Healthcare Services Group
Annual Report 2016

Plain-text annual report

HEALTHCARE SERVICES GROUP INC FORM 10-K (Annual Report) Filed 02/24/17 for the Period Ending 12/31/16 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 Support Services Industrials 12/31 http://www.edgar-online.com © Copyright 2017, 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, 2016 ¨ 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 of incorporation or organization) (I.R.S. Employer Identification No.) 3220 Tillman Drive, Suite 300, Bensalem, PA 19020(Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code:(215) 639-4274Securities registered pursuant to Section 12(b) of the 1934 Act:Common Stock ($.01 par value) The NASDAQ Global Select MarketTitle of each class Name of each exchange on which 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, 2016 wasapproximately $2.15 billion based on the closing sale price of the Common Stock on the NASDAQ Global Select Market on that date. The determination of affiliate status is 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 21,2017 ). 72,812,000DOCUMENTS INCORPORATED BY REFERENCEPortions of the definitive Proxy Statement for the Registrant’s Annual Meeting of Shareholders to be held on May 30, 2017 have been incorporated by reference into Parts IIand III of this Annual Report on Form 10-K.1Healthcare Services Group, Inc.Annual Report on Form 10-KFor the Fiscal Year Ended December 31, 2016TABLE OF CONTENTSPART I Item 1.Business4Item 1A.Risk Factors8Item 1B.Unresolved Staff Comments13Item 2.Properties13Item 3.Legal Proceedings13Item 4.Mine Safety Disclosures13PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities14Item 6.Selected Financial Data16Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations16Item 7A.Quantitative and Qualitative Disclosures About Market Risk29Item 8.Financial Statements and Supplementary Data30Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure57Item 9A.Controls and Procedures57Item 9B.Other Information57PART III Item 10.Directors, Executive Officers and Corporate Governance58Item 11.Executive Compensation58Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters58Item 13.Certain Relationships and Related Transactions, and Director Independence59Item 14.Principal Accountant Fees and Services59PART IV Item 15.Exhibits and Financial Statement Schedules59Exhibit Index60Signatures612Table 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 clients who individually contributed over 5% , with one as high as 9.5% , of our total consolidated revenues for theyear ended December 31, 2016 ; our claims experience related to workers’ compensation and general liability insurance; the effects of changes in, orinterpretations 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; continued realization of tax benefits arising from our corporatereorganization and self-funded health insurance program; risks associated with the reorganization of our corporate structure; and the risk factors described in Part Iin this report under “Government Regulation of Clients,” “Competition” and “Service Agreements and Collections,” and under Item IA “Risk Factors.”These factors, in addition to delays in payments from clients and/or clients in bankruptcy or clients 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, retain and provide new servicesto existing clients, achieve modest price increases on current service agreements with existing clients and maintain internal cost reduction strategies at our variousoperational levels. Furthermore, we believe that our ability to sustain the internal development of managerial personnel is an important factor impacting futureoperating results and the successful execution of our projected growth strategies.3Table of ContentsPART IIn this Annual Report on Form 10-K for the year ended December 31, 2016 , 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 using terms such 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. We believe that we are the largest provider of our services to the long-term care industryin the United States, rendering such services to over 3,500 facilities in the continental United States as of December 31, 2016 . We provide our Housekeepingservices to essentially all of our client facilities and we provide Dietary services to over 1,000 facilities. Although we do not directly participate in any governmentreimbursement programs, our clients receive government reimbursements related to Medicare and Medicaid. Therefore, they are directly affected by anylegislation and regulations relating to Medicare 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 14 of Notes toConsolidated Financial Statements for the years ended December 31, 2016 , 2015 and 2014 .Description of ServicesWe are organized into, and provide our services through two reportable segments: housekeeping, laundry, linen and other services (“Housekeeping”), and dietarydepartment services (“Dietary”). The Company’s corporate headquarters provides centralized financial management and support, legal services, human resourcesmanagement and other administrative services to the Housekeeping and Dietary business segments.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, employing the Housekeeping or Dietary personnel located at our clients’ facilities and providing certain supplies. We also provideservices on the basis of management-only agreements for a limited number of clients. Under a management-only agreement, we provide management andsupervisory services while the client facility retains payroll responsibility for the non-supervisory staff. Our agreements with clients typically provide forrenewable one year service terms, cancelable by either party upon 30 to 90 days’ notice after an initial period of 60 to 120 days.We typically adopt and follow our clients’ employee wage structure, including policies of wage rate increases, and pass through to the client any labor costincreases associated with such wage rate adjustments.Our labor force is interchangeable with respect to the services within Housekeeping, while our Dietary labor force is specific to Dietary operations. In addition,there are some differences in the expertise of the professional management personnel responsible for the services of the respective segments. We believe theservices of each segment provide opportunities for growth.HousekeepingHousekeeping represented approximately 61.3% , or $957.1 million , of consolidated revenues in 2016 . The services provided under this segment includemanaging the client’s housekeeping department which is principally responsible for the cleaning, disinfecting and sanitizing of resident rooms and common areasof a client’s facility, as well as the laundering and processing of the bed linens, uniforms, resident personal clothing and other assorted linen items utilized at aclient facility. Upon beginning service with a client facility, we typically hire and train the employees that were previously employed by such facility and assign anon-site manager to supervise and train the front line personnel and coordinate housekeeping services with other facility support functions in accordance with clientrequest. Such management personnel also oversee the execution of various of quality and cost-control procedures including continuous training and employeeevaluation, and on-site testing for infection control.Housekeeping’s operating performance is significantly impacted by our management of labor costs. Labor accounted for approximately 80.2% of Housekeepingrevenues. Changes in employee compensation resulting from legislative or other4Table of Contentsgovernmental actions, anticipated staffing levels, and our use of labor may adversely impact these costs. Similarly, an increase in the costs of supplies, includinglinen costs, consumed in performing Housekeeping services may impact Housekeeping’s operating performance. In 2016 , the cost of Housekeeping supplies as apercentage of Housekeeping revenues was 7.8% . Generally, the cost of such supplies is dictated by specific product market conditions, which are subject to pricefluctuations influenced by factors outside of our control. Where possible, we negotiate fixed pricing from vendors for an extended period of time on certainsupplies to mitigate such price fluctuations.DietaryDietary services represented approximately 38.7% , or $605.5 million , of consolidated revenues in 2016 . Dietary consists of managing the client’s dietarydepartment which is principally responsible for food purchasing, meal preparation and professional dietitian services, which includes the development of menusthat meet the dietary needs of residents. On-site management is responsible for all daily dietary department activities, with regular support being provided by aDistrict Manager specializing in Dietary services, as well as a registered dietitian. We also offer clinical 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 fluctuations in labor and supply costs resulting from similar factors discussed above in Housekeeping. In2016 , the costs of labor and food-related supplies represented approximately 53.8% and 38.0% of Dietary revenues, respectively.Operational Management StructureBy applying our professional management techniques, we offer our clients the ability to manage certain housekeeping, laundry, linen, facility maintenance anddietary services and costs. We manage and provide our services through a network of management personnel, as illustrated below. Divisional Manager ↓ Regional Manager and Director ↓ District Manager ↓ Facility Manager Facilities are managed by an on-site Facility Manager, and if necessary, additional supervisory personnel. Such facility-level management personnel areresponsible for the management of staff, scheduling, procurement, customer service, quality control and overall day-to-day management of the Housekeeping orDietary function.Districts typically consist of eight to twelve facilities and District Managers oversee the operations of the facilities within their districts. Their responsibilitiesinclude oversight of Facility Managers through management of personnel, operational performance, quality control monitoring, customer satisfaction andadherence to our systems and budgets.Districts are organized into regions, which are headed by Regional Managers who oversee approximately four to six districts. Regional Managers providemanagement support, training and personnel management, while ensuring operational performance consistent with our systems and budgets. Regional Directors areprimarily responsible for marketing our services within their regions, which involves industry outreach, overseeing and participation in contract negotiation, andworking closely with Regional Managers to ensure customer satisfaction and promote retention and growth.Divisions generally consist of four to six regions and are overseen by Divisional Managers, who are ultimately responsible for all aspects of the operational,compliance and financial-based performance of their divisions.We believe that our divisional, regional and district organizational structure facilitates our ability to best serve our clients, expand our service offerings to existingclients and obtain new clients.5Table of ContentsMarketThe 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 range in size from smaller facilities to facilities with over 500 beds. Such facilities may be specialized or general, privately owned or public, profitor not-for-profit, and may serve residents on a long-term or short-term basis. We market our services to facilities after consideration of a variety of factorsincluding facility type, size, location, and service opportunities (Housekeeping or Dietary). The market for our services, particularly in long-term and post-acutecare, is expected to continue to grow as the population of the United States ages and as government reimbursement policies require increased cost control orcontainment 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 health care support service seminars that are offered in conjunction with state or local health authorities in many of the states in which we conductour business. Such programs are typically attended by facility owners, administrators and supervisory personnel, thus presenting marketing opportunities for us.Indications of interest in our services arising from initial marketing efforts are followed up with a presentation regarding our services and an assessment of theservice requirements of the facility. Thereafter, a formal proposal including operational recommendations and proposed costs is submitted to the prospective client.Once the prospective client accepts the proposal and executes our service agreement, we are structured to timely and efficiently establish our operations andsystems at the client facilities.Government Regulation of ClientsOur clients are subject to government regulation. Although laws and rulings directly affect how clients are paid for certain services, we do not directly participatein any government reimbursement programs. Accordingly, our contractual relationships with our clients determine the clients’ payment obligations to us. However,because clients’ revenues are generally highly reliant on Medicare and Medicaid reimbursement funding rates, the overall effect of these laws and trends in thelong term care industry have affected and could adversely affect our clients’ cash flows, resulting in their inability to make payments to us on agreed upon paymentterms (see “Liquidity and Capital Resources” included in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations”).The prospects for legislative action, both on the federal and state level, regarding funding for nursing homes are uncertain. We are unable to predict or to estimatethe ultimate impact of any further changes in reimbursement programs affecting our clients’ future results of operations and/or their impact on our cash flows andoperations.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 expenditures relating to environmental compliance have not had amaterial effect on the Company and are included in normal operating expenses. These laws and regulations are constantly evolving, and it is impossible to predictaccurately the effect they may have upon the capital expenditures, earnings and competitive position of the Company in the future. Based upon informationcurrently available, management believes that expenditures relating to environmental compliance will not have a material impact on the financial position of theCompany.6Table of ContentsService 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, employing the Housekeeping or Dietary personnel located at our clients’ facilities and providing certain supplies. We also provide services onthe basis of management-only agreements for a limited number of clients. In such agreements, our services involve providing on-site management personnel, whilethe non-supervisory staff remain employees of the respective client. Although many of our service agreements are cancelable on short notice, we have historicallyhad a favorable client retention rate and expect to continue to maintain satisfactory relationships with our clients.We have had varying collections experiences with respect to our accounts and notes receivable. We have sometimes been required to extend the period of paymentfor certain clients beyond contractual terms. Such clients include those who have terminated service agreements and slow payers experiencing financial difficulties.Related to these collection problems, we have recorded bad debt provisions (in an Allowance for Doubtful Accounts) of $4.6 million , $4.3 million and $4.5million in the years ended December 31, 2016 , 2015 and 2014 , respectively (see Schedule II - Valuation and Qualifying Accounts and Reserves for year-endbalances). As a percentage of total revenues, these provisions represented approximately 0.3% for each of the years ended December 31, 2016 , 2015 and 2014 . Inmaking our credit evaluations, we consider customer-specific risks as well as the general collection risk associated with trends in the long-term care industry. Weestablish credit limits, perform ongoing credit evaluations and monitor accounts to minimize the risk of loss. Despite our efforts to minimize credit risk exposure,our clients could be adversely affected if future industry trends change in such a manner as to negatively impact their cash flows, as discussed in “GovernmentRegulation of Clients” and “Risk Factors” in this report. If our clients experience a negative impact in their cash flows, it could have a material adverse effect onour consolidated results of operations and financial condition.CompetitionWe compete primarily with the in-house service departments of our potential clients. Most health care 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 can secure for clients.EmployeesAt December 31, 2016 , we employed approximately 48,900 people, of which 5,800 were corporate and field management personnel.Approximately 11% of our employees are unionized. The majority of these union 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. In other cases, we are direct parties to the agreements.We may be adversely affected by relations between our client facilities and the employee unions or between us and such unions. We consider our relationship withour employees to be good.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.7Table 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-K asthese factors could materially and adversely affect our business, results of operations, financial condition and cash flows. We believe that the risks described beloware our most significant risk factors but there may be risks and uncertainties that are not currently known to us or that we currently deem to be immaterial.We provide services to several clients which contribute significantly, on an individual as well as aggregate basis, to our total revenues.We have several clients who individually contributed over 5% , with one as high as 9.5% , of our total consolidated revenues for the year ended December 31,2016 . Although we expect to continue the relationship with these clients, there can be no assurance thereof. The loss, individually or in aggregate, of such clients,or a significant reduction in the revenues we receive from such clients, could have a material adverse effect on the results of operations of our two operatingsegments. In addition, if any of these clients change or alter current payment terms it could increase our accounts receivable balance and have a material adverseeffect on our cash flows.Our clients are concentrated in the health care industry which is subject to changes in government regulation. Many of our clients rely on reimbursement fromMedicare, Medicaid and other third-party payors. Rates from such payors may be altered or reduced, thus affecting our clients’ results of operations and cashflows.We provide our services primarily to providers of long-term and post-acute care. We cannot predict what efforts, and to what extent, legislation and proposals tocontain health care costs will ultimately impact our clients’ revenues through reimbursement rate modifications. Congress has enacted a number of laws during thepast decade that have significantly altered, or may alter, overall government reimbursement for nursing home services. Because many of our clients’ revenues aregenerally highly reliant on Medicare, Medicaid and other third-party payors’ reimbursement funding rates and mechanisms, the overall effect of these laws andtrends in the long term care industry have affected and could adversely affect our clients’ cash flows, resulting in their inability to make payments to us on agreedupon payment terms. These factors, in addition to delays in payments from clients have resulted in, and could continue to result in, significant additional bad debtsin the future.Changes to federal health care reform legislation may adversely affect our operating costs and results of operations.Continued changes to the health care structure and regulations related to the health insurance industry in the United States could have a continuing impact on ouroperating costs. Any requirements to provide additional benefits to our employees or the payment of penalties if such benefits are not provided, would increase ourexpense. 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 costsand results of operations.In addition, often new regulations result in additional reporting requirements for businesses. These and other requirements could result in increased costs, expandedliability exposure, and other changes in the way we provide health care insurance and other benefits to our employees.We have clients located in many states which have had and may continue to experience significant budget deficits and such deficits may result in reduction 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 have and may continue to revise reimbursementstructures for nursing home services. Any disruption or delay in the distribution of Medicaid and related payments to our clients will adversely affect their cashflows and impact their ability to pay us as agreed upon for the services provided.8Table of ContentsThe 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 balance from our customers. We grant credit to substantially all of ourcustomers. Deterioration in the financial condition of 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. We have sometimes been required to extend the period of payment for certain clients beyond contractual terms. Suchclients include those who have terminated service agreements and slow payers experiencing financial difficulties. In making our credit evaluations, in addition toanalyzing and anticipating where possible the specific cases described above, we consider the general collection risk associated with trends in the long-term careindustry. We also establish credit limits, perform ongoing credit evaluations and monitor accounts to minimize the risk of loss. Despite our efforts to minimizecredit 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 clientsexperience a negative impact in their cash flows, it could have a material adverse effect on our consolidated results of operations, financial condition and cashflows.We have a Paid Loss Retrospective Insurance Plan for general liability and workers’ compensation insurance.We carry a high deductible general liability and workers’ compensation program and therefore retain a substantial portion of the risk associated with the expectedlosses under such programs. Under our insurance plans for general liability and workers’ compensation, predetermined loss limits are arranged with our insurancecompany to limit both our per occurrence cash outlay and annual insurance plan cost. We regularly evaluate our claims pay-out experience and other factors relatedto the nature of specific claims in arriving at the basis for our accrued insurance claims estimate. Our evaluation is based primarily on current information derivedfrom reviewing our claims experience and industry trends. In the event that our known claims experience and/or industry trends result in an unfavorable change ininitial estimates of costs to settle such claims resulting from, among other factors, the severity levels of reported claims and medical cost inflation, it would have anadverse effect on our consolidated results of operations, financial condition and cash flows. During 2014, the Company recorded a one-time, non-cash adjustmentof $37.4 million related to a change in estimate and reserve methodology through the utilization of a third party actuary. Although we engage third-party experts toassist us in estimating appropriate insurance accounting reserves, the determination of the required reserves is dependent upon significant actuarial judgments thathave a material impact on our reserves. Changes in our insurance reserves as a result of our periodic evaluation of the related liabilities may cause significantfluctuations 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 believe ourincome 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 penalties. 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 liabilitiesand could negatively impact our competitive position in that jurisdiction. Additionally, if we fail to comply with applicable tax laws and regulations, we couldsuffer civil or criminal penalties in addition to the delinquent tax assessment. In the taxing jurisdictions where our services have been determined to be subject totax, the jurisdiction may increase the tax rate assessed on such services. We seek to pass-through to our clients such tax increases. In the event we are not able topass-through any portion of the tax increase, our gross margin could be adversely impacted.9Table 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 outcomeof litigation, 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 for 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 an 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 have 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 on-site facility managers to our executive officers. Therefore, we believethat our ability to recruit and sustain the internal development of managerial personnel is an important factor impacting future operating results and our ability tosuccessfully execute projected growth strategies. Our professional management personnel are the key personnel in maintaining and selling additional services tocurrent 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, which could increase our cost of servicesprovided. Although we have contractual rights to pass cost increases we incur to our clients due to regulatory changes, our delay in, or inability to pass such costsof our compliance with legislative changes and changes in regulatory interpretation or enforcement in general, through to our clients, could have a material adverseeffect on our financial condition, results of operations and cash flows.In addition, if we fail to comply with applicable laws, we may be subject to lawsuits, investigations, criminal sanctions or civil remedies, including fines, penalties,damages, reimbursement, or injunctions. Also, our clients’ facilities are subject to periodic inspection by federal, state, and local authorities for compliance 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.10Table 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 seek to pass on to clients such increased costs but sometimes we are unable to do so. Even when we are able to pass on the incrementalcosts to our clients, from time to time, sporadic unanticipated increases in the costs of certain supply items due to market economic conditions may result in atiming delay in passing on such increases to our clients. It is this type of spike in Dietary supplies costs that could most adversely affect Dietary’s operatingperformance. The adverse effect would be realized if we delay in passing on such costs to our clients or in instances where we may not be able to pass suchincrease on to our clients until the time of our next scheduled service billing review. We seek to mitigate the impact of an unanticipated increase in such supplies’costs through consolidation of vendors, which increases our ability to obtain 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 rates. Ascollective bargaining agreements are renegotiated, we may need to increase the wages paid to bargaining unit employees covered by such collective bargainingagreements. Although we have contractual rights to pass such union and minimum wage increases through to our clients, our delay in, or inability to pass suchwage increases through to our clients could have a material adverse effect on our financial condition, results of operations and cash flows.Any perceived or real health risks related to the food industry could adversely affect our Dietary segment.We are subject to risks affecting the food industry generally, including food spoilage and food contamination. Our products are susceptible to contamination 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 include limiting our concentrations of investments in individual locations’ bonds, requiring certain credit ratings andmonitoring our investments’ duration period, reduce our exposure related to the financial distress and budget shortfalls that many state and local governmentscurrently face. Increases in market interest rates in our borrowing agreements that have variable interest rates could adversely affect our payment obligations andadversely affect our liquidity and earnings.11Table of ContentsInvestor and market expectations regarding our financial performance are high and rely greatly on execution of our growth strategy and related increases infinancial performance.Management believes the historical performance of our Common Stock reflect high market expectations for our future operating results. Our ability to attract newclients through organic growth or acquisitions, and retain existing clients, has enabled us to execute our growth strategy and increase market share historically,however this cannot be guaranteed in the future. Our business strategy focuses on growth and improving profitability through obtaining service agreements withnew clients, providing new services to existing clients, obtaining modest price increases on service agreements with clients and maintaining internal cost reductionstrategies at our various operational levels. In respect to providing new services to new or existing clients, our strategy is to achieve corresponding profit marginsin each of our segments. If we are unable to continue either historical client revenue and profitability growth rates or projected improvement, our operatingperformance may be adversely affected and the high expectations for our market performance may not be met. Any failure to meet the market’s high expectationsfor our revenue and operating results may have an adverse effect on the market price of our Common Stock.Failure to maintain effective internal control over financial reporting could have a material adverse effect on our ability to report our financial results on atimely and accurate basis.Failure to maintain appropriate and effective internal controls over our financial reporting could result in misstatements in our financial statements and potentiallysubject us to sanctions or investigations by the SEC or other regulatory authorities, and could cause us to delay the filing of required reports with the SEC and ourreporting of financial results. Any of these events could result in a decline in the market price of our Common Stock. Although we have taken steps to maintain ourinternal control structure as required, we cannot guarantee that control deficiencies will not result in a misstatement in the future.Any decrease in or suspension of our dividend could cause our stock price to decline.We expect to continue to pay a regular quarterly cash dividend. However, our dividend policy and the payment of future cash dividends under the policy 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.12Table 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 subsidiaries,including HCSG Insurance Corp. The other locations serve as divisional or regional offices providing management and administrative services to both of ouroperating segments in their respective geographical areas.We are also provided with office and storage space at each of our client facilities.Management does not foresee any difficulties with regard to the continued utilization of all of the aforementioned premises. We also believe that such propertiesare sufficient to support our current operations.We own office furniture and equipment, housekeeping and laundry equipment, and vehicles. The office furniture and equipment and vehicles are primarily locatedat our corporate office, divisional and regional offices. We have housekeeping equipment at all client facilities where we provide services under a full servicehousekeeping agreement. Generally, the aggregate cost of housekeeping equipment located at each client facility is approximately $3,000. Additionally, we havelaundry installations at certain client facilities. Our cost of such laundry installations ranges between $5,000 and $100,000. We believe that such laundryequipment, office furniture and equipment, housekeeping equipment and vehicles are sufficient to support our current operations.Item 3. Legal Proceedings.In the normal course of business, the Company is involved in various administrative and legal proceedings, including labor and employment, contractual, personalinjury, workers compensation and insurance matters. The Company believes it is not a party to, nor are any of its properties the subject of, any pending legalproceeding or governmental examination that would have a material adverse effect on the Company’s consolidated financial condition or liquidity. However, inlight of the uncertainties involved in such proceedings, the ultimate outcome of a particular matter could become material to the Company’s results of operationsfor a particular period depending on, among other factors, the size of the loss or liability imposed and the level of the Company’s operating income for that period.Item 4. Mine Safety Disclosures.Not applicable.13Table 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 21, 2017 ,there were approximately 72,812,000 shares of our Common Stock outstanding.The high and low sales price quotations for our Common Stock during the years ended December 31, 2016 and 2015 were as follows: 2016Quarter Ended High LowMarch 31, 2016 $36.99 $31.50June 30, 2016 $41.40 $36.47September 30, 2016 $42.18 $36.58December 31, 2016 $40.88 $34.83 2015Quarter Ended High LowMarch 31, 2015 $34.75 $29.93June 30, 2015 $33.90 $29.42September 30, 2015 $35.49 $31.57December 31, 2015 $38.49 $33.10HoldersAs of February 21, 2017 , we had approximately 500 holders of record of our Common Stock. Based on reports of security position listings compiled for the 2016annual meeting of shareholders, we believe we may have approximately 7,000 beneficial owners of our Common Stock.DividendsDuring 2016 , we paid regular quarterly cash dividends totaling $53.3 million as detailed below: Quarter Ended March 31, 2016 June 30, 2016 September 30, 2016 December 31, 2016 (in thousands, except per share data)Cash dividend per common share$0.18125 $0.18250 $0.18375 $0.18500Total cash dividends paid$13,158 $13,293 $13,398 $13,493Record dateFebruary 19, 2016 May 20, 2016 August 19, 2016 November 18, 2016Payment dateMarch 25, 2016 June 24, 2016 September 23, 2016 December 23, 2016On January 31, 2017 , our Board of Directors declared a regular quarterly cash dividend of $0.18625 per common share, which will be paid on March 24, 2017 toshareholders of record as of the close of business on February 17, 2017 .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 dividends, 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 2003.14Table of ContentsPerformance GraphThe graph below matches Healthcare Services Group, Inc.’s cumulative five-year total shareholder return on common stock with the cumulative total returns of theS&P 500 index, the NASDAQ Composite index and the Russell 2000 index. The graph tracks the performance of a $100 investment in our common stock and ineach index (with the reinvestment of all dividends) from December 31, 2011 to December 31, 2016 . The stock price performance included in this graph is notnecessarily indicative of future stock price performance.The Company has not defined a peer group based on either industry classification or financial characteristics. The Company believes it is unique in its serviceofferings and client base, and among its closest industry peers, it is unique in size and financial profile. As such, the Company opted to utilize the Russell 2000index to compare our performance to issuers with similar market capitalization.Comparison of 5 Year Cumulative Total Return*Among Healthcare Services Group, Inc., the S&P 500 Index, the NASDAQ Composite Index and the Russell 2000 Index*$100 invested on December 31, 2011 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. Copyright© 2017 Standard & Poor’s, a division of S&P Global. All rights reserved. Copyright© 2017 Russell Investment Group. All rights reserved. December 31,Company/Index 2011 2012 2013 2014 2015 2016Healthcare Services Group, Inc. $100.00 $135.33 $169.87 $189.76 $218.52 $250.36S&P 500 $100.00 $116.00 $153.58 $174.60 $177.01 $198.18Russell 2000 $100.00 $116.35 $161.52 $169.43 $161.95 $196.45NASDAQ Composite $100.00 $116.41 $165.47 $188.69 $200.32 $216.5415Table 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, 2016 2015 2014 2013 2012(in thousands, except per share amounts)Selected Operating Results Revenues$1,562,662 $1,436,849 $1,293,183 $1,149,890 $1,077,435Net income$77,396 $58,024 $21,850 $47,129 $44,214Basic earnings per common share$1.06 $0.81 $0.31 $0.68 $0.65Diluted earnings per common share$1.05 $0.80 $0.31 $0.67 $0.65Selected Balance Sheet Data Total assets$528,446 $480,949 $469,579 $425,342 $331,183Stockholders’ equity$338,842 $296,456 $275,830 $285,143 $229,570Selected Other Financial Data Working capital$313,753 $269,277 $213,414 $207,750 $200,182Cash dividends declared per common share$0.73750 $0.71750 $0.69750 $0.67750 $0.65750Weighted average number of common shares outstanding - basic72,754 71,826 70,616 69,206 67,511Weighted average number of common shares outstanding -diluted73,474 72,512 71,341 70,045 68,485Item 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, “ 2016 ” refers to the year ended December 31, 2016 , “ 2015 ” refers to the year ended December 31,2015 and “ 2014 ” refers to the year ended December 31, 2014 .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, 2016 and the year then ended and the notes accompanying those financial statements.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 over 3,500 facilities throughout the continental United States as of December 31, 2016 .16Table of ContentsWe provide our services primarily pursuant to full service agreements with our clients. In such agreements, we are responsible for the management of thedepartment serviced, employing the Housekeeping or Dietary personnel located at our clients’ facilities and providing certain supplies. We also provide services onthe basis of a management-only agreements for a limited number of clients. Our agreements with clients typically provide for renewable one year service terms,cancelable by either party upon 30 to 90 days’ notice after an initial period of 60 to 120 days.We are organized into two reportable segments; housekeeping, laundry, linen and other services (“Housekeeping”) and dietary department services (“Dietary”).Housekeeping consists of managing the client’s housekeeping department which is principally responsible for the cleaning, disinfecting and sanitizing of residentrooms and common areas of a client’s facility, as well as laundering and processing of the bed linens, uniforms, resident personal clothing and other assorted linenitems utilized at a client facility.Dietary consists of managing the client’s dietary department which is principally responsible for food purchasing, meal preparation and dietitian professionalservices, which includes the development of menus that meet residents’ dietary needs.At December 31, 2016 , Housekeeping services were provided at essentially all of our more than 3,500 client facilities, generating approximately 61.3% or $957.1million of 2016 total revenues. Dietary services were provided to over 1,000 client facilities at December 31, 2016 and contributed approximately 38.7% or $605.5million of 2016 total revenues.The Company’s workers compensation, general liability and certain employee health and welfare insurance programs are provided by HCSG Insurance Corp.(“HCSG Insurance” or the “Captive”), the Company’s wholly owned captive insurance subsidiary. HCSG Insurance provides the Company with greater flexibilityand cost efficiency in meeting its insurance needs. In 2015, the Company completed a corporate restructuring by capitalizing three new operating entities andtransitioning the Company’s facility-based employees to such entities based on the geography served. As a result, (i) HCSG Insurance provides workers’compensation, general liability and other insurance coverages to such entities with respect to such transitioned workforce, (ii) such entities provide housekeeping,laundry and dietary services as a subcontracted provider to the Company, and (iii) the Company provides strategic client-service management and administrativesupport services to such entities.Our ability to acquire new clients, retain existing clients and increase revenues are affected by many factors. Competitive factors consist primarily of competingwith potential clients’ usage of in-house support staff, as well as local companies providing services similar to ours. We are unaware of any other companies, on anational or local level, which have a significant presence or impact on our procurement of new clients in our market. We believe the primary revenue drivers of ourbusiness are our ability to obtain new clients and to pass through, by means of service billing increases, increases in our cost of providing the services. In additionto the recoupment of costs increases, we aim to obtain modest annual revenue increases from our existing clients to attain desired 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 processis driven significantly by their reimbursement funding rate structure and the financial impact on their reimbursement as a result of engaging us for the respectiveservices. The primary operational factor is our ability to demonstrate to potential clients the benefit of being relieved of the administrative and operationalchallenges related to the day-to-day management of their housekeeping and dietary operations. In addition, we must be able to assure new clients that we canimprove the quality of service that they are providing to their residents. We believe the factors discussed above are equally applicable to each of our segments withrespect to acquiring new clients and increasing revenues.The 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, 2016 2015 2014Revenues100.0% 100.0% 100.0%Operating costs and expenses: Costs of services provided85.7% 86.0% 89.3%Selling, general and administrative6.7% 7.8% 8.3%Net investment and interest income0.2% 0.0% 0.1%Income before income taxes7.8% 6.2% 2.5%Income taxes2.8% 2.2% 0.8%Net income5.0% 4.0% 1.7%17Table of ContentsSubject to the factors noted in the Cautionary Statement Regarding Forward Looking Statements included in this report on Form 10-K, we anticipate, our financialperformance in 2017 may be comparable to historical ranges, absent non-recurring charges, as they relate to consolidated revenues. The 2015 percentages werenegatively impacted by mediated settlements regarding certain labor and employment related matters. The Company agreed to these mediated settlements whiledenying any violations. The 2014 percentages were negatively impacted by a one-time, non-cash adjustment related to a change in estimate in our self-insurancereserve methodology.Although there can be no assurance thereof, we believe that in 2017 , Dietary revenues as a percentage of consolidated revenues, will increase from its respective2016 percentages noted above. Furthermore, we expect the sources of growth in 2017 for the respective operating segments will mirror those historicallyexperienced: growth in Dietary is expected to come from our current Housekeeping client base, while growth in Housekeeping will primarily come from obtainingnew clients.Our costs of services can vary and may impact our operating performance. Management reviews two key cost indicators: costs of labor and costs of supplies, tomonitor and manage such costs. The variability of these costs may impact each segment differently due to the respective costs as a percentage of that segment’srevenues. Housekeeping is more significantly impacted by costs of labor than Dietary. Labor costs accounted for approximately 80.2% of Housekeeping revenuesin 2016 . Dietary labor costs accounted for approximately 53.8% of Dietary revenues in 2016 . Changes in wage rates as a result of legislative or collectivebargaining actions, anticipated staffing levels, and other unforeseen variations in our use of labor or in management labor costs will result in variability of thesecosts. Housekeeping supplies, including linen products, accounted for approximately 7.8% of Housekeeping revenues in 2016 . In contrast, supplies consumed inperforming our Dietary services accounted for approximately 38.0% of Dietary revenues. Generally, fluctuations in these expenses are influenced by factorsoutside of our control and are unpredictable. This is because Housekeeping and Dietary supplies are principally commodity products and are affected by marketconditions specific to the respective products.Our clients are concentrated in the health care industry and are primarily providers of long-term care. Many of our clients’ revenues are highly reliant on Medicare,Medicaid and third-party payors’ reimbursement funding rates. Legislation can significantly alter overall government reimbursement for nursing home services andsuch changes, as well as other trends in the long-term care industry, have affected and could adversely affect our clients’ cash flows, resulting in their inability tomake payments to us in accordance with agreed-upon payment terms. The climate of legislative uncertainty has posed, and will continue to pose, both risks andopportunities for us: the risks are related to our clients’ cash flows and solvency, while the opportunities are related to our ability to offer our clients cost stabilityand cost efficiencies.18Table of ContentsYears Ended December 31, 2016 and 2015The following table sets forth 2016 income statement key components that we use to evaluate our financial performance on a consolidated and reportable segmentbasis compared to 2015 . The differences between the reportable segments’ operating results and other disclosed data and our consolidated financial statementsrelate primarily to corporate level transactions and adjustments related to transactions recorded at the reportable segment level which use methods other thangenerally accepted accounting principles. Year Ended December 31, 2016 2015 % Change (in thousands)Revenues Housekeeping services $957,148 $909,709 5.2 %Dietary services 605,514 527,140 14.9 %Consolidated $1,562,662 $1,436,849 8.8 % Costs of services provided Housekeeping services $866,392 $825,238 5.0 %Dietary services 570,873 495,528 15.2 %Corporate and eliminations (97,773) (84,658) 15.5 %Consolidated $1,339,492 $1,236,108 8.4 % Selling, general and administrative expense Corporate and eliminations $105,417 $111,689 (5.6)% Investment and interest income Corporate and eliminations $2,634 $712 269.9 % Income (loss) before income taxes Housekeeping services $90,756 $84,471 7.4 %Dietary services 34,641 31,612 9.6 %Corporate and eliminations (5,010) (26,319) (81.0)%Consolidated $120,387 $89,764 34.1 %RevenuesConsolidatedConsolidated revenues increased 8.8% to $1.56 billion in 2016 compared to $1.44 billion in 2015 as a result of the factors discussed below under ReportableSegments.Reportable SegmentsHousekeeping’s 5.2% increase in reportable segment revenues resulted primarily from service agreements entered into with new clients.Dietary’s 14.9% increase in reportable segment revenues resulted primarily from providing these services to a greater number of existing Housekeeping clients.19Table of ContentsCosts of services providedConsolidatedConsolidated costs of services increased 8.4% to $1.34 billion in 2016 compared to $1.24 billion in 2015 . The increase in costs of services is primarily driven byhigher labor and other labor related costs associated with overall growth. Such costs of services, along with the costs of supplies, are subject to fluctuation with thechanges in our business and client base. Historically, these significant components accounted for approximately 96% to 98% of consolidated costs of services.As a percentage of consolidated revenues, cost of services decreased to 85.7% in 2016 from 86.0% in 2015 . The following table provides a comparison of the keyindicators we consider when managing the consolidated cost of services: Year Ended December 31,Costs of Services Provided - Key Indicators as % of Consolidated Revenue 2016 2015 % ChangeBad debt provision 0.3% 0.3% —%Workers’ compensation and general liability insurance 3.0% 3.4% (0.4)%The bad debt provision remained consistent due to our assessment of the collectability of our accounts and notes receivables.The decrease in workers’ compensation and general liability insurance expense as a percentage of consolidated revenue is primarily the result of the Company’songoing initiative to promote safety and accident prevention in the workplace, as well as proactive management of workers’ compensation claims, which havepositively impacted our claims experience.Reportable SegmentsCosts of services provided for Housekeeping, as a percentage of Housekeeping revenues for 2016 , decreased to 90.5% compared to 90.7% in 2015 . Cost ofservices provided for Dietary, as a percentage of Dietary revenues for 2016 , increased to 94.3% compared to 94.0% in 2015 .The following table provides a comparison of the key indicators we consider when managing cost of services at the segment level, as a percentage of the respectivesegment’s revenues: Year Ended December 31,Costs of Services Provided - Key Indicators as % of Segment Revenue 2016 2015 % ChangeHousekeeping labor and other labor costs 80.2% 79.4% 0.8%Housekeeping supplies 7.8% 8.3% (0.5)%Dietary labor and other labor costs 53.8% 52.9% 0.9%Dietary supplies 38.0% 38.7% (0.7)%The ratios of these key indicators remain relatively consistent. Variations relate to the provision of services at new facilities and changes in the mix of clients forwhom we provide supplies or do not provide supplies. Management focuses on building efficiencies and managing labor and other costs at the facility level, aswell as managing supply chain costs, for new and existing facilities.Consolidated Selling, General and Administrative Expense Year Ended December 31, 2016 2015 % Change (in thousands)Selling, general and administrative expense excluding deferred compensation change (1)$103,922 $111,751 (7.0)%Loss / (gain) on deferred compensation plan investments (2)(1,495) 62 (2,511.3)%Selling, general and administrative expense$105,417 $111,689 (5.6)%(1) Selling, general and administrative expense excluding the change in the market value of the deferred compensation fund.(2) Gains on the deferred compensation plan investments are reflected as increases to selling, general and administrative expense, as such gains increase theamount of the deferred compensation liability. Losses on the deferred compensation plan20Table of Contentsinvestments are reflected as decreases to selling, general and administrative expense, as such losses decrease the amount of the deferred compensationliability.Excluding the change in the deferred compensation plan, consolidated selling, general and administrative expense for 2016 decreased $7.8 million or 7.0%compared to 2015 , in which consolidated selling, general and administrative expense was negatively impacted by legal expenses associated with settlementsregarding certain employment-related matters. The change in the value of the deferred compensation plan is a result of changes in the market value on the balanceof investments held in our deferred compensation plan.Consolidated Investment and Net Interest IncomeInvestment and interest income, as a percentage of consolidated revenues, increased to 0.2% for 2016 compared to less than 0.1% for 2015 , primarily due tofavorable market fluctuations in the value of our investments.Consolidated Income TaxesOur effective tax rate was 35.7% for 2016 and 35.4% for 2015 . Differences between the effective tax rates and the applicable U.S. federal statutory rate ariseprimarily from the effect of state and local taxes and tax credits available to the Company. The Company participates in the Work Opportunity Tax Credit(“WOTC”) program, through which we hire and retain employees from target groups with significant barriers to employment. As part of the program, theCompany receives tax credits, and although the Company has increased its participation in the program year-over-year, the increase in the effective tax rate isprimarily related to the ratio of the tax credits to higher pre-tax book income in 2016 as compared to the prior year. This credit is currently scheduled to expire onDecember 31, 2019.21Table of ContentsYears 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 . The differences between the reportable segments’ operating results and other disclosed data and our consolidated financial statementsrelate primarily to corporate level transactions and adjustments related to transactions recorded at the reportable segment level which use methods other thangenerally accepted accounting principles. Year Ended 2015 2014 % Change (in thousands)Revenues Housekeeping services $909,709 $846,610 7.5 %Dietary services 527,140 446,573 18.0 %Consolidated $1,436,849 $1,293,183 11.1 % Costs of services provided Housekeeping services $825,238 $776,220 6.3 %Dietary services 495,528 420,230 17.9 %Corporate and eliminations (84,658) (41,157) 105.7 %Consolidated $1,236,108 $1,155,293 7.0 % Selling, general and administrative expense Corporate and eliminations $111,689 $107,810 3.6 % Investment and interest income Corporate and eliminations $712 $1,628 (56.3)% Income (loss) before income taxes Housekeeping services $84,471 $70,390 20.0 %Dietary services 31,612 26,343 20.0 %Corporate and eliminations (26,319) (65,025) (59.5)%Consolidated $89,764 $31,708 183.1 %RevenuesConsolidatedConsolidated revenues increased 11.1% to $1.44 billion in 2015 compared to $1.29 billion in 2014 as a result of the factors discussed below under ReportableSegments.Reportable SegmentsHousekeeping’s 7.5% increase in reportable segment revenues resulted primarily from service agreements entered into with new clients.Dietary’s 18.0% increase in reportable segment revenues resulted primarily from providing these services to a greater number of existing Housekeeping clients.22Table of ContentsCosts of services providedConsolidatedConsolidated costs of services increased 7.0% to $1.24 billion in 2015 compared to $1.16 billion in 2014 . The increase in costs of services is a result of growth inour consolidated revenues, partially offset by the one-time, non-cash change in estimate related to our self-insurance liability that occurred during 2014. Certainsignificant components within our costs of services are subject to fluctuation with the changes in our business and client base. The increase during 2015 comparedto 2014 relates primarily to labor and other labor related costs. Historically, these significant components accounted for approximately 96% to 98% of consolidatedcosts of services.As 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 the keyindicators we consider when managing the consolidated cost of services: Year Ended December 31,Costs of Services Provided - Key Indicators as % of Consolidated Revenue 2015 2014 % ChangeBad debt provision 0.3% 0.3% —%Workers’ compensation and general liability insurance 3.4% 5.5% (2.1)%The bad debt provision remained consistent due to our assessment of the collectability of our accounts and notes receivables.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.Reportable SegmentsCosts of services provided for Housekeeping, as a percentage of Housekeeping revenues for 2015 , decreased to 90.7% compared to 91.7% in 2014 . Costs 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 key indicators we consider when managing cost of services at the segment level, as a percentage of the respectivesegment’s revenues: Year Ended December 31,Costs of Services Provided - Key Indicators as % of Segment Revenue 2015 2014 % ChangeHousekeeping labor and other labor costs 79.4% 81.0% (1.6)%Housekeeping supplies 8.3% 8.2% 0.1%Dietary labor and other labor costs 52.9% 51.0% 1.9%Dietary supplies 38.7% 40.7% (2.0)%The ratios of these key indicators to revenue remain relatively consistent. Variations relate to the provision of services at new facilities and changes in the mix ofclients for whom we provide supplies or do not provide supplies. Management focuses on building efficiencies and managing labor and other costs at the facilitylevel, as well as managing supply chain costs, for new and existing facilities.Consolidated Selling, General and Administrative Expense Year Ended December 31, 2015 2014 % Change (in thousands)Selling, general and administrative expense excluding deferred compensation change (1)$111,751 $106,599 4.8 %Loss / (gain) on deferred compensation plan investments (2)62 (1,211) (105.1)%Selling, general and administrative expense$111,689 $107,810 3.6 %(1) Selling, general and administrative expense excluding the change in the market value of the deferred compensation fund.23Table of Contents(2) Gains on the deferred compensation plan investments are reflected as increases to selling, general and administrative expense, as such gains increase theamount of the deferred compensation liability. Losses on the deferred compensation plan investments are reflected as decreases to selling, general andadministrative expense, as such losses decrease the amount of the deferred compensation liability.Excluding the change in the deferred compensation plan, consolidated selling, general and administrative expense for 2015 increased $5.2 million or 4.8%compared to 2014 , related primarily to legal expenses associated with settlements regarding certain employment related matters. The change in the value of thedeferred compensation plan is a result of changes in the market value on the balance of investments held in our deferred compensation plan.Consolidated Investment and Net Interest IncomeInvestment and interest income, as a percentage of consolidated revenues, decreased to less than 1% for 2015 compared to 0.1% for 2014 . We recognized adecrease in the market value of the investments held in our deferred compensation fund compared to an increase in the market value in the prior year.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 but wassubsequently extended to December 31, 2019. The tax effect of this renewal was recorded in the fourth quarter of 2015.Critical Accounting Policies and EstimatesThe preparation of financial statements in accordance with accounting standards generally accepted in the United States (“U.S. GAAP”) requires management tomake estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period.We consider the policies discussed below to be critical to an understanding of our financial statements because their application requires judgment. Therefore, itshould be noted that financial reporting results rely on estimating the effect of matters that are inherently uncertain. Specific risks for these critical accountingpolicies and estimates are described in the following paragraphs. For these estimates, we caution that future events do not always occur as forecasted, and the bestestimates routinely require adjustment. Any such adjustments or revisions to estimates could result in material differences to previously reported amounts.The policies discussed are not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particulartransaction is specifically dictated by U.S. GAAP, with no need for our judgment in their application. There are also areas in which our judgment in selectinganother available alternative would not produce a materially different result. See our audited consolidated financial statements and notes thereto which are includedin this Annual Report on Form 10-K, which contain accounting policies and other disclosures required by U.S. GAAP.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 ongoing 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 collections experience with respect to our accounts and notes receivable. We have sometimes been required to extend the period of paymentfor certain clients beyond contractual terms. Such clients include those who have terminated service agreements and slow payers experiencing financial difficulties.In making credit evaluations, in addition to analyzing and anticipating, where possible, the specific cases described above, we consider customer-specific risks aswell as the general collection risks associated with trends in the long-term care industry. We establish credit limits, perform ongoing credit evaluations, andmonitor accounts to minimize the risk of loss.We regularly evaluate our accounts and notes receivable for impairment or loss of value and when appropriate, will record an Allowance for such receivables. Wegenerally follow a policy of reserving for receivables due from clients in bankruptcy, clients with which we are in litigation for collection and other slow payingclients. The Allowance is adjusted as additional information24Table of Contentsbecomes available to more accurately estimate collectability. Once our recovery of a receivable is determined, through litigation, bankruptcy proceedings ornegotiation, to be less than the recorded amount on our balance sheet, we will charge the applicable amount to the Allowance.Summarized below for the years 2014 through 2016 are the aggregate account balances for the Allowance criteria noted above, net of write-offs of client accounts,bad debt provision and allowance for doubtful accounts:Year Ended Aggregate Account Balances of Clients inBankruptcy or in/or PendingCollection/Litigation Net Write-offs of ClientAccounts Bad Debt Provision Allowance for DoubtfulAccounts (in thousands)2014 $14,903 $2,253 $4,470 $6,1362015 $12,073 $5,863 $4,335 $4,6082016 $15,873 $2,326 $4,629 $6,911At December 31, 2016 , we identified accounts totaling $15.9 million that require an Allowance based on potential impairment or loss of value. An Allowancetotaling $6.9 million was provided for these accounts at such date. Actual collections of these accounts could differ from our current estimate. If our actualcollection experience is 5% less than our estimate, the related increase to our Allowance would decrease net income by approximately $0.3 million .Despite our efforts to minimize credit risk exposure, our clients could be adversely affected if future industry trends, as more fully discussed under Liquidity andCapital Resources below, and in this Annual Report on Form 10-K in Part I under “Risk Factors,” “Government Regulation of Clients” and “Service Agreementsand Collections,” change in such a manner as to negatively impact the cash flows of our clients. If our clients experience a negative impact in their cash flows, itcould 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 46.2% ofour liabilities at December 31, 2016 . 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 utilizes current valuations from a thirdparty actuary, which include assumptions based on data such as historical claims, pay-out experience, demographic factors, industry trends, severity factors, andother actuarial calculations. In the event that our claims experience and/or industry trends result in an unfavorable change in our assumptions or outcomes, it wouldhave an adverse effect on our results of operations and financial condition.For workers’ compensation and general liability, we record both a reserve for the estimated future cost of claims and related expenses that have been reported butnot settled, as well as an estimate of claims incurred but not reported. Such reserves for claims incurred but not reported are developed by a third party actuarythrough review of our historical data and open claims.A summary of the changes in our total self-insurance liability is as follows: 2016 2015 2014 (in thousands)Accrued insurance claims - January 1,$82,250 $68,262 $26,178Claim payments(35,089) (27,883) (24,879)Reserve accruals: Current year accruals40,492 41,871 30,642Changes to the provision for prior years— — 36,321Change in accrued insurance claims$5,403 $13,988 $42,084Accrued insurance claims - December 31,$87,653 $82,250 $68,262Asset 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 circumstances indicate that theircarrying amounts may not be recoverable. This review requires that we make assumptions regarding the value of these assets and the changes in circumstances thatwould affect the carrying value of these assets. If such analysis indicates that a possible impairment may exist, we are then required to estimate the fair value of theasset and, as deemed appropriate,25Table of Contentsexpense all or a portion of the asset. The determination of fair value includes numerous uncertainties, such as the impact of competition on future value. Webelieve that we have made reasonable estimates and judgments in determining whether our long-term assets have been impaired; however, if there is a materialchange in the assumptions used in our determination of fair value or if there is a material change in economic conditions or circumstances influencing fair value,we could be required to recognize certain impairment charges in the future. As a result of our most recent reviews, no changes in asset values were required.Income 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, 2016 , we had cash, cash equivalents and marketable securities of $91.6 million and working capital of $313.8 million compared to December 31,2015 cash, cash equivalents and marketable securities of $102.7 million and working capital of $269.3 million . Our cash, cash equivalents and marketablesecurities, as well as the cash flows that we generate through our operations, are our principal sources of liquidity. As of December 31, 2016 , we had an unusedline of credit of $136.3 million . Our current ratio at December 31, 2016 increased to 4.1 to 1 from 3.8 to 1 at December 31, 2015 . On a historical basis, ouroperations have produced consistent cash flow and have required limited capital resources. We believe that the combination of our current and near term cash flowpositions, coupled with our existing short-term financing arrangements, will enable us to fund our continued anticipated growth. We also believe that, due to ourconservative capital structure and historical and projected financial performance, other sources of liquidity would be readily available to assist in funding futuregrowth.For the years ended December 31, 2016 , 2015 and 2014 , our cash flows were as follows: Year Ended December 31, 2016 2015 2014 (in thousands)Net cash provided by operating activities$41,400 $63,361 $57,730Net cash used in investing activities$(6,452) $(62,314) $(6,460)Net cash used in financing activities$(44,284) $(43,138) $(40,145)Operating ActivitiesOur primary sources of cash are the revenues generated from our Housekeeping and Dietary services. Our primary uses of cash are the funding of our payroll andother personnel-related costs, as well as the costs of supplies used in providing our services. The timing of cash receipts and cash payments are the primary driversof the period-over-period changes in net cash provided by operating activities.26Table of ContentsInvesting ActivitiesThe principal uses of net cash for investing activities are the purchases of marketable securities and capital expenditures such as housekeeping and food serviceequipment, computer software and equipment, and furniture and fixtures (see “Capital Expenditures” below for additional information).Our investments in marketable securities are primarily comprised of tax-exempt municipal bonds and are intended to achieve our goal of preserving principal,maintaining adequate liquidity and maximizing returns subject to our investment guidelines. Our investment policy limits investment to certain types ofinstruments issued by institutions primarily with investment-grade ratings and places restrictions on concentration by type and issuer. In 2015, we increased ourinvestments in these liquid securities in conjunction with the transfer of the Company’s workers compensation and certain employee health and welfare insuranceprograms to HCSG Insurance Corp. (the “Captive”).Financing ActivitiesThe primary use of cash for financing activities is the payment of dividends. We have paid regular quarterly cash dividends since the second quarter of 2003.During 2016 , we paid to shareholders regular quarterly cash dividends totaling $53.3 million as follows. Quarter Ended March 31, 2016 June 30, 2016 September 30, 2016 December 31, 2016 (in thousands, except per share data)Cash dividend per common share$0.18125 $0.18250 $0.18375 $0.18500Total cash dividends paid$13,158 $13,293 $13,398 $13,493Record dateFebruary 19, 2016 May 20, 2016 August 19, 2016 November 18, 2016Payment dateMarch 25, 2016 June 24, 2016 September 23, 2016 December 23, 2016Additionally, on January 31, 2017 , our Board of Directors declared a regular quarterly cash dividend of $0.18625 per common share, which will be paid onMarch 24, 2017 to shareholders of record as of the close of business on February 17, 2017 .The dividends paid to shareholders during the year ended December 31, 2016 were funded by the existing cash, cash equivalents and marketable securities held bythe Company. Our Board of Directors reviews our dividend policy on a quarterly basis. Although there can be no assurance that we will continue to pay dividendsor the amount of the dividend, we expect to continue to pay a regular quarterly cash dividend. In connection with the establishment of our dividend policy, weadopted a Dividend Reinvestment Plan in 2003.During 2016 we elected not to purchase any of our common stock but we remain authorized to purchase 1.7 million shares of our common stock pursuant toprevious Board of Directors’ authorization.Contractual ObligationsOur future contractual obligations and commitments at December 31, 2016 consist of the following: Payments Due by PeriodYear Ended December 31, 2016 Total Less Than 1 Year 1-3 Years 3-5 Years After 5 Years (in thousands)Operating lease obligations $9,110 $2,424 $2,753 $1,495 $2,438Line of CreditWe have a $200 million bank line of credit on which we may draw to meet short-term liquidity requirements. Amounts drawn under the line of credit are payableupon demand. At December 31, 2016 , there were no borrowings under the line of credit. However, at such date, we had outstanding a $63.7 million irrevocablestandby letter of credit, which relates to payment obligations under our insurance programs. As a result of the letter of credit issued, the amount available under theline of credit was reduced by $63.7 million at December 31, 2016 .27Table of ContentsThe line of credit requires us to satisfy one financial covenant. The covenant and its respective status at December 31, 2016 was as follows:Covenant Description and Requirement Status at December 31, 2016Funded debt (1) to EBITDA (2) ratio: less than 3.00 to 1.00 0.50(1) All indebtedness for borrowed money, including but not limited to capitalized lease obligations, reimbursement obligations in respect of letters of credit andguaranties of any such indebtedness.(2) Net income plus interest expense, income tax expense, depreciation, amortization, and extraordinary non-recurring losses/gains.As noted above, we were in compliance with our financial covenant at December 31, 2016 and expect to continue to remain in compliance with such financialcovenant. The line of credit expires on December 18, 2018.On January 3, 2017 , the letter of credit was increased to $67.2 million and the amount available under the line of credit was reduced by $3.5 million .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 and such participation can affect our clients’ cash flows, which may impact their ability to make payments to uson agreed upon payment terms. These factors, in addition to other trends or regulations in the long-term care industry, have resulted in and could continue to resultin significant additional bad debts in the near future. Whenever possible, when a client falls behind in making agreed-upon payments, we convert the unpaidaccounts receivable to interest bearing promissory notes. The promissory notes provide a means to better evidence the amounts owed, materially enhance ourability to defend the validity of the debt, and memorialize a definitive repayment plan, each of which may ultimately enhance our ability to collect the amountsdue. At December 31, 2016 and 2015 , we had $19.2 million and $16.8 million , net of reserves, respectively, of such promissory notes outstanding. Additionally,we consider restructuring service agreements from full service to management-only service in the case of certain clients experiencing significant 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.In order to provide for these collection problems and the general risk associated with the granting of credit terms, we have recorded bad debt provisions (in anAllowance for Doubtful Accounts) of $4.6 million , $4.3 million and $4.5 million in the years ended December 31, 2016 , 2015 and 2014 , respectively. As apercentage of total revenues, these provisions represent approximately 0.3% for each of the years ended December 31, 2016 , 2015 and 2014 .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 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 assists 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.28Table of ContentsCapital ExpendituresThe level of our capital expenditures is generally dependent on the number of new clients obtained. Such capital expenditures primarily consist of housekeepingand food service equipment purchases, laundry and linen equipment installations, computer hardware and software, and furniture and fixtures. Although we haveno specific material commitments for capital expenditures through the end of calendar year 2017 , we estimate that for the period we will have capital expendituresof $4.5 million to $6.0 million . Our capital expenditures totaled $5.4 million in 2016 .Material Off-Balance Sheet ArrangementsWe have no material off-balance sheet arrangements, other than our irrevocable standby letter of credit.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, 2016 , we had $91.6 million in cash, cash equivalents and marketable securities. The fair values of all of our cash equivalents and marketablesecurities are determined based on “Level 1” inputs, which are defined as observable, quoted prices for identical or similar instruments in active markets, “Level 2”inputs, which are defined as quoted prices for identical or similar instruments in markets that are not active or model-based valuation techniques for which allsignificant assumptions are observable. We make investments in instruments that meet our credit quality standards, as specified in our investment policyguidelines.Investments in both fixed rate and floating rate investments carry a degree of interest rate risk. The value of fixed rate securities may be adversely impacted due toan 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 futureinvestment 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.29Table of ContentsItem 8. Financial Statements and Supplementary Data.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm31Management's Report on Internal Control Over Financial Reporting32Reporting of Independent Registered Public Accounting Firm33Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 2016 and 201534Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016, 2015 and 201435Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 201436Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2016, 2015 and 201437Notes to Consolidated Financial Statements for the Years Ended December 31, 2016, 2015 and 20143830Table 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, 2016 and 2015 , and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the threeyears in the period ended December 31, 2016 . Our audits of the basic consolidated financial statements included the financial statement schedule listed in theindex appearing under Item15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express anopinion 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, 2016 and 2015 , and the results of their operations and their cash flows for each of the three years in the period endedDecember 31, 2016 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, 2016 , 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 24, 2017 expressed an unqualified opinion./s/ GRANT THORNTON LLP New York, New York February 24, 2017 31Table 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, 2016 . 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, 2016 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, 2016 ./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 24, 2017 February 24, 201732Table 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, 2016 , 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, 2016 , 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, 2016 , and our report dated February 24, 2017 expressed an unqualified opinion on those financialstatements./s/ GRANT THORNTON LLP New York, New York February 24, 2017 33Table of ContentsHealthcare Services Group, Inc.Consolidated Balance Sheets(in thousands, except per share amounts) December 31, 2016 2015ASSETS: Current assets: Cash and cash equivalents$23,853 $33,189Marketable securities, at fair value67,730 69,496Accounts and notes receivable, less allowance for doubtful accounts of $6,911 as of December 31, 2016 and $4,608 asof December 31, 2015271,276 214,854Inventories and supplies37,800 36,308Prepaid expenses and other assets13,965 11,495Total current assets414,624 365,342Property and equipment, net13,455 13,086Goodwill44,438 44,438Other intangible assets, less accumulated amortization of $14,672 as of December 31, 2016 and $19,473 as ofDecember 31, 201514,409 17,108Notes receivable — long term portion, net of reserve7,531 2,972Deferred compensation funding, at fair value24,119 25,391Deferred income taxes9,822 12,567Other noncurrent assets48 45Total Assets$528,446 $480,949 LIABILITIES AND STOCKHOLDERS’ EQUITY: Current liabilities: Accounts payable$42,912 $41,472Accrued payroll, accrued and withheld payroll taxes22,303 18,062Other accrued expenses3,075 3,115Income taxes payable7,686 3,212Accrued legal expenses1,322 10,464Accrued insurance claims23,573 19,740Total current liabilities100,871 96,065Accrued insurance claims — long term portion64,080 62,510Deferred compensation liability24,653 25,918Commitments and contingencies STOCKHOLDERS’ EQUITY: Common stock, $.01 par value; 100,000 shares authorized; 74,204 and 73,793 shares issued, and 72,601 and 72,034shares outstanding as of December 31, 2016 and December 31, 2015, respectively742 738Additional paid-in capital217,664 199,294Retained earnings130,940 106,886Accumulated other comprehensive (loss) income, net of taxes(319) 543Common stock in treasury, at cost, 1,603 shares as of December 31, 2016 and 1,759 shares as of December 31, 2015(10,185) (11,005)Total stockholders’ equity338,842 296,456TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$528,446 $480,949See accompanying notes.34Table of ContentsHealthcare Services Group, Inc.Consolidated Statements of Comprehensive Income(in thousands, except per share amounts) Years Ended December 31, 2016 2015 2014Revenues$1,562,662 $1,436,849 $1,293,183Operating costs and expenses: Costs of services provided1,339,492 1,236,108 1,155,293Selling, general and administrative105,417 111,689 107,810Other income: Investment and interest2,634 712 1,628Income before income taxes120,387 89,764 31,708Income taxes42,991 31,740 9,858Net income$77,396 $58,024 $21,850 Per share data: Basic earnings per common share$1.06 $0.81 $0.31Diluted earnings per common share$1.05 $0.80 $0.31 Weighted average number of common shares outstanding: Basic72,754 71,826 70,616Diluted73,474 72,512 71,341 Comprehensive income: Net income$77,396 $58,024 $21,850Other comprehensive income: Unrealized (loss) gain on available for sale marketable securities, net of taxes(862) 518 (24)Total comprehensive income$76,534 $58,542 $21,826See accompanying notes.35Table of ContentsHealthcare Services Group, Inc.Consolidated Statements of Cash Flows(in thousands) Years Ended December 31, 2016 2015 2014Cash flows from operating activities: Net income$77,396 $58,024 $21,850Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization7,496 7,660 7,269Bad debt provision4,629 4,335 4,470Deferred income tax (benefit) expense3,001 17,842 (15,059)Stock-based compensation expense4,252 3,541 3,080Tax benefit from equity compensation plans(2,981) (1,873) (2,626)Amortization of premium on marketable securities1,723 681 354Unrealized (gain) loss on deferred compensation fund investments(1,460) 24 (1,216)Changes in operating assets and liabilities: Accounts and notes receivable(61,051) (18,854) (13,492)Inventories and supplies(1,492) (846) (3,015)Prepaid expenses and other assets(2,470) (1,710) (417)Notes receivable — long term(4,559) — 600Deferred compensation funding2,732 (649) (2,542)Accounts payable and other accrued expenses(4,251) 2,403 492Accrued payroll, accrued and withheld payroll taxes6,307 (28,314) 11,813Accrued insurance claims5,404 13,987 42,084Deferred compensation liability(731) 1,113 4,248Income taxes payable7,455 5,997 (163)Net cash provided by operating activities41,400 63,361 57,730 Cash flows from investing activities: Disposals of fixed assets275 267 83Additions to property and equipment(5,442) (4,998) (5,795)Purchases of marketable securities(29,449) (75,150) (5,140)Sales of marketable securities28,164 17,567 4,392Net cash used in investing activities(6,452) (62,314) (6,460) Cash flows from financing activities: Dividends paid(53,342) (51,375) (49,077)Reissuance of treasury stock pursuant to Dividend Reinvestment Plan109 113 110Tax benefit from equity compensation plans2,981 1,873 2,626Proceeds from the exercise of stock options5,968 6,251 6,196Net cash used in financing activities(44,284) (43,138) (40,145) Net change in cash and cash equivalents(9,336) (42,091) 11,125Cash and cash equivalents at beginning of the period33,189 75,280 64,155Cash and cash equivalents at end of the period$23,853 $33,189 $75,280 Supplementary Cash Flow Information: Cash paid for interest$574 $258 $156Cash paid for income taxes, net of refunds$32,532 $7,901 $25,080See accompanying notes.36Table of ContentsHealthcare Services Group, Inc.Consolidated Statements of Stockholders’ Equity(in thousands) Years Ended December 31, Common Stock Additional Paid-in Capital Accumulated OtherComprehensive (Loss)Income, Net of Taxes RetainedEarnings Treasury Stock Stockholders’Equity Shares Amount Balance, December 31, 201371,868 $719 $168,329 $49 $127,464 $(11,418) $285,143Comprehensive income: Net income for the period 21,850 21,850Unrealized loss on available for sale marketable securities, net oftaxes (24) (24)Comprehensive income $21,826Exercise of stock options and other stock-based compensation, net ofshares tendered for payment534 5 6,191 6,196Tax benefit from equity compensation plans 2,626 2,626Share-based compensation expense — stock options and restricted stock 2,705 2,705Treasury shares issued for Deferred Compensation Plan funding andredemptions 459 57 516Shares issued pursuant to Employee Stock Plans 1,457 394 1,851Cash dividends (49,077) (49,077)Shares issued pursuant to Dividend Reinvestment Plan 326 (216) 110Adjustment to purchase price allocation 3,934 3,934Shares issued pursuant to prior year acquisition476 5 (5) —Balance, December 31, 201472,878 $729 $186,022 $25 $100,237 $(11,183) $275,830Comprehensive income: Net income for the period 58,024 58,024Unrealized gain on available for sale marketable securities, net oftaxes 518 518Comprehensive income $58,542Exercise of stock options and other stock-based compensation, net ofshares tendered for payment386 4 6,247 6,251Tax benefit from equity compensation plans 1,873 1,873Share-based compensation expense — stock options and restricted stock 3,033 3,033Treasury shares issued for Deferred Compensation Plan funding andredemptions 418 70 488Shares issued pursuant to Employee Stock Plans 1,363 338 1,701Cash dividends 0 (51,375) (51,375)Shares issued pursuant to Dividend Reinvestment Plan 343 (230) 113Shares issued pursuant to prior year acquisition529 5 (5) —Balance, December 31, 201573,793 $738 $199,294 $543 $106,886 $(11,005) $296,456Comprehensive income: Net income for the period 77,396 77,396Unrealized loss on available for sale marketable securities, net oftaxes (862) (862)Comprehensive income $76,534Exercise of stock options and other stock-based compensation, net ofshares tendered for payment301 3 5,965 5,968Tax benefit from equity compensation plans 2,773 2,773Share-based compensation expense — stock options and restricted stock 3,743 3,743Treasury shares issued for Deferred Compensation Plan funding andredemptions 103 431 534Shares issued pursuant to Employee Stock Plans 1,696 371 2,067Cash dividends (53,342) (53,342)Shares issued pursuant to Dividend Reinvestment Plan 91 18 109Shares issued pursuant to previous settlement113 1 3,999 4,000Other(3) —Balance, December 31, 201674,204 $742 $217,664 $(319) $130,940 $(10,185) $338,842See accompanying notes.37Table of ContentsHealthcare Services Group, Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2016 , 2015 and 2014Note 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 receive government reimbursements related to Medicare andMedicaid. 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 agreements for a 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 managing of the client’s housekeeping department which is principally responsible for the cleaning, disinfecting and sanitizing ofresident rooms and common areas of a client’s facility, as well as the laundering and processing of the bed linens, uniforms, resident personal clothing and otherassorted linen items utilized at a client facility.Dietary consists of managing the client’s dietary department which is principally responsible for food purchasing, meal preparation and dietitian professionalservices, which includes the development of a menu that meets the residents’ dietary needs.Use of Estimates in Financial StatementsIn preparing financial statements in conformity with United States generally accepted accounting principles (“U.S. GAAP”), we make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as thereported amounts of expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are used for, but are not limited to,our allowance for doubtful accounts, accrued insurance claims, asset valuations and review for potential impairment, and deferred taxes. The estimates are basedupon various factors including current and historical trends, as well as other pertinent industry and regulatory authority information. We regularly evaluate thisinformation to determine if it is necessary to update the basis for our estimates and to compensate for known changes.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 InstrumentsWe determine fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at themeasurement date. We utilize valuation techniques that maximize the use of observable inputs (Levels 1 and 2) and minimize the use of unobservable inputs (Level3) within the fair value hierarchy. Assets and liabilities are classified within the fair value hierarchy based on the lowest level (least observable) input that issignificant to the measurement in its entirety.Our financial instruments that are measured at fair value on a recurring basis consist of marketable securities and our deferred compensation fund investments.Other financial instruments such as cash and cash equivalents, accounts and notes receivable and accounts payable (including income taxes payable and accruedexpenses) are short-term in nature, and therefore the carrying value of these instruments is deemed to approximate their fair value.38Table of ContentsWe have certain notes receivable that either do not bear interest or bear interest at a below-market rate. Therefore, such notes receivable of $5.7 million and $6.5million at December 31, 2016 and 2015 , respectively, have been discounted to their present value and are reported at values of $5.7 million and $6.5 million atDecember 31, 2016 and 2015 , 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.Investments in Marketable SecuritiesWe define our marketable securities as fixed income investments which are highly liquid and can be readily purchased or sold through established markets. AtDecember 31, 2016 , we had marketable securities of $67.7 million which were comprised primarily of tax exempt municipal bonds. These investments areaccounted for as available-for-sale securities and are reported at fair value on our balance sheet. For the year ended December 31, 2016 , $0.9 million of unrealizedlosses related to these investments were recorded in other comprehensive income. Unrealized gains and losses are recorded net of income taxes.These assets are available for future needs of the Company to support our current and projected growth, if required. Our investment policy is intended to manageour assets to achieve our goals of preserving principal, maintaining adequate liquidity at all times, and maximizing returns subject to our investment guidelines.Our investment policy limits investment to certain types of instruments issued by institutions primarily with investment grade credit ratings and places restrictionson 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, 2016 , we believe that the recorded value ofour investments 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, net of accumulated depreciation. Additions, renewals and improvements are capitalized, while maintenance and repaircosts are expensed when incurred. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the respectiveaccounts and any resulting gain or loss is included in income. Depreciation is recorded using the straight-line method over the following estimated useful lives:Housekeeping and Dietary equipment — 5 to 7 years; computer hardware and software — 3 to 7 years; and other, consisting of furniture and fixtures, leaseholdimprovements and autos and trucks — 5 to 10 years. Depreciation expense on property and equipment for the years ended December 31, 2016 , 2015 and 2014was $4.8 million , $4.4 million and $3.9 million 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.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 expected future tax consequences of temporary differences between the financial reporting and tax bases ofassets and liabilities. If appropriate, we would record a valuation allowance to reduce deferred tax assets to an amount for which realization is more likely than not.Deferred tax assets and liabilities are more fully described in Note 12.39Table of ContentsUncertain income tax positions taken or expected to be taken in tax returns are reflected within our financial statements based on a recognition and measurementprocess.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 and upon the vesting of restricted stock.Share-Based CompensationWe estimate the fair value of share-based awards on the date of grant using the Black-Scholes valuation model for stock options and using the share price on thedate of grant for restricted stock. The value of the portion of the award that is ultimately expected to vest is recognized ratably as an expense in the Company’sconsolidated statements of income over the requisite service periods. Because share-based compensation expense is based on awards that are ultimately expected tovest, share-based compensation expense will be reduced to account for estimated forfeitures. Forfeitures are estimated 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 no t material for the years ended December 31, 2016 , 2015 and 2014 .Impairment of Long-Lived AssetsThe carrying amounts of long-lived assets are periodically reviewed to determine whether current events or circumstances warrant adjustment to such carryingamounts. Any impairment is measured by the amount that the carrying value of such assets exceeds their fair value, primarily based on estimated discounted cashflows. Considerable management judgment is necessary to estimate the fair value of assets. Assets to be disposed of are carried at the lower of their financialstatement carrying amount or fair value, less cost to sell.Identifiable Intangible Assets and GoodwillIdentifiable intangible assets are amortized on a straight-line basis over their respective lives. Goodwill represents the excess of cost over the fair value of netassets of acquired businesses. We review the carrying value of goodwill at least annually during the fourth quarter of each year to assess for impairment, or moreoften if events or circumstances indicate that the carrying value may exceeds its estimated fair value. No impairment loss was recognized on our intangible assetsor goodwill for the years ended December 31, 2016 , 2015 or 2014 .Treasury 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.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 $37.4 million to reflect estimated current and future insurance claims projected to beclosed out over the next 15 to 17 years. This tax-effected adjustment40Table of Contentswas recorded in the third quarter 2014 and is accounted for as a change in estimate, along with charges related to the corporate reorganization, self-funded healthinsurance program transition and other related expenses in our consolidated statements of comprehensive income.Concentrations of Credit RiskOur financial instruments that are subject to concentrations of credit risk are cash and cash equivalents, marketable securities, deferred compensation funding andaccounts and notes receivable. We define our marketable securities as fixed income investments which are highly liquid investments that can be readily purchasedor sold using established markets. At December 31, 2016 and 2015 , substantially all of our cash and cash equivalents, and marketable securities were held in onelarge 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. New legislation or additional changes in existing regulations could be made which could directlyimpact the governmental reimbursement programs in which our clients participate. As a result, we may not know the full effects of such programs until these lawsare fully implemented and governmental agencies issue applicable regulations or guidance.Significant ClientsWe have several clients who individually contributed over 5% , with one as high as 9.5% , of our total consolidated revenues for the year ended December 31,2016 . 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 March 2016, the FASB issued ASU 2016-09, Stock Compensation: Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 is intended tosimplify several aspects of the accounting for share-based payments. The guidance will be effective for fiscal years beginning after December 15, 2016, includinginterim periods within that year. The Company will adopt the standard beginning January 1, 2017, and is not expecting a material impact to results of operations orfinancial position. The impacts of adopting the standard will relate to the recognition of excess tax benefits related to share-based payments as a component ofincome tax expense, as opposed to in additional paid-in capital; an amendment to the calculation of diluted earnings per share to exclude windfall tax benefits fromassumed proceeds when calculating diluted shares outstanding; as well as accounting for forfeitures of share-based awards as they occur, as opposed to reservingfor estimated forfeitures.In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers , which was subsequently amended and updated throughout 2015 and2016. The standard provides guidance on revenue recognition, among other topics such as the accounting for compensation and costs to obtain a contract. Thestandard requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration towhich the entity expects to be entitled in exchange for those goods or services. Adoption is required for reporting periods beginning after December 15, 2017, withearly adoption prohibited. The Company plans to adopt the standard beginning on January 1, 2018. The Company is in the process of evaluating the impact of theadoption of this ASU, as well as determining the transition method that will be applied. Our analysis has consisted of reviewing the nature and terms of ourexisting contracts under the provisions of the new guidance and assessing any operational changes and process updates required for compliance. Currently, theCompany does not expect a material impact to our accounting for the revenue we earn related to our Housekeeping and Dietary services. We anticipate that themost significant impact of the new standard will relate to additional disclosure obligations.In February 2016, the FASB issued ASU 2016-02, Leases . ASU 2016-02 requires lessees to recognize assets and liabilities on their balance sheet related to therights and obligations created by most leases, while continuing to recognize expenses on their income statements over the lease term. It will also requiredisclosures designed to give financial statement users information regarding the amount, timing, and uncertainty of cash flows arising from leases. The guidance iseffective for annual reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted for all entities. TheCompany will adopt the new guidance as of January 1, 2019. We are continuing to evaluate the expected impact of the requirements, however we expect theprimary impact will relate to the capitalization of operating leases of office space, vehicles and equipment.41Table of ContentsIn November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes . The amendment in this ASU requires that deferred tax assetsand liabilities, along with any related valuation allowance, be classified as noncurrent in a classified statement of financial position. The guidance becomeseffective for annual reporting periods beginning after December 15, 2016 with early adoption permitted. Management elected to adopt the standard in the firstquarter of 2016, with retrospective application to prior period balances presented. The adoption of ASU 2015-17 merely resulted in the reclassification within theasset section of the balance sheet and did not have a material impact on the Company’s working capital or consolidated financial statements.Note 2—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, 2016 and 2015 , 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: Unrealized Gains and (Losses) on Available for Sale Securities(1) 2016 2015 2014 (in thousands)Accumulated other comprehensive income - beginning balance$543 $25 $49Other comprehensive (loss) income before reclassifications(1,005) 535 (16)Amounts reclassified from accumulated other comprehensive (loss) income (2)(3)143 (17) (8)Net current period change in other comprehensive (loss) income (4)$(862) $518 $(24)Accumulated other comprehensive (loss) income - ending balance$(319) $543 $25(1) All amounts are net of tax.(2) Realized gains and losses are recorded pre-tax in the other income - investment and interest caption in our consolidated statements of comprehensiveincome.(3) For the year ended December 31, 2016 , the Company recorded $0.2 million of realized losses from the sale of available for sale securities. For the yearsended December 31, 2015 and 2014 , the Company recorded less than $0.1 million of realized gains for the sale of available for sale securities. Refer toNote 5 herein for further information.(4) For the years ended December 31, 2016 , 2015 and 2014 , these changes in other comprehensive income were net of tax effects of $0.5 million , $0.3 millionand $0.1 million , respectively.Note 3—Property and EquipmentProperty and equipment are 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, 2016 and December 31, 2015 : December 31, 2016 December 31, 2015 (in thousands)Housekeeping and Dietary equipment$21,136 $19,445Computer hardware and software11,750 10,528Other (1)1,133 1,134Total property and equipment, at cost$34,019 $31,107Less accumulated depreciation20,564 18,021Total property and equipment, net$13,455 $13,086(1) Includes furniture and fixtures, leasehold improvements and autos and trucks.42Table of ContentsDepreciation expense for the years ended December 31, 2016 , 2015 and 2014 was $4.8 million , $4.4 million and $3.9 million , respectively.Note 4—Goodwill and Other Intangible AssetsGoodwillGoodwill represents the excess of the purchase price over the fair value of net assets of acquired businesses. Goodwill is not amortized, but is evaluated forimpairment on an annual basis, or more frequently if impairment indicators arise. The carrying value of goodwill as of December 31, 2016 and 2015 was $44.4million .Intangible AssetsOur intangible assets were acquired through acquisitions and are recorded at their fair values at the date of acquisition. Intangible assets with determinable lives areamortized on a straight-line basis over their estimated useful lives. The customer relationships have a weighted-average amortization period of 9.7 years . As ofDecember 31, 2015, the Company’s non-compete agreements and certain of the Company’s customer relationship intangible assets had been fully amortized andthe respective balances were written-off during 2016.The following table sets forth the amounts of our identifiable intangible assets subject to amortization: December 31, 2016 2015 (in thousands)Customer relationships$29,081 $35,781Non-compete agreements— 800Total other intangibles, gross$29,081 $36,581Less accumulated amortization14,672 19,473Other intangibles, net$14,409 $17,108The following table sets forth the estimated amortization expense for intangibles subject to amortization for the next five years:Period/Year Customer Relationships Total (in thousands)2017 $2,427 $2,4272018 $2,328 $2,3282019 $2,130 $2,1302020 $2,130 $2,1302021 $2,130 $2,130Thereafter $3,264 $3,264Amortization expense for the years ended December 31, 2016 , 2015 and 2014 was $2.7 million , $3.2 million and $3.3 million , respectively.Note 5—Fair Value MeasurementsThe Company’s current assets (other than marketable securities and inventories) and current liabilities are financial instruments and most of these items arerecorded at cost in the Consolidated Balance Sheets. The estimated fair value of these financial instruments approximates their carrying value due to their short-term nature. Our financial assets that are measured at fair value on a recurring basis are our marketable securities and our deferred compensation funding.The Company’s marketable securities consist of tax-exempt municipal bonds, which we classify as available-for-sale and which are reported at fair value.Unrealized gains and losses associated with these investments are included in other comprehensive income (net of tax) within our consolidated statements ofcomprehensive income. The fair value of these marketable securities is43Table of Contentsclassified within Level 2 of the fair value hierarchy, as these securities are measured using quoted prices for identical or similar instruments in markets that are notactive, and model-based valuation techniques for which all significant assumptions are observable. Such valuations are determined by a third party pricing service.The investments under the funded deferred compensation plan are accounted for as trading securities and unrealized gains or losses are included in earnings. Thefair value of these investments are determined based on quoted market prices (Level 1).We believe recorded values of all of our financial instruments approximate their current fair values because of their nature, stated interest rates and respectivematurity dates or durations.The following tables provide fair value measurement information for our marketable securities and deferred compensation fund investment assets as ofDecember 31, 2016 and 2015 : As of December 31, 2016 Fair Value Measurement Using: Carrying Amount Total Fair Value Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (in thousands)Financial Assets: Marketable securities Municipal bonds — available for sale$67,730 $67,730 $— $67,730 $—Deferred compensation fund Money Market (1)$3,147 $3,147 $— $3,147 $—Balanced and Lifestyle7,162 7,162 7,162 — —Large Cap Growth5,583 5,583 5,583 — —Small Cap Growth2,933 2,933 2,933 — —Fixed Income2,752 2,752 2,752 — —International1,132 1,132 1,132 — —Mid Cap Growth1,410 1,410 1,410 — —Deferred compensation fund$24,119 $24,119 $20,972 $3,147 $—44Table 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) (in thousands)Financial Assets: Marketable securities Municipal bonds — available for sale$69,496 $69,496 $— $69,496 $—Deferred compensation fund Money Market (1)$3,896 $3,896 $— $3,896 $—Balanced and Lifestyle9,136 9,136 9,136 — —Large Cap Growth5,218 5,218 5,218 — —Small Cap Value2,275 2,275 2,275 — —Fixed Income2,624 2,624 2,624 — —International1,025 1,025 1,025 — —Mid Cap Growth1,217 1,217 1,217 — —Deferred compensation fund$25,391 $25,391 $21,495 $3,896 $—(1) The fair value of the money market fund is based on the net asset value (“NAV”) of the shares held by the plan at the end of the period. The money marketfund includes short-term United States dollar denominated money-market instruments and the NAV is determined by the custodian of the fund. The moneymarket fund can be redeemed at its NAV at the measurement date, as there are no significant restrictions on the ability to sell this investment.Amortized Cost Gross UnrealizedGains Gross UnrealizedLosses Estimated Fair Value Other-Than-TemporaryImpairments (in thousands)December 31, 2016 Marketable securities Municipal bonds — available for sale$68,220 $178 $(668) $67,730 $—Total debt securities$68,220 $178 $(668) $67,730 $—December 31, 2015 Marketable securities Municipal bonds — available for sale$68,640 $869 $(13) $69,496 $—Total debt securities$68,640 $869 $(13) $69,496 $—December 31, 2014 Marketable securities Municipal bonds — available for sale$11,758 $48 $(7) $11,799 $—Total debt securities$11,758 $48 $(7) $11,799 $—For the years ended December 31, 2016 , 2015 and 2014 , we received total proceeds, less the amount of interest received, of $28.1 million , $16.4 million and $3.9million , respectively, from sales of available-for-sale municipal bonds. These sales resulted in realized losses of $0.2 million recorded in other income –investment and interest caption on our statement of comprehensive income for the year ended December 31, 2016 , and gains of less than $0.1 million in both 2015and 2014 . The basis for the sale of these securities was a specific identification of each bond sold during this period.45Table of ContentsThe following table summarizes the contractual maturities of debt securities held at December 31, 2016 and 2015 , which are classified as marketable securities inthe Consolidated Balance Sheets: Municipal Bonds — Available for Sale December 31, 2016 2015 (in thousands)Contractual maturity: Maturing in one year or less$973 $774Maturing in second year through fifth year28,671 13,852Maturing in sixth year through tenth year21,651 36,273Maturing after ten years16,435 18,597Total debt securities$67,730 $69,496Note 6— Accounts and Notes ReceivableMany of our clients participate in programs funded by federal and state governmental agencies. Because our clients’ revenues are generally dependent on Medicareand Medicaid reimbursement funding rates and mechanisms, changes in regulations and trends in the long term care industry have affected and could adverselyaffect our clients’ cash flows, resulting in their inability to make payments to us on agreed upon payment terms. These factors, in addition to other delays inpayments from clients, have resulted in and could continue to result in significant additional bad debts in the near future. Whenever possible, when a client fallsbehind in making agreed-upon payments, we convert the unpaid accounts receivable to interest bearing promissory notes. The promissory notes provide a means tobetter evidence the amounts owed, materially enhance our ability to defend the validity of the debt, and memorialize a definitive repayment plan, each of whichmay enhance our ability to collect the amounts due. Accounts and notes receivable are stated net of an allowance for doubtful accounts. At December 31, 2016 and2015 , we had $ 19.2 million and $ 16.8 million , net of reserves, respectively, of such promissory notes outstanding. Additionally, we consider restructuringservice agreements from full service to management-only service in the case of certain clients experiencing significant financial difficulties. We believe that suchrestructurings may provide us with a means to maintain a relationship with the client while at the same time minimizing collection exposure.Note 7— 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 ourongoing review of accounts and notes receivable and is inherently subjective as it requires estimates that are susceptible to significant revision as more informationbecomes available.We have had varying collections experience with respect to our accounts and notes receivable. We have sometimes been required to extend the period of paymentfor certain clients beyond contractual terms. Such clients include those who have terminated service agreements and slow payers experiencing financial difficulties.In order to provide for these collection problems and the general risk associated with the granting of credit terms, we have recorded the following bad debtprovisions (in an Allowance for Doubtful Accounts): Year Ended December 31, 2016 2015 2014 (in thousands)Bad debt provision$4,629 $4,335 $4,470In 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 establish credit limits, perform ongoing credit evaluation and monitor accounts to minimize the riskof loss. Despite our efforts to minimize credit risk exposure, our clients could be adversely affected if future industry trends change in such a manner as tonegatively impact their cash flows. If our clients experience a negative impact on their cash flows, it could have a material adverse effect on our results ofoperations and financial condition.46Table of ContentsImpaired Notes ReceivableWe evaluate our notes receivable for impairment quarterly and on an individual client basis. Notes receivable are generally evaluated for impairment when therespective clients are either in bankruptcy, are subject to collections activity or are 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 at the market value of relatedcollateral. Summary schedules of impaired notes receivable, and the related reserve, for the years ended December 31, 2016 , 2015 and 2014 are as follows: Impaired Notes ReceivableYear Ended December 31, Balance Beginningof Year Additions Deductions Balance End of Year Average OutstandingBalance (in thousands)2016 $6,471 $— $786 $5,685 $6,0782015 $10,208 $395 $4,132 $6,471 $8,3402014 $2,892 $9,124 $1,808 $10,208 $6,550 Reserve for Impaired Notes ReceivableYear Ended December 31, Balance Beginning ofYear Additions Deductions Balance End of Year (in thousands)2016 $2,139 $280 $— $2,4192015 $3,031 $99 $991 $2,1392014 $2,019 $2,489 $1,477 $3,031For 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 8 — Lease CommitmentsWe lease office facilities, equipment and autos under operating leases expiring on various dates through 2025. 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, 2016 :Period/Year Operating Leases (in thousands)2017 $2,4242018 1,8382019 9152020 7552021 740Thereafter 2,438Total minimum lease payments $9,110Certain 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, 2016 2015 2014 (in thousands)Operating lease expense$2,615 $2,003 $1,21047Table of ContentsNote 9— Share-Based CompensationA summary of stock-based compensation expense and related tax benefits for the years ended December 31, 2016 , 2015 and 2014 is as follows: Year Ended December 31, 2016 2015 2014 (in thousands)Stock options$3,193 $2,781 $2,596Restricted stock550 252 109Employee Stock Purchase Plan ("ESPP")509 508 375Total pre-tax stock-based compensation expense charged against income (1)$4,252 $3,541 $3,080 Total recognized tax benefit related to stock-based compensation$2,773 $1,873 $2,626(1) Stock-based compensation expense is recorded in the selling, general and administrative caption in our consolidated statements of comprehensive income.At December 31, 2016 , the unrecognized compensation cost related to unvested stock options and awards was $8.5 million . The weighted average period overwhich these awards will vest is approximately 2.7 years.2012 Equity Incentive PlanThe Company’s 2012 Equity Incentive Plan (the “Plan”) provides that current or prospective officers, employees, non-employee directors and advisors can receiveshare-based awards such as stock options, restricted stock and other stock awards. The Plan seeks to promote the highest level of performance by providing aneconomic interest in the long-term success of the Company.As of December 31, 2016 , 3.9 million shares of common stock were reserved for issuance under the Plan, including 1.3 million shares available for future grant.No stock award will have a term in excess of ten years . All awards granted under the Plan become vested and exercisable ratably over a five year period on eachyearly anniversary of the grant date.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 and the terms of the grants in accordance with the Plan.Stock OptionsA summary of our stock options outstanding under the Plan as of December 31, 2016 and changes during 2016 is as follows: Number of Shares Weighted Average ExercisePrice (in thousands) Outstanding at December 31, 20152,461 $22.16Granted569 $34.14Exercised(294) $20.46Forfeited(116) $29.80Expired(5) $23.82Outstanding at December 31, 20162,615 $24.6148Table of ContentsThe weighted average grant-date fair values and intrinsic values of options vested during 2016 , 2015 and 2014 are as follows: Year Ended December 31, 2016 2015 2014 (in thousands, except per share data)Weighted average grant-date fair value of options granted$7.46 $6.64 $8.24Total intrinsic value of options exercised$4,886 $6,497 $9,303During 2016 , the Company received $6.0 million in cash and realized $1.2 million in tax benefits from the exercise of stock options.The fair values of the stock option awards granted during 2016 , 2015 and 2014 were estimated on the dates of grant using the Black-Scholes option valuationmodel and the following assumptions: Year Ended December 31, 2016 2015 2014Risk-free interest rate2.0% 1.9% 1.9%Weighted average expected life (years)5.8 years 5.8 years 5.9 yearsExpected volatility26.0% 27.2% 36.9%Dividend yield2.0% 2.2% 2.4%The following table summarizes other information about our stock options at December 31, 2016 : December 31, 2016 (in thousands, except per share data)Outstanding: Number of options2,615Weighted average exercise price$24.61Aggregate intrinsic value$38,072Weighted average remaining contractual life (years)6.2 yearsExercisable: Number of options1,172Weighted average exercise price$18.39Aggregate intrinsic value$24,350Weighted average remaining contractual life (years)4.4 yearsRestricted StockA summary of our restricted stock outstanding under the Plan as of December 31, 2016 and changes during 2016 is as follows: Number of Restricted Shares Weighted Average Grant-Date Fair Value (in thousands) Unvested at December 31, 201540 $29.10Granted44 $34.14Vested(9) $28.76Forfeited (1)— $34.14Unvested at December 31, 201674 $32.09(1) Number of restricted shares rounds to less than a thousand.49Table of ContentsThe weighted average grant-date fair values and total fair values of restricted stock vested during 2016 , 2015 and 2014 are as follows: Year Ended December 31, 2016 2015 2014 (in thousands, except per share data)Weighted average grant-date fair value of restricted stock granted$34.14 $30.30 $28.02Total fair value of restricted stock vested$311 $123 $34Fair value is determined based on the market price of the shares on the date of grant. The weighted average remaining vesting period for the unvested restrictedstock is 3.4 years .Employee Stock Purchase PlanThe Company offers an Employee Stock Purchase Plan (“ESPP”) to all eligible employees. All full-time and certain part-time employees who have completed twoyears of continuous service with us are eligible to participate. The ESPP was scheduled to expire after 2016 , however the Board of Directors extended the ESPPfor an additional five offerings through 2021. Annual offerings commence and terminate on the respective year’s first and last calendar day.Under the ESPP, the Company is authorized to issue up to 4.1 million shares of our common stock to our employees. Pursuant to such authorization, we have 2.3million shares available for future grant at December 31, 2016 (after deducting the 2016 funding of the 53 thousand shares delivered in 2017 ). Under the terms ofthe ESPP, participants may contribute through payroll deductions up to $21,250 ( 85% of IRS limitation) of their compensation toward the purchase of theCompany’s common stock. No employee may purchase common stock which exceeds $25,000 in fair market value (determined on the option date) for eachcalendar year. The option price per share is equal to the lower of 85% of the fair market price on the first day of the offering period, or 85% of the fair market priceon the last day of the offering period.The following table summarizes information about our ESPP annual offerings for the years ended December 31, 2016 , 2015 and 2014 : Year Ended December 31, 2016 2015 2014 (in thousands, except per share data)Common shares purchased53 59 55Per common share purchase price$29.64 $26.29 $24.11Deferred Compensation PlanThe Company offers a Supplemental Executive Retirement Plan (“SERP”) for certain key executives and employees. The SERP is not qualified under Section 401of the Internal Revenue Code. The SERP allows participants to defer up to 25% of their earned income on a pre-tax basis and as of the last day of each plan year,each participant will be credited with a 25% match of up to 15% of their deferral in the form of our Common Stock based on the then-current market value. SERPparticipants fully vest in our matching contribution three years from the first day of the initial year of participation. The income deferred and our matchingcontributions are unsecured and subject to the claims of our general creditors.Under the SERP, we are authorized to issue up to 1.0 million shares of our common stock to our employees. Pursuant to such authorization, we have 0.4 million shares available for future grant at December 31, 2016 (after deducting the 2016 funding of 13 thousand shares delivered in 2017 ). At the time of issuance, suchshares were accounted for at cost as treasury stock. At December 31, 2016 , approximately 0.3 million such shares are vested and remain in the respective activeparticipants’ accounts with the trustee.50Table of ContentsThe following table summarizes information about our SERP for the plan years ended December 31, 2016 , 2015 and 2014 : Year Ended December 31, 2016 2015 2014 (in thousands)Supplemental Executive Retirement Plan ("SERP") expense (1)$511 $538 $497Treasury shares issued to fund SERP expense (2)13 15 16SERP trust account balance at December 31 (3)$34,599 $37,765 $35,310Unrealized gain (loss) recorded in SERP liability account$1,495 $(62) $1,211 (1) Both the SERP match and the deferrals are included in the selling, general and administrative caption in our consolidated statements of comprehensiveincome.(2) Shares related to the SERP match for each year are funded at the beginning of the subsequent year.(3) SERP trust account investments are recorded at their fair value which is based on quoted market prices. Differences between such amounts in the tableabove and the deferred compensation funding asset reported on our Consolidated Balance Sheets represent the value of our Common Stock held in the Planparticipants’ trust accounts and reported by us as treasury stock in our Consolidated Balance Sheets.Note 10— Other Employee Benefit PlansRetirement Savings PlanSince October 1, 1999, we have had a retirement savings plan for eligible employees (the “RSP”) under Section 401(k) of the Internal Revenue Code. The RSPallows eligible employees to contribute up to 15% of their eligible compensation on a pre-tax basis. There is no match by the Company.Note 11— DividendsWe have paid regular quarterly cash dividends since the second quarter of 2003. During 2016 , we paid regular quarterly cash dividends totaling $53.3 million asdetailed below: Quarter Ended March 31, 2016 June 30, 2016 September 30, 2016 December 31, 2016 (in thousands, except per share amounts)Cash dividends paid per common share$0.18125 $0.18250 $0.18375 $0.18500Total cash dividends paid$13,158 $13,293 $13,398 $13,493Record dateFebruary 19, 2016 May 20, 2016 August 19, 2016 November 18, 2016Payment dateMarch 25, 2016 June 24, 2016 September 23, 2016 December 23, 2016Additionally, on January 31, 2017 , our Board of Directors declared a regular quarterly cash dividend of $0.18625 per common share, which will be paid onMarch 24, 2017 to shareholders of record as of the close of business on February 17, 2017 .Cash dividends on our outstanding weighted average number of basic common shares for the years ended December 31, 2016 , 2015 and 2014 were as follows: Year Ended December 31, 2016 2015 2014Cash dividends declared per common share$0.73750 $0.71750 $0.69750Our 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 2003.51Table of ContentsNote 12— Income TaxesThe following table summarizes the provision for income taxes: Year Ended December 31, 2016 2015 2014 (in thousands)Current: Federal$33,032 $11,917 $21,030 State6,958 2,173 4,095 $39,990 $14,090 $25,125Deferred: Federal$2,163 $13,646 $(12,708) State838 4,004 (2,559) $3,001 $17,650 $(15,267)Tax provision$42,991 $31,740 $9,858Deferred 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: Year Ended December 31, 2016 2015 (in thousands)Deferred tax assets: Allowance for doubtful accounts$2,672 $1,819 Deferred compensation8,532 9,191 Accrued insurance claims5,862 5,786 Non-deductible reserves1,257 4,490 Amortization of intangibles624 971 Other858 10 $19,805 $22,267Deferred tax liabilities: Expensing of housekeeping supplies$(6,752) $(6,463) Depreciation of property and equipment(2,568) (3,237) Other(663) — $(9,983) $(9,700) Net deferred tax assets$9,822 $12,567Realization 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 deferred tax assets recorded will be realized to reduce future income taxes and therefore no valuationallowances are necessary.52Table of ContentsThe tables below provide a reconciliation between the tax expense computed by applying the statutory federal income tax rate to income before income taxes andthe provision for income taxes: Year Ended December 31, 2016 2015 2014 (in thousands)Income tax expense computed at statutory rate$42,136 $31,418 $11,098Increases (decreases) resulting from: State income taxes, net of federal tax benefit5,064 4,015 998 Federal jobs credits(4,550) (3,900) (2,925) Tax exempt interest(457) (132) (13) Other, net798 339 700Income tax expense$42,991 $31,740 $9,858Management 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, 2016 is omitted as there is no activity to report in such account for theyear ended December 31, 2016 , 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 13—Related Party TransactionsA director is a member of a law firm which was retained by us. During the years ended December 31, 2016 , 2015 and 2014 , fees paid by us to such firm did notexceed $120 thousand in any period. Additionally, such fees did not exceed, in any period, 5% of such firm’s revenues or the Company’s revenues.Note 14—Segment InformationReportable Operating SegmentsWe 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 services provided, as well as the specialized expertise required of the professional management personnel responsible for delivering eachsegment’s services. We consider the various services provided within each reportable segment to comprise an identifiable reportable operating segment since suchservices are rendered pursuant to a single service agreement, specific to that reportable segment, as well as the fact that the delivery of the respective reportablesegment’s services are managed by management personnel exclusive to 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.All revenues and net income are earned in one geographic area, the United States.53Table of Contents Housekeepingservices Dietary services Corporate andeliminations Total (in thousands)Year Ended December 31, 2016 Revenues$957,148 $605,514 $— $1,562,662Income before income taxes$90,756 $34,641 $(5,010)(1) $120,387Depreciation and amortization$6,535 $439 $522 $7,496Total assets$266,464 $127,187 $134,795(2) $528,446Capital expenditures$4,612 $410 $420 $5,442 Year Ended December 31, 2015 Revenues$909,709 $527,140 $— $1,436,849Income before income taxes$84,471 $31,612 $(26,319)(1) $89,764Depreciation and amortization$6,488 $685 $487 $7,660Total assets$228,116 $104,797 $148,036(2) $480,949Capital expenditures$3,586 $336 $1,076 $4,998 Year Ended December 31, 2014 Revenues$846,610 $446,573 $— $1,293,183Income before income taxes$70,390 $26,343 $(65,025)(1) $31,708Depreciation and amortization$6,114 $662 $493 $7,269Total assets$223,440 $95,861 $150,278(2) $469,579Capital expenditures$4,375 $391 $1,029 $5,795(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) Primarily consists of cash and cash equivalents, marketable securities, deferred income taxes and other current and noncurrent assets.Note 15— Earnings Per Common ShareBasic and diluted earnings per common share are computed by dividing net income by the weighted-average number of basic and diluted common sharesoutstanding, respectively. The weighted-average number of diluted common shares includes the impact of dilutive securities, including unvested, unexercised stockoptions and unvested restricted stock. The table below reconciles the weighted-average basic and diluted common shares outstanding for 2016 , 2015 and 2014 : Year Ended December 31, 2016 2016 2015 2014 (in thousands)Weighted average number of common shares outstanding - basic72,754 71,826 70,616Effect of dilutive securities (1)720 686 725Weighted average number of common shares outstanding - diluted73,474 72,512 71,341(1) Certain outstanding stock options awards are anti-dilutive and were therefore excluded from the calculation of the weighted average number of dilutedcommon shares outstanding. For the years ended December 31, 2016 , 2015 and 2014 , the computation excluded options to purchase 0.5 million , 0.9million and 0.5 million shares, having weighted average exercise prices of $34.14 , $29.34 and $27.97 , respectively.54Note 16—Other ContingenciesLine of CreditWe have a $ 200 million bank line of credit on which we may draw to meet short-term liquidity requirements. Amounts drawn under the line of credit are payableupon demand. At December 31, 2016 , there were no borrowings under the line of credit. However, at such date, we had outstanding a $63.7 million irrevocablestandby letter of credit, which relates to payment obligations under our insurance programs. As a result of the letter of credit issued, the amount available under theline of credit was reduced by $63.7 million at December 31, 2016 . The line of credit requires us to satisfy one financial covenant. We are in compliance with ourfinancial covenant at December 31, 2016 and expect to continue 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 at that time.On January 3, 2017 , the letter of credit increased to $67.2 million and the amount available under the line of credit was reduced by $3.5 million .Tax Jurisdictions and MattersWe provide our services throughout the continental United States and are subject to numerous local taxing jurisdictions. 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 outcomes and amount of probable assessments due,we are unable to make a reasonable estimate of a liability. We do not expect the resolution of any of these matters, taken individually or in the aggregate, to have amaterial adverse effect on our consolidated financial position or results of operations based on our best estimate of the outcomes of such matters.Legal ProceedingsWe 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 record accruals for any exposures that are probable andestimable. If an adverse outcome of such claims and legal actions is reasonably possible, we assess materiality and provide such financial disclosure, asappropriate. The Company believes it is not a party to, nor are any of its properties the subject of, any pending legal proceeding or governmental examination thatwould have a material adverse effect on the Company’s consolidated financial condition or liquidity.Government RegulationsOur clients are concentrated in the health care industry and are primarily providers of long-term care. Many of our clients’ revenues are highly reliant on Medicare,Medicaid and third-party payors’ reimbursement funding rates. New legislation or additional changes in existing regulations could be made which could directlyimpact the governmental reimbursement programs in which our clients participate. As a result, we may not know the full effects of such programs until these lawsare fully implemented and governmental agencies issue applicable regulations or guidance.Note 17—Accrued Insurance ClaimsWe currently have a Paid Loss Retrospective Insurance Plan for general liability and workers’ compensation insurance, which comprise approximately 46.2% ofour liabilities at December 31, 2016 . 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 utilizes current valuations from a thirdparty actuary, which include assumptions based on data such as historical claims, pay-out experience, demographic factors, industry trends, severity factors, andother actuarial calculations. In the event that our claims experience and/or industry trends result in an unfavorable change in our assumptions or outcomes, it wouldhave an adverse effect on our results of operations and financial condition.For workers’ compensation and general liability, we record both a reserve for the estimated future cost of claims and related expenses that have been reported butnot settled, as well as an estimate of claims incurred but not reported. Such reserves for claims incurred but not reported are developed by a third party actuarythrough review of our historical data and open claims.55Table of ContentsNote 18—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 19—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 Quarter (in thousands, except per share amounts)2016 Revenues$384,807 $386,556 $392,734 $398,565Operating costs and expenses$355,390 $357,875 $363,522 $368,122Income before income taxes$29,604 $29,683 $30,571 $30,529Net income$18,626 $18,760 $19,711 $20,299Basic earnings per common share$0.26 $0.26 $0.27 $0.28Diluted earnings per common share$0.26 $0.26 $0.27 $0.28Cash dividends declared per common share$0.18250 $0.18375 $0.18500 $0.186252015 Revenues$355,246 $355,356 $360,165 $366,082Operating costs and expenses$330,699 $329,341 $332,090 $355,667Income before income taxes$25,054 $26,257 $26,741 $11,712Net income$15,516 $16,288 $17,086 $9,134Basic earnings per common share$0.22 $0.23 $0.24 $0.13Diluted earnings per common share$0.22 $0.23 $0.24 $0.13Cash dividends declared per common share$0.17750 $0.17875 $0.18000 $0.18125 56Table 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, 2016 .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, 2016 . 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.57Table 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 2017 Annual Meeting of Shareholders and to be filed within 120 days of the close of the year ended December 31, 2016 .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 2017 Annual Meeting of Shareholders and to be filed within 120 days of the close of the fiscal year ended December 31, 2016 .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 2017 Annual Meeting of Shareholders and to be filed within 120 daysof the close of the fiscal year ending December 31, 2016 .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, 2016 . Number of Securities to be Issued UponExercise of Outstanding Options, Warrantsand Rights Weighted-Average Exercise Price ofOutstanding Options, Warrants andRights Number of Securities Remaining Availablefor Future Issuance Under EquityCompensation Plans (Excluding SecuritiesReflected in Column (a))Plan Category (a) (b) (c) (in thousands, except per share amounts) Equity compensation plans approvedby security holders 2,615(1) $24.61 4,015(2) Equity compensation plans notapproved by security holders — — — Total 2,615 $24.61 4,015 (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 1.3 million shares available for future grant under the Company’s 2012 Equity Incentive Plan. Also includes 2.3 millionand 0.4 million shares available for issuance under the Company’s 1999 Employee Stock Purchase Plan (the “1999 Plan”) as amended and the Company’sAmended and Restated Deferred Compensation Plan, respectively. Treasury shares may be issued under the 1999 Plan and the Company’s Amended andRestated Deferred Compensation Plan.58Table 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 2017 Annual Meeting of Shareholders and to be filed within 120 days of the close of the fiscal yearended December 31, 2016 .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 2017 Annual Meeting of Shareholders and to be filed within 120 days of the close of the fiscal year ended December 31, 2016 .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 Other Accounts Deductions (1) Ending Balance (in thousands)2016 Allowance for Doubtful Accounts$4,608 $4,629 $— $2,326 $6,9112015 Allowance for Doubtful Accounts$6,136 $4,335 $— $5,863 $4,6082014 Allowance for Doubtful Accounts$3,919 $4,470 $— $2,253 $6,136(1) Represent write-offs.59Table 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 Herewith3.1 Amended and Restated Articles of Incorporation of the Registrant asof May 30, 2000 10-K 0-12015 3/21/2001 3.2 —3.2 Amendment to the Amended and Restated Articles of Incorporation ofthe 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, of theRegistrant S-18 2-87625-W — 4.1 —4.2† Healthcare Services Group, Inc. Employee Stock Purchase Plan S-8 333-92835 12/15/1999 4(a) —4.3† Healthcare Services Group, Inc. Amendment No. 3 to Employee StockPurchase Plan 10-Q 0-12015 10/28/2016 4.1 —4.5† Healthcare Services Group, Inc. Amended and Restated DeferredCompensation 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 99.0 —10.3 Amended and Restated Loan Agreement dated as of December 18,2013 8-K 0-12015 12/19/2013 99.2 —10.4 Amended and Restated Committed Line of Credit Note dated as ofDecember 18, 2013 8-K 0-12015 12/19/2013 99.3 —10.5 Consent and Amendment to Loan Documents, dated as of July 9, 2015 8-K 0-12015 7/14/2015 99.2 —10.6 Amended and Restated Committed Line of Credit Note, dated as ofJuly 9, 2015 8-K 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 to Section 302 ofthe Sarbanes-Oxley Act — — — — X31.2 Certification of Principal Financial Officer pursuant to Section 302 ofthe 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 to Section 906of the Sarbanes-Oxley Act — — — — X101 The following financial information from the Company's Form 10-Kfor the fiscal year ended December 31, 2015 formatted in eXtensibleBusiness Reporting Language (XBRL): (i) Consolidated BalanceSheets, (ii) Consolidated Statements of Comprehensive Income, (iii)Consolidated Statements of Cash Flows, (iv) Consolidated Statementsof Stockholders' Equity, and (v) Notes to Consolidated FinancialStatements — — — — X† Indicates a management plan or compensatory plan or arrangement.60Table 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 24, 2017 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 24, 2017Theodore Wahl (Principal Executive Officer) /s/ John C. Shea Chief Financial Officer February 24, 2017John C. Shea (Principal Financial and Accounting Officer) /s/ Daniel P. McCartney Chairman of the Board February 24, 2017Daniel P. McCartney /s/ Michael E. McBryan Director and Executive Vice President February 24, 2017Michael E. McBryan /s/ John M. Briggs Director February 24, 2017John M. Briggs /s/ Robert L. Frome Director February 24, 2017Robert L. Frome /s/ Diane S. Casey Director February 24, 2017Diane S. Casey /s/ Robert J. Moss Director February 24, 2017Robert J. Moss /s/ Dino D. Ottaviano Director February 24, 2017Dino D. Ottaviano /s/ John J. McFadden Director February 24, 2017John J. McFadden /s/ Jude Visconto Director February 24, 2017Jude Visconto 61Exhibit 21SUBSIDIARIES OF HEALTHCARE SERVICES GROUP, INC.AS OF DECEMBER 31, 2016Entity Name Year Formed Jurisdiction DescriptionHCSG Staff Leasing Solutions, LLC ("StaffLeasing") 2011 Pennsylvania Staff Leasing offers professional employer organization services toclients in the health care industry.HCSG Insurance Corp. 2014 New Jersey HCSG Insurance Corp. is a captive insurance company whichprovides the Company with certain insurance-related services.HCSG Labor Supply, LLC ("Labor Supply") 2014 Pennsylvania Labor Supply offers personnel solutions on an indefinite basis inspecific job classifications to clients in the health care industry.HCSG East, LLC 2015 New Jersey HCSG East, LLC provides housekeeping, laundry and dietaryservices at client facilities as a subcontracted service provider onbehalf of HCSG.HCSG Central, LLC 2015 New Jersey HCSG Central, LLC provides housekeeping, laundry and dietaryservices at client facilities as a subcontracted service provider onbehalf of HCSG.HCSG West, LLC 2015 New Jersey HCSG West, LLC provides housekeeping, laundry and dietaryservices at client facilities as a subcontracted service provider onbehalf 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 healthcare industry.Exhibit 23CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe have issued our reports dated February 24, 2017 , 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, 2016 . 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 29, 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 24, 2017Exhibit 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 24, 2017 /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 24, 2017 /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, 2016 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 24, 2017 /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, 2016 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 24, 2017 /s/ John C. Shea John C. Shea Chief Financial Officer (Principal Financial and Accounting Officer)

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