The premier management services provider
to the health care industry focusing on
its clients housekeeping and dietary
departments’ operations
T
R
O
P
E
R
L
A
U
N
N
A
F I N A N C I A L
Y E A R S E N D E D I N D E C E M B E R 3 1 (in thousands except per share data and employees)
Revenues
Net Income
Basic Earnings Per Common Share
Diluted Earnings Per Common Share
Cash Dividends Per Common Share
Weighted Average Number Of Common
Shares Outstanding For Basic EPS
Weighted Average Number Of Common
Shares Outstanding For Diluted EPS
2010
2009
2008
2007
2006
$ 773,956
$ 692,695
$ 602,718
$ 577,721
$ 511,631
$ 34,441
$ 30,342
$ 26,614
$ 29,578
$ 25,452
$
$
$
0.52
0.51
0.60
$
$
$
0.46
0.46
0.49
$
$
$
0.41
0.40
0.39
$
$
$
0.47
0.45
0.28
$
$
$
0.41
0.39
0.21
65,917
65,376
64,697
63,429
61,764
67,008
66,429
66,038
65,771
64,721
A S O F D E C E M B E R 3 1
2010
2009
2008
2007
2006
Working Capital
Total Assets
Stockholders’ Equity
Book Value Per Common Share
Employees
$ 181,244
$ 177,453
$ 177,573
$ 167,217
$ 140,627
$ 277,934
$ 265,892
$ 248,561
$ 243,368
$ 215,556
$ 213,079
$ 208,774
$ 201,682
$ 194,718
$ 165,477
3.22
3.19
31,500
27,200
3.11
24,500
2.67
3.65
23,600
20,400
1 Adjusted to reflect the 3-for-2 Stock Splits of November 12, 2010 and August 3, 2007.
Each one paid in the form of a 50% common stock dividend.
REVENUES
(in thousands)
N E T I N C O M E
(in thousands)
DIlUTED EARNINgS
PER COMMON ShARE
BOOk V AlUE
PER COMMON ShARE
800,000
700,000
600,000
500,000
400,000
300,000
200,000
36,000
30,000
24,000
18,000
12,000
6,000
0
0.7
0.6
0.5
0.4
0.3
0.2
0.1
6
5
4
3
2
1
0
2006 2007 2008 2009 2010
2006 2007 2008 2009 2010
2006 2007 2008 2009 2010
2006 2007 2008 2009 2010
D E A R S H A R E H O L D E R S :
I am pleased to provide you within this report, financial results which represent our Company’s
thirty-fourth consecutive year of increasing revenues, as well as the achievement of record net
income. Revenues for 2010 grew to $773,956,000 or an increase of 12% in comparison to
2009 revenues. Net income increased 14% for 2010 to $34,441,000 or $.52 per basic and $.51
per diluted common share, compared to 2009 net income of $30,342,000 or $.46 per basic
and diluted common share.
As a result of our strong financial position and results, our Board of Directors has continued to
increase shareholder value by the payment of regular quarterly cash dividend payments totaling
$.60 per common share in 2010. These 2010 payments represent an increase of over 22%
compared to 2009 total regular quarterly cash dividend payments, as well as the continuation
for the 30th consecutive quarter of our trend of increasing quarterly cash dividends since our
initiation of regular quarterly cash dividend payments in 2003. Additionally, our Board of Directors
declared the three-for-two stock split in the form of a 50% stock dividend which was paid on
November 12, 2010.
Revenues:
$773,956,000 – a 12% increase
over 2009 revenues
net Income:
$34,441,000 – a 14% increase
over 2009 net income
DIluteD eaRnIngs PeR
common shaRe:
$.51 – a 11% increase over 2009
diluted earnings per common share
total RegulaR cash DIvIDenD
Payments In 2010:
$.60 per common share – a 22% increase over total
regular cash dividend payments in 2009. 2010 total
regular cash dividends represented a 3.5% yield
based on December 31, 2010 common share price.
thRee-FoR-two stock sPlIt
In The Form Of A 50% Stock Dividend
PRovIDIng seRvIces to oveR
2,700 clIent FacIlItIes
The economy, and in particular our target market the health care industry, continues to be
characterized by uncertainties over prospective changes in health care laws and its impact on
our clients’ methods of delivering their respective services and the mechanisms under which
they receive reimbursement, whether it be public or private.
We recognize we must stay abreast of market changes and developments. We believe our
competitive advantage is the Company’s awareness and understanding of, and timely reaction to
the changes in the dynamics of our market. Because we have always emphasized the development
of a strong and well coordinated management team at the operational level, we have the ability
to implement timely strategies which best serve our clients and foster our growth, as well as
strengthen our position in the health care market in which we compete.
We are aware that we will continue to be challenged to provide improved quality of service
along with cost-containment for our clients. As a result, we enter every client relationship as
a partnership, endeavoring to position ourselves as a high-quality, cost-efficient alternative
to a potential clients’ present method of delivering our services within their respective
long-term care, specialty care or hospital facility.
As one of the most respected service providers in the health care marketplace, it is appropriate
to thank and give appreciation to our employees at all levels. It is through their motivation and
commitment we have achieved such status. Also, we want to thank our investors, for placing
your trust in us. We will continue to remain focused on improving the future performance and
shareholder value of our Company.
Sincerely,
Daniel P. mccartney
ChAIRmAN & ChIef exeCuTIve OffICeR
S E R V I C E S
hOUSEkEEPINg DEPARTMENT MANAgEMENT:
launDRy anD lInen
Laundry and Linen services consist of laundering and processing the personal
clothing of residents and patients, as well as the providing, collecting and
laundering of sheets, pillow cases, blankets and other linen items used in a
health care facility. Additionally, we work closely with the facility to design,
install, operate and maintain an on-premise laundry.
housekeePIng
housekeeping services consist of the cleaning, disinfecting and sanitizing of all
areas in the facility, including resident and patient rooms, auxiliary areas, and
main access areas such as the lobby, public rest rooms, offices and corridors.
Through our district management structure and our on-site management team
we provide continuous employee supervision, training and evaluation. We also
conduct periodic testing for the purpose of infection control.
FacIlIty maIntenance & Plant management
facility maintenance & plant management services consist of the repair and
preventive maintenance of the building and equipment at a specific facility.
DIETARY DEPARTMENT MANAgEMENT:
DInIng anD nutRItIon
Dining and Nutrition Services consist of the development of a menu that
meets the residents’ and patients’ dietary needs, purchasing and preparing
the food to assure the residents and patients receive an appetizing meal,
and participation in monitoring of residents’ and patients’ ongoing nutrition
status. On-site management is responsible for all daily food service activities
with regular support being provided by a district manager specializing in food
service and a registered dietitian.
OUR gE OgR A P H I C R E A C H
healthcare Services Group, Inc. is the premier management services
provider to the health care industry focusing on its clients housekeeping
and dietary departments’ operations. Services are provided to
approximately 2,700 nursing homes, rehabilitation facilities, retirement
centers, and hospitals in 47 states and Canada.
Partnership responsibility means thorough understanding of our client’s
mission to deliver high quality care to residents and patients of health
care facilities.
C O R P O R AT E O F F I C E
D I V I S I O N Al O F F I C E
R EgI O N Al O F F I C E
g U I D E L I N E S
OUR gOAL IS TO PROVIDE THE BEST
SERVICE IN THE INDUSTRy
A health care facility derives many benefits from
operating a spotlessly clean, aesthetically pleasing
environment. Our staff is thoroughly trained to perform
housekeeping, laundry, linen, facility management
and dietary responsibilities with skill and sensitivity.
Stringent quality-assurance standards insure that a
facility will receive the most professional services in
the industry.
WE CONCENTRATE ON WHAT
WE DO BEST
Companies which diversify outside their core business
often suffer diminishing returns. healthcare Services
Group, Inc. has prospered by providing exemplary
housekeeping, laundry, linen, facility maintenance and
dietary services to an increasing number of satisfied
clients. This is what we always have done and what
we will continue to do.
DEVELOP A STRONg AND WELL
COORDINATED MANAgEMENT TEAM
The key to our client retention rate and orderly
geographic expansion has been our ability to assemble
the finest group of managers in the industry. Clients,
who receive daily support from on-site management,
are also actively supported by a Company District
manager who is in close proximity to the client. The
development of experienced management back-up
is reassuring to our owners and administrators.
Reducing client costs while improving overall quality is
a most challenging assignment. This objective is met
by standardizing operating systems, maintaining strict
controls through a quality-assurance program and
planning efficient production schedules.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
¥
n
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number: 0-12015
HEALTHCARE SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania
(State or other jurisdiction of
incorporated or organization)
3220 Tillman Drive, Suite 300,
Bensalem, PA
(Address of principal executive offices)
23-2018365
(IRS Employer Identification No.)
19020
(Zip Code)
Registrant’s telephone number, including area code:
(215) 639-4274
Securities registered pursuant to Section 12(b) of the 1934 Act:
Common Stock ($.01 par value)
Title of Class
The NASDAQ Global Select Market
Name of each exchange on which
securities registered
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¥ NO n
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES n NO ¥
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. YES ¥ NO n
Indicate by check mark whether the registrant (1) has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or such shorter period that
the registrant was required to submit and post such files). YES ¥ NO n
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K ¥
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¥
Accelerated filer n
Non-accelerated filer n
Smaller reporting company n
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES n NO ¥
The aggregate market value of the voting stock (Common Stock, $.01 par value) held by non-affiliates of the Registrant as of the close of business on June 30,
2010 was approximately $814,000,000 based on closing sale price of the Common Stock on the NASDAQ National Global Select on that date. The
Registrant does not have any non-voting common equity authorized or outstanding.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock (Common Stock, $.01 par value) as of the latest practicable date
(February 16, 2011). 66,214,000
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant’s Annual Meeting of Shareholders to be held on May 24, 2011 have been incorporated by
reference into Parts II and III of this Annual Report on Form 10-K.
Part I
References made herein to “we,” “our,” “us”, or “the Company” include Healthcare Services Group, Inc. and its
wholly owned subsidiaries Huntingdon Holdings, Inc. and HCSG Supply, Inc. (which was sold on March 1,
2009).
Item I. Business.
(a) General
The Company is a Pennsylvania corporation, incorporated on November 22, 1976. We provide housekeeping,
laundry, linen, facility maintenance and dietary services to the health care industry, including nursing homes,
retirement complexes, rehabilitation centers and hospitals located throughout the United States. Based on the
nature and similarities of the services provided, our business operations consist of two business segments
(Housekeeping and Dietary). We believe that we are the largest provider of our services to the long-term care
industry in the United States, rendering such services to approximately 2,500 facilities in 47 states as of
December 31, 2010. We provide our Housekeeping services to essentially all the approximately 2,500 facilities
and provide Dietary services to approximately 380 of such facilities. Although we do not directly participate in any
government reimbursement programs, our clients’ reimbursements are subject to government regulation.
Therefore, they are directly affected by any legislation relating to Medicare and Medicaid reimbursement
programs.
As of December 31, 2010, we operate one wholly-owned subsidiary, Huntingdon Holdings, Inc. (“Huntingdon”).
Huntingdon invests our cash and cash equivalents as well as managing our portfolio of marketable securities. On
March 1, 2009, we sold our wholly-owned subsidiary HCSG Supply, Inc. (“Supply”) for approximately $1,100,000,
financed principally through our acceptance of a secured promissory note which is recorded in our notes receivable
in the accompanying December 31, 2010 and 2009 balance sheet. On May 1, 2009, we acquired essentially all of the
assets of Contract Environmental Services, Inc. (“CES”), a South Carolina based corporation which is a provider
of professional housekeeping, laundry and dietary services to long-term care and related facilities. We believe the
acquisition of CES expands and complements our position of being the largest provider of such services to long-
term care and related facilities in the United States.
(b) Segment Information
The information called for herein is discussed below in Description of Services, and within Item 8 of this Annual
Report on Form 10-K under Note 12 of Notes to Consolidated Financial Statements for the year ended
December 31, 2010.
(c) Description of Services
General
We provide management, administrative and operating expertise and services to the housekeeping, laundry, linen,
facility maintenance and dietary service departments of the health care industry.
We are organized into, and provide our services through two reportable segments: housekeeping, laundry, linen
and other services (“Housekeeping”), and dietary department services (“Dietary”). The Company’s corporate
headquarters provides centralized financial management and administrative services to the Housekeeping and
Dietary business segments.
1
Housekeeping consists of the managing of the client’s housekeeping department which is principally responsible
for the cleaning, disinfecting and sanitizing of patient rooms and common areas of a client’s facility, as well as the
laundering and processing of the personal clothing belonging to the facility’s patients. Also within the scope of this
segment’s service is the responsibility for laundering and processing of the bed linens, uniforms and other assorted
linen items utilized by a client facility.
Dietary consists of managing the client’s dietary department which is principally responsible for food purchasing,
meal preparation and providing dietician consulting professional services, which includes the development of a
menu that meets the patient’s dietary needs. We began Dietary operations in 1997.
Both segments provide our services primarily pursuant to full service agreements with our clients. In such
agreements, we are responsible for the management and hourly employees located at our clients’ facilities. We also
provide services on the basis of a management-only agreement for a very limited number of clients. Our agreements
with clients typically provide for renewable one year service terms, cancelable by either party upon 30 to 90 days’
notice after the initial 90-day period.
Our labor force is interchangeable with respect to each of the services within Housekeeping. Our labor force with
respect to Dietary is specific to it. There are many similarities in the nature of the services performed by each
segment. However, there are some significant differences in the specialized expertise required of the professional
management personnel responsible for delivering the services of the respective segments. We believe the services of
each segment provide opportunity for growth.
For the year ended December 31, 2010, revenue from GGNSC Holdings LLC (doing business as Golden
Horizons), our major client (“Major Client”), accounted for approximately 11% of our total revenues. In 2010, we
derived approximately 11% and 9% of Housekeeping and Dietary revenues, respectively, from such client. At
December 31, 2010, amounts due from such client represented less than 1% of our accounts receivable balance.
Although we expect to continue the relationship with this client, there can be no assurance thereof.The loss of such
client, or a significant reduction in the revenues we receive from this client, would have a material adverse effect on
the results of operations of our two operating segments. In addition, if such client changes its payment terms it
would increase our accounts receivable balance and have a material adverse effect on our cash flows and cash and
cash equivalents.
An overview of each of our segments follows:
Housekeeping
Housekeeping services. Housekeeping services is our largest service sector, representing approximately 52% or
$399,031,000 of consolidated revenues in 2010.This service involves the management of the Client’s housekeeping
department which is principally responsible for the cleaning, disinfecting and sanitizing resident areas in our clients’
facilities. In providing services to any given client facility, we typically hire and train the hourly employees employed
by such facility prior to our engagement.We normally assign two on-site managers to each facility to supervise and
train hourly personnel and coordinate housekeeping services with other facility support functions in accordance
with the direction provided by the Client facility’s administrator. Such management personnel also oversee the
execution of a variety of quality and cost-control procedures including continuous training and employee
evaluation and on-site testing for infection control. The on-site management team also assists the facility in
complying with federal, state and local regulations.
Laundry and linen services. Laundry and linen services represent approximately 25% or $194,258,000 of
consolidated revenues in 2010. Laundry services are under the responsibilities of the housekeeping department and
involve the laundering and processing of the residents’ personal clothing. We provide laundry services to all of our
2
housekeeping clients. Linen services involve providing, laundering and processing of the sheets, pillow cases,
blankets, towels, uniforms and assorted linen items used by our clients’ facilities. At some facilities that utilize our
laundry and linen services, we install our own equipment. Such installation generally requires an initial capital
outlay by us ranging from $5,000 to $100,000 depending on the size of the facility, installation and construction
costs, and the cost of equipment required. We could incur relocation or other costs in the event of the cancellation
of a linen service agreement where there was an investment by us in a corresponding laundry installation. The
hiring, training and supervision of the hourly employees who perform laundry and linen services are similar to, and
performed by the same management personnel who oversee the housekeeping services hourly employees located at
the respective client facility. In some instances we own linen supplies utilized at our clients’ facilities and therefore,
maintain a sufficient inventory of linen supplies to ensure their availability.
Maintenance and other services. Maintenance services consist of repair and maintenance of laundry equipment,
plumbing and electrical systems, as well as carpentry and painting.This service sector’s total revenues of $2,396,000
represent less than 1% of consolidated revenues.
Laundry installation sales. We (as a distributor of laundry equipment) sell laundry installations to our clients,
which typically represents the construction and installation of a turn-key operation. We generally offer payment
terms, ranging from 36 to 60 months. During the years 2008 through 2010, laundry installation sales were not
material to our operating results as we prefer to own such laundry installations in connection with performance of
our service agreements.
Housekeeping operating performance is significantly impacted by our management of our costs of labor. Such
costs of labor account for approximately 80%, as a percentage of Housekeeping revenues, of operating costs
incurred at a facility service location. Changes in wage rates resulting from legislative or other actions, anticipated
staffing levels, and other unforeseen variations in our use of labor at a client service location will result in volatility
of these costs. Additionally, the costs of supplies consumed in performing Housekeeping services, including linen
costs, are affected by product specific market conditions and therefore subject to price volatility. Generally, this
volatility is influenced by factors outside of our control and is unpredictable. Where possible, we try to obtain fixed
pricing from vendors for an extended period of time on certain supplies to mitigate such pricing volatility.
Although we endeavor to pass on such increases in our costs of labor and supplies to our clients, the inability to
attain such increases may negatively impact Housekeeping’s profit margins.
Dietary
Dietary services. We began providing dietary services in 1997. Dietary services represented 23% or $178,271,000
of consolidated revenues in 2010. Dietary consists of managing the client’s dietary department which is principally
responsible for food purchasing, meal preparation and providing dietician consulting professional services, which
includes the development of a menu that meets the patient’s dietary needs. On-site management is responsible for
all daily dietary department activities, with regular support being provided by a district manager specializing in
dietary services, as well as a registered dietitian. We also offer consulting services to facilities to assist them in cost
containment and to promote improvement in their dietary department service operations.
Dietary operating performance, although to different extents, is also impacted by price volatility in costs of labor
and supplies resulting from similar factors discussed above in Housekeeping. The primary difference in impact on
Dietary operations from price volatility in costs of labor and food-related supplies is that such costs represent
approximately 50% and 40%, respectively, of food costs, as a percentage of Dietary revenues. This is compared to
Housekeeping operations where labor is approximately 80% a percentage of Housekeeping revenue.
3
Operational Management Structure
By applying our professional management techniques, we generally can contain or control certain housekeeping,
laundry, linen, facility maintenance and dietary service costs on a continuing basis. We manage and provide our
services through a network of management personnel, as illustrated below.
CEO/President
Senior Vice President & Executive Vice President
Divisional Vice President
(8 Divisions)
Regional Vice
President/Manager/Director
(57 Regions)
District Manager
(254 Districts)
Training Manager
Facility Manager and
Assistant Facility Manager
Each facility is managed by an on-site Facility Manager, an Assistant Facility Manager, and if necessary, additional
supervisory personnel. Districts, typically consisting of eight to twelve facilities, are supported by a District
Manager and a Training Manager. District Managers bear overall responsibility for the facilities within their
districts. They are generally based in close proximity to each facility. These managers provide active support to
clients in addition to the support provided by our on-site management team.Training Managers are responsible for
the recruitment, training and development of Facility Managers. A division consists of a number of regions within a
specific geographical area. Divisional Vice Presidents manage each division. At December 31, 2010 we maintained
57 regions within 8 divisions. Each region is headed by a Regional Vice President/Manager. Most regions also have
a Regional Director who assumes primary responsibility for marketing our services within the respective region.
Regional Vice Presidents/Managers and Regional Directors provide management support to a number of districts
within a specific geographical area. Regional Vice Presidents/Managers and Regional Directors report to
Divisional Vice Presidents who in turn report to the Senior Vice Presidents and the Executive Vice President.
We believe that our divisional, regional and district organizational structure facilitates our ability to best serve,
and/or sell additional services to, our existing clients, as well as obtain new clients.
Market
The market for our services consists of a large number of facilities involved in various aspects of the health care
industry, including nursing homes, retirement complexes, rehabilitation centers and hospitals. Such facilities may
be specialized or general, privately owned or public, profit or not-for-profit, and may serve patients on a long-term
or short-term basis. The market for our services is expected to continue to grow as the elderly population increases
as a percentage of the United States population and as government reimbursement policies require increased cost
control or containment by the constituents that comprise our targeted market.
The American Health Care Association estimates that there are approximately 16,300 nursing homes in the
United States with about 1.78 million beds and 1.45 million residents. The facilities primarily range in size from
small private facilities with 65 beds to facilities with over 500 beds. We generally market our services to facilities
4
with 100 or more beds. We believe that approximately 16% of our target market, long-term care facilities, currently
use outside providers of housekeeping and laundry services.
Marketing and Sales
Our services are marketed at four levels of our organization: at the corporate level by the Chief Executive Officer,
President, Executive Vice President and the Senior Vice Presidents; at the divisional level by Divisional Vice
Presidents; at the regional level by the Regional Vice Presidents/Managers and Regional Directors; and at the
district level by District Managers. We provide incentive compensation to our operational personnel based on
achieving financial and non-financial goals and objectives which are aligned with the key elements the Company
believes are necessary for it to achieve overall
improvement in its financial results and increase business
development. Regional Directors receive incentive compensation based on achieving budgeted earnings and
new business revenues.
Our services are marketed primarily through referrals and in-person solicitation of target facilities. We also utilize
direct mail campaigns and participate in industry trade shows, health care trade associations and healthcare
support services seminars that are offered in conjunction with state or local health authorities in many of the states
in which we conduct our business. Our programs have been approved for continuing education credits by state
nursing home licensing boards in certain states, and are typically attended by facility owners, administrators and
supervisory personnel, thus presenting marketing opportunities for us. Indications of interest in our services arising
from initial marketing efforts are followed up with a presentation regarding our services and a survey of the service
requirements of the facility. Thereafter, a formal proposal, including operational recommendations and recom-
mendations for proposed savings, is submitted to the prospective client. Once the prospective client accepts the
proposal and signs the service agreement, we can set up our operations on-site within days.
Government Regulation of Clients
Our clients are subject to government regulation. Congress has enacted a number of major laws during the past
years that have significantly altered or will alter government reimbursement for nursing home services, including
the Balanced Budget Act of 1997 (“BBA”), the Benefits Improvement and Protection Act of 2000 (“BIPA”), the
Deficit Reduction Act of 2005 (“DRA”) and the Patient Protection and Affordable Care Act and the Health Care
and Education Reconciliation Act of 2010 (together the “Act”).
As a result of the BBA’s repeal of the “Boren Amendment” federal payment standard for Medicaid payments to
nursing facilities, there is ongoing risk that budget constraints or other factors will cause states to reduce Medicaid
reimbursements to nursing homes or fail to make payments to nursing homes on a timely basis. BIPA enacted a
multi-year phase-out of certain governmental transfers that had boosted Medicaid payment rates, and these
reduced federal payments have impacted the aggregate funds available to our clients.
The DRA’s stated goal of reducing federal Medicaid spending has financial implications for nursing homes, as do
the incentives it put in place for the use of community-based services, since increased use of home and community-
based services and the corollary rebalancing of long term care funding towards a more non-institutional approach
will likely put downward pressure on nursing home rate increases. In addition, changes to Medicaid asset transfer
rules made in the DRA could exacerbate the nursing home Medicaid under-funding problem by increasing the
incidence of uncompensated care. Most recently, there is significant federal pressure to reduce the maximum
provider tax that states have been increasingly relying on to fund nursing home reimbursement.
Although all of these laws directly affect how clients are paid for certain services, we do not directly participate in
any government reimbursement programs. Accordingly, all of our contractual relationships with our clients
5
continue to determine the clients’ payment obligations to us. However, because clients’ revenues are generally
highly reliant on Medicare and Medicaid reimbursement funding rates, the overall effect of these laws and trends in
the long term care industry have affected and could adversely affect the liquidity of our clients, resulting in their
inability to make payments to us on agreed upon payment terms. (See “Liquidity and Capital Resources”)
The prospects for legislative action, both on the federal and state level (particularly in light of current economic
environment affecting government budgets), regarding funding for nursing homes are uncertain. We are unable to
predict or to estimate the ultimate impact of any further changes in reimbursement programs affecting our clients’
future results of operations and/or their impact on our cash flows and operations.
Environmental Regulation
The Company’s operations are subject to various federal, state and/or local laws concerning emissions into the air,
discharges into the waterways and the generation, handling and disposal of waste and hazardous substances. The
Company’s past expenditures relating to environmental compliance have not had a material effect on the Company
and are included in normal operating expenses. These laws and regulations are constantly evolving, and it is
impossible to predict accurately the effect they may have upon the capital expenditures, earnings and competitive
position of the Company in the future. Based upon information currently available, management believes that
expenditures relating to environmental compliance will not have a material impact on the financial position of the
Company.
Service Agreements/Collections
We provide our services primarily pursuant to full service agreements with our clients. In such agreements, we are
responsible for our management and hourly employees located at clients’ facilities.We provide services on the basis
of a management agreement for a very limited number of clients. In such agreements, our services are comprised of
providing on-site management personnel, while the hourly and staff personnel remain employees of the respective
client.
We typically adopt and follow the client’s employee wage structure, including its policy of wage rate increases, and
pass through to the client any labor cost increases associated with wage rate adjustments. Under a management
agreement, we provide management and supervisory services while the client facility retains payroll responsibility
for its hourly employees. Substantially all of our agreements are full service agreements. These agreements typically
provide for renewable one year terms, cancelable by either party upon 30 to 90 days’ notice after the initial 90-day
period. As of December 31, 2010, we provided services to approximately 2,500 client facilities.
Although the service agreements are cancelable on short notice, we have historically had a favorable client retention
rate and expect to continue to maintain satisfactory relationships with our clients.The risks associated with short-
term service agreements have not materially affected either our linen and laundry services, which may from
time-to-time require a capital investment, or our laundry installation sales, which may require us to finance the sales
price. Such risks are often mitigated by certain provisions set forth in the agreements entered into with our clients.
As a result of the current economic crisis, many states have significant budget deficits. State Medicaid programs are
experiencing increased demand, and with lower revenues than projected, they have fewer resources to support their
Medicaid programs. In addition, Federal health reform legislation has been enacted that would significantly expand
state Medicaid programs. As a result, some state Medicaid programs are reconsidering previously approved
increases in nursing home reimbursement or are considering delaying those increases. A few states have indicated it
is possible they will run out of cash to pay Medicaid providers, including nursing homes. Any of these changes
would adversely affect the liquidity of our clients, resulting in their inability to make payments to us as agreed upon.
6
In 2009 and 2010, Federal economic stimulus legislation was enacted to counter the impact of the economic crisis
on state budgets. The legislation included the temporary provision of additional federal matching funds to help
states maintain their Medicaid programs. This legislation to provide states with an extension of this fiscal relief was
extended through June 2011, but at a reduced reimbursement rate. It is uncertain whether additional federal
funding will be provided in the future or if it will be provided in the form of matching funds. In addition, certain
states have proposed legislation to provide additional funding for nursing home providers. Even if federal or state
legislation is enacted that provides additional funding to Medicaid providers, given the volatility of the economic
environment, it is difficult to predict the impact of this legislation on our clients’ liquidity and their ability to make
payments to us as agreed.
We have had varying collection experience with respect to our accounts and notes receivable. When contractual
terms are not met, we generally encounter difficulty in collecting amounts due from certain of our clients.
Therefore, we have sometimes been required to extend the period of payment for certain clients beyond
contractual terms. These clients include those who have terminated service agreements and slow payers expe-
riencing financial difficulties. In order to provide for these collection problems and the general risk associated with
the granting of credit terms, we have recorded bad debt provisions (in an Allowance for Doubtful Accounts) of
$2,200,000, $2,404,000 and $4,234,000 in the years ended December 31, 2010, 2009 and 2008, respectively (See
Schedule II-Valuation and Qualifying Accounts, for year-end balances). These provisions represent .3%, .3% and
.7%, as a percentage of total revenues, for the years ended December 31, 2010, 2009 and 2008, respectively. In
making our credit evaluations, in addition to analyzing and anticipating, where possible, the specific cases described
above, we consider the general collection risk associated with trends in the long-term care industry. We also
establish credit limits, perform ongoing credit evaluation and monitor accounts to minimize the risk of loss.
Notwithstanding our efforts to minimize credit risk exposure, our clients could be adversely affected if future
industry trends change in such a manner as to negatively impact their cash flows, as discussed in “Government
Regulation of Clients” and “Risk Factors” of this report. If our clients experience a negative impact in their cash
flows, it would have a material adverse effect on our consolidated results of operations and financial condition.
Competition
We compete primarily with the in-house support service departments of our potential clients. Most healthcare
facilities perform their own support service functions without relying upon outside management firms. In addition,
a number of local firms compete with us in the regional markets in which we conduct business. Several national
service firms are larger and have greater financial and marketing resources than us, although historically, such firms
have concentrated their marketing efforts on hospitals rather than the long-term care facilities typically serviced by
us. Although the competition to provide service to health care facilities is strong, we believe that we compete
effectively for new agreements, as well as renewals of existing agreements, based upon the quality and dependability
of our services and the cost savings we believe we can usually implement for existing and new clients.
Employees
At December 31, 2010, we employed approximately 5,400 management, office support and supervisory personnel.
Of these employees, approximately 400 held executive, regional/district management and office support positions,
and approximately 5,000 of these employees were on-site management personnel. On such date, we employed
approximately 26,000 hourly employees. Many of our hourly employees were previously support employees of our
clients. We manage, for a very limited number of our client facilities, the hourly employees who remain employed
by those clients.
7
Approximately 18% of our hourly employees are unionized. The majority of these employees are subject to
collective bargaining agreements that are negotiated by individual client facilities and are assented to us, so as to
bind us as an “employer” under the agreements. We may be adversely affected by relations between our client
facilities and the employee unions. We are also a direct party to negotiated collective bargaining agreements
covering a limited number of employees at a few facilities serviced by us. We believe our employee relations are
satisfactory.
(d) Financial Information about Geographic Areas
Our Housekeeping segment provides services in Canada, although essentially all of its revenues and net income,
99% in each category, are earned in one geographic area, the United States. The Dietary segment provides services
only in the United States.
(e) Available Information
Healthcare Services Group, Inc. is a reporting company under the Securities Exchange Act of 1934, as amended,
and files reports, proxy statements and other information with the Securities and Exchange Commission (the
“Commission” or “SEC”).The public may read and copy any of our filings at the Commissioner’s Public Reference
Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public
Reference Room by calling the Commission at 1-800-SEC-0330. Additionally, because we make filings to the
Commission electronically, you may access this information at the Commission’s internet site: www.sec.gov. This
site contains reports, proxies and information statements and other information regarding issuers that file
electronically with the Commission.
Website Access
Our website address is www.hcsgcorp.com. Our filings with the Commission, as well as other pertinent financial
and Company information are available at no cost on our website as soon as reasonably practicable after the filing
of such reports with the Commission.
Item 1A. Risk Factors.
We make 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, in this report and documents
incorporated by reference into this report, other public filings with the Securities and Exchange Commission, and
in our press releases. Such forward-looking statements are not historical facts but rather are based on current
expectations, estimates and projections about our business and industry, our beliefs and assumptions. Generally
they may include statements on: projections of revenues, net income, earnings per share, cash flows and other
financial data. Additionally, we may make forward-looking statements relating to business objectives of man-
agement and evaluations of the market we serve. Such forward-looking statements are subject to risks and
uncertainties that could cause actual results or objectives to differ materially from those projected.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.
We have described below what we believe are our most significant risk factors, which may be beyond our control
and could cause results to differ significantly from our projections.
8
We have one client, a nursing home chain, which due to its significant contribution to our total reve-
nues, we consider a Major Client.
Our Major Client accounted for 11% of our 2010 total consolidated revenues, consisting of 11% and 9% of our
Housekeeping and Dietary revenues, respectively. At December 31, 2010, amounts due from such client
represented less than 1% of our accounts receivable balance. Although we expect to continue the relationship
with this client, there can be no assurance thereof.The loss of such client, or a significant reduction in the revenues
we receive from such client, would have a material adverse effect on the results of operations of our two operating
segments. In addition, if such client changes its payment terms it would increase our accounts receivable balance
and have a material adverse effect on our cash flows and cash and cash equivalents.
Although we expect our acquisition of Contract Environmental Services, Inc. will result in benefits to our
Company, those benefits may not occur, or may be delayed, because of integration and other challenges
associated with the acquisition.
On May 1, 2009, we acquired essentially all of the assets of Contract Environmental Services, Inc. (“CES”), a South
Carolina based corporation which is a provider of professional housekeeping, laundry and dietary department
services to long-term care and related facilities. Achieving the benefits we expect from the acquisition of CES
depends in part on our ability to integrate CES and our operations and personnel in a timely and efficient manner.
Although this integration has largely occurred, there remain aspects of the integration, known and unknown,
which will take time to fully accomplish. Such integration challenges include, but are not limited to:
•
•
•
•
•
potential loss of key employees and management;
integration of acquired personnel into our culture and philosophies;
diversion of management focus and attention;
assumption of liabilities and potentially unknown liabilities including past failures to comply with
healthcare or other authorities’ regulations;
potential loss of clients acquired through the acquisition if there were changes in management of
CES or if our operations do not meet the financial or service expectations of such clients.
Our clients are concentrated in the health care industry which is currently undergoing considerable leg-
islative proposals to reform it.
We provide our services primarily to providers of long-term care. In March 2010, the U.S. Congress enacted the
Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, and is
considering legislation to reform healthcare in the United States which could significantly impact our clients. We
cannot predict what efforts, and to what extent, such legislation and proposals to contain healthcare costs will
ultimately impact our clients’ revenues through government reimbursements. Congress has enacted a number of
major laws during the past decade that have significantly altered, or may alter, overall government reimbursement
for nursing home services. Because our clients’ revenues are generally highly reliant on Medicare and Medicaid
reimbursement funding rates and mechanisms, the overall effect of these laws and trends in the long term care
industry have affected and could adversely affect the liquidity of our clients, resulting in their inability to make
payments to us on agreed upon payment terms. These factors, in addition to delays in payments from clients have
resulted in, and could continue to result in, significant additional bad debts in the future.
9
Federal health care reform legislation’s eventual impact, including requiring most individuals to have health
insurance and establish new regulation on health plans, may adversely affect our business and results of
operations.
The Act includes a large number of health-related provisions that become effective over the next four years,
including requiring most individuals to have health insurance and establishing new regulations on health plans.
While much of the cost of the recent healthcare legislation enacted will occur on or after 2014 due to provisions of
the legislation being phased in over time, changes to our healthcare cost structure could have an impact on our
business and operating costs. Providing such additional health insurance benefits to our employees or the payment
of penalties if such coverage is not provided, would increase our expense. If we are unable to pass-through these
charges to our clients to cover this expense, such increases in expense could adversely impact our business and
operating costs.
We have clients located in many states which have had and may continue to experience significant bud-
get deficits and such deficits may result in reduction of reimbursements to nursing homes.
Many states, in which our clients are located, have significant budget deficits as a result of lower than projected
revenue collections and increased demand for the funding of entitlements. As a result of these and other adverse
economic factors, state Medicaid programs are reconsidering previously approved increases in nursing home
reimbursement or are considering delaying those increases. Some states have over the past year indicated it is
possible they may be unable to make entitlement payments, including Medicaid payments to nursing homes. Any
disruption or delay in the distribution of Medicaid and related payments to our clients will adversely affect their
liquidity and impact their ability to pay us as agreed upon for the services provided.
The Company has substantial investment in the credit worthiness and financial condition of our
customers.
The largest current asset on the Company’s balance sheet on a net basis is our accounts and notes receivable
balances from our customers.We grant credit to substantially all of our customers. A decline in financial condition
across a significant component of our customer base could hinder our ability to collect amounts from our
customers. The potential causes of such decline include national or local economic downturns, customers’
dependence on continued Medicare and Medicaid funding and the impact of additional regulatory actions. When
contractual terms are not met, we generally encounter difficulty in collecting amounts due from certain of our
clients. Therefore, we have sometimes been required to extend the period of payment for certain clients beyond
contractual terms. These clients include those who have terminated service agreements and slow payers expe-
riencing financial difficulties. In making our credit evaluations, in addition to analyzing and anticipating, where
possible, the specific cases described above, we consider the general collection risk associated with trends in the
long-term care industry. We also establish credit limits, perform ongoing credit evaluation and monitor accounts
to minimize the risk of loss. Notwithstanding our efforts to minimize credit risk exposure, our clients could be
adversely affected if future industry trends change in such a manner as to negatively impact their cash flows. If our
clients experience a negative impact in their cash flows, it would have a material adverse effect on our results of
operations and financial condition.
We have a Paid Loss Retrospective Insurance Plan for general liability and workers’ compensation
insurance.
Under our insurance plans for general liability and workers’ compensation, predetermined loss limits are arranged
with our insurance company to limit both our per occurrence cash outlay and annual insurance plan cost. We
10
regularly evaluate our claims pay-out experience, present value factor and other factors related to the nature of
specific claims in arriving at the basis for our accrued insurance claims estimate. Our evaluation is based primarily
on current information derived from reviewing our claims experience and industry trends. In the event that our
claims experience and/or industry trends result in an unfavorable change, it would have an adverse effect on our
results of operations and financial condition.
We provide services in 47 states and are subject to numerous local taxing jurisdictions within those
states.
The taxability of our services is subject to various interpretations within the taxing jurisdictions of our markets.
Consequently, in the ordinary course of business, a jurisdiction may contest our reporting positions with respect to
the application of its tax code to our services. A jurisdiction’s conflicting position on the taxability of our services
could result in additional tax liabilities which we may not be able to pass on to our clients or could negatively
impact our competitive position in the respective location. Additionally, if we or one of our employees fail to
comply with applicable tax laws and regulations we could suffer civil or criminal penalties in addition to the
delinquent tax assessment. In the taxing jurisdictions where our services have been determined to be subject to tax,
the jurisdiction may increase the tax rate assessed on such services.We endeavor to pass-through to our clients such
tax increases. In the event we are not able to pass-through any portion of the tax increase, it may have an adverse
impact on our gross margin.
Our business and financial results could be adversely affected by unfavorable results of material litigation
or governmental inquiries.
We may from time to time become the subject in the ordinary course of business to material legal action related to,
among other things, general liability, payroll or employee-related matters, as well as inquiries from governmental
agencies. Legal actions could result in substantial monetary damages as well as adversely affect our reputation and
business status with our clients. As a result of the risks and consequences of legal actions, our results of operations
and financial position could be adversely affected.
We primarily provide our services pursuant to agreements which have a one year term, cancelable by
either party upon 30 to 90 days’ notice after the initial 90-day service agreement period.
We do not enter into long-term contractual agreements with our clients for the rendering of our services.
Consequently, our clients can unilaterally decrease the amount of services we provide or terminate all services
pursuant to the terms of our service agreements. Any loss of a significant number of clients during the first year of
providing services, for which we have incurred significant start-up costs or invested in an equipment installation,
could in the aggregate materially adversely affect our consolidated results of operations and financial position.
We are dependent on the management experience of our key personnel.
We manage and provide our services through a network of management personnel, from the on-site facility
manager up to the executive officers of our Company. Therefore, we believe that our ability to recruit and sustain
the internal development of managerial personnel is an important factor impacting future operating results and our
ability to successfully execute projected growth strategies. Our professional management personnel are the key
personnel in maintaining and selling additional services to current clients and obtaining new clients.
11
We may be adversely affected by inflationary or market fluctuations in the cost of products consumed
in providing our services or our cost of labor. Additionally, we rely on certain vendors for certain house-
keeping, laundry and dietary supplies.
The prices we pay for the principal items we consume in performing our services are dependent primarily on
current market prices. Additionally, our cost of labor may be influenced by unanticipated factors in certain market
areas or increases in collective bargaining agreements of our clients, to which we assent. We have consolidated
certain supply purchases with national vendors through agreements containing negotiated prospective pricing. In
the event such vendors are not able to comply with their obligations under the agreements and we are required to
seek alternative suppliers, we may incur increased costs of supplies. Additionally we may experience increased
pricing upon the renegotiation of our contracted agreements. Although we endeavor to pass on such increased
costs to our clients, any inability or delay in passing on such increases in costs could negatively impact our
profitability.
Our investments represent a significant amount of our assets that may be subject to fluctuating and even
negative returns depending upon interest rate movements and financial market conditions.
Although management believes we have a prudent investment policy, we are exposed to fluctuations in interest
rates and in the market values of our investment portfolio which could adversely impact our financial condition
and results of operations. Our marketable securities are primarily invested in municipal bonds. We believe that our
investment criteria which includes reducing our exposure to individual states, requiring certain credit ratings and
limiting our investments’ duration period, reduces our exposure related to the financial duress and budget shortfalls
that many state and local governments currently face.
Market expectations are high and rely greatly on execution of our growth strategy and related increases in
financial performance.
Management believes the historical price increases of our Common Stock reflect high market expectations for our
future operating results. In particular, our ability to attract new clients, through organic growth or acquisitions, has
enabled us to execute our growth strategy and increase market share. If, in the event we are not able to continue
historical client and revenue growth rates, our operating performance may be adversely affected and the high
expectations for our market performance may not be met. Any failure to meet the market’s high expectations for
our revenue and operating results may have an adverse effect on the market price of our Common Stock.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
We lease our corporate offices, located at 3220 Tillman Drive, Suite 300, Bensalem, Pennsylvania 19020. We also
lease office space at other locations in Pennsylvania, Colorado, South Carolina, Connecticut, Florida, Illinois,
California, and New Jersey. These locations serve as divisional or regional offices providing management and
administrative services to both of our operating segments in their respective geographical areas.
We are also provided with office and storage space at each of our client facilities.
Management does not foresee any difficulties with regard to the continued utilization of all of the aforementioned
premises. We also believe that such properties are sufficient for our current operations.
12
We presently own laundry equipment, office furniture and equipment, housekeeping equipment and vehicles. Such
office furniture and equipment, and vehicles are primarily located at our corporate office, warehouse, and divisional
and regional offices. We have housekeeping equipment at all client facilities where we provide services under a full
service housekeeping agreement. Generally, the aggregate cost of housekeeping equipment located at each client
facility is less than $2,500. Additionally, we have laundry installations at approximately 90 client facilities. Our cost
of such laundry installations ranges between $5,000 and $100,000. We believe that such laundry equipment, office
furniture and equipment, housekeeping equipment and vehicles are sufficient for our current operations.
Item 3. Legal Proceedings.
As of December 31, 2010, there were no material pending legal proceedings to which we were a party, or as to
which any of our property was subject, other than routine litigation, claims and/or proceedings believed to be
adequately covered by insurance or which could be satisfied by us through monetary payments of non-material
amounts.
Item 4. Submission of Matters to a Vote of Security
Holders.
(Removed and Reserved)
13
PART II
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities.
(a) Market Information
Our common stock, $.01 par value (the “Common Stock”), is traded under the symbol “HCSG” on the
NASDAQ Global Select Market. On February 16, 2011, there were approximately 66,214,000 shares of Common
Stock outstanding and held by non-affiliates.
The high and low sales price quotations for our Common Stock during the years ended December 31, 2010 and
2009 ranged as follows (adjusted where applicable, to reflect the 3 for 2 stock split in the form of a 50% common
stock dividend on November 12, 2010):
Quarter
First
Second
Third
Fourth
First
Second
Third
Fourth
Holders
2010
High
Low
$15.19
$13.67
$15.57
$12.47
$15.79
$12.27
$17.05
$15.10
2009
High
Low
$10.96
$ 9.21
$13.15
$ 9.55
$12.95
$11.39
$14.67
$11.92
We have been advised by our transfer agent, American Stock Transfer and Trust Company, that we had 850
holders of record of our Common Stock as of February 16, 2011. Based on reports of security position listings
compiled for the 2010 annual meeting of shareholders, we believe we may have approximately 5,100 beneficial
owners of our Common Stock.
(b) Dividends
We have paid regular quarterly cash dividends since the second quarter of 2003. During 2010, we paid regular
quarterly cash dividends totaling approximately $39,285,000, as follows (adjusted where applicable, to reflect the 3
for 2 stock split in the form of a 50% common stock dividend on November 12, 2010):
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Cash dividend per common share
$
.1400
$
.1467
$
.1533
$
.1550
Total cash dividends paid
$9,224,000
$9,677,000
$10,124,000
$10,260,000
Record date
Payment date
14
February 12
April 23
July 23
October 22
March 5
May 14
August 6
November 5
Additionally, on January 25, 2011, our Board of Directors declared a regular quarterly cash dividend of $.15625 per
common share, which will be paid on March 4, 2011 to shareholders of record as of the close of business on
February 11, 2011.
On October 12, 2010, our Board of Directors declared a three-for-two stock split in the form of a 50% common
stock dividend which was paid on November 12, 2010 to shareholders of record at the close of business on
November 8, 2010. All fractional shares were rounded up. The effect of the stock dividend was to increase
Common Shares outstanding by approximately 22,000,000 shares.
Our Board of Directors reviews our dividend policy on a quarterly basis. Although there can be no assurance that
we will continue to pay dividends or as to the amount of the dividend, we expect to continue to pay a regular
quarterly cash dividend. In connection with the establishment of our dividend policy, we adopted a Dividend
Reinvestment Plan in 2003.
(c) Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth for the Company’s equity compensation plans, on an aggregated basis, the number of
shares of its Common Stock subject to outstanding options, the weighted-average exercise price of outstanding
options, and the number of shares remaining available for future award grants as of December 31, 2010.
Number of Securities
Remaining Available
for Future
Issuance Under
Equity
Weighted-Average
Exercise Price of
Compensation Plans
(Excluding
Number of
Securities to be
Issued Upon
Exercise of
Outstanding Options,
Outstanding Options,
Securities
Warrants and Rights
(a)
Warrants and Rights
(b)
Reflected in Column
(a))(c)
3,002,000(1)
N/A
3,002,000
$9.14
N/A
$9.14
5,468,000(2)
N/A
5,468,000
Plan Category
Equity compensation plans approved by security
holders
Equity compensation plans not approved by
security holders
Total
(1) Represents shares of Common Stock issuable upon exercise of outstanding options granted under the 2002 Stock Option Plan,
the 1996 Non-employee Director’s Stock Option Plan, or the 1995 Incentive and Non-Qualified Stock Option Plan (the “Stock
Option Plans”).
(2) Includes options to purchase 2,265,000 shares available for future grant under the Company’s Stock Option Plans. Also includes
2,691,000 and 512,000 shares available for issuance under the Company’s 1999 Employee Stock Purchase Plan and 1999
Deferred Compensation Plan, respectively (collectively, the “1999 Plans”). Treasury shares may be issued under the 1999 Plans.
15
(d) Performance Graph
The graph below matches Healthcare Services Group, Inc.’s cumulative 5-year total shareholder return on
common stock with the cumulative total returns of the S&P 500 index and the S&P Health Care Distributors
index. The graph tracks the performance of a $100 investment in our common stock and in each of the indexes
(with the reinvestment of all dividends) from 12/31/2005 to 12/31/2010.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Healthcare Services Group, Inc., the S&P 500 Index
and the S&P Health Care Distributors Index
$250
$200
$150
$100
$50
$0
12/05
12/06
12/07
12/08
12/09
12/10
Healthcare Services Group, Inc.
S&P 500
S&P Health Care Distributors
*$100 invested on 12/31/05 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright· 2011 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
Healthcare Services Group, Inc.
100.00
142.74
159.92
124.53
174.77
206.85
S&P 500
100.00
115.80
122.16
76.96
97.33
111.99
S&P Health Care Distributors
100.00
98.64
102.74
64.51
93.90
112.15
12/05
12/06
12/07
12/08
12/09
12/10
The stock price performance included in this graph is not necessarily indicative of future price performance.
16
Item 6. Selected Financial Data.
The following selected condensed consolidated financial data has been derived from, and should be read in
conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and
our Consolidated Financial Statements and Notes thereto, included elsewhere in this report on Form 10-K and
incorporated herein by reference.
Selected Operating Results
Revenues
Net income
Basic earnings per Common Share
Diluted earnings per Common Share
Selected Balance Sheet Date
Total assets
Stockholders’ equity
Selected Other Financial Data
Working capital
(in thousands except for per share data)
Years Ended December 31
2010
2009
2008
2007
2006
$ 773,956
$ 692,695
$ 602,718
$ 577,721
$ 511,631
$ 34,441
$ 30,342
$ 26,614
$ 29,578
$ 25,452
$
$
0.52
0.51
$
$
0.46
0.46
$
$
0.41
0.40
$
$
0.47
0.45
$
$
0.41
0.39
$ 277,934
$ 265,892
$ 248,561
$ 243,368
$ 215,556
$ 213,079
$ 208,774
$ 201,682
$ 194,718
$ 165,477
$ 181,244
$ 177,453
$ 177,573
$ 167,217
$ 140,627
Cash dividends per common share
$
0.60
$
0.49
$
0.39
$
0.28
$
0.21
Weighted average number of common shares outstanding for
basic EPS
65,917
65,376
64,697
63,429
61,764
Weighted average number of common shares outstanding for
diluted EPS
67,008
66,429
66,038
65,771
64,721
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operation.
Cautionary Statement Regarding Forward Looking Statements
This report and documents incorporated by reference into this report contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934 (the “Exchange Act”), as amended, which are not historical facts but rather are based on current expectations,
estimates and projections about our business and industry, our beliefs and assumptions. Words such as “believes”,
“anticipates”, “plans”, “expects”, “will”, “goal”, and similar expressions are intended to identify forward-looking
statements.The inclusion of forward-looking statements should not be regarded as a representation by us that any of
our plans will be achieved. We undertake no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. Such forward looking information is also subject
to various risks and uncertainties. Such risks and uncertainties include, but are not limited to, risks arising from our
providing services exclusively to the health care industry, primarily providers of long-term care; proposed and enacted
legislation and/or regulations to reform the U.S. healthcare system in an effort to contain healthcare costs; credit and
collection risks associated with this industry; one client accounting for approximately 11.0% of revenues in 2010 —
(see notes 1 and 12, “Major Client” in the accompanying Notes to Consolidated Financial Statements); our claims
experience related to workers’ compensation and general liability insurance; the effects of changes in, or interpre-
tations of laws and regulations governing the industry, including state and local regulations pertaining to the
taxability of our services; and the risk factors described in Part I in this report under “Government Regulation of
17
Clients”, “Competition”, “Service Agreements/Collections”, and under Item IA, “Risk Factors”. Many of our clients’
revenues are highly contingent on Medicare and Medicaid reimbursement funding rates, which Congress has affected
through the enactment of a number of major laws during the past decade, most recently the March 2010 enactment
of the Act. Currently, the U.S. Congress is considering further changes or revising legislation relating to health care in
the United States which, among other initiatives, may impose cost containment measures impacting our clients.
These enacted and proposed laws have significantly altered, or threaten to alter, overall government reimbursement
funding rates and mechanisms. In addition, the current economic crises could adversely affect such funding. The
overall effect of these laws and trends in the long-term care industry has affected and could adversely affect the
liquidity of our clients, resulting in their inability to make payments to us on agreed upon payment terms. These
factors, in addition to delays in payments from clients, 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, provide new services to existing clients, achieve modest price increases on current service
agreements with existing clients and maintain internal cost reduction strategies at our various operational levels.
Furthermore, we believe that our ability to sustain the internal development of managerial personnel is an
important factor impacting future operating results and successfully executing projected growth strategies.
Results of Operations
The following discussion is intended to provide the reader with information that will be helpful in understanding
our financial statements including the changes in certain key items in comparing financial statements period to
period. We also intend to provide the primary factors that accounted for those changes, as well as a summary of
how certain accounting principles affect our financial statements. In addition, we are providing information about
the financial results of our two operating segments to further assist in understanding how these segments and their
results affect our consolidated results of operations. This discussion should be read in conjunction with our
financial statements as of December 31, 2010 and the year then ended and the notes accompanying those financial
statements contained herein under Item 8.
As disclosed in Note 2 of the Notes to the Consolidated Financial Statements, CES was acquired May 1, 2009.The
CES results of operations, for the period May 1, 2009 to December 31, 2009 are included in our 2009 consolidated
results of operations and financial information presented below. Such impact, when material and quantifiable, is
discussed where we believe it would contribute to the reader’s understanding of our financial statements.
Overview
We provide management, administrative and operating expertise and services to the housekeeping, laundry, linen,
facility maintenance and dietary service departments of the health care industry, including nursing homes,
retirement complexes, rehabilitation centers and hospitals located throughout the United States. We believe that
we are the largest provider of housekeeping and laundry management services to the long-term care industry in the
United States, rendering such services to approximately 2,500 facilities in 47 states as of December 31, 2010.
Although we do not directly participate in any government reimbursement programs, our clients’ reimbursements
are subject to government regulation. Therefore, they are directly affected by any legislation relating to Medicare
and Medicaid reimbursement programs.
18
We provide our services primarily pursuant to full service agreements with our clients. In such agreements, we are
responsible for the day to day management of the department managers and hourly employees located at our
clients’ facilities. We also provide services on the basis of a management-only agreement for a very limited number
of clients. Our agreements with clients typically provide for renewable one year service terms, cancelable by either
party upon 30 to 90 days’ notice after the initial 90-day period.
We are organized into two reportable segments; housekeeping, laundry, linen and other services (“Housekeeping”),
and dietary department services (“Dietary”). At December 31, 2010, Housekeeping is being provided at essentially
all of our approximately 2,500 client facilities, generating approximating 77% or $595,685,000 of 2010 total
revenues. Dietary is being provided to approximately 380 client facilities at December 31, 2010 and contributed
approximately 23% or $178,271,000 of 2010 total revenues.
Housekeeping consists of the managing of the client’s housekeeping department which is principally responsible
for the cleaning, disinfecting and sanitizing of patient rooms and common areas of a client’s facility, as well as the
laundering and processing of the personal clothing belonging to the facility’s patients. Also within the scope of this
segment’s service is the responsibility for laundering and processing of the bed linens, uniforms and other assorted
linen items utilized by a client facility.
Dietary consists of managing the client’s dietary department which is principally responsible for food purchasing,
meal preparation and providing dietician consulting professional services, which includes the development of a
menu that meets the patient’s dietary needs.
Our ability to acquire new clients and increase revenues is affected by many factors. Competitive factors consist
primarily of competing with the potential client utilizing an in-house support staff to provide services similar to
ours, as well as local companies which provide services similar to ours. We do not believe that there are any other
companies, on a national or local level, which have a significant presence or impact on our procurement of new
clients in our market. We believe the primary revenue drivers of our business are our ability to obtain new clients
and to pass through, by means of service billing increases, increases in our cost of providing the services. In addition
to the recoupment of costs increases, we endeavor to obtain modest annual revenue increases from our existing
clients to preserve current profit margins at the facility level. The primary economic factor in acquiring new clients
is our ability to demonstrate the cost-effectiveness of our services.This is because many of our clients’ revenues are
generally highly reliant on Medicare and Medicaid reimbursement funding rates and mechanisms.Therefore, their
economic decision-making process in engaging us is driven significantly by their reimbursement funding rate
structure in relation to how their costs are currently being reimbursed and the financial impact on their
reimbursement as a result of engaging us for the respective services. Another factor is our ability to demonstrate to
potential clients the benefit of being relieved of the administrative and operational challenges related to the day-to-
day management of their respective department services for which they contract with us. In addition, we must be
able to assure new clients that we will be able to improve the quality of service which they are providing to their
patients and residents. We believe the factors discussed above are equally applicable to each of our segments with
respect to acquiring new clients and increasing revenues.
Primarily, our costs of services provided can experience volatility and impact our operating performance in two key
cost indicators. They are costs of labor, and costs of supplies, although the volatility of these costs impacts each
segment somewhat differently due to the respective costs as a percentage of that segment’s revenues. Housekeeping
is more significantly impacted than Dietary as a consequence of our management of our costs of labor. Such costs
of labor can account for approximately 80%, as a percentage of Housekeeping revenues. Dietary costs of labor
account for approximately 50%, as a percentage of Dietary revenues. Changes in wage rates as a result of legislative
or collective bargaining actions, anticipated staffing levels, and other unforeseen variations in our use of labor at a
19
client service location or in management labor costs will result in volatility of these costs. In contrast, supplies
consumed in performing our services is more significant for Dietary, accounting for approximately 40%, as a
percentage of Dietary revenues, of total operating costs incurred at a Dietary facility service location. House-
keeping supplies, including linen products, account for approximately 7%, as a percentage of Housekeeping
revenues, of total operating costs incurred at a Housekeeping facility service location. Generally, the volatility of
these expenses is influenced by factors outside of our control and is unpredictable. This is because Housekeeping
and Dietary supplies are principally commodity products and affected by market conditions specific to the
respective products. Although we endeavor to pass on such increases in labor and supplies costs to our clients, the
inability or delay in procuring service billing increases to reflect these additional costs would negatively impact our
profit margins.
As a result of the current economic crisis, many states have significant budget deficits. State Medicaid programs are
experiencing increased demand, and with lower revenues than projected, they have fewer resources to support their
Medicaid programs. In addition, Federal health reform legislation has been enacted that would significantly expand
state Medicaid programs and their related costs. As a result, some state Medicaid programs are reconsidering
previously approved increases in nursing home reimbursement or are considering delaying those increases. A few
states have indicated it is possible they will run out of cash to pay Medicaid providers, including nursing homes.
Any of these changes would adversely affect the liquidity of our clients, resulting in their inability to make
payments to us as agreed upon.
In 2009 and 2010, Federal economic stimulus legislation was enacted to counter the impact of the economic crisis
on state budgets. The legislation includes the temporary provision of additional federal matching funds to help
states maintain their Medicaid programs. The legislation passed in 2010 extended the benefits until June 2011,
albeit at a reduced reimbursement rate. It is uncertain whether additional federal funding will be provided in the
future or if it will be provided in the form of matching funds. In addition, certain states have proposed legislation to
provide additional funding for nursing home providers. Even if federal or state legislation is enacted that provides
additional funding to Medicaid providers, given the volatility of the economic environment, it is difficult to predict
the impact of this legislation on our clients’ liquidity and their ability to make payments to us as agreed.
We currently operate one wholly-owned subsidiary, Huntingdon Holdings, Inc. (“Huntingdon”). Huntingdon
invests our cash and cash equivalents, as well as managing our portfolio of available-for-sale marketable securities.
On March 1, 2009, we sold our wholly-owned subsidiary HCSG Supply, Inc. (“Supply”) for approximately
$1,100,000 financed principally through our acceptance of a secured promissory note which is recorded in our
notes receivable in the accompanying December 31, 2010 and 2009 balance sheet. As a result of the Supply sale, we
recorded an immaterial gain in our 2009 consolidated statements of income.
20
Consolidated Operations
The following table sets forth, for the years indicated, the percentage which certain items bear to consolidated
revenues:
Revenues
Operating costs and expenses:
Costs of services provided
Selling, general and administrative
Investment and interest
Income before income taxes
Income taxes
Net income
Relation to Consolidated Revenues
Years Ended December 31,
2010
2009
2008
100.0%
100.0%
100.0%
85.9%
86.3%
86.5%
7.4%
0.3%
7.0%
2.5%
4.5%
7.3%
0.7%
7.1%
2.7%
4.4%
6.5%
0.2%
7.2%
2.8%
4.4%
Subject to the factors noted in the Cautionary Statement Regarding Forward Looking Statements included in this
report, we anticipate, although there can be no assurance thereof, our financial performance in 2011 may be
comparable to the 2010 percentages presented in the above table as they relate to consolidated revenues.
Housekeeping is our largest and core reportable segment, representing approximately 77% of 2010 consolidated
revenues. Dietary revenues represented approximately 23% of 2010 consolidated revenues.
Although there can be no assurance thereof, we believe that in 2011 each of Housekeeping’s and Dietary’s revenues,
as a percentage of consolidated revenues, will remain approximately the same as their respective 2010 percentages
noted above. Furthermore, we expect the sources of growth in 2011 for the respective operating segments will be
primarily the same as historically experienced. Accordingly, although there can be no assurance thereof, the growth
in Dietary is expected to come from our current Housekeeping client base, while growth in Housekeeping will
primarily come from obtaining new clients.
2010 Compared with 2009
The following table sets forth 2010 income statement key components that we use to evaluate our financial
performance on a consolidated and reportable segment basis, as well as the percentage increases of each compared
to 2009 amounts. The differences between the reportable segments’ operating results and other disclosed data and
our consolidated financial statements relate primarily to corporate level transactions and recording of transactions
at the reportable segment level which use methods other than generally accepted accounting principles.
Reportable Segments
Housekeeping
Dietary
Consolidated
% inc./
(dec.)
Corporate and
Eliminations
Amount
% inc. Amount
% inc.
Revenues
$773,956,000
11.7% $
(29,000)
$595,924,000
11.9% $178,061,000
11.4%
Cost of services provided
665,149,000
Selling, general and administrative
57,310,000
11.3
14.0
57,310,000
Investment and interest income
2,622,000
(43.3)
2,622,000
(45,165,000)
539,837,000
12.4
170,477,000
12.1
—
—
—
—
—
—
—
—
Income before income taxes
$ 54,119,000
9.7% $ (9,552,000)
$ 56,087,000
7.1% $ 7,584,000
(2.5)%
21
Revenues
Consolidated
Consolidated revenues increased 11.7% to $773,956,000 in 2010 compared to $692,695,000 in 2009 as a result of
the factors discussed below under Reportable Segments.
We have one client, a nursing home chain (“Major Client”), which in 2010 and 2009 accounted for 11% and 12%,
respectively, of consolidated revenues. At both December 31, 2010 and 2009 amounts due from such client
represented less than 1% of our accounts receivable balance. Although we expect to continue the relationship with
this client, there can be no assurance thereof, and the loss of such client, or a significant reduction in the revenues
we receive from this client, would have a material adverse effect on the results of operations of our two operating
segments. In addition, if such client changes its payment terms it would increase our accounts receivable balance
and have a material adverse effect on our cash flows and cash and cash equivalents.
Reportable Segments
Housekeeping’s 11.9% net growth in reportable segment revenues resulted primarily from an increase in revenues
attributable to service agreements entered into with new clients. Excluding revenue from CES operations,
Housekeeping segment revenue would have increased 11.0%.
Dietary’s 11.4% net growth in reportable segment revenues is primarily a result of providing this service to an
increasing number of existing Housekeeping clients. Excluding revenue from CES operations, Dietary segment
revenue would have increased 6.2%.
We derived 11% and 9%, respectively, of Housekeeping and Dietary’s 2010 revenues from our Major Client.
Costs of services provided
Consolidated
As a percentage of consolidated revenues, cost of services decreased to 85.9% in 2010 from 86.3% in 2009. The
following table provides a comparison of the primary cost of services provided-key indicators that we manage on a
consolidated basis in evaluating our financial performance.
Cost of Services Provided-Key Indicators
Bad debt provision
Workers’ compensation and general liability insurance
2010% 2009% Decr%
.3
3.6
.3
3.9
—
(.3)
The bad debt expense remained consistent as a percentage of revenue as there was not an increase in expense
recorded related to amounts due from clients which we evaluate as being subject to recovery uncertainty. In the
period when we evaluate that there is an uncertainty associated with the collectability of amounts due from a client,
we record a bad debt provision based upon our initial estimate of ultimate collectability. We revise such provision
as additional information is available which we believe enables us to have a more accurate estimate of the
collectability of an account. Some of our clients may experience liquidity problems because of governmental
funding or operational issues. Such liquidity problems may cause them to not pay us as agreed upon or necessitate
them filing for bankruptcy protection. In the event of additional clients filing for bankruptcy protection, we would
increase our bad debt provision during the reporting period when such filing occurs. Therefore, if more clients file
for bankruptcy protection or if we have to increase our current provision related to existing bankruptcies, our bad
debt provision may increase from our last two years’ average of .3%, as a percentage of consolidated revenues.
22
The workers’ compensation and general liability insurance expense decrease is primarily the result of favorable
claims’ experience during the year as compared to the overall increase in revenue for the year.
Reportable Segments
Cost of services provided for Housekeeping, as a percentage of Housekeeping revenues, for 2010 increased to
90.6% compared to 90.2% in 2009. Cost of services provided for Dietary, as a percentage of Dietary revenues,
increased for 2010 to 95.7% from 95.1% in 2009.
The following table provides a comparison of the primary cost of services provided-key indicators, as a percentage
of the respective segment’s revenues that we manage on a reportable segment basis in evaluating our financial
performance:
Cost of Services Provided-Key Indicators
2010% 2009% Incr (Decr)%
Housekeeping labor and other labor costs
Housekeeping supplies
Dietary labor and other labor costs
Dietary supplies
81.1
6.9
53.5
39.4
81.3
6.4
52.5
40.0
(.2)
.5
1.0
(.6)
The decrease in Housekeeping labor and other labor costs, as a percentage of Housekeeping revenues, resulted
primarily from efficiencies recognized in managing labor at the facility level. We can realize volatility in
Housekeeping labor and other labor costs from time to time as a result of inefficient management of labor
in respect to adhering to established labor and other labor costs benchmarks at various operational levels, or the
timing of passing through to clients, changes in wage rates as a result of legislative or collective bargaining actions.
Although we believe these factors were controlled effectively in 2010 in comparison to 2009, ineffective control of
these factors in the future would result in unfavorable volatility in our labor and other labor costs. The increase in
Housekeeping supplies, as a percentage of Housekeeping revenues, resulted primarily from an increase in linen
supplies due to the growth in laundry and linen revenue. We do realize volatility in the costs of supplies utilized in
providing our Housekeeping services but we work to mitigate any vendor price increases through efficiencies in
managing such costs. Our supplies’ costs are impacted by commodity pricing factors, which in many cases are
unpredictable and outside of our control. Although we endeavor to pass on to clients such increased costs, from
time to time, sporadic unanticipated increases in the costs of certain supply items due to economic conditions may
result in a timing delay in obtaining such increases from our clients. Additionally, if the increase is a result of a
temporary market condition or change in availability of the specific commodity, and trends indicate it will not
continue, we may not be able to pass such temporary increase on to our clients until the time of our next scheduled
annual service billing review.
The increase in Dietary labor and other labor costs, as a percentage of Dietary revenues, resulted from inefficiencies
in managing these costs at the facility level. As noted above in the Housekeeping labor and other labor costs
discussion, our ability to control volatility in labor and other labor costs is directly related to our efficient
management of labor at the various Dietary operational levels in respect to established staffing benchmarks, as well
as procuring on a timely basis increases from clients to reflect increased labor and other labor costs. We believe
Dietary’s increase in labor and other labor costs can be reduced in future periods by addressing such volatility
factors effectively.
The decrease in Dietary supplies, as a percentage of Dietary revenues, is a result of improved management of these
costs and more favorable vendor prices obtained through further consolidation of dietary supply vendors. Dietary
supplies, to a much greater extent than Housekeeping supplies, are impacted by commodity pricing factors, which
in many cases are unpredictable and outside of our control. Although we endeavor to pass on to clients such
23
increased costs, from time to time, sporadic unanticipated increases in the costs of certain supply items due to
market economic conditions may result in a timing delay in passing on such increases to our clients. It is this type of
spike in Dietary supplies’ costs that could most adversely affect Dietary’s operating performance. The adverse effect
would be realized if we delay in passing on such costs to our clients or in instances where we may not be able to pass
such increase on to our clients until the time of our next scheduled service billing review. We endeavor to mitigate
the impact of unanticipated increase in such supplies’ costs thought consolidation of vendors, which increases our
ability to obtain reduced pricing.
Consolidated Selling, General and Administrative Expense
Years Ended
December 31, 2010
December 31, 2009 % Inc./(Dec.)
Selling, general and administrative expense w/o deferred
compensation change
(a)
$55,985,000
$48,472,000
Gain deferred compensation fund
1,325,000
1,797,000
Consolidated selling, general and administrative expense
(b)
$57,310,000
$50,269,000
15.5%
(26.3)%
14.0%
(a) Selling, general and administrative expense excluding the gain of the deferred compensation fund.
(b) Consolidated selling, general and administrative expense reported for the period presented.
Although our growth in consolidated revenues was 11.7% for the year ended December 31, 2010, selling, general
and administrative expenses excluding gain of deferred compensation fund increased 15.5% or $7,513,000
compared to the 2009 comparable period. Consequently for the year ended December 31, 2010, selling, general
and administrative expenses (excluding impact of deferred compensation fund), as a percentage of consolidated
revenues, increased to 7.2% of consolidated revenues as compared to 7.0% in the 2009 comparable period. This
percentage increase resulted primarily from an increase in our payroll and payroll related expenses which grew in
advance of the new business that was obtained during the course of the year. We expect to maintain selling, general
and administrative expenses as a percentage of consolidated revenues consistent with historical levels in 2011.
The increase in consolidated selling, general and administrative expenses was partially attributable to an increase in
compensation expense (reported in this financial statement item) reflecting the increase in our Deferred
Compensation liability due to an increase in the market value of the investments held in our Deferred
Compensation Fund as noted below in Consolidated Investment and Interest Income discussion. Consolidated
selling, general and administrative expenses increased $7,041,000 or 14.0%.
Consolidated Investment and Interest Income
Investment and interest income, as a percentage of consolidated revenues, decreased to 0.3% for the year ended
December 31, 2010 compared to 0.7% for the comparable period in 2009.The decrease in investment and interest
income was primarily attributable to the decrease in interest earned, and realized and unrealized net gains on our
marketable securities portfolio during this period. Additionally, we recognized a lower increase in the market value
of the investments held in our Deferred Compensation Fund compared to the prior year. The decrease in interest
income derived from our marketable securities resulted partially from a reduction in the amount of change in our
marketable securities portfolio during 2010. From time to time in 2010, we sold securities to increase cash and cash
equivalents to fund our revenue growth. Additionally, we realized lower rate of returns on our marketable securities
and on cash and cash equivalents during the year.
24
Income before IncomeTaxes
Consolidated
As a result of the discussion above related to revenues and expenses, consolidated income before income taxes for
2010 decreased slightly to 7.0%, as a percentage of consolidated revenues, compared to 7.1% in 2009.
Reportable Segments
Housekeeping’s 7.1% increase in income before income taxes is primarily attributable to the gross profit earned on
the 11.9% increase in organic reportable segment revenues.
Dietary’s income before income taxes decrease of 2.5% on a reportable segment basis is primarily attributable to
factors discussed in Dietary’s cost of services key indicators, which was offset by the gross profit earned on the
11.4% increase in reportable segment revenues and the 16.7% CES’ contribution to Dietary’s 2010 increase in
income before income taxes.
Consolidated Income Taxes
Our effective tax rate was 36.4% for the year ended December 31, 2010 and 38.5% for 2009. The decrease in the
effective tax rate was primarily the result of tax credits realized upon the filing, in the third quarter of 2010, of the
2009 income tax return compared to estimated tax credits for previous fiscal periods. Additionally, there was a
slight decrease in the effective tax rate resulting from changes in the apportionment of our income among the states
within which we do business that have positively impacted our combined state income taxes.
Absent any significant change in federal, or state and local tax laws, we expect our effective tax rate for 2011 to
approximate a rate between our 2010 rate of 36.4% and our historical rate of 38.5%. Our actual 2011 rate will be
impacted by our ability to obtain available 2011 tax credits related to the Hiring Incentives to Restore Employment
Act (“HIRE Act”) that was enacted in March 2010. However, due to the requirements of the realization of this
credit, the effect cannot be reasonably estimated at this time. Our effective tax rate differs from the federal income
tax statutory rate principally because of the effect of state and local income taxes.
Consolidated Net Income
As a result of the matters discussed above, consolidated net income as a percentage of revenue for 2010 slightly
increased to 4.5% compared to 4.4% for 2009.
2009 Compared with 2008
The following table sets forth 2009 income statement key components that we use to evaluate our financial
performance on a consolidated and reportable segment basis, as well as the percentage increases of each compared
to 2008 amounts. The differences between the reportable segments’ operating results and other disclosed data and
our consolidated financial statements relate primarily to corporate level transactions and recording of transactions
at the reportable segment level which use methods other than generally accepted accounting principles.
Reportable Segments
Housekeeping
Dietary
Consolidated % inc.
Corporate and
Eliminations
Amount
% inc. Amount
% inc.
Revenues
Cost of services provided
$692,695,000
597,715,000
14.9% $
14.7
127,000
(34,696,000)
$532,723,000
480,348,000
9.0% $159,845,000
152,063,000
8.6
38.5%
35.6
Selling, general and administrative
50,269,000
27.2
50,269,000
—
—
—
—
Investment and interest income
Income before income taxes
4,624,000
$ 49,335,000
242.8
4,624,000
14.0% $(10,822,000)
—
$ 52,375,000
—
—
12.4% $ 7,782,000
—
137.9%
25
Revenues
Consolidated
Consolidated revenues increased 14.9% to $692,695,000 in 2009 compared to $602,718,000 in 2008 as a result of
the factors discussed below under Reportable Segments.
Our Major Client in 2009 and 2008 accounted for 12% and 15%, respectively, of consolidated revenues. At both
December 31, 2009 and 2008 amounts due from such client represented less than 1% of our accounts receivable
balance. Although we expect to continue the relationship with this client, there can be no assurance thereof, and
the loss of such client, or a significant reduction in the revenues we receive from this client, would have a material
adverse effect on the results of operations of our two operating segments. In addition, if such client changes its
payment terms it would increase our accounts receivable balance and have a material adverse effect on our cash
flows and cash and cash equivalents.
Reportable Segments
Housekeeping’s 9.0% net growth in reportable segment revenues resulted primarily from an increase in revenues
attributable to service agreements entered into with new clients. CES accounted for approximately 3% of the
increase in housekeeping segment revenue.
Dietary’s 38.5% net growth in reportable segment revenues is primarily a result of providing this service to an
increasing number of existing Housekeeping clients. CES accounted for approximately 15% of the increase in
Dietary segment revenue.
We derived 13% and 11%, respectively, of Housekeeping and Dietary’s 2009 revenues from our Major Client.
Costs of services provided
Consolidated
As a percentage of consolidated revenues, cost of services decreased slightly to 86.3% in 2009 compared to 86.5% in
2008. The following table provides a comparison of the primary cost of services provided-key indicators that we
manage on a consolidated basis in evaluating our financial performance.
Cost of Services Provided-Key Indicators
2009% 2008% Inc/(Decr)%
Bad debt provision
Workers’ compensation and general liability insurance
.3
3.9
.7
3.4
(.4)
.5
The decrease in bad debt provision is primarily a result of less expense recorded related to certain nursing homes
filing for bankruptcy. In the period when a client files for bankruptcy, we record a bad debt provision based upon
our initial estimate of ultimate collectability. We revise such provision as additional information is available which
we believe enables us to have a more accurate estimate of the collectability of an account. Some of our clients may
experience liquidity problems because of governmental funding or operational issues. Such liquidity problems may
cause them to not pay us as agreed upon or necessitate them filing for bankruptcy protection. In the event of
additional clients filing for bankruptcy protection, we would increase our bad debt provision during our reporting
period of such filing. Therefore, if more clients file for bankruptcy protection or if we have to increase our current
provision related to existing bankruptcies, our bad debt provision may increase from our last two years’ average of
.5%, as a percentage of consolidated revenues.
The workers’ compensation and general liability insurance expense increase is primarily a result of unfavorable
claims’ experience during the year.
26
Reportable Segments
Cost of services provided for Housekeeping, as a percentage of Housekeeping revenues, for 2009 decreased to
90.2% compared to 90.5% in 2008. Cost of services provided for Dietary, as a percentage of Dietary revenues,
decreased for 2009 to 95.1% from 97.2% in 2008.
The following table provides a comparison of the primary cost of services provided-key indicators, as a percentage
of the respective segment’s revenues that we manage on a reportable segment basis in evaluating our financial
performance:
Cost of Services Provided-Key Indicators
2009% 2008% Inc/(Decr)%
Housekeeping labor and other labor costs
Housekeeping supplies
Dietary labor and other labor costs
Dietary supplies
81.3
6.4
52.5
40.0
81.4
6.2
53.2
40.1
(.1)
.2
(.7)
(.1)
Housekeeping labor and other labor costs, as a percentage of Housekeeping revenues, remained essentially
unchanged in comparison to the prior year. We can realize volatility in Housekeeping labor and other labor costs
from time to time as a result of inefficient management of labor in respect to adhering to established labor and
other labor costs benchmarks at various operational levels, or the timing of passing through to clients’ changes in
wage rates as a result of legislative or collective bargaining actions. Although we believe these factors were
controlled effectively in 2009 in comparison to 2008, ineffective control of these factors in the future would result
in unfavorable volatility in our labor and other labor costs. Housekeeping supplies increased slightly in comparison
to prior year.We do realize volatility in the costs of supplies utilized in providing our Housekeeping services but we
were able to mitigate any vendor price increases thru efficiencies in managing such costs. Our supplies’ costs are
impacted by commodity pricing factors, which in many cases are unpredictable and outside of our control.
Although we endeavor to pass on to clients such increased costs, from time to time, sporadic unanticipated
increases in the costs of certain supply items due to economic conditions may result in a timing delay in obtaining
such increases from our clients. Additionally, if the increase is a result of a temporary market condition or change in
availability of the specific commodity, and trends indicate it will not continue, we may not be able to pass such
temporary increase on to our clients until the time of our next scheduled annual service billing review.
The decrease in Dietary labor and other labor costs, as a percentage of Dietary revenues, resulted primarily from
efficiencies in managing these costs as compared to prior periods. Additionally, such costs, as a percentage of
Dietary revenues, recognized a net favorable effect as a result of CES operations, realizing lower Dietary labor and
other labor costs, as a percentage of its Dietary revenues, than historically realized by Healthcare. As noted above in
the Housekeeping labor and other labor costs discussion, our ability to control volatility in labor and other labor
costs is directly related to our efficient management of labor at the various Dietary operational levels in respect to
established staffing benchmarks, as well as procuring on a timely basis increases from clients to reflect increased
labor and other labor costs. We believe Dietary’s improvement in labor and other labor costs is a result of
addressing such volatility factors effectively.
The slight decrease in Dietary supplies, as a percentage of Dietary segment revenues, is a result of better
management of these supplies at the facility level and improved vendor prices resulting from increases in our
purchasing volume of Dietary supplies. Dietary supplies, to a much greater extent than Housekeeping supplies, are
impacted by commodity pricing factors, which in many cases are unpredictable and outside of our control.
Although we endeavor to pass on to clients such increased costs, from time to time, sporadic unanticipated
increases in the costs of certain supply items due to market economic conditions may result in a timing delay in
passing on such increases to our clients. Additionally in 2008, Dietary supply costs increased as the result of the
27
impact of temporary market conditions on the specific commodity, which we did not anticipate and were unable
to predict the extent of the upward trend in such supply costs. It is this type of spike in Dietary supplies’ costs that
could most adversely affect Dietary’s operating performance. The adverse effect would be realized if we delay in
passing on such costs to our clients or in instances where we may not be able to pass such increase on to our clients
until the time of our next scheduled service billing review.
Consolidated Selling, General and Administrative Expense
Years Ended
December 31, 2009
December 31, 2008 % Inc.
Selling, general and administrative expense w/o deferred
compensation change
(a)
$48,472,000
$41,912,000
Gain/(loss) deferred compensation fund
1,797,000
(2,389,000)
Consolidated selling, general and administrative expense
(b)
$50,269,000
$39,523,000
15.7%
24.8%
27.2%
(a) Selling, general and administrative expense excluding the gain of the deferred compensation fund.
(b) Consolidated selling, general and administrative expense reported for the period presented.
Although consolidated selling, general and administrative expenses increased in 2009 by $10,746,000 or 27.2% over
2008, the increase resulted primarily from the effect of recording an increase to compensation expense reflecting
the increase in our Deferred Compensation liability resulting from an increase in market value of the investments
held in our Deferred Compensation Fund as noted below in Consolidated Investment and Interest Income
discussion. Absent the effect of market value change in both 2009 and 2008 in our Deferred Compensation Fund,
consolidated selling, general and administrative expenses increased $6,560,000 or 15.7%, which is consistent with
our 14.9% growth in revenues. Additionally selling, general and administrative expenses year-to-year comparison is
unfavorably affected by increased professional and legal fees incurred in 2009 associated with the CES acquisition
and settlements of employment related matters.
Consolidated Investment and Interest Income
Investment and interest income in 2009 increased $3,275,000 or 243% over 2008 reported amounts. The net
increase is primarily attributable to an increase in market value of the investments held in our Deferred
Compensation Fund. Such net increase in consolidated investment and interest income was somewhat offset
by reduced rates of return on cash and cash equivalents recognized during the year.
Income before IncomeTaxes
Consolidated
As a result of the discussion above related to revenues and expenses, consolidated income before income taxes for
2009 decreased slightly to 7.1%, as a percentage of consolidated revenues, compared to 7.2% in 2008.
Reportable Segments
Housekeeping’s 12.4% increase in income before income taxes is attributable approximately equally between the
gross profit earned on the 9.0% increase in organic reportable segment revenues and the gross profit earned on
Housekeeping revenues from the service agreements acquired in the CES acquisition.
Dietary’s income before income taxes increase of 137.9% on a reportable segment basis is primarily attributable to
the gross profit earned on the 23.5% increase in organic reportable segment revenues, as well as the improvement in
28
gross profit earned at certain existing clients’ facilities derived primarily from the factors discussed in Dietary’s cost
of services key indicators. Additionally, CES contributed approximately 42.8% of Dietary’s 2009 increase in income
before income taxes.
Consolidated Income Taxes
Our effective tax rate was 38.5% in each of the years ended December 31, 2009 and 2008. Our 38.5% effective tax rate
differs from the federal income tax statutory rate principally because of the effect of state and local income taxes.
Consolidated Net Income
As a result of the matters discussed above, consolidated net income for 2009 and 2008 remained consistent at 4.4%,
as a percentage of consolidated revenues.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting standards generally accepted in the United
States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
We consider the three policies discussed below to be critical to an understanding of our financial statements
because their application places the most significant demands on our judgment.Therefore, it should be noted that
financial reporting results rely on estimating the effect of matters that are inherently uncertain. Specific risks for
these critical accounting policies and estimates are described in the following paragraphs. For these estimates, we
caution that future events rarely develop exactly as forecasted, and the best estimates routinely require adjustment.
Any such adjustments or revisions to estimates could result in material differences to previously reported amounts.
The three policies discussed are not intended to be a comprehensive list of all of our accounting policies. In many cases,
the accounting treatment of a particular transaction is specifically dictated by accounting standards generally accepted in
the United States, with no need for our judgment in their application. There are also areas in which our judgment in
selecting another available alternative would not produce a materially different result. See our audited consolidated
financial statements and notes thereto which are included in this Annual Report on Form 10-K, which contain
accounting policies and other disclosures required by accounting principles generally accepted in the United States.
Allowance for Doubtful Accounts
The Allowance for Doubtful Accounts (the “Allowance”) is established as losses are estimated to have occurred
through a provision for bad debts charged to earnings.The Allowance is evaluated based on our periodic review of
accounts and notes receivable and is inherently subjective as it requires estimates that are susceptible to significant
revision as more information becomes available.
We have had varying collection experience with respect to our accounts and notes receivable. When contractual
terms are not met, we generally encounter difficulty in collecting amounts due from certain of our clients.
Therefore, we have sometimes been required to extend the period of payment for certain clients beyond
contractual terms. These clients include those who have terminated service agreements and slow payers expe-
riencing financial difficulties. In making credit evaluations, in addition to analyzing and anticipating, where
possible, the specific cases described above, we consider the general collection risks associated with trends in the
long-term care industry. We also establish credit limits, perform ongoing credit evaluations, and monitor accounts
to minimize the risk of loss.
29
In accordance with the risk of extending credit, we regularly evaluate our accounts and notes receivable for
impairment or loss of value and when appropriate, will provide in our Allowance for such receivables.We generally
follow a policy of reserving for receivables due from clients in bankruptcy, clients with which we are in litigation for
collection and other slow paying clients. The reserve is based upon our estimates of ultimate collectability.
Correspondingly, once our recovery of a receivable is determined through litigation, bankruptcy proceedings or
negotiation to be less than the recorded amount on our balance sheet, we will charge-off the applicable amount to
the Allowance.
Our methodology for the Allowance is based upon a risk-based evaluation of accounts and notes receivable
associated with a client’s ability to make payments. Such Allowance generally consists of an initial amount
established based upon criteria generally applied if and when a client account files bankruptcy, is placed for
collection/litigation and/or is considered to be pending collection/litigation.
The initial Allowance is adjusted either higher or lower when additional information is available to permit a more
accurate estimate of the collectability of an account.
Summarized below for the years 2008 through 2010 are the aggregate account balances for the three Allowance
criteria noted above, net write-offs of client accounts, bad debt provision and allowance for doubtful accounts.
Aggregate Account
Balances of Clients
in Bankruptcy or
in/or Pending
Net Write-Offs
Bad Debt
Allowance for
Year Ending
Collection/Litigation
of Client Accounts
Provision
Doubtful Accounts
2008
2009
2010
$8,417,000
$9,874,000
$8,550,000
$5,304,000
$4,234,000
$3,214,000
$ 978,000
$2,404,000
$4,640,000
$2,771,000
$2,200,000
$4,069,000
At December 31, 2010, we identified accounts totaling $8,550,000 that require an Allowance based on potential
impairment or loss of value. An Allowance totaling $4,069,000 was provided for these accounts at such date.
Actual collections of these accounts could differ from that which we currently estimate. If our actual collection
experience is 5% less than our estimate, the related increase to our Allowance would decrease net income by
approximately $148,000.
Notwithstanding our efforts to minimize credit risk exposure, our clients could be adversely affected if future
industry trends, as more fully discussed under Liquidity and Capital Resources below, and as further described in
this Annual Report on Form 10-K in Part I under “Risk Factors”, “Government Regulation of Clients” and “Service
Agreements/Collections”, change in such a manner as to negatively impact the cash flows of our clients. If our
clients experience a negative impact in their cash flows, it would have a material adverse effect on our results of
operations and financial condition.
Accrued Insurance Claims
We currently have a Paid Loss Retrospective Insurance Plan for general liability and workers’ compensation
insurance, which comprise approximately 26% of our liabilities at December 31, 2010. Our accounting for this plan
is affected by various uncertainties because we must make assumptions and apply judgment to estimate the
ultimate cost to settle reported claims and claims incurred but not reported as of the balance sheet date.We address
these uncertainties by regularly evaluating our claims’ pay-out experience, present value factor and other factors
related to the nature of specific claims in arriving at the basis for our accrued insurance claims estimate. Our
evaluations are based primarily on current information derived from reviewing our claims experience and industry
30
trends. In the event that our claims experience and/or industry trends result in an unfavorable change, it would
have a material adverse effect on our consolidated results of operations and financial condition. Under these plans,
predetermined loss limits are arranged with an insurance company to limit both our per-occurrence cash outlay
and annual insurance plan cost.
For workers’ compensation, we record a reserve based on the present value of future payments, including an
estimate of claims incurred but not reported, that are developed as a result of a review of our historical data and
open claims.The present value of the payout is determined by applying an 8% discount factor against the estimated
value of the claims over the estimated remaining pay-out period. Reducing the discount factor by 1% would reduce
net income by approximately $86,000. Additionally, reducing the estimated payout period by six months would
result in an approximate $145,000 reduction in net income.
For general liability, we record a reserve for the estimated ultimate amounts to be paid for known claims. The
estimated ultimate reserve amount recorded is derived from the estimated claim reserves provided by our insurance
carrier reduced by an historical experience factor.
Asset Valuations and Review for Potential Impairment
We review our fixed assets, deferred income taxes, goodwill and other intangible assets at least annually or
whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. This review
requires that we make assumptions regarding the value of these assets and the changes in circumstances that would
affect the carrying value of these assets. If such analysis indicates that a possible impairment may exist, we are then
required to estimate the fair value of the asset and, as deemed appropriate, expense all or a portion of the asset.The
determination of fair value includes numerous uncertainties, such as the impact of competition on future value.We
believe that we have made reasonable estimates and judgments in determining whether our long-term assets have
been impaired; however, if there is a material change in the assumptions used in our determination of fair value or if
there is a material change in economic conditions or circumstances influencing fair value, we could be required to
recognize certain impairment charges in the future. As a result of our most recent reviews, no changes in asset
values were required.
Liquidity and Capital Resources
At December 31, 2010, we had cash and cash equivalents, and marketable securities of $83,129,000 and working
capital of $181,244,000 compared to December 31, 2009 cash, cash equivalents and marketable securities of
$83,949,000 and working capital of $177,453,000.We view our cash and cash equivalents, and marketable securities
as our principal measure of liquidity. Our current ratio at December 31, 2010 decreased to 5.5 to 1 from 6.1 to 1 at
December 31, 2009. This decrease resulted primarily from increases in accrued payroll, withheld payroll taxes
primarily resulting from the timing of such payments and accrued insurance claims expense. Additionally, the
decrease was impacted by the slight decline in our cash, cash equivalents and marketable securities at December 31,
2010 from December 31, 2009.While our revenue and net income increased in 2010, our cash, cash equivalents and
marketable securities did not experience a similar increase due to the investment required to support our 2010
revenue growth and the payment of dividends to shareholders. The current ratio decrease was favorably impacted
by the increase in accounts and notes receivable resulting from our 11.7% increase in revenues. On an historical
basis, our operations have generally produced consistent cash flow and have required limited capital resources. We
believe our current and near term cash flow positions will enable us to fund our continued anticipated growth.
31
Operating Activities
The net cash provided by our operating activities was $37,747,000 for the year ended December 31, 2010. The
principal sources of net cash flows from operating activities for 2010 were net income, and non-cash charges to
operations for bad debt provisions, depreciation and amortization. Additionally, operating activities’ cash flows
increased by $9,221,000 as a result of the increase in accounts payable and other accrued expenses ($1,306,000),
accrued payroll and payroll taxes ($4,437,000), accrued insurance claims ($775,000), and deferred compensation
liability ($1,697,000) and decrease in prepaid expense and other assets ($1,006,000). The operating activities that
used the largest amount of cash during 2010 was a net increase of $10,341,000 in accounts and notes receivable
($6,270,000), long-term notes receivable ($432,000), and an increase of prepaid income taxes ($4,014,000) due to
the timing of payments and inventory ($3,639,000) resulting primarily from the 11.7% growth in the Company’s
revenues for 2010.
Investing Activities
Our principal source of cash in investing activities for 2010 was $7,210,000 for the net sales and maturities of
marketable securities. The net sales and maturities of marketable securities enabled us to increase cash and cash
equivalents to support the increase in client facilities in 2010 and dividend payments. Additionally, we expended
$4,174,000 for the purchase of housekeeping equipment, computer software and equipment, and laundry
equipment installations. See “Capital Expenditures” below.
Financing Activities
We have paid regular quarterly cash dividends since the second quarter of 2003. During 2010, we paid to
shareholders regular quarterly cash dividends totaling $39,285,000 as follows.
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Cash dividend per common share
$
.1400
$
.1467
$
.1533
$
.1550
Total cash dividends paid
$9,224,000
$9,677,000
$10,124,000
$10,260,000
Record date
Payment date
February 12
April 23
July 23
October 22
March 5
May 14
August 6
November 5
Additionally, on January 25, 2011, our Board of Directors declared a regular quarterly cash dividend of $.15625 per
common share, which will be paid on March 4, 2011 to shareholders of record as of the close of business on
February 11, 2011.
Our Board of Directors reviews our dividend policy on a quarterly basis. Although there can be no assurance that
we will continue to pay dividends or the amount of the dividend, we expect to continue to pay a regular quarterly
cash dividend. In connection with the establishment of our dividend policy, we adopted a Dividend Reinvestment
Plan in 2003.
During the year ended December 31, 2010 we elected not to purchase any of our common stock but we remain
authorized to purchase 1,698,000 of our common stock pursuant to previous Board of Directors’ approvals.
During the year ended December 31, 2010, we received proceeds of $4,790,000 from the exercise of stock options
by employees and directors. Additionally, as a result of deductions derived from the stock option exercises, we
recognized an income tax benefit of $1,938,000.
32
Contractual Obligations
Our future contractual obligations and commitments at December 31, 2010 consist of the following:
Years Ended December 31,
2010
2009
2008
Operating lease expense
$1,158,000
$1,006,000
$1,205,000
Line of Credit
We have a $36,000,000 (increased to $42,000,000 on January 1, 2011) bank line of credit on which we may draw to
meet short-term liquidity requirements in excess of internally generated cash flow. Amounts drawn under the line
of credit are payable upon demand. At December 31, 2010, there were no borrowings under the line of credit.
However, at such date, we had outstanding a $35,420,000 (increased to $40,420,000 on January 1, 2011) irrevocable
standby letter of credit which relates to payment obligations under our insurance programs. As a result of the letter
of credit issued, the amount available under the line of credit was reduced by $35,420,000 at December 31, 2010.
The line of credit requires us to satisfy two financial covenants. Such covenants and their respective status at
December 31, 2010 were as follows:
Covenant Description and Requirement
Status at December 31, 2010
Commitment coverage ratio: cash and cash equivalents plus
marketable securities must equal or exceed outstanding
obligations under the line by a multiple of 2.0
Tangible net worth: must exceed $185,000,000
2.3
$188,862,000
As noted above, we complied with both financial covenants at December 31, 2010 and expect to continue to
remain in compliance with all such financial covenants. As of January 1, 2011, the commitment coverage rate has
been modified so that cash and cash equivalents plus marketable securities must equal or exceed outstanding
obligations under the line by a multiple of 1.25 (versus the multiple of 2.0 as of December 31, 2010). This line of
credit expires on June 30, 2012. We believe the line of credit will be renewed at that time.
Accounts and Notes Receivable
We expend considerable effort to collect the amounts due for our services on the terms agreed upon with our
clients. Many of our clients participate in programs funded by federal and state governmental agencies which
historically have encountered delays in making payments to its program participants. Congress has enacted a
number of laws during the past decade that have significantly altered, or may alter, overall government
reimbursement for nursing home services. Because our clients’ revenues are generally dependent on Medicare
and Medicaid reimbursement funding rates and mechanisms, the overall effect of these laws and trends in the long
term care industry have affected and could adversely affect the liquidity of our clients, resulting in their inability to
make payments to us on agreed upon payment terms.These factors, in addition to delays in payments from clients,
have resulted in and could continue to result in significant additional bad debts in the near future. Whenever
possible, when a client falls behind in making agreed-upon payments, we convert the unpaid accounts receivable to
interest bearing promissory notes. The promissory notes receivable provide a means by which to further evidence
the amounts owed and provide a definitive repayment plan and therefore may ultimately enhance our ability to
collect the amounts due. At December 31, 2010 and 2009, we had $9,269,000 and $9,257,000, net of reserves,
respectively, of such promissory notes outstanding. Additionally, we consider restructuring service agreements
from full service to management-only service in the case of certain clients experiencing financial difficulties. We
33
believe that such restructurings may provide us with a means to maintain a relationship with the client while at the
same time minimizing collection exposure.
As a result of the current economic crisis, many states have significant budget deficits. State Medicaid programs are
experiencing increased demand, and with lower revenues than projected, they have fewer resources to support their
Medicaid programs. In addition, in March 2010, comprehensive health care reform legislation was signed into law.
The Act will significantly impact the governmental healthcare programs our clients participate in, and reim-
bursements received there under from governmental or third-party payors. Furthermore, in the coming year, new
proposals or additional changes in existing regulations could be made under the Act which could directly impact
the governmental reimbursement programs in which our clients participate. As a result, some state Medicaid
programs are reconsidering previously approved increases in nursing home reimbursement or are considering
delaying those increases. A few states have indicated they may run out of cash to pay Medicaid providers, including
nursing homes. Any negative changes in our clients’ reimbursements would negatively impact our results of
operations. Although we are currently evaluating the Act’s effect on our client base, we may not know the full effect
until such a time as these laws are fully implemented and the Centers for Medicare and Medicaid Services and
other agencies issue applicable regulations or guidance.
We have had varying collection experience with respect to our accounts and notes receivable. When contractual
terms are not met, we generally encounter difficulty in collecting amounts due from certain of our clients.
Therefore, we have sometimes been required to extend the period of payment for certain clients beyond
contractual terms. These clients include those who have terminated service agreements and slow payers expe-
riencing financial difficulties. In order to provide for these collection problems and the general risk associated with
the granting of credit terms, we have recorded bad debt provisions (in an Allowance for Doubtful Accounts) of
$2,200,000, $2,404,000 and $4,234,000 in the years ended December 31, 2010, 2009 and 2008, respectively. These
provisions represent approximately .3%, .3% and .7%, as a percentage of total revenues for such respective periods.
In making our credit evaluations, in addition to analyzing and anticipating, where possible, the specific cases
described above, we consider the general collection risk associated with trends in the long-term care industry. We
also establish credit limits, perform ongoing credit evaluation and monitor accounts to minimize the risk of loss.
Notwithstanding our efforts to minimize credit risk exposure, our clients could be adversely affected if future
industry trends change in such a manner as to negatively impact their cash flows. If our clients experience a negative
impact in their cash flows, it would have a material adverse effect on our results of operations and financial
condition.
At December 31, 2010, amounts due from our Major Client represented less than 1% of our accounts receivable
balance. If such client changes its payment terms, it would increase our accounts receivable balance and have a
material adverse effect on our cash flows and cash and cash equivalents.
Insurance Programs
We have a Paid Loss Retrospective Insurance Plan for general liability and workers’ compensation insurance. Under
these plans, pre-determined loss limits are arranged with an insurance company to limit both our per-occurrence
cash outlay and annual insurance plan cost.
For workers’ compensation, we record a reserve based on the present value of future payments, including an
estimate of claims incurred but not reported, that are developed as a result of a review of our historical data and
open claims.The present value of the payout is determined by applying an 8% discount factor against the estimated
value of the claims over the estimated remaining pay-out period.
34
For general liability, we record a reserve for the estimated ultimate amounts to be paid for known claims. The
estimated ultimate reserve amount recorded is derived from the estimated claim reserves provided by our insurance
carrier reduced by an historical experience factor.
We regularly evaluate our claims’ pay-out experience, present value factor and other factors related to the nature of
specific claims in arriving at the basis for our accrued insurance claims’ estimate. Our evaluation is based primarily
on current information derived from reviewing our claims experience and industry trends. In the event that our
claims experience and/or industry trends result in an unfavorable change, it would have an adverse effect on our
results of operations and financial condition.
Capital Expenditures
The level of capital expenditures is generally dependent on the number of new clients obtained. Such capital
expenditures primarily consist of housekeeping equipment purchases, laundry and linen equipment installations,
and computer hardware and software. Although we have no specific material commitments for capital expen-
ditures through the end of calendar year 2011, we estimate that for the period we will have capital expenditures of
$2,000,000 to $3,000,000 in connection with housekeeping equipment purchases and laundry and linen equipment
installations in our clients’ facilities, as well as expenditures relating to internal data processing hardware and
software requirements. We believe that our cash from operations, existing cash and cash equivalents balance and
credit line will be adequate for the foreseeable future to satisfy the needs of our operations and to fund our
anticipated growth. However, should these sources not be sufficient, we would, if necessary, seek to obtain
necessary working capital from such sources as long-term debt or equity financing.
Material Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements, other than our irrevocable standby letter of credit previously
discussed.
Effects of Inflation
Although there can be no assurance thereof, we believe that in most instances we will be able to recover increases in
costs attributable to inflation by passing through such cost increases to our clients.
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.
At December 31, 2010, we had $83,129,000 in cash, cash equivalents and marketable securities. In accordance with
U.S. GAAP, the fair value of all of our cash equivalents and marketable securities is determined based on “Level 2”
inputs, which consist of quoted prices whose value is based upon quoted prices for identical or similar instruments
in markets that are not active, and model-based valuation techniques for which all significant assumptions are
observable in the market. We place our cash investments in instruments that meet credit quality standards, as
specified in our investment policy guidelines.
Investments in both fixed rate and floating rate investments carry a degree of interest rate risk. Fixed rate securities
may have their market value adversely impacted due to an increase in interest rates, while floating rate securities
may produce less income than expected if interest rates fall. Due in part to these factors, our future investment
income may fall short of expectations due to changes in interest rates or if there is a decline in the fair value of our
investments.
35
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm (on Internal Control Over Financial
Reporting)
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2010 and 2009
Consolidated Statements of Income for the Years Ended December 31, 2010, 2009 and 2008
Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009 and 2008
Consolidated Statement of Changes in Stockholders’ Equity for the years Ended December 31, 2010,
2009 and 2008
Notes to Consolidated Financial Statements for the Years Ended December 31, 2010, 2009 and 2008
Page
37
38
39
41
42
43
44
46
36
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Stockholders and Board of Directors of
Healthcare Services Group, Inc.
We have audited the accompanying consolidated balance sheets of Healthcare Services Group, Inc. and
Subsidiaries (the “Company”) (a Pennsylvania Corporation) as of December 31, 2010 and 2009, and the related
statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2010. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of Healthcare Services Group, Inc. and Subsidiaries as of December 31, 2010 and 2009, and the results of
its operations and its cash flows for each of the three years in the period ended December 31, 2010 in conformity
with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), Healthcare Services Group, Inc. and Subsidiaries’ internal control over financial reporting as of
December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated Febru-
ary 18, 2011 expressed an unqualified opinion.
Edison, New Jersey
February 18, 2011
37
Management’s Annual Report on Internal
Control Over Financial Reporting
The management of Healthcare Services Group, Inc. (“Healthcare” or the “Company”), is responsible for
establishing and maintaining adequate internal control over financial reporting. The Company’s internal control
over financial reporting is defined in Rule 13a-15(f ) and 15d-15(f ) promulgated under the Securities Exchange Act
of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal
financial officers and effected by the Company’s board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial
statements for external purposes in accordance with generally accepted accounting principles in the United States
and includes those policies and procedures that:
1. Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of assets of the Company;
2. Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and directors of the
company; and
3. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material effect on the financial statements.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting
as of December 31, 2010. In making this assessment, the Company’s management used the criteria set forth in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
Under the supervision and with the participation of our management, including our principal executive officer and
principal financial officer, we conducted an evaluation of our internal control over financial reporting, as prescribed
above, for the period covered by this report. Based on our evaluation, our principal executive officer and principal
financial officer concluded that the Company’s internal control over financial reporting as of December 31, 2010 is
effective as a whole.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstate-
ments. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
The Company’s independent auditors have audited, and reported on, the Company’s internal control over financial
reporting as of December 31, 2010. This report appears on page 39.
Daniel P. McCartney
Chief Executive Officer
(Principal Executive Officer)
February 18, 2011
38
Richard W. Hudson
Chief Financial Officer
(Principal Financial Officer)
February 18, 2011
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Stockholders and Board of Directors of
Healthcare Services Group, Inc.
We have audited Healthcare Services Group, Inc. and Subsidiaries’ (the “Company”) (a Pennsylvania Corpo-
ration) internal control over financial reporting as of December 31, 2010, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Healthcare Services Group, Inc.’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’ Annual Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on Healthcare Services Group, Inc.’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstate-
ments. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, Healthcare Services Group, Inc. maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated
Framework issued by COSO.
39
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of the Company as of December 31, 2010 and 2009, and the
related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the
period ended December 31, 2010, and our report dated February 18, 2011, expressed an unqualified opinion
thereon.
Edison, New Jersey
February 18, 2011
40
Consolidated Balance Sheets
Assets
Current Assets:
December 31
2010
2009
Cash and cash equivalents
Marketable securities, at fair value
Accounts and notes receivable, less allowance for doubtful accounts of $4,069,000 in 2010
$ 39,692,000
43,437,000
$ 31,301,000
52,648,000
and $4,640,000 in 2009
Inventories and supplies
Deferred income taxes
Prepaid income taxes
Prepaid expenses and other
Total current assets
Property and equipment:
Laundry and linen equipment installations
Housekeeping equipment and office furniture
Autos and trucks
Less accumulated depreciation
GOODWILL
OTHER INTANGIBLE ASSETS, less accumulated amortization of $5,938,000 in 2010 and
$4,038,000 in 2009
NOTES RECEIVABLE — long term portion, net of discount
DEFERRED COMPENSATION FUNDING, at fair value
DEFERRED INCOME TAXES — long term portion
OTHER NONCURRENT ASSETS
108,426,000
20,614,000
—
3,978,000
5,628,000
104,356,000
16,974,000
115,000
—
6,776,000
221,775,000
212,170,000
1,886,000
20,111,000
284,000
22,281,000
15,625,000
6,656,000
16,955,000
7,262,000
5,055,000
12,080,000
8,109,000
42,000
1,695,000
16,905,000
278,000
18,878,000
14,487,000
4,391,000
17,087,000
8,862,000
4,623,000
10,783,000
7,907,000
69,000
TOTAL ASSETS
$277,934,000
$265,892,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued payroll, accrued and withheld payroll taxes
Other accrued expenses
Income taxes payable
Deferred income taxes
Accrued insurance claims
Total current liabilities
ACCRUED INSURANCE CLAIMS — long term portion
DEFERRED COMPENSATION LIABILITY
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
$ 11,434,000
21,429,000
1,988,000
—
604,000
5,076,000
40,531,000
11,845,000
12,479,000
$ 9,134,000
17,647,000
3,057,000
35,000
—
4,844,000
34,717,000
11,302,000
11,099,000
Common stock, $.01 par value; 100,000,000 shares authorized; 69,315,000 shares issued in
2010 and 68,729,000 shares in 2009
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net of taxes
Common stock in treasury, at cost, 3,139,000 shares in 2010 and 3,316,000 shares in 2009
Total stockholders’ equity
693,000
100,138,000
130,993,000
(78,000)
(18,667,000)
687,000
92,110,000
135,837,000
—
(19,860,000)
213,079,000
208,774,000
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$277,934,000
$265,892,000
See accompanying notes
41
Consolidated Statements of Income
Revenues
Operating costs and expenses:
Costs of services provided
Selling, general and administrative
Other income:
Investment and interest
Income before income taxes
Income taxes
Net income
Basic earnings per common share
Diluted earnings per common share
Cash dividends per common share
Weighted average number of common shares outstanding
Basic
Diluted
See accompanying notes
Years Ended December 31,
2010
2009
2008
$773,956,000
$692,695,000
$602,718,000
665,149,000
597,715,000
521,269,000
57,310,000
50,269,000
39,523,000
2,622,000
4,624,000
1,349,000
54,119,000
49,335,000
43,275,000
19,678,000
18,993,000
16,661,000
$ 34,441,000
$ 30,342,000
$ 26,614,000
$
$
$
0.52
0.51
0.60
$
$
$
0.46
0.46
0.49
$
$
$
0.41
0.40
0.39
65,917,000
65,376,000
64,697,000
67,008,000
66,429,000
66,038,000
42
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
Bad debt provision
Deferred income tax (benefits)
Stock-based compensation expense
Amortization of premium on marketable securities
Unrealized (gain) loss on marketable securities
Unrealized (gain) loss on deferred compensation fund investments
Changes in operating assets and liabilities:
Accounts and notes receivable
Prepaid income taxes
Inventories and supplies
Notes receivable — long term
Deferred compensation funding
Accounts payable and other accrued expenses
Accrued payroll, accrued and withheld payroll taxes
Accrued insurance claims
Deferred compensation liability
Income taxes payable
Prepaid expenses and other assets
Years Ended December 31,
2010
2009
2008
$ 34,441,000
$ 30,342,000
$ 26,614,000
3,764,000
2,200,000
517,000
1,332,000
840,000
1,083,000
(1,325,000)
(6,270,000)
(4,014,000)
(3,639,000)
(432,000)
29,000
1,306,000
4,437,000
775,000
1,697,000
—
1,006,000
3,229,000
2,404,000
(2,390,000)
1,074,000
956,000
(505,000)
(1,797,000)
(10,202,000)
2,838,000
(620,000)
(1,422,000)
(700,000)
1,934,000
2,800,000
3,002,000
2,817,000
35,000
4,512,000
2,852,000
4,234,000
1,182,000
563,000
174,000
(1,146,000)
2,389,000
(17,841,000)
(2,838,000)
(963,000)
2,856,000
(315,000)
(85,000)
3,753,000
(1,195,000)
(1,725,000)
(1,726,000)
(121,000)
Net cash provided by operating activities
37,747,000
38,307,000
16,662,000
Cash flows from investing activities:
Disposals of fixed assets
Additions to property and equipment
Purchases of marketable securities, net
Sales of marketable securities, net
Cash paid for acquisition
44,000
(4,174,000)
(38,873,000)
46,083,000
—
220,000
(2,154,000)
(3,686,000)
—
(4,613,000)
157,000
(1,577,000)
(48,442,000)
—
—
Net cash provided by (used in) investing activities
3,080,000
(10,233,000)
(49,862,000)
Cash flows from financing activities:
Acquisition of treasury stock
Dividends paid
Repayment of debt assumed in acquisition
Reissuance of treasury stock pursuant to Dividend Reinvestment Plan
Tax benefit from equity compensation plans
Proceeds from the exercise of stock options
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the period
—
(39,285,000)
—
121,000
1,938,000
4,790,000
—
(32,246,000)
(4,718,000)
88,000
722,000
1,880,000
(4,652,000)
(24,983,000)
—
61,000
4,267,000
3,547,000
(32,436,000)
(34,274,000)
(21,760,000)
8,391,000
31,301,000
(6,200,000)
37,501,000
(54,960,000)
92,461,000
Cash and cash equivalents at end of the period
$ 39,692,000
$ 31,301,000
$ 37,501,000
Supplementary Cash Flow Information:
Issuance of 99,000 shares of Common Stock related to acquisition in 2009
Issuance of 73,000, 73,000 and 92,000 shares of Common Stock in 2010,
$
— $ 4,494,000
$
—
2009 and 2008, respectively, pursuant to Employee Stock Plans
$ 1,047,000
$
777,000
$ 1,293,000
See accompanying notes
43
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2010, 2009 and 2008
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income
Retained
Earnings
Treasury
Stock
Stockholders’
Equity
67,113,000 $671,000 $ 74,840,000
$
—
$136,110,000 $(16,903,000) $194,718,000
26,614,000
26,614,000
1,272,000
13,000
3,534,000
4,267,000
447,000
269,000
806,000
3,547,000
4,267,000
(4,652,000)
(4,652,000)
447,000
101,000
370,000
487,000
1,293,000
(24,983,000)
(24,983,000)
30,000
31,000
61,000
68,385,000
684,000
84,193,000
—
137,741,000
30,342,000
(20,936,000) $201,682,000
30,342,000
344,000
3,000
1,889,000
(12,000)
1,880,000
722,000
681,000
328,000
351,000
722,000
—
—
681,000
26,000
354,000
426,000
777,000
Balance, December 31,
2007
Net income for the year
Exercise of stock
options and other
stock-based
compensation, net of
11,000 shares
tendered for payment
Tax benefit arising from
stock option
transactions
Purchase of common
stock for treasury
(444,000 shares)
Share-based
compensation
expense — stock
options
Treasury shares issued
for Deferred
Compensation Plan
funding and
redemptions
(53,000 shares)
Shares issued pursuant
to Employee Stock
Plans (92,000 shares)
Cash dividends — $.39
per common share
Shares issued pursuant
to Dividend
Reinvestment Plan
(6,000 shares)
Balance, December 31,
2008
Net income for the year
Exercise of stock
options and other
stock-based
compensation, net of
14,000 shares
tendered for payment
Tax benefit arising from
stock option
transactions
Purchase of common
stock for treasury
Share-based
compensation
expense — stock
options
Treasury shares issued
for Deferred
Compensation Plan
funding and
redemptions
(5,000 shares)
Shares issued pursuant
to Employee Stock
Plans (73,000 shares)
44
Years Ended December 31, 2010, 2009 and 2008
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income
Retained
Earnings
Treasury
Stock
Stockholders’
Equity
(32,246,000)
(32,246,000)
43,000
3,903,000
45,000
88,000
591,000
4,494,000
68,729,000
687,000
92,110,000
—
135,837,000
(19,860,000) 208,774,000
34,441,000
34,441,000
(78,000)
(78,000)
34,363,000
586,000
6,000
4,167,000
617,000
4,790,000
1,938,000
1,015,000
226,000
609,000
1,938,000
1,015,000
90,000
316,000
438,000
1,047,000
(39,285,000)
(39,285,000)
73,000
48,000
121,000
Cash dividends — $.49
per common share
Shares issued pursuant
to Dividend
Reinvestment Plan
(8,000 shares)
Shares issued pursuant
to acquisition
(99,000 shares)
Balance, December 31,
2009
Comprehensive income:
Net income for the
period
Unrealized loss on
available for sale
marketable
securities, net of
taxes
Comprehensive income
Exercise of stock
options and other
stock-based
compensation, net of
14,000 shares
tendered for payment
Tax benefit from equity
compensation plans
Share-based
compensation
expense — stock
options
Treasury shares issued
for Deferred
Compensation Plan
funding and
redemptions
(15,000 shares)
Shares issued pursuant
to Employee Stock
Plans (73,000 shares)
Cash dividends — $0.60
per common share
Shares issued pursuant
to Dividend
Reinvestment Plan
(8,000 shares)
Balance, December 31,
2010
69,315,000 $693,000 $100,138,000
$(78,000)
$130,993,000 $(18,667,000) $213,079,000
See accompanying notes.
45
Notes to Consolidated Financial
Statements
Note 1— Summary of Significant Accounting Policies
Nature of Operations
We provide management, administrative and operating expertise and services to the housekeeping, laundry, linen,
facility maintenance and dietary service departments of the health care industry, including nursing homes,
retirement complexes, rehabilitation centers and hospitals located throughout the United States. We believe that
we are the largest provider of housekeeping and laundry departmental management services to the long-term care
industry in the United States rendering such services to approximately 2,500 facilities in 47 states as of
December 31, 2010. Although we do not directly participate in any government reimbursement programs,
our clients’ reimbursements are subject to government regulation. Therefore, they are directly affected by any
legislation relating to Medicare and Medicaid reimbursement programs.
We provide our services primarily pursuant to full service agreements with our clients. In such agreements, we are
responsible for the day to day management of the managers and hourly employees located at our clients’ facilities.
We also provide services on the basis of a management-only agreement for a very limited number of clients. Our
agreements with clients typically provide for a one year service term, cancelable by either party upon 30 to 90 days’
notice after the initial 90-day period.
On May 1, 2009, we acquired essentially all of the assets of Contract Environmental Services, Inc. (“CES”), a South
Carolina based corporation which is a provider of professional housekeeping, laundry and dietary services to long-
term care and related facilities.The CES results of operations for the period May 1, 2009 to December 31, 2009 are
included in our consolidated results of operations and financial information presented. Effective January 1, 2010,
CES’ operations were fully integrated with our operations.
We are organized into two reportable segments; housekeeping, laundry, linen and other services (“Housekeeping”),
and dietary department services (“Dietary”).
Housekeeping consists of the managing of the client’s housekeeping department which is principally responsible
for the cleaning, disinfecting and sanitizing of patient rooms and common areas of a client’s facility, as well as the
laundering and processing of the personal clothing belonging to the facility’s patients. Also within the scope of this
segment’s service is the responsibility for laundering and processing of the bed linens, uniforms and other assorted
linen items utilized by a client facility.
Dietary consists of managing the client’s dietary department which is principally responsible for food purchasing,
meal preparation and providing dietician consulting professional services, which includes the development of a
menu that meets the patient’s dietary needs. We began the Dietary operations in 1997.
As of December 31, 2010, we operate a wholly-owned subsidiary, Huntingdon Holdings, Inc. (“Huntingdon”).
Huntingdon invests our cash and cash equivalents as well as managing our portfolio of marketable securities. On
March 1, 2009, we sold our wholly-owned subsidiary HCSG Supply, Inc. (“Supply”) for approximately $1,100,000,
financed principally through our acceptance of a secured promissory note which is recorded in our notes receivable
in the accompanying December 31, 2010 and 2009 balance sheet.
46
Principles of Consolidation
The consolidated financial statements include the accounts of Healthcare Services Group, Inc. and its wholly-
owned subsidiary, Huntingdon Holdings, Inc. (HCSG Supply, Inc. accounts are included up through March 1,
2009, the date of the sale of such) after elimination of intercompany transactions and balances.
Fair Value of Financial Instruments
Our financial instruments consist principally of cash and cash equivalents, marketable securities, accounts and
notes receivable and accounts payable. Our marketable securities consist of tax-exempt municipal bond invest-
ments that are reported at fair value with the unrealized gains and losses included in our consolidated statements of
income. In accordance with U.S. GAAP, we define fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit
price). The fair value of our cash equivalents and marketable securities is determined based on “Level 2” inputs,
which consists of quoted prices for similar assets or market corroborated inputs. We believe recorded values of all
of our financial instruments approximate their current fair values because of their nature, stated interest rates and
respective maturity dates or durations.
We have certain notes receivable that either do not bear interest or bear interest at a below market rate. Therefore,
such notes receivable of $1,910,000 and $1,888,000 at December 31, 2010 and 2009, respectively, have been
discounted to their present value and are reported at such values of $1,846,000 and $1,801,000 at December 31,
2010 and 2009, respectively.
Cash and Cash Equivalents
Cash and cash equivalents consist of short-term, highly liquid investments with a maturity of three months or less
at time of purchase.
Investments in Marketable Securities
We define our marketable securities as fixed income investments which are highly liquid investments that can be
readily purchased or sold using established markets. At December 31, 2010, we had marketable securities of
$43,437,000 which were comprised of tax exempt municipal bonds.These investments are reported at fair value on
our balance sheet. Unrealized holding losses of $1,083,000 at December 31, 2010 were recorded in our
consolidated statement of income for the year then ended for investments recorded under the fair value option.
For the year ended December 31, 2010, the accumulated other comprehensive income on our consolidated balance
sheet and stockholder’ equity includes unrealized losses from marketable securities of $78,000 related to
marketable securities that are not recognized under the fair value option in accordance with U.S. GAAP. The
unrealized losses are recorded net of income taxes, although there is no income tax benefit from these amounts
since unrealized losses are not subject to income taxes. Management determines the appropriate classification of
such securities at the time of purchase and re-evaluates such classification as of each balance sheet date.
We, in accordance with U.S. GAAP, define fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date (exit price).
Effective January 1, 2008, we elected the fair value option for certain of our marketable securities purchased since
such adoption. Management initially elected the fair value option for certain of our marketable securities because
we viewed such investment securities as highly liquid and available to be drawn upon for working capital purposes
making them similar to its cash and cash equivalents. Accordingly, we record net unrealized gain or loss in the other
47
income, investment and interest caption in our consolidated income statements for such investments.We have not
elected the fair value option for marketable securities acquired after December 31, 2009. Although these assets
continue to be highly liquid and available, we believe these assets are more representative of our investing activities.
We do not anticipate liquidating these assets but they are available for future needs of the Company to support its
current and projected growth. In accordance with U.S. GAAP, our investments in marketable securities are
classified within Level 2 of the fair value hierarchy.These investment securities are valued based upon quoted prices
for identical or similar instruments in markets that are not active, and model-based valuation techniques for which
all significant assumptions are observable in the market.
Our investment policy is to seek to manage these assets to achieve our goal of preserving principal, maintaining
adequate liquidity at all times, and maximizing returns subject to our investment guidelines. Our investment policy
limits investment to certain types of instruments issued by institutions primarily with investment grade credit
ratings and places restrictions on maturities and concentration by type and issuer.
We review periodically our investments in marketable securities for other than temporary declines in fair value
below the cost basis and whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. As of December 31, 2010, we believe that recorded value of our investments in marketable
securities was recoverable in all material respects.
Inventories and Supplies
Inventories and supplies include housekeeping, linen and laundry supplies, as well as food provisions and supplies.
Inventories and supplies are stated at cost to approximate a first-in, first-out (FIFO) basis. Linen supplies are
amortized on a straight-line basis over a 24 month period.
Property and Equipment
Property and equipment are stated at cost. Additions, renewals and improvements are capitalized, while
maintenance and repair costs are expensed when incurred. When assets are retired or otherwise disposed of,
the cost and related accumulated depreciation are removed from the respective accounts and any resulting gain or
loss is included in income. Depreciation is provided by the straight-line method over the following estimated useful
laundry and linen equipment installations — 3 to 7 years; housekeeping, and office furniture and
lives:
equipment — 3 to 7 years; autos and trucks — 3 years.
Revenue Recognition
Revenues from our service agreements with clients are recognized as services are performed.
As a distributor of laundry equipment, we occasionally sell laundry installations to certain clients.The sales in most
cases represent the construction and installation of a turn-key operation and are for payment terms ranging from
24 to 60 months. Our accounting policy for these sales is to recognize the gross profit over the life of the payments
associated with our financing of the transactions. During 2010, 2009 and 2008 laundry installation sales were not
material.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is
recognized for the amount of taxes payable or refundable for the current year. We accrue for probable tax
obligations as required by facts and circumstances in the various regulatory environments. In addition, deferred tax
assets and liabilities are recognized for expected future tax consequences of temporary differences between the
48
financial reporting and tax bases of assets and liabilities. If appropriate, we would record a valuation allowance to
reduce deferred tax assets to an amount for which realization is more likely than not. Deferred tax assets and
liabilities are more fully described in Note 10.
In accordance with U.S. GAAP, we account for uncertain income tax positions reflected within our financial
statements based on a recognition threshold and measurement process for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
Earnings per Common Share
Basic earnings per common share are computed by dividing income available to common shareholders by the
weighted-average common shares outstanding for the period. Diluted earnings per common share reflect the
weighted-average common shares outstanding and dilutive common shares, such as those issuable upon exercise of
stock options.
Share-Based Compensation
Share-based compensation is the measurement and recognition of compensation expense, based on estimated fair
values, for all share-based awards made to employees and directors, including stock options and participation in the
Company’s employee stock purchase plan. We estimate the fair value of share-based awards on the date of grant
using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is
recognized as an expense in the Company’s consolidated financial statements of income over the requisite service
periods. We use the straight-line single option method of expensing share-based awards in our consolidated
financial statements of income. Because share-based compensation expense is based on awards that are ultimately
expected to vest, share-based compensation expense will be reduced to account for estimated forfeitures.
Forfeitures are to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.
Advertising Costs
Advertising costs are expensed when incurred. Advertising costs were not material for the years ended Decem-
ber 31, 2010, 2009 and 2008.
Impairment of Long-Lived Assets
We account for long-lived assets in accordance with current accounting guidance which states that the carrying
amounts of long-lived assets be periodically reviewed to determine whether current events or circumstances
warrant adjustment to such carrying amounts. Any impairment is measured by the amount that the carrying value
of such assets exceeds their fair value, primarily based on estimated discounted cash flows. Considerable
management judgment is necessary to estimate the fair value of assets. Assets to be disposed of are carried at
the lower of their financial statement carrying amount or fair value, less cost to sell.
Acquisitions
We acquire businesses and/or assets that augment and complement our operations from time to time. These
acquisitions are accounted for under the purchase method of accounting. The consolidated financial statements
include the results of operations from such business combinations as of the date of acquisition. Additional
disclosure related to our acquisition that occurred in 2009 is provided in Note 2.
49
Identifiable Intangible Assets and Goodwill
Identifiable intangible assets with finite lives are amortized on a straight-line basis over their respective lives.
Goodwill represents the excess of costs over the fair value of net assets of the acquired business. We review the
carrying values of goodwill at least annually to assess impairment because these assets are not amortized. During
October 2009, the Company changed the timing of its annual goodwill impairment testing from the end of the
fourth quarter (December 31) to the beginning of the fourth quarter (October 1). This change allows the
Company to complete its annual goodwill impairment testing in advance of its year end closing. Accordingly,
management believes that this accounting change is preferable under the circumstances. Additionally, we review
the carrying value of any intangible asset or goodwill whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable. We assess impairment by comparing the fair value of an identifiable
intangible asset or goodwill with its carrying value. Impairments are expensed when incurred. No impairment loss
was recognized on our intangible assets for the year ended December 31, 2010.
Treasury Stock
Treasury stock purchases are accounted for under the cost method whereby the entire cost of the acquired stock is
recorded as treasury stock. Gains or losses on the subsequent reissuance of shares are credited or charged to
additional paid in capital.
Three-for-Two Stock Split
On October 12, 2010 our Board of Directors declared a three-for-two stock split in the form of a 50% common
stock dividend which was paid on November 12, 2010 to shareholders of record at the close of business on
November 8, 2010. All share and per common share information for all periods presented have been adjusted to
reflect the three-for-two stock split.
Reclassification
Certain prior period amounts have been reclassified to conform to current year presentation.
Use of Estimates in Financial Statements
In preparing financial statements in conformity with generally accepted accounting principles, we make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Significant estimates are used for, but not
limited to, our allowance for doubtful accounts, accrued insurance claims, asset valuations and review for potential
impairment, and deferred taxes. The estimates are based upon various factors including current and historical
trends, as well as other pertinent industry and regulatory authority information. We regularly evaluate this
information to determine if it is necessary to update the basis for our estimates and to compensate for known
changes.
Concentrations of Credit Risk
The accounting guidance requires the disclosure of significant concentrations of credit risk, regardless of the
degree of such risk. Financial instruments, as defined by U.S. GAAP, which potentially subject us to concentrations
of credit risk, consist principally of cash and cash equivalents, marketable securities and accounts and notes
receivable. We define our marketable securities as fixed income investments which are highly liquid investments
that can be readily purchased or sold using established markets. At December 31, 2010 and 2009, substantially all of
50
our cash and cash equivalents, and marketable securities were held in one large financial institution located in the
United States, in excess of regulatory insured amounts.
Our clients are concentrated in the health care industry, primarily providers of long-term care. Many of our clients’
revenues are highly contingent on Medicare and Medicaid reimbursement funding rates. Congress has enacted a
number of major laws during the past decade that have significantly altered, or threatened to alter, overall
government reimbursement for nursing home services. These changes and lack of substantive reimbursement
funding rate reform legislation, as well as other trends in the long-term care industry have affected and could
adversely affect the liquidity of our clients, resulting in their inability to make payments to us on agreed upon
payment terms. These factors, in addition to delays in payments from clients, have resulted in, and could continue
to result in, significant additional bad debts in the near future.
As a result of the current economic crisis, many states have significant budget deficits. State Medicaid programs are
experiencing increased demand, and with lower revenues than projected, they have fewer resources to support their
Medicaid programs. Many of our clients’ revenues are highly contingent on Medicare and Medicaid reimburse-
ment funding rates, which Congress has affected through the enactment of a number of major laws during the past
decade, most recently the March 2010 enactment of the Patient Protection and Affordable Care Act and the
Health Care and Education Reconciliation Act of 2010 (together, the “Act”). Currently, the U.S. Congress is
considering further changes or revising legislation relating to health care in the United States which, among other
initiatives, may impose cost containment measures impacting our clients. These laws and proposed laws have
significantly altered, or threaten to alter, overall government reimbursement funding rates and mechanisms. In
addition, the current economic crises could adversely affect such funding. The overall effect of these laws and
trends in the long-term care industry has affected and could adversely affect the liquidity of our clients, resulting in
their inability to make payments to us on agreed upon payment terms. These factors, in addition to delays in
payments from clients, have resulted in, and could continue to result in, significant additional bad debts in the near
future.
In 2009 and 2010, Federal economic stimulus legislation was enacted to counter the impact of the economic crisis
on state budgets. The legislation includes the temporary provision of additional federal matching funds to help
states maintain their Medicaid programs. This legislation was extended to June 2011 but at a reduced
reimbursement rate. It is uncertain whether additional federal funding will be provided in the future or if it
will be provided in the form of matching funds. In addition, certain states have proposed legislation to provide
additional funding for nursing home providers. Even if federal or state legislation is enacted that provides
additional funding to Medicaid providers, given the volatility of the economic environment, it is difficult to predict
the impact of this legislation on our clients’ liquidity and their ability to make payments to us as agreed.
Major Client
Our Major Client’s percentage contribution to revenues and accounts receivable balances is summarized below:
Reportable Segment
Revenue
Amounts due at December 31,
Total Revenues
Housekeeping
Dietary
% of accounts receivable balance
2010
2009
2008
11%
12%
15%
11%
13%
14%
9%
less than 1%
11%
17%
less than 1%
less than 1%
Although we expect to continue the relationship with this client, there can be no assurance thereof.The loss of such
client, or a significant reduction in the revenues we receive from this client, would have a material adverse effect on
51
the results of operations of our two operating segments. In addition, if such client changes its payment terms it
would increase our accounts receivable balance and have a material adverse effect on our cash flows and cash and
cash equivalents.
Recent Accounting Pronouncements
In February 2010, the Financial Accounting Standards Board (the “FASB”) issued amended guidance on
subsequent events. Under this amended guidance, SEC filers are no longer required to disclose the date through
which subsequent events have been evaluated in originally issued and revised financial statements. This guidance
was effective immediately and the Company adopted these new requirements upon issuance of this guidance.
In January 2010, the FASB issued updated standards related to additional requirements and guidance regarding
disclosures of fair value measurements. The guidance require the gross presentation of activity within the Level 3
fair value measurement roll forward and details of transfers in and out of Level 1 and 2 fair value measurements. In
addition, companies will be required to disclose quantitative information about the inputs used in determining fair
values. These standards were adopted in the first quarter of 2010. The adoption of these standards had no impact
on the Company’s financial position or results of operations as it only amends required disclosures.
In September 2009, the FASB issued Accounting Standards Update 2009-13 (“ASU 2009-13”), “Multiple Element
Arrangements”. ASU 2009-13 addresses the determination of when the individual deliverables included in a
multiple arrangement may be treated as separate units of accounting. ASU 2009-13 also modifies the manner in
which the transaction consideration is allocated across separately identified deliverables and establishes definitions
for determining fair value of elements in an arrangement. This standard must be adopted by us no later than
January 1, 2011 with earlier adoption permitted. Accordingly, we have adopted this standard and we are currently
evaluating the impact, if any, that this standard update will have on our consolidated financial statements.
In June 2009, the FASB issued Accounting Standards Codification (“ASC”) 105, “Generally Accepted Accounting
Principles (the “Codification”)”.The Codification will become the single source of authoritative nongovernmental
U.S. generally accepted accounting principles. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. All existing accounting standards are
superseded as described in ASC 105-10. All other accounting literature not included in the Codification is non-
authoritative. ASC 105-10 was effective for interim and annual periods ending after September 30, 2009. The
adoption of ASC 105-10 did not have a material impact on our financial condition or results of operations.
In May 2009, the FASB issued a standard which establishes general requirements for accounting and disclosure of
events that occur after the balance sheet date but before the financial statements are issued or are available to be
issued. The pronouncement requires the disclosure of the date through which an entity has evaluated subsequent
events and the basis for that date, whether that date represents the date the financial statements were issued or were
available to be issued. It was effective with interim and annual financial periods ending after June 15, 2009. We
adopted this standard at the beginning of our 2009 third quarter.The adoption did not have a significant impact on
the subsequent events that we report, either through recognition or disclosure, in our consolidated financial
statement
In April 2008 the FASB issued updated guidance related to the determination of the useful life of intangible assets,
which amends the factors that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under this standard. This pronouncement requires
enhanced disclosures concerning a company’s treatment of costs incurred to renew or extend the term of a
recognized intangible asset. It was effective for financial statements issued for fiscal years beginning after
December 15, 2008. We determined that the standard did not have a material impact on our consolidated
financial statements.
52
Note 2 — Acquisition
On May 1, 2009, we acquired essentially all of the assets of Contract Environmental Services, Inc. (“CES”), a South
Carolina based corporation which is a provider of professional housekeeping, laundry and dietary department
services to long-term care and related facilities. We believe the acquisition of CES expands and complements our
position of being the largest provider of such services to long-term care and related facilities in the United States.
The aggregate consideration was approximately $13,825,000 consisting of: (i) $4,613,000 in cash, (ii) issuance of
approximately 99,000 shares of our common stock (valued at approximately $1,183,000) and future issuance of
approximately 397,000 shares (valued at approximately $3,311,000) contingent upon the achievement of certain
financial targets, and (iii) the repayment of approximately $4,718,000 of certain debt obligations of CES. The final
allocation of such consideration resulted in our recording of the following: (i) approximately $8,998,000 of
tangible assets consisting primarily of accounts receivable, (ii) $5,700,000 of amortizable intangible assets,
(iii) $1,936,000 of goodwill and (iv) current liabilities of approximately $2,809,000.The CES results of operations
are not included in our consolidated results of operations before May 1, 2009, which was prior to the closing of the
transaction. Effective January 1, 2010, all of CES’ operations were fully integrated with our operations.
Note 3 — Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net assets acquired of businesses and is
not amortized. Goodwill is evaluated for impairment on an annual basis, or more frequently if impairment
indicators arise, using a fair-value-based test that compares the fair value of the asset to its carrying value.
The following table sets forth goodwill by reportable operating segment, as described in Note 12 herein, and the
changes in the carrying amounts of goodwill for the year ended December 31, 2010. The goodwill associated with
the CES acquisition is deductible for tax purposes over a fifteen year period.
Housekeeping
Dietary
Segment
Segment
Total
Balance as of December 31, 2009
$14,913,000
$2,174,000
$17,087,000
Goodwill adjusted for final purchase price adjustments
(19,000)
(113,000)
(132,000)
Balance as of December 31, 2010
$14,894,000
$2,061,000
$16,955,000
The cost of intangible assets is based on fair values at the date of acquisition. Intangible assets with determinable
lives are amortized on a straight-line basis over their estimated useful life (between 7 and 8 years).
The following table sets forth the amounts of our identifiable intangible assets subject to amortization, which were
acquired in acquisitions.
Customer relationships
Non-compete agreements
Total other intangibles, gross
Less accumulated amortization
Other intangibles, net
December 31,
2010
2009
$12,400,000
$12,100,000
800,000
800,000
13,200,000
12,900,000
(5,938,000)
(4,038,000)
$ 7,262,000
$ 8,862,000
53
The customer relationships have a weighted-average amortization period of seven years and the non-compete
agreements have a weighted-average amortization period of eight years.The following table sets forth the estimated
amortization expense for intangibles subject to amortization for the following five fiscal years:
Period/Year
2011
2012
2013
2014
2015
Customer
Relationships
Non-Compete
Agreements
Total
1,771,000
1,771,000
1,452,000
814,000
814,000
100,000
1,871,000
100,000
1,871,000
100,000
1,552,000
67,000
—
881,000
814,000
Amortization expense for the years ended December 31, 2010 and 2009 was $1,900,000 and $1,571,000,
respectively.
Note 4 — Fair Value Measurements
We, in accordance with U.S. GAAP, define fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date (exit price).
Effective January 1, 2008, we elected the fair value option for certain of our marketable securities purchased since
such adoption. Management initially elected the fair value option for certain of our marketable securities because it
views such investment securities as highly liquid and available to be drawn upon for working capital purposes
making them similar to its cash and cash equivalents. Accordingly, we record net unrealized gain or loss in the other
income, investment and interest caption in our consolidated income statements for such investments.We have not
elected the fair value option for marketable securities acquired after December 31, 2009. Although these assets
continue to be highly liquid and available, we believe these assets are more representative of our investing activities.
We do not anticipate liquidating these assets but they are available for future needs of the Company to support its
current and projected growth.
Certain of our assets and liabilities are reported at fair value in the accompanying balance sheets. Such assets and
liabilities include cash and cash equivalents, marketable securities, accounts and notes receivable, and accounts
payable (including income taxes payable and accrued expenses). The following tables provide fair value
measurement information for our marketable securities and deferred compensation fund investment assets as
of December 31, 2010 and 2009.
As of December 31, 2010
Fair Value Measurement Using:
Quoted Prices
Significant
in Active
Markets
(Level 1)
Significant Other
Observable Inputs
Unobservable
Inputs
(Level 2)
(Level 3)
Carrying
Total Fair
Amount
Value
$43,437,000 $43,437,000
$
—
$43,437,000
$
—
Financial Assets
Marketable securities
Municipal bonds
54
As of December 31, 2010
Fair Value Measurement Using:
Quoted Prices
Significant
in Active
Markets
(Level 1)
Significant Other
Observable Inputs
Unobservable
Inputs
(Level 2)
(Level 3)
Carrying
Total Fair
Amount
Value
Equity securities — Deferred comp fund
Money Market
Large Cap Value
Large Cap Growth
Small Cap Value
Fixed Income
Speciality
Balanced and Lifestyle
International
Large Cap Blend
Mid Cap Growth
$ 2,737,000 $ 2,737,000
$
—
$ 2,737,000
$
2,433,000
2,433,000
2,433,000
2,106,000
2,106,000
2,106,000
1,152,000
1,152,000
1,152,000
987,000
987,000
712,000
712,000
566,000
566,000
572,000
572,000
444,000
444,000
371,000
371,000
987,000
712,000
566,000
572,000
444,000
371,000
—
—
—
—
—
—
—
—
—
Equity securities — Deferred comp fund
$12,080,000 $12,080,000
$9,343,000
$ 2,737,000
$
—
—
—
—
—
—
—
—
—
—
—
As of December 31, 2009
Fair Value Measurement Using:
Quoted Prices
Significant
in Active
Markets
(Level 1)
Significant Other
Unobservable
Observable Inputs
(Level 2)
Inputs
(Level 3)
Carrying
Amount
Total Fair
Value
Financial Assets
Marketable securities
Municipal bonds
Equity securities — Deferred comp fund
Money Market
Large Cap Value
Large Cap Growth
Small Cap Value
Fixed Income
Speciality
Balanced and Lifestyle
International
Large Cap Blend
Mid Cap Growth
$52,648,000 $52,648,000
$
$ 3,588,000 $ 3,588,000
$
—
—
$52,648,000
$ 3,588,000
$
$
1,893,000
1,893,000
1,893,000
1,833,000
1,833,000
1,833,000
822,000
822,000
664,000
664,000
523,000
523,000
413,000
413,000
453,000
453,000
326,000
326,000
268,000
268,000
822,000
664,000
523,000
413,000
453,000
326,000
268,000
—
—
—
—
—
—
—
—
—
Equity securities — Deferred comp fund
$10,783,000 $10,783,000
$7,195,000
$ 3,588,000
$
—
—
—
—
—
—
—
—
—
—
—
—
The fair value of the municipal bonds is measured using pricing service data from an external provider. The fair
value of equity investments in the funded deferred compensation plan are valued (Level 1) based on quoted market
prices. The money market fund in the funded deferred compensation plan is valued (Level 2) at the net asset value
(“NAV”) of the shares held by the plan at the end of the period. As a practical expedient, fair value of our money
55
market fund is valued at the NAV as determined by the custodian of the fund. The money market fund includes
short-term United States dollar denominated money-market instruments. The money market fund can be
redeemed at its NAV at its measurement date as there are no significant restrictions on the ability of participants to
sell this investment. These assets will be redeemed by the plan participants on an as needed basis.
For the years ended December 31, 2010, 2009 and 2008, the other income, investment and interest caption on our
statement of income includes unrealized gains/ (losses) from marketable securities of $(1,083,000), $505,000 and
$1,146,000, respectively.
December 31, 2010
Type of security:
Municipal bonds
Gross
Gross
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Estimated Fair
Value
$18,029,000
$ 568,000
$
—
$18,597,000
Municipal bonds — available for sale
24,918,000
—
(78,000)
24,840,000
Total debt securities
$42,947,000
$ 568,000
$ (78,000)
$43,437,000
December 31, 2009
Cost
Gains
Losses
Value
Amortized
Gross
Unrealized
Gross
Unrealized
Estimated Fair
Other-than-
temporary
Impairments
$
$
—
—
—
Other-than-
temporary
Impairments
Type of security:
Municipal bonds
$50,997,000
$1,651,000
$
Municipal bonds — available for sale
—
—
Total debt securities
$50,997,000
$1,651,000
$
—
—
—
$52,648,000
—
$52,648,000
$
$
—
—
—
December 31, 2008
Cost
Gains
Losses
Value
Impairments
Gross
Gross
Other-than-
Amortized
Unrealized
Unrealized
Estimated Fair
temporary
Type of security:
Municipal bonds — available for sale
$48,268,000
$1,146,000
Total debt securities
$48,268,000
$1,146,000
$
$
—
—
$49,414,000
$49,414,000
$
$
—
—
For the year ended December 31, 2010 we received total proceeds of $11,877,000 from sales of available for sale
municipal bonds. These sales resulted in realized gains of $69,000 recorded in other income, investment and
interest caption on our statement of income for 2010. The basis for the sale of these securities was on a specific
identification of each bond sold during this period.
56
The following tables include contractual maturities of debt securities held at December 31, 2010 and 2009 and
their classification in the consolidated Balance Sheet.
As of December 31,
2010
2009
2010
2009
2010
2009
Contractual maturity:
Municipal Bonds
Municipal Bonds —
Available
for Sale
Total Debt Securities
Maturing in one year or less
$ 9,527,000
$15,653,000
$
313,000
$
— $ 9,840,000
$15,653,000
Maturing after one year through
three years
9,070,000
26,002,000
22,325,000
Maturing after three years
—
10,993,000
2,202,000
—
—
31,395,000
26,002,000
2,202,000
10,993,000
Total debt securities
$18,597,000
$52,648,000
$24,840,000
$
— $43,437,000
$52,648,000
Classification in consolidated Balance Sheet:
Cash and cash equivalents
Marketable securities — Municipal bonds
Less cash and cash quivalents
December 31,
2010
2009
$ 39,692,000
$ 31,301,000
43,437,000
52,648,000
83,129,000
83,949,000
(39,692,000)
(31,301,000)
$ 43,437,000
$ 52,648,000
Note 5 — Allowance for Doubtful Accounts
The allowance for doubtful accounts is established as losses are estimated to have occurred through a provision for
bad debts charged to earnings. The allowance for doubtful accounts is evaluated based on our periodic review of
accounts and notes receivable and is inherently subjective as it requires estimates that are susceptible to significant
revision as more information becomes available.
As a result of the current economic crisis, many states have significant budget deficits. State Medicaid programs are
experiencing increased demand, and with lower revenues than projected, they have fewer resources to support their
Medicaid programs. In addition, in March 2010, the Act was signed into law. The Act will significantly impact the
governmental healthcare programs which our clients participate, and reimbursements received thereunder from
governmental or third-party payors. Furthermore, in the coming year, new proposals or additional changes in
existing regulations could be made to the Act which could directly impact the governmental reimbursement
programs in which our clients participate. As a result, some state Medicaid programs are reconsidering previously
approved increases in nursing home reimbursement or are considering delaying or foregoing those increases. A few
states have indicated it is possible they will run out of cash to pay Medicaid providers, including nursing homes.
Any negative changes in our clients’ reimbursements may negatively impact our results of operations. Although we
are currently evaluating the Act’s effect on our client base, we may not know the full effect until such a time as these
laws are fully implemented and the Centers for Medicare and Medicaid Services and other agencies issue applicable
regulations or guidance.
In 2009 and 2010, Federal economic stimulus legislation was enacted to counter the impact of the economic crisis
on state budgets. The legislation includes the temporary provision of additional federal matching funds to help
states maintain their Medicaid programs. This legislation was extended until June 2011 but at a reduced rate of
matching funds. It is uncertain whether additional federal funding will be provided in the future or if it will be
provided in the form of matching funds. In addition, certain states have proposed legislation to provide additional
57
funding for nursing home providers. Even if federal or state legislation is enacted that provides additional funding
to Medicaid providers, given the volatility of the economic environment, it is difficult to predict the impact of this
legislation on our clients’ liquidity and their ability to make payments to us as agreed.
We have had varying collection experience with respect to our accounts and notes receivable. When contractual
terms are not met, we generally encounter difficulty in collecting amounts due from certain of our clients.
Therefore, we have sometimes been required to extend the period of payment for certain clients beyond
contractual terms. These clients include those who have terminated service agreements and slow payers expe-
riencing financial difficulties. In order to provide for these collection problems and the general risk associated with
the granting of credit terms, we have recorded the following bad debt provisions (in an Allowance for Doubtful
Accounts):
Year Ended December 31,
2010
2009
2008
Bad debt provision
$2,200,000
$2,404,000
$4,234,000
In making our credit evaluations, in addition to analyzing and anticipating, where possible, the specific cases
described above, we consider the general collection risk associated with trends in the long-term care industry. We
also establish credit limits, perform ongoing credit evaluation and monitor accounts to minimize the risk of loss.
Notwithstanding our efforts to minimize credit risk exposure, our clients could be adversely affected if future
industry trends change in such a manner as to negatively impact their cash flows. If our clients experience a negative
impact in their cash flows, it would have a material adverse effect on our results of operations and financial
condition.
Impaired Notes Receivable
We evaluate our notes receivable for impairment quarterly and on an individual client basis. Notes receivable
considered impaired are generally attributable to clients that are either in bankruptcy, are subject to collection
activity or those slow payers that are experiencing financial difficulties. In the event that our evaluation results in a
determination that a note receivable is impaired, it is valued at the present value of expected cash flows or market
value of related collateral. Summary schedules of impaired notes receivable, and the related reserve, for the years
ended December 31, 2010 and 2009 are as follows:
Impaired Notes Receivable
Balance
Beginning
Balance
End of
Average
Outstanding
Year ending December 31,
of Year
Additions
Deductions
Year
Balance
2010
2009
$2,900,000
$676,000
$1,666,000
$1,910,000
$2,405,000
$3,000,000
$100,000
$ 200,000
$2,900,000
$2,950,000
Year ending December 31,
2010
2009
58
Reserve for Impaired Notes Receivable
Balance
Beginning
of Year
Additions
Deductions
Balance
End of
Year
$2,100,000
$496,000
$1,666,000
$ 930,000
$1,300,000
$900,000
$ 100,000
$2,100,000
For impaired notes receivable, interest income is recognized on a cost recovery basis only. As a result, no interest
income was recognized on impaired notes receivable. We follow an income recognition policy on all other notes
receivable that does not recognize interest income until cash payments are received. This policy was established,
recognizing the environment of the long-term care industry, and not because such notes receivable are necessarily
impaired.The difference between income recognition on a full accrual basis and cash basis, for notes receivable that
are not considered impaired, is not material.
Note 6 — Lease Commitments
We lease office facilities, equipment and autos under operating leases expiring on various dates through 2015.
Certain office leases contain renewal options. The following is a schedule, by calendar year, of future minimum
lease payments under operating leases that have remaining terms as of December 31, 2010.
Period/Year
2011
2012
2013
2014
2015
Thereafter
Total minimum lease payments
Operating
Leases
$ 895,000
716,000
660,000
705,000
98,000
—
$3,074,000
Certain property leases provide for scheduled rent escalations. We do not consider the scheduled rent escalations
to be material to our operating lease expenses individually or in the aggregate.Total expense for all operating leases
was as follows:
Year Ended December 31,
2010
2009
2008
Operating lease expense
$1,158,000
$1,006,000
$1,205,000
Note 7— Share-Based Compensation
As of December 31, 2010, we had five share-based compensation plans which are described below: the 2002 Stock
Option Plan, the 1995 Incentive and Non-Qualified Stock Option Plan for key employees, the 1996 Non-
Employee Director’s Stock Option Plan (collectively the “Stock Option Plans”), the 2000 Employee Stock
Purchase Plan (the “ESPP”) and the Supplemental Executive Retirement Plan (the “SERP”).
In the years ended December 31, 2010, 2009 and 2008 we recorded share-based compensation of $317,000,
$393,000 and $116,000, respectively resulting from our ESPP. In respect to our SERP, we recorded share-based
compensation of $400,000, $315,000 and $353,000 (representing the company’s 25% match of participants’
deferrals) for the years ended December 31, 2010, 2009 and 2008, respectively. Additionally in 2010, 2009 and
2008, we recorded share-based compensation expense from our issuance of stock options of $1,015,000, $681,000
and $447,000, respectively.
59
Stock Option Plans
The Nominating, Compensation and Stock Option Committee of the Board of Directors is responsible for
determining the individuals who will be granted options, the number of options each individual will receive, the
option price per share (in accordance with the terms of our option plans), and the exercise period of each option.
Incentive Stock Options
As of December 31, 2010, 3,665,000 shares of common stock were reserved for issuance under our incentive stock
option plans, including 1,691,000 shares which are available for future grant. The incentive stock option price will
not be less than the fair market value of the common stock on the date the option is granted. No option grant will
have a term in excess of ten years. The options are exercisable over a five to ten year period. The options granted in
2010, 2009 and 2008 become vested and exercisable ratably over a five year period on each yearly anniversary date
of the option grant.
A summary of incentive stock option activity is as follows:
2010
Weighted
Average
Number
2009
Weighted
Average
Number
2008
Weighted
Average
price
of Shares
price
of Shares
price
Number
of Shares
Beginning of period
$ 8.48
1,904,000
$ 7.55
1,532,000
$ 5.09
1,477,000
Granted
Cancelled
Exercised
End of period
14.31
514,000
9.29
7.27
(33,000)
(411,000)
10.39
12.35
5.70
591,000
13.93
416,000
(46,000)
(173,000)
6.53
4.55
(52,000)
(309,000)
$10.24
1,974,000
$ 8.48
1,904,000
$ 7.55
1,532,000
The weighted average grant- date fair value of incentive stock options granted during 2010, 2009 and 2008 was
$3.98, $2.76 and $4.14 per common share, respectively.
The following table summarizes information about incentive stock options outstanding at December 31, 2010.
Options Outstanding
Options Exercisable
Average
Weighted
Remaining
Average
Number
Outstanding
Contractual
Life
Exercise
price
Number
Exercisable
Weighted
Average
Exercise
Price
166,000
220,000
166,000
555,000
867,000
1,974,000
1.47
2.99
3.99
8.01
8.19
6.64
$ 2.22
166,000
$ 2.22
3.68
6.07
10.39
14.15
220,000
166,000
102,000
135,000
3.68
6.07
10.39
13.93
$10.24
789,000
$ 6.49
Exercise Price Range
$1.83 — 2.50
3.68 — 3.68
6.07 — 6.07
10.39 — 10.39
$13.93 — 14.31
Non-Qualified Options
As of December 31, 2010, 1,602,000 shares of common stock were reserved for issuance under our non-qualified
stock option plans, including 574,000 shares which are available for future grant. The non-qualified options were
granted at option prices which were not less than the fair market value of the common stock on the date the
60
options were granted. The options granted in 2010, 2009 and 2008 become vested and exercisable ratably over a
five year period on each yearly anniversary date of the option grant.
A summary of non-qualified stock option activity is as follows.
2010
Weighted
2009
Weighted
2008
Weighted
Average
Number
Average
Number
Average
Number
price
of Shares
price
of Shares
price
of Shares
Beginning of period
$ 6.05
1,173,000
$ 5.85
1,317,000
$ 3.63
2,136,000
Granted
Cancelled
Exercised
End of period
14.31
156,000
9.20
6.87
(8,000)
(293,000)
10.39
10.76
5.49
41,000
13.93
155,000
(3,000)
(182,000)
—
2.27
—
(974,000)
$ 7.04
1,028,000
$ 6.05
1,173,000
$ 5.85
1,317,000
The weighted average grant-date fair value of non-qualified stock options granted during 2010, 2009 and 2008 was
$3.98, $2.76 and $4.14 per common share, respectively.
The following table summarizes information about non-qualified stock options outstanding at December 31,
2010.
Exercise Price Range
$1.83 — 2.50
3.68 — 3.68
6.07 — 6.07
10.39 — 10.39
$13.93 — 14.31
Options Outstanding
Options Exercisable
Average
Weighted
Number
Remaining
Contractual
Outstanding
Life
Average
Exercise
price
Weighted
Average
Exercise
Number
Exercisable
Price
302,000
190,000
188,000
39,000
309,000
1,028,000
1.26
2.99
3.99
8.01
8.01
4.37
$ 2.04
302,000
$ 2.04
3.68
6.07
10.39
14.12
190,000
188,000
8,000
60,000
3.68
6.07
10.39
13.93
$ 7.04
748,000
$ 4.54
Fair Value Valuation Estimates
The fair value of options granted during 2010, 2009 and 2008 is estimated on the date of grant using the Black-
Scholes-Merton option pricing model based on the following assumptions:
Risk-free interest rate
Weighted average expected life in years — Incentive Options
Non-Qualified options
Expected volatility
Dividend yield
Forfeiture rate
2010
2009
2008
2.50%
2.49%
4.19%
4.5 years
4.5 years
4.5 years
4.5 years
4.5 years
4.5 years
42.1%
3.45%
3.88%
41.0%
3.64%
5.80%
35.0%
1.98%
3.10%
61
Other Information
Other information pertaining to activity of our Stock Option Plans during the years ended December 31, 2010,
2009 and 2008 was as follows:
2010
2009
2008
Aggregate intrinsic value of stock option exercised
$ 5,613,000
$ 2,434,000
$11,599,000
Aggregate intrinsic value of outstanding stock options
$21,393,000
$20,759,000
$12,833,000
Total grant-date fair value of stock options granted
$ 2,176,000
$ 1,545,000
$ 2,237,000
Total fair value of options vested during period
$
579,000
$
372,000
$
—
As of December 31, 2010, the unrecognized compensation related to stock options was approximately $3,356,000.
This cost is expected to be expensed over a four year period.
Employee Stock Purchase Plan
Since January 1, 2000, we have had a non-compensatory ESPP for all eligible employees. All full-time and certain
part-time employees who have completed two years of continuous service with us are eligible to participate. The
ESPP was implemented through five annual offerings. On January 1, 2000, the first annual offering commenced.
On February 12, 2004 (effective January 1, 2004), our Board of Directors extended the ESPP for an additional
eight annual offerings. Annual offerings commence and terminate on the respective year’s first and last calendar
day. Under the ESPP, we are authorized to issue up to 4,050,000 shares of our common stock to our employees.
Pursuant to such authorization, we have 2,691,000 shares available for future grant at December 31, 2010.
Furthermore, under the terms of the ESPP, eligible employees can choose each year to have up to $25,000 of their
annual earnings withheld to purchase our Common Stock. The purchase price of the stock is 85% of the lower of
its beginning or end of the plan year market price.
The following table summarizes information about our ESPP annual offerings for the years ended December 31,
2010, 2009 and 2008:
Common shares purchased
Per common share purchase Price
Amount expensed under ESPP
Common shares date of issue
Deferred Compensation Plan
ESPP Annual Offering
2010
2009
2008
75,000
$12.07
74,000
$9.01
74,000
$9.03
$317,000
$393,000
$115,000
Jan. 6, 2011
Jan. 4, 2010
Jan. 14, 2009
Since January 1, 2000, we have had a SERP for certain key executives and employees. The SERP is not qualified
under Section 401 of the Internal Revenue Code. Effective in Plan year 2010, the Plan was amended to allow
participants to defer up to 25% of their earned income on a pre-tax basis. Prior to the amendment, participants
were eligible to defer up to 15% of their earned income on a pre-tax basis. As of the last day of each plan year, each
participant will receive a 25% match of up to 15% of their deferral in the form of our Common Stock based on the
then current market value. The 2010 amendment increased the deferral amount to 25% of their earned income on
a pre-tax basis, but the 25% match is still limited to a maximum of 15% of eligible participants’ deferral. SERP
participants fully vest in our matching contribution three years from the first day of the initial year of participation.
The income deferred and our matching contributions are unsecured and subject to the claims of our general
creditors. Under the SERP, we are authorized to issue up to 675,000 shares of our common stock to our employees.
62
Pursuant to such authorization, we have 511,000 shares available for future grant at December 31, 2010 (after
deducting the 2010 funding of 25,000 shares delivered in 2011). In the aggregate, since initiation of the SERP, the
Company’s 25% match has resulted in 502,000 shares (including the 2010 funding of shares delivered in
2011) being issued to the trustee. At the time of issuance, such shares were accounted for at cost, as treasury stock.
At December 31, 2010, approximately 477,000 of such shares are vested and remain in the respective active
participants’ accounts. The following table summarizes information about our SERP for the plan years ended
December 31, 2010, 2009 and 2008:
SERP Plan Year
2010
2009
2008
Amount of company match expensed under SERP
$
400,000
$
315,000
$
353,000
Treasury shares issued to fund SERP expense
25,000
15,000
22,000
SERP trust account balance at December 31
$16,534,000(1)
$14,591,000(1)
$10,828,000(1)
Unrealized gain (loss) recorded in SERP liability account
$ 1,325,000
$ 1,797,000
$ (2,389,000)
(1) SERP trust account investments are recorded at their fair value which is based on quoted market prices. Differences between
such amounts in the table above and the deferred compensation funding asset reported on our Consolidated Balance Sheets
represent the value of our Common Stock held in the Plan’s participants’ trust account and reported by us as treasury stock in our
Consolidated Balance Sheets.
Note 8 — Other Employee Benefit Plans
Retirement Savings Plan
Since October 1, 1999, we have had a retirement savings plan for employees (the “RSP”) under Section 401(k) of
the Internal Revenue Code. The RSP allows eligible employees to contribute up to fifteen percent (15%) of their
eligible compensation on a pre-tax basis. There is no match by the Company.
Note 9 — Dividends
We have paid regular quarterly cash dividends since the second quarter of 2003. During 2010, we paid regular
quarterly cash dividends totaling $39,285,000 as detailed below (adjusted where applicable, to reflect the 3 for 2
stock split in the form of a 50% common stock dividend on November 12, 2010):
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Cash dividend per common share
$.1400
$.1467
$.1533
$.1550
Total cash dividends paid
$9,224,000
$9,677,000
$10,124,000
$10,260,000
Record date
Payment date
February 12
April 23
July 23
October 22
March 5
May 14
August 6
November 5
Additionally, on January 25, 2011, our Board of Directors declared a regular quarterly cash dividend of $.15625 per
common share, which will be paid on March 4, 2011 to shareholders of record as of the close of business on
February 11, 2011.
Our Board of Directors reviews our dividend policy on a quarterly basis. Although there can be no assurance that
we will continue to pay dividends or the amount of the dividend, we expect to continue to pay a regular quarterly
cash dividend. In connection with the establishment of our dividend policy, we adopted a Dividend Reinvestment
Plan in 2003.
63
On October 12, 2010 our Board of Directors declared a three-for-two stock split in the form of a 50% stock
dividend which was paid on November 12, 2010 to holders of record at the close of business November 8, 2010.
The effect of this action was to increase common shares outstanding by approximately 22,000,000 in 2010. All
share and per common share information for all periods presented have been adjusted to reflect the three-for-two
stock split.
Note 10 — Income Taxes
The following table summarizes the provision for income taxes.
Current:
Federal
State
Deferred:
Federal
State
Tax Provision
Year Ended December 31,
2010
2009
2008
$15,398,000
$17,086,000
$12,454,000
3,889,000
4,439,000
3,225,000
19,287,000
21,525,000
15,679,000
323,000
(1,988,000)
815,000
68,000
(544,000)
167,000
391,000
(2,532,000)
982,000
$19,678,000
$18,993,000
$16,661,000
Deferred income taxes are recorded using the asset and liability method. Deferred tax assets and liabilities are
determined based on differences between the financial reporting and income tax basis of assets and liabilities.
Significant components of our federal and state deferred tax assets and liabilities are as follows:
Net current deferred assets (liabilities):
Allowance for doubtful accounts
Accrued insurance claims — current
Expensing of housekeeping supplies
Other
Net noncurrent deferred assets:
Deferred compensation
Non-deductible reserves
Depreciation of property and equipment
Accrued insurance claims — noncurrent
Amortization of intangibles
Other
Years Ended
December 31
2010
2009
$ 1,625,000
$ 1,865,000
2,028,000
1,947,000
(3,556,000)
(3,279,000)
(701,000)
(418,000)
$ (604,000)
$
115,000
$ 5,199,000
$ 5,217,000
25,000
31,000
(1,394,000)
(881,000)
4,731,000
4,543,000
(626,000)
(1,268,000)
174,000
265,000
$ 8,109,000
$ 7,907,000
Realization of the Company’s deferred tax assets is dependent upon future earnings in specific tax jurisdictions, the
timing and amount of which are uncertain. Management assesses the Company’s income tax positions and records
tax benefits for all years subject to examination based upon an evaluation of the facts, circumstances, and
64
information available at the reporting dates, which include historical operating results and expectations of future
earnings. As such, management believes it is more likely than not that the current and noncurrent deferred tax
assets recorded will be realized to reduce future income taxes and therefore no valuation allowances are necessary.
A reconciliation of the provision for income taxes and the amount computed by applying the statutory federal
income tax rate to income before income taxes is as follows:
Tax expense computed at statutory rate
Increases(decreases) resulting from:
Year Ended December 31,
2010
2009
2008
$18,942,000
$17,266,000
$15,146,000
State income taxes, net of federal tax benefit
2,572,000
2,551,000
2,201,000
Federal jobs credits
Tax exempt interest
Other, net
(1,615,000)
(881,000)
(767,000)
(370,000)
(504,000)
(339,000)
149,000
561,000
420,000
$19,678,000
$18,993,000
$16,661,000
Management performs an evaluation each period of its tax positions taken and expected to be taken in tax returns.
The evaluation is performed on positions relating to tax years that remain subject to examination by major tax
jurisdictions, the earliest of which is tax year ended December 31, 2007. Based on our evaluation, management has
concluded that there are no significant uncertain tax positions requiring recognition in our financial statements.
Therefore, the table reporting on the change in the liability for unrecognized tax benefits during the year ended
December 31, 2010 is omitted as there is no activity to report in such account for the year ended December 31,
2010, and there was no balance of unrecognized tax benefits at the beginning of the year.
We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such
assessments historically have been minimal and immaterial to our financial results. In the event we have received an
assessment for interest and/or penalties, it has been classified in the financial statements as selling, general and
administrative expense.
Income taxes paid for the last three fiscal years are as follows:
Year Ended December 31,
2010
2009
2008
Income taxes paid
$21,251,000
$17,789,000
$15,776,000
Note 11 — Related Party Transactions
One of our former directors, as well as the brother of an officer and a director (collectively “Related Parties”), have
separate ownership interests in several different client facilities which have entered into service agreements with us.
The following table includes the annual revenues from the service agreements with the client facilities in which the
Related Parties have ownership interests.
Revenue — related party
$4,145,000
$5,268,000
$4,529,000
65
Year Ended December 31,
2010
2009
2008
At December 31, 2010 and 2009, accounts and notes receivable and related reserves from such facilities were as
follows:
Accounts and notes receivable — related party
Allowance for doubtful accounts — related party
Accounts and notes receivable, net — related party
December 31
2010
2009
$1,071,000
$2,975,000
—
1,666,000
$1,071,000
$1,309,000
At December 31, 2009, the entity in which an officer’s brother has an ownership interest included a reserve as this
entity had declared bankruptcy in 2008. The reserve was recorded in a consistent manner with our reserve policy,
which requires a reserve amount for such entities.The accounts and notes receivable and related reserves related to
these amounts were written off in 2010.
Another of our directors is a member of a law firm which was retained by us. During the years ended December 31,
2010, 2009 and 2008, fees received from us by such firm did not exceed $100,000 in any period. Additionally, such
fees did not exceed, in any period, 5% of such firm’s revenues.
Note 12 — Segment Information
Reportable Operating Segments
We manage and evaluate our operations in two reportable segments. With respect to the CES acquisition, as
described in Note 2, its operations are comparable to ours and therefore reported within our reportable operating
segments in 2009 (since the date of acquisition). The two reportable segments are 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 service provided, as well as the specialized expertise required of the professional management personnel
responsible for delivering the respective segment’s services. We consider the various services provided within
Housekeeping to be one reportable operating segment since such services are rendered pursuant to a single service
agreement and the delivery of such services is managed by the same management personnel.
Differences between the reportable segments’ operating results and other disclosed data and our consolidated
financial statements relate primarily to corporate level transactions and recording of transactions at the reportable
segment level which use methods other than generally accepted accounting principles, and transactions between
reportable segments and our warehousing and distribution subsidiary that was sold on March 1, 2009. Prior to
disposition, the subsidiary’s transactions with reportable segments were made on a basis intended to reflect the fair
market value of the goods transferred. Additionally, included in the differences between the reportable segments’
operating results and other disclosed data are amounts attributable to our investment holding company subsidiary.
This subsidiary does not transact any business with the reportable segments. Segment amounts disclosed are prior
to any elimination entries made in consolidation.
66
Housekeeping provides services in Canada, although essentially all of its revenues and net income, 99% in both
categories, are earned in one geographic area, the United States. Dietary provides services solely in the United
States.
Year Ended December 31, 2010
Revenues
Income before income taxes
Depreciation and amortization
Total assets
Capital expenditures
Year Ended December 31, 2009
Revenues
Income before income taxes
Depreciation and amortization
Total assets
Capital expenditures
Year Ended December 31, 2008
Revenues
Income before income taxes
Depreciation and amortization
Total assets
Capital expenditures
Housekeeping
Corporate and
Services
Dietary Services
Eliminations
Total
$595,924,000
$178,061,000
$
(29,000)(1) $773,956,000
56,087,000
7,584,000
(9,552,000)(1)
54,119,000
2,874,000
595,000
295,000
3,764,000
124,494,000
39,683,000
113,757,000(2)
277,934,000
$ 3,693,000
$
144,000
$532,723,000
$159,845,000
$
$
337,000
$ 4,174,000
127,000(1) $692,695,000
52,375,000
7,782,000
(10,822,000)(1)
49,335,000
2,455,000
465,000
309,000
3,229,000
116,240,000
38,379,000
111,273,000(2)
265,892,000
$ 1,602,000
$
150,000
$
402,000
$ 2,154,000
$488,954,000
$115,409,000
$ (1,645,000)(1) $602,718,000
46,600,000
3,271,000
(6,596,000)(1)
43,275,000
2,246,000
238,000
368,000
2,852,000
102,511,000
25,583,000
120,467,000(2)
248,561,000
$ 1,266,000
$
106,000
$
205,000
$ 1,577,000
(1) represents primarily corporate office cost and related overhead, recording of transactions at the reportable segment level which
use methods other than generally accepted accounting principles, as well as consolidated subsidiaries’ operating expenses that
are not allocated to the reportable segments, net of investment and interest income.
(2) represents primarily cash and cash equivalents, marketable securities, deferred income taxes and other current and noncurrent
assets.
Total Revenues from Clients
The following revenues earned from clients differ from segment revenues reported above due to the inclusion of
adjustments used for segment reporting purposes by management. We earned total revenues from clients in the
following service categories:
Housekeeping services
Laundry and linen services
Dietary services
Maintenance services and other
Year Ended December 31,
2010
2009
2008
$399,031,000
$361,644,000
$334,034,000
194,258,000
168,877,000
151,291,000
178,271,000
159,767,000
115,165,000
2,396,000
2,407,000
2,228,000
$773,956,000
$692,695,000
$602,718,000
67
Major Client
We have one client, a nursing home chain, which in 2010, 2009 and 2008 accounted for 11%, 12% and 15%,
respectively, of total revenues. In the year ended December 31, 2010, we derived 11% and 9%, respectively, of the
Housekeeping and Dietary segments’ revenues from such client. Additionally, at both December 31, 2010 and
2009, amounts due from such client represented less than 1% of our accounts receivable balance. Although we
expect to continue the relationship with this client, there can be no assurance thereof. The loss of such client, or a
significant reduction in revenues from such client, would have a material adverse effect on the results of operations
of our two operating segments. In addition, if such client changes its payment terms it would increase our accounts
receivable balance and have a material adverse effect on our cash flows and cash and cash equivalents.
Total revenues
Housekeeping
Dietary services
Year Ended
December 31,
2010
2009
2008
11%
11%
9%
12%
13%
11%
15%
14%
17%
Note 13 — Earnings Per Common Share
Basic net earnings per share are computed using the weighted- average number of common shares outstanding.
The dilutive effect of potential common shares outstanding is included in diluted net earnings per share. The
computations of basic net earnings per share and diluted net earnings per share for 2010, 2009 and 2008 are as
follows:
Net income
$34,441,000
Year Ended December 31, 2010
Income
Shares
Per-share
(Numerator)
(Denominator)
Amount
Basic earnings per common share
Effect of dilutive securities: Options
Diluted earnings per common share
$34,441,000
65,917,000
1,091,000
$34,441,000
67,008,000
$ .52
(.01)
$ .51
Year Ended December 31, 2009
Income
Shares
Per-share
(Numerator)
(Denominator)
Amount
Net income
$30,342,000
Basic earnings per common share
Effect of dilutive securities: Options
Diluted earnings per common share
68
$30,342,000
65,376,000
1,053,000
$30,342,000
66,429,000
$ .46
—
$ .46
Year Ended December 31, 2008
Income
Shares
Per-share
(Numerator)
(Denominator)
Amount
Net income
$26,614,000
Basic earnings per common share
Effect of dilutive securities: Options
$26,614,000
64,697,000
1,341,000
$ .41
(.01)
Diluted earnings per common share
$26,614,000
66,038,000
$ .40
No outstanding options were excluded from the computation of diluted earnings per common share for the year
ended December 31, 2010 as none have an exercise price in excess of the average market value of our common
stock during such periods. For the year ended December 31, 2009 and 2008, options to purchase 528,000 and
557,000 shares, respectively, were excluded from the computation of diluted earnings per common share as the
exercise price of such options were in excess of the average market value of our common stock at the respective year
end.
Note 14 — Other Contingencies
We have a $36,000,000 (increased to $42,000,000 on January 1, 2011) bank line of credit on which we may draw to
meet short-term liquidity requirements in excess of internally generated cash flow. Amounts drawn under the line
of credit are payable upon demand. At December 31, 2010, there were no borrowings under the line of credit.
However, at such date, we had outstanding a $35,420,000 (increased to $40,420,000 on January 1, 2011) irrevocable
standby letter of credit which relates to payment obligations under our insurance programs. As a result of the letter
of credit issued, the amount available under the line of credit was reduced by $35,420,000 at December 31, 2010.
The line of credit requires us to satisfy two financial covenants. We are in compliance with the financial covenants
at December 31, 2010 and expect to continue to remain in compliance with such financial covenants. This line of
credit expires on June 30, 2012. We believe the line of credit will be renewed at that time.
We provide our services in 47 states and are subject to numerous local taxing jurisdictions within those states.
Consequently, in the ordinary course of business, a jurisdiction may contest our reporting positions with respect to
the application of its tax code to our services. A jurisdiction’s conflicting position on the taxability of our services
could result in additional tax liabilities.
We have tax matters with various taxing authorities. Because of the uncertainties related to both the probable
outcome and amount of probable assessment due, we are unable to make a reasonable estimate of a liability. We do
not expect the resolution of any of these matters, taken individually or in the aggregate, to have a material adverse
effect on our consolidated financial position or results of operations based on our best estimate of the outcomes of
such matters.
We are also subject to various claims and legal actions in the ordinary course of business. Some of these matters
include payroll and employee-related matters and examinations by governmental agencies. As we become aware of
such claims and legal actions, we provide accruals if the exposures are probable and estimable. If an adverse
outcome of such claims and legal actions is reasonably possible, we assess materiality and provide such financial
disclosure, as appropriate.
As a result of the current economic crisis, many states have significant budget deficits. State Medicaid programs are
experiencing increased demand, and with lower revenues than projected, they have fewer resources to support their
Medicaid programs. In addition, in March 2010, comprehensive health care reform legislation under the Act were
69
signed into law. As a result, some state Medicaid programs are reconsidering previously approved increases in
nursing home reimbursement or are considering delaying those increases. A few states have indicated they may run
out of cash to pay Medicaid providers, including nursing homes. Any of these changes would adversely affect the
liquidity of our clients, resulting in their inability to make payments to us as agreed upon.
In 2009 and 2010, Federal economic stimulus legislation was enacted to counter the impact of the economic crisis
on state budgets. The legislation includes the temporary provision of additional federal matching funds to help
states maintain their Medicaid programs. It is uncertain whether additional federal funding will be provided in the
future or if it will be provided in the form of matching funds. In addition, certain states have proposed legislation to
provide additional funding for nursing home providers. Even if federal or state legislation is enacted that provides
additional funding to Medicaid providers, given the volatility of the economic environment, it is difficult to predict
the impact of this legislation on our clients’ liquidity and their ability to make payments to us as agreed.
Note 15 — Accrued Insurance Claims
We currently have a Paid Loss Retrospective Insurance Plan for general liability and workers’ compensation
insurance. Under these plans, predetermined loss limits are arranged with our insurance company to limit both our
per-occurrence cash outlay and annual insurance plan cost.
We regularly evaluate our claims’ pay-out experience, present value factor and other factors related to the nature of
specific claims in arriving at the basis for our accrued insurance claims’ estimate. Our evaluation is based primarily
on current information derived from reviewing our claims’ experience and industry trends. In the event that our
claims’ experience and/or industry trends result in an unfavorable change, it would have an adverse effect on our
consolidated results of operations and financial condition.
For workers’ compensation, we record a reserve based on the present value of future payments, including an
estimate of claims incurred but not reported, that are developed as a result of a review of our historical data and
open claims.The accrued insurance claims were reduced by approximately $1,147,000, $1,001,000 and $867,000 at
December 31, 2010, 2009 and 2008, respectively, in order to record the estimated present value at the end of each
year using an 8% discount factor over the estimated remaining pay-out period (48 months).
For general liability, we record a reserve for the estimated amounts to be paid for known claims. The estimated
ultimate reserve amount recorded is derived from the estimated claim reserves provided by our insurance carrier
reduced by an historical experience factor.
Note 16 — Subsequent Events
We evaluated all subsequent events through the date these financial statements are being filed with the SEC. There
were no events or transactions occurring during this subsequent reporting period which require recognition or
additional disclosure in these financial statements.
70
Note 17 — Selected Quarterly Financial Data (Unaudited)
2010
Revenues
Operating costs and expenses
Income before income taxes
Net income
Basic earnings per common share(1)
Diluted earnings per common share(1)
Cash dividends per common share(1)
2009
Revenues
Operating costs and expenses
Income before income taxes
Net income
Basic earnings per common share(1)
Diluted earnings per common share(1)
Cash dividends per common share(1)
Three Months Ended
March 31
June 30
September 30
December 31
$183,801,000
$192,954,000
$195,114,000
$202,087,000
$172,474,000
$178,390,000
$182,872,000
$188,723,000
$ 12,077,000
$ 14,181,000
$ 13,424,000
$ 14,437,000
$ 7,428,000
$ 8,721,000
$ 9,169,000
$ 9,123,000
$
$
$
0.11
0.11
0.14
$
$
$
0.13
0.13
0.15
$
$
$
0.14
0.14
0.15
$
$
$
0.14
0.14
0.16
$160,409,000
$170,896,000
$178,829,000
$182,561,000
$148,768,000
$159,346,000
$167,164,000
$172,706,000
$ 12,578,000
$ 12,707,000
$ 13,374,000
$ 10,676,000
$ 7,736,000
$ 7,815,000
$ 8,225,000
$ 6,566,000
$
$
$
0.12
0.12
0.11
$
$
$
0.12
0.12
0.12
$
$
$
0.13
0.12
0.13
$
$
$
0.10
0.10
0.13
(1) Year-to-date earnings and cash dividends per common share amounts may differ from the sum of quarterly amounts due to
rounding.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.
None
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
In accordance with Exchange Act Rules 13a-15 and 15a-15, we carried out an evaluation, under the supervision and
with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls
and procedures were effective as of December 31, 2010.
Design and Evaluation of Internal Control Over Financial Reporting
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we included a report of management’s assessment of
the design and effectiveness of our internal controls over financial reporting as part of this Annual Report on
Form 10-K for the fiscal year ended December 31, 2010. Grant Thornton, LLP, our independent registered public
accounting firm, also audited our internal control over financial reporting. Management’s report and the
independent registered public accounting firm’s audit report are included in this Annual Report on Form 10-K
on pages 38 and 39 under the captions entitled “Management’s Report on Internal Control Over Financial
Reporting” and “Report of Independent Registered Public Accounting Firm”.
71
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the period covered by
this Annual Report on Form 10-K that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Item 9B. Other Information.
Effective January 1, 2011, Mr. Thomas Cook retired as President of the Company. As previously reported,
Mr. Cook’s duties as Chief Operating Officer were assumed by certain Senior and Divisional Vice Presidents in
June 2008.
Part III
Item 10. Directors, Executive Officers and Corporate
Governance.
The information regarding directors and executive officers is incorporated herein by reference to the Company’s
definitive proxy statement to be mailed to its shareholders in connection with its 2011 Annual Meeting of
Shareholders and to be filed within 120 days of the close of the year ended December 31, 2010.
Item 11. Executive Compensation.
The information regarding executive compensation is incorporated herein by reference to the Company’s
definitive proxy statement to be mailed to shareholders in connection with its 2011 Annual Meeting of
Shareholders and to be filed within 120 days of the close of the fiscal year ended December 31, 2010.
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.
The information regarding security ownership of certain beneficial owners and management and related
stockholder matters is incorporated herein by reference to the Company’s definitive proxy statement to be
mailed to shareholders in connection with its 2011 Annual Meeting of Shareholders and to be filed within 120 days
of the close of the fiscal year ending December 31, 2010.
Item 13. Certain Relationships and Related Transactions.
The information regarding certain relationships and related transactions is incorporated herein by reference to the
Company’s definitive proxy statement mailed to shareholders in connection with its 2011 Annual Meeting of
Shareholders and to be filed within 120 days of the close of the fiscal year ended December 31, 2010.
Item 14. Principal Accounting Fees and Services
The information regarding principal accounting fees and services is incorporated herein by reference to the
Company’s definitive proxy statement mailed to shareholders in connection with its 2011 Annual Meeting of
Shareholders and to be filed within 120 days of the close of the fiscal year ended December 31, 2010.
72
Part IV
Item 15. Exhibits and Financial Statement Schedules
(a)
Index of Financial Statements
The Financial Statements listed in the Index to Consolidated Financial Statements are filed as port of this report
on Form 10-K (see Part II, Item 8- Financial Statements and Supplementary Data).
(b)
Index of Exhibits
The following Exhibits are filed as part of this Report (references are to Reg. S-K Exhibit Numbers):
Exhibit
Number Description
3.1
Articles of Incorporation of the Registrant, as amended, are incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement
on Form S-2 (File No. 33-35798).
3.2
Amendment to Articles of Incorporation of the Registrant as of May 30, 2000, is incorporated by reference to Exhibit 3.2 to the Company’s
Form 10-K for the period ended December 31, 2001
3.3
Amendment to Articles of Incorporation of the Registrant as of May 22, 2007, is incorporated by reference to Exhibit 3.1 to the Company’s
Form 8-K filed May 24, 2007.
3.4
Amended and Restated By-laws of the Registrant as of July 18, 1990 are incorporated by reference to Exhibit 4.2 to the Company’s Registration
Statement on Form S-2 (File No. 33-35798).
3.5
Amended to Amended and Restated By-laws of the Registrant as of July 14, 2009 is incorporated by reference to Exhibit 99.2 to the Company’s
Form 10-Q for the quarter ended June 30, 2009.
4.1
Specimen Certificate of the Common Stock, $.01 par value, of the Registrant is incorporated by reference to Exhibit 4.1 of Registrant’s
Registration Statement on Form S-18 (Commission File No. 2-87625-W).
4.2**
4.3**
Employee Stock Purchase Plan of the Registrant is incorporated by reference to Exhibit 4(a) of Registrant’s Registration Statement on Form S-8
(Commission File No. 333-92835).
Amendment to Employee Stock Purchase Plan is incorporated by reference to Exhibit 4.3 to the Company’s Form 10-K for the period ended
December 31, 2003.
4.4**
Deferred Compensation Plan is incorporated by reference to Exhibit 4(b) of Registrant’s Registration Statement on Form S-8 (Commission File
No. 333-92835).
10.1**
1995 Incentive and Non-Qualified Stock Option Plan, as amended is incorporated by reference to Exhibit 4(d) of the Form S-8 filed by the
Registrant, Commission File No. 33-58765.
10.2**
Amendment to the 1995 Employee Stock Option Plan is incorporated by reference to Exhibit 4(a) of Registrant’s Registration Statement on
Form S-8 (Commission File No. 333-46656).
10.3**
1996 Non-Employee Directors’ Stock Option Plan, Amended and Restated as of October 28, 1997 is incorporated by reference to Exhibit 10.6
of Form 10-Q Report for the quarter ended September 30, 1997 filed by Registrant on November 14, 1997).
10.4**
Form of Non-Qualified Stock Option Agreement granted to certain Directors is incorporated by reference to Exhibit 10.9 of Registrant’s
Registration Statement on Form S-1 (Commission File No. 2-98089).
10.5**
Amended and restated 2002 Stock Option Plan is incorporated by reference to Exhibit 4(1) to the Company’s Registration Statement on
Form S-8 (Commission File No. 333-127747).
10.7
14.
21.
23.
Healthcare Services Group, Inc. Dividend Reinvestment Plan is incorporated by reference to the Company’s Registration Statement on
Form S-3 (Commission File No. 333-108182).
Code of Ethics and Business Conduct. Such document is available at our website www.hcsgcorp.com
List of subsidiaries is filed herewith in Part I, Item I.
Consent of Independent Registered Public Accounting Firm.
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
73
Exhibit
Number Description
31.2
32.1
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
**
indicates that exhibit is a management contract or a management compensatory plan or arrangement.
(c) Financial Statement Schedules
Except for Schedule II provided below, all other schedules for the registrant have been omitted since the required
information is not applicable or because the information is included in the financial statements or notes thereto.
Healthcare Services Group, Inc. and
Subsidiaries Schedule II — Valuation
and Qualifying Accounts
Years Ended December 31, 2010, 2009,
and 2008
Additions
Balance —
Charged to
Charged to
Beginning of
Period
Costs and
Expenses
Other
Accounts
Deductions (A)
Balance —
End of Period
Description
2010
Allowance for Doubtful Accounts
$4,640,000
$2,200,000
$—
$2,771,000
$4,069,000
2009
Allowance for Doubtful Accounts
$3,214,000
$2,404,000
$—
$ 978,000
$4,640,000
2008
Allowance for Doubtful Accounts
$4,284,000
$4,234,000
$—
$5,304,000
$3,214,000
(A) Represents write-offs
74
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: February 18, 2011
HEALTHCARE SERVICES GROUP, INC.
(Registrant)
Daniel P. McCartney
Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the
following persons and in the capacities and on the date indicated:
Signature
Title
Date
/s/ Daniel P. McCartney
Daniel P. McCartney
/s/ Richard W. Hudson
Richard W. Hudson
Chief Executive
Officer and Chairman
(Principal Executive Office)
Chief Financial
Officer and Secretary
(Principal Financial Officer)
Joseph F. McCartney
/s/
Joseph F. McCartney
Director and Vice
President
/s/ Robert L. Frome
Robert L. Frome
/s/ Thomas A. Cook
Thomas A. Cook
John M. Briggs
/s/
John M. Briggs
/s/ Robert J. Moss
Robert J. Moss
/s/ Dino D. Ottaviano
Dino D. Ottaviano
Director
Director
Director
Director
Director
February 18, 2011
February 18, 2011
February 18, 2011
February 18, 2011
February 18, 2011
February 18, 2011
February 18, 2011
February 18, 2011
75
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
We have issued our reports dated February 18, 2011 with respect to the consolidated financial statements,
schedule, and internal control over financial reporting included in the Annual Report of Healthcare Services
Group, Inc. and Subsidiaries on Form 10-K for the year ended December 31, 2010. We hereby consent to the
incorporation by reference of said reports in the Registration Statements of Healthcare Services Group, Inc. and
Subsidiaries on Forms S-8 (File No. 333-92835, effective December 15, 1999, File No. 333-101063, effective
November 7, 2002, File No. 333-46656, effective September 26, 2006, File No. 33-58765, effective May 13, 1995,
File No. 333-107467, effective July 30, 2003 and File No. 333-127747, effective August 22, 2005) and on Forms S-3
(File No. 333-108182, effective August 22, 2003, File No. 333-137713 effective October 23, 2006, and File No. 333-
161553, effective September 11, 2009).
Edison, New Jersey
February 18, 2011
76
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Stockholders and Board of Directors of
Healthcare Services Group, Inc.
We have audited in accordance with the standards of the Public Company Accounting Oversight Board (United
States) the consolidated financial statements of Healthcare Services Group, Inc. and Subsidiaries (the “Company”)
referred to in our report dated February 18, 2011, which is included in the Company’s Annual Report on
Form 10-K and included in Part II of this form. Our audits of the basic consolidated financial statements included
the financial statement schedule listed in the index appearing under Item 15(c), which is the responsibility of the
Company’s management. In our opinion, this financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
Edison, New Jersey
February 18, 2011
77
Exhibit 31.1
Certification of the Chief Executive Officer
Pursuant to Rules 13a-14(a) and 15d-14(a)
Under the Securities Exchange Act, as
Amended
I, Daniel P. McCartney, certify that:
1. I have reviewed this Annual Report on Form 10-K of Healthcare Services Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures ( as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f ) and 15d-15(f )) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of
Directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
78
b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting
Date: February 18, 2011
Daniel P. McCartney
Chief Executive Officer
(Principal Executive Officer)
79
Exhibit 31.2
Certification of the Chief Financial Officer
Pursuant to Rules 13a-14(a) and 15d-14(a)
Under the Securities Exchange Act, as
Amended
I, Richard W. Hudson, certify that:
1. I have reviewed this annual report on Form 10-K of Healthcare Services Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures ( as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f ) and 15d-15(f )) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation and;
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of
Directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
80
b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting
Date: February 18, 2011
Richard W. Hudson
Chief Financial Officer
(Principal Financial Officer)
81
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Sec-
tion 1350 as Adopted Pursuant to Sec-
tion 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report on Form 10-K of Healthcare Services Group, Inc. (the “Company”) for the
year ended December 31, 2010 as filed with the Securities and Exchange commission on the date hereof (the
“Report”), I, Daniel P. McCartney, Chief Executive Officer of the of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d), of the Securities Exchange Act
of 1934; and
(2) That information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Daniel P. McCartney
Chief Executive Officer
(Principal Executive Officer)
February 18, 2011
82
Exhibit 32.2
Certification Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
In connection with the Annual Report on Form 10-K of Healthcare Services Group, Inc. (the “Company”) for the
year ended December 31, 2010 as filed with the Securities and Exchange commission on the date hereof (the
“Report”), I, Richard W. Hudson, Chief Financial Officer and Secretary of the of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my
knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d), of the Securities Exchange Act
of 1934; and
(2) That information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Richard W. Hudson
Chief Financial Officer
(Principal Financial Officer)
February 18, 2011
83
tRansFeR agent
coRPoRate oFFIces
stock lIstIng
maRket makeRs
American Stock Transfer
& Trust Co.
99 Wall St.
New York, NY 10005
healthcare Services group, Inc.
3220 Tilman Drive, Suite 300
Bensalem, PA 19020
215-639-4274
Listed on the NASDAQ
Stock Global Select market
symbol “hCSg”
As of the end of 2010, the
following firms were making a
market in the shares of healthcare
Services Group, Inc.
auDItoRs
grant Thornton llP
399 Thornall Street
edison, NJ 08837
coRPoRate counsel
Olshan grundman Frome
Rosenzweig & Wolosky llP
Park Avenue Tower
65 east 55th Street
New York, NY 10022
annual stockholDeRs’
meetIng
Date: May 24, 2011
Time: 10:00AM
Place: The Radisson hotel
of Bucks County
2400 Old Lincoln highway
Trevose, PA 19047
UBS Capital Markets, l.P.
goldman, Sachs & Co.
Jefferies & Company, Inc.
lehman Bros. Inc.
Morgan Stanley & Co., Inc.
Merrill lynch, Pierce, Fenner
C.l. king & Associates
Citigroup
global Marketing, Inc.
Wm. Blair & Co.
J.P. Morgan Securities
Bank of America Securities
DIRectoRs
Daniel P. mccartney
Chairman & Chief Executive Officer
thomas a. cook
Former President
Joseph F. mccartney
Vice President
Robert l. Frome, esq.
Senior Partner – Olshan grundman
Frome Rosenzweig & Wolosky LLP
oFFIceRs anD coRPoRate
management
Daniel P. mccartney
Chief Executive Officer
Raymond m. crouse
Vice President Financial Services
Richard w. hudson
Chief Financial Officer & Secretary
David hurlock
Midwest Divisional Vice President
Robert J. moss, esq.1 2
President – Moss Associates
John D. kelly
Western Divisional Vice President
John m. Briggs1 2
Certified Public Accountant
Dino ottaviano1
Principal, D20 Marketing, Inc.
andrew w. kush
Vice President Human Resources
Jason w. lecroy
Southeast Divisional Vice President
michael P. lind
Southeast Divisional Vice President
1 Member – Audit Committee
2 Member – Nominating, Compensation and Stock Option Committee
edward D. massey
Southeast Divisional Vice President
nicholas Rucker
Southeast Divisional Vice President
michael e. mcBryan
Senior Vice President
Bryan D. mccartney
Senior Vice President
James schreck
Midwest Divisional Vice President
Robert scutta
Mid-Atlantic Divisional Vice President
Joseph F. mccartney
Vice President
John c. shea
Chief Accouting Officer
kevin mccartney
Northeast Divisional Vice President
David smigel
Western Divisional Vice President
timothy mccartney
In-House Cousel
theodore wahl
Executive Vice President
James P. o’toole
Mid-Atlantic Divisional Vice President
Brian m. waters
Southeast Divisional Vice President
John Pliego
Northeast Divisional Vice President
aBout youR shaRes
avaIlaBIlIty oF FoRm 10-k
A copy of the healthcare Services Group, Inc.’s 2010 Annual Report
on form 10-K, as filed with the Securities and exchange Commission
is available on the Company’s website “www.hcsgcorp.com”.
Additionally, it will be provided without charge to each shareholder
making a written request to the Investor Relations Department of
the Company at its Corporate Offices.
healthcare Services Group, Inc.’s Common Stock is traded on
the NASDAQ Global Select market. On December 31, 2010
there were approximately 66,176,000 of the Company’s common
shares issued and outstanding. As of february 8, 2011 there were
approximately 650 holders of record of the common stock, including
holders whose stock was held in nominee name by brokers or
other nominees. The high and low closing price quotations for our
Common Stock during the years ended December 31, 2010 and
2009, ranged as follows (after giving effect to the November 12,
2010 3-for-2 stock split):
2010 High 2010 Low 2009 High 2009 Low
1st Qtr.
2nd Qtr.
$15.19
$13.67
$15.57
$12.47
3rd Qtr.
$15.79
$12.27
4th Qtr.
$17.05
$15.10
$10.96
$13.15
$12.95
$14.67
$ 9.21
$ 9.55
$11.39
$11.92
3220 Tilman Drive
Glenview Corporate Center
Suite 300
Bensalem, PA 19020