ notice after the initial period of 60 to 120 ~~day period.~~days.

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

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

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

At ~~June 30, 2016,~~March 31, 2017, Housekeeping isservices were provided at essentially all of our more than 3,500 client facilities, generating approximately ~~61.8%~~60.2% or ~~$476,570,000~~$243.4 million of total revenues for the ~~six~~three months ended ~~June 30, 2016.~~March 31, 2017. Dietary isservices were provided to over 1,000 client facilities at ~~June 30, 2016~~March 31, 2017 and contributed approximately ~~38.2%~~39.8% or ~~$294,793,000~~$161.1 million of total revenues for the ~~six~~three months ended ~~June 30, 2016.~~

On July 12, 2015, the Company completed its corporate restructuring by capitalizing its three new operating entities (HCSG East, LLC, HCSG Central, LLC and HCSG West, LLC), and transitioning the Company’s facility-based employees to such entities based on the geography served. As of July 12, 2015, (i) HCSG Insurance provided workers’ compensation 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.March 31, 2017.

Subject to the factors noted in the Cautionary Statement Regarding Forward Looking Statements included in this Quarterly Report on Form 10-Q, although there can be no assurance thereof, we expect our ~~financial performance~~consolidated revenues for the remainder of ~~2016 may be comparable~~2017 to continue to improve compared to historical ~~ranges as they relate~~ranges. We expect that Dietary revenues will continue to ~~consolidated revenues. Specifically, each of Housekeeping’s and Dietary’s revenues,~~grow as a percentage of consolidated ~~revenues, should approximate the respective percentages noted~~revenue and such growth is expected to come from our current Housekeeping client base. Growth in ~~the Overview Section above.~~Housekeeping is expected to primarily come from obtaining new clients. Furthermore, we expect the sources of organic growth for the remainder of ~~2016~~2017 for the respective operating segments to be primarily the same as historically experienced. Accordingly, although there can be no assurance thereof, the growth in Dietary is expected to come from our current Housekeeping client base, while growth in Housekeeping will primarily come from obtaining new clients.

Three Months Ended ~~June 30,~~March 31, 2017 and 2016 ~~and 2015~~

The following ~~tables~~table sets forth the ~~second~~first quarter ~~2016~~2017 income statement key components that we use to evaluate our financial performance on a consolidated and reportable segment basis, compared to ~~second~~first quarter ~~2015~~ amounts. The differences between the reportable segments’ operating results and other disclosed data and our consolidated financial statements relate primarily to corporate level transactions and recording of transactions at the reportable segment level which use methods other than generally accepted accounting principles.

For the Three Months Ended June 30, 2016
Housekeeping Dietary
Consolidated % Change Corporate & Eliminations Amount % Change Amount % Change
Revenues $ 386,556,000
8.8 % $ —
$ 238,291,000
5.0 % $ 148,265,000
15.5 %
Costs of services provided 332,211,000
9.2 % (22,453,000 ) 215,470,000
5.0 % 139,194,000
15.5 %
Selling, general and administrative expense 25,664,000
2.1 % 25,664,000
—
—
—
—
Investment and interest income 1,002,000
314.0 % 1,002,000
—
—
—
—
Income before income taxes $ 29,683,000
13.0 % $ (2,209,000 ) $ 22,821,000
4.9 % $ 9,071,000
15.3 %

For the Three Months Ended June 30, 2015
Consolidated Corporate & Eliminations Housekeeping Dietary
Revenues $ 355,356,000
$ —
$ 226,965,000
$ 128,391,000
Costs of services provided 304,217,000
(21,523,000 ) 205,213,000
120,527,000
Selling, general and administrative expense 25,124,000
25,124,000
—
—
Investment and interest income 242,000
242,000
—
—
Income before income taxes $ 26,257,000
$ (3,359,000 ) $ 21,752,000
$ 7,864,000

Housekeeping, our largest and core reportable segment, represented approximately 62% of consolidated revenues for the second quarter 2016. Dietary revenues represented approximately 38% of consolidated revenues for the second quarter 2016.

~~Table of Contents~~

~~The following table sets forth the ratio which certain items bear to consolidated revenues:~~

For the Three Months Ended
June 30,
2016 2015
Revenues 100.0 % 100.0 %
Operating costs and expenses:
Costs of services provided 85.9 % 85.6 %
Selling, general and administrative expense 6.6 % 7.1 %
Investment and interest income 0.3 % 0.1 %
Income before income taxes 7.8 % 7.4 %
Income taxes 2.8 % 2.8 %
Net income 5.0 % 4.6 %

~~Table of Contents~~

~~Revenues~~

~~Consolidated~~

~~Consolidated revenues increased~~ ~~8.8%~~ to ~~$386,556,000~~ ~~in the~~ ~~second quarter~~ 2016 ~~compared to $355,356,000 in the~~ ~~second quarter 2015~~ ~~as a result of the factors discussed below under Reportable Segments.~~

~~Reportable Segments~~

~~Housekeeping’s~~ ~~5.0%~~ ~~net growth in reportable segment revenues resulted from service agreements entered into with new clients.~~

~~Dietary’s~~ ~~15.5%~~ ~~net growth in reportable segment revenues resulted primarily from providing this service to a greater number of existing Housekeeping clients.~~

~~Costs of Services Provided~~

~~Consolidated~~

Consolidated costs of services increased 9.2% to $332,211,000 in the second quarter 2016 compared to $304,217,000 in the second quarter 2015. The increase in costs of services is a direct result of growth in our 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 in such components during 2016 compared to 2015 includes labor and other labor related costs, dietary supplies, workers’ compensation and general liability insurance and bad debt provision. Historically, these significant components accounted for approximately 96% to 98% of consolidated costs of services.

~~As a percentage of consolidated revenues, cost of services increased~~to 85.9% in the second quarter 2016 from 85.6% in the second quarter 2015. The following table provides a comparison of the key indicators we consider when managing the consolidated cost of services provided:

For the Three Months Ended June 30,
Costs of Services Provided-Key Indicators as a % of Consolidated Revenue 2016 2015 Change
Bad debt provision 0.3% 0.2% 0.1%
Workers’ compensation and general liability insurance 3.0% 3.3% (0.3)%

The decrease in workers’ compensation and general liability insurance expense 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.

~~Reportable Segments~~

Cost of services provided for Housekeeping, as a percentage of Housekeeping revenues for the second quarter 2016 remained consistent at 90.4% from the second quarter 2015. Cost of services provided for Dietary, as a percentage of Dietary revenues for the second quarter 2016 remained consistent at 93.9% from the second quarter 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:~~

For the Three Months Ended June 30,
Costs of Services Provided-Key Indicators as a % of Segment Revenue 2016 2015 Change
Housekeeping labor and other labor costs 79.5% 78.5% 1.0%
Housekeeping supplies 7.8% 8.4% (0.6)%
Dietary labor and other labor costs 53.1% 53.0% 0.1%
Dietary supplies 38.4% 38.3% 0.1%

~~Table of Contents~~

~~building efficiencies and managing labor and other costs at the facility level, as well as managing supply chain costs, for new and existing facilities.~~

~~Selling, General and Administrative Expense~~

For the Three Months Ended June 30,
2016 2015 $ Change % Change
Selling, general and administrative expense excluding deferred compensation change ⁽¹⁾
$ 25,118,000
$ 25,104,000
$ 14,000
0.1 %
Change in value of deferred compensation plan 546,000
20,000
526,000
2,630.0 %
Selling, general and administrative expense $ 25,664,000
$ 25,124,000
$ 540,000
2.1 %


⁽¹⁾	~~Selling, general and administrative expense excluding the change in the market value of the deferred compensation fund.~~

Excluding the change in the deferred compensation plan, consolidated selling, general and administrative expense increased $14,000 or 0.1% compared to the second quarter 2015. The increase related to the deferred compensation plan is a result of changes in the value of our deferred compensation liability.

~~Consolidated Investment and Interest Income~~

Investment and interest income, as a percentage of consolidated revenues, increased to 0.3% for the three months ended June 30, 2016 compared to 0.1% for the corresponding 2015 period, primarily due to favorable market fluctuations in the value of our investments.

~~Consolidated Income Taxes~~

For the second quarter 2016, our effective tax rate was 37% compared to 38% for the 2015 period. Differences between the effective tax rate and the applicable U.S. federal statutory rate arise primarily from the effect of state and local income taxes and tax credits available to the Company. The decrease in the effective tax rate is primarily due to the recognition of certain tax credits in the second quarter 2016 that had not been recognized in the second quarter 2015, as the credits were not approved until late 2015.

~~Six Months Ended June 30, 2016 and 2015~~

The following tables set forth the six months ended June 30, 2016 income statement key components that we use to evaluate our financial performance on a consolidated and reportable segment basis compared to the six months ended June 30, 2015 amounts. The differences between the reportable segments’ operating results and other disclosed data and our consolidated financial statements relate primarily to corporate level transactions and recording of transactions at the reportable segment level which use methods other than generally accepted accounting principles.

Reportable Segments — For the Six Months Ended June 30, 2016
Housekeeping Dietary
Consolidated % Change Corporate &
Eliminations Amount % Change Amount % Change
Revenues $ 771,363,000
8.6 % $ —
$ 476,570,000
5.1 % $ 294,793,000
14.7 %
Costs of services provided 662,255,000
8.9 % (45,568,000 ) 431,249,000
4.9 % 276,574,000
15.1 %
Selling, general and administrative expense 51,010,000
(1.7 )% 51,010,000
—
—
—
—
Investment and interest income 1,189,000
58.7 % 1,189,000
—
—
—
—
Income (loss) before income taxes $ 59,287,000
15.5 % $ (4,253,000 ) $ 45,321,000
7.0 % $ 18,219,000
8.6 %

2319

Table of Contents


										Three Months Ended March 31,
	Reportable Segments — For the Six Months Ended June 30, 2015									2017			2016			% Change
	Consolidated		Corporate & Eliminations			Housekeeping		Dietary		(in thousands)
Revenues	$	710,602,000	$	—		$	453,546,000	$	257,056,000
Costs of services provided	608,153,000		(43,311,000		)	411,177,000		240,287,000
Housekeeping services										$	243,423		$	238,279		2.2	%
Dietary services										161,067			146,528			9.9	%
Consolidated										$	404,490		$	384,807		5.1	%

Costs of Services Provided
Housekeeping services										$	220,221		$	215,779		2.1	%
Dietary services										150,842			137,380			9.8	%
Corporate and eliminations										(25,493		)	(23,115		)	10.3	%
Consolidated										$	345,570		$	330,044		4.7	%

Selling, general and administrative expense	51,887,000		51,887,000			—		—
Corporate and eliminations										$	28,210		$	25,346		11.3	%

Investment and interest income	749,000		749,000			—		—
Corporate and eliminations										$	1,569		$	187		739.0	%

Income (loss) before income taxes	$	51,311,000	$	(7,827,000	)	$	42,369,000	$	16,769,000
Housekeeping services										$	23,202		$	22,500		3.1	%
Dietary services										10,225			9,148			11.8	%
Corporate and eliminations										(1,148		)	(2,044		)	(43.8	)%
Consolidated										$	32,279		$	29,604		9.0	%

Housekeeping, our largest and core reportable segment, represented approximately ~~62%~~60.2% of consolidated revenues for the ~~six months ended June 30, 2016.~~first quarter 2017. Dietary revenues represented approximately ~~38%~~39.8% of consolidated revenues for the ~~six months ended June 30, 2016.~~first quarter 2017.

The following table sets forth the ratio which certain items bear to consolidated revenues:


	For the Six Months Ended June 30,				Three Months Ended March 31,
	2016		2015		2017		2016
Revenues	100.0	%	100.0	%	100.0	%	100.0	%
Operating costs and expenses:
Costs of services provided	85.9	%	85.6	%	85.4	%	85.8	%
Selling, general and administrative expense	6.6	%	7.3	%	7.0	%	6.6	%
Investment and interest income	0.2	%	0.1	%	0.4	%	0.0	%
Income before income taxes	7.7	%	7.2	%	8.0	%	7.6	%
Income taxes	2.8	%	2.7	%	2.5	%	2.9	%
Net income	4.9	%	4.5	%	5.5	%	4.7	%

Revenues

Consolidated

Consolidated revenues increased ~~8.6%~~5.1% to ~~$771,363,000~~$404.5 million in the ~~six months ended June 30, 2016~~first quarter 2017 compared to ~~$710,602,000~~$384.8 million in the ~~corresponding period in 2015~~first quarter 2016, as a result of the factors discussed below under Reportable Segments.

Reportable Segments

Housekeeping’s ~~5.1%~~2.2% net growth in reportable segment revenues resulted from service agreements entered into with new clients.

Dietary’s ~~14.7%~~9.9% net growth in reportable segment revenues resulted primarily from providing this service to a greater number of existing Housekeeping clients.

Costs of ~~services provided~~Services Provided

Consolidated

Consolidated costs of services increased ~~8.9%~~4.7% to ~~$662,255,000 for~~$345.6 million in the ~~six months ended June 30, 2016~~first quarter 2017 compared to ~~$608,153,000~~$330.0 million in the ~~corresponding period in 2015.~~first quarter 2016. The increase in ~~such~~costs of services is a direct result of growth in our 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~~2017 compared to ~~2015 includes~~2016 relates primarily to labor and other labor related costs. Historically, labor and other labor related costs, ~~and housekeeping and dietary supplies. Our workers’ compensation and general liability~~as well as self insurance ~~decreased in the six months ended June 30, 2016 compared to the corresponding period in 2015. Historically, these significant components~~costs, accounted for approximately 96% to 98% of consolidated costs of services.

As a percentage of consolidated revenues, cost of services ~~increased~~decreased to ~~85.9%~~85.4% in the ~~six months ended June 30, 2016~~first quarter 2017 from ~~85.6%~~85.8% in the ~~corresponding period in 2015.~~first quarter 2016. The following table provides a comparison of the key indicators we consider when managing the consolidated cost of services provided:


	For the Six Months Ended June 30,						Three Months Ended March 31,
Cost of Services Provided-Key Indicators as a % of Consolidated Revenue	2016		2015		Change
Costs of Services Provided-Key Indicators as a % of Consolidated Revenue							2017	2016	Change
Bad debt provision	0.3	%	0.2	%	0.1	%	0.3%	0.3%	—%
Workers’ compensation and general liability insurance	3.0	%	3.3	%	(0.3	)%	2.6%	3.1%	(0.5)%

The decrease in workers’ compensation and general liability insurance expense 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.~~claims, which positively impact our claims experience.

Reportable Segments

Cost of services provided for Housekeeping, as a percentage of Housekeeping revenues for the ~~six months ended June 30, 2016,~~first quarter 2017, decreased to 90.5% from ~~90.7% compared to~~90.6% in the ~~corresponding period in 2015.~~first quarter 2016. Cost of services provided for Dietary, as a percentage

~~Table of Contents~~

of Dietary revenues for the ~~six months ended June 30, 2016, increased slightly~~first quarter 2017, decreased to 93.7% from 93.8% ~~from 93.5% compared to~~in the ~~corresponding period in 2015.~~first quarter 2016.

The following table provides a comparison of the key indicators we consider when managing ~~the~~ cost of services at the segment level, as a percentage of the respective segment’s revenues:


	For the Six Months Ended June 30,						Three Months Ended March 31,
Cost of Services Provided-Key Indicators as a % of Segment Revenue	2016		2015		Change
Costs of Services Provided-Key Indicators as a % of Segment Revenue							2017	2016	Change
Housekeeping labor and other labor costs	79.5	%	78.7	%	0.8	%	80.1%	79.5%	0.6%
Housekeeping supplies	7.9	%	8.5	%	(0.6	)%	8.0%	7.9%	0.1%
Dietary labor and other labor costs	53.0	%	52.4	%	0.6	%	54.3%	52.8%	1.5%
Dietary supplies	38.2	%	38.2	%	—	%	37.1%	38.0%	(0.9)%

The ratios of these key indicators to revenue remain relatively consistent. Variations relate to the provision of services at new facilities and changes in the mix of clients for whom we provide supplies or do not provide supplies. Management focuses on building efficiencies and managing labor and other costs at the facility level, as well as managing supply chain costs, for new and existing facilities.

Selling, General and Administrative Expense

For the Six Months Ended June 30,
2016 2015 $ Change % Change
Selling, general and administrative expense w/o deferred compensation change ⁽¹⁾
$ 50,792,000
$ 51,499,000
$ (707,000 ) (1.4 )%
Change in value of deferred compensation plan 218,000
388,000
(170,000 ) (43.8 )%
Consolidated selling, general and administrative expense $ 51,010,000
$ 51,887,000
$ (877,000 ) (1.7 )%



	Three Months Ended March 31,
	2017		2016			$ Change		% Change
	(in thousands)
Selling, general and administrative expense excluding deferred compensation change ⁽¹⁾	$	27,049	$	25,674		$	1,375	5.4	%
Gain / (loss) on deferred compensation plan investments ⁽²⁾	1,161		(328		)	1,489		(454.0	)%
Selling, general and administrative expense	$	28,210	$	25,346		$	2,864	11.3	%


⁽¹⁾	Selling, general and administrative expense excluding the change in the market value of the deferred compensation fund.

Table of Contents

⁽²⁾

Gains on the deferred compensation plan investments are reflected as increases to selling, general and administrative expense, as such gains also increase the amount of the deferred compensation liability. Losses on the deferred compensation plan investments are reflected as decreases to selling, general and administrative expense, as such losses also decrease the amount of the deferred compensation liability.

Excluding the change in the deferred compensation plan, consolidated selling, general and administrative expense ~~decreased $707,000~~increased $1.4 million or ~~1.4% during the six months ended June 30, 2016, primarily due to legal matters and charges related~~5.4% compared to the ~~corporate reorganization under our wholly owned captive insurance subsidiary~~first quarter 2016, related primarily to growth. The increase in selling, general and ~~other related expenses incurred during 2015. The decrease~~administrative expense related to the deferred compensation plan is a result of ~~changes in~~gains on the plan investments that increased the value of our deferred compensation liability.

Consolidated Investment and Interest Income

Investment and interest income, as a percentage of consolidated revenues, increased to ~~0.2%~~0.4% for the ~~six~~three months ended ~~June 30, 2016~~March 31, 2017 compared to ~~0.1% for~~ the corresponding ~~2015~~2016 period, primarily due to favorable market fluctuations in the value of our investments.

Consolidated Income Taxes

For the ~~six months ended June 30, 2016,~~first quarter 2017, our effective tax rate was ~~37% compared to 38%~~31.8%, versus 37.1% for the ~~2015 period.~~same period in 2016. In the first quarter 2017, the Company adopted 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 the first quarter 2017 income tax expense. Differences between the effective tax rate and the applicable U.S. federal statutory rate generally arise primarily from the effect of state and local income taxes, share-based compensation and tax credits available to the Company. The decrease in the effective tax rate is primarily due to the recognition of certain tax credits in the second quarter 2016 that had not been recognized in the second quarter 2015, as the credits were not approved until late 2015.

Liquidity and Capital Resources

Cash generated through operations is our primary source of liquidity. At ~~June 30, 2016,~~March 31, 2017, we had cash, cash equivalents and marketable securities of ~~$100,638,000~~$116.5 million and working capital of ~~$301,438,000,~~$334.1 million, compared to December 31, ~~2015~~2016 cash, cash equivalents and marketable securities of ~~$102,685,000~~$91.6 million and working capital of ~~$269,277,000. Our current ratio remained at 3.8 to 1 at June 30, 2016 and December 31, 2015.~~$313.8 million. The increase in working capital is driven by the timing of payments and cash receipts as of ~~June 30, 2016~~March 31, 2017 as compared with December 31, ~~2015.~~2016. As of March 31, 2017, we had an unused line of credit of $132.8 million. Our current ratio was 3.8 to 1 at March 31, 2017 versus 4.1 to 1 at December 31, 2016.

For the three months ended March 31, 2017 and the three months ended March 31, 2016, our cash flows were as follows:



	March 31, 2017			March 31, 2016
	(in thousands)
Net cash provided by operating activities	$	34,646		$	9,689
Net cash used in investing activities	$	(1,356	)	$	(3,671	)
Net cash used in financing activities	$	(8,913	)	$	(10,087	)

Operating Activities

Our primary sources of cash from operating activities are the revenues generated from our Housekeeping and Dietary services. Our primary uses of cash for operating activities 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 the 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 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 $13.6 million as follows.



	March 31, 2017
	(in thousands, except per share data)
Cash dividends paid per common share	$	0.18625
Total cash dividends paid	$	13,624
Record date	February 17, 2017
Payment date	March 24, 2017

Table of Contents

The dividends paid to shareholders during the three months ended March 31, 2017 were funded by the existing cash, cash equivalents and marketable securities held by the Company. Our Board of Directors reviews our dividend policy on a quarterly basis. Although there can be no assurance that we will continue to pay dividends or the amount of the dividend, we expect to continue to pay a regular quarterly cash dividend. Partially offsetting the cash used to pay dividends are the proceeds received from the exercise of stock options by employees and directors.

Line of Credit

We have a ~~$200,000,000~~$200 million bank line of credit on which we may draw to meet short-term liquidity ~~requirements in excess of internally generated cash flow.~~requirements. Amounts drawn under the line of credit are payable upon demand. At ~~June 30, 2016,~~March 31, 2017, there were no borrowings under the line of credit. At ~~June 30, 2016,~~March 31, 2017, we also had outstanding a ~~$73,428,000~~$67.2 million irrevocable standby letter of credit, which relates to

~~Table of Contents~~

payment obligations under our insurance programs. ~~The letter of credit was increased to $78,078,000 on July 1, 2016.~~ In connection with the issuance of the letter of credit, the amount available under the line of credit was reduced by ~~$73,428,000~~$67.2 million to $132.8 million at ~~June 30, 2016.~~March 31, 2017. The letter of credit was increased to $70.7 million on April 3, 2017.

The line of credit requires us to satisfy one financial covenant. The covenant and its respective status at ~~June 30, 2016~~March 31, 2017 was as follows:



Covenant Description and Requirement		~~Status at June 30, 2016~~As of March 31, 2017
Funded debt ⁽¹⁾ to EBITDA⁽²⁾ ratio: less than 3.00 to 1.00		~~0.69 to 1.00~~0.51


⁽¹⁾	All indebtedness for borrowed money, including but not limited to, capitalized lease obligations, reimbursement obligations in respect of letters of credit and guaranties of any such indebtedness.


⁽²⁾	Net income plus interest expense, income tax expense, depreciation, amortization and extraordinary non-recurring losses/gains.

As noted above, we were in compliance with our financial covenant at ~~June 30, 2016~~March 31, 2017 and we expect to remain in compliance. The line of credit expires on December 18, 2018.

~~Cash Flows from Operating Activities~~

~~Cash flows from operating activities are primarily driven by earnings, excluding the impact of non-cash items, the timing of cash receipts and disbursements, and changes in working capital items.~~

The net cash provided by our operating activities was $20,211,000 for the six months ended June 30, 2016. The principal source of net cash flows from operating activities for the period was net income of $37,386,000, adjusted for non-cash charges to operations for depreciation and amortization, provision for bad debts, deferred income taxes and stock-based compensation, which totaled $10,694,000. Cash was also provided by decreases in accrued payroll and accrued and withheld payroll taxes of $9,329,000, income taxes payable of $7,098,000 and accrued insurance claims of $4,448,000. These sources of cash were partially offset by increases in accounts and notes receivable of $43,190,000, prepaid expenses and other assets of $4,787,000 and inventories and supplies of $1,295,000.

~~Cash Flows from Investing Activities~~

~~Cash flows from investing activities are related to capital expenditures and our investments in marketable securities.~~

The net cash used in our investing activities for the six months ended June 30, 2016 was $11,171,000, related to $8,344,000 of net purchases of marketable securities and $2,954,000 for the purchase of property and equipment. See “Capital Expenditures” below.

~~Cash Flows from Financing Activities~~

~~Cash flows from financing activities relate primarily to dividends paid and proceeds from the exercise of stock options.~~

The net cash used in financing activities during the six months ended June 30, 2016 was primarily related to $26,451,000 in dividend payments, partially offset by proceeds of $4,777,000 from the exercise of stock options by employees and directors. Additionally, as a result of tax deductions derived from the stock option exercises, we recognized an income tax benefit of $1,107,000.

The dividends paid to shareholders during the six months ended June 30, 2016 were funded by the existing cash, cash equivalents and marketable securities held by the Company. At June 30, 2016 and December 31, 2015, we had $100,638,000 and $102,685,000, respectively, in cash, cash equivalents and marketable securities. Our Board of Directors reviews our dividend policy on a quarterly basis. Although there can be no assurance that we will continue to pay dividends or the amount of the dividend, we expect to continue to pay a regular quarterly cash dividend. In connection with the establishment of our dividend policy, we adopted a Dividend Reinvestment Plan in 2003.

Accounts and Notes Receivable

We expend considerable effort to collect the amounts due for our services on the terms agreed upon with our clients. Many of our clients participate in programs funded by federal and state governmental agencies which historically have encountered delays in

~~Table of Contents~~

making payments to their program participants. Whenever possible, when a client falls behind in making agreed-upon payments to us, we convert the unpaid accounts receivable to interest bearing promissory notes. The promissory notes receivable provide a means by which to further evidence the amounts owed and provide a definitive repayment plan and therefore may ultimately enhance our ability to collect the amounts due. At ~~June 30, 2016~~March 31, 2017 and December 31, ~~2015,~~2016, we had ~~$16,299,000~~$18.4 million and ~~$16,830,000,~~$19.2 million, net of reserves, respectively, of such promissory notes outstanding. Additionally, we consider restructuring service agreements from full service to management-only service in the case of certain clients experiencing financial difficulties. We believe that such restructurings may provide us with a means to maintain a relationship with the client while at the same time minimizing collection exposure.

We have had varying collections experience with respect to our accounts and notes receivable. When contractual terms are not met, we generally encounter difficulty in collecting amounts due from certain of our clients. Therefore, we have sometimes been required to extend the period of payment for certain clients beyond contractual terms. These clients include those who have terminated service agreements and slow payers experiencing financial difficulties. In order to provide for these collection problems and the general risk associated with the granting of credit terms, we have recorded bad debt provisions (in an Allowance for Doubtful Accounts) of ~~$2,150,000 and $1,675,000~~$1.1 million for the ~~six~~three months ended ~~June 30, 2016~~March 31, 2017 and ~~2015, respectively.~~2016. As a percentage of total revenues, these provisions represent approximately 0.3% ~~and 0.2%~~ for ~~the respective~~both periods. In making our credit evaluations, in addition to analyzing and anticipating, where possible, the specific cases described above, we consider the general collection risk associated with trends in the long-term care industry. We also establish credit limits, perform ongoing credit evaluation and monitor accounts to minimize the risk of loss. Notwithstanding our efforts to minimize credit risk exposure, our clients could be adversely affected if future industry trends change in such a manner as to negatively impact their cash flows. If our clients experience a negative impact in their cash flows, it would have a material adverse effect on our results of operations and financial condition.

Capital Expenditures

Table of Contents

The 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, ~~and~~ computer hardware and ~~software.~~software, and furniture and fixtures. Although we have no specific material commitments for capital expenditures through the end of calendar year ~~2016,~~2017, we estimate that for ~~the remainder of 2016~~2017 we will have capital expenditures of approximately ~~$2,250,000~~$4.5 million to $3,000,000 in connection with housekeeping equipment purchases and laundry and linen equipment installations in our clients’ facilities, as well as expenditures relating to internal data processing hardware and software requirements, computer equipment and office equipment.$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 ~~if necessary,~~ seek to obtain necessary ~~working~~ 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 previously discussed.

2723

Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk

At ~~June 30, 2016~~,March 31, 2017, we had ~~$100,638,000~~$116.5 million in cash, cash equivalents and marketable securities. The fair ~~value~~values of all of our cash equivalents and marketable securities is determined based on “Level 1” or “Level 2” inputs, which are based upon quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. We place our cash investments in instruments that meet credit quality standards, as specified in our investment policy guidelines.

Investments in both fixed-rate and floating-rate investments carry a degree of interest rate risk. Fixed rate securities may have their market value 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.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are intended to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934 (the “Exchange Act”), such as this Form 10-Q, is reported in accordance with Securities and Exchange Commission rules. Disclosure controls are also intended to ensure that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Based on their evaluation as of ~~June 30, 2016~~,March 31, 2017, pursuant to Exchange Act Rule 13a-15(b), our management, including our Chief Executive Officer and Chief Financial Officer, believe our disclosure controls and procedures (as defined in Exchange Act

13a-15(e)) are effective.

Changes in Internal Controls over Financial Reporting

In connection with the evaluation pursuant to Exchange Act Rule 13a-15(d) of our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) by our management, including our Chief Executive Officer and Chief Financial Officer, no changes during the quarter ended ~~June 30, 2016~~March 31, 2017 were identified that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Certifications

Certifications of the Principal Executive Officer and Principal Financial and Accounting Officer regarding, among other items, disclosure controls and procedures are included as exhibits to this Form 10-Q.

2824

Table of Contents

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There has been no material change in the risk factors set forth in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2015.~~2016.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

The following exhibits are filed as part of this Report:



Exhibit Number		Description
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
32.1		Certification of the Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
101		The following financial information from the ~~Company's~~Company’s Form 10-Q for the quarterly period ended ~~June 30, 2016~~March 31, 2017 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statement of ~~Stockholders'~~Stockholders’ Equity, and (v) Notes to Consolidated Financial Statements

2925

Table of Contents

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		HEALTHCARE SERVICES GROUP, INC.

Date:	~~July 22, 2016~~April 28, 2017	/s/ Theodore Wahl
		Theodore Wahl
		President & Chief Executive Officer
		(Principal Executive Officer)

Date:	~~July 22, 2016~~April 28, 2017	/s/ John C. Shea
		John C. Shea
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

3026



	For the Six Months Ended June 30, 2016
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income, net of taxes		Retained Earnings			Treasury Stock			Stockholders’ Equity
	Shares	Amount
Balance — December 31, 2015	73,793,000	$	738,000	$	199,294,000	$	543,000	$	106,886,000		$	(11,005,000	)	$	296,456,000
Comprehensive income:
Net income for the period								37,386,000						37,386,000
Unrealized gain on available for sale marketable securities, net of taxes						1,133,000								1,133,000
Comprehensive income														38,519,000
Exercise of stock options and other stock-based compensation, net of shares tendered	245,000	3,000		4,774,000										4,777,000
Tax benefit from equity compensation plans				897,000										897,000
Share-based compensation expense — stock options and restricted stock				1,878,000										1,878,000
Treasury shares issued for Deferred Compensation Plan funding and redemptions				513,000							21,000			534,000
Shares issued pursuant to Employee Stock Purchase Plan				1,696,000							371,000			2,067,000
Cash dividends								(26,451,000		)				(26,451,000		)
Shares issued pursuant to Dividend Reinvestment Plan				182,000							(125,000		)	57,000
Shares issued pursuant to settlement	113,000	1,000		3,999,000										4,000,000
Balance — June 30, 2016	74,151,000	$	742,000	$	213,233,000	$	1,676,000	$	117,821,000		$	(10,738,000	)	$	322,734,000



	Stock Options
Range of exercise prices	$10.39 - $34.14
Outstanding:
Weighted average remaining contractual life (years)	6.7
Aggregate intrinsic value	$	45,605,000
Exercisable:
Number of shares	1,230,000
Weighted average remaining contractual life (years)	4.9
Aggregate intrinsic value	$	28,105,000
Exercised:
Aggregate intrinsic value	$	3,874,000



	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2016		2015		2016		2015
Cash dividends per common share	$	0.18	$	0.18	$	0.36	$	0.36



	For the Three Months Ended June 30, 2015
	Consolidated		Corporate & Eliminations			Housekeeping		Dietary
Revenues	$	355,356,000	$	—		$	226,965,000	$	128,391,000
Costs of services provided	304,217,000		(21,523,000		)	205,213,000		120,527,000
Selling, general and administrative expense	25,124,000		25,124,000			—		—
Investment and interest income	242,000		242,000			—		—
Income before income taxes	$	26,257,000	$	(3,359,000	)	$	21,752,000	$	7,864,000