UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(MARK ONE)

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

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

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 number)
3220 Tillman Drive-Suite 300, Bensalem, Pennsylvania		19020
(Address of principal executive office)		(Zip code)

Registrant’s telephone number, including area code: 215-639-4274

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 o

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 such shorter period that the registrant was required to submit and post such files). YES þ NO o

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 definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” as defined in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(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 Exchange Act). YES o NO þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock, $.01 Par Value: 43,936,000 shares outstanding as of October 22, 2010.

 

 

INDEX

		PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009			3
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2010 and 2009			5
Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2010 and 2009			6
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the Nine Months Ended September 30, 2010			7
Notes To Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results Of Operations			21
Item 3. Quantitative and Qualitative Disclosure About Market Risk			35
Item 4. Controls and Procedures			35
Part II. OTHER INFORMATION			35
Item 1. Legal Proceedings			35
Item 1A. Risk Factors			35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			35
Item 3. Defaults Upon Senior Securities			35
Item 4. (Removed and Reserved)			36
Item 5. Other Information			36
Item 6. Exhibits			37
Signatures			38
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

CONSOLIDATED BALANCE SHEETS

		(Unaudited)
		September 30, 2010				December 31, 2009
ASSETS
Current Assets:
Cash and cash equivalents		$	26,109,000			$	31,301,000
Marketable securities, at fair value			44,498,000				52,648,000
Accounts and notes receivable, less allowance for doubtful accounts of $5,483,000 in 2010 and $4,640,000 in 2009			108,363,000				104,356,000
Inventories and supplies			18,858,000				16,974,000
Deferred income taxes			667,000				115,000
Prepaid expenses and other			4,825,000				6,776,000
Total current assets			203,320,000				212,170,000
Property and equipment:
Laundry and linen equipment installations			1,774,000				1,695,000
Housekeeping equipment and office furniture			19,002,000				16,905,000
Autos and trucks			259,000				278,000
			21,035,000				18,878,000
Less accumulated depreciation			15,444,000				14,487,000
			5,591,000				4,391,000
GOODWILL			16,955,000				17,087,000
OTHER INTANGIBLE ASSETS, less accumulated amortization of $5,470,000 in 2010 and $4,038,000 in 2009			7,730,000				8,862,000
NOTES RECEIVABLE — long term portion, net of discount			6,084,000				4,623,000
DEFERRED COMPENSATION FUNDING, at fair value			12,510,000				10,783,000
DEFERRED INCOME TAXES — long term portion			10,040,000				7,907,000
OTHER NONCURRENT ASSETS			42,000				69,000
TOTAL ASSETS		$	262,272,000			$	265,892,000

See accompanying notes.

CONSOLIDATED BALANCE SHEETS (continued)

		(Unaudited)
		September 30, 2010				December 31, 2009
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	7,636,000			$	9,134,000
Accrued payroll, accrued and withheld payroll taxes			8,494,000				17,647,000
Other accrued expenses			1,841,000				3,057,000
Income taxes payable			215,000				35,000
Accrued insurance claims			6,032,000				4,844,000
Total current liabilities			24,218,000				34,717,000
ACCRUED INSURANCE CLAIMS — long term portion			14,074,000				11,302,000
DEFERRED COMPENSATION LIABILITY			12,837,000				11,099,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common stock, $.01 par value; 100,000,000 shares authorized; 46,049,000 shares issued in 2010 and 45,792,000 shares in 2009			460,000				458,000
Additional paid-in capital			97,474,000				92,339,000
Retained earnings			132,130,000				135,837,000
Accumulated other comprehensive income, net of taxes			152,000				—
Common stock in treasury, at cost, 2,123,000 shares in 2010 and 2,211,000 shares in 2009			(19,073,000	)			(19,860,000	)
Total stockholders’ equity			211,143,000				208,774,000
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	262,272,000			$	265,892,000

See accompanying notes.

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Revenues		$	195,114,000			$	178,829,000			$	571,868,000			$	510,134,000
Operating costs and expenses:
Costs of services provided			168,384,000				155,228,000				492,196,000				438,950,000
Selling, general and administrative			14,488,000				11,936,000				41,539,000				36,328,000
Other income:
Investment and interest			1,182,000				1,709,000				1,549,000				3,803,000
Income before income taxes			13,424,000				13,374,000				39,682,000				38,659,000
Income taxes			4,255,000				5,149,000				14,364,000				14,883,000
Net income		$	9,169,000			$	8,225,000			$	25,318,000			$	23,776,000
Basic earnings per common share		$	0.21			$	0.19			$	0.58			$	0.55
Diluted earnings per common share		$	0.21			$	0.19			$	0.57			$	0.54
Cash dividends per common share		$	0.23			$	0.19			$	0.66			$	0.54
Weighted average number of common shares outstanding
Basic			44,026,000				43,626,000				43,964,000				43,540,000
Diluted			44,719,000				44,334,000				44,677,000				44,224,000

See accompanying notes.

CONSOLIDATED STATEMENTS OF CASH FLOW

		(Unaudited)
		For the Nine Months Ended
		September 30,
		2010				2009
Cash flows from operating activities:
Net income		$	25,318,000			$	23,776,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			2,725,000				2,336,000
Bad debt provision			1,550,000				1,956,000
Deferred income tax benefits			(2,685,000	)			(1,269,000	)
Stock-based compensation expense			947,000				739,000
Amortization of premium on marketable securities			623,000				702,000
Unrealized (gain) loss on marketable securities			849,000				(589,000	)
Unrealized gain on deferred compensation fund investments			(476,000	)			(1,454,000	)
Changes in operating assets and liabilities:
Accounts and notes receivable			(5,557,000	)			(10,119,000	)
Prepaid income taxes			—				2,838,000
Inventories and supplies			(1,883,000	)			(449,000	)
Notes receivable — long term portion			(1,461,000	)			(2,192,000	)
Deferred compensation funding			(1,250,000	)			(500,000	)
Accounts payable and other accrued expenses			(2,529,000	)			(261,000	)
Accrued payroll, accrued and withheld payroll taxes			(8,499,000	)			10,025,000
Accrued insurance claims			3,960,000				2,864,000
Deferred compensation liability			2,055,000				2,202,000
Income taxes payable			180,000				329,000
Prepaid expenses and other assets			1,809,000				4,244,000
Net cash provided by operating activities			15,676,000				35,178,000
Cash flows from investing activities:
Disposals of fixed assets			44,000				219,000
Additions to property and equipment			(2,537,000	)			(1,593,000	)
Purchases of marketable securities, net			(33,963,000	)			(12,699,000	)
Sales of marketable securities, net			40,792,000				10,405,000
Cash paid for acquisition			—				(4,613,000	)
Net cash provided by (used in) investing activities			4,336,000				(8,281,000	)
Cash flows from financing activities:
Dividends paid			(29,025,000	)			(23,506,000	)
Repayment of debt assumed in acquisition			—				(4,718,000	)
Reissuance of treasury stock pursuant to Dividend Reinvestment Plan			89,000				64,000
Tax benefit from equity compensation plans			1,262,000				373,000
Proceeds from the exercise of stock options			2,470,000				826,000
Net cash used in financing activities			(25,204,000	)			(26,961,000	)
Net decrease in cash and cash equivalents			(5,192,000	)			(64,000	)
Cash and cash equivalents at beginning of the period			31,301,000				37,501,000
Cash and cash equivalents at end of the period		$	26,109,000			$	37,437,000
Supplementary Cash Flow Information:
Income taxes cash payments, net of refunds		$	15,607,000			$	12,612,000
Issuance of 66,000 shares of Common Stock related to acquisition in 2009		$	—			$	4,494,000
Issuance of 49,000 shares of Common Stock in both 2010 and 2009 pursuant to Employee Stock Plans		$	1,047,000			$	777,000

See accompanying notes.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (Unaudited)

		For the Nine Months Ended September 30, 2010
										Additional				Accumulated Other
		Common Stock								Paid-in				Comprehensive				Retained				Treasury				Stockholders’
		Shares				Amount				Capital				Income				Earnings				Stock				Equity
Balance, December 31, 2009			45,792,000			$	458,000			$	92,339,000			$	—			$	135,837,000			$	(19,860,000	)		$	208,774,000
Comprehensive income:
Net income for the period																			25,318,000								25,318,000
Unrealized gain on available for sale marketable securities, net of taxes															152,000												152,000
Comprehensive income																											25,470,000
Exercise of stock options and other stock- based compensation, net of 9,000 shares tendered for payment			257,000				2,000				2,211,000												257,000				2,470,000
Tax benefit from equity compensation plans											1,262,000																1,262,000
Share-based compensation expense — stock options											740,000																740,000
Treasury shares issued for Deferred Compensation Plan funding and redemptions (6,000 shares)											260,000												56,000				316,000
Shares issued pursuant to Employee Stock Plans (49,000 shares)											609,000												438,000				1,047,000
Cash dividends — $0.66 per common share																			(29,025,000	)							(29,025,000	)
Shares issued pursuant to Dividend Reinvestment Plan (4,000 shares)											53,000												36,000				89,000
Balance, September 30, 2010			46,049,000			$	460,000			$	97,474,000			$	152,000			$	132,130,000			$	(19,073,000	)		$	211,143,000

See accompanying notes.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 — Basis of Reporting

The accompanying financial statements are unaudited and do not include certain information and note disclosures required by accounting principles generally accepted in the United States for complete financial statements. However, in our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The balance sheet shown in this report as of December 31, 2009 has been derived from, and does not include, all the disclosures contained in the financial statements for the year ended December 31, 2009. The financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009. The results of operations for the three and nine month period ended September 30, 2010 are not necessarily indicative of the results that may be expected for the full fiscal year.

As of September 30, 2010, we operate one wholly-owned subsidiary, Huntingdon Holdings, Inc. (“Huntingdon”). Huntingdon invests our cash and cash equivalents, as well as manages our portfolio of marketable securities.

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are used for, but not limited to, our allowance for doubtful accounts, accrued insurance claims, asset valuations and review for potential impairment, stock-based compensation, and deferred tax benefits. The estimates are based upon various factors including current and historical trends, as well as other pertinent industry and regulatory authority information. We regularly evaluate this information to determine if it is necessary to update the basis for our estimates and to compensate for known changes.

Inventories and supplies include housekeeping, linen and laundry supplies, as well as dietary provisions and supplies. Inventories and supplies are stated at cost to approximate a first-in, first-out (FIFO) basis. Linen supplies are amortized over a 24 month period.

Revenues from services provided and equipment sales are recorded net of sales taxes.

Note 2 — Acquisition

On May 1, 2009, we acquired essentially all of the assets of Contract Environmental Services, Inc. (“CES”), a South Carolina based corporation which is a provider of professional housekeeping, laundry and dietary department services to long-term care and related facilities. We believe the acquisition of CES expands and compliments our position of being the largest provider of such services to long-term care and related facilities in the United States. The aggregate consideration was approximately $13,825,000 consisting of: (i) $4,613,000 in cash, (ii) issuance of approximately 66,000 shares of our common stock (valued at approximately $1,183,000) future issuance of approximately 265,000 shares (valued at approximately $3,311,000) contingent upon the achievement of certain financial targets, and (iii) the repayment of approximately $4,718,000 of certain debt obligations of CES. The final allocation of such consideration resulted in our recording of the following: (i) approximately $8,998,000 of tangible assets consisting primarily of accounts receivable, (ii) $5,700,000 of amortizable intangible assets, (iii) $1,936,000 of goodwill and (iv) current liabilities of approximately $2,809,000. The CES results of operations are not included in our consolidated results of operations before May 1, 2009, which was prior to the closing of the transaction. Effective January 1, 2010, all of CES’ operations were fully integrated with our operations.

Note 3 — Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of net assets acquired of businesses and is not amortized. Goodwill is evaluated for impairment on an annual basis, or more frequently if impairment indicators arise, using a fair-value-based test that compares the fair value of the asset to its carrying value. The goodwill associated with the CES acquisition is deductible for tax purposes over a fifteen year period.

The following table sets forth goodwill by reportable operating segment, as described in Note 6 herein, and the changes in the carrying amounts of goodwill for the nine month period ended September 30, 2010.

		Housekeeping				Dietary
		Segment				Segment				Total
Balance as of December 31, 2009		$	14,913,000			$	2,174,000			$	17,087,000
Goodwill adjusted for final purchase price adjustments			(19,000	)			(113,000	)			(132,000	)
Balance as of September 30, 2010		$	14,894,000			$	2,061,000			$	16,955,000

The cost of intangible assets is based on fair values at the date of acquisition. Intangible assets with determinable lives are amortized on a straight-line basis over their estimated useful life (between 7 and 8 years). The following table sets forth the amounts of our identifiable intangible assets subject to amortization, which were acquired in acquisitions.

		September 30,				December 31,
		2010				2009
Customer relationships		$	12,400,000			$	12,100,000
Non-compete agreements			800,000				800,000
Total other intangibles, gross		$	13,200,000			$	12,900,000
Less accumulated amortization			(5,470,000	)			(4,038,000	)
Other intangibles, net		$	7,730,000			$	8,862,000

The customer relationships have a weighted-average amortization period of seven years and the non-compete agreements have a weighted-average amortization period of eight years. The following table sets forth the estimated amortization expense for intangibles subject to amortization for the following five fiscal years:

		Customer				Non-Compete
Period/Year		Relationships				Agreements				Total
October 1 to December 31, 2010		$	443,000			$	25,000			$	468,000
2011			1,771,000				100,000				1,871,000
2012			1,771,000				100,000				1,871,000
2013			1,452,000				100,000				1,552,000
2014			814,000				67,000				881,000
2015			814,000				—				814,000

Amortization expense for the three and nine month periods ended September 30, 2010 were $468,000 and $1,432,000, respectively.

Note 4 — Fair Value Measurements and Marketable Securities

We, in accordance with U.S. GAAP, define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Effective January 1, 2008, we elected the fair value option for certain of our marketable securities purchased since such adoption. Management initially elected the fair value option for certain of our marketable securities because it views such investment securities as highly liquid and available to be drawn upon for working capital purposes making them similar to its cash and cash equivalents. Accordingly, we record net unrealized gain or loss in the other income, investment and interest caption in our consolidated income statements for such investments. We have not elected the fair value option for marketable securities acquired after December 31, 2009. Although these assets continue to be highly liquid and available, we do not believe these assets are representative of our operating activities. These assets are representative of our investing activities, and they will be available for future needs of the Company to support its current and projected growth.

Certain of our assets and liabilities are reported at fair value in the accompanying balance sheets. Such assets and liabilities include cash and cash equivalents, marketable securities, accounts and notes receivable, and accounts payable (including income taxes payable and accrued expenses). The following tables provide fair value measurement information for our marketable securities and deferred compensation fund investment assets as of September 30, 2010 and December 31, 2009.

		As of September 30, 2010
										Fair Value Measurement Using:
										Quoted Prices								Significant
										in Active				Significant Other				Unobservable
		Carrying				Total Fair				Markets				Observable Inputs				Inputs
		Amount				Value				(Level 1)				(Level 2)				(Level 3)
Financial Assets
Marketable securities
Municipal bonds		$	44,498,000			$	44,498,000			$	—			$	44,498,000			$	—
Equity securities — Deferred comp fund
Money Market		$	4,174,000			$	4,174,000			$	—			$	4,174,000			$	—
Large Cap Value			2,160,000				2,160,000				2,160,000				—				—
Large Cap Growth			1,925,000				1,925,000				1,925,000				—				—
Small Cap Value			930,000				930,000				930,000				—				—
Fixed Income			927,000				927,000				927,000				—				—
Speciality			668,000				668,000				668,000				—				—
Balanced and Lifestyle			511,000				511,000				511,000				—				—
International			505,000				505,000				505,000				—				—
Large Cap Blend			392,000				392,000				392,000				—				—
Mid Cap Growth			318,000				318,000				318,000				—				—
Equity securities — Deferred comp fund		$	12,510,000			$	12,510,000			$	8,336,000			$	4,174,000			$	—

		As of December 31, 2009
										Fair Value Measurement Using:
										Quoted Prices								Significant
										in Active				Significant Other				Unobservable
		Carrying				Total Fair				Markets				Observable Inputs				Inputs
		Amount				Value				(Level 1)				(Level 2)				(Level 3)
Financial Assets
Marketable securities
Municipal bonds		$	52,648,000			$	52,648,000			$	—			$	52,648,000			$	—
Equity securities — Deferred comp fund
Money Market		$	3,588,000			$	3,588,000			$	—			$	3,588,000			$	—
Large Cap Value			1,893,000				1,893,000				1,893,000				—				—
Large Cap Growth			1,833,000				1,833,000				1,833,000				—				—
Small Cap Value			822,000				822,000				822,000				—				—
Fixed Income			664,000				664,000				664,000				—				—
Speciality			523,000				523,000				523,000				—				—
Balanced and Lifestyle			413,000				413,000				413,000				—				—
International			453,000				453,000				453,000				—				—
Large Cap Blend			326,000				326,000				326,000				—				—
Mid Cap Growth			268,000				268,000				268,000				—				—
Equity securities — Deferred comp fund		$	10,783,000			$	10,783,000			$	7,195,000			$	3,588,000			$	—

The fair value of the municipal bonds is measured using pricing service data from an external provider. The fair value of equity investments in the funded deferred compensation plan are valued (Level 1) based on quoted market prices. The money market fund in the funded deferred compensation plan is valued (Level 2) at the net asset value (“NAV”) of the shares held by the plan at the end of the period. As a practical expedient, fair value of our money market fund is valued at the NAV as determined by the custodian of the fund. The money market fund includes short-term United States dollar denominated money-market instruments. The money market fund can be redeemed at its NAV at its measurement date as there are no significant restrictions on the ability of participants to sell this investment.

For the three and nine month period ended September 30, 2010, the other income — investment and interest caption on our consolidated statements of income includes an unrealized loss from marketable securities of $191,000 and $849,000, respectively, for investments recorded under the fair value option. For the three and nine month period ended September 30, 2009, the other income/(loss) — investment and interest caption on our consolidated statements of income includes an unrealized gain from marketable securities of $217,000 and $589,000, respectively, for investments recorded under the fair value option. For the three and nine month period ended September 30, 2010, the accumulated other comprehensive income on our consolidated balance sheet and stockholders’ equity includes unrealized gains from marketable securities of $120,000 and $152,000, respectively, related to marketable securities that are not recognized under the fair value option in accordance with U.S. GAAP.

						Gross				Gross								Other-than-
						Unrealized				Unrealized				Estimated Fair				temporary
September 30, 2010		Amortized Cost				Gains				Losses				Value				Impairments
Type of security:
Municipal bonds		$	20,986,000			$	802,000			$	—			$	21,788,000			$	—
Municipal bonds — available for sale			22,558,000				152,000				—				22,710,000				—
Total debt securities		$	43,544,000			$	954,000			$	—			$	44,498,000			$	—

						Gross				Gross								Other-than-
						Unrealized				Unrealized				Estimated Fair				temporary
December 31, 2009		Amortized Cost				Gains				Losses				Value				Impairments
Type of security:
Municipal bonds		$	50,997,000			$	1,651,000			$	—			$	52,648,000			$	—
Total debt securities		$	50,997,000			$	1,651,000			$	—			$	52,648,000			$	—

The contractual maturities of available for sale investments held at September 30, 2010 and December 31, 2009.

		September 30,				December 31,
Contractual maturity:		2010				2009
Maturing in one year or less		$	227,000			$	—
Maturing after one year through three years			17,654,000				—
Maturing after three years			4,829,000				—
Total available for sale debt securities		$	22,710,000			$	—

Note 5 — Other Contingencies

We have a $36,000,000 bank line of credit on which we may draw to meet short-term liquidity requirements in excess of internally generated cash flow. Amounts drawn under the line of credit are payable upon demand. At September 30, 2010, there were no borrowings under the line of credit. However, at such date, we had outstanding a $35,420,000 irrevocable standby letter of credit which relates to payment obligations under our insurance programs. As a result of the letters of credit issued, the amount available under the line of credit was reduced by $35,420,000 at September 30, 2010. The line of credit requires us to satisfy two financial covenants. We are in compliance with the financial covenants at September 30, 2010 and expect to continue to remain in compliance with such financial covenants. This line of credit expires on June 30, 2011. We believe the line of credit will be renewed at that time.

We provide our services in 47 states and we are subject to numerous local taxing jurisdictions within those states. Consequently, the taxability of our services is subject to various interpretations within these jurisdictions. 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, which may result in additional tax liabilities.

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

We are also subject to various claims and legal actions in the ordinary course of business. Some of these matters include payroll and employee-related matters and examinations by governmental agencies. As we become aware of such claims and legal actions, we provide accruals if the exposures are probable and estimable. If an adverse outcome of such claims and legal actions is reasonably possible, we assess materiality and provide such financial disclosure, as appropriate. We believe that these matters, taken individually or in the aggregate, would not have a material adverse effect on our financial position or results of operations.

As a result of the current economic crisis, many states have significant budget deficits. State Medicaid programs are experiencing increased demand, and with lower revenues than projected, they have fewer resources to support their Medicaid programs. In addition, in March 2010, comprehensive health care legislation under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (together, the “Act”) was signed into law. The Act will significantly impact the governmental healthcare programs which our clients participate, and reimbursements received thereunder from governmental or third-party payors. Furthermore, in the coming year, new proposals or additional changes in existing regulations could be made to the Act which could directly impact the governmental reimbursement programs in which our clients participate. As a result, some state Medicaid programs are reconsidering previously approved increases in nursing home reimbursement or are considering delaying or foregoing those increases. A few states have indicated it is possible they will run out of cash to pay Medicaid providers, including nursing homes. Any negative changes in our clients’ reimbursements may negatively impact our results of operations. Although we are currently evaluating the Act’s effect on our client base, we may not know the full effect until such a time as these laws are fully implemented and the Centers for Medicare and Medicaid Services and other agencies issue applicable regulations or guidance.

Note 6 — Segment Information

Reportable Operating Segments

We manage and evaluate our operations in two reportable segments. The two reportable segments are Housekeeping (housekeeping, laundry, linen and other services), and Dietary (dietary department services). Although both segments serve the same client base and share many operational similarities, they are managed separately due to distinct differences in the type of service provided, as well as the specialized expertise required of the professional management personnel responsible for delivering the respective segment’s services. We consider the various services provided within each reportable segment to comprise an identifiable reportable operating segment since such services are rendered pursuant to a single service agreement, specific to that reportable segment, as well as the fact that the delivery of the respective reportable segment’s services are managed by the same management personnel of the particular reportable segment.

Differences between the reportable segments’ operating results and other disclosed data and our consolidated financial statements relate primarily to corporate level transactions and recording of transactions at the reportable segment level which use methods other than generally accepted accounting principles. Additionally, included in the differences between the reportable segments’ operating results and other disclosed data are amounts attributable to Huntingdon, our investment holding company subsidiary. Huntingdon does not transact any business with the reportable segments. Segment amounts disclosed are prior to any elimination entries made in consolidation.

Housekeeping provides services in Canada, although essentially all of its revenues and net income, 99% in both categories, are earned in one geographic area, the United States. Dietary provides services solely in the United States.

		Housekeeping								Corporate and
		Services				Dietary Services				Eliminations				Total
Three Months Ended September 30, 2010
Revenues		$	151,265,000			$	43,771,000			$	78,000	(1)		$	195,114,000
Income before income taxes			14,040,000				1,558,000				(2,174,000	) (1)			13,424,000
Three Months Ended September 30, 2009
Revenues		$	136,496,000			$	42,322,000			$	11,000	(1)		$	178,829,000
Income before income taxes			12,908,000				1,431,000				(965,000	) (1)			13,374,000
Nine Months Ended September 30, 2010
Revenues		$	441,680,000			$	130,145,000			$	43,000	(1)		$	571,868,000
Income before income taxes			43,390,000				5,867,000				(9,575,000	) (1)			39,682,000
Nine Months Ended September 30, 2009
Revenues		$	393,431,000			$	116,567,000			$	136,000	(1)		$	510,134,000
Income before income taxes			38,528,000				5,194,000				(5,063,000	) (1)			38,659,000

Total Consolidated Revenues from Clients

The following revenues earned from clients represent their reporting in accordance with U.S. GAAP and differ from segment revenues reported above due to the inclusion of adjustments used for segment reporting purposes by management. We earned total revenues from clients in the following service categories:

		Three Months Ended September 30,
		2010				2009
Housekeeping services		$	101,118,000			$	92,459,000
Laundry and linen services			49,493,000				43,465,000
Dietary services			43,883,000				42,305,000
Maintenance services and other			620,000				600,000
		$	195,114,000			$	178,829,000

		Nine Months Ended September 30,
		2010				2009
Housekeeping services		$	296,453,000			$	267,602,000
Laundry and linen services			143,619,000				124,205,000
Dietary services			130,085,000				116,527,000
Maintenance services and other			1,711,000				1,800,000
		$	571,868,000			$	510,134,000

Major Client

We have one client, a nursing home chain (“Major Client”), which accounted for the respective percentages of our revenues as detailed below:

		Three Months Ended September 30,
		2010				2009
Total revenues			11	%			12	%
Housekeeping			11	%			12	%
Dietary services			9	%			11	%

		Nine Months Ended September 30,
		2010				2009
Total revenues			11	%			13	%
Housekeeping			11	%			13	%
Dietary services			9	%			12	%

Additionally, at both September 30, 2010 and December 31, 2009, amounts due from such client represented less than 1% of our accounts receivable balance. The loss of such client, or a significant reduction in revenues from such client, would have a material adverse effect on the results of operations of our two operating segments. In addition, if such client changes its payment terms it would increase our accounts receivable balance and have a material adverse effect on our cash flows and cash and cash equivalents.

Note 7 — Earnings Per Common Share

A reconciliation of the numerator and denominator of basic and diluted earnings per common share is as follows:

		Three Months ended September 30, 2010
		Income				Shares
		(Numerator)				(Denominator)				Per-share Amount
Net income		$	9,169,000
Basic earnings per common share		$	9,169,000				44,026,000			$	.21
Effect of dilutive securities:
Options							693,000
Diluted earnings per common share		$	9,169,000				44,719,000			$	.21

		Three Months ended September 30, 2009
		Income				Shares
		(Numerator)				(Denominator)				Per-share Amount
Net income		$	8,225,000
Basic earnings per common share		$	8,225,000				43,626,000			$	.19
Effect of dilutive securities:
Options							708,000
Diluted earnings per common share		$	8,225,000				44,334,000			$	.19

		Nine Months ended September 30, 2010
		Income				Shares
		(Numerator)				(Denominator)				Per-share Amount
Net income		$	25,318,000
Basic earnings per common share		$	25,318,000				43,964,000			$	.58
Effect of dilutive securities:
Options							713,000				(.01	)
Diluted earnings per common share		$	25,318,000				44,677,000			$	.57

		Nine Months ended September 30, 2009
		Income				Shares
		(Numerator)				(Denominator)				Per-share Amount
Net income		$	23,776,000
Basic earnings per common share		$	23,776,000				43,540,000			$	.55
Effect of dilutive securities:
Options							684,000				(.01	)
Diluted earnings per common share		$	23,776,000				44,224,000			$	.54

No outstanding options were excluded from the computations of diluted earnings per common share for the three and nine month periods ended September 30, 2010 as no options have an exercise price in excess of the average market value of our common stock at September 30, 2010.

Options to purchase 353,000 and 358,000 shares of common stock at an average exercise price of $20.89 per common share were outstanding during the three and nine month periods ended September 30, 2009 but not included in the computation of diluted earnings per common share because the options’ exercise prices were greater than the average market price of the common shares, and therefore, would be antidilutive.

Note 8 — Dividends

During the nine month period ended September 30, 2010, we paid regular quarterly cash dividends totaling $29,025,000 as follows:

		Three Months ended
		March 31, 2010				June 30, 2010				September 30, 2010
Cash dividend per common share		$	.21			$	.22			$	.23
Total cash dividends paid		$	9,224,000			$	9,677,000			$	10,124,000
Record date			February 12				April 23				July 23
Payment date			March 5				May 14				August 6

On October 12, 2010, our Board of Directors declared a regular quarterly cash dividend of $.2325 per common share to be paid on November 5, 2010 to shareholders of record as of October 22, 2010.

Additionally, our Board of Directors has declared a three-for-two stock split in the form of a 50% stock dividend payable on November 12, 2010 to shareholders of record of its Common Stock at the close of business November 8, 2010. All fractional share interests will be rounded up to the nearest whole number. The effect of this action will be to increase Common Shares outstanding by approximately 22,000,000 shares. All per share information presented in this report has not been affected for the stock dividend.

Note 9 — Share-Based Compensation

Stock Options

During the nine month period ended September 30, 2010, the stock option activity under our 2002 Stock Option Plan, 1995 Incentive and Non-Qualified Stock Option Plan for key employees, and 1996 Non-Employee Director’s Stock Option Plan (collectively the “Stock Option Plans”), was as follows:

										Weighted
										Average
		Weighted								Remaining
		Average				Number of				Contractual				Aggregate
		Price				Shares				Life (In Years)				Intrinsic Value
Outstanding, January 1, 2010		$	11.33				2,049,000
Granted			21.46				445,000
Cancelled			18.35				(10,000	)
Exercised			9.08				(295,000	)
Outstanding, September 30, 2010		$	13.66				2,189,000				5.65			$	19,988,000
Options exercisable as of September 30, 2010							1,214,000				3.37			$	16,671,000

The weighted average fair value of options granted during the 2010 and 2009 nine month periods ended September 30, 2010 was $5.97 and $4.14, respectively. The following table summarizes information about stock options outstanding at September 30, 2010.

																		Options
		Options Outstanding																Exercisable
						Average
						Remaining				Weighted								Weighted
		Number				Contractual				Average				Number				Average
Exercise Price Range		Outstanding				Life				Exercise price				Exercisable				Exercise Price
$1.50 – 2.74			159,000				1.15			$	2.71				159,000			$	2.71
3.01 – 5.53			437,000				2.78				4.81				437,000				4.81
9.10 – 9.10			246,000				4.24				9.10				246,000				9.10
13.81 – 15.58			560,000				5.95				15.07				237,000				14.36
$20.89 – 21.46			787,000				8.39				21.21				135,000				20.89
			2,189,000				5.65			$	13.66				1,214,000			$	9.06

Other information pertaining to option activity during the nine month periods ended September 30, 2010 and 2009 was as follows:

		September 30, 2010				September 30, 2009
Weighted average grant-date fair value of stock options granted:		$	2,176,000			$	1,545,000
Total fair value of stock options vested:		$	681,000			$	447,000
Total intrinsic value of stock options exercised:		$	3,738,000			$	1,535,000
Total pre-tax stock-based compensation expense charged against income:		$	740,000			$	532,000
Total unrecognized compensation expense related to non-vested options:		$	3,631,000			$	2,615,000

Under our Stock Option Plans at September 30, 2010, in addition to the 2,189,000 shares issuable pursuant to outstanding option grants, an additional 1,409,000 shares of our Common Stock are available for future grants. Options outstanding and exercisable were granted at stock option prices which were not less than the fair market value of our Common Stock on the date the options were granted and no option has a term in excess of ten years. Additionally, with the exception of the options granted in 2010 and 2009, options became vested and exercisable either on the date of grant or commencing nine months after the option grant date. The options granted in 2010 and 2009 become vested and exercisable ratably over a five year period on each anniversary date of the option grant.

At September 30, 2010, the total unrecognized compensation expense related to non-vested options, as reported above, was expected to be recognized through the fourth quarter of 2014 for the options granted in 2010 and the fourth quarter of 2013 for the options granted in 2009. The fair value of options granted in 2010 and 2009 was estimated on the date of grant using the Black-Scholes valuation model with the following weighted average assumptions:

		2010				2009
Risk-free interest rate			2.5	%			2.5	%
Expected volatility			42.1	%			41.0	%
Weighted average expected life in years			4.5				4.5
Dividend yield			3.5	%			3.6	%

Employee Stock Purchase Plan

Total pre-tax share-based compensation expense charged against income for the three month and nine month periods ended September 30, 2010 and 2009 for options granted under our Employee Stock Purchase Plan (“ESPP”) was:

		Three Months Ended September 30,
		2010				2009
ESPP compensation expense		$	63,000			$	63,000

		Nine Months Ended September 30,
		2010				2009
ESPP compensation expense		$	207,000			$	207,000

It is estimated, at this time, that the expense attributable to such share-based payments in the subsequent quarter of 2010 will approximate the amount recorded in each of the first three quarters in 2010. However, such future expense related to our ESPP will be impacted by, and be dependent on the change in our stock price over the remaining period up to the December 31, 2010 measurement date.

Such expense was estimated on the date of grant using the Black-Scholes valuation model with the following weighted average assumptions:

		Three and Nine Months Ended September 30,
		2010				2009
Risk-free interest rate			0.2	%			0.2	%
Expected volatility			34.0	%			62.9	%
Weighted average expected life in years			1.0				1.0
Dividend yield			3.5	%			3.6	%

We may issue new common stock or re-issue common stock from treasury to satisfy our obligations under any of our share-based compensation plans.

Note 10 — Related Party Transactions

One of our former directors, as well as the brother of an officer and a director (collectively “Related Parties”), have separate ownership interests in several different client facilities which have entered into service agreements with us. In the nine month periods ended September 30, 2010 and 2009, the service agreements with the client facilities in which the Related Parties have ownership interests resulted in revenues of approximately $3,244,000 and $4,093,000, respectively. At September 30, 2010 and December 31, 2009, accounts and notes receivable from such facilities of $1,281,000 (net of reserves of $1,666,000) and $1,309,000 (net of reserves of $1,666,000), respectively, are included in the accompanying consolidated balance sheets.

Another of our directors is a member of a law firm which was retained by us. In each of the nine month periods ended September 30, 2010 and 2009, fees received from us by such firm did not exceed $100,000. Additionally, such fees did not exceed, in either three or nine month period, 5% of such firm’s revenues.

Note 11 — Income Taxes

For the nine month period ended September 30, 2010, our effective tax rate was 36.2%, which was a decrease from the 38.5% effective tax rate for the comparable 2009 period. Such differences between the effective tax rates and the applicable U.S. federal statutory rate primarily arise from the effect of state and local income taxes and tax credits available to the Company. The decrease in the effective tax rate was primarily the result of tax credits realized upon the filing, in the 2010 third quarter, of the 2009 income tax return compared to estimated tax credits for previous fiscal periods. Additionally, there was a slight decrease in the effective tax rate resulting from changes in the apportionment of our income among the states within which we do business that have positively impacted our combined state income taxes.

We account for income taxes using the asset and liability method, which results in recognizing income tax expense based on the amount of income taxes payable or refundable for the current year. Additionally, we evaluate regularly the tax positions taken or expected to be taken resulting from financial statement recognition of certain items. Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our financial statements. Our evaluation was performed for the tax years ended December 31, 2006 through 2009 (with regard to U.S. federal income tax returns) and December 31, 2005 through 2009 (with regard to various state and local income tax returns), the tax years which remain subject to examination by major tax jurisdictions as of September 30, 2010.

We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. When we have received an assessment for interest and/or penalties, it has been classified in the financial statements as selling, general and administrative expense.

Note 12 — Recently Issued Accounting Pronouncements

In February 2010, the Financial Accounting Standards Board (the “FASB”) issued amended guidance on subsequent events. Under this amended guidance, SEC filers are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. This guidance was effective immediately and the Company adopted these new requirements upon issuance of this guidance.

In January 2010, the FASB issued updated standards related to additional requirements and guidance regarding disclosures of fair value measurements. The guidance require the gross presentation of activity within the Level 3 fair value measurement roll forward and details of transfers in and out of Level 1 and 2 fair value measurements. In addition, companies will be required to disclose quantitative information about the inputs used in determining fair values. These standards were adopted in the first quarter of 2010. The adoption of these standards had no impact on the Company’s financial position or results of operations as it only amends required disclosures.

In September 2009, the FASB issued updated standards that address the determination of when the individual deliverables included in a multiple arrangement may be treated as separate units of accounting. This guidance also modifies the manner in which the transaction consideration is allocated across separately identified deliverables and establishes definitions for determining fair value of elements in an arrangement. This standard must be adopted by us no later than January 1, 2011 with earlier adoption permitted. We are currently evaluating the impact, if any, that this standard update will have on our consolidated financial statements.

Note 13 — Subsequent Event

We evaluated all subsequent events through the date these financial statements are being filed with the SEC. There were no events or transactions occurring during this subsequent event reporting period which require recognition or disclosure in the financial statements.

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward Looking Statements

This report and documents incorporated by reference into this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, which are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, our beliefs and assumptions. Words such as “believes”, “anticipates”, “plans”, “expects”, “will”, “goal”, and similar expressions are intended to identify forward-looking statements. The inclusion of forward-looking statements should not be regarded as a representation by us that any of our plans will be achieved. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Such forward looking information is also subject to various risks and uncertainties. Such risks and uncertainties include, but are not limited to, risks arising from our providing services exclusively to the health care industry, primarily providers of long-term care; proposed legislation and/or regulations to reform the U.S. healthcare system in an effort to contain healthcare costs; credit and collection risks associated with this industry; one client accounting for approximately 11.0% of revenues in the nine month period ended September 30, 2010 - (see note 6, “Major Client” in the accompanying Notes to Consolidated Financial Statements); risks associated with our acquisition of Contract Environmental Services, Inc., including integration risks and costs, or such business not achieving expected financial results or synergies or failure to otherwise perform as expected; 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, including state and local regulations pertaining to the taxability of our services; and the risk factors described in Part I in this report under “Government Regulation of Clients”, “Competition”, “Service Agreements/Collections”, and under Item IA, “Risk Factors”. Many of our clients’ revenues are highly contingent on Medicare and Medicaid reimbursement funding rates, which Congress has affected through the enactment of a number of major laws during the past decade, most recently the March 2010 enactment of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (together, the “Act”). Currently, the U.S. Congress is considering further changes or revising legislation relating to health care in the United States which, among other initiatives, may impose cost containment measures impacting our clients. These laws and proposed laws have significantly altered, or threaten to alter, overall government reimbursement funding rates and mechanisms. In addition, the current economic crises could adversely affect such funding. The overall effect of these laws and trends in the long-term care industry has affected and could adversely affect the liquidity of our clients, resulting in their inability to make payments to us on agreed upon payment terms. These factors, in addition to delays in payments from clients, have resulted in, and could continue to result in, significant additional bad debts in the near future. Additionally, our operating results would be adversely affected if unexpected increases in the costs of labor and labor related costs, materials, supplies and equipment used in performing services could not be passed on to our clients.

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

RESULTS OF OPERATIONS

The following discussion is intended to provide the reader with information that will be helpful in understanding our financial statements, including the changes in certain key items in comparing financial statements period to period. We also intend to provide the primary factors that accounted for those changes, as well as a summary of how certain accounting principles affect our financial statements. In addition, we are providing information about the financial results of our two operating segments to further assist in understanding how these segments and their results affect our consolidated results of operations. This discussion should be read in conjunction with our financial statements as of September 30, 2010 and December 31, 2009 and the periods then ended and the notes accompanying those financial statements.

Overview

We provide management, administrative, and operating expertise to the housekeeping, laundry, linen, facility maintenance and dietary service departments to 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 services to the long-term care industry in the United States, rendering such services to approximately 2,450 facilities in 47 states as of September 30, 2010. Although we do not directly participate in any government reimbursement programs, our clients’ reimbursements are subject to government regulation. Therefore, they are directly affected by any legislation relating to Medicare and Medicaid reimbursement programs.

We provide our services primarily pursuant to full service agreements with our clients. In such agreements, we are responsible for the management and hourly employees located at our clients’ facilities. We also provide services on the basis of a management-only agreement for a very limited number of clients. Additionally, we also provide, individually or as a combination thereof, the specialized services of Dietary (dietary department management, food preparation services, consulting services and food purchasing) on a stand-alone basis to certain clients. Our agreements with clients typically provide for a one year service term, cancelable by either party upon 30 to 90 days’ notice after the initial 120-day period.

We are organized into two reportable segments: housekeeping, laundry, linen and facility maintenance (“Housekeeping”), and dietary department services (“Dietary”). Housekeeping is being provided at all of our approximately 2,450 client facilities, generating approximately 77% or $441,783,000 of the nine month period ending September 30, 2010 total revenues. Dietary is being provided to approximately 350 client facilities and contributed approximately 23% or $130,085,000 to the nine month period ending September 30, 2010 total revenues.

Housekeeping consists primarily of the cleaning, disinfecting and sanitizing of patient rooms and common areas of a client’s facility, as well as the laundering and processing of the personal clothing belonging to the facility’s patients. Also within the scope of this segment’s service is the laundering and processing of the bed linens, uniforms and other assorted linen items utilized by a client facility.

Dietary consists of food purchasing, meal preparation and providing dietician consulting professional services, which includes the development of a menu that meets the patient’s dietary needs.

We currently operate one wholly-owned subsidiary, Huntingdon Holdings, Inc. (“Huntingdon”). Huntingdon invests our cash and cash equivalents and manages our portfolio of available-for-sale marketable securities.

On May 1, 2009, we acquired essentially all of the assets of Contract Environmental Services, Inc. (“CES”), a South Carolina based corporation which is a provider of professional housekeeping, laundry and dietary department services to long-term care and related facilities. We believe the acquisition of CES expands and complements our position of being the largest provider of such services to long-term care and related facilities in the United States. The aggregate consideration was approximately $13,825,000 consisting of: (i) $4,613,000 in cash, (ii) a issuance of approximately 66,000 shares of our common stock (valued at approximately $1,183,000) future issuance of approximately 265,000 shares (valued at approximately $3,311,000) contingent upon the achievement of certain financial targets, and (iii) the repayment of approximately $4,718,000 of certain debt obligations of CES. The final allocation of such consideration resulted in our recording of the following: (i) approximately $8,998,000 of tangible assets consisting primarily of accounts receivable, (ii) $5,700,000 of amortizable intangible assets, (iii) $1,936,000 of goodwill and (iv) current liabilities of approximately $2,809,000. The CES results of operations are not included in our consolidated results of operations before May 1, 2009, which was prior to the closing of the transaction. Effective January 1, 2010, all of CES’ operations were fully integrated with our operations.

Consolidated Operations

The following table sets forth, for the periods indicated, the percentage which certain items bear to consolidated revenues:

		Relation to Consolidated Revenues
		For the Three Months Ended September 30,								For the Nine Month Period Ended September 30,
		2010				2009				2010				2009
Revenues			100.0	%			100.0	%			100.0	%			100.0	%
Operating costs and expenses:
Costs of services provided			86.3	%			86.8	%			86.1	%			86.0	%
Selling, general and administrative			7.4	%			6.7	%			7.3	%			7.1	%
Investment and interest			0.6	%			1.0	%			0.3	%			0.7	%
Income before income taxes			6.9	%			7.5	%			6.9	%			7.6	%
Income taxes			2.2	%			2.9	%			2.5	%			2.9	%
Net income			4.7	%			4.6	%			4.4	%			4.7	%