Healthcare Services Group Annual Report 2015

Plain-text annual report

HEALTHCARE SERVICES GROUP INC FORM 10-K (Annual Report) Filed 02/19/16 for the Period Ending 12/31/15 Address Telephone CIK 3220 TILLMAN DRIVE SUITE 300 BENSALEM, PA 19020 2159381661 0000731012 Symbol HCSG SIC Code Industry Sector Fiscal Year 8050 - Nursing And Personal Care Facilities Business Services Services 12/31 http://www.edgar-online.com © Copyright 2016, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use. UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 Form 10-K þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934For the fiscal year ended December 31, 2015 ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934For the transition period from to Commission file number: 0-12015 HEALTHCARE SERVICES GROUP, INC.(Exact name of registrant as specified in its charter)Pennsylvania 23-2018365(State or other jurisdiction ofincorporated or organization) (IRS Employer Identification No.) 3220 Tillman Drive, Suite 300, Bensalem, PA 19020(Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code:(215) 639-4274Securities registered pursuant to Section 12(b) of the 1934 Act:Common Stock ($.01 par value) The NASDAQ Global Select MarketTitle of Class Name of each exchange on which securities registeredIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES þ NO ¨Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO þIndicate 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 preceding12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submitand post such files). YES þ NO ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, tothe best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of“large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨ (Do not check if a smallerreporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ¨ NO þThe 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, 2015 wasapproximately $1,665,396,000 based on closing sale price of the Common Stock on the NASDAQ Global Select Market on that date. The determination of affiliate status is nota determination for any other purpose. The Registrant does not have any non-voting common equity authorized or outstanding.Indicate the number of shares outstanding of each of the registrant’s classes of common stock (Common Stock, $.01 par value) as of the latest practicable date ( February 16,2016 ). 72,177,000DOCUMENTS INCORPORATED BY REFERENCEPortions of the definitive Proxy Statement for the Registrant’s Annual Meeting of Shareholders to be held on May 31, 2016 have been incorporated by reference into Parts IIand III of this Annual Report on Form 10-K.1Healthcare Services Group, Inc.Annual Report on Form 10-KFor the Fiscal Year Ended December 31, 2015TABLE OF CONTENTSPART I Item 1.Business4Item 1A.Risk Factors10Item 1B.Unresolved Staff Comments15Item 2.Properties15Item 3.Legal Proceedings15Item 4.Mine Safety Disclosures15PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities16Item 6.Selected Financial Data19Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations19Item 7A.Quantitative and Qualitative Disclosures About Market Risk33Item 8.Financial Statements and Supplementary Data35Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure65Item 9A.Controls and Procedures65Item 9B.Other Information65PART III Item 10.Directors, Executive Officers and Corporate Governance66Item 11.Executive Compensation66Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters66Item 13.Certain Relationships and Related Transactions, and Director Independence67Item 14.Principal Accountant Fees and Services67PART IV Item 15.Exhibits and Financial Statement Schedules68Exhibit Index68Signatures692Table of ContentsCAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTSThis Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934 (the “Exchange Act”), as amended, which are not historical facts but rather are based on current expectations, estimates andprojections about our business and industry, our beliefs and assumptions. Words such as “believes,” “anticipates,” “plans,” “expects,” “will,” “goal,” and similarexpressions are intended to identify forward-looking statements. The inclusion of forward-looking statements should not be regarded as a representation by us thatany 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 notlimited to, risks arising from our providing services exclusively to the health care industry, primarily providers of long-term care; credit and collection risksassociated with this industry; having several significant clients who each individually contributed at least 3% with one as high as 9% to our total consolidatedrevenues for the year ended December 31, 2015 ; our claims experience related to workers’ compensation and general liability insurance; the effects of changes in,or interpretations of laws and regulations governing the industry, our workforce and services provided, including state and local regulations pertaining to thetaxability of our services and other labor related matters such as minimum wage increases; tax benefits arising from our corporate reorganization and self-fundedhealth insurance program transition; risks associated with the reorganization of our corporate structure; and the risk factors described in Part I in this report under“Government Regulation of Clients,” “Competition” and “Service Agreements/Collections,” and under Item IA “Risk Factors.”These factors, in addition to delays in payments from clients and/or clients in bankruptcy or clients for which we are in litigation to collect payment, have resultedin, and could continue to result in, significant additional bad debts in the near future. Additionally, our operating results would be adversely affected if unexpectedincreases 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 existingclients, achieve modest price increases on current service agreements with existing clients and maintain internal cost reduction strategies at our various operationallevels. Furthermore, we believe that our ability to sustain the internal development of managerial personnel is an important factor impacting future operatingresults and successfully executing projected growth strategies.3Table of ContentsPART IIn this Annual Report on Form 10-K for the year ended December 31, 2015 , Healthcare Services Group, Inc. (together with its wholly-owned subsidiaries,included in Exhibit 21 which has been filed as part of this Report) is referred to as the "Company," "we," "us" or "our."Item I. Business.GeneralThe Company is a Pennsylvania corporation, incorporated on November 22, 1976. We provide management, administrative and operating expertise and services tothe housekeeping, laundry, linen, facility maintenance and dietary service departments of the health care industry, including nursing homes, retirement complexes,rehabilitation centers and hospitals located throughout the United States. Based on the nature and similarities of the services provided, our business operationsconsist 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 theUnited States, rendering such services to approximately 3,500 facilities in 48 states as of December 31, 2015. We provide our Housekeeping services to essentiallyall client facilities and provide Dietary services to over 1,000 of such facilities. Although we do not directly participate in any government reimbursementprograms, our clients’ reimbursements are subject to government regulation. Therefore, they are directly affected by any legislation and regulations relating toMedicare and Medicaid reimbursement programs.Segment InformationThe 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 15 of Notes toConsolidated Financial Statements for the years ended December 31, 2015, 2014 and 2013.Description of ServicesWe provide management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary servicedepartments 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 dietarydepartment services (“Dietary”). The operating results from our professional employer organization ("PEO") service contracts are included primarily in ourHousekeeping segment as these services include the provision of housekeeping and laundry personnel. The Company’s corporate headquarters provides centralizedfinancial management and administrative services to the Housekeeping and Dietary business segments.Housekeeping consists of managing the client’s housekeeping department which is principally responsible for the cleaning, disinfecting and sanitizing of patientrooms 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 thescope of this segment’s service is the responsibility for laundering and processing the bed linens, uniforms and other assorted linen items utilized by a clientfacility.Dietary consists of managing the client’s dietary department which is principally responsible for food purchasing, meal preparation and providing professionaldietitian consulting services, which includes the development of a menu that meets the patient’s dietary needs.Both segments provide our services primarily pursuant to full service agreements with our clients. In such agreements, we are responsible for the management ofthe department serviced, the employees located at our clients’ facilities and the provision of certain supplies. We also provide services on the basis of amanagement-only agreement for a limited number of clients. Our agreements with clients typically provide for renewable one year service terms, cancelable byeither party upon 30 to 90 days’ notice after an initial period of 60 to 120 days.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 aremany similarities in the nature of the services performed by each segment. However, there are some differences in the specialized expertise required of theprofessional management personnel responsible for delivering the services of the respective segments. We believe the services of each segment provideopportunity for growth.4Table of ContentsAn overview of each of our segments follows:HousekeepingHousekeeping services . Housekeeping services is our largest service sector, representing approximately 44% , or $631,875,000 , of consolidated revenues in2015. This service involves the management of the client’s housekeeping department which is principally responsible for cleaning, disinfecting and sanitizingresident areas in our clients’ facilities. In providing services to any given client facility, we typically hire and train the employees that were previously employed bysuch facility. We normally assign an on-site manager to each facility to supervise and train the front line personnel and coordinate housekeeping services withother facility support functions in accordance with the direction provided by the client. Such management personnel also oversee the execution of a variety ofquality and cost-control procedures including continuous training and employee evaluation and on-site testing for infection control. The on-site management teamalso assists the facility in complying with federal, state and local regulations.Laundry and linen services . Laundry and linen services represented approximately 19% , or $275,477,000 , of consolidated revenues in 2015. Laundry servicesare under the responsibility of the housekeeping department and involve the laundering and processing of the residents’ personal clothing. We provide laundryservices to mostly all of our housekeeping clients. Linen services involve providing, laundering and processing of the sheets, pillow cases, blankets, towels,uniforms and assorted linen items used by our clients’ facilities. At some facilities that utilize our laundry and linen services, we install our own equipment. Suchinstallation generally requires an initial capital outlay by us ranging from $5,000 to $100,000 depending on the size of the facility, installation and constructioncosts, 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 aninvestment by us in a corresponding laundry installation. The hiring, training and supervision of the employees who perform laundry and linen services are similarto, and performed by the same management personnel who oversee the housekeeping employees located at the respective client facility. In some instances we ownthe 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 ascarpentry and painting. This service sector’s total revenues of $2,357,000 represented less than 1% of consolidated revenues in 2015.Laundry installation sales . We (as a distributor of laundry equipment) sell laundry installations to our clients, which typically represents the construction andinstallation of a turn-key operation. We generally offer payment terms, ranging from 36 to 60 months. During the years 2013 through 2015, laundry installationsales were not material to our operating results as we prefer to own such laundry installations in connection with performance of our service agreements during theterm of such agreements.Housekeeping operating performance is significantly impacted by our management of labor costs. Labor accounted for approximately 80% of operating costsincurred at a facility service location, as a percentage of Housekeeping revenues. Changes in employee compensation 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, thecosts of supplies consumed in performing Housekeeping services, including linen costs, are affected by product specific market conditions and therefore aresubject to price volatility. Generally, this volatility is influenced by factors outside our control and is unpredictable. Where possible, we try to obtain fixed pricingfrom vendors for an extended period of time on certain supplies to mitigate such price volatility. Although we endeavor to pass on increases in our labor and supplycosts to our clients, the inability to attain such increases may negatively impact Housekeeping’s profit margins.PEO services . Through the Company's wholly-owned subsidiary, HCSG Staff Leasing Solutions, LLC ("Staff Leasing"), we enter into a client servicesagreement to become a co-employer of the client's existing workforce, assuming responsibility for payroll, payroll taxes, insurance coverage and certain otheradministrative functions, while the client maintains physical care, custody and control of their workforce, including the authority to hire and terminate employees.Our services include housekeeping and laundry personnel and are provided to clients in the health care industry. As of December 31, 2015, we have PEO servicecontracts in several states. During the years 2013 through 2015, operating results from our PEO service contracts were not material to our operating results.DietaryDietary services . Dietary services represented approximately 37% , or $527,140,000 , of consolidated revenues in 2015. Dietary consists of managing the client’sdietary department which is principally responsible for food purchasing, meal preparation and providing professional dietitian consulting services, which includesthe development of a menu that meets the dietary needs of the residents. On-site management is responsible for all daily dietary department activities, with regularsupport being provided5Table of Contentsby a district manager specializing in dietary services, as well as a registered dietitian. We also offer consulting services to facilities to assist them in costcontainment and to promote improvement in their dietary department service operations.Dietary operating performance is also impacted by price volatility in labor and supply costs resulting from similar factors discussed above in Housekeeping. Theprimary difference in impact on Dietary operations from price volatility in costs of labor and food-related supplies is that such costs represent approximately 53%and 39% of Dietary revenues, respectively. In contrast, labor is approximately 80% of operating costs as a percentage of Housekeeping revenues.Operational Management StructureBy applying our professional management techniques, we generally contain or control certain housekeeping, laundry, linen, facility maintenance and dietaryservice costs on a continuing basis. We manage and provide our services through a network of management personnel, as illustrated below. President and CEO ↓ Executive Vice President & Senior Vice President ↓ Divisional Vice President (10 Divisions) ↓ Regional Vice President/Manager and Director (80 Regions) ↓ District Manager (443 Districts) ↓ Training Manager/Facility Manager and Assistant Facility Manager Each facility is generally 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 thefacilities within their districts. They are generally based in close proximity to each facility. These managers provide active support to clients in addition to thesupport provided by our on-site management team. Training Managers are responsible for the recruitment, training and development of Facility Managers. Adivision consists of a number of regions within a specific geographical area. Divisional Vice Presidents manage each division. At December 31, 2015 we had 80regions within 10 divisions. Each region is headed by a Regional Vice President/Manager. Most regions also have a Regional Director who assumes primaryresponsibility for marketing our services within the respective region. Regional Vice Presidents/Managers and Directors provide management support to a numberof districts within a specific geographical area. Regional Vice Presidents/Managers and Directors report to Divisional Vice Presidents who in turn report to SeniorVice Presidents and/or Executive Vice Presidents. 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.MarketThe market for our services consists of a large number of facilities involved in various aspects of the health care industry, including long-term and post-acute carefacilities (skilled nursing facilities, residential care and assisted living facilities, etc.) and hospitals (acute care, critical access, psychiatric, etc.).These facilities primarily range in size from small private facilities to facilities with over 500 beds. Such facilities may be specialized or general, privately ownedor public, profit or not-for-profit, and may serve patients on a long-term or short-term basis. We market our services to such facilities after consideration of avariety of factors including facility type, size, location, and service (Housekeeping or Dietary). The market for our services, particularly in long-term and post-acute care, is expected to continue to6Table of Contentsgrow as the elderly population increases as a percentage of the United States population and as government reimbursement policies require increased cost controlor containment by the constituents that comprise our target market.Marketing and SalesOur services are marketed at four levels of our organization: at the corporate level by the President & Chief Executive Officer, Executive Vice Presidents andSenior Vice Presidents; at the divisional level by Divisional Vice Presidents; at the regional level by the Regional Vice Presidents/Divisional Managers andDirectors; 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 financialresults, along with continued business development.Our services are marketed primarily through referrals and in-person solicitation of target facilities. We also participate in industry trade shows, health care tradeassociations and healthcare support service seminars that are offered in conjunction with state or local health authorities in many of the states in which we conductour business. Our programs have been approved for continuing education credits by state nursing home licensing boards in certain states, and are typically attendedby facility owners, administrators and supervisory personnel, thus presenting marketing opportunities for us. Indications of interest in our services arising frominitial marketing efforts are followed up with a presentation regarding our services and an assessment of the service requirements of the facility. Thereafter, aformal proposal, including operational recommendations and recommendations for proposed savings, is submitted to the prospective client. Once the prospectiveclient accepts the proposal and signs the service agreement, we can set up our operations on-site within days.Government Regulation of ClientsOur clients are subject to government regulation. Congress has enacted a number of major laws during the past several years that have significantly altered or willalter government reimbursement for nursing home services, including the Patient Protection and Affordable Care Act and the Health Care and EducationReconciliation Act of 2010. In July 2011, Centers for Medicare and Medicaid Services (“CMS”) issued a final rule that reduced Medicare payments to nursingcenters by 11.1% and changed the reimbursement for the provision of group rehabilitation therapy services to Medicare beneficiaries. This new rule was effectiveas of October 1, 2011. Furthermore, in the coming year and beyond, new proposals or additional changes in existing regulations could be made which coulddirectly impact the governmental reimbursement programs in which our clients participate. As a result, some state Medicaid programs are reconsidering previouslyapproved increases in nursing home reimbursement or are considering delaying or foregoing those increases. A few states have indicated it is possible they will runout of cash to pay Medicaid providers, including nursing homes.In January 2013, the U.S. Congress enacted the American Taxpayer Relief Act of 2012, which delayed automatic spending cuts of $1.2 trillion, including reducedMedicare payments to plans and providers up to 2%. These discretionary spending caps were originally enacted under provisions in the Budget Control Act of2011, an initiative to reduce the federal deficit through the year 2021, also known as “sequestration.” The sequestration went into effect starting March 2013. InDecember 2013, the U.S. Congress enacted the Bipartisan Budget Act of 2013, which reduces the impact of sequestration over the next two years. This began infiscal year 2014 and extended the reduction in Medicare payments to plans and providers for two years from 2021 through 2023.Although laws and rulings directly affect how clients are paid for certain services, we do not directly participate in any government reimbursement programs.Accordingly, all of our contractual relationships with our clients continue to determine the clients’ payment obligations to us. However, because clients’ revenuesare generally highly reliant on Medicare and Medicaid reimbursement funding rates, the overall effect of these laws and trends in the long term care industry haveaffected and could adversely affect the liquidity of our clients, resulting in their inability to make payments to us on agreed upon payment terms (See “Liquidityand Capital Resources" included in our "Management's Discussion and Analysis of Financial Condition and Results of Operations").The prospects for legislative action, both on the federal and state level (particularly in light of current economic environment affecting government budgets),regarding funding for nursing homes are uncertain. We are unable to predict or to estimate the ultimate impact of any further changes in reimbursement programsaffecting our clients’ future results of operations and/or their impact on our cash flows and operations.Environmental RegulationThe Company’s operations are subject to various federal, state and/or local laws concerning emissions into the air, discharges into the waterways and thegeneration, handling and disposal of waste and hazardous substances. The Company’s past expenditures7Table of Contentsrelating to environmental compliance have not had a material effect on the Company and are included in normal operating expenses. These laws and regulationsare constantly evolving, and it is impossible to predict accurately the effect they may have upon the capital expenditures, earnings and competitive position of theCompany in the future. Based upon information currently available, management believes that expenditures relating to environmental compliance will not have amaterial impact on the financial position of the Company for the foreseeable future.Service Agreements and CollectionsWe provide our services primarily pursuant to full service agreements with our clients. In such agreements, we are responsible for the management of thedepartment serviced, the employees located at our clients’ facilities and the provision of certain supplies. We also provide services on the basis of a management-only agreement for a limited number of clients. In such agreements, our services are comprised of providing on-site management personnel, while the non-supervisory staff 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 costincreases associated with wage rate adjustments. Under a management agreement, we provide management and supervisory services while the client facility retainspayroll responsibility for the non-supervisory staff. Substantially all of our agreements are full service agreements. These agreements typically provide forrenewable one year terms, cancelable by either party upon 30 to 90 days’ notice after the initial 60 to 120 day period. As of December 31, 2015, we providedservices to approximately 3,500 client facilities.Although many of our service agreements are cancelable on short notice, we have historically had a favorable client retention rate and expect to continue tomaintain satisfactory relationships with our clients. The risks associated with short-term service agreements have not materially affected either our linen andlaundry services, which may from time-to-time require capital investment, or our laundry installation sales, which may require us to finance the sales price. Suchrisks are often mitigated by certain provisions set forth in the agreements entered into with our clients.State Medicaid programs are experiencing increased demand, and with lower revenues than projected, they have fewer resources to support their Medicaidprograms. In addition, Federal health reform legislation has been enacted that would significantly expand state Medicaid programs. As a result, some stateMedicaid programs are reconsidering previously approved increases in nursing home reimbursement or are considering delaying those increases. A few states haveindicated 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 ofour clients, resulting in their inability to make payments to us as agreed upon.We have had varying collection experience with respect to our accounts and notes receivable. When contractual terms are not met, we generally encounterdifficulty in collecting amounts due from certain of our clients. Therefore, we have sometimes been required to extend the period of payment for certain clientsbeyond contractual terms. These clients include those who have terminated service agreements and slow payers experiencing financial difficulties. In order toprovide for these collection problems and the general risk associated with the granting of credit terms, we have recorded bad debt provisions (in an Allowance forDoubtful Accounts) of $4,335,000 , $4,470,000 and $1,990,000 in the years ended December 31, 2015, 2014 and 2013, respectively (See Schedule II - Valuationand Qualifying Accounts and Reserves, for year-end balances). As a percentage of total revenues, these provisions represented approximately 0.3% for each of theyears ended December 31, 2015 and 2014 and 0.2% for the year ended December 31, 2013. In making our credit evaluations, in addition to analyzing andanticipating, where possible, the specific cases described above, we consider the general collection risk associated with trends in the long-term care industry. Wealso establish credit limits, perform ongoing credit evaluation and monitor accounts to minimize the risk of loss. Notwithstanding our efforts to minimize creditrisk exposure, our clients could be adversely affected if future industry trends change in such a manner as to negatively impact their cash flows, as discussed in“Government Regulation of Clients” and “Risk Factors” in this report. If our clients experience a negative impact in their cash flows, it would have a materialadverse effect on our consolidated results of operations and financial condition.CompetitionWe compete primarily with the in-house support service departments of our potential clients. Most healthcare facilities perform their own support service functionswithout 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 theirmarketing efforts primarily on hospitals, rather than the long-term care facilities typically serviced by us. Although the competition to provide service to healthcare facilities is strong, we believe that we compete effectively for new agreements, as well as renewals of existing agreements, based upon the quality anddependability of our services and the cost savings we believe we can usually implement for clients.8Table of ContentsEmployeesAt December 31, 2015, we employed approximately 8,600 management, office support and supervisory personnel. Of these employees, approximately 650 heldexecutive, regional/district management and office support positions, and approximately 7,900 of these employees were on-site management personnel. On suchdate, we employed approximately 37,300 hourly employees. Many of our hourly employees were previously support employees of our clients. We manage, for alimited number of our client facilities, the hourly employees who remain employed by those clients.Approximately 23% of our hourly employees are unionized. The majority of these employees are subject to collective bargaining agreements that are negotiated byindividual client facilities and are assented by us, so as to bind us as an “employer” under the agreements. We may be adversely affected by relations between ourclient facilities and the employee unions or between us and such unions. We consider our relationship with our employees to be good.Financial Information about Geographic AreasOur Housekeeping segment provided services in Canada during 2015 and 2014, although essentially all of its revenues and net income, 99% in each category, wereearned in one geographic area, the United States. The Housekeeping segment no longer provides services to Canada as of December 31, 2015. The Dietarysegment provides services only in the United States.Available InformationHealthcare Services Group, Inc. is a reporting company under the Securities Exchange Act of 1934, as amended, and files reports, proxy statements and otherinformation with the Securities and Exchange Commission (the “Commission” or “SEC”). The public may read and copy any of our filings at the Commissioner’sPublic 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 theCommission at 1-800-SEC-0330. Additionally, because we make filings to the Commission electronically, you may access this information at the Commission’sinternet site: www.sec.gov . This site contains reports, proxies and information statements and other information regarding issuers that file electronically with theCommission.Website AccessOur website address is www.hcsg.com . Our filings with the Commission, as well as other pertinent financial and Company information are available at no cost onour website as soon as reasonably practicable after the filing of such reports with the Commission.9Table of ContentsItem 1A. Risk Factors.You should carefully consider the risk factors we have described below, as well as other related information contained within this annual report on Form 10-Kbecause these factors could cause the actual results and our financial condition to differ materially from those projected in forward-looking statements. We believethat the risks described below are our most significant risk factors but there may be risks and uncertainties that are not currently known to us or that we currentlydeemed to be immaterial. Therefore, any such unknown or deemed immaterial risks and uncertainties, as well as those noted below could materially adverselyaffect our business, financial condition or results of operations and cash flows.We provide services to several clients which contribute significantly, on an individual, as well as aggregate basis, to our total revenues.We have several clients who each have made a contribution to our total consolidated revenues ranging from 3% to 9% for the year ended December 31, 2015.Although we expect to continue the relationship with these clients, there can be no assurance thereof. The loss, individually or in combination, of such clients, or asignificant reduction in the revenues we receive from such clients, could have a material adverse effect on the results of operations of our two operating segments.In addition, if any of these clients change or alter current payment terms it could increase our accounts receivable balance and have a material adverse effect on ourcash flows and cash and cash equivalents.Our clients are concentrated in the health care industry which is currently facing considerable legislative proposals to reform it. Many of our clients rely onreimbursement from Medicare, Medicaid and other third-party payors. Rates from such payors may be altered or reduced, thus affecting our Clients’ results ofoperations and cash flows.We provide our services primarily to providers of long-term and post-acute care. In March 2010, the U.S. Congress enacted the Patient Protection and AffordableCare Act and the Health Care and Education Reconciliation Act of 2010 (together, the "Act"), and is considering further legislation to reform healthcare in theUnited States which could significantly impact our clients. In July 2011, CMS issued final rulings which, among other things, reduced, effective October 1, 2011,Medicare payments to nursing centers by 11.1% and changed the reimbursement for the provision of group rehabilitation therapy services to Medicarebeneficiaries. In January 2013, the U.S. Congress enacted the American Taxpayer Relief Act of 2012, which delayed automatic spending cuts of $1.2 trillion,including reduced Medicare payments to plans and providers up to 2%. These discretionary spending caps were originally enacted under provisions in the BudgetControl Act of 2011, an initiative to reduce the federal deficit through the year 2021, also known as “sequestration.” The sequestration went into effect startingMarch 2013. In December 2013, the U.S. Congress enacted the Bipartisan Budget Act of 2013, which reduces the impact of sequestration over the next two years.This began in fiscal year 2014 and extended the reduction in Medicare payments to plans and providers for two years from 2021 through 2023. Some states haveenacted or are considering enacting measures designed to reduce their Medicaid expenditures. We cannot predict what efforts, and to what extent, such legislationand proposals to contain healthcare costs will ultimately impact our clients’ revenues through reimbursement rate modifications. Congress has enacted a number ofmajor 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, Medicaid and other third-party payors’ reimbursement funding rates and mechanisms, the overall effect of theselaws 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 tous on agreed upon payment terms. These factors, in addition to delays in payments from clients have resulted in, and could continue to result in, significantadditional bad debts in the future.Federal health care reform legislation’s eventual impact, including requiring most individuals to have health insurance and establish new regulation on healthplans, may adversely affect our operating costs and results of operations.The Act includes a large number of health-related provisions that become effective over the next several years, including requiring most individuals to have healthinsurance and establishing new regulations on health plans. While much of the cost of the recent healthcare legislation enacted began in 2015 due to provisions ofthe legislation being phased in over time, changes to our healthcare cost structure could have a continuing impact on our operating costs. Providing such additionalhealth 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 operating costs and results of operations.In addition, under the Act, employers will have to file a significant amount of additional information with the Internal Revenue Service. These and otherrequirements related to compliance under the Act could result in increased costs, expanded liability exposure, and other changes in the way we provide healthcareand other benefits to our employees.10Table of ContentsWe have clients located in many states which have had and may continue to experience significant budget deficits and such deficits may result in reduction ofreimbursements 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 thefunding of entitlements. As a result of these and other adverse economic factors, state Medicaid programs are reconsidering previously approved increases innursing home reimbursement or are considering delaying those increases. Some states have over the past year indicated they may be unable to make entitlementpayments, including Medicaid payments to nursing homes. Any disruption or delay in the distribution of Medicaid and related payments to our clients willadversely affect their liquidity and impact their ability to pay us as agreed upon for the services provided.The Company has substantial investment in the creditworthiness and financial condition of our customers.The largest current asset on our balance sheet is our accounts and notes receivable balances from our customers. We grant credit to substantially all of ourcustomers. Deterioration 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 theimpact of additional regulatory actions. When contractual terms are not met, we generally encounter difficulty in collecting amounts due from certain of ourclients. Therefore, we have sometimes been required to extend the period of payment for certain clients beyond contractual terms. These clients include those whohave terminated service agreements and slow payers experiencing financial difficulties. In making our credit evaluations, in addition to analyzing and anticipating,where possible, the specific cases described above, we consider the general collection risk associated with trends in the long-term care industry. We also establishcredit 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 anegative impact in their cash flows, it would have a material adverse effect on our consolidated results of operations, financial condition and cash flows.We have a Paid Loss Retrospective Insurance Plan for general liability and workers’ compensation insurance.We self-insure or carry a high deductible, and therefore retain a substantial portion of the risk associated with the expected losses under our general liability andworkers' compensation programs. Under our insurance plans for general liability and workers’ compensation, predetermined loss limits are arranged with ourinsurance company to limit both our per occurrence cash outlay and annual insurance plan cost. We regularly evaluate our claims pay-out experience and otherfactors related to the nature of specific claims in arriving at the basis for our accrued insurance claims estimate. Our evaluation is based primarily on currentinformation derived from reviewing our claims experience and industry trends. In the event that our known claims experience and/or industry trends result in anunfavorable change in initial estimates of costs to settle such claims resulting from, among other factors, the severity levels of reported claims and medical costinflation, it would have an adverse effect on our consolidated results of operations, financial condition and cash flows. During 2014, the Company recorded a one-time, non-cash adjustment of $37,416,000 related to a change in estimate and reserve methodology through the utilization of a third party actuary. Although weengage third-party experts to assist us in estimating appropriate insurance accounting reserves, the determination of the required reserves is dependent uponsignificant actuarial judgments that have a material impact on our reserves. Changes in our insurance reserves as a result of our periodic evaluation of the relatedliabilities may cause significant volatility in our operating results.Federal, State and Local tax rules can adversely impact our results of operations and financial position.We are subject to Federal, State and Local taxes in the United States. Significant judgment is required in determining the provision of income taxes. We believeour income tax estimates are reasonable. Although, if the Internal Revenue Service or other taxing authority disagrees with a taken tax position and upon finaladjudication we are unsuccessful, we could incur additional tax liability, including interest and penalty. Such costs and expenses could have a material adverseimpact on our results of operations and financial position. Additionally, the taxability of our services is subject to various interpretations within the taxingjurisdictions of our markets. Consequently, in the ordinary course of business, a jurisdiction may contest our reporting positions with respect to the application ofits tax code to our services. A conflicting position taken by a state or local taxation authority on the taxability of our services could result in additional tax liabilitieswhich we may not be able to pass on to our clients or could negatively impact our competitive position in that jurisdiction. Additionally, if we fail to comply withapplicable tax laws and regulations we could suffer civil or criminal penalties in addition to the delinquent tax assessment. In the taxing jurisdictions where ourservices 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 clientssuch tax increases. In the event we are not able to pass-through any portion of the tax increase, our gross margin could be adversely impacted.11Table of ContentsOur business and financial results could be adversely affected by unfavorable results of material litigation or governmental inquiries.We are currently involved in civil litigations and government inquiries which arise in the ordinary course of business. These matters relate 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 damagesand expenses and may adversely affect our reputation and business status with our clients whether we are ultimately determined to be liable or not. The outcome oflitigation, particularly class action and collective action lawsuits and regulatory actions, is difficult to assess or quantify. The plaintiffs in these types of actionsmay seek recovery of very large or indeterminate amounts, and estimates may remain unknown for substantial periods of time.We assess contingencies to determine the degree of probability and range of possible loss of potential accrual in our financial statements. We would accrue anestimated loss contingency in our financial statements if it were probable that a liability had been incurred and the amount of the loss could be reasonablyestimated. Due to the unpredictable and unfavorable nature of litigation, assessing contingencies is highly subjective and requires judgments about future events.The amount of actual losses may differ from our current assessment. As a result of the costs and expenses of defending ourselves against lawsuits or claims, andrisks and consequences of legal actions, regardless of merit, our results of operations and financial position could be adversely affected or cause variability in ourresults compared to expectations.We primarily provide our services pursuant to agreements which have a one year term, cancelable by either party upon 30 to 90 days’ notice after the initial 60to 120 day service agreement period.We do not enter into long-term contractual agreements with our clients for the rendering of our services. Consequently, our clients can unilaterally decrease theamount 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 firstyear of providing services, for which we have incurred significant start-up costs or invested in an equipment installation, could in the aggregate materiallyadversely affect our consolidated results of operations and financial position.The Company's business success depends on the management experience of our key personnel.We manage and provide our services through a network of management personnel, from the on-site facility manager up to our executive officers. Therefore, webelieve that our ability to recruit and sustain the internal development of managerial personnel is an important factor impacting future operating results and ourability to successfully execute projected growth strategies. Our professional management personnel are the key personnel in maintaining and selling additionalservices to current clients and obtaining new clients.Governmental regulations related to labor, employment, immigration and health and safety could adversely impact our results of operations and financialcondition.Our business is subject to various federal, state, and local laws and regulations, in areas such as labor, employment, immigration, and health and safety. These lawsfrequently evolve through case law, legislative changes and changes in regulatory interpretation, implementation and enforcement. Our policies and procedures andcompliance programs are subject to adjustments in response to these changing regulatory and enforcement environments. For example, the Department of Labor(“DOL”) recently issued proposed rule changes to the Fair Labor Standards Act (“FLSA”) that would increase the minimum salary threshold for employees exemptfrom overtime along with an automatic annual increase to this salary threshold. This proposed change, as well as other potential changes, could increase our cost ofservices provided. Although we have contractual rights to pass cost increases we incur to our clients due to regulatory changes, our delay in, or inability to passsuch costs of our compliance with legislative changes and changes in regulatory interpretation or enforcement in general, through to our clients could have amaterial adverse effect on our financial condition, results of operations and cash flowsIn addition, if we fail to comply with applicable laws, we may be subject to lawsuits, investigations, criminal sanctions or civil remedies, including fines, penalties,damages, reimbursement, or injunctions. Also, our clients’ facilities are subject to periodic inspection by federal, state, and local authorities for compliance withstate and local departments of health requirements. Expenses resulting from failed inspections of the departments that we service could result in our clients’ beingfined and seeking recovery from us, which could also adversely impact our financial condition, results of operations and cash flows.12Table of ContentsWe may be adversely affected by inflationary or market fluctuations in the cost of products consumed in providing our services or our cost of labor.Additionally, we rely on certain vendors for housekeeping, laundry and dietary supplies.The prices we pay for the principal items we consume in performing our services are dependent primarily on current market prices. We have consolidated certainsupply purchases with national vendors through agreements containing negotiated prospective pricing. In the event such vendors are not able to comply with theirobligations under the agreements and we are required to seek alternative suppliers, we may incur increased costs of supplies.Dietary supplies, to a much greater extent than Housekeeping supplies, are impacted by commodity pricing factors, which in many cases are unpredictable andoutside of our control. We endeavor to pass on to clients such increased costs but sometimes we are unable to do so. Even when we are able to pass on teincremental costs to our clients, from time to time, sporadic unanticipated increases in the costs of certain supply items due to market economic conditions mayresult 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’soperating 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 passsuch increase on to our clients until the time of our next scheduled service billing review. We endeavor to mitigate the impact of an unanticipated increase in suchsupplies’ costs through consolidation of vendors, which increases our ability to obtain reduced pricing.Our cost of labor may be influenced by unanticipated factors in certain market areas or increases in the respective collective bargaining agreements that we are aparty to. A substantial number of our employees are hourly employees whose wage rates are affected by increases in the federal or state minimum wage rate. Ascollective bargaining agreements are renegotiated or minimum wage rates increase, which currently will occur in about eighteen states in 2016, we may need toincrease the wages paid to employees. This may be applicable to not only minimum wage employees but also to employees at wage rates which are currently abovethe minimum wage. Although we have contractual rights to pass such wage increases through to our clients, our delay in, or inability to pass such wage increasesthrough to our clients could have a material adverse effect on our financial condition, results of operations and cash flows.Any perceived or real health risks related to the food industry could adversely affect our Dietary segment.We are subject to risks affecting the food industry generally, including food spoilage and food contamination. Our products are susceptible to contamination bydisease-producing organisms, or pathogens, such as listeria monocytogenes, salmonella, campylobacter, hepatitis A, trichinosis and generic E. coli. Because thesepathogens are generally found in the environment, there is a risk that these pathogens could be introduced to our products as a result of improper handling at themanufacturing, processing or food service level. Our suppliers' manufacturing facilities and products are subject to extensive laws and regulations relating tohealth, food preparation, sanitation and safety standards. Difficulties or failures by these companies in obtaining any required licenses or approvals or otherwisecomplying with such laws and regulations could adversely affect our revenue that is generated from these companies. Furthermore, there can be no assurance thatcompliance with governmental regulations by our suppliers will eliminate the risks related to food safety.Additionally, the Company may be subject to liability if the consumption of our food products causes injury, illness or death. Even if a product liability claim isunsuccessful or is not fully pursued, the negative publicity surrounding any assertion that the Company's products caused injury or illness could adversely affectthe Company's reputation.Events reported in the media, such as incidents involving food-borne illnesses or food tampering, whether or not accurate, can cause damage to the reputation ofour dietary segment. In addition, to the extent there is an outbreak of food related illness in any of our client facilities, it could materially harm our business, resultsof operations and financial condition.Changes in interest rates and changes in financial market conditions may result in fluctuating and even negative returns in our investments, and couldincrease the cost of the borrowings under our borrowing agreements.Although management believes we have a prudent investment policy, we are exposed to fluctuations in interest rates and in the market values of our investmentportfolio which could adversely impact our financial condition and results of operations. Our marketable securities are primarily invested in municipal bonds. Webelieve that our investment criteria which includes reducing our exposure to individual states, requiring certain credit ratings and monitoring our investments’duration period, reduces our exposure related to the financial duress and budget shortfalls that many state and local governments currently face. Increases in marketinterest rates in our borrowing agreements that have variable interest rates could adversely affect our payment obligations and adversely affect our liquidity andearnings.13Table of ContentsMarket 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 abilityto attract new clients, through organic growth or acquisitions, has enabled us to execute our growth strategy and increase market share. Our business strategyfocuses on growth and improving profitability through obtaining service agreements with new clients, providing new services to existing clients, obtaining modestprice increases on service agreements with clients and maintaining internal cost reduction strategies at our various operational levels. In respect to providing newservices to new or existing clients, our strategy is to achieve corresponding profit margins in each of our segments. If, in the event we are not able to continueeither historical client revenue and profitability growth rates or projected improvement, our operating performance may be adversely affected and the highexpectations 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 anadverse effect on the market price of our Common Stock.Failure to maintain effective internal control over financial reporting could have a material adverse effect on our ability to report our financial results on atimely and accurate basis.We are required to maintain internal control over financial reporting pursuant to Rule 13a-15 under the Exchange Act. Failure to maintain such controls couldresult in misstatements in our financial statements and potentially subject us to sanctions or investigations by the SEC or other regulatory authorities or could causeus to delay the filing of required reports with the SEC and our reporting of financial results. Any of these events could result in a decline in the market price of ourCommon Stock. Although we have taken steps to maintain our internal control structure as required, we cannot assure you that control deficiencies will not resultin a misstatement in the future.Recent government regulations may impact our ability to distribute dividends or the amount of such dividends to shareholders. Any decrease in or suspensionof our dividend could cause our stock price to decline.We expect to continue to pay a regular quarterly cash dividend. However, our dividend policy and the payment of future cash dividends under the policy aresubject to the final determination each quarter by our Board of Directors that (i) the dividend will be made in compliance with laws applicable to the declarationand payment of cash dividends, including Section 1551(b) of the Pennsylvania Business Corporation Law, and (ii) the policy remains in our best interests, whichdetermination will be based on a number of factors, including the impact of changing laws and regulations, economic conditions, our results of operations and/orfinancial condition, capital resources, the ability to satisfy financial covenants and other factors considered relevant by the Board of Directors. While we havecontinually increased the amount of our dividends, given these considerations, there can be no assurance these increases will continue and our Board of Directorsmay increase or decrease the amount of the dividend at any time and may also decide to suspend or discontinue the payment of cash dividends in the future. Anydecrease in the amount of the dividend, or suspension or discontinuance of payment of a dividend, could cause our stock price to decline.14Table of ContentsItem 1B. Unresolved Staff Comments.None.Item 2. Properties.We lease our corporate offices, located at 3220 Tillman Drive, Suite 300, Bensalem, Pennsylvania 19020. We also lease office space at other locations inPennsylvania, Colorado, South Carolina, Connecticut, Georgia, Illinois, California and New Jersey. The New Jersey office is the headquarters of our subsidiariesand HCSG Insurance Corp. The other locations serve as divisional or regional offices providing management and administrative services to both of our operatingsegments 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 propertiesare sufficient for our current operations.We presently own laundry equipment, office furniture and equipment, housekeeping equipment and vehicles. Such office furniture and equipment, and vehicles areprimarily located at our corporate office, warehouse, and divisional and regional offices. We have housekeeping equipment at all client facilities where we provideservices 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 certain client facilities. Our cost of such laundry installations ranges between $5,000 and $100,000. We believe thatsuch laundry equipment, office furniture and equipment, housekeeping equipment and vehicles are sufficient for our current operations.Item 3. Legal Proceedings.In the normal course of business, the Company is involved in various administrative and legal proceedings, including labor and employment, contracts, personalinjury, and insurance matters. The Company believes it is not a party to, nor are any of its properties the subject of, any pending legal proceeding or governmentalexamination that would have a material adverse effect on the Company's consolidated financial condition or liquidity. However, in light of the uncertaintiesinvolved in such proceedings, the ultimate outcome of a particular matter could become material to the Company’s results of operations for a particular perioddepending on, among other factors, the size of the loss or liability imposed and the level of the Company’s operating income for that period.Item 4. Mine Safety Disclosures.Not applicable.15Table of ContentsPART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Market InformationOur common stock, $.01 par value (the “Common Stock”), is traded under the symbol “HCSG” on the NASDAQ Global Select Market. As of February 16, 2016 ,there were approximately 72,177,000 shares of our Common Stock outstanding.The high and low sales price quotations for our Common Stock during the years ended December 31, 2015 and 2014 ranged as follows: 2015Quarter EndedHigh LowMarch 31, 2015$34.75 $29.93June 30, 2015$33.90 $29.42September 30, 2015$35.49 $31.57December 31, 2015$38.49 $33.10 2014Quarter EndedHigh LowMarch 31, 2014$29.14 $24.40June 30, 2014$30.58 $28.12September 30, 2014$30.69 $25.51December 31, 2014$31.96 $26.54HoldersWe have been advised by our transfer agent, American Stock Transfer and Trust Company, that we had approximately 550 holders of record of our Common Stockas of February 16, 2016 . Based on reports of security position listings compiled for the 2015 annual meeting of shareholders, we believe we may haveapproximately 7,000 beneficial owners of our Common Stock.DividendsWe have paid regular quarterly cash dividends since the second quarter of 2003. During 2015, we paid regular quarterly cash dividends totaling $51,375,000 asdetailed below: Quarter Ended March 31, 2015 June 30, 2015 September 30, 2015 December 31, 2015Cash dividend per common share$0.17625 $0.17750 $0.17875 $0.18000Total cash dividends paid$12,655,000 $12,760,000 $12,923,000 $13,037,000Record dateFebruary 20, 2015 May 22, 2015 August 21, 2015 November 20, 2015Payment dateMarch 27, 2015 June 26, 2015 September 25, 2015 December 18, 2015Additionally, on January 26, 2016 , our Board of Directors declared a regular quarterly cash dividend of $0.18125 per common share, which will be paid onMarch 25, 2016 to shareholders of record as of the close of business on February 19, 2016 .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 amountof the dividend, we expect to continue to pay a regular quarterly cash dividend. In connection with the establishment of our dividend policy, we adopted aDividend Reinvestment Plan in 2003.16Table of ContentsPerformance GraphThe graph below matches Healthcare Services Group, Inc.'s cumulative 5-Year total shareholder return on common stock with the cumulative total returns of theS&P 500 index, the Russell 2000 index, the NASDAQ Composite index, and the S&P Health Care Distributors index. The graph tracks the performance of a $100investment in our common stock and in each index (with the reinvestment of all dividends) from 12/31/2010 to 12/31/2015.The Company has changed its indexes for fiscal 2015, removing S&P Health Care Distributers index and replacing it with the Russell 2000 and NASDAQComposite indexes. The company believes these two indexes more appropriately reflect our performance relative to our peers. As required by Item 201 (e) (4) ofRegulation S-K, we are also including the S&P Health Care Distributors index.Comparison of 5 Year Cumulative Total Return*Among Healthcare Services Group, Inc., the S&P 500 Index, the Russell 2000 Index, the NASDAQ Composite Index and the S&P Health Care Distributors Index*$100 invested on 12/31/10 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. Copyright© 2016 S&P, a division of McGraw Hill Financial. All rights reserved. Copyright© 2016 Russell Investment Group. All rights reserved.17Table of Contents December 31, Company/Index 2010 2011 2012 2013 2014 2015 Healthcare Services Group, Inc. $100.00 $112.90 $152.79 $191.78 $214.25 $246.72 S&P 500 $100.00 $102.11 $118.45 $156.82 $178.29 $180.75 Russell 2000 $100.00 $95.82 $111.49 $154.78 $162.35 $155.18 NASDAQ Composite $100.00 $100.53 $116.92 $166.19 $188.78 $199.95 S&P Health Care Distributors $100.00 $109.38 $127.71 $209.42 $266.00 $283.24 The stock price performance included in this graph is not necessarily indicative of future stock price performance.18Table of ContentsItem 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 andAnalysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and Notes thereto, included elsewhere in this report onForm 10-K and incorporated herein by reference. Years Ended December 31, 2015 2014 2013 2012 2011 (in thousands, except per share amounts)Selected Operating Results Revenues$1,436,849 $1,293,183 $1,149,890 $1,077,435 $889,065Net income$58,024 $21,850 $47,129 $44,214 $38,156Basic earnings per common share$0.81 $0.31 $0.68 $0.65 $0.57Diluted earnings per common share$0.80 $0.31 $0.67 $0.65 $0.56Selected Balance Sheet Date Total assets$480,949 $469,579 $425,342 $331,183 $289,695Stockholders’ equity$296,456 $275,830 $285,143 $229,570 $217,726Selected Other Financial Data Working capital$269,881 $216,869 $210,089 $200,182 $186,734Cash dividends per common share$0.72 $0.69 $0.67 $0.65 $0.63Weighted average number of common shares outstanding - basic EPS71,826 70,616 69,206 67,511 66,637Weighted average number of common shares outstanding - diluted EPS72,512 71,341 70,045 68,485 67,585Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.You should read the following discussion and analysis of our financial condition and results of our operations in conjunction with our consolidated financialstatements and the related notes to those statements included elsewhere in this report. This discussion contains forward-looking statements reflecting our currentexpectations that involve risks and uncertainties. Our actual results and the timing of events may differ materially from those contained in these forward-lookingstatements due to a number of factors, including those discussed in the section entitled "Risk Factors," and elsewhere in this report on Form 10-K. We are on acalendar year end, and except where otherwise indicated below, "2015" refers to the year ended December 31, 2015, "2014" refers to the year ended December31, 2014 and "2013" refers to the year ended December 31, 2013.Results of OperationsThe following discussion is intended to provide the reader with information that will be helpful in understanding our financial statements including the changes incertain 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 asummary of how certain accounting principles affect our financial statements. In addition, we are providing information about the financial results of our twooperating segments to further assist in understanding how these segments and their results affect our consolidated results of operations. This discussion should beread in conjunction with our financial statements as of December 31, 2015 and the year then ended and the notes accompanying those financial statementscontained herein under Item 8.OverviewWe provide management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary servicedepartments 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 suchservices to approximately 3,500 facilities in 48 states as of December 31, 2015. Although we do not directly participate in any government reimbursementprograms, our clients’ reimbursements are subject to government regulation. Therefore, our clients are directly affected by any legislation relating to Medicare andMedicaid reimbursement programs.19Table of ContentsWe provide our services primarily pursuant to full service agreements with our clients. In such agreements, we are responsible for the day to day management ofemployees located at our clients’ facilities. We also provide services on the basis of a management-only agreement for a limited number of clients. Our agreementswith clients typically provide for renewable one year service terms, cancelable by either party upon 30 to 90 days’ notice after the initial 60 to 120 day period.We are organized into two reportable segments; housekeeping, laundry, linen and other services (“Housekeeping”) and dietary department services (“Dietary”). AtDecember 31, 2015, we provided Housekeeping at essentially all of our 3,500 client facilities, generating approximately 63% or $909,709,000 of 2015 totalrevenues. Dietary is provided to over 1,000 client facilities at December 31, 2015 and contributed approximately 37% or $527,140,000 of 2015 total revenues.Housekeeping consists of managing the client’s housekeeping department which is principally responsible for the cleaning, disinfecting and sanitizing of patientrooms and common areas of a client’s facility, as well as laundering and processing of the personal clothing belonging to the facility’s patients. Also within thescope of this segment’s service is the responsibility for laundering and processing the bed linens, uniforms and other assorted linen items utilized by a clientfacility.Dietary consists of managing the client’s dietary department which is principally responsible for food purchasing, meal preparation and providing dietitianconsulting 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 clientutilizing an in-house support staff, as well as local companies which provide services similar to ours. We are unaware of any other companies, on a national orlocal 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 businessare 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 therecoupment of costs increases, we endeavor to obtain modest annual revenue increases from our existing clients to preserve current profit margins at the facilitylevel. The primary economic factor in acquiring new clients is our ability to demonstrate the cost-effectiveness of our services, because many of our clients’revenues are generally highly reliant on Medicare and Medicaid reimbursement funding rates and mechanisms. Therefore, their economic decision-making processin engaging us is driven significantly by their reimbursement funding rate structure in relation to how their costs are currently being reimbursed and the financialimpact 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 ofbeing relieved of the administrative and operational challenges related to the day-to-day management of their respective department services for which theycontract with us. In addition, we must be able to assure new clients that we can to improve the quality of service that they are providing to their patients andresidents. We believe the factors discussed above are equally applicable to each of our segments with respect to acquiring new clients and increasing revenues.Our costs of services can experience volatility and impact our operating performance in two key cost indicators: costs of labor and costs of supplies. The volatilityof these costs impacts each segment somewhat differently due to the respective costs as a percentage of that segment’s revenues. Housekeeping is moresignificantly impacted than Dietary as a consequence of our management of our costs of labor. Labor costs accounted for approximately 80% of Housekeepingrevenues. Dietary labor costs accounted for approximately 53% of Dietary revenues. Changes in wage rates as a result of legislative or collective bargainingactions, anticipated staffing levels, and other unforeseen variations in our use of labor at a client service location or in management labor costs will result involatility of these costs. Housekeeping supplies, including linen products, accounted for approximately 8% of Housekeeping revenues. In contrast, suppliesconsumed in performing our services is more significant for Dietary and accounted for approximately 39% of Dietary revenues. Generally, the volatility of theseexpenses is influenced by factors outside of our control and is unpredictable. This is because Housekeeping and Dietary supplies are principally commodityproducts and affected by market conditions specific to the respective products. Although we endeavor to pass on such increases in labor and supplies costs to ourclients, the inability or delay in procuring service billing increases to reflect these additional costs would negatively impact our profit margins.State Medicaid programs are experiencing increased demand, and with lower revenues than projected, they have fewer resources to support their Medicaidprograms. In addition, comprehensive health care legislation under the Patient Protection and Affordable Care Act and the Health Care and EducationReconciliation Act of 2010 (together, the “Act”) was signed into law in March 2010. The Act has significantly impacted the governmental healthcare programs inwhich our clients participate, and reimbursements received thereunder from governmental or third-party payors. In July 2011, Centers for Medicare and MedicaidServices (“CMS”) issued a final rule that reduced Medicare payments to nursing centers by 11.1% and changed the reimbursement for the provision of grouprehabilitation therapy services to Medicare beneficiaries. This new rule was effective as of October 1, 2011. Furthermore, in the coming year and beyond, newproposals or additional changes in existing regulations could be made to the Act which could directly impact the governmental reimbursement programs in whichour clients participate. As a result, some state Medicaid programs are reconsidering previously approved increases in nursing home reimbursement or areconsidering delaying or foregoing20Table of Contentsthose 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 inour clients’ reimbursements may negatively impact our results of operations. Although we are currently evaluating the Act’s effect on our client base, we may notknow the full effect until such time as these laws are fully implemented and CMS and other agencies issue applicable regulations or guidance. Additionally, even iffederal or state legislation is enacted that provides additional funding to Medicaid providers, given the volatility of the economic environment, it is difficult topredict the impact of this legislation on our clients’ liquidity and their ability to make payments to us as agreed.In January 2013, the U.S. Congress enacted the American Taxpayer Relief Act of 2012, which delayed automatic spending cuts of $1.2 trillion, including reducedMedicare payments to plans and providers up to 2%. These discretionary spending caps were originally enacted under provisions in the Budget Control Act of2011, an initiative to reduce the federal deficit through the year 2021, also known as “sequestration.” The sequestration went into effect starting March 2013. InDecember 2013, the U.S. Congress enacted the Bipartisan Budget Act of 2013, which reduces the impact of sequestration over the next two years. This began infiscal year 2014 and extended the reduction in Medicare payments to plans and providers for two years from 2021 through 2023.On July 12, 2013, the Company acquired substantially all of the operating assets of Platinum Health Services, LLC, and Platinum Health Services PEO, LLC,(collectively “Platinum”). Platinum was a privately-held provider of professional housekeeping, laundry and maintenance services to long-term and post-acute carefacilities and operated solely within the United States. The acquisition has been included within the consolidated results of operations and financial condition fromthe date of the acquisition.In fiscal year 2015, the Company transitioned its workers compensation and certain employee health & welfare insurance programs to HCSG Insurance Corp.("HCSG Insurance" or the "Captive"), its wholly owned captive insurance subsidiary which previously provided general liability coverage to the Company. HCSGInsurance was formed in January 2014 to provide the Company with greater flexibility and cost efficiency in meeting its property & casualty and health & welfareneeds. In conjunction with the aforementioned insurance programs being administered and provided by the Captive, during the third quarter 2014, managementconducted a review of its self-insurance reserves to enhance its self-insurance estimation process. After analysis and consultation with insurance regulators andadvisors, the Company recorded a one-time, non-cash adjustment of $37,416,000 to reflect estimated current and future insurance claims projected to be closed outover the next 15 to 17 years. This tax-effected adjustment was recorded during the third quarter 2014 and is accounted for as a change in estimate, along withcharges related to the corporate reorganization, self-funded health insurance program transition and other related expenses, is recorded in our consolidatedstatements of comprehensive income.Consolidated OperationsThe following table sets forth, for the years indicated, the percentage which certain items bear to consolidated revenues: Relation to Consolidated Revenues Years Ended December 31, 2015 2014 2013Revenues100.0% 100.0% 100.0%Operating costs and expenses: Costs of services provided86.0% 89.3% 86.5%Selling, general and administrative7.8% 8.3% 8.0%Net investment and interest income0.0% 0.1% 0.3%Income before income taxes6.2% 2.5% 5.8%Income taxes2.2% 0.8% 1.7%Net income4.0% 1.7% 4.1%Subject to the factors noted in the Cautionary Statement Regarding Forward Looking Statements included in this report, we anticipate, although there can be noassurance thereof, our financial performance in 2016 may be comparable to historical ranges, absent non-recurring charges, as they relate to consolidated revenues.The 2015 and 2013 percentages were negatively impacted by mediated settlements regarding certain labor and employment related matters. The Company agreedto these mediated settlements while denying any violations. 2014 percentages were negatively impacted by a one-time, non-cash adjustment related to a change inestimate in our self-insurance reserve methodology.Housekeeping is our largest and core reportable segment, representing approximately 63% of 2015 consolidated revenues. Dietary revenues representedapproximately 37% of 2015 consolidated revenues.21Table of ContentsAlthough there can be no assurance thereof, we believe that in 2016, Dietary’s revenues, as a percentage of consolidated revenues, will increase from its respective2015 percentages noted above. Furthermore, we expect the sources of growth in 2016 for the respective operating segments will be primarily the same ashistorically experienced. Accordingly, although there can be no assurance thereof, the growth in Dietary is expected to come from our current Housekeeping clientbase, while growth in Housekeeping will primarily come from obtaining new clients.Years Ended December 31, 2015 and 2014The following table sets forth 2015 income statement key components that we use to evaluate our financial performance on a consolidated and reportable segmentbasis compared to 2014 amounts. The differences between the reportable segments’ operating results and other disclosed data and our consolidated financialstatements relate primarily to corporate level transactions and recording of transactions at the reportable segment level. Reportable Segments — For the Year Ended December 31, 2015 Housekeeping Dietary Consolidated % Change Corporate and Eliminations Amount % Change Amount % ChangeRevenues$1,436,849,000 11.1% $— $909,709,000 7.5% $527,140,000 18.0%Cost of services provided1,236,108,000 7.0 (84,658,000) 825,238,000 6.3 495,528,000 17.9Selling, general and administrative111,689,000 3.6 111,689,000 — — — —Investment and interest income712,000 (56.3) 712,000 — — — —Income before income taxes$89,764,000 183.1% $(26,319,000) $84,471,000 20.0% $31,612,000 20.0% Reportable Segments — For the Year Ended December 31, 2014 Consolidated Corporate & Eliminations Housekeeping DietaryRevenues$1,293,183,000 $— $846,610,000 $446,573,000Cost of services provided1,155,293,000 (41,157,000) 776,220,000 420,230,000Selling, general and administrative107,810,000 107,810,000 — —Investment and interest income1,628,000 1,628,000 — —Income before income taxes$31,708,000 $(65,025,000) $70,390,000 $26,343,000RevenuesConsolidatedConsolidated revenues increased 11.1% to $1,436,849,000 in 2015 compared to $1,293,183,000 in 2014 as a result of the factors discussed below under ReportableSegments.Reportable SegmentsHousekeeping’s 7.5% net growth in reportable segment revenues resulted primarily from an increase in revenues attributable to service agreements entered intowith new clients.Dietary’s 18.0% net growth in reportable segment revenues is primarily a result of providing this service to a greater number of existing Housekeeping clients.Costs of services providedConsolidatedConsolidated costs of services increased 7 % to $1,236,108,000 in 2015 compared to $1,155,293,000 in 2014 . The increase in costs of services is a result ofgrowth in our consolidated revenues, partially offset by the one-time, non-cash change in estimate related to our self-insurance liability that occurred during 2014.Certain significant components within our costs of services are subject to fluctuation with the changes in our business and client base. The increase in suchcomponents during 2015 compared to 2014 include labor and other labor related costs, housekeeping and dietary supplies and workers' compensation and generalliability insurance. Historically, these significant components accounted for approximately 98% of consolidated costs of services.22Table of ContentsAs a percentage of consolidated revenues, cost of services decreased to 86.0% in 2015 from 89.3% in 2014 . The following table provides a comparison of theprimary cost of services provided-key indicators that we manage on a consolidated basis in evaluating our financial performance.Cost of Services Provided-Key Indicators as % of Consolidated Revenue2015 % 2014 % % ChangeBad debt provision0.3 0.3 —Workers’ compensation and general liability insurance3.4 5.5 (2.1)The bad debt provision remained consistent due to our assessment of the collectability of our accounts and notes receivables. When we evaluate that there isuncertainty associated with the collectability of amounts due from a client, we record a bad debt provision based upon our initial estimate of ultimate collectability.We revise such provision as additional information is available which we believe enables us to make a more accurate estimate of the collectability of an account.Some of our clients may experience liquidity problems because of governmental funding or operational issues. Such liquidity problems may cause them to not payus as agreed upon or necessitate them filing for bankruptcy protection. In the event of additional clients filing for bankruptcy protection, we would increase our baddebt provision during the reporting period when such filing occurs. Therefore, if more clients file for bankruptcy protection or if we have to increase our currentprovision related to existing bankruptcies, our bad debt provision may increase from our last two years’ average as a percentage of consolidated revenues.The workers’ compensation and general liability insurance expense decreased in 2015 due to the 2014 change in estimate which resulted in a one-time, non-cashcharge to reflect certain costs related to the estimated current and future insurance claims projected to be paid out over the next 15 to 17 years.Reportable SegmentsCost of services provided for Housekeeping, as a percentage of Housekeeping revenues for 2015 , decreased to 90.7% compared to 91.7% in 2014 . Cost ofservices provided for Dietary, as a percentage of Dietary revenues for 2015 , decreased to 94.0% compared to 94.1% in 2014 .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 wemanage on a reportable segment basis in evaluating our financial performance:Cost of Services Provided-Key Indicators as % of Segment Revenue2015 % 2014 % % ChangeHousekeeping labor and other labor costs79.4 81.0 (1.6)Housekeeping supplies8.3 8.2 0.1Dietary labor and other labor costs52.9 51.0 1.9Dietary supplies38.7 40.7 (2.0)Housekeeping labor and other labor costs, as a percentage of Housekeeping revenues, decreased primarily due to efficiencies recognized in managing labor at thefacility level. The increase in Housekeeping supplies, as a percentage of Housekeeping revenues, resulted primarily from adding more clients where we provide agreater amount of supplies under the terms of our service agreements compared to what we historically provided to our client base.Dietary labor and other labor costs, as a percentage of Dietary revenues, increased primarily due to inefficiencies in managing these costs at the facility level. Thedecrease in Dietary supplies, as a percentage of Dietary revenues, is a result of more efficient management of these costs and more favorable vendor pricingprograms obtained through further consolidation of dietary supply vendors. Additionally, we experienced an increase in the number of clients where we do notprovide all of the food and food related supplies compared to our typical Dietary contracts. This shift within our Dietary segment impacted the trends on the keyindicators as a percentage of Dietary revenues.23Table of ContentsConsolidated Selling, General and Administrative Expense Year Ended December 31, 2015 2014 % ChangeSelling, general and administrative expense w/o deferred compensation change (a)$111,751,000 $106,599,000 4.8 %Deferred compensation fund (gain)/loss(62,000) 1,211,000 (105.1)%Consolidated selling, general and administrative expense (b)$111,689,000 $107,810,000 3.6 %(a)Selling, general and administrative expense excluding the change in the market value of the deferred compensation fund.(b)Consolidated selling, general and administrative expense reported for the period presented.Although our growth in consolidated revenues was 11.1% for 2015 , selling, general and administrative expenses excluding the change in market value of thedeferred compensation fund increased 4.8% or $5,152,000 compared to 2014 . Consequently, for 2015 , selling, general and administrative expenses (excluding theimpact of deferred compensation fund), as a percentage of consolidated revenues, decreased to 7.8% of consolidated revenues as compared to 8.2% in 2014 . Thispercentage decrease resulted primarily from the increase in our payroll and payroll related expenses in advance of the new business, along with professional fees,legal matters and charges related to the corporate reorganization under our wholly owned captive insurance subsidiary and other related expenses which occurredin 2014. The decrease was offset in 2015 by an increase in our legal expenses associated with settlements regarding certain employment related matters, whichimpacted the year over year compatibility. In 2016, we expect to incur selling, general and administrative expenses as a percentage of consolidated revenuesconsistent with historical levels.For 2015 , the portion of our consolidated selling, general and administrative expense attributable to deferred compensation decreased $1,273,000 compared to2014 . The decrease in deferred compensation is a result of unfavorable market value fluctuations on the balance of investments held in our deferred compensationfund as noted below in Consolidated Investment and Interest Income. Consolidated selling, general and administrative expenses increased $3,879,000 or 3.6% .Consolidated Investment and Net Interest IncomeInvestment and interest income, as a percentage of consolidated revenues, decreased to 0.0% for 2015 compared to 0.1% for 2014 . We recognized a decrease inthe market value of the investments held in our deferred compensation fund compared to an increase in the market value in the prior year.Income before Income TaxesConsolidatedAs a result of the discussion above related to revenues and expenses, consolidated income before income taxes for 2015 increased to 6.2% , as a percentage ofconsolidated revenues, compared to 2.5% in 2014 .Reportable SegmentsHousekeeping’s increase in income before income taxes is primarily attributable to the key indicators discussed above, specifically the increase in reportablesegment revenues, as well as the decrease in labor and labor related costs, partially offset by the increase supplies as a percentage of segment revenue.Dietary’s increase in income before income taxes is primarily attributable to the key indicators discussed above, specifically the increase in reportable segmentrevenues, as well as the decrease in supplies, partially offset by the increase in labor and labor related costs as a percentage of segment revenue.Consolidated Income TaxesOur effective tax rate was 35.4% for 2015 and 31.1% for 2014 . Such differences between the effective tax rates and the applicable U.S. federal statutory rate ariseprimarily from the effect of state and local taxes and tax credits available to the Company. The increase in the effective tax rate is primarily due to the greaterimpact of tax credits as a percentage of a lower pre-tax book income in 2014 as compared to the current year. The Company receives credits related to the WorkOpportunity Tax Credit (“WOTC”) program which has had a history of expiration with short renewal periods. The WOTC expired at December 31, 2013 and wasnot renewed again for the 2014 year until December 2014 as part of the Tax Increase Prevention Act of 2014. The tax effect of this renewal was recorded in thefourth quarter of 2014. The WOTC expired again at December 31, 2014, but was renewed by24Table of Contentsthe Protecting Americans From Tax Hikes Act of 2015 and is now scheduled to expire on December 31, 2019. The tax effect of this renewal was recorded in thefourth quarter of 2015.Absent any other significant change in federal or state and local tax laws, we expect our effective tax rate for 2016 to be within the range of 36.5% to 37.5% sincethe WOTC program has been extended through 2019. Other than the effect of the WOTC, our effective tax rate differs from the federal income tax statutory rateprincipally because of the effect of state and local income taxes. The Company continues to analyze the effect of the 2015 corporate reorganization but does notforesee a significant effect on the effective tax rate at this time.Consolidated Net IncomeAs a result of the matters discussed above, consolidated net income as a percentage of revenue for 2015 increased to 4.0% compared to 1.7% in 2014 .Years Ended December 31, 2014 and 2013The following table sets forth 2014 income statement key components that we use to evaluate our financial performance on a consolidated and reportable segmentbasis compared to 2013 amounts. The differences between the reportable segments’ operating results and other disclosed data and our consolidated financialstatements relate primarily to corporate level transactions and recording of transactions at the reportable segment level. Reportable Segments — For the Year Ended December 31, 2014 Housekeeping Dietary Consolidated % Change Corporate and Eliminations Amount % Change Amount % ChangeRevenues$1,293,183,000 12.5 % $— $846,610,000 11.5% $446,573,000 14.3%Cost of services provided1,155,293,000 16.1 (41,157,000) 776,220,000 12.5 420,230,000 13.7Selling, general and administrative107,810,000 17.2 107,810,000 — — — —Investment and interest income1,628,000 (56.0) 1,628,000 — — — —Income before income taxes$31,708,000 (52.3)% $(65,025,000) $70,390,000 2.2% $26,343,000 24.0% Reportable Segments — For the Year Ended December 31, 2013 Consolidated Corporate & Eliminations Housekeeping DietaryRevenues$1,149,890,000 $— $759,093,000 $390,797,000Cost of services provided995,104,000 (64,670,000) 690,221,000 369,553,000Selling, general and administrative91,998,000 91,998,000 — —Investment and interest income3,701,000 3,701,000 — —Income before income taxes$66,489,000 $(23,627,000) $68,872,000 $21,244,000RevenuesConsolidatedConsolidated revenues increased 12.5% to $1,293,183,000 in 2014 compared to $1,149,890,000 in 2013 as a result of the factors discussed below under ReportableSegments.Reportable SegmentsHousekeeping’s 11.5% net growth in reportable segment revenues resulted primarily from an increase in revenues attributable to service agreements entered intowith new clients.Dietary’s 14.3% net growth in reportable segment revenues is primarily a result of providing this service to a greater number of facilities for existing Housekeepingclients.25Table of ContentsCosts of services providedConsolidatedConsolidated costs of services increased 16.1% to $1,155,293,000 in 2014 compared to $995,104,000 in 2013. The increase in costs of services is a result ofgrowth in our consolidated revenues and the one-time, non-cash change in estimate related to our self-insurance liability. Certain significant components within ourcosts of services are subject to fluctuation with the changes in our business and client base. The increase in such components during 2014 compared to 2013include labor and other labor related costs, housekeeping and dietary supplies, bad debt provision, and workers' compensation and general liability insurance.Historically, these significant components have accounted for approximately 98% of consolidated costs of services.As a percentage of consolidated revenues, cost of services increased to 89.3% in 2014 from 86.5% in 2013. The following table provides a comparison of theprimary cost of services provided-key indicators that we manage on a consolidated basis in evaluating our financial performance. Cost of Services Provided-Key Indicators as % of Consolidated Revenue2014 % 2013 % % ChangeBad debt provision0.3 0.2 0.1Workers’ compensation and general liability insurance5.5 3.2 2.3The bad debt provision increased primarily due to our assessment of the collectability of our receivables. When we evaluate that there is an uncertainty associatedwith the collectability of amounts due from a client, we record a bad debt provision based upon our initial estimate of ultimate collectability. We revise suchprovision as additional information is available which we believe enables us to make a more accurate estimate of the collectability of an account. Some of ourclients may experience liquidity problems because of governmental funding or operational issues. Such liquidity problems may cause them to not pay us as agreedupon or necessitate them filing for bankruptcy protection. In the event of additional clients filing for bankruptcy protection, we would increase our bad debtprovision during the reporting period when such filing occurs. Therefore, if more clients file for bankruptcy protection or if we have to increase our currentprovision related to existing bankruptcies, our bad debt provision may increase from our last two years’ average as a percentage of consolidated revenues.The workers’ compensation and general liability insurance expense increased due to a change in estimate which resulted in a one-time, non-cash charge to reflectcertain costs related to the estimated current and future insurance claims projected to be paid out over the next 15 to 17 years.Reportable SegmentsCost of services provided for Housekeeping, as a percentage of Housekeeping revenues for 2014, increased to 91.7% compared to 90.9% in 2013. Cost of servicesprovided for Dietary, as a percentage of Dietary revenues for 2014, decreased to 94.1% compared to 94.6% in 2013.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 wemanage on a reportable segment basis in evaluating our financial performance:Cost of Services Provided-Key Indicators as % of Segment Revenue2014 % 2013 % % ChangeHousekeeping labor and other labor costs81.0 80.4 0.6Housekeeping supplies8.2 8.0 0.2Dietary labor and other labor costs51.0 51.8 (0.8)Dietary supplies40.7 39.9 0.8Housekeeping labor and other labor costs, as a percentage of Housekeeping revenues, increased due to inefficiencies recognized in managing labor at the facilitylevel. The increase in Housekeeping supplies, as a percentage of Housekeeping revenues, resulted primarily from an increase in supplies due to the growth inhousekeeping, laundry and linen revenue compared to overall Housekeeping revenues. Additionally, we added more clients where we provide a greater amount ofsupplies under the terms of our service agreements compared to what we have historically provided to our client base.Dietary labor and other labor costs, as a percentage of Dietary revenues, decreased due to increased efficiencies in managing these costs at the facility level. Theincrease in Dietary supplies, as a percentage of Dietary revenues, is a result of the inefficient26Table of Contentsmanagement of these costs, partially offset by more favorable vendor pricing programs obtained through further consolidation of dietary supply vendors.Consolidated Selling, General and Administrative Expense Year Ended December 31, 2014 2013 % ChangeSelling, general and administrative expense w/o deferred compensation change (a)$106,599,000 $88,993,000 19.8 %Deferred compensation fund gain1,211,000 3,005,000 (59.7)%Consolidated selling, general and administrative expense (b)$107,810,000 $91,998,000 17.2 %(a)Selling, general and administrative expense excluding the change in the market value of the deferred compensation fund.(b)Consolidated selling, general and administrative expense reported for the period presented.Although our growth in consolidated revenues was 12.5% for 2014, selling, general and administrative expenses excluding the change in market value of thedeferred compensation fund increased 19.8% or $17,606,000 compared to 2013. Consequently, for 2014, selling, general and administrative expenses (excludingthe impact of deferred compensation fund), as a percentage of consolidated revenues, increased to 8.2% of consolidated revenues as compared to 7.7% in 2013.This percentage increase resulted primarily from the increase in our payroll and payroll related expenses in advance of the new business, professional fees, legalmatters and charges related to the corporate reorganization under our wholly owned captive insurance subsidiary and other related expenses.For 2014, the portion of our consolidated selling, general and administrative expense attributable to deferred compensation decreased $1,794,000 compared to2013. The decrease in deferred compensation is a result of unfavorable market value fluctuations on the balance of investments held in our deferred compensationfund as noted below in Consolidated Investment and Interest Income. Consolidated selling, general and administrative expenses increased $15,812,000 or 17.2%.Consolidated Investment and Interest IncomeInvestment and interest income, as a percentage of consolidated revenues, decreased to 0.1% for 2014 compared to 0.3% for 2013. We recognized a decrease in themarket value of the investments held in our deferred compensation fund compared to an increase in the market value in the prior year. Income before Income TaxesConsolidatedAs a result of the discussion above related to revenues and expenses, consolidated income before income taxes for 2014 decreased to 2.5% as a percentage ofconsolidated revenues, compared to 5.8% in 2013.Reportable SegmentsHousekeeping’s increase in income before income taxes is primarily attributable to the key indicators discussed above, specifically the increase in reportablesegment revenues, partially offset by the increase in labor and labor related costs and housekeeping supplies as a percentage of segment revenue.Dietary’s increase in income before income taxes is primarily attributable to the key indicators discussed above, specifically the increase in reportable segmentrevenues, as well as the decrease in labor and labor related costs as a percentage of segment revenue, partially offset by the increased cost of dietary supplies.Consolidated Income TaxesOur effective tax rate was 31.1% for 2014 and 29.1% for 2013. Such differences between the effective tax rates and the applicable U.S. federal statutory rate ariseprimarily from the effect of state and local taxes and tax credits available to the Company. The increase in the effective tax rate is primarily due to the impact of taxcredits in 2013 for 2012 and 2013 as compared to 2014. The Company receives credits related to the Work Opportunity Tax Credit (“WOTC”) program but thisprogram expired at December 31, 2011. The WOTC was subsequently renewed, but not until January 2, 2013, as part of The American Taxpayer Relief Act of2012. The tax effect of a change in tax law is recognized in the period in which the date of the enactment occurs. Since the WOTC27Table of Contentswas renewed in 2013, the total tax effect of additional expected credits for 2012 was included in this period. In addition, the WOTC expired again at December 31,2013 and was not renewed again for the 2014 year until December 2014 as part of the Tax Increase Prevention Act of 2014. The tax effect of this renewal wasrecorded in the fourth quarter of 2014.Consolidated Net IncomeAs a result of the matters discussed above, consolidated net income as a percentage of revenue for 2014 decreased to 1.7% compared to 4.1% in 2013.Critical Accounting Policies and EstimatesThe preparation of financial statements in accordance with accounting standards generally accepted in the United States requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expensesduring the reporting period.We consider the policies discussed below to be critical to an understanding of our financial statements because their application places the most significantdemands 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 rarelydevelop as forecasted, and the best estimates routinely require adjustment. Any such adjustments or revisions to estimates could result in material differences topreviously reported amounts.The policies discussed are not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particulartransaction is specifically dictated by accounting standards generally accepted in the United States, with no need for our judgment in their application. There arealso areas in which our judgment in selecting another available alternative would not produce a materially different result. See our audited consolidated financialstatements and notes thereto which are included in this Annual Report on Form 10-K, which contain accounting policies and other disclosures required byaccounting principles generally accepted in the United States.Allowance for Doubtful AccountsThe allowance for doubtful accounts (the “Allowance”) is established as losses are estimated to have occurred through a provision for bad debts charged toearnings. The Allowance is evaluated based on our periodic review of accounts and notes receivable and is inherently subjective as it requires estimates that aresusceptible 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 encounterdifficulty in collecting amounts due from certain of our clients. Therefore, we have sometimes been required to extend the period of payment for certain clientsbeyond contractual terms. These clients include those who have terminated service agreements and slow payers experiencing financial difficulties. In making creditevaluations, in addition to analyzing and anticipating, where possible, the specific cases described above, we consider the general collection risks associated withtrends in the long-term care industry. We also establish credit limits, perform ongoing credit evaluations, and monitor accounts to minimize the risk of loss.In accordance with the risk of extending credit, we regularly evaluate our accounts and notes receivable for impairment or loss of value and when appropriate, willprovide in our Allowance for such receivables. We generally follow a policy of reserving for receivables due from clients in bankruptcy, clients with which we arein litigation for collection and other slow paying clients. The reserve is based upon our estimates of ultimate collectability. Correspondingly, once our recovery of areceivable is determined through litigation, bankruptcy proceedings or negotiation to be less than the recorded amount on our balance sheet, we will charge-off theapplicable 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 forcollection/litigation and/or is considered to be pending collection/litigation. The initial Allowance is adjusted either higher or lower when additional information isavailable to permit a more accurate estimate of the collectability of an account.Summarized below for the years 2013 through 2015 are the aggregate account balances for the three Allowance criteria noted above, net of write-offs of clientaccounts, bad debt provision and allowance for doubtful accounts.28Table of ContentsYear EndedAggregate Account Balancesof Clients in Bankruptcy or in/orPending Collection/Litigation Net Write-offs of ClientAccounts Bad Debt Provision Allowance for DoubtfulAccounts2013$6,047,000 $2,041,000 $1,990,000 $3,919,0002014$14,903,000 $2,253,000 $4,470,000 $6,136,0002015$12,073,000 $5,863,000 $4,335,000 $4,608,000At December 31, 2015 , we identified accounts totaling $12,073,000 that require an Allowance based on potential impairment or loss of value. An Allowancetotaling $4,608,000 was provided for these accounts at such date. Actual collections of these accounts could differ from that which we currently estimate. If ouractual collection experience is 5% less than our estimate, the related increase to our Allowance would decrease net income by approximately $ 241,000 .Notwithstanding our efforts to minimize credit risk exposure, our clients could be adversely affected if future industry trends, as more fully discussed underLiquidity and Capital Resources below, and as further described in this Annual Report on Form 10-K in Part I under “Risk Factors”, “Government Regulation ofClients” and “Service Agreements/Collections”, change in such a manner as to negatively impact the cash flows of our clients. If our clients experience a negativeimpact in their cash flows, it would have a material adverse effect on our results of operations and financial condition.Accrued Insurance ClaimsWe currently have a Paid Loss Retrospective Insurance Plan for general liability and workers’ compensation insurance, which comprise approximately 45% of ourliabilities at December 31, 2015 . Under our insurance plans for general liability and workers' compensation, predetermined loss limits are arranged with ourinsurance company to limit both our per occurrence cash outlay and annual insurance plan cost. Our accounting for this plan is affected by various uncertainties,such as historical claims, pay-out experience, demographic factors, industry trends, severity factors, and other actuarial assumptions calculated by a third partyactuary. Evaluations of our accrued insurance claims estimate as of the balance sheet date are based primarily on current information derived from our actuarialvaluation which assist in quantifying and valuing these trends. In the event that our claims experience and/or industry trends result in an unfavorable changeresulting from, among other factors, the severity levels of reported claims and medical cost inflation, as compared to historical claim trends, it would have anadverse effect on our results of operations and financial condition. Under these plans, predetermined loss limits are arranged with an insurance company to limitboth our per-occurrence cash outlay and annual insurance plan cost.For workers’ compensation and general liability, we record a reserve for the estimated future cost of claims and related expenses that have been reported but notsettled, including an estimate of claims incurred but not reported that are developed as a result of a review of our historical data and open claims, which is based onestimates provided by a third party actuary.A summary of the changes in our total self-insurance liability is as follows: Year Ended December 31, 2015 2014 2013Accrued insurance claims - January 1,$68,262,000 $26,178,000 $22,562,000Claim payments(27,883,000) (24,879,000) (26,091,000)Reserve accruals: Current year accruals41,870,000 30,642,000 19,854,000Changes to the provision for prior years— 36,321,000 9,853,000Change in accrued insurance claims$13,987,000 $42,084,000 $3,616,000Accrued insurance claims - December 31,$82,250,000 $68,262,000 $26,178,000Asset Valuations and Review for Potential ImpairmentWe review our fixed assets, deferred income taxes, goodwill and other intangible assets at least annually or whenever events or changes in circumstances indicatethat its carrying amount may not be recoverable. This review requires that we make assumptions regarding the value of these assets and the changes incircumstances that would affect the carrying value of these assets. If such analysis indicates that a possible impairment may exist, we are then required to estimatethe 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 asthe impact of competition on future value. We believe that we have made reasonable estimates and judgments in determining whether29Table of Contentsour 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 materialchange in economic conditions or circumstances influencing fair value, we could be required to recognize certain impairment charges in the future. As a result ofour most recent reviews, no changes in asset values were required.Income TaxesDeferred income taxes are recognized for the tax consequences related to temporary differences between the carrying amount of assets and liabilities for financialreporting purposes and the amounts used for tax purposes at each year-end, based on enacted tax laws and statutory tax rates applicable to the periods in which thedifferences are expected to affect taxable income. A valuation allowance is established when necessary based on the weight of available evidence, if it isconsidered more likely than not that all or some portion of the deferred tax assets will not be realized. Income tax expense is the sum of current income tax plus thechange in deferred tax assets and liabilities.We are subject to income taxes in the United States and numerous state and local jurisdictions. The determination of the income tax provision is an inherentlycomplex process, requiring management to interpret continually changing regulations and to make certain significant judgments. Our assumptions, judgments andestimates relative to the amount of deferred income taxes take into account scheduled reversals of deferred tax liabilities, recent financial operations, estimates ofthe amount of future taxable income and available tax planning strategies. Actual operating results in future years could render our current assumptions, judgmentsand estimates inaccurate. No assurance can be given that the final impact of these matters will not be different from that which is reflected in the Company’shistorical income tax provisions and accruals. The Company adjusts these items in light of changing facts and circumstances. To the extent that the final impact ofthese matters is different than the amounts recorded, such differences could have a material effect on the income tax provisions or benefits in the periods in whichsuch determinations are made.Liquidity and Capital ResourcesAt December 31, 2015 , we had cash and cash equivalents, and marketable securities of $102,685,000 and working capital of $269,881,000 compared toDecember 31, 2014 cash, cash equivalents and marketable securities of $87,079,000 and working capital of $216,869,000 . We view our cash and cash equivalentsand marketable securities as our principal measure of liquidity. Our current ratio at December 31, 2015 increased to 3.8 to 1 from 2.8 to 1 at December 31, 2014 .The increase in working capital resulted primarily from the increases in our marketable securities, accounts and notes receivable (from our 11.1% increase inrevenues), inventories and supplies, prepaid expenses and other, and decreases in our accounts payable and accrued payroll and payroll taxes. This increase waspartially negatively impacted by the decrease in cash and cash equivalents and deferred income taxes and increases in our other accrued expenses and income taxespayable primarily resulting from the timing of such payments at December 31, 2015 as compared with December 31, 2014 , as well as an increase in our accruedinsurance claims liability. On an historical basis, our operations have produced consistent cash flow and have required limited capital resources. We believe ourcurrent and near term cash flow positions will enable us to fund our continued anticipated growth.Operating ActivitiesThe net cash provided by our operating activities was $63,361,000 for 2015 . The principal sources of net cash flows from operating activities for 2015 was netincome adjusted for non-cash charges to operations for bad debt provisions, stock-based compensation, depreciation and amortization, deferred income taxes andunrealized gains and losses, which totaled $90,234,000 . Additionally, operating activities' cash flows increased by $21,790,000 in 2015 as a result of the increasesin accounts payable and other accrued expenses ( $2,403,000 ), deferred compensation liability ( $1,113,000 ), income tax payable ( $5,997,000 ), and accruedinsurance claims ( $13,987,000 ) and decrease in prepaid expenses and other assets ( $1,710,000 ). These operating cash inflows were partially offset by the cashoutflows of $48,663,000 as a result of the increases in accounts and notes receivable, net ( $18,854,000 ), inventories and supplies ( $846,000 ), deferredcompensation funding ( $649,000 ) and the decrease in accrued payroll and payroll taxes ( $28,314,000 ).Investing ActivitiesThe net cash used in our investing activities was $62,314,000 for 2015 . The principal uses of net cash flows from investing activities for 2015 was $57,583,000 ofnet purchases of marketable securities and $4,998,000 for the purchase of housekeeping equipment, computer software and equipment, food service equipment andfurniture & fixtures. See “Capital Expenditures” below.Financing ActivitiesWe have paid regular quarterly cash dividends since the second quarter of 2003. During 2015 , we paid to shareholders regular quarterly cash dividends totaling$51,375,000 as follows.30Table of Contents Quarter Ended March 31, 2015 June 30, 2015 September 30, 2015 December 31, 2015Cash dividend per common share$0.17625 $0.17750 $0.17875 $0.18000Total cash dividends paid$12,655,000 $12,760,000 $12,923,000 $13,037,000Record dateFebruary 20, 2015 May 22, 2015 August 21, 2015 November 20, 2015Payment dateMarch 27, 2015 June 26, 2015 September 25, 2015 December 18, 2015Additionally, on January 26, 2016 , our Board of Directors declared a regular quarterly cash dividend of $0.18125 per common share, which will be paid onMarch 25, 2016 to shareholders of record as of the close of business on February 19, 2016 .The dividends paid to shareholders during the year ended December 31, 2015 were funded by the existing cash, cash equivalents and marketable securities held bythe Company. At December 31, 2015 and 2014 , we had $102,685,000 and $87,079,000 , respectively, in cash, cash equivalents and marketable securities. OurBoard 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 ofthe dividend, we expect to continue to pay a regular quarterly cash dividend. In connection with the establishment of our dividend policy, we adopted a DividendReinvestment Plan in 2003.During 2015 we elected not to purchase any of our common stock but we remain authorized to purchase 1,689,000 shares of our common stock pursuant toprevious Board of Directors’ approvals.During 2015 we received proceeds of $6,251,000 from the exercise of stock options by employees and directors. Additionally, as a result of deductions derivedfrom the stock option exercises, we recognized an income tax benefit of $1,873,000 .Contractual ObligationsOur future contractual obligations and commitments at December 31, 2015 consist of the following: Payments Due by PeriodYear EndingTotal Less Than 1 Year 1-3 Years 3-5 Years After 5 YearsOperating Lease Obligations$7,771,000 $1,172,000 $1,890,000 $1,530,000 $3,179,000Line of CreditWe have a $200,000,000 bank line of credit on which we may draw to meet short-term liquidity requirements in excess of internally generated cash flow. Amountsdrawn under the line of credit are payable upon demand. At December 31, 2015 , there were no borrowings under the line of credit. However, at such date, we hadoutstanding a $78,259,000 (decreased to $68,778,000 on January 1, 2016) irrevocable standby letter of credit which relates to payment obligations under ourinsurance programs. As a result of the letter of credit issued, the amount available under the line of credit was reduced by $78,259,000 at December 31, 2015(decreased to $68,778,000 on January 1, 2016).The line of credit requires us to satisfy one financial covenant. Such covenant and its respective status at December 31, 2015 was as follows:Covenant Description and RequirementStatus at December 31, 2015Funded debt (1) to EBITDA (2) ratio: less than 3.00 to 1.000.80(1)All indebtedness for borrowed money, including but not limited to capitalized lease obligations, reimbursement obligations in respect of letters of credit and guaranties ofany such indebtedness.(2)Net income plus interest expense plus income tax expense plus depreciation plus amortization plus extraordinary non-recurring losses/gains.As noted above, we complied with our financial covenant at December 31, 2015 and expect to continue to remain in compliance with such financial covenant. Theline of credit expires on December 18, 2018.31Table of ContentsPledged Assets and CollateralOn December 29, 2014, we entered into a Security Interest, Pledge and Assignment of Deposit Account (the "Pledge") with Wells Fargo Bank, NationalAssociation (the “Bank”) as collateral for the Promissory Note (the “Note”) dated December 29, 2014 between the Company’s third party payroll administrator andthe Bank. The Company entered into the Pledge at year end due to the timing of payroll funding and the holidays. On January 2, 2015, the Company's third partypayroll administrator satisfied its payment obligation under the Note, and accordingly, the Company's Pledge was terminated. As of December 31, 2014, the cashassociated with the Pledge was held in the Company's operating cash account, and used to fund the Company's operations and general operating expenses. TheCompany concluded that the pledge was immaterial to our statement of financial position as it represented less than 6% and 5%, respectively, of current assets andtotal assets as of December 31, 2014. Additionally, the commitment had no material impact on the Company's consolidated results of operations for the year endedDecember 31, 2014.Accounts and Notes ReceivableWe 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 programsfunded by federal and state governmental agencies which historically have encountered delays in making payments to its program participants. Congress hasenacted 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 lawsand 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 onagreed upon payment terms. These factors, in addition to delays in payments from clients, have resulted in and could continue to result in significant additional baddebts in the near future. Whenever possible, when a client falls behind in making agreed-upon payments, we convert the unpaid accounts receivable to interestbearing promissory notes. The promissory notes receivable provide a means by which to further evidence the amounts owed and provide a definitive repaymentplan and therefore may ultimately enhance our ability to collect the amounts due. At December 31, 2015 and 2014 , we had $ 16,830,000 and $ 16,945,000 , net ofreserves, respectively, of such promissory notes outstanding. Additionally, we consider restructuring service agreements from full service to management-onlyservice in the case of certain clients experiencing financial difficulties. We believe that such restructurings may provide us with a means to maintain a relationshipwith the client while at the same time minimizing collection exposure.State Medicaid programs are experiencing increased demand, and with lower revenues than projected, they have fewer resources to support their Medicaidprograms. In addition, comprehensive health care legislation under the Patient Protection and Affordable Care Act and the Health Care and EducationReconciliation Act of 2010 (together, the “Act”) was signed into law in March 2010. The Act will significantly impact the governmental healthcare programs inwhich our clients participate, and reimbursements received thereunder from governmental or third-party payors. In July 2011, Centers for Medicare and MedicaidServices (“CMS”) issued a final rule that reduced Medicare payments to nursing centers by 11.1% and changed the reimbursement for the provision of grouprehabilitation therapy services to Medicare beneficiaries. This new rule was effective as of October 1, 2011. Furthermore, in the coming year and beyond, newproposals or additional changes in existing regulations could be made to the Act which could directly impact the governmental reimbursement programs in whichour clients participate. As a result, some state Medicaid programs are reconsidering previously approved increases in nursing home reimbursement or areconsidering delaying or foregoing those increases. A few states have indicated it is possible they will run out of cash to pay Medicaid providers, including nursinghomes. Any negative changes in our clients’ reimbursements may negatively impact our results of operations. Although we are currently evaluating the Act’s effecton our client base, we may not know the full effect until such time as these laws are fully implemented and CMS and other agencies issue applicable regulations orguidance. Additionally, even if federal or state legislation is enacted that provides additional funding to Medicaid providers, given the volatility of the economicenvironment, it is difficult to predict the impact of this legislation on our clients’ liquidity and their ability to make payments to us as agreed.In January 2013, the U.S. Congress enacted the American Taxpayer Relief Act of 2012, which delayed automatic spending cuts of $1.2 trillion, including reducedMedicare payments to plans and providers up to 2%. These discretionary spending caps were originally enacted under provisions in the Budget Control Act of2011, an initiative to reduce the federal deficit through the year 2021, also known as “sequestration.” The sequestration went into effect starting March 2013. InDecember 2013, the U.S. Congress enacted the Bipartisan Budget Act of 2013, which reduces the impact of the sequestration over the next two years. This beganin fiscal year 2014 and extended the reduction in Medicare payments to plans and providers for two years from 2021 through 2023.We have had varying collection experience with respect to our accounts and notes receivable. When contractual terms are not met, we generally encounterdifficulty in collecting amounts due from certain of our clients. Therefore, we have sometimes been required to extend the period of payment for certain clientsbeyond contractual terms. These clients include those who have terminated service agreements and slow payers experiencing financial difficulties. In order toprovide for these collection problems and the general risk associated with the granting of credit terms, we have recorded bad debt provisions (in an Allowance forDoubtful32Table of ContentsAccounts) of $4,335,000 , $4,470,000 and $1,990,000 in the years ended December 31, 2015 , 2014 and 2013 , respectively. As a percentage of total revenues,these provisions represent approximately 0.3% for each of the years ended December 31, 2015 and 2014 and 0.2% for the year ended December 31, 2013 . Inmaking our credit evaluations, in addition to analyzing and anticipating, where possible, the specific cases described above, we consider the general collection riskassociated with trends in the long-term care industry. We also establish credit limits, perform ongoing credit evaluation and monitor accounts to minimize the riskof 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 tonegatively 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 ofoperations and financial condition.Insurance ProgramsWe self-insure or carry a high deductible, and therefore retain a substantial portion of the risk associated with the expected losses under our general liability andworkers compensation programs. Under our insurance plans for general liability and workers’ compensation, predetermined loss limits are arranged with ourinsurance company to limit both our per occurrence cash outlay and annual insurance plan cost. Our accounting for this plan is affected by various uncertainties,such as historical claims, pay-out experience, demographic factors, industry trends, severity factors, and other actuarial assumption calculated by a third partyactuary. Evaluations of our accrued insurance claims estimate as of the balance sheet date are based primarily on current information derived from our actuarialvaluation which assist in quantifying and valuing these trends. In the event that our claims experience and/or industry trends result in an unfavorable changeresulting from, among other factors, the severity levels of reported claims and medical cost inflation, as compared to historical claim trends, it would have anadverse effect on our results of operations and financial condition. Under these plans, predetermined loss limits are arranged with an insurance company to limitboth our per-occurrence cash outlay and annual insurance plan cost.For workers’ compensation and general liability, we record a reserve for the estimated future cost of claims and related expenses that have been reported but notsettled, including an estimate of claims incurred but not reported that are developed as a result of a review of our historical data and open claims, which is based onestimates provided by a third party actuary.Capital ExpendituresThe level of capital expenditures is generally dependent on the number of new clients obtained. Such capital expenditures primarily consist of housekeepingequipment purchases, laundry and linen equipment installations, and computer hardware and software. Although we have no specific material commitments forcapital expenditures through the end of calendar year 2016, we estimate that for the period we will have capital expenditures of $4,500,000 to $6,000,000 inconnection with housekeeping equipment purchases, food services equipment and laundry and linen equipment installations in our clients’ facilities, as well asexpenditures relating to internal data processing hardware and software requirements, computer equipment and furniture & fixtures. All such capital expenditurestotaled $4,998,000 in 2015 . We believe that our cash from operations, existing cash and cash equivalents balance and credit line will be adequate for theforeseeable future to satisfy the needs of our operations and to fund our anticipated growth. However, should these sources not be sufficient, we would, ifnecessary, seek to obtain necessary working capital from such sources as long-term debt or equity financing.Material Off-Balance Sheet ArrangementsWe have no material off-balance sheet arrangements, other than our irrevocable standby letter of credit and pledge previously discussed for the period endedDecember 31, 2014.Effects of InflationAlthough 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 passingthrough such cost increases to our clients.Item 7A. Quantitative and Qualitative Disclosures About Market Risk.At December 31, 2015 , we had $102,685,000 in cash, cash equivalents and marketable securities. In accordance with U.S. GAAP, the fair value of all of our cashequivalents and marketable securities is determined based on "Level 1" or “Level 2” inputs, which consist of quoted prices whose value is based upon quotedprices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observablein the market. We place our cash investments in instruments that meet credit quality standards, as specified in our investment policy guidelines.33Table of ContentsInvestments in both fixed rate and floating rate investments carry a degree of interest rate risk. Fixed rate securities may have their market value adverselyimpacted 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.34Table of ContentsItem 8. Financial Statements and Supplementary Data.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm36Management’s Report on Internal Control Over Financial Reporting37Report of Independent Registered Public Accounting Firm (on Internal Control Over Financial Reporting)38Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 2015 and 201439Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2015, 2014 and 201340Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 201341Consolidated Statements of Stockholders’ Equity for the years Ended December 31, 2015, 2014 and 201342Notes to Consolidated Financial Statements for the Years Ended December 31, 2015, 2014 and 20134335Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and StockholdersHealthcare Services Group, Inc.We have audited the accompanying consolidated balance sheets of Healthcare Services Group, Inc. (a Pennsylvania corporation) and subsidiaries (the “Company”)as of December 31, 2015 and 2014 , and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the threeyears in the period ended December 31, 2015 . Our audits of the basic consolidated financial statements included the financial statement schedule listed in theindex appearing under Item 15 (a) (2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that weplan 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 andsignificant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basisfor our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Healthcare Services Group,Inc. and subsidiaries as of December 31, 2015 and 2014 , and the results of their operations and their cash flows for each of the three years in the period endedDecember 31, 2015 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financialstatement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, theinformation set forth therein.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control overfinancial reporting as of December 31, 2015 , based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO), and our report dated February 19, 2016 expressed an unqualified opinion./s/ GRANT THORNTON LLP New York, New York February 19, 2016 36Table of ContentsManagement’s Annual Report on Internal Control Over Financial ReportingThe management of Healthcare Services Group, Inc. (“Healthcare”, "We" or the “Company”), is responsible for establishing and maintaining adequate internalcontrol over financial reporting. The Company’s internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under theSecurities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers andeffected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting andthe preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles in the United States andincludes 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 generallyaccepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of managementand directors of the Company; and3.Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that couldhave 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, 2015 . In making thisassessment, the Company’s management used the criteria set forth in Internal Control — Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the "2013 Framework").Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted anevaluation of our internal control over financial reporting, as prescribed above, for the period covered by this report. Based on our evaluation, our principalexecutive officer and principal financial officer concluded that the Company’s internal control over financial reporting as of December 31, 2015 is effective as awhole.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectivenessto 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 orprocedures may deteriorate.The Company’s independent auditors have audited, and reported on, the Company’s internal control over financial reporting as of December 31, 2015 ./s/ Theodore Wahl /s/ John C. SheaTheodore Wahl John C. SheaChief Executive Officer(Principal Executive Officer) Chief Financial Officer(Principal Financial and Accounting Officer)February 19, 2016 February 19, 201637Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and StockholdersHealthcare Services Group, Inc.We have audited the internal control over financial reporting of Healthcare Services Group, Inc. (a Pennsylvania corporation) and subsidiaries (the “Company”) asof December 31, 2015 , based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control overFinancial Reporting. Our responsibility is to express an opinion on the Company’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 weplan 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 evaluatingthe design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in thecircumstances. 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 thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only inaccordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance withthe policies or procedures may deteriorate.In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015 , based on criteriaestablished in the 2013 Internal Control-Integrated Framework issued by COSO.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statementsof the Company as of and for the year ended December 31, 2015 , and our report dated February 19, 2016 expressed an unqualified opinion on those financialstatements./s/ GRANT THORNTON LLP New York, New York February 19, 2016 38Table of ContentsHealthcare Services Group, Inc.Consolidated Balance Sheets December 31, 2015 2014ASSETS: Current assets: Cash and cash equivalents$33,189,000 $75,280,000Marketable securities, at fair value69,496,000 11,799,000Accounts and notes receivable, less allowance for doubtful accounts of $4,608,000 in 2015 and $6,136,000 in 2014214,854,000 198,128,000Inventories and supplies36,308,000 35,462,000Deferred income taxes604,000 3,455,000Prepaid income taxes— 912,000Prepaid expenses and other11,495,000 9,792,000Total current assets365,946,000 334,828,000Property and equipment, net13,086,000 12,772,000Goodwill44,438,000 44,438,000Other intangible assets, less accumulated amortization of $19,473,000 in 2015 and $16,232,000 in 201417,108,000 20,349,000Notes receivable — long term portion, net of reserve2,972,000 5,179,000Deferred compensation funding, at fair value25,391,000 24,742,000Deferred income taxes — long term portion11,963,000 27,233,000Other noncurrent assets45,000 38,000Total Assets$480,949,000 $469,579,000 LIABILITIES AND STOCKHOLDERS’ EQUITY: Current liabilities: Accounts payable$41,472,000 $43,554,000Accrued payroll, accrued and withheld payroll taxes18,062,000 47,696,000Other accrued expenses3,115,000 3,861,000Income taxes payable3,212,000 —Accrued legal expenses10,464,000 5,100,000Accrued insurance claims19,740,000 17,748,000Total current liabilities96,065,000 117,959,000Accrued insurance claims — long term portion62,510,000 50,514,000Deferred compensation liability25,918,000 25,276,000Commitments and contingencies STOCKHOLDERS’ EQUITY: Common stock, $.01 par value; 100,000,000 shares authorized; 73,793,000 shares issued and outstanding in 2015 and72,878,000 shares issued and outstanding in 2014738,000 729,000Additional paid-in capital199,294,000 186,022,000Retained earnings106,886,000 100,237,000Accumulated other comprehensive income, net of taxes543,000 25,000Common stock in treasury, at cost, 1,759,000 shares in 2015 and 1,821,000 shares in 2014(11,005,000) (11,183,000)Total stockholders’ equity296,456,000 275,830,000TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$480,949,000 $469,579,000See accompanying notes.39Table of ContentsHealthcare Services Group, Inc.Consolidated Statements of Comprehensive Income Years Ended December 31, 2015 2014 2013Revenues$1,436,849,000 $1,293,183,000 $1,149,890,000Operating costs and expenses: Costs of services provided1,236,108,000 1,155,293,000 995,104,000Selling, general and administrative111,689,000 107,810,000 91,998,000Other income: Investment and interest712,000 1,628,000 3,701,000Income before income taxes89,764,000 31,708,000 66,489,000Income taxes31,740,000 9,858,000 19,360,000Net income$58,024,000 $21,850,000 $47,129,000 Per share data: Basic earnings per common share$0.81 $0.31 $0.68Diluted earnings per common share$0.80 $0.31 $0.67 Weighted average number of common shares outstanding: Basic71,826,000 70,616,000 69,206,000Diluted72,512,000 71,341,000 70,045,000 Comprehensive income: Net income$58,024,000 $21,850,000 $47,129,000Other comprehensive income: Unrealized gain (loss) on available for sale marketable securities, net of taxes518,000 (24,000) (78,000)Total comprehensive income$58,542,000 $21,826,000 $47,051,000See accompanying notes.40Table of ContentsHealthcare Services Group, Inc.Consolidated Statements of Cash Flows Years Ended December 31, 2015 2014 2013Cash flows from operating activities: Net income$58,024,000 $21,850,000 $47,129,000Adjustments to reconcile net income to net cash provided by operatingactivities: Depreciation and amortization7,660,000 7,269,000 6,204,000Bad debt provision4,335,000 4,470,000 1,990,000Deferred income tax (benefit) expense17,842,000 (15,059,000) (4,922,000)Stock-based compensation expense3,541,000 3,080,000 2,607,000Tax benefit from equity compensation plans(1,873,000) (2,626,000) (2,615,000)Amortization of premium on marketable securities681,000 354,000 537,000Unrealized (gain) loss on deferred compensation fund investments24,000 (1,216,000) (2,820,000)Changes in operating assets and liabilities: Accounts and notes receivable(18,854,000) (13,492,000) (50,879,000)Inventories and supplies(846,000) (3,015,000) (3,772,000)Prepaid expenses and other assets(1,710,000) (417,000) 790,000Notes receivable — long term— 600,000 (3,956,000)Deferred compensation funding(649,000) (2,542,000) (4,369,000)Accounts payable and other accrued expenses2,403,000 492,000 25,961,000Accrued payroll, accrued and withheld payroll taxes(28,314,000) 11,813,000 6,349,000Accrued insurance claims13,987,000 42,084,000 3,616,000Deferred compensation liability1,113,000 4,248,000 7,721,000Income taxes payable5,997,000 (163,000) 2,587,000Net cash provided by operating activities63,361,000 57,730,000 32,158,000 Cash flows from investing activities: Disposals of fixed assets267,000 83,000 158,000Additions to property and equipment(4,998,000) (5,795,000) (3,762,000)Purchases of marketable securities(75,150,000) (5,140,000) (6,598,000)Sales of marketable securities17,567,000 4,392,000 15,807,000Cash paid for acquisition— — (5,000,000)Net cash (used in) provided by investing activities(62,314,000) (6,460,000) 605,000 Cash flows from financing activities: Dividends paid(51,375,000) (49,077,000) (46,707,000)Reissuance of treasury stock pursuant to Dividend Reinvestment Plan113,000 110,000 107,000Tax benefit from equity compensation plans1,873,000 2,626,000 2,615,000Proceeds from the exercise of stock options6,251,000 6,196,000 6,428,000Net cash used in financing activities(43,138,000) (40,145,000) (37,557,000) Net change in cash and cash equivalents(42,091,000) 11,125,000 (4,794,000)Cash and cash equivalents at beginning of the period75,280,000 64,155,000 68,949,000Cash and cash equivalents at end of the period$33,189,000 $75,280,000 $64,155,000 Supplementary Cash Flow Information: Cash paid for interest$258,000 $156,000 $4,000Cash paid for income taxes, net of refunds$7,901,000 $25,080,000 $21,694,000See accompanying notes.41Table of ContentsHealthcare Services Group, Inc.Consolidated Statements of Stockholders’ Equity Years Ended December 31, 2015, 2014 and 2013 Common Stock Additional Paid-inCapital Accumulated OtherComprehensiveIncome, net of taxes RetainedEarnings Treasury Stock Stockholders’Equity Shares Amount Balance, December 31, 201270,036,000 700,000 113,495,000 127,000 127,042,000 (11,794,000) 229,570,000Comprehensive income: Net income for the period 47,129,000 47,129,000Unrealized loss on available for sale marketable securities, netof taxes (78,000) (78,000)Comprehensive income 47,051,000Exercise of stock options and other stock-based compensation, netof shares tendered for payment617,000 7,000 6,381,000 40,000 6,428,000Tax benefit from equity compensation plans 2,615,000 2,615,000Share-based compensation expense — stock options andrestricted stock 2,045,000 2,045,000Treasury shares issued for Deferred Compensation Plan fundingand redemptions 294,000 66,000 360,000Shares issued pursuant to Employee Stock Plans 1,370,000 472,000 1,842,000Cash dividends (46,707,000) (46,707,000)Shares issued pursuant to Dividend Reinvestment Plan 309,000 (202,000) 107,000Shares issued pursuant to current year acquisition 41,820,000 — 41,832,000Balance, December 31, 201371,868,000 719,000 168,329,000 49,000 127,464,000 (11,418,000) 285,143,000Comprehensive income: Net income for the period 21,850,000 21,850,000Unrealized loss on available for sale marketable securities, netof taxes (24,000) (24,000)Comprehensive income 21,826,000Exercise of stock options and other stock-based compensation, netof shares tendered for payment534,000 5,000 6,191,000 6,196,000Tax benefit from equity compensation plans 2,626,000 2,626,000Share-based compensation expense — stock options andrestricted stock 2,705,000 2,705,000Treasury shares issued for Deferred Compensation Plan fundingand redemptions 459,000 57,000 516,000Shares issued pursuant to Employee Stock Plans 1,457,000 394,000 1,851,000Cash dividends (49,077,000) (49,077,000)Shares issued pursuant to Dividend Reinvestment Plan 326,000 (216,000) 110,000Shares issued pursuant to prior year acquisition476,000 5,000 (5,000) —Balance, December 31, 201472,878,000 $729,000 $186,022,000 $25,000 $100,237,000 $(11,183,000) $275,830,000Comprehensive income: Net income for the period 58,024,000 58,024,000Unrealized gain on available for sale marketable securities, netof taxes 518,000 518,000Comprehensive income 58,542,000Exercise of stock options and other stock-based compensation, netof shares tendered for payment386,000 4,000 6,247,000 6,251,000Tax benefit from equity compensation plans 1,873,000 1,873,000Share-based compensation expense — stock options andrestricted stock 3,033,000 3,033,000Treasury shares issued for Deferred Compensation Plan fundingand redemptions 418,000 70,000 488,000Shares issued pursuant to Employee Stock Plans 1,363,000 338,000 1,701,000Cash dividends (51,375,000) (51,375,000)Shares issued pursuant to Dividend Reinvestment Plan 343,000 (230,000) 113,000Shares issued pursuant to previous acquisition529,000 5,000 (5,000) —Balance, December 31, 201573,793,000 $738,000 $199,294,000 $543,000 $106,886,000 $(11,005,000) $296,456,000See accompanying notes.42Table of ContentsHealthcare Services Group, Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2015, 2014 and 2013Note 1— Description of Business and Significant Accounting PoliciesNature of OperationsWe provide management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary servicedepartments of the health care industry, including nursing homes, retirement complexes, rehabilitation centers and hospitals located throughout the United States.Although we do not directly participate in any government reimbursement programs, our clients’ 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 ofthe 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. Ouragreements with clients typically provide for a one year service term, cancelable by either party upon 30 to 90 days’ notice, after the initial 60 to 120 day period.We are organized into two reportable segments; housekeeping, laundry, linen and other services (“Housekeeping”), and dietary department services (“Dietary”).Housekeeping consists of the managing of the client’s housekeeping department which is principally responsible for the cleaning, disinfecting and sanitizing ofpatient 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. Alsowithin 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 aclient facility.Dietary consists of managing the client’s dietary department which is principally responsible for food purchasing, meal preparation and providing dietitianconsulting professional services, which includes the development of a menu that meets the patient’s dietary needs.Principles of ConsolidationThe accompanying consolidated financial statements include the accounts of Healthcare Services Group, Inc. and its wholly-owned subsidiaries. All significantintercompany transactions and balances have been eliminated in consolidation.Fair Value of Financial InstrumentsOur financial instruments consist principally of cash and cash equivalents, marketable securities, accounts and notes receivable, deferred compensation funding andaccounts payable. Our marketable securities consist of tax-exempt municipal bond investments that are reported at fair value with the unrealized gains and lossesincluded in our consolidated statements of comprehensive income. In accordance with generally accepted accounting principles in the United States ("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 participantsat the measurement date (exit price). The fair value of our cash equivalents and marketable securities is determined based on “Level 2” inputs, which consist ofquoted prices for similar assets or market corroborated inputs. We believe recorded values of all of our financial instruments approximate their current fair valuesbecause 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 $6,472,000 and$10,208,000 at December 31, 2015 and 2014 , respectively, have been discounted to their present value and are reported at values of $6,460,000 and $10,196,000at December 31, 2015 and 2014 , respectively.Cash and Cash EquivalentsCash and cash equivalents are held in U.S. financial institutions or in custodial accounts with U.S. financial institutions. Cash and cash equivalents are defined asshort-term, highly liquid investments with a maturity of three months or less at time of purchase that are readily convertible into cash and have insignificantinterest rate risk.43Table of ContentsInvestments in Marketable SecuritiesWe define our marketable securities as fixed income investments which are highly liquid investments that can be readily purchased or sold using establishedmarkets. At December 31, 2015 , we had marketable securities of $69,496,000 which were comprised primarily of tax exempt municipal bonds. These investmentsare reported at fair value on our balance sheet. For the year ended December 31, 2015 , the accumulated other comprehensive income on our consolidated balancesheet, statements of comprehensive income and stockholders’ equity includes unrealized gains from marketable securities of $543,000 related to marketablesecurities which are not recognized under the fair value option in accordance with U.S. GAAP. The unrealized gains and losses are recorded net of income taxes.We, in accordance with U.S. GAAP, define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transactionbetween market participants at the measurement date (exit price). We have not elected the fair value option for our available for sale marketable securities as webelieve these assets are more representative of our investing activities and are viewed as non-operating in nature. These assets are available for future needs of theCompany to support our current and projected growth, if required. In accordance with U.S. GAAP, our investments in marketable securities are classified withinLevel 2 of the fair value hierarchy. These investment securities are valued based upon quoted prices for identical or similar instruments in markets that are notactive, 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 maximizingreturns subject to our investment guidelines. Our investment policy limits investment to certain types of instruments issued by institutions primarily withinvestment grade credit ratings and places restrictions on concentration by type and issuer.We periodically review our investments in marketable securities for other than temporary declines in fair value below the cost basis and whenever events orchanges in circumstances indicate that the carrying amount of an asset may not be recoverable. As of December 31, 2015 , we believe that recorded value of ourinvestments in marketable securities was recoverable in all material respects.Inventories and SuppliesInventories and supplies include housekeeping, linen and laundry supplies, as well as food provisions and supplies. Inventories and supplies are stated at cost toapproximate a first-in, first-out (FIFO) basis. Linen supplies are amortized on a straight-line basis over their estimated useful life of 24 months.Property and EquipmentProperty 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 orloss is included in income. Depreciation is provided by the straight-line method over the following estimated useful lives: laundry and linen equipmentinstallations — 3 to 7 years; housekeeping, and office furniture and equipment — 3 to 7 years; autos and trucks — 3 years. Depreciation expense on property andequipment for the years ended December 31, 2015, 2014 and 2013 was $4,419,000 , $3,946,000 and $3,373,000 , respectively.Revenue RecognitionRevenues from our service agreements with clients are recognized as services are performed. Revenues are reported net of sales taxes that are collected fromcustomers and remitted to taxing authorities.As a distributor of laundry equipment, we occasionally sell laundry installations to certain clients. The sales in most cases represent the construction andinstallation 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 profitover the life of the payments associated with our financing of the transactions. During 2015 , 2014 and 2013 , laundry installation sales were not material.Income TaxesWe 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 orrefundable 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 expected44Table of Contentsfuture tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. If appropriate, we would record a valuationallowance 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 insubsequent Note 13.In accordance with U.S. GAAP, we account for uncertain income tax positions reflected within our financial statements based on a recognition threshold andmeasurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.Earnings per Common ShareBasic earnings per common share are computed by dividing income available to common shareholders by the weighted-average common shares outstanding for theperiod. Diluted earnings per common share reflect the weighted-average common shares outstanding and dilutive common shares, such as those issuable uponexercise of stock options.Share-Based CompensationU.S. GAAP addresses the accounting for share-based compensation, specifically, the measurement and recognition of compensation expense, based on estimatedfair values, for all share-based awards made to employees and directors, including stock options and participation in the Company’s employee stock purchase plan.We estimate the fair value of share-based awards on the date of grant using the Black-Scholes option valuation model. The value of the portion of the award that isultimately expected to vest is recognized as an expense in the Company’s consolidated statements of income over the requisite service periods. We use the straight-line single option method of expensing share-based awards in our consolidated financial statements of income. Because share-based compensation expense isbased on awards that are ultimately expected to vest, share-based compensation expense will be reduced to account for estimated forfeitures. Forfeitures are to beestimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.Advertising CostsAdvertising costs are expensed when incurred. Advertising costs were not material for the years ended December 31, 2015 , 2014 and 2013 .Impairment of Long-Lived AssetsWe account for long-lived assets in accordance with the criteria established in U.S. GAAP, which states that the carrying amounts of long-lived assets beperiodically reviewed to determine whether current events or circumstances warrant adjustment to such carrying amounts. Any impairment is measured by theamount that the carrying value of such assets exceeds their fair value, primarily based on estimated discounted cash flows. Considerable management judgment isnecessary 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 tosell.AcquisitionsWe acquire businesses and/or assets that augment and complement our operations from time to time. These acquisitions are accounted for under the purchasemethod of accounting. The consolidated financial statements include the results of operations from such business combinations as of the date of acquisition.Identifiable Intangible Assets and GoodwillIdentifiable intangible assets with finite lives are amortized on a straight-line basis over their respective lives. Goodwill represents the excess of costs over the fairvalue of net assets of the acquired business. We review the carrying values of goodwill at least annually during the fourth quarter of each year to assess impairmentbecause these assets are not amortized. Additionally, we review the carrying value of any intangible asset or goodwill whenever events or changes in circumstancesindicate that its carrying amount may not be recoverable. We assess impairment by comparing the fair value of an identifiable intangible asset or reporting unitwith its carrying value. Impairments are recorded when incurred. No impairment loss was recognized on our intangible assets and goodwill for the years endedDecember 31, 2015 , 2014 or 2013 .45Table of ContentsTreasury StockTreasury 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 thesubsequent reissuance of shares are credited or charged to additional paid in capital.ReclassificationCertain prior period amounts have been reclassified to conform to current year presentation.Use of Estimates in Financial StatementsIn preparing financial statements in conformity with U.S. GAAP, we make estimates and assumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of 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 insuranceclaims, asset valuations and review for potential impairment, and deferred taxes. The estimates are based upon various factors including current and historicaltrends, as well as other pertinent industry and regulatory authority information. We regularly evaluate this information to determine if it is necessary to update thebasis for our estimates and to compensate for known changes.Change in Accounting EstimateIn fiscal year 2015, the Company transitioned its workers compensation and certain employee health & welfare insurance programs to HCSG Insurance Corp.("HCSG Insurance" or the "Captive"), its wholly owned captive insurance subsidiary which was previously providing general liability coverage to the Company.HCSG Insurance was formed in January 2014 to provide the Company with greater flexibility and cost efficiency in meeting its property & casualty and health &welfare needs. In conjunction with the aforementioned insurance programs being administered and provided by the Captive, during the third quarter 2014,management conducted a review of its self-insurance reserves to enhance its self-insurance estimation process. After analysis and consultation with insuranceregulators and advisors, the Company recorded a non-cash adjustment of $37,416,000 to reflect estimated current and future insurance claims projected to beclosed out over the next 15 to 17 years. This tax-effected adjustment was recorded in the third quarter 2014 and is accounted for as a change in estimate, along withcharges related to the corporate reorganization, self-funded health insurance program transition and other related expenses in our consolidated statements ofcomprehensive income.Concentrations of Credit RiskThe accounting guidance requires the disclosure of significant concentrations of credit risk, regardless of the degree of such risk. Financial instruments, as definedby U.S. GAAP, which potentially subject us to concentrations of credit risk, consist principally of cash and cash equivalents, marketable securities, deferredcompensation funding and accounts and notes receivable. We define our marketable securities as fixed income investments which are highly liquid investmentsthat can be readily purchased or sold using established markets. At December 31, 2015 and 2014 , substantially all of our cash and cash equivalents, andmarketable securities were held in one large financial institution located in the United States.Our clients are concentrated in the health care industry, primarily providers of long-term care. Many of our clients’ revenues are highly contingent on Medicare,Medicaid and third party payors’ reimbursement funding rates. Congress has enacted a number of major laws during the past decade that have significantly altered,or threatened to alter, overall government reimbursement for nursing home services. These changes and lack of substantive reimbursement funding rate reformlegislation, 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 tomake 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.State Medicaid programs are experiencing increased demand, and with lower revenues than projected, they have fewer resources to support their Medicaidprograms. In addition, comprehensive health care legislation under the Patient Protection and Affordable Care Act and the Health Care and EducationReconciliation Act of 2010 (together, the “Act”) was signed into law in March 2010. The Act will significantly impact the governmental healthcare programs inwhich our clients participate, and reimbursements received thereunder from governmental or third-party payors. Furthermore, in the coming year and beyond, newproposals or additional changes in existing regulations could be made to the Act which could directly impact the governmental reimbursement programs in whichour clients participate. As a result, some state Medicaid programs are reconsidering previously approved increases in nursing home reimbursement or areconsidering delaying or foregoing those increases. A few states have indicated46Table of Contentsthat it is possible they will run out of cash to pay Medicaid providers, including nursing homes. Any negative changes in our clients’ reimbursements maynegatively impact our results of operations.In 2009 and 2010, Federal economic stimulus legislation was enacted to counter the impact of the economic crisis on state budgets. The legislation included thetemporary provision of additional federal matching funds to help states maintain their Medicaid programs. This legislation to provide states with an extension ofthis fiscal relief was extended through June 2011, but at a reduced reimbursement rate. In July 2011, CMS issued a final rule that reduced Medicare payments tonursing centers by 11.1% and changed the reimbursement for the provision of group rehabilitation therapy services to Medicare beneficiaries. This new rule waseffective as of October 1, 2011. Even if federal or state legislation is enacted that provides additional funding to Medicaid providers, given the volatility of theeconomic environment, it is difficult to predict the impact of this legislation on our clients’ liquidity and their ability to make payments to us as agreed.In January 2013, the U.S. Congress enacted the American Taxpayer Relief Act of 2012, which delayed automatic spending cuts, including reduced Medicarepayments to plans and providers up to 2% . These discretionary spending caps were originally enacted under provisions in the Budget Control Act of 2011, aninitiative to reduce the federal deficit through 2021, also known as “sequestration.” The sequestration went into effect starting March 2013. In December 2013, theU.S. Congress enacted the Bipartisan Budget Act of 2013, which reduces the impact of the sequestration over the next two years. This began in fiscal year 2014and extended the reduction in Medicare payments to plans and providers for two years from 2021 through 2023.Significant ClientsWe have several clients who each have made a contribution to our total consolidated revenues ranging from 3% to 9% for the year ended December 31, 2015 .Although we expect to continue relationships with these clients, there can be no assurance thereof. The loss of such clients, or a significant reduction in therevenues we receive from these clients, would have a material adverse effect on the results of operations of our two operating segments. In addition, if such clientschange their respective payment terms it could increase our accounts receivable balance and have a material adverse effect on our cash flows and cash and cashequivalents.Recent Accounting PronouncementsIn November 2015, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2015-17, Balance Sheet Classification of DeferredTaxes. The amendment in this ASU requires that deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent in aclassified statement of financial position. The guidance becomes effective for annual reporting periods beginning after December 15, 2016 with early adoptionpermitted. The Company does not expect the guidance in this ASU to have a material impact on our consolidated financial statements and related disclosures. In September 2015, the Financial Accounting Standards Board issued ASU 2015-16, Business Combinations (Topic 805). The amendments in this ASU requirethat an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustmentamounts are determined. Additionally, this ASU requires an entity to present separately on the face of the income statement or disclose in the notes the portion ofthe amount recorded in current period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisionalamounts had been recognized as of the acquisition date. To simplify the accounting for adjustments made to provisional amounts recognized in a businesscombination, the amendments in this ASU eliminate the requirement to retrospectively account for those adjustments. This ASU is effective prospectively forfiscal years beginning after December 15, 2015, including interim periods within those fiscal years.The Company does not expect the guidance in this ASU to havea material impact on our consolidated financial statements and related disclosures.In August 2015, the Financial Accounting Standards Board issued ASU 2015-14, Revenue from Contracts with Customer (Topic 606): Deferral of the EffectiveDate. This ASU defers the effective date of ASU 2014-09, Revenue from Contracts with Customer (Topic 606) for all entities by one year. As a result, all entitieswill be required to apply the provisions of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods withinthat reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periodswithin that reporting period. The Company is currently assessing the adoption date and impact the guidance in this ASU will have, if any, on our consolidatedresults of operations, cash flows, or financial position.In June 2015, the Financial Accounting Standards Board issued ASU 2015-10, Technical Corrections and Improvements. The amendments in this ASU representchanges to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have asignificant effect on current accounting practice or create a significant administrative cost to most entities. Additionally, some of the amendments will make theCodification easier to understand and easier to apply by eliminating inconsistencies, providing needed clarifications, and improving the presentation of47Table of Contentsguidance in the Codification. This ASU is effective for fiscal years and interim periods beginning on or after December 15, 2015, with early adoption permitted.The Company does not expect the guidance in this ASU to have a material impact on our consolidated financial statements and related disclosures.Note 2—AcquisitionOn July 12, 2013 , the Company acquired substantially all of the operating assets of Platinum Health Services, LLC, a Delaware limited liability company andPlatinum Health Services PEO, LLC, a Delaware limited liability company (collectively “Platinum”). Platinum was a privately-held provider of professionalhousekeeping, laundry and maintenance services to long-term and post-acute care facilities and operated within the United States. The acquisition has beenincluded within the consolidated results of operations and financial condition from the date of the acquisition.The total purchase consideration was $50,766,000 , which consisted of a cash payment of $5,000,000 , the issuance of 1,215,000 shares of the Company's commonstock with a fair value of $30,062,000 and contingent consideration with a fair value of $15,704,000 as of December 31, 2014.Upon the achievement of certain financial and retention targets, the Platinum stockholders were eligible for contingent consideration paid by the future issuance of 1,005,000 shares of the Company's common stock. As of December 31, 2015, all shares of contingent consideration were earned and distributed to the Platinumstockholders. The Company's obligation to pay contingent consideration has been appropriately classified as equity within the financial statements.The purchase consideration of the acquisition has been allocated to the assets acquired and liabilities assumed based on estimated fair values. The purchase priceallocation was completed in the second quarter of 2014. The purchase price allocation is as follows: Purchase Price Allocation Preliminary Adjustments FinalFair value of assets acquired, net of liabilities assumed$2,604,000 $(621,000) $1,983,000Goodwill23,228,000 4,255,000 27,483,000Intangible assets21,000,000 300,000 21,300,000Net assets acquired$46,832,000 $3,934,000 $50,766,000Goodwill, which is expected to be amortized for tax purposes, represents the excess of the purchase price over the fair value of the net assets acquired, and isprimarily attributable to the assembled workforce of the acquired business. Goodwill was allocated to our Housekeeping reportable operating segment. Intangibleassets consist of customer relationships of $21,300,000 and has been assigned an estimated useful life of 10 years.Note 3—Changes in Accumulated Other Comprehensive Income by ComponentU.S. GAAP establishes standards for presenting information about significant items reclassified out of accumulated other comprehensive income by component.As of December 31, 2015 and 2014 , respectively, we generated other comprehensive income from one component. This component relates to the unrealized gainsand losses from our available for sale marketable securities during a given reporting period.The following table provides a summary of changes in accumulated other comprehensive income, net of taxes:48Table of Contents Unrealized Gains and Losses onAvailable for Sale Securities (1)Accumulated other comprehensive income — December 31, 2012$127,000Other comprehensive loss before reclassifications(43,000)Amounts reclassified from accumulated other comprehensive income (2)(3)(35,000)Net current period change in other comprehensive income(78,000)Accumulated other comprehensive income — December 31, 2013$49,000Other comprehensive loss before reclassifications(16,000)Amounts reclassified from accumulated other comprehensive income (2)(3)(8,000)Net current period change in other comprehensive income(24,000)Accumulated other comprehensive income — December 31, 2014$25,000Other comprehensive income before reclassifications535,000Amounts reclassified from accumulated other comprehensive income (2)(3)(17,000)Net current period change in other comprehensive income518,000Accumulated other comprehensive income — December 31, 2015$543,000(1)All amounts are net of tax.(2)Realized gains and losses are recorded pre-tax in the other income - investment and interest caption on our consolidated statements of comprehensive income.(3)For the years ended December 31, 2015 , 2014 and 2013 , the Company recorded $27,000 , $12,000 and $49,000 of realized gains from the sale of available for salesecurities. Refer to Note 6 herein for further information.Note 4—Property and EquipmentProperty and equipment is recorded at cost. Depreciation is recorded over the estimated useful life of each class of depreciable assets, and is computed using thestraight-line method. Leasehold improvements are amortized over the shorter of the estimated asset life or term of the lease. Repairs and maintenance costs arecharged to expense as incurred.The following table sets forth the amounts of property and equipment by each class of depreciable assets as of December 31, 2015 and December 31, 2014 : December 31, 2015 December 31, 2014Laundry and linen equipment installations$1,117,000 $2,578,000Housekeeping and office equipment and furniture29,852,000 33,546,000Autos and trucks138,000 232,000Total property and equipment, at cost31,107,000 36,356,000Less accumulated depreciation18,021,000 23,584,000Total property and equipment, net13,086,000 12,772,000Depreciation expense for the years ended December 31, 2015 , 2014 and 2013 was $4,419,000 , $3,946,000 and $3,373,000 respectively.Note 5—Goodwill and Other Intangible AssetsGoodwill represents the excess of the purchase price over the fair value of net assets acquired of businesses and is not amortized. Goodwill is evaluated forimpairment on an annual basis, or more frequently if impairment indicators arise, using a fair-value-based test that compares the fair value of the reporting unit toits carrying value. The carrying value of goodwill as of December 31, 2015 and 2014 was $44,438,000 in both periods.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 overtheir estimated useful life (between 7 and 10 years).The following table sets forth the amounts of our identifiable intangible assets subject to amortization, which were acquired in acquisitions.49Table of Contents December 31, 2015 2014Customer relationships$35,781,000 $35,781,000Non-compete agreements800,000 800,000Total other intangibles, gross36,581,000 36,581,000Less accumulated amortization19,473,000 16,232,000Other intangibles, net$17,108,000 $20,349,000The customer relationships and non-compete agreements have a weighted-average amortization period of eight years. As of December 31, 2014, the Company'snon-compete agreements have been fully amortized.The following table sets forth the estimated amortization expense for intangibles subject to amortization for the following five fiscal years:Period/YearCustomer Relationships2016$2,699,00020172,427,00020182,328,00020192,130,00020202,130,000Thereafter5,394,000Amortization expense for the years ended December 31, 2015 , 2014 and 2013 was $3,241,000 , $3,323,000 and $2,831,000 , respectively.Note 6—Fair Value MeasurementsWe, 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 transactionbetween market participants at the measurement date (exit price). We have not elected the fair value option for our available for sale marketable securities as webelieve these assets are more representative of our investing activities and are viewed as non-operating in nature. These assets are available for future needs of theCompany to support our current and projected growth, if required. In accordance with U.S. GAAP, our investments in marketable securities are classified withinLevel 2 of the fair value hierarchy. These investment securities are valued based upon quoted prices for identical or similar instruments in markets that are notactive, and model-based valuation techniques for which all significant assumptions are observable in the market.The Company’s financial instruments consist mainly of cash and cash equivalents, available for sale marketable securities, accounts and notes receivable, prepaidexpenses and other, and accounts payable (including income taxes payable and accrued expenses). The carrying value of these financial instruments approximatetheir fair value because of their short-term nature. The fair value of financial instruments is defined as the amount at which the instrument could be exchanged in acurrent transaction between willing parties.The following tables provide fair value measurement information for our marketable securities and deferred compensation fund investment assets as ofDecember 31, 2015 and 2014 :50Table of Contents As of December 31, 2015 Fair Value Measurement Using: Carrying Amount Total Fair Value Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)Financial Assets: Marketable securities Municipal bonds — available for sale$69,496,000 $69,496,000 $69,496,000 $— Deferred compensation fund Money Market$3,896,000 $3,896,000 $— 3,896,000 $—Balanced and Lifestyle9,136,000 9,136,000 9,136,000 — —Large Cap Growth5,218,000 5,218,000 5,218,000 — —Small Cap Growth2,275,000 2,275,000 2,275,000 — —Fixed Income2,624,000 2,624,000 2,624,000 — —International1,025,000 1,025,000 1,025,000 — —Mid Cap Growth1,217,000 1,217,000 1,217,000 — —Deferred compensation fund$25,391,000 $25,391,000 $21,495,000 $3,896,000 $— As of December 31, 2014 Fair Value Measurement Using: Carrying Amount Total Fair Value Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)Financial Assets: Marketable securities Municipal bonds — available for sale$11,799,000 $11,799,000 $— $11,799,000 $— Deferred compensation fund Money Market$4,278,000 $4,278,000 $— $4,278,000 $—Balanced and Lifestyle8,885,000 8,885,000 8,885,000 — —Large Cap Growth4,856,000 4,856,000 4,856,000 — —Small Cap Value2,392,000 2,392,000 2,392,000 — —Fixed Income2,081,000 2,081,000 2,081,000 — —International1,097,000 1,097,000 1,097,000 — —Mid Cap Growth1,153,000 1,153,000 1,153,000 — —Deferred compensation fund$24,742,000 $24,742,000 $20,464,000 $4,278,000 $—The fair value of the municipal bonds is measured using third party pricing service data. The fair value of equity investments in the funded deferred compensationplan 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 assetvalue (“NAV”) of the shares held by the plan at the end of the period. As a practical expedient, the fair value of our money market fund is valued at the NAV asdetermined by the custodian of the fund. The money market fund includes short-term United States dollar denominated money-market instruments. The moneymarket 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. Theseassets will be redeemed by the plan participants on an as needed basis.Unrealized gains and losses from marketable securities are recorded in the other comprehensive income caption in our consolidated statements of comprehensiveincome.51Table of ContentsAmortized Cost Gross UnrealizedGains Gross UnrealizedLosses Estimated Fair Value Other-than-temporaryImpairmentsDecember 31, 2015 Type of security: Municipal bonds — available for sale68,640,000 869,000 (13,000) 69,496,000 —Total debt securities$68,640,000 $869,000 $(13,000) $69,496,000 $—December 31, 2014 Type of security: Municipal bonds — available for sale11,758,000 48,000 (7,000) 11,799,000 —Total debt securities$11,758,000 $48,000 $(7,000) $11,799,000 $—December 31, 2013 Type of security: Municipal bonds — available for sale11,364,000 83,000 (2,000) 11,445,000 —Total debt securities$11,364,000 $83,000 $(2,000) $11,445,000 $—For the years ended December 31, 2015 , 2014 and 2013 , we received total proceeds, less the amount of interest received, of $16,432,000 , $3,905,000 and$14,985,000 , respectively, from sales of available for sale municipal bonds. These sales resulted in realized gains of $27,000 , $12,000 and $49,000 recorded inother income – investment and interest caption on our statement of comprehensive income for the years ended December 31, 2015 , 2014 and 2013 , respectively.The basis for the sale of these securities was a specific identification of each bond sold during this period.The following tables include contractual maturities of debt securities held at December 31, 2015 and 2014 , which are classified as marketable securities in theconsolidated Balance Sheets. Municipal Bonds — Available for SaleContractual maturity:December 31, 2015 December 31, 2014Maturing in one year or less$774,000 $4,343,000Maturing after one year through five years13,852,000 7,456,000Maturing after five years through ten years36,273,000 —Maturing after ten years18,597,000 —Total debt securities$69,496,000 $11,799,000Note 7— Accounts and Notes ReceivableWe 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 programsfunded by federal and state governmental agencies which historically have encountered delays in making payments to its program participants. Congress hasenacted 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 lawsand 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 onagreed upon payment terms. These factors, in addition to delays in payments from clients, have resulted in and could continue to result in significant additional baddebts in the near future. Whenever possible, when a client falls behind in making agreed-upon payments, we convert the unpaid accounts receivable to interestbearing promissory notes. The promissory notes receivable provide a means by which to further evidence the amounts owed and provide a definitive repaymentplan and therefore may ultimately enhance our ability to collect the amounts due. Accounts and notes receivable are stated net of an allowance for doubtfulaccounts. At December 31, 2015 and 2014 , we had $ 16,830,000 and $ 16,945,000 , 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 financialdifficulties. We believe that such restructurings may provide us with a means to maintain a relationship with the client while at the same time minimizingcollection exposure.Note 8— Allowance for Doubtful AccountsThe allowance for doubtful accounts is established as losses are estimated to have occurred through a provision for bad debts charged to earnings and is included inthe costs of services provided caption in our consolidated statements of comprehensive income. The allowance for doubtful accounts is evaluated based on ourperiodic review of accounts and notes receivable and is inherently subjective as it requires estimates that are susceptible to significant revision as more informationbecomes available.52Table of ContentsState Medicaid programs are experiencing increased demand, and with lower revenues than projected, they have fewer resources to support their Medicaidprograms. In addition, comprehensive health care legislation under the Act was signed into law in March 2010. The Act will significantly impact the governmentalhealthcare programs in which our clients participate, and reimbursements received thereunder from governmental or third-party payors. Furthermore, in the comingyear and beyond, new proposals or additional changes in existing regulations could be made to the Act which could directly impact the governmentalreimbursement programs in which our clients participate. As a result, some state Medicaid programs are reconsidering previously approved increases in nursinghome 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 Medicaidproviders, including nursing homes. Any negative changes in our clients’ reimbursements may negatively impact our results of operations.In 2009 and 2010, Federal economic stimulus legislation was enacted to counter the impact of the economic crisis on state budgets. The legislation included thetemporary provision of additional federal matching funds to help states maintain their Medicaid programs. This legislation to provide states with an extension ofthis fiscal relief was extended through June 2011, but at a reduced reimbursement rate. In July 2011, CMS issued a final rule that reduced Medicare payments tonursing centers by 11.1% and changed the reimbursement for the provision of group rehabilitation therapy services to Medicare beneficiaries. This new rule waseffective as of October 1, 2011. Even if federal or state legislation is enacted that provides additional funding to Medicaid providers, given the volatility of theeconomic environment, it is difficult to predict the impact of this legislation on our clients’ liquidity and their ability to make payments to us as agreed.In January 2013, the U.S. Congress enacted the American Taxpayer Relief Act of 2012, which delayed automatic spending cuts, including reduced Medicarepayments to plans and providers up to 2% . These discretionary spending caps were originally enacted under provisions in the Budget Control Act of 2011, aninitiative to reduce the federal deficit through 2021, also known as “sequestration.” The sequestration went into effect starting March 2013. In December 2013, theU.S. Congress enacted the Bipartisan Budget Act of 2013, which reduces the impact of the sequestration over the next two years. This began in fiscal year 2014and extended the reduction in Medicare payments to plans and providers for two years from 2021 through 2023.We have had varying collection experience with respect to our accounts and notes receivable. When contractual terms are not met, we generally encounterdifficulty in collecting amounts due from certain of our clients. Therefore, we have sometimes been required to extend the period of payment for certain clientsbeyond contractual terms. These clients include those who have terminated service agreements and slow payers experiencing financial difficulties. In order toprovide for these collection problems and the general risk associated with the granting of credit terms, we have recorded the following bad debt provisions (in anAllowance for Doubtful Accounts): Year Ended December 31, 2015 2014 2013Bad debt provision$4,335,000 $4,470,000 $1,990,000In making our credit evaluations, in addition to analyzing and anticipating, where possible, the specific cases described above, we consider the general collectionrisk associated with trends in the long-term care industry. We also establish credit limits, perform ongoing credit evaluation and monitor accounts to minimize therisk of loss. Notwithstanding our efforts to minimize credit risk exposure, our clients could be adversely affected if future industry trends change in such a manneras 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 ofoperations and financial condition.Impaired Notes ReceivableWe evaluate our notes receivable for impairment quarterly and on an individual client basis. Notes receivable considered impaired are generally attributable toclients that are either in bankruptcy, are subject to collection activity or those slow payers that are experiencing financial difficulties. In the event that ourevaluation 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, 2015 , 2014 and 2013 are as follows:53Table of Contents Impaired Notes ReceivableYear ended December 31,Balance Beginning ofYear Additions Deductions Balance End of Year Average OutstandingBalance2015$10,208,000 $395,000 $4,132,000 $6,471,000 $8,340,0002014$2,892,000 $9,124,000 $1,808,000 $10,208,000 $6,550,0002013$1,639,000 $1,267,000 $14,000 $2,892,000 $2,266,000 Reserve for Impaired Notes ReceivableYear ended December 31,Balance Beginning ofYear Additions Deductions Balance End of Year2015$3,031,000 $99,000 $991,000 $2,139,0002014$2,019,000 $2,489,000 $1,477,000 $3,031,0002013$958,000 $1,072,000 $11,000 $2,019,000For impaired notes receivable, interest income is recognized on a cost recovery basis only. As a result, no interest income was recognized on impaired notesreceivable. We follow an income recognition policy on all other notes receivable that does not recognize interest income until cash payments are received. Thispolicy was established, recognizing the environment of the long-term care industry, and not because such notes receivable are necessarily impaired. The differencebetween income recognition on a full accrual basis and cash basis, for notes receivable that are not considered impaired, is not material.Note 9 — Lease CommitmentsWe lease office facilities, equipment and autos under operating leases expiring on various dates through 2020. Certain office leases contain renewal options. Thefollowing is a schedule, by calendar year, of future minimum lease payments under operating leases that have remaining terms as of December 31, 2015 .Period/YearOperating Leases2016$1,172,00020171,073,0002018817,0002019775,0002020755,000Thereafter3,179,000Total minimum lease payments$7,771,000Certain property leases provide for scheduled rent escalations. We do not consider the scheduled rent escalations to be material to our operating lease expensesindividually or in the aggregate. Total expense for all operating leases was as follows: Year Ended December 31, 2015 2014 2013Operating lease expense$2,003,000 $1,210,000 $1,239,000Note 10— Share-Based Compensation2012 Equity Incentive PlanOn May 29, 2012, the Company's shareholders adopted and approved the 2012 Equity Incentive Plan (the "2012 Plan"), under which current or prospectiveofficers, employees, non-employee directors and advisors can receive share-based awards such as stock options, restricted stock and other stock awards. The 2012Plan seeks to promote the highest level of performance by providing an economic interest in the long-term success of the Company. As of the date of shareholderadoption of the 2012 Plan, no further grants were permitted under any previously existing stock plans (the "Pre-existing Plans"). Additionally, all remaining sharesavailable for future grants under the Pre-existing Plans became available for issuance under the 2012 Plan.54Table of ContentsIn addition to the 2012 Plan, the Company also had two compensation plans at December 31, 2015 which are described below: the Employee Stock Purchase Plan(the “ESPP”) and the Supplemental Executive Retirement Plan (the “SERP”).The Nominating, Compensation and Stock Option Committee of the Board of Directors is responsible for determining the individuals who will be granted stockawards, the number of stock awards each individual will receive, the price per share (in accordance with the terms of our 2012 Plan), and the exercise period ofeach stock award.A summary of stock-based compensation expense for the years ended December 31, 2015 , 2014 and 2013 is as follows: December 31, 2015 2014 2013Stock Options$2,781,000 $2,596,000 $2,017,000Restricted Stock252,000 109,000 28,000Employee Stock Purchase Plan ("ESPP")509,000 375,000 562,000Total pre-tax stock-based compensation expense charged against income (1)$3,542,000 $3,080,000 $2,607,000(1)Stock-based compensation expense is recorded in the selling, general and administrative caption in our consolidated statements of comprehensive income.With respect to our SERP, we recorded expense of $538,000 , $497,000 and $538,000 (representing the Company’s 25% match of participants’ deferrals) for theyears ended December 31, 2015 , 2014 and 2013 , respectively. Both the SERP match and deferrals are included in the selling, general and administrative captionin our consolidated statements of comprehensive income.We have outstanding stock awards that were granted under the Pre-existing Plans to non-employee directors, officers and employees of the Company and otherspecified groups, depending on the Pre-existing Plan. As of December 31, 2015 , 4,258,000 shares of common stock were reserved for issuance under our 2012Plan, including 1,797,000 shares which are available for future grant. The stock price will not be less than the fair market value of the common stock on the datethe award is granted. No stock award will have a term in excess of ten years. Since 2008, all awards granted under the Pre-existing Plans or the 2012 Plan becomevested and exercisable ratably over a five year period on each yearly anniversary date of the stock grant.A summary of our stock option activity under the 2012 Plan is as follows: 2015 2014 2013 Weighted AverageExercise Price Number of Shares Weighted AverageExercise Price Number of Shares Weighted AverageExercise Price Number of SharesBeginning of period$19.45 2,362,000 $16.05 2,483,000 $13.18 2,632,000Granted30.30 561,000 28.02 535,000 23.50 564,000Cancelled26.59 (80,000) 21.95 (122,000) 18.18 (88,000)Exercised16.46 (382,000) 11.66 (534,000) 10.37 (625,000)End of period$22.16 2,461,000 $19.45 2,362,000 $16.05 2,483,000The weighted average grant-date fair value of stock options granted during 2015 , 2014 and 2013 was $6.64 , $8.24 and $6.81 per option, respectively.During 2015 , 2014 and 2013 , the Company granted 25,000 , 14,000 and 6,000 shares, respectively, of restricted stock with weighted average grant date fair valuesof $30.30 , $28.02 and $23.50 per share, respectively.A summary of our non-vested stock-based compensation is as follows:55Table of Contents 2015 2014 2013 Weighted AverageGrant Date Fair Value Number of Non-vested Shares Weighted AverageGrant Date Fair Value Number of Non-vested Shares Weighted AverageGrant Date Fair Value Number of Non-vested SharesBeginning of period$6.17 1,465,000 $4.72 1,559,000 $3.45 1,592,000Granted30.30 561,000 8.24 535,000 6.81 564,000Vested5.17 (486,000) 3.90 (517,000) 3.09 (518,000)Forfeited6.70 (79,000) 6.05 (112,000) 4.77 (79,000)End of period$6.65 1,461,000 $6.17 1,465,000 $4.72 1,559,000The following table summarizes other information about our outstanding stock options at December 31, 2015 , 2014 and 2013 .Stock Options 2015 2014 2013Range of exercise prices $10.39-$30.30 $10.39 - $28.02 $6.07 - 23.50Outstanding: Weighted average remaining contractual life (years) 6.5 6.7 6.5Aggregate intrinsic value $31,285,000 $27,118,000 $30,599,000Exercisable: Number of shares 1,000,000 895,000 922,000Weighted average remaining contractual life (years) 4.8 5.1 4.5Aggregate intrinsic value $18,225,000 $14,457,000 $15,053,000Exercised: Aggregate intrinsic value $6,497,000 $9,303,000 $9,139,000Fair Value EstimatesThe fair value of stock awards granted during 2015 , 2014 and 2013 was estimated on the date of grant using the Black-Scholes option valuation model based onthe following assumptions: 2015 2014 2013Risk-free interest rate1.90% 1.90% 1.50%Weighted average expected life in years5.8 years 5.9 years 6.0 yearsExpected volatility27.2% 36.9% 38.9%Dividend yield2.20% 2.40% 2.80%Forfeiture rate3.00% 3.00% 3.00%Other InformationOther information pertaining to activity of our stock awards during the years ended December 31, 2015 , 2014 and 2013 was as follows: 2015 2014 2013Total grant-date fair value of stock awards granted$4,027,000 $4,268,000 $3,412,000Total fair value of stock awards vested during period$2,719,000 $2,051,000 $1,897,000Total unrecognized compensation expense related to non-vested stock awards$7,108,000 $6,492,000 $4,963,000For the years ended December 31, 2015 , 2014 and 2013 , the unrecognized compensation cost related to stock awards granted but not yet vested, as reportedabove, was expected to be recognized over a weighted average remaining period of four years.Employee Stock Purchase PlanWe have an ESPP for all eligible employees. All full-time and certain part-time employees who have completed two years of continuous service with us areeligible to participate. On April 12, 2011, the Board of Directors extended the ESPP for an additional five offerings through 2016. Annual offerings commence andterminate on the respective year’s first and last calendar day.56Table of ContentsUnder 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 2,362,000shares available for future grant at December 31, 2015 . Furthermore, under the terms of the ESPP, eligible employees may contribute through payroll deductionsup to $21,250 ( 85% of IRS limitation) of their compensation toward the purchase of the Company's common stock. No employee may purchase common stockwhich exceeds $25,000 in fair market value (determined on the date of grant) for each calendar year. The price per share is equal to the lower of 85% of the fairmarket price on the first day of the offering period, or 85% of the fair market price on the day of purchase.The following table summarizes information about our ESPP annual offerings for the years ended December 31, 2015 , 2014 and 2013 : ESPP Annual Offering 2015 2014 2013Common shares purchased59,000 55,000 65,000Per common share purchase price$26.29 $24.11 $19.75Amount expensed under ESPP$509,000 $375,000 $562,000Net proceeds from issuance$1,558,000 $1,326,000 $1,288,000Common shares date of issueJan 6, 2016 Jan 7, 2015 Jan 3, 2014Deferred Compensation PlanWe have a SERP for certain key executives and employees. The SERP is not qualified under Section 401 of the Internal Revenue Code. Effective in Plan year2010, the Plan was amended to allow participants to defer up to 25% of their earned income on a pre-tax basis. As of the last day of each plan year, each participantwill 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. SERP participants fully vest inour matching contribution three years from the first day of the initial year of participation. The income deferred and our matching contributions are unsecured andsubject to the claims of our general creditors.Under the SERP, we are authorized to issue up to 1,013,000 shares of our common stock to our employees. Pursuant to such authorization, we have 421,000 shares available for future grant at December 31, 2015 (after deducting the 2015 funding of 15,000 shares delivered in 2016 ). In the aggregate, since initiation ofthe SERP, the Company’s 25% match has resulted in 591,000 shares (including the 2015 funding of shares delivered in 2016 ) being issued to the trustee. At thetime of issuance, such shares were accounted for at cost, as treasury stock. At December 31, 2015 , approximately 359,000 of such shares are vested and remain inthe respective active participants’ accounts.The following table summarizes information about our SERP for the plan years ended December 31, 2015 , 2014 and 2013 : SERP Plan Year 2015 2014 2013Amount of company match expensed under SERP$538,000 $497,000 $538,000 Treasury shares issued to fund SERP expense15,000 16,000 19,000 SERP trust account balance at December 31$37,765,000 (1) $35,310,000 (1) $31,415,000 (1) Unrealized gain (loss) recorded in SERP liability account$(62,000) $1,211,000 $3,005,000 (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 thedeferred compensation funding asset reported on our Consolidated Balance Sheets represent the value of our Common Stock held in the Plan’s participants’ trustaccount and reported by us as treasury stock in our Consolidated Balance Sheets.Note 11— Other Employee Benefit PlansRetirement Savings PlanSince 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 allowseligible employees to contribute up to fifteen percent (15)% of their eligible compensation on a pre-tax basis. There is no match by the Company.57Table of ContentsNote 12— DividendsWe have paid regular quarterly cash dividends since the second quarter of 2003. During 2015 , we paid regular quarterly cash dividends totaling $51,375,000 asdetailed below: Quarter Ended March 31, 2015 June 30, 2015 September 30, 2015 December 31, 2015Cash dividend per common share$0.17625 $0.17750 $0.17875 $0.18000Total cash dividends paid$12,655,000 $12,760,000 $12,923,000 $13,037,000Record dateFebruary 20, 2015 May 22, 2015 August 21, 2015 November 20, 2015Payment dateMarch 27, 2015 June 26, 2015 September 25, 2015 December 18, 2015Additionally, on January 26, 2016 , our Board of Directors declared a regular quarterly cash dividend of $0.18125 per common share, which will be paid on March11, 2016 to shareholders of record as of the close of business on February 19, 2016 .Cash dividends on our outstanding weighted average number of basic common shares for the years ended December 31, 2015 , 2014 and 2013 was as follows: December 31, 2015 2014 2013Cash dividends per common share$0.72 $0.69 $0.67Our 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 amountof the dividend, we expect to continue to pay a regular quarterly cash dividend. In connection with the establishment of our dividend policy, we adopted aDividend Reinvestment Plan in 2003.Note 13— Income TaxesThe following table summarizes the provision for income taxes: Year Ended December 31, 2015 2014 2013Current: Federal$11,917,000 $21,030,000 $19,045,000State2,173,000 4,095,000 5,381,000 14,090,000 25,125,000 24,426,000Deferred: Federal13,646,000 (12,708,000) (4,172,000)State4,004,000 (2,559,000) (894,000) 17,650,000 (15,267,000) (5,066,000)Tax Provision$31,740,000 $9,858,000 $19,360,000Deferred income taxes are recorded using the asset and liability method. Deferred tax assets and liabilities are determined based on differences between thefinancial reporting and income tax basis of assets and liabilities.Significant components of our federal and state deferred tax assets and liabilities are as follows:58Table of Contents Years Ended December 31, 2015 2014Net current deferred assets (liabilities): Allowance for doubtful accounts$1,819,000 $2,427,000Accrued insurance claims — current1,389,000 5,974,000Expensing of housekeeping supplies(6,463,000) (6,622,000)Other3,859,000 1,676,000 $604,000 $3,455,000Net noncurrent deferred assets (liabilities): Deferred compensation$9,191,000 $8,681,000Non-deductible reserves5,000 5,000Depreciation of property and equipment(3,237,000) (3,160,000)Accrued insurance claims — noncurrent4,397,000 19,982,000Amortization of intangibles971,000 1,229,000Other636,000 496,000 $11,963,000 $27,233,000Realization of the Company’s deferred tax assets is dependent upon future earnings in specific tax jurisdictions, the timing and amount of which are uncertain.Management assesses the Company’s income tax positions and records tax benefits for all years subject to examination based upon an evaluation of the facts,circumstances, and information available at the reporting dates, which include historical operating results and expectations of future earnings. As such,management believes it is more likely than not that the current and noncurrent deferred tax assets recorded will be realized to reduce future income taxes andtherefore 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 asfollows: Year Ended December 31, 2015 2014 2013Tax expense computed at statutory rate$31,418,000 $11,098,000 $23,271,000Increases (decreases) resulting from: State income taxes, net of federal tax benefit4,015,000 998,000 2,916,000Federal jobs credits(3,900,000) (2,925,000) (7,121,000)Tax exempt interest(132,000) (13,000) (29,000)Other, net339,000 700,000 323,000 $31,740,000 $9,858,000 $19,360,000Management performs an evaluation each period of its tax positions taken and expected to be taken in tax returns. The evaluation is performed on positions relatingto tax years that remain subject to examination by major tax jurisdictions, the earliest of which is the tax year ended December 31, 2011. Based on our evaluation,management has concluded that there are no significant uncertain tax positions requiring recognition in our financial statements. Therefore, the table reporting onthe change in the liability for unrecognized tax benefits during the year ended December 31, 2015 is omitted as there is no activity to report in such account for theyear ended December 31, 2015, 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 andimmaterial 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 asselling, general and administrative expense.Note 14—Related Party TransactionsA director is a member of a law firm which was retained by us. During the years ended December 31, 2015 , 2014 and 2013 , fees received from us by such firmdid not exceed $120,000 in any period. Additionally, such fees did not exceed, in any period, 5% of such firm’s revenues or the Company's revenues.59Table of ContentsNote 15—Segment InformationReportable Operating SegmentsU.S. GAAP establishes standards for reporting information regarding operating segments in annual financial statements. Operating segments are identified ascomponents of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision-makinggroup in making decisions on how to allocate resources and assess performance.We manage and evaluate our operations in two reportable segments: Housekeeping (housekeeping, laundry, linen and other services), and Dietary (dietarydepartment services). Although both segments serve the same client base and share many operational similarities, they are managed separately due to distinctdifferences in the type of service provided, as well as the specialized expertise required of the professional management personnel responsible for delivering therespective segment’s services. We consider the various services provided within each reportable segment to comprise an identifiable reportable operating segmentsince such services are rendered pursuant to a single service agreement, specific to that reportable segment, as well as the fact that the delivery of the respectivereportable segment’s services are managed by the same management personnel of the particular reportable segment.The Company’s accounting policies for the segments are generally the same as the Company’s significant accounting policies. Differences between the reportablesegments’ operating results and other disclosed data and our consolidated financial statements relate primarily to corporate level transactions and recording oftransactions at the reportable segment level which use methods other than generally accepted accounting principles. There are certain inventories and supplies thatare primarily expensed when incurred within the operating segments, while they are capitalized for the consolidated financial statements. As discussed, mostcorporate expense is not allocated to the operating segments, and such expenses include corporate salary and benefit costs, certain legal costs, informationtechnology costs, depreciation, amortization of finite lived intangibles, share based compensation costs and other corporate specific costs. Additionally, there areallocations for workers compensation and general liability expense within the operating segments that differ from our actual expense recorded for U.S. GAAP.Segment amounts disclosed are prior to any elimination entries made in consolidation.Housekeeping provides services in Canada, although essentially all of its revenues and net income, 99% in both categories, are earned in one geographic area, theUnited States. Dietary provides services solely in the United States. Housekeeping Services Dietary Services Corporate and Eliminations TotalYear Ended December 31, 2015 Revenues$909,709,000 $527,140,000 $— $1,436,849,000Income before income taxes84,471,000 31,612,000 (26,319,000) (1) 89,764,000Depreciation and amortization6,488,000 685,000 487,000 7,660,000Total assets228,116,000 104,797,000 148,036,000 (2) 480,949,000Capital expenditures$3,586,000 $336,000 $1,076,000 $4,998,000 Year Ended December 31, 2014 Revenues$846,610,000 $446,573,000 $— $1,293,183,000Income before income taxes70,390,000 26,343,000 (65,025,000) (1) 31,708,000Depreciation and amortization6,114,000 662,000 493,000 7,269,000Total assets223,440,000 95,861,000 150,278,000 (2) 469,579,000Capital expenditures$4,375,000 $391,000 $1,029,000 $5,795,000 Year Ended December 31, 2013 Revenues$759,093,000 $390,797,000 $— $1,149,890,000Income before income taxes68,872,000 21,244,000 (23,627,000) (1) 66,489,000Depreciation and amortization5,105,000 693,000 406,000 6,204,000Total assets213,397,000 92,424,000 119,521,000 (2) 425,342,000Capital expenditures$2,726,000 $460,000 $576,000 $3,762,000 60Table of Contents(1)Represents primarily corporate office cost and related overhead, recording of certain inventories and supplies and workers compensation costs at thereportable segment level which use accounting methods that differ from those used at the corporate level, as well as consolidated subsidiaries’ operatingexpenses that are not allocated to the reportable segments, net of investment and interest income. Additionally, during 2014, the Company recorded a one-time, non-cash change in estimate related to our self-insurance liability which was not allocated to the reportable segments.(2)Represents primarily cash and cash equivalents, marketable securities, deferred income taxes and other current and noncurrent assets.Total Revenues from ClientsThe following revenues earned from clients differ from segment revenues reported above due to the inclusion of adjustments used for segment reporting purposesby management. We earned total revenues from clients in the following service categories: Year Ended December 31,2015 2014 2013Housekeeping services$631,875,000 $589,820,000 $514,180,000Laundry and linen services275,477,000 254,777,000 241,540,000Dietary services527,140,000 446,573,000 390,797,000Maintenance services and other2,357,000 2,013,000 3,373,000 $1,436,849,000 $1,293,183,000 $1,149,890,000Note 16— Earnings Per Common ShareBasic net earnings per share are computed using the weighted-average number of common shares outstanding. The dilutive effect of potential common sharesoutstanding is included in diluted net earnings per share. The computations of basic net earnings per share and diluted net earnings per share for 2015 , 2014 and2013 are as follows:61Table of Contents Year ended December 31, 2015 Income (Numerator) Shares (Denominator) Per-share Amount Net income$58,024,000 Basic earnings per common share$58,024,000 71,826,000 $0.81 Effect of dilutive securities: Stock options and unvested restricted stock 686,000 (0.01) Diluted earnings per common share$58,024,000 72,512,000 $0.80 Year ended December 31, 2014 Income (Numerator) Shares (Denominator) Per-share Amount Net income$21,850,000 Basic earnings per common share$21,850,000 70,616,000 $0.31 Effect of dilutive securities: Stock options and unvested restricted stock 725,000 — Diluted earnings per common share$21,850,000 71,341,000 $0.31 Year ended December 31, 2013 Income (Numerator) Shares (Denominator) Per-share Amount Net income$47,129,000 Basic earnings per common share$47,129,000 69,206,000 $0.68 Effect of dilutive securities: Stock options and unvested restricted stock 839,000 (0.01) Diluted earnings per common share$47,129,000 70,045,000 $0.67For the years ended December 31, 2015 , 2014 and 2013 , options to purchase 918,000 , 516,000 and 546,000 shares, respectively, were excluded from thecomputation 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 therespective year end.Note 17—Other ContingenciesWe have a $ 200,000,000 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, 2015, there were no borrowings under the line of credit. However, at suchdate, we had outstanding a $78,259,000 (decreased to $68,778,000 on January 1, 2016) irrevocable standby letter of credit which relates to payment obligationsunder our insurance programs. As a result of the letter of credit issued, the amount available under the line of credit was reduced by $78,259,000 at December 31,2015. The line of credit requires us to satisfy one financial covenant. We are in compliance with our financial covenant at December 31, 2015 and expect tocontinue to remain in compliance with such financial covenant. This line of credit expires on December 18, 2018 . We believe the line of credit will be renewed atthat time.On December 29, 2014, we entered into a Security Interest, Pledge and Assignment of Deposit Account (the "Pledge") with a different bank (the “Bank”) ascollateral for the Promissory Note (the “Note”) dated December 29, 2014 between the Company’s third party payroll administrator and the Bank. The Companyentered into the Pledge at year end due to the timing of payroll funding and the holidays. On January 2, 2015, the Company's third party payroll administratorsatisfied its payment obligation under the Note, and accordingly, the Company's Pledge was terminated. As of December 31, 2014, the cash associated with thePledge was held in the Company's operating cash account, and used to fund the Company's operations and general operating expenses. The Company concludedthat the pledge was immaterial to our statement financial position as it represented less than 6% and 5% , respectively, of current assets and total assets as ofDecember 31, 2014. Additionally, the commitment had no material impact on the Company's consolidated results of operations for the year ended December 31,2014.62We provide our services in 48 states and are subject to numerous local taxing jurisdictions within those states. Consequently, in the ordinary course of business, ajurisdiction may contest our reporting positions with respect to the application of its tax code to our services. A jurisdiction’s conflicting position on the taxabilityof 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, weare 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 amaterial 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 andexaminations by governmental agencies. As we become aware of such claims and legal actions, we provide accruals if the exposures are probable and estimable. Ifan adverse outcome of such claims and legal actions is reasonably possible, we assess materiality and provide such financial disclosure, as appropriate. TheCompany believes it is not a party to, nor are any of its properties the subject of, any pending legal proceeding or governmental examination that would have amaterial adverse effect on the Company's consolidated financial condition or liquidity.State Medicaid programs are experiencing increased demand, and with lower revenues than projected, they have fewer resources to support their Medicaidprograms. In addition, comprehensive health care legislation under the Patient Protection and Affordable Care Act and the Health Care and EducationReconciliation Act of 2010 (together, the “Act”) was signed into law in March 2010. The Act will significantly impact the governmental healthcare programswhich our clients participate, and reimbursements received thereunder from governmental or third-party payors. In July 2011, Centers for Medicare and MedicaidServices (“CMS”) issued a final rule that reduced Medicare payments to nursing centers by 11.1% and changed the reimbursement for the provision of grouprehabilitation therapy services to Medicare beneficiaries. This rule was effective as of October 1, 2011. Furthermore, in the coming year, new proposals oradditional changes in existing regulations could be made to the Act and/or CMS could propose additional reimbursement reductions which could directly impactthe governmental reimbursement programs in which our clients participate. As a result, some state Medicaid programs are reconsidering previously approvedincreases in nursing home reimbursement or are considering delaying or foregoing those increases. A few states have indicated it is possible they will run out ofcash to pay Medicaid providers, including nursing homes. In addition, certain state governors have recently stated that they will reject Federal Medicaid assistanceunder the Act. Any negative changes in our clients’ reimbursements may negatively impact our results of operations. Although we are currently evaluating theAct’s effect on our client base, we may not know the full effect until such time as these laws are fully implemented and CMS and other agencies issue applicableregulations or guidance.In January 2013, the U.S. Congress enacted the American Taxpayer Relief Act of 2012, which delayed automatic spending cuts, including reduced Medicarepayments to plans and providers up to 2% . These discretionary spending caps were originally enacted under provisions in the Budget Control Act of 2011, aninitiative to reduce the federal deficit through the year 2021, also known as “sequestration.” The sequestration went into effect starting March 2013. In December2013, the U.S. Congress enacted the Bipartisan Budget Act of 2013, which reduces the impact of the sequestration over the next two years. This began in fiscalyear 2014 and extended the reduction in Medicare payments to plans and providers for two years from 2021 through 2023.Note 18—Accrued Insurance ClaimsWe currently have a Paid Loss Retrospective Insurance Plan for general liability and workers’ compensation insurance, which comprise approximately 45% of ourliabilities at December 31, 2015 . Under our insurance plans for general liability and workers' compensation, predetermined loss limits are arranged with ourinsurance company to limit both our per occurrence cash outlay and annual insurance plan cost. Our accounting for this plan is affected by various uncertainties,such as historical claims, pay-out experience, demographic factors, industry trends, severity factors, and other actuarial assumption calculated by a third partyactuary. Evaluations of our accrued insurance claims estimate as of the balance sheet date are based primarily on current information derived from our actuarialvaluation which assist in quantifying and valuing these trends. In the event that our claims experience and/or industry trends result in an unfavorable changeresulting from, among other factors, the severity levels of reported claims and medical cost inflation, as compared to historical claim trends, it would have anadverse effect on our results of operations and financial condition. Under these plans, predetermined loss limits are arranged with an insurance company to limitboth our per-occurrence cash outlay and annual insurance plan cost.For workers' compensation and general liability, we record a reserve for the estimated future cost of claims and related expenses that have been reported but notsettled, including an estimate of claims incurred but not reported that are developed as a result of a review of our historical data and open claims, which is based onestimated provided by a third party actuary.63Table of ContentsNote 19—Subsequent EventsWe evaluated all subsequent events through the date these financial statements are being filed with the SEC. There were no events or transactions occurring duringthis subsequent reporting period which require recognition or additional disclosure in these financial statements.Note 20—Selected Quarterly Financial Data (Unaudited)The following tables summarize the unaudited quarterly financial data for the last two fiscal years. First Quarter Second Quarter Third Quarter Fourth Quarter2015 Revenues$355,246,000 $355,356,000 $360,165,000 $366,082,000Operating costs and expenses$330,699,000 $329,341,000 $332,090,000 $355,667,000Income before income taxes$25,054,000 $26,257,000 $26,741,000 $11,712,000Net income$15,516,000 $16,288,000 $17,086,000 $9,134,000Basic earnings per common share (1)$0.22 $0.23 $0.24 $0.13Diluted earnings per common share (1)$0.22 $0.23 $0.24 $0.13Cash dividends per common share (1)$0.18 $0.18 $0.18 $0.182014 Revenues$312,165,000 $319,295,000 $320,099,000 $341,624,000Operating costs and expenses$289,417,000 $298,055,000 $355,132,000 $320,499,000Income before income taxes$23,129,000 $22,043,000 $(35,083,000) $21,619,000Net income$14,639,000 $13,921,000 $(22,182,000) $15,472,000Basic earnings per common share (1)$0.21 $0.20 $(0.31) $0.22Diluted earnings per common share (1)$0.21 $0.20 $(0.31) $0.22Cash dividends per common share (1)$0.17 $0.17 $0.17 $0.18 (1)Year-to-date earnings and cash dividends per common share amounts may differ from the sum of quarterly amounts due to rounding.64Table of ContentsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.None.Item 9A. Controls and Procedures.Evaluation of Disclosure Controls and ProceduresIn 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 periodcovered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedureswere effective as of December 31, 2015 .Design and Evaluation of Internal Control Over Financial ReportingPursuant 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 internalcontrols over financial reporting as part of this Annual Report on Form 10-K for the fiscal year ended December 31, 2015 . Grant Thornton, LLP, our independentregistered public accounting firm, also audited our internal control over financial reporting. Management’s report and the independent registered public accountingfirm’s audit report are included in this Annual Report on Form 10-K within Part II, Item 8 under the captions entitled “Management’s Report on Internal ControlOver Financial Reporting” and “Report of Independent Registered Public Accounting Firm”.Changes in Internal Control over Financial ReportingThere 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 havematerially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Item 9B. Other Information.Not applicable.65Table of ContentsPART IIIItem 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 itsshareholders in connection with its 2016 Annual Meeting of Shareholders and to be filed within 120 days of the close of the year ended December 31, 2015 .Code of EthicsWe have adopted a code of ethics that applies to all employees, including executive officers and directors. The code of ethics is publicly available on the CorporateGovernance page of our website at www.hcsg.com . If we make any amendments or grant any waivers, including implicit waivers, from a provision of our code ofethics that applies to our principal executive officer, principal financial officer, principal accounting officer or any person performing similar functions, we willdisclose the nature of the amendment or waiver, its effective date and to whom it applies on our website set forth above or in a report on Form 8-K filed with theSecurities and Exchange Commission.Item 11. Executive Compensation.The information regarding executive compensation is incorporated herein by reference to the Company’s definitive proxy statement to be mailed to shareholders inconnection with its 2016 Annual Meeting of Shareholders and to be filed within 120 days of the close of the fiscal year ended December 31, 2015 .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 tothe Company’s definitive proxy statement to be mailed to shareholders in connection with its 2016 Annual Meeting of Shareholders and to be filed within 120 daysof the close of the fiscal year ending December 31, 2015 .Securities Authorized for Issuance Under Equity Compensation PlansThe following table sets forth for the Company’s equity compensation plans, on an aggregated basis, the number of shares of its Common Stock subject tooutstanding stock awards, the weighted-average exercise price of stock awards, and the number of shares remaining available for future award grants as ofDecember 31, 2015 . Number of Securities to be IssuedUpon Exercise of OutstandingOptions, Warrants and Rights Weighted-Average Exercise Price ofOutstanding Options, Warrants andRights Number of Securities RemainingAvailable for Future Issuance UnderEquity Compensation Plans(Excluding Securities Reflected inColumn (a)) Plan Category(a) (b) (c) Equity compensation plans approved bysecurity holders2,461,000(1) $22.16 4,580,000(2) Equity compensation plans notapproved by security holders— — — Total2,461,000 $22.16 4,580,000 (1)Represents shares of Common Stock issuable upon exercise of outstanding stock awards granted under the 2012 Equity Incentive Plan and carryover sharesfrom Pre-existing Plans. (2)Includes stock awards to purchase 1,797,000 shares available for future grant under the Company’s 2012 Equity Incentive Plan and carryover shares fromPre-existing Plans. Also includes 2,362,000 and 421,000 shares available for issuance under the Company’s 1999 Employee Stock Purchase Plan (the"1999 Plan") as amended and the Company's Amended and Restated Deferred Compensation Plan. Treasury shares may be issued under the 1999 Plan andthe Company's Amended and Restated Deferred Compensation Plan.66Table of ContentsUnregistered Sales of Equity Securities and Use of ProceedsNone.Item 13. Certain Relationships and Related Transactions, and Director Independence.The information regarding certain relationships and related transactions, and director independence is incorporated herein by reference to the Company’s definitiveproxy statement mailed to shareholders in connection with its 2016 Annual Meeting of Shareholders and to be filed within 120 days of the close of the fiscal yearended December 31, 2015 .Item 14. Principal Accountant Fees and Services.The information regarding principal accountant fees and services is incorporated herein by reference to the Company’s definitive proxy statement mailed toshareholders in connection with its 2016 Annual Meeting of Shareholders and to be filed within 120 days of the close of the fiscal year ended December 31, 2015 .PART IVItem 15. Exhibits and Financial Statement Schedules.(a)The following financial statements, schedules and exhibits are filed as part of this report:1.Index to Consolidated Financial Statements — The Financial Statements required by this item are listed on the Index to Financial Statements in Part II,Item 8 of this report.2.Index to Financial Statement Schedules —a.Schedule II—Valuation and Qualifying Accounts and Reserves; and b.Other financial statement schedules are not included because they are not required or the information is otherwise shown in the financialstatements or notes thereto.3.Index to Exhibits —a.The exhibits listed below are filed as part of, or are incorporated by reference into, this report.(b)See Item 15(a)(3) above.(c)See Item 15(a)(2) above.Healthcare Services Group, Inc.Schedule II — Valuation and Qualifying Accounts and Reserves Additions DescriptionBeginning Balance Charged to Costs andExpenses Charged to OtherAccounts Deductions (A) Ending Balance2015 Allowance for Doubtful Accounts$6,136,000 $4,335,000 $— $5,863,000 $4,608,0002014 Allowance for Doubtful Accounts$3,919,000 $4,470,000 $— $2,253,000 $6,136,0002013 Allowance for Doubtful Accounts$3,970,000 $1,990,000 $— $2,041,000 $3,919,000(A) Represents write-offs67Table of ContentsExhibit IndexThe following Exhibits are filed as part of this Report (references are to Reg. S-K Exhibit Numbers): Incorporated by Reference ExhibitNumber Description Form File No. Date of Filing Exhibit Number Filed Herewith2.1 Asset Purchase Agreement, dated July 11, 2013, amongHealthcare Services Group, Inc., Platinum Health Services,LLC, Platinum Health Services PEO, LLC, Joseph Foy,Platinum SG Equities LLC, Walnut Court Capital Advisors, LLC,Z Capital LLC, Simon Ganz and Seth E. Gribetz 8-K 0-12015 7/16/2013 2.1 —3.1 Amended and Restated Articles of Incorporation of theRegistrant as of May 30, 2000 10-K 0-12015 3/21/2001 3.2 —3.2 Amendment to the Amended and Restated Articles ofIncorporation of the Registrant as of May 22, 2007 8-K 0-12015 5/24/2007 3.1 —3.3 Second Amended and Restated Bylaws of the Registrant as ofFebruary 17, 2015 10-K 0-12015 2/19/2015 3.3 —4.1 Specimen Certificate of the Common Stock, $.01 par value, ofthe Registrant S-18 2-87625-W — 4.1 —4.2† Healthcare Services Group, Inc. Employee Stock PurchasePlan S-8 333-92835 12/15/1999 4(a) —4.3† Healthcare Services Group, Inc. Amendment to EmployeeStock Purchase Plan S-8 333-107467 7/30/2003 — —4.5† Healthcare Services Group, Inc. Amended and RestatedDeferred Compensation Plan 10-Q 0-12015 10/22/2012 10.1 —10.1† Healthcare Services Group, Inc. 2012 Equity Incentive Plan 10-Q 0-12015 7/27/2012 10.1 —10.2 Healthcare Services Group, Inc. Dividend Reinvestment Plan S-3D 333-108182 8/22/2003 — —10.3 Amended and Restated Loan Agreement dated as of December18, 2013 8-K 0-12015 12/19/2013 99.2 —10.4 Amended and Restated Committed Line of Credit Note datedas of December 18, 2013 8-K 0-12015 12/19/2013 99.3 —10.5 Consent and Amendment to Loan Documents, dated as of July9, 2015 10-Q 0-12015 7/14/2015 99.2 —10.6 Amended and Restated Committed Line of Credit Note, datedas of July 9, 2015 10-Q 0-12015 7/14/2015 99.3 —21 Subsidiaries of Healthcare Services Group, Inc. — — — — X23 Consent of Independent Registered Public Accounting Firm — — — — X31.1 Certification of Principal Executive Officer pursuant toSection 302 of the Sarbanes-Oxley Act — — — — X31.2 Certification of Principal Financial Officer pursuant toSection 302 of the Sarbanes-Oxley Act — — — — X32.1 Certification of the Principal Executive Officer pursuant toSection 906 of the Sarbanes-Oxley Act — — — — X32.2 Certification of the Principal Financial Officer pursuant toSection 906 of the Sarbanes-Oxley Act — — — — X101 The following financial information from the Company's Form10-K for the fiscal year ended December 31, 2015 formatted ineXtensible Business Reporting Language (XBRL): (i)Consolidated Balance Sheets, (ii) Consolidated Statements ofComprehensive Income, (iii) Consolidated Statements of CashFlows, (iv) Consolidated Statements of Stockholders' Equity,and (v) Notes to Consolidated Financial Statements — — — — X† Indicates a management plan or compensatory plan or arrangement.68Table of ContentsSignaturesPursuant 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 behalfby the undersigned, thereunto duly authorized. Dated: February 19, 2016 HEALTHCARE SERVICES GROUP, INC. (Registrant) By: /s/ Theodore Wahl Theodore Wahl President and Chief Executive OfficerPursuant 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 onthe date indicated:Signature Title Date /s/ Theodore Wahl Director and President and Chief Executive Officer February 19, 2016Theodore Wahl (Principal Executive Officer) /s/ John C. Shea Chief Financial Officer February 19, 2016John C. Shea (Principal Financial and Accounting Officer) /s/ Daniel P. McCartney Chairman of the Board February 19, 2016Daniel P. McCartney /s/ Michael E. McBryan Director and Executive Vice President February 19, 2016Michael E. McBryan /s/ John M. Briggs Director February 19, 2016John M. Briggs /s/ Robert L. Frome Director February 19, 2016Robert L. Frome /s/ Diane S. Casey Director February 19, 2016Diane S. Casey /s/ Robert J. Moss Director February 19, 2016Robert J. Moss /s/ Dino D. Ottaviano Director February 19, 2016Dino D. Ottaviano /s/ John J. McFadden Director February 19, 2016John J. McFadden /s/ Jude Visconto Director February 19, 2016Jude Visconto 69Exhibit 21SUBSIDIARIES OF HEALTHCARE SERVICES GROUP, INC.AS OF DECEMBER 31, 2015Entity Name Year Formed Jurisdiction DescriptionHuntingdon Holdings Inc. ("Huntingdon") 1998 Delaware Huntingdon invests our cash and cash equivalents and manages ourportfolio of available-for-sale marketable securities.HCSG Staff Leasing Solutions, LLC ("StaffLeasing") 2011 Pennsylvania Staff Leasing offers professional employer organization services to clientsin the health care industry.HCSG Insurance Corp. 2014 New Jersey HCSG Insurance Corp. is a captive insurance company which providesthe Company with certain insurance-related services.HCSG Labor Supply, LLC ("Labor Supply") 2014 Pennsylvania Labor Supply offers personnel solutions on an indefinite basis in specificjob classifications to clients in the health care industry.HCSG East, LLC 2015 New Jersey HCSG East, LLC provides housekeeping, laundry and dietary services atclient facilities as a subcontracted service provider on behalf of HCSG.HCSG Central, LLC 2015 New Jersey HCSG Central, LLC provides housekeeping, laundry and dietary servicesat client facilities as a subcontracted service provider on behalf of HCSG.HCSG West, LLC 2015 New Jersey HCSG West, LLC provides housekeeping, laundry and dietary services atclient facilities as a subcontracted service provider on behalf of HCSG.HCSG East Labor Supply, LLC 2015 New Jersey HCSG East Labor Supply, LLC provides personnel solutions on anindefinite basis in specific job classifications to clients in the health careindustry.Exhibit 23CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe have issued our reports dated February 19, 2016 , with respect to the consolidated financial statements, schedule, and internal control over financial reportingincluded in the Annual Report of Healthcare Services Group, Inc. and Subsidiaries on Form 10-K for the year ended December 31, 2015 . We consent to theincorporation by reference of said reports in the Registration Statements of Healthcare Services Group, Inc. on Forms S-3 (File No. 333-108182, effective August22, 2003, File No. 333-137713, effective September 9, 2006, File No. 333-161553, effective August 26, 2009, File No. 333-189986, effective July 17, 2013, andFile No.333-197900, effective August 6, 2014) and on Forms S-8 (File No. 333-92835, effective December 15, 1999, and File No. 333-184612, effective October26, 2012)./s/ GRANT THORNTON LLPNew York, New YorkFebruary 19, 2016Exhibit 31.1Certification of the Chief Executive OfficerPursuant to Rules 13a-14(a) and 15d-14(a)Under the Securities Exchange Act, as AmendedI, Theodore Wahl, 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 statementsmade, 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 financialcondition, 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 ActRules 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 andhave:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly duringthe 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, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordancewith 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 ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarterthat has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’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 toadversely affect the registrant’s ability to record, process, summarize and report financial information; andb) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reportingDate:February 19, 2016 /s/ Theodore Wahl Theodore Wahl President & Chief Executive Officer (Principal Executive Officer)Exhibit 31.2Certification of the Chief Financial OfficerPursuant to Rules 13a-14(a) and 15d-14(a)Under the Securities Exchange Act, as AmendedI, John C. Shea, 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 statementsmade, 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 financialcondition, 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 ActRules 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 andhave:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly duringthe 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, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordancewith 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 ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarterthat has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’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 toadversely affect the registrant’s ability to record, process, summarize and report financial information; andb) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reportingDate:February 19, 2016 /s/ John C. Shea John C. Shea Chief Financial Officer (Principal Financial and Accounting Officer)Exhibit 32.1Certification Pursuant to18 U.S.C. Section 1350,As Adopted Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002In connection with the Annual Report on Form 10-K of Healthcare Services Group, Inc. (the “Company”) for the year ended December 31, 2015 as filed with theSecurities and Exchange commission on the date hereof (the “Report”), I, Theodore Wahl, President and 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. Date:February 19, 2016 /s/ Theodore Wahl Theodore Wahl President & Chief Executive Officer (Principal Executive Officer)Exhibit 32.2Certification Pursuant to18 U.S.C. Section 1350,As Adopted Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002In connection with the Annual Report on Form 10-K of Healthcare Services Group, Inc. (the “Company”) for the year ended December 31, 2015 as filed with theSecurities and Exchange commission on the date hereof (the “Report”), I, John C. Shea, Chief Financial Officer of the of the Company, certify, pursuant to18 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. Date:February 19, 2016 /s/ John C. Shea John C. Shea Chief Financial Officer (Principal Financial and Accounting Officer)

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