10-K 1 hcsg10kfy2016.htm 10-K Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
 
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                    
Commission file number: 0-12015
 
 
 HEALTHCARE SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania
 
23-2018365
(State or other jurisdiction of 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) 639-4274

Securities registered pursuant to Section 12(b) of the 1934 Act:
Common Stock ($.01 par value)
 
The NASDAQ Global Select Market
Title of each class
 
Name of each exchange on which registered
Indicate 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  þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES  þ    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES  þ    NO  ¨
Indicate by check mark 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, to the 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.  þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer 
þ
 
Accelerated filer 
¨
 
Non-accelerated filer  
¨
 
Smaller reporting company  
¨
 
 
 
 
 
 
(Do not check if a smaller reporting company)
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES  ¨    NO  þ
The aggregate market value of the voting stock (Common Stock, $.01 par value) held by non-affiliates of the Registrant as of the close of business on June 30, 2016 was approximately $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 not a 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). 72,812,000

DOCUMENTS INCORPORATED BY REFERENCE

Portions 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 II and III of this Annual Report on Form 10-K.

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Healthcare Services Group, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2016

TABLE OF CONTENTS

PART I
 
PART II
 
PART III
 
PART IV
 



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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This 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 the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, which are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, our beliefs and assumptions. Words such as “believes,” “anticipates,” “plans,” “expects,” “will,” “goal,” and similar expressions are intended to identify forward-looking statements. The inclusion of forward-looking statements should not be regarded as a representation by us that any of our plans will be achieved. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Such forward-looking information is also subject to various risks and uncertainties. Such risks and uncertainties include, but are not limited to, risks arising from our providing services exclusively to the health care industry, primarily providers of long-term care; credit and collection risks associated with this industry; having 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; our claims experience related to workers’ compensation and general liability insurance; the effects of changes in, or interpretations of laws and regulations governing the industry, our workforce and services provided, including state and local regulations pertaining to the taxability of our services and other labor related matters such as minimum wage increases; continued realization of tax benefits arising from our corporate reorganization and self-funded health insurance program; risks associated with the reorganization of our corporate structure; and the risk factors described in Part I in this report under “Government Regulation of Clients,” “Competition” and “Service Agreements 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 resulted in, and could continue to result in, significant additional bad debts in the near future. Additionally, our operating results would be adversely affected if unexpected increases in the costs of labor and labor-related costs, materials, supplies and equipment used in performing services could not be passed on to our clients.

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


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PART I

In 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.

General

The Company is a Pennsylvania corporation, incorporated on November 22, 1976. We provide management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary service departments of the health care industry, including nursing homes, retirement complexes, rehabilitation centers and hospitals located throughout the United States. We believe that we are the largest provider of our services to the long-term care industry in the United States, rendering such services to over 3,500 facilities in the continental United States as of December 31, 2016. We provide our Housekeeping services 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 government reimbursement programs, our clients receive government reimbursements related to Medicare and Medicaid. Therefore, they are directly affected by any legislation and regulations relating to Medicare and Medicaid reimbursement programs.

Segment Information

The information called for herein is discussed below in Description of Services, and within Item 8 of this Annual Report on Form 10-K under Note 14 of Notes to Consolidated Financial Statements for the years ended December 31, 2016, 2015 and 2014.

Description of Services

We are organized into, and provide our services through two reportable segments: housekeeping, laundry, linen and other services (“Housekeeping”), and dietary department services (“Dietary”). The Company’s corporate headquarters provides centralized financial management and support, legal services, human resources management 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 of the department serviced, employing the Housekeeping or Dietary personnel located at our clients’ facilities and providing certain supplies. We also provide services on the basis of management-only agreements for a limited number of clients. Under a management-only agreement, we provide management and supervisory services while the client facility retains payroll responsibility for the non-supervisory staff. Our agreements with clients typically provide for 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 typically adopt and follow our clients’ employee wage structure, including policies of wage rate increases, and pass through to the client any labor cost increases 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 the services of each segment provide opportunities for growth.

Housekeeping

Housekeeping represented approximately 61.3%, or $957.1 million, of consolidated revenues in 2016. The services provided under this segment include managing the client’s housekeeping department which is principally responsible for the cleaning, disinfecting and sanitizing of resident rooms and common areas of a client’s facility, as well as the laundering and processing of the bed linens, uniforms, resident personal clothing and other assorted linen items utilized at a client facility. Upon beginning service with a client facility, we typically hire and train the employees that were previously employed by such facility and assign an on-site manager to supervise and train the front line personnel and coordinate housekeeping services with other facility support functions in accordance with client request. Such management personnel also oversee the execution of various of quality and cost-control procedures including continuous training and employee evaluation, 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 Housekeeping revenues. Changes in employee compensation resulting from legislative or other

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governmental actions, anticipated staffing levels, and our use of labor may adversely impact these costs. Similarly, an increase in the costs of supplies, including linen costs, consumed in performing Housekeeping services may impact Housekeeping’s operating performance. In 2016, the cost of Housekeeping supplies as a percentage of Housekeeping revenues was 7.8%. Generally, the cost of such supplies is dictated by specific product market conditions, which are subject to price fluctuations influenced by factors outside of our control. Where possible, we negotiate fixed pricing from vendors for an extended period of time on certain supplies to mitigate such price fluctuations.

Dietary

Dietary services represented approximately 38.7%, or $605.5 million, of consolidated revenues in 2016. Dietary consists of managing the client’s dietary department which is principally responsible for food purchasing, meal preparation and professional dietitian services, which includes the development of menus that meet the dietary needs of residents. On-site management is responsible for all daily dietary department activities, with regular support being provided by a District Manager specializing in Dietary services, as well as a registered dietitian. We also offer clinical consulting services to facilities to assist them in cost containment 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. In 2016, the costs of labor and food-related supplies represented approximately 53.8% and 38.0% of Dietary revenues, respectively.

Operational Management Structure

By applying our professional management techniques, we offer our clients the ability to manage certain housekeeping, laundry, linen, facility maintenance and dietary 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 are responsible for the management of staff, scheduling, procurement, customer service, quality control and overall day-to-day management of the Housekeeping or Dietary function.

Districts typically consist of eight to twelve facilities and District Managers oversee the operations of the facilities within their districts. Their responsibilities include oversight of Facility Managers through management of personnel, operational performance, quality control monitoring, customer satisfaction and adherence 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 provide management support, training and personnel management, while ensuring operational performance consistent with our systems and budgets. Regional Directors are primarily responsible for marketing our services within their regions, which involves industry outreach, overseeing and participation in contract negotiation, and working 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 existing clients and obtain new clients.


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Market

The 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 care facilities (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, profit or 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 factors including facility type, size, location, and service opportunities (Housekeeping or Dietary). The market for our services, particularly in long-term and post-acute care, is expected to continue to grow as the population of the United States ages and as government reimbursement policies require increased cost control or containment by the constituents that comprise our target market.

Marketing and Sales

Our services are marketed at four levels of our organization: at the corporate level by the President & Chief Executive Officer, Executive Vice Presidents and Senior Vice Presidents; at the divisional level by Divisional Vice Presidents; at the regional level by the Regional Vice Presidents/Divisional Managers and Directors; and at the district level by District Managers. We provide incentive compensation to our operational personnel based on achieving financial and non-financial goals and objectives which are aligned with the key elements the Company believes are necessary for it to achieve overall improvement in its financial results, 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 trade associations 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 conduct our 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 the service 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 and systems at the client facilities.

Government Regulation of Clients

Our clients are subject to government regulation. Although laws and rulings directly affect how clients are paid for certain services, we do not directly participate in 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 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 agreed upon payment terms (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 estimate the ultimate impact of any further changes in reimbursement programs affecting our clients’ future results of operations and/or their impact on our cash flows and operations.

Environmental Regulation

The Company’s operations are subject to various federal, state and/or local laws concerning emissions into the air, discharges into the waterways and the generation, handling and disposal of waste and hazardous substances. The Company’s past expenditures relating to environmental compliance have not had a material effect on the Company and are included in normal operating expenses. These laws and regulations are constantly evolving, and it is impossible to predict accurately the effect they may have upon the capital expenditures, earnings and competitive position of the Company in the future. Based upon information currently available, management believes that expenditures relating to environmental compliance will not have a material impact on the financial position of the Company.


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Service Agreements and Collections

We provide our services primarily pursuant to full service agreements with our clients. In such agreements, we are responsible for the management of the department serviced, employing the Housekeeping or Dietary personnel located at our clients’ facilities and providing certain supplies. We also provide services on the basis of management-only agreements for a limited number of clients. In such agreements, our services involve providing on-site management personnel, while the non-supervisory staff remain employees of the respective client. Although many of our service agreements are cancelable on short notice, we have historically had a favorable client retention rate and expect to continue to maintain satisfactory relationships with our clients.

We have had varying collections experiences with respect to our accounts and notes receivable. We have sometimes been required to extend the period of payment for certain clients beyond contractual terms. Such clients include those who have terminated service agreements and slow payers experiencing financial difficulties. 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 $4.5 million in the years ended December 31, 2016, 2015 and 2014, respectively (see Schedule II - Valuation and Qualifying Accounts and Reserves for year-end balances). As a percentage of total revenues, these provisions represented approximately 0.3% for each of the years ended December 31, 2016, 2015 and 2014. In making our credit evaluations, we consider customer-specific risks as well as the general collection risk associated with trends in the long-term care industry. We establish 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 “Government Regulation 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 on our consolidated results of operations and financial condition.

Competition

We compete primarily with the in-house service departments of our potential clients. Most health care facilities perform their own support service functions without relying upon outside management firms. In addition, a number of local firms compete with us in the regional markets in which we conduct business. Several national service firms are larger and have greater financial and marketing resources than us, although historically such firms have concentrated their marketing efforts primarily on hospitals, rather than the long-term care facilities typically serviced by us. Although the competition to provide service to health care facilities is strong, we believe that we compete effectively for new agreements, as well as renewals of existing agreements, based upon the quality and dependability of our services and the cost savings we can secure for clients.

Employees

At 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 by individual 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 with our employees to be good.

Available Information

Healthcare Services Group, Inc. is a reporting company under the Securities Exchange Act of 1934, as amended, and files reports, proxy statements and other information with the Securities and Exchange Commission (the “Commission” or “SEC”). The public may read and copy any of our filings at the Commissioner’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. Additionally, because we make filings to the Commission electronically, you may access this information at the Commission’s internet site: www.sec.gov. This site contains reports, proxies and information statements and other information regarding issuers that file electronically with the Commission.

Website Access

Our website address is www.hcsg.com. Our filings with the Commission, as well as other pertinent financial and Company information are available at no cost on our website as soon as reasonably practicable after the filing of such reports with the Commission.

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Item 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 as these factors could materially and adversely affect our business, results of operations, financial condition and cash flows. We believe that the risks described below are our most significant risk factors but there may be risks and uncertainties that are not currently known to us or that we 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 operating segments. In addition, if any of these clients change or alter current payment terms it could increase our accounts receivable balance and have a material adverse effect on 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 from Medicare, Medicaid and other third-party payors. Rates from such payors may be altered or reduced, thus affecting our clients’ results of operations and cash flows.

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 to contain health care costs will ultimately impact our clients’ revenues through reimbursement rate modifications. Congress has enacted a number of laws during the past decade that have significantly altered, or may alter, overall government reimbursement for nursing home services. Because many of our clients’ revenues are generally highly reliant on Medicare, Medicaid and other third-party payors’ reimbursement funding rates and mechanisms, the overall effect of these laws and trends in the long term care industry have affected and could adversely affect our clients’ cash flows, resulting in their inability to make payments to us on agreed upon payment terms. These factors, in addition to delays in payments from clients have resulted in, and could continue to result in, significant additional bad debts in the future.

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 our operating costs. Any requirements to provide additional benefits to our employees or the payment of penalties if such benefits are not provided, would increase our expense. If we are unable to pass-through these charges to our clients to cover this expense, such increases in expense could adversely impact our operating costs and results of operations.

In addition, often new regulations result in additional reporting requirements for businesses. These and other requirements could result in increased costs, expanded liability 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 of reimbursements to nursing homes.

Many states in which our clients are located have significant budget deficits as a result of lower than projected revenue collections and increased demand for the funding of entitlements. As a result of these and other adverse economic factors, state Medicaid programs have and may continue to revise reimbursement structures for nursing home services. Any disruption or delay in the distribution of Medicaid and related payments to our clients will adversely affect their cash flows and impact their ability to pay us as agreed upon for the services provided.


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The Company has substantial investment in the creditworthiness and financial condition of our customers.

The largest current asset on our balance sheet is our accounts and notes receivable balance from our customers. We grant credit to substantially all of our customers. 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 the impact of additional regulatory actions. We have sometimes been required to extend the period of payment for certain clients beyond contractual terms. Such clients include those who have terminated service agreements and slow payers experiencing financial difficulties. In making our credit evaluations, in addition to analyzing and anticipating where possible the specific cases described above, we consider the general collection risk associated with trends in the long-term care industry. We also establish credit limits, perform ongoing credit 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. If our clients experience a negative impact in their cash flows, it could have a material adverse effect on our consolidated results of operations, financial condition and cash flows.

We have a Paid Loss Retrospective Insurance Plan for general liability and workers’ compensation insurance.

We carry a high deductible general liability and workers’ compensation program and therefore retain a substantial portion of the risk associated with the expected losses under such programs. Under our insurance plans for general liability and workers’ compensation, predetermined loss limits are arranged with our insurance company to limit both our per occurrence cash outlay and annual insurance plan cost. We regularly evaluate our claims pay-out experience and other factors related to the nature of specific claims in arriving at the basis for our accrued insurance claims estimate. Our evaluation is based primarily on current information derived from reviewing our claims experience and industry trends. In the event that our known claims experience and/or industry trends result in an unfavorable change in initial 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 an adverse effect on our consolidated results of operations, financial condition and cash flows. During 2014, the Company recorded a one-time, non-cash adjustment of $37.4 million related to a change in estimate and reserve methodology through the utilization of a third party actuary. Although we engage third-party experts to assist us in estimating appropriate insurance accounting reserves, the determination of the required reserves is dependent upon significant actuarial judgments that have a material impact on our reserves. Changes in our insurance reserves as a result of our periodic evaluation of the related liabilities may cause significant fluctuations 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 our income tax estimates are reasonable. Although, if the Internal Revenue Service or other taxing authority disagrees with a taken tax position and upon final adjudication we are unsuccessful, we could incur additional tax liability, including interest and penalties. Such costs and expenses could have a material adverse impact on our results of operations and financial position. Additionally, the taxability of our services is subject to various interpretations within the taxing jurisdictions of our markets. Consequently, in the ordinary course of business, a jurisdiction may contest our reporting positions with respect to the application of its tax code to our services. A conflicting position taken by a state or local taxation authority on the taxability of our services could result in additional tax liabilities and could negatively impact our competitive position in that jurisdiction. Additionally, if we fail to comply with applicable tax laws and regulations, we could suffer civil or criminal penalties in addition to the delinquent tax assessment. In the taxing jurisdictions where our services have been determined to be subject to tax, the jurisdiction may increase the tax rate assessed on such services. We seek to pass-through to our clients such tax increases. In the event we are not able to pass-through any portion of the tax increase, our gross margin could be adversely impacted.


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Our 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 damages and expenses and may adversely affect our reputation and business status with our clients, whether we are ultimately determined to be liable or not. The outcome of litigation, particularly class action and collective action lawsuits and regulatory actions, is difficult to assess or quantify. The plaintiffs in these types of actions may 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 an estimated loss contingency in our financial statements if it were probable that a liability had been incurred and the amount of the loss could be reasonably estimated. 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, and risks and consequences of legal actions, regardless of merit, our results of operations and financial position could be adversely affected or cause variability in our results 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 60 to 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 the amount of services we provide or terminate all services pursuant to the terms of our service agreements. Any loss of a significant number of clients during the first year of providing services, for which we have incurred significant start-up costs or have invested in an equipment installation, could in the aggregate materially adversely 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 believe that our ability to recruit and sustain the internal development of managerial personnel is an important factor impacting future operating results and our ability to successfully execute projected growth strategies. Our professional management personnel are the key personnel in maintaining and selling additional services to current clients and obtaining new clients.

Governmental regulations related to labor, employment, immigration and health and safety could adversely impact our results of operations and financial condition.

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 laws frequently evolve through case law, legislative changes and changes in regulatory interpretation, implementation and enforcement. Our policies and procedures and compliance programs are subject to adjustments in response to these changing regulatory and enforcement environments, which could increase our cost of services provided. Although we have contractual rights to pass cost increases we incur to our clients due to regulatory changes, our delay in, or inability to pass such costs of our compliance with legislative changes and changes in regulatory interpretation or enforcement in general, through to our clients, could have a material adverse effect 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 with state and local departments of health requirements. Expenses resulting from failed inspections of the departments that we service could result in our clients being fined and seeking recovery from us, which could also adversely impact our financial condition, results of operations and cash flows.


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We may be adversely affected by inflationary or market fluctuations in the cost of products consumed in providing our services or our cost of labor. Additionally, we rely on certain vendors for 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 certain supply purchases with national vendors through agreements containing negotiated prospective pricing. In the event such vendors are not able to comply with their obligations under the agreements and we are required to seek alternative suppliers, we may incur increased costs of supplies.

Dietary supplies, to a much greater extent than Housekeeping supplies, are impacted by commodity pricing factors, which in many cases are unpredictable and outside of our control. 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 incremental costs 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 a timing delay in passing on such increases to our clients. It is this type of spike in Dietary supplies costs that could most adversely affect Dietary’s operating performance. The adverse effect would be realized if we delay in passing on such costs to our clients or in instances where we may not be able to pass such increase on to our clients until the time of our next scheduled service billing review. We 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 a party 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. As collective bargaining agreements are renegotiated, we may need to increase the wages paid to bargaining unit employees covered by such collective bargaining agreements. Although we have contractual rights to pass such union and minimum wage increases through to our clients, our delay in, or inability to pass such wage 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 by disease-producing organisms, or pathogens, such as listeria monocytogenes, salmonella, campylobacter, hepatitis A, trichinosis and generic E. coli. Because these pathogens 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 the manufacturing, processing or food service level. Our suppliers’ manufacturing facilities and products are subject to extensive laws and regulations relating to health, food preparation, sanitation and safety standards. Difficulties or failures by these companies in obtaining any required licenses or approvals or otherwise complying with such laws and regulations could adversely affect our revenue that is generated from these companies. Furthermore, there can be no assurance that compliance 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 is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that the Company’s products caused injury or illness could adversely affect the 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 of our 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, results of 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 could increase 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 investment portfolio which could adversely impact our financial condition and results of operations. Our marketable securities are primarily invested in municipal bonds. We believe that our investment criteria, which include limiting our concentrations of investments in individual locations’ bonds, requiring certain credit ratings and monitoring our investments’ duration period, reduce our exposure related to the financial distress and budget shortfalls that many state and local governments currently face. Increases in market interest rates in our borrowing agreements that have variable interest rates could adversely affect our payment obligations and adversely affect our liquidity and earnings.


11




Investor and market expectations regarding our financial performance are high and rely greatly on execution of our growth strategy and related increases in financial performance.

Management believes the historical performance of our Common Stock reflect high market expectations for our future operating results. Our ability to attract new clients 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 with new clients, providing new services to existing clients, obtaining modest price increases on service agreements with clients and maintaining internal cost reduction strategies at our various operational levels. In respect to providing new services to new or existing clients, our strategy is to achieve corresponding profit margins in each of our segments. If we are unable to continue either historical client revenue and profitability growth rates or projected improvement, our operating performance may be adversely affected and the high expectations for our market performance may not be met. Any failure to meet the market’s high expectations for our revenue and operating results may have an adverse effect on the market price of our Common Stock.

Failure to maintain effective internal control over financial reporting could have a material adverse effect on our ability to report our financial results on a timely and accurate basis.

Failure to maintain appropriate and effective internal controls over our financial reporting could result in misstatements in our financial statements and potentially subject 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 our reporting 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 our internal 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 are subject 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 declaration and payment of cash dividends, including Section 1551(b) of the Pennsylvania Business Corporation Law, and (ii) the policy remains in our best interests, which determination will be based on a number of factors, including the impact of changing laws and regulations, economic conditions, our results of operations and/or financial condition, capital resources, the ability to satisfy financial covenants and other factors considered relevant by the Board of Directors. While we have continually increased the amount of our dividends, given these considerations, there can be no assurance these increases will continue and our Board of Directors may 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. Any decrease in the amount of the dividend, or suspension or discontinuance of payment of a dividend, could cause our stock price to decline.



12




Item 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 in Pennsylvania, 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 our operating segments in their respective geographical areas.

We are also provided with office and storage space at each of our client facilities.

Management does not foresee any difficulties with regard to the continued utilization of all of the aforementioned premises. We also believe that such properties are sufficient 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 located at our corporate office, divisional and regional offices. We have housekeeping equipment at all client facilities where we provide services under a full service housekeeping agreement. Generally, the aggregate cost of housekeeping equipment located at each client facility is approximately $3,000. Additionally, we have laundry installations at certain client facilities. Our cost of such laundry installations ranges between $5,000 and $100,000. We believe that such laundry equipment, office furniture and equipment, housekeeping equipment and vehicles are sufficient 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, personal injury, 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 legal proceeding or governmental examination that would have a material adverse effect on the Company’s consolidated financial condition or liquidity. However, in light of the uncertainties involved in such proceedings, the ultimate outcome of a particular matter could become material to the Company’s results of operations for a particular period depending on, among other factors, the size of the loss or liability imposed and the level of the Company’s operating income for that period.

Item 4.   Mine Safety Disclosures.

Not applicable.


13




PART II

Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our 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:
 
 
2016
Quarter Ended
 
High
 
Low
March 31, 2016
 
$
36.99

 
$
31.50

June 30, 2016
 
$
41.40

 
$
36.47

September 30, 2016
 
$
42.18

 
$
36.58

December 31, 2016
 
$
40.88

 
$
34.83

 
 
 
2015
Quarter Ended
 
High
 
Low
March 31, 2015
 
$
34.75

 
$
29.93

June 30, 2015
 
$
33.90

 
$
29.42

September 30, 2015
 
$
35.49

 
$
31.57

December 31, 2015
 
$
38.49

 
$
33.10


Holders

As 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 2016 annual meeting of shareholders, we believe we may have approximately 7,000 beneficial owners of our Common Stock.

Dividends

During 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

 
$
0.18500

Total cash dividends paid
$
13,158

 
$
13,293

 
$
13,398

 
$
13,493

Record date
February 19, 2016

 
May 20, 2016

 
August 19, 2016

 
November 18, 2016

Payment date
March 25, 2016

 
June 24, 2016

 
September 23, 2016

 
December 23, 2016


On 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 to shareholders 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 amount of the dividends, we expect to continue to pay a regular quarterly cash dividend. In connection with the establishment of our dividend policy, we adopted a Dividend Reinvestment Plan in 2003.


14




Performance Graph

The graph below matches Healthcare Services Group, Inc.’s cumulative five-year total shareholder return on common stock with the cumulative total returns of the S&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 in each index (with the reinvestment of all dividends) from December 31, 2011 to December 31, 2016. The stock price performance included in this graph is not necessarily 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 service offerings 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 2000 index 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
hcsg10kfy2014_chart-54733a03.jpg
*$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
 
2016
Healthcare Services Group, Inc.
 
$
100.00

 
$
135.33

 
$
169.87

 
$
189.76

 
$
218.52

 
$
250.36

S&P 500
 
$
100.00

 
$
116.00

 
$
153.58

 
$
174.60

 
$
177.01

 
$
198.18

Russell 2000
 
$
100.00

 
$
116.35

 
$
161.52

 
$
169.43

 
$
161.95

 
$
196.45

NASDAQ Composite
 
$
100.00

 
$
116.41

 
$
165.47

 
$
188.69

 
$
200.32

 
$
216.54


15




Item 6.   Selected Financial Data.

The following selected condensed consolidated financial data has been derived from, and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and Notes thereto, included elsewhere in this report on Form 10-K and incorporated herein by reference.

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

 
$
1,077,435

Net income
$
77,396

 
$
58,024

 
$
21,850

 
$
47,129

 
$
44,214

Basic earnings per common share
$
1.06

 
$
0.81

 
$
0.31

 
$
0.68

 
$
0.65

Diluted earnings per common share
$
1.05

 
$
0.80

 
$
0.31

 
$
0.67

 
$
0.65

Selected Balance Sheet Data

 

 

 

 

Total assets
$
528,446

 
$
480,949

 
$
469,579

 
$
425,342

 
$
331,183

Stockholders’ equity
$
338,842

 
$
296,456

 
$
275,830

 
$
285,143

 
$
229,570

Selected Other Financial Data

 

 

 

 

Working capital
$
313,753

 
$
269,277

 
$
213,414

 
$
207,750

 
$
200,182

Cash dividends declared per common share
$
0.73750

 
$
0.71750

 
$
0.69750

 
$
0.67750

 
$
0.65750

Weighted average number of common shares outstanding - basic
72,754

 
71,826

 
70,616

 
69,206

 
67,511

Weighted average number of common shares outstanding - diluted
73,474

 
72,512

 
71,341

 
70,045

 
68,485


Item 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 financial statements and the related notes to those statements included elsewhere in this report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Our actual results and the timing of events may differ materially from those contained in these forward-looking statements 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 a calendar 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 Operations

The following discussion is intended to provide the reader with information that will be helpful in understanding our financial statements, including the changes in certain key items in comparing financial statements period to period. We also intend to provide the primary factors that accounted for those changes, as well as a summary of how certain accounting principles affect our financial statements. In addition, we are providing information about the financial results of our two operating segments to further assist in understanding how these segments and their results affect our consolidated results of operations. This discussion should be read in conjunction with our financial statements as of December 31, 2016 and the year then ended and the notes accompanying those financial statements.

Overview

We provide management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary service departments of the health care industry, including nursing homes, retirement complexes, rehabilitation centers and hospitals located throughout the United States. We believe that we are the largest provider of housekeeping and laundry management services to the long-term care industry in the United States, rendering such services to over 3,500 facilities throughout the continental United States as of December 31, 2016.


16




We provide our services primarily pursuant to full service agreements with our clients. In such agreements, we are responsible for the management of the department serviced, employing the Housekeeping or Dietary personnel located at our clients’ facilities and providing certain supplies. We also provide services on the 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 resident rooms 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 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 professional services, 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 $957.1 million of 2016 total revenues. Dietary services were provided to over 1,000 client facilities at December 31, 2016 and contributed approximately 38.7% or $605.5 million 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 flexibility and cost efficiency in meeting its insurance needs. In 2015, the Company completed a corporate restructuring by capitalizing three new operating entities and transitioning 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 administrative support 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 competing with 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 a national or local level, which have a significant presence or impact on our procurement of new clients in our market. We believe the primary revenue drivers of our business are our ability to obtain new clients and to pass through, by means of service billing increases, increases in our cost of providing the services. In addition to the recoupment of costs increases, we aim to obtain modest annual revenue increases from our existing clients to attain desired profit margins at the facility level. The primary economic factor in acquiring new clients is our ability to demonstrate the cost-effectiveness of our services, because many of our clients’ revenues are generally highly reliant on Medicare and Medicaid reimbursement funding rates and mechanisms. Therefore, their economic decision-making process is driven significantly by their reimbursement funding rate structure and the financial impact on their reimbursement as a result of engaging us for the respective services. The primary operational factor is our ability to demonstrate to potential clients the benefit of being relieved of the administrative and operational challenges related to the day-to-day management of their housekeeping and dietary operations. In addition, we must be able to assure new clients that we can improve 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 with respect 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
 
2014
Revenues
100.0
%
 
100.0
%
 
100.0
%
Operating costs and expenses:
 
 
 
 
 
Costs of services provided
85.7
%
 
86.0
%
 
89.3
%
Selling, general and administrative
6.7
%
 
7.8
%
 
8.3
%
Net investment and interest income
0.2
%
 
0.0
%
 
0.1
%
Income before income taxes
7.8
%
 
6.2
%
 
2.5
%
Income taxes
2.8
%
 
2.2
%
 
0.8
%
Net income
5.0
%
 
4.0
%
 
1.7
%

17





Subject to the factors noted in the Cautionary Statement Regarding Forward Looking Statements included in this report on Form 10-K, we anticipate, our financial performance in 2017 may be comparable to historical ranges, absent non-recurring charges, as they relate to consolidated revenues. The 2015 percentages were negatively impacted by mediated settlements regarding certain labor and employment related matters. The Company agreed to these mediated settlements while denying any violations. The 2014 percentages were negatively impacted by a one-time, non-cash adjustment related to a change in estimate in our self-insurance reserve 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 respective 2016 percentages noted above. Furthermore, we expect the sources of growth in 2017 for the respective operating segments will mirror those historically experienced: growth in Dietary is expected to come from our current Housekeeping client base, while growth in Housekeeping will primarily come from obtaining new 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, to monitor 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’s revenues. Housekeeping is more significantly impacted by costs of labor than Dietary. Labor costs accounted for approximately 80.2% of Housekeeping revenues in 2016. Dietary labor costs accounted for approximately 53.8% of Dietary revenues in 2016. Changes in wage rates as a result of legislative or collective bargaining actions, anticipated staffing levels, and other unforeseen variations in our use of labor or in management labor costs will result in variability of these costs. Housekeeping supplies, including linen products, accounted for approximately 7.8% of Housekeeping revenues in 2016. In contrast, supplies consumed in performing our Dietary services accounted for approximately 38.0% of Dietary revenues. Generally, fluctuations in these expenses are influenced by factors outside of our control and are unpredictable. This is because Housekeeping and Dietary supplies are principally commodity products and are affected by market conditions 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 and such 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 to make payments to us in accordance with agreed-upon payment terms. The climate of legislative uncertainty has posed, and will continue to pose, both risks and opportunities 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 stability and cost efficiencies.


18




Years Ended December 31, 2016 and 2015

The following table sets forth 2016 income statement key components that we use to evaluate our financial performance on a consolidated and reportable segment basis compared to 2015. The differences between the reportable segments’ operating results and other disclosed data and our consolidated financial statements relate primarily to corporate level transactions and adjustments related to transactions recorded at the reportable segment level which use methods other than generally 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
 %

Revenues

Consolidated

Consolidated 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 Reportable Segments.

Reportable Segments

Housekeeping’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




Costs of services provided

Consolidated

Consolidated 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 by higher 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 the changes 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 key indicators 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
 
% Change
Bad 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’s ongoing initiative to promote safety and accident prevention in the workplace, as well as proactive management of workers’ compensation claims, which have positively impacted our claims experience.

Reportable Segments

Costs of services provided for Housekeeping, as a percentage of Housekeeping revenues for 2016, decreased to 90.5% compared to 90.7% in 2015. Cost of services 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 respective segment’s revenues:
 
 
Year Ended December 31,
Costs of Services Provided - Key Indicators as % of Segment Revenue
 
2016
 
2015
 
% Change
Housekeeping 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 for whom we provide supplies or do not provide supplies. Management focuses on building efficiencies and managing labor and other costs at the facility level, as well as managing supply chain costs, for new and existing facilities.

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 the amount of the deferred compensation liability. Losses on the deferred compensation plan

20




investments are reflected as decreases to selling, general and administrative 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 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 settlements regarding 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 balance of investments held in our deferred compensation plan.

Consolidated Investment and Net Interest Income

Investment 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 to favorable market fluctuations in the value of our investments.

Consolidated Income Taxes

Our 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 arise primarily 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, the Company receives tax credits, and although the Company has increased its participation in the program year-over-year, the increase in the effective tax rate is primarily 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 on December 31, 2019.


21




Years Ended December 31, 2015 and 2014

The following table sets forth 2015 income statement key components that we use to evaluate our financial performance on a consolidated and reportable segment basis compared to 2014. The differences between the reportable segments’ operating results and other disclosed data and our consolidated financial statements relate primarily to corporate level transactions and adjustments related to transactions recorded at the reportable segment level which use methods other than generally 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
 %

Revenues

Consolidated

Consolidated 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 Reportable Segments.

Reportable Segments

Housekeeping’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




Costs of services provided

Consolidated

Consolidated 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 in our consolidated revenues, partially offset by the one-time, non-cash change in estimate related to our self-insurance liability that occurred during 2014. Certain significant components within our costs of services are subject to fluctuation with the changes in our business and client base. The increase during 2015 compared to 2014 relates primarily to labor and other labor related costs. 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 86.0% in 2015 from 89.3% in 2014. The following table provides a comparison of the key indicators 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
 
% Change
Bad 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-cash charge to reflect certain costs related to the estimated current and future insurance claims projected to be paid out.

Reportable Segments

Costs of services provided for Housekeeping, as a percentage of Housekeeping revenues for 2015, decreased to 90.7% compared to 91.7% in 2014. Costs of services 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 respective segment’s revenues:
 
 
Year Ended December 31,
Costs of Services Provided - Key Indicators as % of Segment Revenue
 
2015
 
2014
 
% Change
Housekeeping 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 of clients for whom we provide supplies or do not provide supplies. Management focuses on building efficiencies and managing labor and other costs at the facility level, as well as managing supply chain costs, for new and existing facilities.

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




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

Investment and interest income, as a percentage of consolidated revenues, decreased to less than 1% for 2015 compared to 0.1% for 2014. We recognized a decrease 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 Taxes

Our 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 arise primarily 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 greater impact 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 Work Opportunity Tax Credit (“WOTC”) program which has had a history of expiration with short renewal periods. The WOTC expired at December 31, 2013 but was subsequently extended to December 31, 2019. The tax effect of this renewal was recorded in the fourth quarter of 2015.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting standards generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

We consider the policies discussed below to be critical to an understanding of our financial statements because their application requires judgment. Therefore, it should be noted that financial reporting results rely on estimating the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies and estimates are described in the following paragraphs. For these estimates, we caution that future events do not always occur as forecasted, and the best estimates routinely require adjustment. Any such adjustments or revisions to estimates could result in material differences to previously reported amounts.

The policies discussed are not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP, with no need for our judgment in their application. There are also areas in which our judgment in selecting another available alternative would not produce a materially different result. See our audited consolidated financial statements and notes thereto which are included in this Annual Report on Form 10-K, which contain accounting policies and other disclosures required by U.S. GAAP.

Allowance for Doubtful Accounts

The allowance for doubtful accounts (the “Allowance”) is established as losses are estimated to have occurred through a provision for bad debts charged to earnings. The Allowance is evaluated based on our ongoing review of accounts and notes receivable and is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

We have had varying collections experience with respect to our accounts and notes receivable. We have sometimes been required to extend the period of payment for certain clients beyond contractual terms. Such clients include those who have terminated service agreements and slow payers experiencing financial difficulties. In making credit evaluations, in addition to analyzing and anticipating, where possible, the specific cases described above, we consider customer-specific risks as well as the general collection risks associated with trends in the long-term care industry. We establish credit limits, perform ongoing credit evaluations, and monitor 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. We generally follow a policy of reserving for receivables due from clients in bankruptcy, clients with which we are in litigation for collection and other slow paying clients. The Allowance is adjusted as additional information

24




becomes available to more accurately estimate collectability. Once our recovery of a receivable is determined, through litigation, bankruptcy proceedings or negotiation, to be less than the recorded amount on our balance sheet, we will charge 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 in Bankruptcy or in/or Pending Collection/Litigation
 
Net Write-offs of Client Accounts
 
Bad Debt Provision
 
Allowance for Doubtful Accounts
 
 
(in thousands)
2014
 
$
14,903

 
$
2,253

 
$
4,470

 
$
6,136

2015
 
$
12,073

 
$
5,863

 
$
4,335

 
$
4,608

2016
 
$
15,873

 
$
2,326

 
$
4,629

 
$
6,911


At December 31, 2016, we identified accounts totaling $15.9 million that require an Allowance based on potential impairment or loss of value. An Allowance totaling $6.9 million was provided for these accounts at such date. Actual collections of these accounts could differ from our current estimate. If our actual collection 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 and Capital Resources below, and in this Annual Report on Form 10-K in Part I under “Risk Factors,” “Government Regulation of Clients” and “Service Agreements and Collections,” change in such a manner as to negatively impact the cash flows of our clients. If our clients experience a negative impact in their cash flows, it could have a material adverse effect on our results of operations and financial condition.

Accrued Insurance Claims

We currently have a Paid Loss Retrospective Insurance Plan for general liability and workers’ compensation insurance, which comprise approximately 46.2% of our liabilities at December 31, 2016. Under our insurance plans for general liability and workers’ compensation, predetermined loss limits are arranged with our insurance company to limit both our per occurrence cash outlay and annual insurance plan cost. Our accounting for this plan utilizes current valuations from a third party actuary, which include assumptions based on data such as historical claims, pay-out experience, demographic factors, industry trends, severity factors, and other actuarial calculations. In the event that our claims experience and/or industry trends result in an unfavorable change in our assumptions or outcomes, it would have 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 but not 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 actuary through 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

 
$
26,178

Claim payments
(35,089
)
 
(27,883
)
 
(24,879
)
Reserve accruals:


 


 


Current year accruals
40,492

 
41,871

 
30,642

Changes to the provision for prior years

 

 
36,321

Change in accrued insurance claims
$
5,403

 
$
13,988

 
$
42,084

Accrued insurance claims - December 31,
$
87,653

 
$
82,250

 
$
68,262


Asset Valuations and Review for Potential Impairment

We review our fixed assets, deferred income taxes, goodwill and other intangible assets at least annually or whenever events or circumstances indicate that their carrying amounts may not be recoverable. This review requires that we make assumptions regarding the value of these assets and the changes in circumstances that would affect the carrying value of these assets. If such analysis indicates that a possible impairment may exist, we are then required to estimate the fair value of the asset and, as deemed appropriate,

25




expense all or a portion of the asset. The determination of fair value includes numerous uncertainties, such as the impact of competition on future value. We believe that we have made reasonable estimates and judgments in determining whether our long-term assets have been impaired; however, if there is a material change in the assumptions used in our determination of fair value or if there is a material change in economic conditions or circumstances influencing fair value, we could be required to recognize certain impairment charges in the future. As a result of our most recent reviews, no changes in asset values were required.

Income Taxes

Deferred income taxes are recognized for the tax consequences related to temporary differences between the carrying amount of assets and liabilities for financial reporting 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 the differences are expected to affect taxable income. A valuation allowance is established when necessary based on the weight of available evidence, if it is considered 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 the change 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 inherently complex process, requiring management to interpret continually changing regulations and to make certain significant judgments. Our assumptions, judgments and estimates relative to the amount of deferred income taxes take into account scheduled reversals of deferred tax liabilities, recent financial operations, estimates of the amount of future taxable income and available tax planning strategies. Actual operating results in future years could render our current assumptions, judgments and 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’s historical income tax provisions and accruals. The Company adjusts these items in light of changing facts and circumstances. To the extent that the final impact of these 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 which such determinations are made.

Liquidity and Capital Resources

At 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 marketable securities, 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 unused line 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, our operations have produced consistent cash flow and have required limited capital resources. We believe that the combination of our current and near term cash flow positions, coupled with our existing short-term financing arrangements, will enable us to fund our continued anticipated growth. We also believe that, due to our conservative capital structure and historical and projected financial performance, other sources of liquidity would be readily available to assist in funding future growth.

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

 
$
57,730

Net cash used in investing activities
$
(6,452
)
 
$
(62,314
)
 
$
(6,460
)
Net cash used in financing activities
$
(44,284
)
 
$
(43,138
)
 
$
(40,145
)

Operating Activities

Our 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 and other personnel-related costs, as well as the costs of supplies used in providing our services. The timing of cash receipts and cash payments are the primary drivers of the period-over-period changes in net cash provided by operating activities.


26




Investing Activities

The principal uses of net cash for investing activities are the purchases of marketable securities and capital expenditures such as housekeeping and food service equipment, 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 of instruments issued by institutions primarily with investment-grade ratings and places restrictions on concentration by type and issuer. In 2015, we increased our investments in these liquid securities in conjunction with the transfer of the Company’s workers compensation and certain employee health and welfare insurance programs to HCSG Insurance Corp. (the “Captive”).

Financing Activities

The primary use of cash for financing activities is the payment of dividends. We have paid regular quarterly cash dividends since the second quarter of 2003. During 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

 
$
0.18500

Total cash dividends paid
$
13,158

 
$
13,293

 
$
13,398

 
$
13,493

Record date
February 19, 2016

 
May 20, 2016

 
August 19, 2016

 
November 18, 2016

Payment date
March 25, 2016

 
June 24, 2016

 
September 23, 2016

 
December 23, 2016


Additionally, on 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 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 by the Company. Our Board of Directors reviews our dividend policy on a quarterly basis. Although there can be no assurance that we will continue to pay dividends or the amount of the dividend, we expect to continue to pay a regular quarterly cash dividend. In connection with the establishment of our dividend policy, we adopted 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 to previous Board of Directors’ authorization.

Contractual Obligations

Our future contractual obligations and commitments at December 31, 2016 consist of the following:

 
Payments Due by Period
Year 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

 
$
2,438


Line of Credit

We 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 payable upon 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 irrevocable standby letter of credit, which relates to payment obligations under our insurance programs. As a result of the letter of credit issued, the amount available under the line of credit was reduced by $63.7 million at December 31, 2016.


27




The 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, 2016
Funded 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 and guaranties of any such indebtedness.
(2) 
Net income plus interest expense, income tax expense, depreciation, amortization, and extraordinary non-recurring losses/gains.

As noted above, we were in compliance with our financial covenant at December 31, 2016 and expect to continue to remain in compliance with such financial covenant. 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 Receivable

We expend considerable effort to collect the amounts due for our services on the terms agreed upon with our clients. Many of our clients participate in programs funded by federal and state governmental agencies and such participation can affect our clients’ cash flows, which may impact their ability to make payments to us on 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 result in significant additional bad debts in the near future. Whenever possible, when a client falls behind in making agreed-upon payments, we convert the unpaid accounts receivable to interest bearing promissory notes. The promissory notes provide a means to better evidence the amounts owed, materially enhance our ability to defend the validity of the debt, and memorialize a definitive repayment plan, each of which may ultimately enhance our ability to collect the amounts due. 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 financial difficulties. We believe that such restructurings may provide us with a means to maintain a relationship with the client while at the same time minimizing collection exposure.

In order to provide for these collection problems and the general risk associated with the granting of credit terms, we have recorded bad debt provisions (in an Allowance for Doubtful Accounts) of $4.6 million, $4.3 million and $4.5 million in the years ended December 31, 2016, 2015 and 2014, respectively. As a percentage of total revenues, these provisions represent approximately 0.3% for each of the years ended December 31, 2016, 2015 and 2014.

Insurance Programs

We self-insure or carry a high deductible, and therefore retain a substantial portion of the risk associated with the expected losses under our general liability and workers compensation programs. Under our insurance plans for general liability and workers’ compensation, predetermined loss limits are arranged with our insurance company to limit both our per occurrence cash outlay and annual insurance plan cost. 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 party actuary. Evaluations of our accrued insurance claims estimate as of the balance sheet date are based primarily on current information derived from our actuarial valuation which assists in quantifying and valuing these trends. In the event that our claims experience and/or industry trends result in an unfavorable change resulting from, among other factors, the severity levels of reported claims and medical cost inflation, as compared to historical claim trends, it would have an adverse effect on our results of operations and financial condition. Under these plans, predetermined loss limits are arranged with an insurance company to limit both our per-occurrence cash outlay and annual insurance plan cost.

For workers’ compensation and general liability, we record a reserve for the estimated future cost of claims and related expenses that have been reported but not settled, 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 on estimates provided by a third party actuary.


28




Capital Expenditures

The level of our capital expenditures is generally dependent on the number of new clients obtained. Such capital expenditures primarily consist of housekeeping and food service equipment purchases, laundry and linen equipment installations, computer hardware and software, and furniture and fixtures. Although we have no specific material commitments for capital expenditures through the end of calendar year 2017, we estimate that for the period we will have capital expenditures of $4.5 million to $6.0 million. Our capital expenditures totaled $5.4 million in 2016.

Material Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements, other than our irrevocable standby letter of credit.

Effects of Inflation

Although there can be no assurance thereof, we believe that in most instances we will be able to recover increases in costs attributable to inflation by passing through such cost increases to our clients.

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk.

At December 31, 2016, we had $91.6 million in cash, cash equivalents and marketable securities. The fair values of all of our cash equivalents and marketable securities 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 all significant assumptions are observable. We make investments in instruments that meet our credit quality standards, as specified in our investment policy guidelines.

Investments in both fixed rate and floating rate investments carry a degree of interest rate risk. The value of fixed rate securities may be adversely impacted due to an increase in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if there is a decline in the fair value of our investments.

29




Item 8.   Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
Page
Report of Independent Registered Public Accounting Firm
Management's Report on Internal Control Over Financial Reporting
Reporting of Independent Registered Public Accounting Firm
Consolidated Financial Statements
 
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements for the Years Ended December 31, 2016, 2015 and 2014


30




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Healthcare 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 three years in the period ended December 31, 2016. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item
15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the 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 ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information 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 over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring 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




Management’s Annual Report on Internal Control Over Financial Reporting

The management of Healthcare Services Group, Inc. (“Healthcare”, “We” or the “Company”), is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles in the United States and includes those policies and procedures that:

1.
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the Company;

2.
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

3.
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. In making this assessment, the Company’s management used the criteria set forth in Internal Control -Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “2013 Framework”).

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our internal control over financial reporting, as prescribed above, for the period covered by this report. Based on our evaluation, our principal executive officer and principal financial officer concluded that the Company’s internal control over financial reporting as of December 31, 2016 is effective as a whole.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s independent auditors have audited, and reported on, the Company’s internal control over financial reporting as of December 31, 2016.

/s/ Theodore Wahl
  
/s/ John C. Shea
Theodore Wahl
  
John C. Shea
Chief Executive Officer
(Principal Executive Officer)
  
Chief Financial Officer
(Principal Financial and Accounting Officer)
February 24, 2017
  
February 24, 2017

32




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Healthcare Services Group, Inc.

We have audited the internal control over financial reporting of Healthcare Services Group, Inc. (a Pennsylvania corporation) and subsidiaries (the “Company”) as of December 31, 2016, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial 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 we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established 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 statements of 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 financial statements.

/s/ GRANT THORNTON LLP
 
 
 
New York, New York
 
February 24, 2017
 


33




Healthcare Services Group, Inc.
Consolidated Balance Sheets
(in thousands, except per share amounts)
 
 
December 31,
 
2016
 
2015
ASSETS:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
23,853

 
$
33,189

Marketable securities, at fair value
67,730

 
69,496

Accounts and notes receivable, less allowance for doubtful accounts of $6,911 as of December 31, 2016 and $4,608 as of December 31, 2015
271,276

 
214,854

Inventories and supplies
37,800

 
36,308

Prepaid expenses and other assets
13,965

 
11,495

Total current assets
414,624

 
365,342

Property and equipment, net
13,455

 
13,086

Goodwill
44,438

 
44,438

Other intangible assets, less accumulated amortization of $14,672 as of December 31, 2016 and $19,473 as of December 31, 2015
14,409

 
17,108

Notes receivable — long term portion, net of reserve
7,531

 
2,972

Deferred compensation funding, at fair value
24,119

 
25,391

Deferred income taxes
9,822

 
12,567

Other noncurrent assets
48

 
45

Total Assets
$
528,446

 
$
480,949

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY:
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
42,912

 
$
41,472

Accrued payroll, accrued and withheld payroll taxes
22,303

 
18,062

Other accrued expenses
3,075

 
3,115

Income taxes payable
7,686

 
3,212

Accrued legal expenses
1,322

 
10,464

Accrued insurance claims
23,573

 
19,740

Total current liabilities
100,871

 
96,065

Accrued insurance claims — long term portion
64,080

 
62,510

Deferred compensation liability
24,653

 
25,918

Commitments and contingencies


 


STOCKHOLDERS’ EQUITY:
 
 
 
Common stock, $.01 par value; 100,000 shares authorized; 74,204 and 73,793 shares issued, and 72,601 and 72,034 shares outstanding as of December 31, 2016 and December 31, 2015, respectively
742

 
738

Additional paid-in capital
217,664

 
199,294

Retained earnings
130,940

 
106,886

Accumulated other comprehensive (loss) income, net of taxes
(319
)
 
543

Common 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’ equity
338,842

 
296,456

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
528,446

 
$
480,949


See accompanying notes.


34




Healthcare Services Group, Inc.
Consolidated Statements of Comprehensive Income
(in thousands, except per share amounts)
 
 
Years Ended December 31,
 
2016
 
2015
 
2014
Revenues
$
1,562,662

 
$
1,436,849

 
$
1,293,183

Operating costs and expenses:
 
 
 
 
 
Costs of services provided
1,339,492

 
1,236,108

 
1,155,293

Selling, general and administrative
105,417

 
111,689

 
107,810

Other income:
 
 
 
 
 
Investment and interest
2,634

 
712

 
1,628

Income before income taxes
120,387

 
89,764

 
31,708

Income taxes
42,991

 
31,740

 
9,858

Net income
$
77,396

 
$
58,024

 
$
21,850

 
 
 
 
 
 
Per share data:
 
 
 
 
 
Basic earnings per common share
$
1.06

 
$
0.81

 
$
0.31

Diluted earnings per common share
$
1.05

 
$
0.80

 
$
0.31

 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
Basic
72,754

 
71,826

 
70,616

Diluted
73,474

 
72,512

 
71,341

 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
Net income
$
77,396

 
$
58,024

 
$
21,850

Other comprehensive income:
 
 
 
 
 
Unrealized (loss) gain on available for sale marketable securities, net of taxes
(862
)
 
518

 
(24
)
Total comprehensive income
$
76,534

 
$
58,542

 
$
21,826


See accompanying notes.


35




Healthcare Services Group, Inc.
Consolidated Statements of Cash Flows
(in thousands)
 
Years Ended December 31,
 
2016
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
 
Net income
$
77,396

 
$
58,024

 
$
21,850

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
7,496

 
7,660

 
7,269

Bad debt provision
4,629

 
4,335

 
4,470

Deferred income tax (benefit) expense
3,001

 
17,842

 
(15,059
)
Stock-based compensation expense
4,252

 
3,541

 
3,080

Tax benefit from equity compensation plans
(2,981
)
 
(1,873
)
 
(2,626
)
Amortization of premium on marketable securities
1,723

 
681

 
354

Unrealized (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
)
 

 
600

Deferred compensation funding
2,732

 
(649
)
 
(2,542
)
Accounts payable and other accrued expenses
(4,251
)
 
2,403

 
492

Accrued payroll, accrued and withheld payroll taxes
6,307

 
(28,314
)
 
11,813

Accrued insurance claims
5,404

 
13,987

 
42,084

Deferred compensation liability
(731
)
 
1,113

 
4,248

Income taxes payable
7,455

 
5,997

 
(163
)
Net cash provided by operating activities
41,400

 
63,361

 
57,730

 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
Disposals of fixed assets
275

 
267

 
83

Additions to property and equipment
(5,442
)
 
(4,998
)
 
(5,795
)
Purchases of marketable securities
(29,449
)
 
(75,150
)
 
(5,140
)
Sales of marketable securities
28,164

 
17,567

 
4,392

Net 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 Plan
109

 
113

 
110

Tax benefit from equity compensation plans
2,981

 
1,873

 
2,626

Proceeds from the exercise of stock options
5,968

 
6,251

 
6,196

Net cash used in financing activities
(44,284
)
 
(43,138
)
 
(40,145
)
 
 
 
 
 
 
Net change in cash and cash equivalents
(9,336
)
 
(42,091
)
 
11,125

Cash and cash equivalents at beginning of the period
33,189

 
75,280

 
64,155

Cash and cash equivalents at end of the period
$
23,853

 
$
33,189

 
$
75,280

 
 
 
 
 
 
Supplementary Cash Flow Information:
 
 
 
 
 
Cash paid for interest
$
574

 
$
258

 
$
156

Cash paid for income taxes, net of refunds
$
32,532

 
$
7,901

 
$
25,080


See accompanying notes.

36




Healthcare Services Group, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands)
 
Years Ended December 31,
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive (Loss) Income, Net of Taxes
 
Retained Earnings
 
Treasury Stock
 
Stockholders’ Equity
 
Shares
 
Amount
 
Balance, December 31, 2013
71,868

 
$
719

 
$
168,329

 
$
49

 
$
127,464

 
$
(11,418
)
 
$
285,143

Comprehensive income:

 

 

 

 

 

 

Net income for the period

 

 

 

 
21,850

 

 
21,850

Unrealized loss on available for sale marketable securities, net of taxes

 

 

 
(24
)
 

 

 
(24
)
Comprehensive income

 

 

 

 

 

 
$
21,826

Exercise of stock options and other stock-based compensation, net of shares tendered for payment
534

 
5

 
6,191

 

 

 


 
6,196

Tax benefit from equity compensation plans

 

 
2,626

 

 

 

 
2,626

Share-based compensation expense — stock options and restricted stock

 

 
2,705

 

 

 

 
2,705

Treasury shares issued for Deferred Compensation Plan funding and redemptions

 

 
459

 

 

 
57

 
516

Shares issued pursuant to Employee Stock Plans

 

 
1,457

 

 

 
394

 
1,851

Cash dividends

 

 

 

 
(49,077
)
 

 
(49,077
)
Shares issued pursuant to Dividend Reinvestment Plan

 

 
326

 

 

 
(216
)
 
110

Adjustment to purchase price allocation


 


 
3,934

 


 


 


 
3,934

Shares issued pursuant to prior year acquisition
476

 
5

 
(5
)
 


 


 


 

Balance, December 31, 2014
72,878

 
$
729

 
$
186,022

 
$
25

 
$
100,237

 
$
(11,183
)
 
$
275,830

Comprehensive income:

 

 

 

 

 

 

Net income for the period

 

 

 

 
58,024

 

 
58,024

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

 

 

 
518

 

 

 
518

Comprehensive income

 

 

 

 

 

 
$
58,542

Exercise of stock options and other stock-based compensation, net of shares tendered for payment
386

 
4

 
6,247

 

 

 


 
6,251

Tax benefit from equity compensation plans

 

 
1,873

 

 

 

 
1,873

Share-based compensation expense — stock options and restricted stock

 

 
3,033

 

 

 

 
3,033

Treasury shares issued for Deferred Compensation Plan funding and redemptions

 

 
418

 

 

 
70

 
488

Shares issued pursuant to Employee Stock Plans

 

 
1,363

 

 

 
338

 
1,701

Cash dividends

 

 
0
 

 
(51,375
)
 

 
(51,375
)
Shares issued pursuant to Dividend Reinvestment Plan

 

 
343

 

 

 
(230
)
 
113

Shares issued pursuant to prior year acquisition
529

 
5

 
(5
)
 

 

 


 

Balance, December 31, 2015
73,793

 
$
738

 
$
199,294

 
$
543

 
$
106,886

 
$
(11,005
)
 
$
296,456

Comprehensive income:


 


 


 


 


 


 


Net income for the period


 


 


 


 
77,396

 


 
77,396

Unrealized loss on available for sale marketable securities, net of taxes


 


 


 
(862
)
 


 


 
(862
)
Comprehensive income


 


 


 


 


 


 
$
76,534

Exercise of stock options and other stock-based compensation, net of shares tendered for payment
301

 
3

 
5,965

 


 


 


 
5,968

Tax benefit from equity compensation plans


 


 
2,773

 


 


 


 
2,773

Share-based compensation expense — stock options and restricted stock


 


 
3,743

 


 


 


 
3,743

Treasury shares issued for Deferred Compensation Plan funding and redemptions


 


 
103

 


 


 
431