SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(State or other jurisdiction of

incorporation or organization)

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

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.

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: ~~73,273,000~~73,712,000 shares outstanding as of ~~October 26, 2017~~April 25, 2018.

Healthcare Services Group, Inc.

For the Period Ended ~~September 30, 2017~~March 31, 2018

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report and documents incorporated by reference into ~~this report~~it may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, and our beliefs and assumptions. Words such as “believes,” “anticipates,” “plans,” “expects,” “will,” “goal,” and similar expressions are intended to identify forward-looking statements. The inclusion of forward-looking statements should not be regarded as a representation by us that any of our plans will be achieved. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Such forward-looking information is also subject to various risks and uncertainties. Such risks and uncertainties include, but are not limited to, risks arising from our providing services exclusively to the ~~health care~~healthcare industry, primarily providers of long-term care; having ~~one client which accounted for approximately 16% and another client which accounted for approximately 9%~~a significant portion of our ~~total~~ consolidated revenues ~~for~~contributed by one customer during the ~~nine~~three months ended ~~September 30, 2017;~~March 31, 2018; credit and collection risks associated with ~~this~~the healthcare industry; our claims experience related to workers’ compensation and general liability insurance; the effects of changes in, or interpretations of laws and regulations governing the healthcare industry, our workforce and services provided, including state and local regulations pertaining to the taxability of our services and other labor-related matters such as minimum wage increases; continued realization of tax benefits arising from our corporate reorganization and self-funded health insurance program; risks associated with the reorganization of our corporate structure; realization of our expectations regarding the impact of the Tax Cuts and Jobs Act on our financial results; and the risk factors described in Part I of our Form 10-K for the fiscal year ended December 31, ~~2016~~2017 under “Government Regulation of Clients,” “Competition” and “Service Agreements and Collections,” and under Item IA. “Risk Factors” in such Form ~~10-K and in this Form 10-Q.~~10-K.

These factors, in addition to delays in payments from clients and/or clients in bankruptcy or clients with which we are in litigation to collect payment, have resulted in, and could continue to result in, significant additional bad debts in the near future. Additionally, our operating results would be adversely affected if unexpected increases in the costs of labor and labor-related costs, materials, supplies and equipment used in performing services could not be passed on to our clients.

In addition, we believe that to improve our financial performance we must continue to obtain service agreements with new clients, retain and provide new services to existing clients, achieve modest price increases on current service agreements with existing clients and maintain internal cost reduction strategies at our various operational levels. Furthermore, we believe that our ability to sustain the internal development of managerial personnel is an important factor impacting future operating results and the successful execution of our projected growth strategies.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

See accompanying notes.

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

Income taxes payable⁽¹⁾

Tax benefit from equity compensation plans ⁽¹⁾

⁽¹⁾~~The Company adopted the provisions of ASU 2016-09 prospectively, and as such the amounts reflected for the nine months ended September 30, 2016 have not been adjusted.~~

See accompanying notes.

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~~healthcare industry, including nursing homes, retirement complexes, rehabilitation centers and hospitals located throughout the United States. Although the Company does not directly participate in any government reimbursement programs, the Company’s clients receive government reimbursements related to Medicare and Medicaid. Therefore, they are directly affected by any legislation relating to Medicare and Medicaid reimbursement programs.

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

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

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

Dietary consists of managing the clients’ dietary departments which are principally responsible for food purchasing, meal preparation and dietitian professional services, which includes the development of menus that meet 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 (“U.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 the Company’s 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, ~~2016~~2017 has been derived from, and does not include, all of the disclosures contained in the financial statements for the year ended December 31, ~~2016.~~2017. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017. The results of operations for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 are not necessarily indicative of the results that may be expected for any future period.

~~Certain amounts~~Use of Estimates in ~~the prior year~~Financial Statements

In preparing financial statements ~~have been reclassified~~in conformity with U.S. GAAP, estimates and assumptions are made 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, ~~conform~~the Company’s allowance for doubtful accounts, accrued insurance claims, 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. Management regularly evaluates this information to ~~current presentation.~~determine if it is necessary to update the basis for its estimates and to adjust for known changes.

Principles of Consolidation

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

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.

8Accounts and Notes Receivable

Accounts and notes receivable consist of Housekeeping and Dietary segment receivables from contracts with customers. Accounts receivables initially are recorded at the transaction amount, and recorded after the Company has an unconditional right to payment where only the passage of time is required before payment is received. Each reporting period, the Company evaluates the collectability of outstanding receivable balances and records an allowance for doubtful accounts representing an estimate of probable losses. Additions to the allowance for doubtful accounts are made by recording a charge to bad debt expense reported in costs of services provided.

~~Table~~Notes receivable are initially recorded as an alternative to accounts receivable to enhance the collectability of ~~Contents~~amounts due, by providing a definitive repayment plan and providing a means by which to further evidence the amounts owed.

Refer to Note 3— Accounts and Notes Receivable herein for further information.

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 the Company’s service agreements with ~~clients~~customers are recognized when or as we transfer control of the promised goods and services ~~are performed.~~to our customers. Revenues are reported net of sales taxes that are collected from customers and remitted to taxing authorities.

The guidance under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification subtopic 606 Revenue from Contracts with Customers (“ASC 606”) became effective and was adopted by the Company as of January 1, 2018, by applying the modified retrospective method for contracts that were not completed as of January 1, 2018. The standard requires the Company to recognize revenue as the promised goods and services within the terms of the Company’s contracts are performed and satisfied. The amount of revenue which the Company recognizes is based on the consideration which the Company expects to be entitled to in exchange for contracted promised goods and services. The adoption of this standard did not have a material impact to the Company's accounting for revenue earned relating to the Housekeeping and Dietary department services. The Company also did not recognize an opening adjustment to retained earnings as a result of the adoption of the standard. See Note 2—Revenue herein for additional revenue disclosure that is being presented as a result of the newly adopted standard.

Prior period amounts were not adjusted and continue to be reported in accordance with previous guidance.

Income Taxes

The Company uses 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. The Company accrues 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 financial reporting and tax ~~bases~~basis 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 the Company’s financial statements based on a recognition and measurement process.

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Earnings per Common Share

Basic earnings per common share is 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 is calculated using the weighted-average number of common shares outstanding and dilutive common shares, such as those issuable upon exercise of stock options and upon the vesting of restricted stock and restricted stock units.

Share-Based Compensation

The Company estimates the fair value of share-based awards on the date of grant using the Black-Scholes valuation model for stock options and using the share price on the date of grant for restricted stock and restricted stock units. The value of the award is recognized ratably as an expense in the Company’s Consolidated Statements of Comprehensive Income over the requisite service periods, with adjustments made for forfeitures as they occur.

~~Use~~As of ~~Estimates in Financial Statements~~

~~In preparing financial statements in conformity with U.S. GAAP, estimates and assumptions are made that affect~~January 1, 2017, 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, the Company’s allowance for doubtful accounts, accrued insurance claims, 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. Management regularly evaluates this information to determine if it is necessary to update the basis for its estimates and to adjust for known changes.

~~Concentrations of Credit Risk~~

The financial instruments that are subject to concentrations of credit risk are cash and cash equivalents, marketable securities, deferred compensation funding and accounts and notes receivable. The Company’s marketable securities are fixed income investments which are highly liquid and can be readily purchased or sold through established markets. At September 30, 2017 and December 31, 2016, substantially all of the Company’s cash and cash equivalents and marketable securities were held in one large financial institution located in the United States.

The Company’s clients are concentrated in the health care industry and are primarily providers of long-term care. The revenues of many of the Company’s clients are highly reliant on Medicare, Medicaid and third party payors’ reimbursement funding rates. New legislation or changes in existing regulations could be made which could directly impact the governmental reimbursement

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programs in which the clients participate. The full effect of any such programs would not be realized until these laws are fully implemented and governmental agencies issue applicable regulations or guidance.

~~Recent Accounting Pronouncements~~

~~In March 2016, the Financial Accounting Standards Board (“FASB”)~~Company adopted 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 impact of adopting the standard ~~includes~~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 changes the definition of a business to assist entities in evaluating whether a set of transferred assets~~Identifiable Intangible Assets and activities constitutes a business under Topic 805. The guidance is effective for annual periods beginning after December 15, 2017, with early adoption permitted. The Company plans to adopt the standard effective January 1, 2018.Goodwill

~~In May 2014,~~Identifiable intangible assets are amortized on a straight-line basis over their respective lives. Goodwill represents the ~~FASB issued ASU 2014-09,~~ ~~Revenue from Contracts with Customers~~,excess of cost over the fair value of net assets of acquired businesses. Management reviews the carrying value of goodwill at least annually during the fourth quarter of each year to assess for impairment, or more often if events or circumstances indicate that the carrying value may exceed its estimated fair value. No impairment loss was recognized on the Company’s intangible assets or goodwill during the three months ended March 31, 2018.

Reclassification

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

Concentrations of Credit Risk

The financial instruments that are subject to concentrations of credit risk are cash and cash equivalents, marketable securities, deferred compensation funding and accounts and notes receivable. The Company’s marketable securities are fixed income investments which ~~was subsequently amended~~are highly liquid and ~~updated throughout 2015~~can be readily purchased or sold through established markets. At March 31, 2018 and ~~2016.~~ December 31, 2017, substantially all of the Company’s cash and cash equivalents and marketable securities were held in one large financial institution located in the United States.

The ~~standard provides guidance~~Company’s clients are concentrated in the healthcare industry and are primarily providers of long-term care. The revenues of many of the Company’s clients are highly reliant on ~~revenue recognition, among other topics such as~~Medicare, Medicaid and third party payors’ reimbursement funding rates. New legislation or changes in existing regulations could directly impact 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~~governmental reimbursement programs in ~~an amount that reflects the consideration to~~ which the ~~entity expects to be entitled in exchange for those goods~~clients participate. As a result, the Company may not know the full effects of such programs until these laws are fully implemented and governmental agencies issue applicable regulations or services. Adoption is 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 utilizing the modified retrospective method. The Company has evaluated the impact of the adoption of this ASU by reviewing the nature and terms of existing contracts under the provisions of the new guidance and designing operational and process updates required for ongoing compliance. Management does not expect a material impact to the Company's accounting for the revenue earned related to its Housekeeping and Dietary department services. Management anticipates that the most significant impact of the new standard will relate to additional disclosure obligations.guidance.

Recent Accounting Pronouncements

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. Management is continuing to evaluate the ~~expected impact of the~~ requirements, however it is expected that the primary ~~impact~~impacts will relate to the capitalization of operating leases of office space, vehicles and equipment.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. ASU 2017-04 requires companies to no longer perform a hypothetical purchase price allocation to measure impairment, eliminating step 2 of the goodwill impairment test. Instead, impairment will be measured using the difference of the carrying amount to the fair value of Goodwill on a reporting

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unit basis. The guidance is effective for annual reporting periods beginning after December 15, 2019, but early adoption is permitted. The Company has elected to early adopt ASU 2017-04 for the 2018 annual evaluation which will be performed during the fourth quarter.

Note 2—Revenue

The Company disaggregates its consolidated revenues by reportable segment, as Management evaluates the nature, amount, timing and uncertainty of the Company’s revenues by segment. Refer to Note 13—Segment Information herein as well as the information below regarding the Company’s reportable segments.

Housekeeping

Housekeeping accounted for approximately 49.1%, or $246.4 million, and 60.2%, or $243.4 million, of the Company’s consolidated revenues for the three months ended March 31, 2018 and 2017, respectively. The services provided under this segment include managing clients’ housekeeping departments, which are principally responsible for the cleaning, disinfecting and sanitizing of resident rooms and common areas of the clients’ facilities, as well as the laundering and processing of the bed linens, uniforms, resident personal clothing and other assorted linen items utilized at the clients’ facilities. Upon beginning service with a client facility, the Company will typically hire and train the employees previously employed by such facility and assign an on-site manager to supervise and train the front-line personnel and coordinate housekeeping services with other facility support functions in accordance with client requests. Such management personnel also oversee the execution of various cost- and quality-control procedures including continuous training and employee evaluation, and on-site testing for infection control.

Dietary

Dietary services represented approximately 50.9%, or $255.4 million, and 39.8%, or $161.1 million, of the Company’s consolidated revenues for the three months ended March 31, 2018 and 2017, respectively. Dietary services consist of managing clients’ dietary departments which are principally responsible for food purchasing, meal preparation and professional dietitian services, which include the development of menus that meet the dietary needs of residents. On-site management is responsible for all daily dietary department activities, with regular support being provided by a District Manager specializing in dietary services, as well as a registered dietitian. The Company also offers clinical consulting services to facilities which if contracted is a service bundled within the monthly service provided to clients.

Revenue Recognition

Substantially all of the Company's revenues are derived from contracts with customers. The Company accounts for revenue from contracts with customers in accordance with ASC 606, and as such, the Company recognizes revenue to depict the transfer of promised goods and services to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods and services. The Company’s costs of obtaining contracts are not material.

The Company performs services and provides goods in accordance with contracts with its customers. Such contracts typically provide for a renewable one year service term, cancelable by either party upon 30 to 90 days' notice, after an initial period of 60 to 120 days. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is defined as the unit of account under ASC 606. The Company’s Housekeeping and Dietary contracts relate to the provision of bundles of goods, services or both, which represent a series of distinct goods and services and that are substantially the same and that have the same pattern of transfer to the customer. Accordingly, the Company accounts for the series as a single performance obligation satisfied over time, as the customer simultaneously receives and consumes the benefits of the goods and services provided. Revenue is recognized using the output method, which is based upon the delivery of goods and services to the clients’ facilities. In limited cases, the Company provides goods, services or both, before the execution of a written contract. In these cases, the Company defers the recognition of revenue until a contract is executed. The amount of such deferred revenue was not material as of and for the three months ended March 31, 2018.

The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to its customers. The transaction price does not include taxes assessed or collected. The Company’s contracts detail the fees that the Company charges for the goods and services it provides. For certain contracts which contain a variable component to the transaction price, the Company is required to make estimates of the amount of consideration to which the Company will be entitled, based on variability in resident and patient populations serviced, product usage or quantities consumed. The Company recognizes revenue related to such estimates only when Management determines that there will not be a significant reversal in the amount of revenue recognized. The Company’s contracts generally do not contain significant financing components, as the contracts contain payment terms that are less than one year.

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The Company allocates the transaction price to each performance obligation, noting that the bundle of goods, services or goods and services provided under each Housekeeping and Dietary contract represents a single performance obligation that is satisfied over time. The Company recognizes the related revenue when it satisfies the performance obligation by transferring a bundle of promised goods, services or both to a customer. Such recognition is on a monthly or weekly basis, as goods are provided and services are performed. In some cases, the Company requires customers to pay in advance for goods and services to be provided. However, as of March 31, 2018, the value of the associated contract liabilities was not material.

Transaction Price Allocated to Remaining Performance Obligations

The Company recognizes revenue as it satisfies the performance obligations associated with contracts with customers, which due to the nature of the goods and services provided by the Company, are satisfied over time. Contracts may contain transaction prices that are fixed, variable or both. The significant majority of the Company’s contracts with is customers have an initial term of one year or less, with renewable one year service terms, cancelable by either party upon 30 to 90 days’ notice after an initial period of 60 to 120 days. For the purpose of disclosing the transaction price allocated to remaining performance obligations, the Company elected to apply practical expedients available under the guidance in ASC 606 to exclude from the calculation future revenues expected for the performance of services under contracts with variable consideration that are for a term of one year or less. Although only a small portion of the Company’s contracts have an original expected duration that exceeds 12 months, the Company has historically had, and expects to continue to have, favorable client retention rates. As of March 31, 2018, the revenue expected to be recognized associated with the fixed transaction price associated with the remaining performance obligations under the Company’s existing contracts with a term greater than one year is $220.1 million for the remainder of 2018, $293.5 million for 2019, $293.6 million for 2020, $293.7 million for 2021, $291.2 million for 2022 and $363.8 million thereafter.

Note 3— Accounts and Notes Receivable

The Company’s accounts and notes receivable balances consisted of the following as of March 31, 2018 and December 31, 2017:



	March 31, 2018			December 31, 2017
	(in thousands)
Short-term
Accounts and notes receivable	$	383,919		$	390,705
Allowance for doubtful accounts	(48,905		)	(11,985		)
	$	335,014		$	378,720
Long-term
Notes receivable	$	38,814		$	15,476
Total accounts and notes receivable	$	373,828		$	394,196

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

The Company’s net current accounts and notes receivable balance decreased from December 31, 2017. Fluctuations in net accounts and notes receivable are generally attributable to a variety of factors including, but not limited to, the timing of cash receipts from customers and the inception, transition or termination of client relationships. However, in the first quarter 2018, the Company offset its accounts and notes receivable with an increased allowance for doubtful accounts related primarily to corporate restructurings of two privately-held, multi-state operators that occurred during the first quarter 2018. In addition, the Company converted approximately $25 million of accounts receivable to long-term notes receivable, related to the achievement of key operational and financial milestones related to the 2017 dining and nutrition expansion with Genesis HealthCare.

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

The Company deploys significant resources and has invested in tools and processes to optimize Management’s credit and collections efforts. When appropriate, the Company utilizes interest-bearing promissory notes as an alternative to accounts receivable to

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enhance the collectability of amounts due, by instituting a definitive repayment plan and providing a means by which to further evidence the amounts owed. As of March 31, 2018 and December 31, 2017, the Company had $60.9 million and $36.6 million, net of reserves, respectively, of such promissory notes outstanding. In addition, the Company may assist clients who are adjusting to changes in their cash flows by amending the Company’s agreements from full-service to management-only arrangements, or by modifying contractual payment terms to accommodate clients who have in good faith established clearly-defined plans for addressing cash flow issues. These efforts are intended to minimize the Company’s collections risk while maintaining relationships with the clients.

Note 4— Allowance for Doubtful Accounts

The allowance for doubtful accounts is established when the Company determines that it is probable that receivables have been impaired and the Company can reasonably estimate the amount of the losses. The related provision for bad debts is charged to costs of services provided in the Company’s Consolidated Statements of Comprehensive Income. The allowance for doubtful accounts is evaluated based on the Company’s ongoing review of accounts and notes receivable and is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The Company has had varying collections experience with respect to its accounts and notes receivable. The Company has sometimes extended the period of payment for certain clients beyond contractual terms. Such clients include those who have terminated service agreements and slow payers experiencing financial difficulties. In order to provide for such collection issues and the general risk associated with the granting of credit terms, the Company recorded bad debt provisions (in an Allowance for Doubtful Accounts) of $37.1 million and $1.1 million for the three months ended March 31, 2018 and 2017, respectively. The increase in the provision for bad debts period-over-period is primarily related to corporate restructurings of two privately-held, multi-state operators that occurred during the first quarter 2018.

In making the Company’s credit evaluations, in addition to analyzing and anticipating, where possible, the specific cases described above, management considers the general collection risk associated with trends in the long-term care industry. The Company establishes credit limits, performs ongoing credit evaluations and monitors accounts to minimize the risk of loss. Despite the Company’s efforts to minimize credit risk exposure, clients could be adversely affected if future industry trends change in such a manner as to negatively impact their cash flows. If the Company’s clients experience a negative impact on their cash flows, it could have a material adverse effect on the Company’s results of operations and financial condition.

Impaired Notes Receivable

The Company evaluates its notes receivable for impairment quarterly and on an individual client basis. Notes receivable are generally evaluated for impairment when the respective clients are either in bankruptcy, are subject to collections activity or are slow payers that are experiencing financial difficulties. In the event that the evaluation results in a determination that a note receivable is impaired, it is valued at the present value of expected future cash flows or at the market value of related collateral. A summary schedule of impaired notes receivable, and the related reserve, for the three months ended March 31, 2018 is as follows:



	Impaired Notes Receivable
	Balance December 31, 2017		Additions		Deductions		Balance March 31, 2018
	(in thousands)
Impaired Notes Receivable	$	6,854	$	150	$	—	$	7,004
Reserve for Impaired Notes Receivable	$	2,884	$	2,752	$	—	$	5,636

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Note 5—Changes in Accumulated Other Comprehensive Income by Component

Accumulated other comprehensive income consists of unrealized gains and losses from the Company’s available-for-sale marketable securities. The following table provides a summary of the changes in accumulated other comprehensive income for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 and ~~2016:~~2017:

Unrealized Gains and Losses on Available-for-Sale Securities⁽¹⁾
Nine Months Ended September 30,
2017 2016
(in thousands)
Accumulated other comprehensive income (loss) — beginning balance $ (319 ) $ 543
Other comprehensive income before reclassifications 1,162
909
Losses (gains) reclassified from other comprehensive income 1
(144 )
Net current period other comprehensive income⁽²⁾
1,163
765
Accumulated other comprehensive income — ending balance $ 844
$ 1,308



	Unrealized Gains and Losses on Available-for-Sale Securities⁽¹⁾
	Three Months Ended March 31,
	2018			2017
	(in thousands)
Accumulated other comprehensive income (loss) — beginning balance	$	837		$	(319	)
Other comprehensive (loss) income before reclassifications	(1,208		)	446
Losses reclassified from other comprehensive income⁽²⁾	70			33
Net current period other comprehensive (loss) income⁽³⁾	(1,138		)	479
Accumulated other comprehensive (loss) income — ending balance	$	(301	)	$	160


⁽¹⁾	All amounts are net of tax.

⁽²⁾

Realized losses were recorded pre-tax under “Other income, net - Investment and interest” in our Consolidated Statements of Comprehensive Income. For the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and 2017, the Company recorded $89 thousand and ~~2016, these~~$48 thousand, respectively of realized losses from the sale of available for sale securities. Refer to Note 8—Fair Value Measurements herein for further information.


⁽³⁾	For the three months ended March 31, 2018 and 2017, the changes in other comprehensive income were net of a tax ~~effects~~benefit of ~~$0.6~~$0.3 million and ~~$0.4~~an expense of $0.5 million, respectively.

Amounts reclassified from accumulated other comprehensive income (loss) represent realized gains or losses on the sale of the Company’s available-for-sale securities. Realized gains and losses are recorded pre-tax within “Other income - Investment and interest” in the Consolidated Statements of Comprehensive Income. Refer to Note 5 - Fair Value Measurements for further information. The table below shows the reclassification adjustments out of accumulated other comprehensive income (loss) for the ~~three and nine~~ ~~months ended~~ ~~September 30, 2017~~ ~~and~~ ~~2016~~:

Amounts Reclassified from Accumulated Other Comprehensive Income
2017 2016
(in thousands)
Three Months Ended September 30,
Gains (losses) from the sale of available-for-sale securities $ 171
$ (17 )
Tax expense (benefit) $ (54 ) $ 8
Net gain (loss) reclassified from accumulated other comprehensive income $ 117
$ (9 )
Nine Months Ended September 30,
Gains (losses) from the sale of available-for-sale securities $ (2 ) $ 226
Tax expense (benefit) $ 1
$ (82 )
Net gain (loss) reclassified from accumulated other comprehensive income $ (1 ) $ 144



	Amounts Reclassified from Accumulated Other Comprehensive Income
	Three Months Ended March 31,
	2018			2017
	(in thousands)
Losses from the sale of available-for-sale securities	$	(89	)	$	(48	)
Tax benefit	19			15
Net loss reclassified from accumulated other comprehensive income	$	(70	)	$	(33	)

Note 3—6—Property and Equipment

Property and equipment are recorded at cost. Depreciation is recorded over the estimated useful life of each class of depreciable asset, 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.

~~Table of Contents~~

The following table sets forth the amounts of property and equipment by each class of depreciable asset as of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016:~~2017:


	September 30, 2017		December 31, 2016		March 31, 2018		December 31, 2017
	(in thousands)				(in thousands)
Housekeeping and Dietary equipment	$	22,057	$	21,136	$	22,518	$	22,349
Computer hardware and software	12,381		11,750		12,803		12,665
Other ⁽¹⁾	988		1,133		989		990
Total property and equipment, at cost	35,426		34,019		36,310		36,004
Less accumulated depreciation	21,927		20,564		22,823		22,495
Total property and equipment, net	$	13,499	$	13,455	$	13,487	$	13,509

Depreciation expense for each of the three months ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~ was ~~$1.1~~$1.3 million. ~~Depreciation expense for the nine months ended September 30, 2017 and 2016 was $3.7 million and $3.5 million, respectively.~~

Note 4—7—Goodwill and Other Intangible Assets

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 -~~ 13—Segment Information, was approximately $42.4 million and $8.7 million for Housekeeping and Dietary, ~~respectively,~~ as of ~~September 30, 2017. At~~March 31, 2018 and December 31, ~~2016, goodwill by reportable operating segment was $42.3 million and $2.1 million for Housekeeping and Dietary,~~2017, respectively. ~~The increase in goodwill is related to the acquisition of certain Dietary-related assets during 2017.~~

The Company’s intangible assets consist of customer relationships which were obtained 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 9.9 years. As of ~~September 30, 2017,~~March 31, 2018, certain customer relationship intangible assets were fully amortized and the respective balances were written off. ~~The increase from year-end is related to the acquisition of certain Dietary-related assets during 2017.~~

The following table sets forth the estimated amortization expense for intangibles subject to amortization for the remainder of ~~2017,~~2018, the following five fiscal years and thereafter:

Amortization expense for the three months ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~ was ~~$1.0~~$1.1 million and $0.6 million, respectively. ~~Amortization expense for the nine months ended September 30, 2017 and 2016 was $2.7 million and $2.1 million, respectively.~~

Note 5—8—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 (other than marketable securities and inventories) 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. The carrying value of the Company’s line of credit represents the outstanding amount of the borrowings, which approximates fair value. The Company’s financial assets that are measured at fair value on a recurring basis are its marketable securities and deferred compensation funding. The recorded values of all of the 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 are classified as available-for-sale and are reported at fair value. Unrealized gains and losses associated with these investments are included in other comprehensive income (net of tax) within the 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 ~~September 30,~~March 31, 2018 and 2017, ~~and 2016,~~ the Company recorded unrealized ~~gains of $82 thousand and unrealized~~ losses of ~~$0.4~~$1.1 million ~~on marketable securities, respectively. For the nine months ended September 30, 2017~~ and ~~2016, the Company recorded~~ unrealized gains of ~~$1.2 million and $0.8~~$0.5 million on marketable securities, respectively.

For the three months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016,~~ the Company received total proceeds, less the amount of interest received, of ~~$5.7~~$2.4 million and ~~$3.0~~$7.5 million, respectively, from sales of available-for-sale municipal bonds. For the three months ended ~~September 30,~~March 31, 2018 and 2017, these sales resulted in realized ~~gains~~losses of ~~$171~~$89 thousand and $48 thousand, respectively which were recorded in ~~“Other~~

“Other income, net – Investment and interest” in the 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 September 30, 2016, there were $17 thousand in realized losses.~~

For the nine months ended September 30, 2017 and 2016, the Company received total proceeds, less the amount of interest received, of $20.2 million and $8.1 million, respectively, from sales of available-for-sale municipal bonds. For the nine months ended September 30, 2017, these sales resulted in realized losses of $2 thousand which were recorded in “Other income, net – Investment and interest” in the 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 nine months ended September 30, 2016, there were $226 thousand in realized gains.

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 fair value measurement information for the Company’s marketable securities and deferred compensation fund investments as of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016:~~2017:

As of September 30, 2017
Fair Value Measurement Using:
Carrying Amount Total Fair Value Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)
(in thousands)
Financial Assets:
Marketable securities
Municipal bonds — available-for-sale $ 70,384
$ 70,384
$ —
$ 70,384
$ —

Deferred compensation fund
Money Market⁽¹⁾
$ 2,378
$ 2,378
$ —
$ 2,378
$ —
Balanced and Lifestyle 8,181
8,181
8,181
—
—
Large Cap Growth 7,227
7,227
7,227
—
—
Small Cap Growth 3,359
3,359
3,359
—
—
Fixed Income 3,038
3,038
3,038
—
—
International 1,471
1,471
1,471
—
—
Mid Cap Growth 1,733
1,733
1,733
—
—
Deferred compensation fund $ 27,387
$ 27,387
$ 25,009
$ 2,378
$ —

Money Market ⁽¹⁾



	As of December 31, 2017
					Fair Value Measurement Using:
	Carrying Amount		Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Financial Assets:
Marketable securities
Municipal bonds — available-for-sale	$	73,221	$	73,221	$	—	$	73,221	$	—

Deferred compensation fund
Money Market ⁽¹⁾	$	2,720	$	2,720	$	—	$	2,720	$	—
Balanced and Lifestyle	8,523		8,523		8,523		—		—
Large Cap Growth	7,802		7,802		7,802		—		—
Small Cap Growth	3,442		3,442		3,442		—		—
Fixed Income	3,050		3,050		3,050		—		—
International	1,531		1,531		1,531		—		—
Mid Cap Growth	1,817		1,817		1,817		—		—
Deferred compensation fund	$	28,885	$	28,885	$	26,165	$	2,720	$	—

The following table summarizes the contractual maturities of debt securities held at ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, which are classified as marketable securities in the Consolidated Balance Sheets:

Note 9— Stock-Based Compensation

The components of the Company’s stock-based compensation expense for the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016 is~~are as follows:

Total pre-tax stock-based compensation expense charged against income ⁽¹⁾

At ~~September 30, 2017,~~March 31, 2018, the unrecognized compensation cost related to unvested stock options and awards was ~~$12.7~~$18.8 million. The weighted average period over which these awards will vest is approximately ~~3.0~~3.2 years.

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.

As of ~~September 30, 2017, 3.4~~March 31, 2018, 3.0 million shares of common stock were reserved for issuance under the Plan, including ~~0.8~~0.5 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.

A summary of stock options outstanding under the Plan as of December 31, ~~2016~~2017 and changes during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 is as follows:

Stock Options Outstanding
Number of Shares Weighted Average Exercise Price
(in thousands)
December 31, 2016 2,615
$ 24.61
Granted 544
$ 39.38
Canceled (93 ) $ 33.66
Exercised (513 ) $ 20.39
September 30, 2017 2,553
$ 28.27



	Stock Options Outstanding
	Number of Shares		Weighted Average Exercise Price
	(in thousands)
December 31, 2017	2,374		$	29.22
Granted	169		$	52.06
Exercised	(177	)	$	28.19
Forfeited	(16	)	$	35.51
Expired	—		$	—
March 31, 2018	2,350		$	30.90

The weighted average grant-date fair value of stock options granted during the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and 2017 was $10.48 and ~~2016 was~~ $8.52 ~~and $7.46~~ per common share, respectively. The total intrinsic value of options exercised during the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~ was ~~$13.3~~$4.2 million and ~~$4.6~~$3.5 million, respectively.

The fair value of stock option awards granted in ~~2017~~2018 and ~~2016~~2017 was estimated on the date of grant using the Black-Scholes option valuation model ~~using~~with the following assumptions:

Nine Months Ended
2017 2016
Risk-free interest rate 2.0 % 2.0 %
Weighted average expected life (years) 5.8 years
5.8 years
Expected volatility 25.1 % 26.0 %
Dividend yield 1.9 % 2.0 %

~~Table of Contents~~



	Three Months Ended March 31,
	2018		2017
Risk-free interest rate	2.1	%	2.0	%
Weighted average expected life	5.8 years		5.8 years
Expected volatility	21.4	%	25.1	%
Dividend yield	1.5	%	1.9	%

The following table summarizes other information about the stock options at ~~September 30, 2017:~~March 31, 2018:

Restricted Stock and Restricted Stock Units

During the nine months ended September 30, 2017, the Company did not grant any restricted stock. During the nine months ended September 30, 2016, the Company granted 44 thousand shares of restricted stock with a weighted average grant dateThe fair value of ~~$34.14 per share. Fair value is~~outstanding restricted stock and restricted stock units was determined based on the market price of the shares on the date of grant.

~~A summary of~~ During the ~~outstanding restricted stock awards as of December 31, 2016 and changes during the nine~~three months ended ~~September 30, 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 —
$ —
September 30, 2017 56
$ 32.30

~~Restricted Stock Units~~

~~During the nine months ended September 30, 2017,~~March 31, 2018, the Company granted 88139 thousand restricted stock units with a weighted average grant date fair value of ~~$40.16~~$52.06 per unit. ~~Fair value is determined based on the market price of the underlying shares on the date of grant.~~ During the ~~nine~~three months ended ~~September 30, 2016, there were no grants of~~March 31, 2017, the Company granted 81 thousand restricted stock ~~units.~~units with a weighted average grant date fair value of $39.38 per share.

During the three months ended March 31, 2018 and 2017 the Company did not grant any restricted stock.

A summary of the outstanding restricted stock and stock units as of December 31, ~~2016~~2017 and changes during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 is as follows:

Units Weighted Average Grant Date Fair Value
(in thousands)
December 31, 2016 —
$ —
Granted 88
$ 40.16
Vested —
$ —
Forfeited —
$ —
September 30, 2017 88
$ 40.16

~~Table of Contents~~



	Restricted Stock and Restricted Stock Units
	Number of Restricted Shares/Units		Weighted Average Grant Date Fair Value
	(in thousands)
December 31, 2017	145		$	37.07
Granted	139		$	52.06
Vested	(34	)	$	35.16
Forfeited	(2	)	$	52.06
March 31, 2018	248		$	45.64

Employee Stock Purchase Plan

The Company's Employee Stock Purchase Plan ("ESPP") is currently available through 2021 to all eligible employees. All full-time and part-time employees who work an average of 20 hours per week and have completed two years of continuous service with the Company 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 4.1 million shares of its common stock to its employees. Pursuant to such authorization, there are 2.3 million shares available for future grant at ~~September 30, 2017.~~March 31, 2018.

The ~~stock-based compensation~~ expense associated with the options granted under the ESPP during the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~ was estimated on the date of grant using the Black-Scholes option valuation model ~~using~~with the following assumptions:

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 of a portion of their deferral in the form of the Company’s common stock based on the then-current market value. Under the SERP, the Company is authorized to issue 1.0 million shares of its common stock to its employees. Pursuant to such authorization, the Company has 0.4 million shares available for future grant at ~~September 30, 2017.~~March 31, 2018. At the time of issuance, such shares are accounted for at cost as treasury stock.

The following table summarizes information about the SERP during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 and ~~2016:~~2017:

SERP expense⁽¹⁾

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


⁽¹⁾	Both the SERP match and the deferrals are included in the selling, general and administrative caption in the Consolidated Statements of Comprehensive Income.

Note 7—10— Dividends

During the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, the Company paid a regular quarterly cash ~~dividends~~dividend totaling approximately ~~$41.3~~$14.1 million as follows:


	Quarter Ended						Quarter Ended
	March 31, 2017		June 30, 2017		September 30, 2017		March 31, 2018
	(in thousands, except per share amounts)						(in thousands, except per share data)
Cash dividends paid per common share	$	0.18625	$	0.18750	$	0.18875
Cash dividend paid per common share							$	0.19125
Total cash dividends paid	$	13,624	$	13,750	$	13,883	$	14,149
Record date	February 17, 2017		May 19, 2017		August 18, 2017		February 16, 2018
Payment date	March 24, 2017		June 23, 2017		September 22, 2017		March 23, 2018

Additionally, on ~~October~~April 17, ~~2017,~~2018, the Company’s Board of Directors declared a regular quarterly cash dividend of ~~$0.19~~$0.19250 per common share, which will be paid on ~~December 22, 2017,~~June 29, 2018, to shareholders of record as of the close of business on ~~November 17, 2017.~~May 25, 2018.

Cash dividends declared for the periods presented were as follows:

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Cash dividends declared per common share $ 0.19000
$ 0.18500
$ 0.56625
$ 0.55125



	Three Months Ended March 31,
	2018		2017
Cash dividends declared per common share	$	0.19250	$	0.18750

Note 8—11— Income Taxes

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018. During the first quarter of 2018, the Company recognized a benefit for income taxes of $1.5 million.

The ~~2017~~2018 estimated annual effective tax rate is expected to be approximately ~~31.9%~~22% to 24%. ~~Due to the adoption of ASU 2016-09,~~The actual annual effective tax rate will be impacted by the tax effects of option exercises or vested awards, ~~should be~~which are 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. ~~Excluding~~The impact on the ~~impact of ASU 2016-09,~~Company’s income tax benefit for the ~~estimated annual effective tax rate would be 35.6%.~~three months ended March 31, 2018 for such discrete items was approximately $1.1 million.

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 ~~2017~~2018 effective tax rate will likely vary from the estimate depending on the availability of tax credits and the ~~exercises~~exercise of stock options and vesting of share-based awards.

The Company accounts 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, the Company regularly evaluates the tax positions taken or expected to be taken resulting from financial statement recognition of certain items. Based on the evaluation, there are no significant uncertain tax positions requiring recognition in the Company’s financial statements. The evaluation was performed for the tax years ended December 31, 2013 through ~~2016~~2017 (with regard to U.S. federal income tax returns) and December 31, 2012 through ~~2016~~2017 (with regard to various state and local income tax returns), the tax years which remain subject to examination by major tax jurisdictions as of ~~September 30, 2017.~~March 31, 2018.

The Company may from time to time be assessed interest or penalties by taxing jurisdictions, although any such assessments historically have been minimal and immaterial to its financial results. When the Company has received an assessment for interest and/or penalties, it will be 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—12—Related Party Transactions

~~A director~~One of the directors of Company’s Board of Directors is ~~a member~~counsel of a law firm retained by the Company. In each of the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016,~~ fees paid to such firm by the Company did not exceed $120,000. Additionally, such fees did not exceed, in either period, 5% of such firm’s or the Company’s revenues.

Note ~~10—~~13—Segment Information

The Company manages and evaluates its operations in two reportable segments: Housekeeping (housekeeping, laundry, linen and other services) and Dietary (dietary department services). Although both segments serve the same client base and share many operational similarities, they are managed separately due to distinct differences in the type of services provided, as well as the specialized expertise required of the professional management personnel responsible for delivering each segment’s services. Such services are rendered pursuant to discrete 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 the information in the consolidated financial statements relate primarily to corporate level transactions and recording of transactions at the reportable segment level using 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 in the consolidated financial statements. In addition, most corporate expenses such as corporate salary and benefit costs, certain legal costs, bad debt expense, information technology costs, depreciation, amortization of finite-lived intangible assets, share based compensation costs and other corporate-specific costs, are not allocated to the operating segments. There are also allocations for workers’ compensation and general liability expense within the operating segments that differ from the actual expense recorded by the Company under U.S. GAAP. Segment amounts disclosed are prior to elimination entries made in consolidation.

Corporate and eliminations ⁽¹⁾

Note ~~11—~~14— 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 outstanding stock options and unvested restricted stock and restricted stock units. The table below reconciles the weighted-average basic and diluted common shares outstanding:

Effect of dilutive securities⁽¹⁾

Note ~~12—~~15— Other Contingencies

At ~~September 30, 2017,~~March 31, 2018, the Company had a $300 million bank line of credit on which to draw for general corporate purposes. Amounts drawn under the line of credit are payable upon demand and generally bear interest at ~~September 30, 2017,~~LIBOR plus 75 basis points (or if LIBOR becomes unavailable, the higher of the Prime Rate or the Overnight Bank Funding Rate plus 50 basis points). At March 31, 2018, there were ~~$25.0~~$26.0 million in borrowings under the line of credit. The line of credit requires the Company to satisfy one financial covenant, with which the Company is in compliance as of ~~September 30, 2017~~March 31, 2018 and expects to remain in compliance. The line of credit expires on December 18, ~~2018.~~2018, and although no assurances can be provided that the Company will renew the line of credit or secure other financing, the Company expects the line of credit to be renewed prior to expiration, or substituted with another form of financing.

At ~~September 30, 2017,~~March 31, 2018, the Company also had outstanding ~~$74.2~~$65.9 million in irrevocable standby letters of credit, which relate to payment obligations under the Company's insurance programs. In connection with the issuance of the letters of credit, the amount available under the line of credit was reduced by ~~$74.2~~$65.9 million to ~~$200.8~~$208.1 million at ~~September 30, 2017. The letters of credit were increased to $77.6 million on October 2, 2017.~~March 31, 2018.

Tax Jurisdictions and Matters

The Company provides services throughout the continental United States and is subject to numerous state and local taxing jurisdictions. In the ordinary course of business, a jurisdiction may contest the Company’s reporting positions with respect to the application of its tax code to the Company’s services, which could result in additional tax liabilities.

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

The Company is 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 the Company becomes aware of such claims and legal actions, the Company records accruals for any exposures that are probable and estimable. If adverse outcomes of such claims and legal actions are reasonably possible, Management assesses materiality and provides 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

The Company’s clients are concentrated in the ~~health care~~healthcare industry and are primarily providers of long-term care. The revenues of many of the Company’s clients are highly reliant on Medicare, Medicaid and third party payors’ reimbursement funding rates. New legislation or additional changes in existing regulations could directly impact the governmental reimbursement programs in which the clients participate. The full effect of any such programs would not be realized until these laws are fully implemented and government agencies issue applicable regulations or guidance.

Note ~~13—~~16—Subsequent Events

The Company evaluated all subsequent events through the filing date of this Form 10-Q. There were no 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 when comparing financial statements period to period. We also intend to provide the primary factors that accounted for those changes, as well as a summary of how certain accounting principles affect our financial statements. In addition, we are providing information about the financial results of our two operating segments to further assist in understanding how these segments and their results affect our consolidated results of operations. This discussion should be read in conjunction with our financial statements as of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017 and the notes accompanying those financial statements.

We provide management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary service departments of ~~heath care providers,~~healthcare facilities, 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,~~nation, rendering such services to over 3,500 facilities throughout the continental United States as of September 30, 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.March 31, 2018.

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

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

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

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

At ~~September 30, 2017,~~March 31, 2018, Housekeeping services were provided at essentially all of our more than 3,500 client facilities, generating approximately ~~53.7%~~49.1% or ~~$733.7~~$246.4 million of our total revenues for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. Dietary ~~department~~ services were provided to over 1,500 client facilities at ~~September 30, 2017~~March 31, 2018 and contributed approximately ~~46.3%~~50.9% or ~~$633.0~~$255.4 million of our total revenues for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018.

Subject to the factors noted in the Cautionary Statement Regarding Forward Looking Statements included in this Quarterly Report on Form 10-Q, and although there can be no assurance thereof, we expect our consolidated revenues for the remainder of ~~2017~~2018 to continue to ~~improve compared to historical ranges.~~grow. We expect that Dietary revenues will continue to grow as a percentage of consolidated revenue and such growth is expected to come from extending our Dietary department service offerings to our current Housekeeping client base. Growth in Housekeeping is expected to primarily come from obtaining new clients. ~~Furthermore, we expect the sources of organic growth for the remainder of 2017 for the respective operating segments to be primarily the same as historically experienced.~~

Three Months Ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~

The following table summarizes the income statement key components that we use to evaluate our financial performance on a consolidated and reportable segment basis, for the three months ended ~~September 30, 2017~~March 31, 2018 and ~~2016.~~2017. The differences between the reportable segments’ operating results and other disclosed data and our consolidated financial results relate primarily to corporate level transactions and ~~recording of~~adjustments related to transactions recorded at the reportable segment level ~~using~~which use methods other than generally accepted accounting principles.

Housekeeping revenues represented approximately ~~50.3%~~49.1% of consolidated revenues for the ~~third~~first quarter ~~2017.~~2018. Dietary revenues represented approximately ~~49.7%~~50.9% of consolidated revenues for the ~~third~~first quarter ~~2017.~~2018.

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

Consolidated revenues increased ~~25.1%~~24.1% to ~~$491.4~~$501.8 million in the ~~third~~first quarter ~~2017~~2018 compared to ~~$392.7~~$404.5 million in the ~~third~~first quarter ~~2016,~~2017, as a result of the factors discussed below under Reportable Segments.

Housekeeping’s ~~3.3%~~1.2% net growth in reportable segment revenues resulted from service agreements entered into with new clients. Dietary’s ~~59.3%~~58.6% net growth in reportable segment revenues resulted primarily from providing these services to a greater number of existing Housekeeping clients.

Costs of Services Provided

Consolidated costs of services provided increased ~~26.9%~~36.0% to ~~$426.9~~$469.9 million in the ~~third~~first quarter ~~2017~~2018 compared to ~~$336.3~~$345.6 million in the ~~third~~first quarter ~~2016,~~2017, which is primarily related to our ~~25.1%~~24.1% growth in consolidated revenues for the same ~~period.~~period and charges recorded to bad debt expense during first quarter 2018 as a result of restructuring events primarily from two customers. As a percentage of consolidated revenues, costs of services provided increased to ~~86.9%~~93.6% in the ~~third~~first quarter ~~2017~~2018 from ~~85.6%~~85.4% in the ~~third~~first quarter ~~2016.~~2017.

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

The following table provides a comparison of key indicators we consider when managing the consolidated ~~cost~~costs of services provided:

Three Months Ended September 30,
Costs of Services Provided-Key Indicators as a % of Consolidated Revenue 2017 2016 Change
Bad debt provision 0.4% 0.3% 0.1%
Workers’ compensation and general liability insurance 2.6% 2.7% (0.1)%

~~The change in the Company’s bad debt provision as a percentage of consolidated revenue is related to our assessment of the collectability of our accounts and notes receivable.~~

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, which positively impact our claims experience.



	Three Months Ended March 31,
Costs of Services Provided - Key Indicators as a % of Consolidated Revenue	2018	2017	Change
Bad debt provision	7.4%	0.3%	7.1%
Self-insurance costs	2.6%	2.6%	—%

Costs of services provided for Housekeeping, as a percentage of Housekeeping revenues, decreased to ~~89.1%~~88.3% for the ~~third~~first quarter ~~2017~~2018 from ~~90.1%~~90.5% in the ~~third~~first quarter ~~2016.~~2017. Costs of services provided for Dietary, as a percentage of Dietary revenues, increased to ~~95.3%~~94.2% for the ~~third~~first quarter ~~2017~~2018 from ~~94.9%~~93.7% in the ~~third~~first quarter ~~2016.~~2017.

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

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

Consolidated Selling, General and Administrative Expense

Excluding the change in the deferred compensation plan described below, consolidated selling, general and administrative expense increased ~~$5.6~~$6.5 million or ~~21.3%~~24.0% compared to the ~~third~~first quarter ~~2016,~~2017, related primarily to our overall growth. Selling, general and administrative expense, excluding the change in the deferred compensation plan, represented 6.7% of consolidated revenues for the first quarter 2018 and 2017, respectively.

Included in selling, general and administrative expense are gains and losses associated with changes in the value of investments under the deferred compensation ~~plan that~~plan. These investments represent the amounts held on behalf of the participating ~~employees. Changes~~employees and changes in the value of these investments affect the amount of our deferred compensation liability. Gains on the plan investments during the ~~third~~first quarter ~~2017~~2018 and ~~2016~~2017 increased our selling, general and administrative expense for these periods.

The table below summarizes the changes in these components of selling, general and administrative expense:

Consolidated Investment and Interest Income

Investment and interest income ~~increased 5.9%~~decreased 69.7% for the three months ended ~~September 30, 2017~~March 31, 2018 compared to the corresponding ~~2016~~2017 period, primarily due to favorable market fluctuations in the value of our trading security investments representing the funding for our deferred compensation plan. Realized gains and losses on our available-for-sale municipal bonds also impacted consolidated investment income.

~~Consolidated Income Taxes~~

For the third quarter 2017, our effective tax rate was 28.7%, versus 35.5% for the 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 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.

~~Nine Months Ended September 30, 2017 and 2016~~

The following table summarizes the income statement key components that we use to evaluate our financial performance on a consolidated and reportable segment basis, for the nine months ended September 30, 2017 and 2016. The differences between the reportable segments’ operating results and other disclosed data and our consolidated financial results relate primarily to corporate level transactions and recording of transactions at the reportable segment level using other than generally accepted accounting principles.

Nine Months Ended September 30,
2017 2016 % Change
(in thousands)
Revenues
Housekeeping $ 733,737
$ 716,154
2.5 %
Dietary 632,984
447,943
41.3 %
Consolidated $ 1,366,721
$ 1,164,097
17.4 %

Costs of Services Provided
Housekeeping $ 662,213
$ 647,188
2.3 %
Dietary 598,251
421,840
41.8 %
Corporate and eliminations (80,648 ) (70,433 ) 14.5 %
Consolidated $ 1,179,816
$ 998,595
18.1 %

Selling, general and administrative expense
Corporate and eliminations $ 93,141
$ 78,192
19.1 %

Investment and interest income
Corporate and eliminations $ 4,523
$ 2,548
77.5 %

Income (loss) before income taxes
Housekeeping $ 71,524
$ 68,966
3.7 %
Dietary 34,733
26,103
33.1 %
Corporate and eliminations (7,970 ) (5,211 ) 52.9 %
Consolidated $ 98,287
$ 89,858
9.4 %

~~Housekeeping and Dietary respectively represented approximately 53.7% and 46.3% of consolidated revenues for the nine months ended September 30, 2017.~~

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

Nine Months Ended September 30,
2017 2016
Revenues 100.0 % 100.0 %
Operating costs and expenses:
Costs of services provided 86.3 % 85.8 %
Selling, general and administrative expense 6.8 % 6.7 %
Investment and interest income 0.3 % 0.2 %
Income before income taxes 7.2 % 7.7 %
Income taxes 2.2 % 2.8 %
Net income 5.0 % 4.9 %

Consolidated revenues increased 17.4% to $1.4 billion in the nine months ended September 30, 2017 compared to $1.2 billion in the corresponding period in 2016 as a result of the factors discussed below under Reportable Segments.

~~Reportable Segments~~

~~Housekeeping’s 2.5% net growth in reportable segment revenues resulted from service agreements entered into with new clients.~~

~~Dietary’s 41.3% net growth in reportable segment revenues resulted primarily from providing these services to existing Housekeeping clients.~~

~~Costs of services provided~~

Consolidated costs of services increased 18.1% to $1.2 billion for the nine months ended September 30, 2017 compared to $1.0 billion for the nine months ended September 30, 2016, which is primarily related to our 17.4% growth in consolidated revenues for the same period. As a percentage of consolidated revenues, costs of services increased~~to 86.3% in the nine months ended September 30, 2017 from 85.8% in the corresponding period in 2016.~~

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

~~The following table provides a comparison of key indicators we consider when managing the consolidated cost of services provided:~~

Nine Months Ended September 30,
Costs of Services Provided-Key Indicators as a % of Consolidated Revenue 2017 2016 Change
Bad debt provision 0.3 % 0.3 % — %
Workers’ compensation and general liability insurance 2.7 % 3.0 % (0.3 )%

~~Reportable Segments~~

Costs of services provided for Housekeeping, as a percentage of Housekeeping revenues, decreased to 90.3% for the nine months ended September 30, 2017 from 90.4% in the corresponding period in 2016. Costs of services provided for Dietary, as a percentage of Dietary revenues, increased to 94.5% for the nine months ended September 30, 2017 from 94.2% in the corresponding period in 2016.

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

Nine Months Ended September 30,
Costs of Services Provided-Key Indicators as a % of Segment Revenue 2017 2016 Change
Housekeeping labor and other labor-related costs 80.0 % 80.0 % — %
Housekeeping supplies 8.0 % 7.8 % 0.2 %
Dietary labor and other labor-related costs 55.9 % 53.5 % 2.4 %
Dietary supplies 36.6 % 38.1 % (1.5 )%

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

~~Selling, General and Administrative Expense~~

Excluding the change in the deferred compensation plan described below, consolidated selling, general and administrative expense increased $12.7 million or 16.5% during the nine months ended September 30, 2017, related primarily to our overall growth.

Included in selling, general and administrative expense are gains and losses associated with changes in the value of investments under the deferred compensation plan that represent the amounts held on behalf of the participating employees. Changes in the value of these investments affect the amount of our deferred compensation liability. Gains on the plan investments during the nine months ended September 30, 2017 and 2016 increased our selling, general and administrative expense for these periods.

~~The table below summarizes the changes in these components of selling, general and administrative expense:~~

Nine Months Ended September 30,
2017 2016 $ Change % Change
(in thousands)
Selling, general and administrative expense excluding change in deferred compensation liability
$ 89,766
$ 77,078
$ 12,688
16.5 %
Gain on deferred compensation plan investments 3,375
1,114
2,261
203.0 %
Selling, general and administrative expense $ 93,141
$ 78,192
$ 14,949
19.1 %

~~Consolidated Investment and Interest Income~~

~~Investment and interest income increased 77.5% for the nine months ended September 30, 2017 compared to the corresponding 2016 period, primarily due to favorable~~unfavorable market fluctuations in the value of our trading security investments representing the funding for our deferred compensation plan. Realized gains and losses on our available-for-sale municipal bonds also impacted consolidated investment income.

Consolidated Income Taxes

~~For~~During the ~~nine months ended September 30,~~first quarter 2018, the Company recognized a benefit for income taxes of $1.5 million versus a tax expense of $10.3 million for the same period in 2017. On December 22, 2017, ~~our~~the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018.

The 2018 estimated annual effective tax rate ~~was 30.8% compared~~is expected to ~~36.5% for the 2016 period. In the first quarter 2017, the Company adopted ASU 2016-09, under which excess tax benefits related~~be approximately 22% to ~~share-based payments were recognized as a component of income tax expense, as opposed to additional paid-in capital, resulting in a decrease in 2017 income tax expense. Differences between the~~24%. The actual annual effective tax rate will be impacted by the tax effects of option exercises or vested awards, which are treated as discrete items in the reporting period in which they occur, and therefore cannot be considered in the ~~applicable U.S. federal statutory rate generally arise primarily from~~calculation of the ~~effect of state and local~~estimated annual effective tax rate. The impact on the Company’s income ~~taxes, share-based compensation and~~ tax ~~credits available to~~benefit for the ~~Company.~~three months ended March 31, 2018 for such discrete items was approximately $1.1 million.

Liquidity and Capital Resources

Cash generated through operations is our primary source of liquidity. At ~~September 30, 2017,~~March 31, 2018, we had cash, cash equivalents and marketable securities of ~~$81.4~~$84.9 million and working capital of ~~$340.2~~$317.5 million, compared to December 31, ~~2016~~2017 cash, cash equivalents and marketable securities of ~~$91.6~~$82.8 million and working capital of ~~$313.8~~$343.2 million. The ~~increase~~decrease in working capital iswas driven by ~~growth~~a decrease in ~~new business and by~~ the ~~timing~~Company’s net receivables, primarily as a result of ~~payments and cash receipts~~the increase in the accounts receivable allowance as of ~~September 30, 2017 as~~March 31, 2018 compared with December 31, ~~2016.~~2017. As of ~~September 30, 2017,~~March 31, 2018, we had an unused line of credit of ~~$200.8~~$208.1 million. Our current ratio was ~~2.9~~2.8 to 1 at ~~September 30, 2017~~March 31, 2018 versus ~~4.1~~2.9 to 1 at December 31, ~~2016.~~2017.



Pennsylvania		23-2018365
(State or other jurisdiction of incorporation or organization)		(I.R.S Employer Identification No.)

3220 Tillman Drive, Suite 300, Bensalem, PA		19020
(Address of principal executive offices)		(Zip Code)



	Large accelerated filer	þ		Accelerated filer	o

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

				Smaller reporting company	o

				Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.					o



PART I	FINANCIAL INFORMATION	4
Item 1.	Financial Statements (Unaudited)	4
	Consolidated Balance Sheets as of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017	4
	Consolidated Statements of Comprehensive Income for the Three ~~and Nine~~ Months Ended
	~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~	5
	Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~	6
	Consolidated Statement of Stockholders’ Equity for the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2018	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2023
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2930
Item 4.	Controls and Procedures	2930

PART II	OTHER INFORMATION	3031
Item 1.	Legal Proceedings	3031
Item 1A.	Risk Factors	3031
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3031
Item 3.	Defaults Upon Senior Securities	3031
Item 4.	Mine Safety Disclosures	3031
Item 5.	Other Information	3031
Item 6.	Exhibits	31

Signatures		32


	September 30, 2017			December 31, 2016
	(Unaudited)						March 31, 2018			December 31, 2017
ASSETS:
Current assets:
Cash and cash equivalents	$	11,005		$	23,853		$	10,489		$	9,557
Marketable securities, at fair value	70,384			67,730			74,372			73,221
Accounts and notes receivable, less allowance for doubtful accounts of $9,795 as of September 30, 2017 and $6,911 as of December 31, 2016	367,009			271,276
Accounts and notes receivable, less allowance for doubtful accounts of $48,905 and $11,985 as of March 31, 2018 and December 31, 2017, respectively							335,014			378,720
Inventories and supplies	41,516			37,800			42,274			42,393
Prepaid expenses and other assets	25,628			13,965			27,004			23,515
Total current assets	515,542			414,624			489,153			527,406
Property and equipment, net	13,499			13,455			13,487			13,509
Goodwill	51,084			44,438			51,084			51,084
Other intangible assets, less accumulated amortization of $11,659 as of September 30, 2017 and $14,672 as of December 31, 2016	32,075			14,409
Notes receivable — long term portion	11,495			7,531
Other intangible assets, less accumulated amortization of $13,969 and $12,853 as of March 31, 2018 and December 31, 2017, respectively							29,766			30,881
Notes receivable - long-term portion							38,814			15,476
Deferred compensation funding, at fair value	27,387			24,119			29,443			28,885
Deferred income taxes	9,196			9,822			7,802			7,498
Other noncurrent assets	1,264			48			1,258			1,264
Total Assets	$	661,542		$	528,446
Total assets							$	660,807		$	676,003

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable	$	62,323		$	42,912		$	70,624		$	74,463
Accrued payroll, accrued and withheld payroll taxes	48,786			22,303			48,040			32,139
Other accrued expenses	3,665			4,397			3,123			4,561
Borrowings under line of credit	25,000			—			26,000			35,382
Income taxes payable	10,781			7,686			939			15,378
Accrued insurance claims	24,827			23,573			22,917			22,245
Total current liabilities	175,382			100,871			171,643			184,168
Accrued insurance claims — long term portion	67,818			64,080
Accrued insurance claims — long-term portion							65,225			62,454
Deferred compensation liability	27,886			24,653			29,595			29,429
Commitments and contingencies
STOCKHOLDERS’ EQUITY:
Common stock, $.01 par value; 100,000 shares authorized; 74,791 and 74,204 shares issued, and 73,265 and 72,601 shares outstanding as of September 30, 2017 and December 31, 2016, respectively	748			742
Common stock, $.01 par value; 100,000 shares authorized; 75,169 and 74,960 shares issued, and 73,701 and 73,436 shares outstanding as of March 31, 2018 and December 31, 2017, respectively							752			750
Additional paid-in capital	241,008			217,664			253,692			244,363
Retained earnings	157,678			130,940			149,743			163,860
Accumulated other comprehensive income (loss), net of taxes	844			(319		)
Common stock in treasury, at cost, 1,525 shares as of September 30, 2017 and 1,603 shares as of December 31, 2016	(9,822		)	(10,185		)
Accumulated other comprehensive (loss) income, net of taxes							(301		)	837
Common stock in treasury, at cost, 1,469 and 1,524 shares as of March 31, 2018 and December 31, 2017, respectively							(9,542		)	(9,858		)
Total stockholders’ equity	$	390,456		$	338,842		394,344			399,952
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	661,542		$	528,446
Total liabilities and stockholders’ equity							$	660,807		$	676,003


	Three Months Ended September 30,					Nine Months Ended September 30,				Three Months Ended March 31,
	2017		2016			2017		2016		2018			2017
Revenues	$	491,355	$	392,734		$	1,366,721	$	1,164,097	$	501,810		$	404,490
Operating costs and expenses:
Costs of services provided	426,924		336,340			1,179,816		998,595		469,904			345,570
Selling, general and administrative expense	32,940		27,182			93,141		78,192		33,777			28,210
Other income, net:
Investment and interest	1,439		1,359			4,523		2,548		476			1,569
Income before income taxes	32,930		30,571			98,287		89,858
Income tax provision	9,458		10,860			30,247		32,761
(Loss) income before income taxes										(1,395		)	32,279
Income tax (benefit) provision										(1,467		)	10,262
Net income	$	23,472	$	19,711		$	68,040	$	57,097	$	72		$	22,017

Per share data:
Basic earnings per common share	$	0.32	$	0.27		$	0.93	$	0.79	$	0.00		$	0.30
Diluted earnings per common share	$	0.31	$	0.27		$	0.92	$	0.78	$	0.00		$	0.30

Weighted average number of common shares outstanding:
Basic	73,461		72,839			73,272		72,718		73,913			73,074
Diluted	74,538		73,592			74,252		73,435		74,725			73,946

Comprehensive income:
Net income	$	23,472	$	19,711		$	68,040	$	57,097	$	72		$	22,017
Other comprehensive income:
Unrealized gain (loss) on available-for-sale marketable securities, net of taxes	82		(369		)	1,163		765
Total comprehensive income	$	23,554	$	19,342		$	69,203	$	57,862
Unrealized (loss) gain on available-for-sale marketable securities, net of taxes										(1,138		)	479
Total comprehensive (loss) income										$	(1,066	)	$	22,496



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



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



	For the Nine Months Ended September 30, 2017
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss), net of taxes			Retained Earnings			Treasury Stock			Stockholders’ Equity
	Shares	Amount
Balance — December 31, 2016	74,204	$	742	$	217,664	$	(319	)	$	130,940		$	(10,185	)	$	338,842
Comprehensive income:
Net income for the period									68,040						68,040
Unrealized gain on available-for-sale marketable securities, net of taxes						1,163									1,163
Comprehensive income															69,203
Exercise of stock options and other stock-based compensation, net of shares tendered for payment	528	5		10,333											10,338
Share-based compensation expense — stock options, restricted stock and restricted stock units				3,773											3,773
Treasury shares issued for Deferred Compensation Plan funding and redemptions				487								14			501
Shares issued pursuant to Employee Stock Plan				1,752								339			2,091
Cash dividends									(41,302		)				(41,302		)
Shares issued pursuant to Dividend Reinvestment Plans				61								10			71
Shares issued pursuant to acquisition	59	1		2,500											2,501
Contingent shares issuable pursuant to acquisition				4,438											4,438
Balance — September 30, 2017	74,791	$	748	$	241,008	$	844		$	157,678		$	(9,822	)	$	390,456


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


Period/Year	Total Amortization Expense		Total Amortization Expense
	(in thousands)		(in thousands)
October 1 to December 31, 2017	$	1,116
2018	$	4,363
April 1 to December 31, 2018			$	3,246
2019	$	4,165	$	4,165
2020	$	4,165	$	4,165
2021	$	4,165	$	4,165
2022	$	4,165	$	4,165
2023			$	3,169
Thereafter	$	9,858	$	6,690



	As of September 30, 2017
					Fair Value Measurement Using:
	Carrying Amount		Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Financial Assets:
Marketable securities
Municipal bonds — available-for-sale	$	70,384	$	70,384	$	—	$	70,384	$	—

Deferred compensation fund
Money Market⁽¹⁾	$	2,378	$	2,378	$	—	$	2,378	$	—
Balanced and Lifestyle	8,181		8,181		8,181		—		—
Large Cap Growth	7,227		7,227		7,227		—		—
Small Cap Growth	3,359		3,359		3,359		—		—
Fixed Income	3,038		3,038		3,038		—		—
International	1,471		1,471		1,471		—		—
Mid Cap Growth	1,733		1,733		1,733		—		—
Deferred compensation fund	$	27,387	$	27,387	$	25,009	$	2,378	$	—


	As of December 31, 2016										As of March 31, 2018
					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)										(in thousands)
Financial Assets:
Marketable securities
Municipal bonds — available-for-sale	$	67,730	$	67,730	$	—	$	67,730	$	—	$	74,372	$	74,372	$	—	$	74,372	$	—

Deferred compensation fund
Money Market ⁽¹⁾	$	3,147	$	3,147	$	—	$	3,147	$	—	$	2,983	$	2,983	$	—	$	2,983	$	—
Balanced and Lifestyle	7,162		7,162		7,162		—		—		8,367		8,367		8,367		—		—
Large Cap Growth	5,583		5,583		5,583		—		—		8,200		8,200		8,200		—		—
Small Cap Growth	2,933		2,933		2,933		—		—		3,511		3,511		3,511		—		—
Fixed Income	2,752		2,752		2,752		—		—		3,033		3,033		3,033		—		—
International	1,132		1,132		1,132		—		—		1,544		1,544		1,544		—		—
Mid Cap Growth	1,410		1,410		1,410		—		—		1,805		1,805		1,805		—		—
Deferred compensation fund	$	24,119	$	24,119	$	20,972	$	3,147	$	—	$	29,443	$	29,443	$	26,460	$	2,983	$	—


	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
	(in thousands)											(in thousands)
September 30, 2017
March 31, 2018
Type of security:
Municipal bonds — available-for-sale	$	69,085	$	1,379	$	(80	)	$	70,384	$	—	$	74,840	$	301	$	(769	)	$	74,372	$	—
Total debt securities	$	69,085	$	1,379	$	(80	)	$	70,384	$	—	$	74,840	$	301	$	(769	)	$	74,372	$	—

December 31, 2016
December 31, 2017
Type of security:
Municipal bonds — available-for-sale	$	68,220	$	178	$	(668	)	$	67,730	$	—	$	72,249	$	1,169	$	(197	)	$	73,221	$	—
Total debt securities	$	68,220	$	178	$	(668	)	$	67,730	$	—	$	72,249	$	1,169	$	(197	)	$	73,221	$	—


	Municipal Bonds — Available-for-Sale				Municipal Bonds — Available-for-Sale
Contractual maturity:	September 30, 2017		December 31, 2016		March 31, 2018		December 31, 2017
	(in thousands)				(in thousands)
Maturing in one year or less	$	1,403	$	973	$	968	$	916
Maturing in second year through fifth year	23,879		28,671		16,330		15,948
Maturing in sixth year through tenth year	19,346		21,651		22,914		22,851
Maturing after ten years	25,756		16,435		34,160		33,506
Total debt securities	$	70,384	$	67,730	$	74,372	$	73,221


⁽¹⁾	Stock-based compensation expense is recorded in selling, general and administrative expense in the Company’s Consolidated Statements of Comprehensive Income.



	Nine Months Ended
	2017		2016
Risk-free interest rate	2.0	%	2.0	%
Weighted average expected life (years)	5.8 years		5.8 years
Expected volatility	25.1	%	26.0	%
Dividend yield	1.9	%	2.0	%



	Units	Weighted Average Grant Date Fair Value
	(in thousands)
December 31, 2016	—	$	—
Granted	88	$	40.16
Vested	—	$	—
Forfeited	—	$	—
September 30, 2017	88	$	40.16



	Three Months Ended September 30,
Costs of Services Provided-Key Indicators as a % of Consolidated Revenue	2017	2016	Change
Bad debt provision	0.4%	0.3%	0.1%
Workers’ compensation and general liability insurance	2.6%	2.7%	(0.1)%



	Nine Months Ended September 30, 2017			Nine Months Ended September 30, 2016
	(in thousands)
Net cash provided by operating activities	$	3,122		$	37,898
Net cash used in investing activities	$	(10,077	)	$	(14,345	)
Net cash used in financing activities	$	(5,893	)	$	(32,415	)



Covenant Description and Requirement		As of ~~September 30, 2017~~March 31, 2018
Funded debt⁽¹⁾ to EBITDA⁽²⁾ ratio: less than 3.00 to 1.00		~~0.72~~0.83


⁽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.



Exhibit Number		Description
~~10.1~~10.1*		Second Amended and Restated ~~Committed Line of Credit Note, dated as of July 11, 2017 (Incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q for the quarter ended June 30, 2017)~~2012 Equity Incentive Plan
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 Form 10-Q for the quarterly period ended ~~September 30, 2017~~March 31, 2018 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’ Equity, and (v) Notes to Consolidated Financial Statements



		HEALTHCARE SERVICES GROUP, INC.

Date:	~~October~~April 27, ~~2017~~2018	/s/ Theodore Wahl
		Theodore Wahl
		President & Chief Executive Officer
		(Principal Executive Officer)

Date:	~~October~~April 27, ~~2017~~2018	/s/ John C. Shea
		John C. Shea
		Chief Financial Officer
		(Principal Financial and Accounting Officer)