##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2009
 OR
 o
    
    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.
  Pennsylvania
    
    23-2018365(State or other jurisdiction of
    
    (IRS Employer Identificationincorporation or organization)
    
    number)
 3220 Tillman Drive-Suite 300, Bensalem, Pennsylvania
    
    19020(Address of principal executive office)
    
    (Zip code)
 215-639-4274
  þ o
  o þ
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o(Do not check if a smaller reporting
company)
    
    Smaller reporting company o
  o þ




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##### 



INDEX
 PAGE NO.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008
    
    2Consolidated Statements of Income for the Three
Months Ended September 30, 2009 and 2008
    
    3Consolidated Statements of Income for the Nine
Months Ended September 30, 2009 and 2008
    
    4Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 2009 and 2008
    
    5Consolidated Statement of Stockholders Equity
for the Nine Months Ended September 30, 2009
    
    6Notes To Consolidated Financial Statements
    
    7  19Item 2. Managements Discussion and Analysis of
Financial Condition and Results Of Operations
    
    20  35Item 3. Quantitative and Qualitative Disclosure About
Market Risk
    
    36Item 4. Controls and Procedures
    
    36Part II. Other InformationItem 1. Legal Proceedings
    
    37Item 1A. Risk Factors
    
    37Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds
    
    37Item 3. Defaults Upon Senior Securities
    
    37Item 4. Submission of Matters to a Vote of Security
Holders
    
    37Item 5. Other Information
    
    37Item 6 Exhibits
    
    37Signatures
    
    38EX-31.1EX-31.2EX-32.1EX-32.2
  -1-




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Consolidated Balance Sheets
 (Unaudited)September 30,
    
    
    December 31,2009
    
    
    2008ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    37,437,000
    
    
    $
    37,501,000Marketable securities, at fair value
    
    
    51,594,000
    
    
    
    49,414,000Accounts and notes receivable, less allowance for doubtful
accounts of $4,400,000 in 2009 and $3,214,000 in 2008
    
    
    104,721,000
    
    
    
    96,558,000Prepaid income taxes
    
    
    
    
    
    
    2,838,000Inventories and supplies
    
    
    16,804,000
    
    
    
    16,079,000Prepaid expenses and other
    
    
    7,077,000
    
    
    
    4,225,000Total current assets
    
    
    217,633,000
    
    
    
    206,615,000PROPERTY AND EQUIPMENT:Laundry and linen equipment installations
    
    
    1,672,000
    
    
    
    1,767,000Housekeeping equipment and office furniture
    
    
    16,636,000
    
    
    
    16,365,000Autos and trucks
    
    
    278,000
    
    
    
    93,00018,586,000
    
    
    
    18,225,000Less accumulated depreciation
    
    
    14,321,000
    
    
    
    14,296,0004,265,000
    
    
    
    3,929,000GOODWILL
    
    
    17,054,000
    
    
    
    15,020,000OTHER INTANGIBLE ASSETS, Less accumulated amortization of
$3,581,000 in 2009 and $2,466,000 in 2008
    
    
    9,319,000
    
    
    
    5,033,000NOTES RECEIVABLE- long term portion, net of discount
    
    
    5,394,000
    
    
    
    3,202,000DEFERRED COMPENSATION FUNDING, at fair value
    
    
    10,241,000
    
    
    
    8,287,000DEFERRED INCOME TAXES- long term portion
    
    
    7,713,000
    
    
    
    6,386,000OTHER NONCURRENT ASSETS
    
    
    68,000
    
    
    
    89,000TOTAL ASSETS
    
    $
    271,687,000
    
    
    $
    248,561,000LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    8,377,000
    
    
    $
    9,301,000Accrued payroll, accrued and withheld payroll taxes
    
    
    24,872,000
    
    
    
    14,365,000Income taxes payable
    
    
    329,000
    
    
    
    Other accrued expenses
    
    
    1,433,000
    
    
    
    679,000Deferred income taxes
    
    
    812,000
    
    
    
    754,000Accrued insurance claims
    
    
    4,802,000
    
    
    
    3,943,000Total current liabilities
    
    
    40,625,000
    
    
    
    29,042,000ACCRUED INSURANCE CLAIMS- long term portion
    
    
    11,206,000
    
    
    
    9,201,000DEFERRED COMPENSATION LIABILITY
    
    
    10,484,000
    
    
    
    8,636,000COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, $.01 par value: 100,000,000 shares authorized,
45,689,000 shares issued in 2009 and 45,563,000 in 2008
    
    
    457,000
    
    
    
    456,000Additional paid in capital
    
    
    90,699,000
    
    
    
    84,421,000Retained earnings
    
    
    138,011,000
    
    
    
    137,741,000Common stock in treasury, at cost, 2,206,000 shares in 2009 and
2,335,000 in 2008
    
    
    (19,795,000
    )
    
    
    (20,936,000
    )Total stockholders equity
    
    
    209,372,000
    
    
    
    201,682,000TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    271,687,000
    
    
    $
    248,561,000
  -2-




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Consolidated Statements of Income  (Unaudited)
 For the Three Months Ended September 30,2009
    
    
    2008Revenues
    
    $
    178,829,000
    
    
    $
    152,978,000Operating costs and expenses:Costs of services provided
    
    
    155,228,000
    
    
    
    134,228,000Selling, general and administrative
    
    
    11,936,000
    
    
    
    9,615,000Other Income:Investment and interest
    
    
    1,709,000
    
    
    
    (157,000
    )Income before income taxes
    
    
    13,374,000
    
    
    
    8,978,000Income taxes
    
    
    5,149,000
    
    
    
    3,456,000Net Income
    
    $
    8,225,000
    
    
    $
    5,522,000Basic earnings per Common Share
    
    $
    0.19
    
    
    $
    0.13Diluted earnings per Common Share
    
    $
    0.19
    
    
    $
    0.13Cash dividends per Common Share
    
    $
    0.19
    
    
    $
    0.15Basic weighted average number of
Common Shares outstanding
    
    
    43,626,000
    
    
    
    43,143,000Diluted weighted average number of
Common Shares outstanding
    
    
    44,334,000
    
    
    
    43,980,000
  -3-




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Consolidated Statements of Income  (Unaudited)
 For the Nine Months Ended September 30,2009
    
    
    2008Revenues
    
    $
    510,134,000
    
    
    $
    448,155,000Operating costs and expenses:Costs of services provided
    
    
    438,950,000
    
    
    
    387,157,000Selling, general and
administrative
    
    
    36,328,000
    
    
    
    30,318,000Other Income:Investment and interest
    
    
    3,803,000
    
    
    
    753,000Income before income taxes
    
    
    38,659,000
    
    
    
    31,433,000Income taxes
    
    
    14,883,000
    
    
    
    12,102,000Net Income
    
    $
    23,776,000
    
    
    $
    19,331,000Basic earnings per Common Share
    
    $
    0.55
    
    
    $
    0.45Diluted earnings per Common Share
    
    $
    0.54
    
    
    $
    0.44Cash dividends per Common Share
    
    $
    0.54
    
    
    $
    0.42Basic weighted average number of
Common Shares outstanding
    
    
    43,540,000
    
    
    
    43,078,000Diluted weighted average number
of
Common Shares outstanding
    
    
    44,224,000
    
    
    
    44,050,000
  -4-




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Consolidated Statements of Cash Flows
 (Unaudited)For the Nine Months EndedSeptember 30,2009
    
    
    2008Cash flows from operating activities:Net Income
    
    $
    23,776,000
    
    
    $
    19,331,000Adjustments to reconcile net income
to net cash provided by operating activities:Depreciation and amortization
    
    
    2,336,000
    
    
    
    2,152,000Bad debt provision
    
    
    1,956,000
    
    
    
    3,050,000Deferred income tax benefits
    
    
    (1,269,000
    )
    
    
    (1,376,000
    )Stock-based compensation expense
    
    
    739,000
    
    
    
    529,000Amortization of premium on marketable securities
    
    
    702,000Unrealized gain on marketable securities
    
    
    (589,000
    )Unrealized (gain) loss on deferred compensation fund
investments
    
    
    (1,454,000
    )
    
    
    1,212,000Changes in operating assets and liabilities:Accounts and notes receivable
    
    
    (10,119,000
    )
    
    
    (14,788,000
    )Prepaid income taxes
    
    
    2,838,000
    
    
    
    Inventories and supplies
    
    
    (449,000
    )
    
    
    (881,000
    )Notes receivable- long term portion
    
    
    (2,192,000
    )
    
    
    1,871,000Deferred compensation funding
    
    
    (500,000
    )
    
    
    (162,000
    )Accounts payable and other accrued expenses
    
    
    (261,000
    )
    
    
    (1,187,000
    )Accrued payroll, accrued and withheld payroll taxes
    
    
    10,025,000
    
    
    
    10,198,000Accrued insurance claims
    
    
    2,864,000
    
    
    
    14,000Deferred compensation liability
    
    
    2,202,000
    
    
    
    (773,000
    )Income taxes payable
    
    
    329,000
    
    
    
    (616,000
    )Prepaid expenses and other assets
    
    
    4,244,000
    
    
    
    (148,000
    )Net cash provided by operating activities
    
    
    35,178,000
    
    
    
    18,426,000Cash flows from investing activities:Disposals of fixed assets
    
    
    219,000
    
    
    
    6,000Additions to property and equipment
    
    
    (1,593,000
    )
    
    
    (1,046,000
    )Purchases of marketable securities, net
    
    
    (2,294,000
    )Cash paid for acquisition
    
    
    (4,613,000
    )Net cash used in investing activities
    
    
    (8,281,000
    )
    
    
    (1,040,000
    )Cash flows from financing activities:Acquisition of treasury stock
    
    
    
    
    
    
    (4,666,000
    )Dividends paid
    
    
    (23,506,000
    )
    
    
    (18,077,000
    )Repayment of
debt assumed in acquisition
    
    
    (4,718,000
    )Reissuance of treasury stock pursuant to Dividend Reinvestment
Plan
    
    
    64,000
    
    
    
    46,000Proceeds from the exercise of stock options
    
    
    826,000
    
    
    
    3,054,000Tax benefit from equity compensation plans
    
    
    373,000
    
    
    
    3,368,000Net cash used in financing activities
    
    
    (26,961,000
    )
    
    
    (16,275,000
    )Net decrease in cash and cash equivalents
    
    
    (64,000
    )
    
    
    1,111,000Cash and cash equivalents at beginning of the period
    
    
    37,501,000
    
    
    
    92,461,000Cash and cash equivalents at end of the period
    
    $
    37,437,000
    
    
    $
    93,572,000Supplementary Cash Flow Information:Cash payments for income taxes, net of refunds
    
    $
    12,612,000
    
    
    $
    5,883,000Issuance of 66,000 shares of Common Stock related to acquisition
    
    $
    4,494,000
    
    
    $
    Issuance of 49,000 shares of Common Stock in 2009 and
61,000 shares of Common Stock in 2008 pursuant to
Employee Stock Plans
    
    $
    777,000
    
    
    $
    1,293,000
  -5-




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For the Nine Months Ended September 30, 2009AdditionalCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    Treasury
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Stock
    
    
    EquityBalance, December
31, 2008
    
    
    45,563,000
    
    
    $
    456,000
    
    
    $
    84,421,000
    
    
    $
    137,741,000
    
    
    
    ($20,936,000
    )
    
    $
    201,682,000Net income for the
period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,776,000
    
    
    
    
    
    
    
    23,776,000Exercise of stock
options and other
stock-based
compensation,
net of 5,000
shares tendered
for payment
    
    
    126,000
    
    
    
    1,000
    
    
    
    758,000
    
    
    
    
    
    
    
    67,000
    
    
    
    826,000Share-based
compensation
expense  stock
options
    
    
    
    
    
    
    
    
    
    
    532,000
    
    
    
    
    
    
    
    
    
    
    
    532,000Tax benefit arising
from Stock Plans
transactions
    
    
    
    
    
    
    
    
    
    
    373,000
    
    
    
    
    
    
    
    
    
    
    
    373,000Treasury shares
issued for Deferred
Compensation Plan
funding and
redemptions
(21,000 shares)
    
    
    
    
    
    
    
    
    
    
    331,000
    
    
    
    
    
    
    
    23,000
    
    
    
    354,000Shares issued
pursuant to
Employee Stock
Plans (49,000
shares)
    
    
    
    
    
    
    
    
    
    
    351,000
    
    
    
    
    
    
    
    426,000
    
    
    
    777,000Cash dividends -
$.54 per common
share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,506,000
    )
    
    
    
    
    
    
    (23,506,000
    )Shares issued pursuant
to Dividend
Reinvestment Plan
(4,000 shares)
    
    
    
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    34,000
    
    
    
    64,000Shares issued
pursuant to
acquisition
(66,000)
    
    
    
    
    
    
    
    
    
    
    3,903,000
    
    
    
    
    
    
    
    591,000
    
    
    
    4,494,000Balance, September
30, 2009
    
    
    45,689,000
    
    
    $
    457,000
    
    
    $
    90,699,000
    
    
    $
    138,011,000
    
    
    $
    (19,795,000
    )
    
    $
    209,372,000
  -6-




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1   Basis of Reporting
     -7-




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Note 2  Fair Value Measurements and Marketable Securities
   As of September 30, 2009Fair Value Measurement Using:SignificantQuoted Prices
    
    Other
    
    Significantin Active
    
    Observable
    
    UnobservableCarrying
    
    
    
    
    
    Markets
    
    Inputs
    
    InputsAmount
    
    Total Fair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Financial AssetsMarketable Securities
    
    $
    51,594,000
    
    
    $
    51,594,000
    
    
    $
    51,594,000
    
    
    $
    
    
    
    $
    Deferred Compensation
Funding
    
    $
    10,241,000
    
    
    $
    10,241,000
    
    
    $
    10,241,000
    
    
    $
    
    
    
    $
    
 As of December 31, 2008Fair Value Measurement Using:SignificantQuoted Prices
    
    Other
    
    Significantin Active
    
    Observable
    
    UnobservableCarrying
    
    
    
    
    
    Markets
    
    Inputs
    
    InputsAmount
    
    Total Fair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Financial AssetsMarketable Securities
    
    $
    49,414,000
    
    
    $
    49,414,000
    
    
    $
    49,414,000
    
    
    $
    
    
    
    $
    Deferred Compensation
Funding
    
    $
    8,287,000
    
    
    $
    8,287,000
    
    
    $
    8,287,000
    
    
    $
    
    
    
    $
    
  -8-




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Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    EstimatedCost
    
    Gains
    
    Losses
    
    Fair ValueSeptember 30, 2009Type of security:Marketable Securities
    
    $
    49,859,000
    
    
    $
    1,735,000
    
    
    $
    
    
    
    $
    51,594,000
 Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    EstimatedCost
    
    Gains
    
    Losses
    
    Fair ValueDecember 31, 2008Type of security:Marketable Securities
    
    $
    48,268,000
    
    
    $
    1,146,000
    
    
    $
    
    
    
    $
    49,414,000
 Note 3   Goodwill and Other Intangible Assets
    Acquisition
    
    
    Amortization ExpenseAmount
    
    
    3rd Quarter
    
    
    Nine MonthsCustomer Relationships
    
    $
    12,100,000
    
    
    $
    432,000
    
    
    $
    1,039,000Non-compete Agreements
    
    
    800,000
    
    
    
    25,000
    
    
    
    75,000Total
    
    $
    12,900,000
    
    
    $
    457,000
    
    
    $
    1,114,000
 -9-




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##### Table of Contents



Customer
    
    Non-CompetePeriod/Year
    
    Relationships
    
    Agreements
    
    TotalOctober 1 to
December 31, 2009
    
    $
    432,000
    
    
    $
    25,000
    
    
    $
    457,0002010
    
    $
    1,729,000
    
    
    $
    100,000
    
    
    $
    1,829,0002011
    
    $
    1,729,000
    
    
    $
    100,000
    
    
    $
    1,829,0002012
    
    $
    1,729,000
    
    
    $
    100,000
    
    
    $
    1,829,0002013
    
    $
    1,410,000
    
    
    $
    100,000
    
    
    $
    1,510,000
  CES
    
    Summit

    
    All other
    
    Total$2,034,000
    
    $
    
    13,408,000
    
    
    $
    1,612,000
    
    
    $
    17,054,000
  Segment
    
    AmountFood
    
    $
    2,380,000Housekeeping
    
    
    14,674,000Total
    
    $
    17,054,000
 Note 4   Other Contingencies
   -10-




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Note 5   Segment Information
 Reportable Operating Segments
   -11-




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Housekeeping
    
    Food
    
    Corporate andservices
    
    services
    
    eliminations
    
    TotalQuarter Ended
September 30, 2009Revenues
    
    $
    136,496,000
    
    
    $
    42,322,000
    
    
    $
    11,000
    
    
    $
    178,829,000Income before income
taxes
    
    $
    12,908,000
    
    
    $
    1,431,000
    
    
    $
    (965,000
    )(1)
    
    $
    13,374,000Quarter Ended
September 30, 2008Revenues
    
    $
    124,793,000
    
    
    $
    29,423,000
    
    
    $
    (1,238,000
    )
    
    $
    152,978,000Income before income
taxes
    
    $
    11,542,000
    
    
    $
    717,000
    
    
    $
    (3,281,000
    )(1)
    
    $
    8,978,000Nine Months Ended
September 30, 2009Revenues
    
    $
    393,431,000
    
    
    $
    116,567,000
    
    
    $
    136,000
    
    
    $
    510,134,000Income before income
taxes
    
    $
    38,528,000
    
    
    $
    5,194,000
    
    
    $
    (5,063,000
    )(1)
    
    $
    38,659,000Nine Months Ended
September 30, 2008Revenues
    
    $
    364,263,000
    
    
    $
    84,256,000
    
    
    $
    (364,000
    )
    
    $
    448,155,000Income before income
taxes
    
    $
    34,585,000
    
    
    $
    2,696,000
    
    
    $
    (5,848,000
    )(1)
    
    $
    31,433,000
 
 (1)
    
    represents primarily corporate office cost and related overhead, as well as
consolidated subsidiarys operations that are not allocated to the reportable segments. Total Revenues from Clients
  For the Quarter Ended September 30,2009
    
    
    2008Housekeeping services
    
    $
    92,459,000
    
    
    $
    85,048,000Laundry and linen services
    
    
    43,465,000
    
    
    
    38,556,000Food Services
    
    
    42,305,000
    
    
    
    28,861,000Maintenance services
and Other
    
    
    600,000
    
    
    
    513,000$
    178,829,000
    
    
    $
    152,978,000
 -12-




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##### Table of Contents



For the Nine Months Ended September 30,2009
    
    
    2008Housekeeping services
    
    $
    267,602,000
    
    
    $
    249,924,000Laundry and linen services
    
    
    124,205,000
    
    
    
    112,763,000Food Services
    
    
    116,527,000
    
    
    
    83,870,000Maintenance services
and Other
    
    
    1,800,000
    
    
    
    1,598,000$
    510,134,000
    
    
    $
    448,155,000
 Major Client
  2009
    
    2009Nine months
    
    3rd quarterTotal revenues
    
    
    13
    %
    
    
    12
    %Housekeeping
    
    
    13
    %
    
    
    12
    %Food
    
    
    12
    %
    
    
    11
    %
 2008
    
    2008Nine months
    
    3rd quarterTotal revenues
    
    
    15
    %
    
    
    14
    %Housekeeping
    
    
    14
    %
    
    
    14
    %Food
    
    
    18
    %
    
    
    16
    %
  Note 6   Earnings Per Common Share
  Quarter Ended September 30, 2009Income
    
    
    Shares
    
    
    Per-share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet income
    
    $
    8,225,000Basic earnings per
common share
    
    $
    8,225,000
    
    
    
    43,626,000
    
    
    $
    .19Effect of dilutive
securities:Options
    
    
    
    
    
    
    708,000Diluted earnings per
common share
    
    $
    8,225,000
    
    
    
    44,334,000
    
    
    $
    .19
 -13-




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##### Table of Contents



Quarter Ended September 30, 2008Income
    
    
    Shares
    
    
    Per-share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet income
    
    $
    5,522,000Basic earnings per
common share
    
    $
    5,522,000
    
    
    
    43,143,000
    
    
    $
    .13Effect of dilutive securities:Options
    
    
    
    
    
    
    837,000Diluted earnings per
common share
    
    $
    5,522,000
    
    
    
    43,980,000
    
    
    $
    .13
 Nine Months Ended September 30, 2009Income
    
    
    Shares
    
    
    Per-share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet income
    
    $
    23,776,000Basic earnings per
common share
    
    $
    23,776,000
    
    
    
    43,540,000
    
    
    $
    .55Effect of dilutive securities:Options
    
    
    
    
    
    
    684,000
    
    
    
    (.01
    )Diluted earnings per
common share
    
    $
    23,776,000
    
    
    
    44,224,000
    
    
    $
    .54
 Nine Months Ended September 30, 2008Income
    
    
    Shares
    
    
    Per-share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet income
    
    $
    19,331,000Basic earnings per
common share
    
    $
    19,331,000
    
    
    
    43,078,000
    
    
    $
    .45Effect of dilutive securities:Options
    
    
    
    
    
    
    972,000
    
    
    
    (.01
    )Diluted earnings per
common share
    
    $
    19,331,000
    
    
    
    44,050,000
    
    
    $
    .44
   Note 7  Dividends
  -14-




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##### Table of Contents



1st Quarter
    
    2nd Quarter
    
    3rd QuarterCash dividend per common share
    
    $
    .17
    
    
    $
    .18
    
    
    $
    .19Total cash dividends paid
    
    $
    7,388,000
    
    
    $
    7,826,000
    
    
    $
    8,292,000Record date
    
    
    February 6
    
    
    
    April 24
    
    
    
    July 24Payment date
    
    
    February 20
    
    
    
    May 15
    
    
    
    August 7
  Note 8  Share-Based Compensation
 Stock Options
  Weighted AverageRemainingContractual
    
    
    AggregateWeighted Average
    
    
    Number
    
    
    Life
    
    
    IntrinsicPrice
    
    
    of Shares
    
    
    ( In Years)
    
    
    ValueOutstanding, January 1, 2009
    
    $
    10.14
    
    
    
    1,896,000Granted
    
    
    15.58
    
    
    
    421,000Cancelled
    
    
    19.00
    
    
    
    (30,000
    )Exercised
    
    
    6.58
    
    
    
    (138,000
    )Outstanding, September 30, 2009
    
    $
    11.31
    
    
    
    2,149,000
    
    
    
    5.24
    
    
    $
    16,055,000Options exercisable as of
September 30, 2009
    
    
    
    
    
    
    1,458,000
    
    
    
    3.52
    
    
    $
    14,914,000
  Options Outstanding
    
    
    
    
    
    
    Options ExercisableAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    Number
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    ExercisePrice Range
    
    
    
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$
    1.50 - 2.74
    
    
    
    
    
    185,000
    
    
    
    2.06
    
    
    $
    2.64
    
    
    
    185,000
    
    
    $
    2.643.01 - 5.53
    
    
    
    
    
    561,000
    
    
    
    3.77
    
    
    
    4.76
    
    
    
    561,000
    
    
    
    4.769.10 - 9.10
    
    
    
    
    
    311,000
    
    
    
    5.24
    
    
    
    9.10
    
    
    
    311,000
    
    
    
    9.1013.81 - 15.58
    
    
    
    
    
    739,000
    
    
    
    5.70
    
    
    
    14.78
    
    
    
    330,000
    
    
    
    13.81$
    20.89 - 20.89
    
    
    
    
    
    353,000
    
    
    
    8.26
    
    
    
    20.89
    
    
    
    71,000
    
    
    
    20.892,149,000
    
    
    
    5.24
    
    
    $
    11.31
    
    
    
    1,458,000
    
    
    $
    8.25
  -15-




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##### Table of Contents



September
    
    September30, 2009
    
    30, 2008Weighted average grant-date fair value of stock options granted:
    
    $
    1,545,000
    
    
    $
    2,237,000Total fair value of stock options vested:
    
    $
    447,000
    
    
    $
    -0-Total pre-tax intrinsic value of stock options exercised:
    
    $
    1,535,000
    
    
    $
    9,092,000Total pre-tax share-based compensation expense charged
against income:
    
    $
    532,000
    
    
    $
    335,000Total unrecognized compensation expense related to non-vested
options:
    
    $
    2,615,000
    
    
    $
    1,902,000
   2009
    
    2008Risk-free interest rate
    
    
    2.5
    %
    
    
    4.2
    %Expected volatility
    
    
    41.0
    %
    
    
    35.9
    %Weighted average expected life in years
    
    
    4.5
    
    
    
    4.5Dividend yield
    
    
    3.6
    %
    
    
    2.0
    %
 Employee Stock Purchase Plan
  2009
    
    20083rd Quarter
    
    Nine Months
    
    3rd Quarter
    
    Nine Months$63,000
    
    $
    207,000
    
    
    $
    37,000
    
    
    $
    194,000
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##### Table of Contents



20093rd Quarter
    
    Nine MonthsRisk-free interest rate
    
    
    0.2
    %
    
    
    0.2
    %Expected volatility
    
    
    62.9
    %
    
    
    62.9
    %Weighted average expected life (in years)
    
    
    1.0
    
    
    
    1.0Dividend yield
    
    
    3.6
    %
    
    
    3.6
    %
 20083rd Quarter
    
    Nine MonthsRisk-free interest rate
    
    
    3.6
    %
    
    
    3.6
    %Expected volatility
    
    
    38.8
    %
    
    
    38.8
    %Weighted average expected life (in years)
    
    
    1.0
    
    
    
    1.0Dividend yield
    
    
    2.0
    %
    
    
    2.0
    %
  Note 9  Related Party Transactions
   Note 10  Income Taxes
   -17-




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##### Table of Contents



Note 11  Subsequent Events
  Note 12  Recently Issued Accounting Pronouncements
    -18-




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##### Table of Contents



-19-




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##### Table of Contents



ITEM 2    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 Cautionary Statement Regarding Forward Looking Statements
   -20-




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##### Table of Contents



RESULTS OF OPERATIONS
  Overview
       -21-




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##### Table of Contents



Consolidated Operations
  Relation to Consolidated RevenuesFor the Quarter Ended Sept 30,
    
    For the Nine Months Ended Sept 30,2009
    
    2008
    
    2009
    
    2008Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Operating costs and expenses:Costs of services provided
    
    
    86.8
    
    
    
    87.7
    
    
    
    86.0
    
    
    
    86.4Selling, general and
administration
    
    
    6.7
    
    
    
    6.3
    
    
    
    7.1
    
    
    
    6.8Investment and interest income
    
    
    1.0
    
    
    
    (.1
    )
    
    
    .7
    
    
    
    .2Income before income taxes
    
    
    7.5
    
    
    
    5.9
    
    
    
    7.6
    
    
    
    7.0Income taxes
    
    
    2.9
    
    
    
    2.3
    
    
    
    2.9
    
    
    
    2.7Net income
    
    
    4.6
    %
    
    
    3.6
    %
    
    
    4.7
    %
    
    
    4.3
    %
  -22-




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##### Table of Contents



2009 Third Quarter Compared with 2008 Third Quarter
  Reportable SegmentsPercent
    
    Corporate and
    
    Housekeeping
    
    FoodConsolidated
    
    increase
    
    eliminations
    
    Amount
    
    % increase
    
    Amount
    
    % increaseRevenues
    
    $
    178,829,000
    
    
    
    16.9
    %
    
    $
    (11,000
    )
    
    $
    136,496,000
    
    
    
    9.4
    %
    
    $
    42,322,000
    
    
    
    43.8
    %Cost of services provided
    
    
    155,228,000
    
    
    
    15.6
    
    
    
    (9,250,000
    )
    
    
    123,587,000
    
    
    
    9.1
    
    
    
    40,891,000
    
    
    
    42.4Selling, general and
administrative expense
    
    
    11,936,000
    
    
    
    24.1
    
    
    
    11,936,000
    
    
    
    
    
    
    
    
    
    
    
    Investment and interest income
    
    
    1,709,000
    
    
    
    N/A
    
    
    
    1,709,000
    
    
    
    
    
    
    
    
    
    
    
    Income before income taxes
    
    $
    13,374,000
    
    
    
    49.0
    %
    
    $
    966,000
    
    
    $
    12,909,000
    
    
    
    11.8
    %
    
    $
    1,431,000
    
    
    
    99.6
    %
 Revenues
 Consolidated
   Reportable Segments
  -23-




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##### Table of Contents



Costs of services provided
 Consolidated
  IncrCost of Services Provided-Key Indicators
    
    2009 %
    
    2008 %
    
    (Decr) %Bad debt provision
    
    
    .3
    
    
    
    1.4
    
    
    
    (1.1
    )Workers compensation and general
liability insurance
    
    
    4.0
    
    
    
    3.9
    
    
    
    .1
   Reportable Segments
   Cost of Services Provided-Key Indicators
    
    2009 %
    
    2008 %
    
    Incr (Decr) %Housekeeping labor and other labor costs
    
    
    81.4
    
    
    
    81.6
    
    
    
    (.2
    )Housekeeping supplies
    
    
    6.8
    
    
    
    6.0
    
    
    
    .8Food labor and other labor costs
    
    
    53.3
    
    
    
    53.3
    
    
    
    Food supplies
    
    
    40.8
    
    
    
    40.2
    
    
    
    .6
  -24-




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##### Table of Contents



Consolidated Selling, General and Administrative Expense
  Consolidated Investment and Interest Income
  Income before Income Taxes
 Consolidated
  Reportable Segments
   Consolidated Income Taxes
  -25-




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##### Table of Contents



Consolidated Net Income
  2009 Nine Month Period Compared with 2008 Nine Month Period
  Reportable SegmentsPercent
    
    Corporate and
    
    Housekeeping
    
    FoodConsolidated
    
    increase
    
    eliminations
    
    Amount
    
    % incr
    
    Amount
    
    % incrRevenues
    
    $
    510,134,000
    
    
    
    13.8
    %
    
    $
    (136,000
    )
    
    $
    393,431,000
    
    
    
    8.0
    %
    
    $
    116,567,000
    
    
    
    38.3
    %Cost of services provided
    
    
    438,950,000
    
    
    
    13.4
    
    
    
    (27,326,000
    )
    
    
    354,903,000
    
    
    
    7.7
    
    
    
    111,373,000
    
    
    
    36.5Selling, general and
administrative expense
    
    
    36,328,000
    
    
    
    19.8
    
    
    
    36,328,000
    
    
    
    
    
    
    
    
    
    
    
    Investment and interest income
    
    
    3,803,000
    
    
    
    404.9
    
    
    
    3,803,000
    
    
    
    
    
    
    
    
    
    
    
    Income before income taxes
    
    $
    38,659,000
    
    
    
    23.0
    %
    
    $
    (5,063,000
    )
    
    $
    38,528,000
    
    
    
    11.4
    %
    
    $
    5,194,000
    
    
    
    92.7
    %
 Revenues
 Consolidated
   Reportable Segments
    Costs of services provided
 Consolidated
  -26-




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##### Table of Contents



IncrCost of Services Provided-Key Indicators
    
    2009 %
    
    2008 %
    
    (Decr) %Bad debt provision
    
    
    .4
    
    
    
    .7
    
    
    
    (.3
    )Workers compensation and general
liability insurance
    
    
    3.9
    
    
    
    3.4
    
    
    
    .5
   Reportable Segments
   Cost of Services Provided-Key Indicators
    
    2009 %
    
    2008 %
    
    Incr (Decr) %Housekeeping labor and other labor costs
    
    
    81.3
    
    
    
    81.4
    
    
    
    (.1
    )Housekeeping supplies
    
    
    6.3
    
    
    
    6.1
    
    
    
    .2Food labor and other labor costs
    
    
    52.5
    
    
    
    53.3
    
    
    
    (.8
    )Food supplies
    
    
    39.9
    
    
    
    39.8
    
    
    
    .1
   Consolidated Selling, General and Administrative Expense
  -27-




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##### Table of Contents



Consolidated Investment and Interest Income
  Income before Income Taxes
 Consolidated
  Reportable Segments
   Consolidated Income Taxes
  Consolidated Net Income
  -28-




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##### Table of Contents



Critical Accounting Policies and Estimates
    Allowance for Doubtful Accounts
    -29-




---



##### Table of Contents



Aggregate AccountBalances of Clientsin Bankruptcy orPeriod
    
    In/Pending
    
    Net Write-Offs
    
    Bad Debt
    
    Allowance forEnded
    
    Collection/Litigation
    
    of Client Accounts
    
    Provision
    
    Doubtful AccountsSeptember
30, 2009
    
    $
    9,954,000
    
    
    $
    770,000
    
    
    $
    1,956,000
    
    
    $
    4,400,000December
31, 2008
    
    $
    8,417,000
    
    
    $
    5,304,000
    
    
    $
    4,234,000
    
    
    $
    3,214,000
   Accrued Insurance Claims
  -30-




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##### Table of Contents



Asset Valuations and Review for Potential Impairment
  Liquidity and Capital Resources
  -31-




---



##### Table of Contents



Operating Activities
  Investing Activities
  Financing Activities
   1st Quarter
    
    2nd Quarter
    
    3rd QuarterCash dividend per common share
    
    $
    .17
    
    
    $
    .18
    
    
    $
    .19Total cash dividends paid
    
    $
    7,388,000
    
    
    $
    7,826,000
    
    
    $
    8,292,000Record date
    
    
    February 6
    
    
    
    April 24
    
    
    
    July 24Payment date
    
    
    February 20
    
    
    
    May 15
    
    
    
    August 7
    -32-




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##### Table of Contents



Line of Credit
   Covenant Description and Requirement
    
    Status at September 30, 2009Commitment coverage ratio: cash and cash
equivalents must equal or exceed outstanding
obligations under the line by a multiple of 2
    
    Commitment coverage is 2.8Tangible net worth: must exceed $164,330,000
    
    Tangible net worth is $183,000,000
  Accounts and Notes Receivable
   -33-




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##### Table of Contents



Insurance Programs
   -34-




---



##### Table of Contents



Capital Expenditures
  Material Off-Balance Sheet Arrangements
  Effects of Inflation
  -35-




---



##### Table of Contents



ITEM 3
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
    Certifications
  -36-




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1 Legal Proceedings
 
 ITEM 1A. Risk Factors
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 3 Defaults under Senior Securities.
 
 ITEM 4. Submission of Matters to a Vote of Security Holders
 
 ITEM 5. Other Information.
  
 ITEM 6. Exhibits
 a)
    
    Exhibits -
     -37-




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##### Table of Contents



SIGNATURES
  HEALTHCARE SERVICES GROUP,
INC.October 16, 2009
    
    /s/ Daniel P. McCartneyDate
    
    DANIEL P. McCARTNEY, ChiefExecutive OfficerOctober 16, 2009
    
    /s/Richard W. HudsonDate
    
    RICHARD W. HUDSON, ChiefFinancial Officer and Secretary
 -38-