HEALTHCARE SERVICES GROUP INC Management’s Discussion and Analysis of Financial Condition and Results of Operations. (Form 10-K)

You should read the following discussion and analysis of our financial condition
and results of our operations in conjunction with our Consolidated Financial
Statements and the related notes to those statements included elsewhere in this
report. This discussion contains forward-looking statements reflecting our
current expectations that involve risks and uncertainties. Our actual results
and the timing of events may differ materially from those contained in these
forward-looking statements due to a number of factors, including those discussed
in the section entitled "Risk Factors," and elsewhere in this report on Form
10-K. We are on a calendar year end, and except where otherwise indicated,
"2021" refers to the year ended December 31, 2021, and "2020" refers to the year
ended December 31, 2020. Discussions of 2019 items and year-to-year comparisons
between 2020 and 2019 that are not included in this Form 10-K can be found in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal
year ended December 31, 2020.

Operating results

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 when 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 consolidated financial
statements as of December 31, 2021 and for the year then ended and the notes
accompanying those financial statements.

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COVID-19 Considerations

The Company's priorities during the COVID-19 pandemic are protecting the health
and safety of our employees; maximizing the impact of our main services in
helping customers with the housekeeping and dietary services needs of their
facilities, and deploying the talents of our employees and our resources to help
the communities we serve meet and overcome the current challenges. During the
year ended December 31, 2021, the COVID-19 pandemic did not have a material net
impact on our consolidated operating results. Revenues for the year ended
December 31, 2021 included $5.7 million of COVID-19 supplemental billings,
primarily related to employee pay premiums passed through to customers, which
were offset by temporary decreases in recurring billings as a result of
census-driven cost reductions in staffing and purchasing. In the future, the
pandemic may cause reduced demand for our services if, for example, the pandemic
results in a recessionary economic environment to the long-term care and skilled
nursing industries in which we serve; however since the services that we offer
are essential to our customers, and although there can be no assurance, we
believe that over the long term, there will continue to be strong demand for our
services. The full impact that COVID-19 will have on our future revenues is not
known at this time.

Our ability to continue to operate without significant negative operational
impact from the COVID-19 pandemic will in part depend on our ability to protect
our employees and our supply chain. The Company has endeavored to follow the
recommended actions of government and health authorities to protect our
employees, with particular measures in place for those working in our customer
facilities. For the year ended December 31, 2021, we have maintained the
consistency of our operations since the onset of the COVID-19 pandemic. We will
continue to innovate in managing our business, coordinating with nursing
departments to do our part in the infection prevention and control continuum and
remain flexible in responding to our customer-partners. However, the continued
uncertainty resulting from the pandemic, and any new or additional measures
required by national, state or local governments to combat COVID-19, such as a
COVID-19 vaccine mandate, could result in an unforeseen disruption to our
workforce and supply chain (for example, an inability of a key supplier or
transportation supplier to source and transport materials) that could negatively
impact our operations or employee availability.

Through December 31, 2021, we continue to generate operating cash flows to meet
our short-term liquidity needs, and although there can be no assurance, we
expect to maintain access to the capital markets. We have also not observed any
material impairments of our assets or a significant change in the fair value of
our assets due to the COVID-19 pandemic.

For more information on risk factors related to the pandemic or other risks that could affect our results, please refer to the “Risk Factors” section of Part I, point 1A of this Form 10-K.

Overview

We provide management, administrative and operating expertise and services to
the housekeeping, laundry, linen, facility maintenance and dietary service
departments of healthcare facilities, including nursing homes, retirement
complexes, rehabilitation centers and hospitals located throughout the United
States. We believe we are the largest provider of housekeeping and laundry
management services to the long-term care industry in the United States,
rendering such services to approximately 3,000 facilities throughout the
continental United States as of December 31, 2021.

We provide services primarily pursuant to full service agreements with our
customers. Under such agreements, we are responsible for the day-to-day
management of the employees located at our customers' facilities, as well as for
the provision of certain supplies. We also provide services on the basis of
management-only agreements for a limited number of customers. Under a
management-only agreement, we provide management and supervisory services while
the customer facility retains payroll responsibility for the non-supervisory
staff. Our agreements with customers typically provide for a renewable one year
service term, cancellable by either party upon 30 to 90 days' notice after an
initial period of 60 to 120 days.

We are organized into two reportable segments: Housekeeping, Laundry, Linen and Other Services (“Housekeeping”) and Dietary Services (“Dietary”).

Housekeeping consists of managing our customers' housekeeping departments, which
are principally responsible for the cleaning, disinfecting and sanitizing of
resident rooms and common areas of the customers' facilities, as well as the
laundering and processing of the bed linens, uniforms, resident personal
clothing and other assorted linen items utilized at the customers' facilities.
Upon beginning service with a customer facility, we typically hire and train the
employees previously employed by such facility and assign an on-site manager to
supervise and train the front-line personnel and coordinate housekeeping
services with other facility support functions in accordance with customer
requests. Such management personnel also oversee the execution of various cost
and quality control procedures including continuous training and employee
evaluation.

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Dietary consists of managing our customers' dietary departments, which are
principally responsible for food purchasing, meal preparation and professional
dietitian services, which include the development of menus that meet the dietary
needs of residents. On-site management is responsible for all daily dietary
department activities, with regular support provided by a District Manager
specializing in dietary services. We also offer clinical consulting services to
our dietary customers, which may be provided as a stand-alone service, or
bundled with other dietary department services. Upon beginning service with a
customer facility, we typically hire and train the employees previously employed
by such facility and assign an on-site manager to supervise and train the
front-line personnel and coordinate dietitian services with other facility
support functions in accordance with customer requests. Such management
personnel also oversee the execution of various cost and quality control
procedures including continuous training and employee evaluation.

At December 31, 2021, Housekeeping services were provided at essentially all of
our approximately 3,000 customer facilities, generating approximately 50.0% or
$821.3 million of our consolidated revenues for the year ended December 31,
2021. Dietary services were provided to over 1,500 customer facilities at
December 31, 2021 and contributed approximately 50.0% or $820.6 million of our
consolidated revenues for the year ended December 31, 2021.

Our workers' compensation, general liability and certain employee health and
welfare insurance programs are provided by HCSG Insurance Corp. ("HCSG
Insurance" or the "Captive"), our wholly-owned captive insurance subsidiary.
HCSG Insurance provides the Company with greater flexibility and cost efficiency
in meeting our insurance needs. In 2015, we completed a corporate restructuring
by capitalizing three new operating entities and transitioning our
facility-based employees to such entities based on the geography served. HCSG
Insurance provides workers' compensation, general liability and other insurance
coverages to such entities with respect to such transitioned workforce, such
entities provide housekeeping, laundry and dietary services as a subcontracted
provider to the Company, and the Company provides strategic customer-service
management and administrative support services to such entities.

Our ability to acquire new customers, retain existing customers and increase
revenues are affected by many factors. Competitive factors consist primarily of
competing with potential customers' use of in-house support staff, as well as a
number of firms which compete with us in the regional and national markets in
which we conduct business. We believe the primary revenue drivers of our
business are our ability to obtain new customers and to provide additional
services to existing customers. In addition, we seek to pass through, by means
of service billing increases, increases in our cost of providing the services,
while also aiming to obtain modest annual revenue increases from our existing
customers to attain desired profit margins at the facility level. The primary
economic factor in acquiring new customers is our ability to demonstrate the
cost-effectiveness of our services, because many of our customers' revenues are
generally highly reliant on Medicare and Medicaid reimbursements. Therefore, our
customers' economic decision-making is driven significantly by their
reimbursement funding rate structure and the financial impact on their
reimbursement as a result of engaging us for the respective services. The
primary operational factor is our ability to demonstrate to potential customers
the benefits of being relieved of the administrative and operational challenges
related to the day-to-day management of their housekeeping and dietary
operations. In addition, we must be able to assure new customers that we can
improve the quality of service that they are providing to their residents. We
believe the factors discussed above are equally applicable to each of our
segments with respect to acquiring new customers and increasing revenues.

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Table of contents When evaluating financial performance, we consider the ratio of certain financial items to consolidated revenues. The table below summarizes these measures for 2021, 2020 and 2019:

Relationship to consolidated revenue

                                                                             Year Ended December 31,
                                                               2021                     2020                    2019
Revenues                                                           100.0  %                100.0  %                100.0  %
Operating costs and expenses:
Costs of services provided                                          86.2  %                 84.8  %                 87.6  %

Selling, general and administrative expenses excluding change in deferred compensation liability

                           10.1  %                  8.0  %                  7.8  %
Gain on deferred compensation plan                                   0.4  %                  0.6  %                  0.4  %
Selling, general and administrative expense                         10.5  %                  8.6  %                  8.2  %
Other income (expense):
Investment and other income, net                                     0.6  %                  0.8  %                  0.6  %
Interest expense                                                    (0.1) %                 (0.1) %                 (0.2) %
Income before income taxes                                           3.8  %                  7.3  %                  4.6  %
Income tax                                                           1.0  %                  1.7  %                  1.1  %
Net income                                                           2.8  %                  5.6  %                  3.5  %



Our costs of services can vary and may impact our operating performance.
Management reviews two primary indicators (costs of labor and costs of supplies
as percentages of segment revenues) to monitor and manage such costs. The
variability of these costs may impact each segment differently, as Housekeeping
is more significantly impacted by costs of labor than Dietary. Labor costs
accounted for approximately 80.9% of Housekeeping revenues in 2021. Dietary
labor costs accounted for approximately 64.0% of Dietary revenues in 2021.
Changes in wage rates as a result of legislative or collective bargaining
actions, market factors, adjustments to staffing levels, and other variations in
our use of labor or managing labor costs can result in variability of these
costs. Housekeeping supplies, including linen products, accounted for
approximately 6.5% of Housekeeping revenues in 2021. In contrast, supplies
consumed in performing our Dietary services accounted for approximately 27.9% of
Dietary revenues. Generally, fluctuations in these expenses are influenced by
factors outside of our control and are unpredictable. Housekeeping and Dietary
supplies are principally commodity products and are affected by market
conditions specific to the respective products. Our consolidated costs of
services decreased 2.8% for the year ended December 31, 2020 as compared to 2019
due to higher than normal bad debt expense incurred during the year ended
December 31, 2019.

Our customers are concentrated in the healthcare industry and are primarily
providers of long-term care. Many of our customers' revenues are highly reliant
on Medicare, Medicaid and third-party payors' reimbursement funding rates.
Legislation can significantly alter overall government reimbursement for nursing
home services and such changes, as well as other trends in the long-term care
industry, have affected and could adversely affect our customers' cash flows,
resulting in their inability to make payments to us in accordance with
agreed-upon payment terms. The climate of legislative uncertainty has posed, and
will continue to pose, both risks and opportunities for us: the risks are
related to our customers' cash flows and solvency, while the opportunities are
related to our ability to offer our customers cost stability and efficiencies.

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Years Ended December 31, 2021 and 2020

The following table summarizes the income statement key components that we use
to evaluate our financial performance on a consolidated and reportable segment
basis, for the years ended December 31, 2021 and 2020. The differences between
the reportable segments' operating results and other disclosed data and our
consolidated financial results relate primarily to corporate level transactions
and adjustments related to transactions recorded at the reportable segment level
which use methods other than generally accepted accounting principles.

                                                          Year Ended December 31,
                                                    2021             2020          % Change
                                                        (in thousands)
Revenues
Housekeeping                                    $   821,329      $   895,267         (8.3) %
Dietary                                             820,630          865,036         (5.1) %
Consolidated                                    $ 1,641,959      $ 1,760,303         (6.7) %

Costs of services provided
Housekeeping                                    $   741,949      $   799,544         (7.2) %
Dietary                                             774,872          796,743         (2.7) %
Corporate and eliminations                         (101,739)        (103,970)        (2.1) %
Consolidated                                    $ 1,415,082      $ 1,492,317         (5.2) %

Selling, general and administrative expense
Corporate and eliminations                      $   173,108      $   

150,778 14.8%

Investment and other income, net
Corporate                                       $     9,439      $    13,352        (29.3) %

Interest expense
Corporate                                       $    (1,385)     $    (1,374)         0.8  %

Income (loss) before income taxes
Housekeeping                                    $    79,380      $    95,723        (17.1) %
Dietary                                              45,758           68,293        (33.0) %
Corporate and eliminations                          (63,315)         (34,830)        81.8  %
Consolidated                                    $    61,823      $   129,186        (52.1) %

Income taxes
Corporate                                       $    15,960      $    30,504        (47.7) %



Revenues

Consolidated

Consolidated revenues decreased 6.7% to $1.6 billion for the year ended December
31, 2021 compared to the corresponding period in 2020 as a result of the factors
discussed below under Reportable Segments.

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Reportable Segments

Housekeeping and Dietary revenues decreased 8.3% and 5.1%, respectively, during
the year ended December 31, 2021 compared to the corresponding period in 2020,
primarily driven by decreases in recurring billings as a result of census-driven
reductions in staffing and purchasing, a decrease in the number of facilities
serviced and an agreement with a significant customer to modify pricing and
payment terms. Revenue for the year ended December 31, 2021 included
$5.7 million of COVID-19 supplemental billings, as compared to $32.3 million of
COVID-19 supplemental billings for the year ended December 31, 2020, primarily
related to employee pay premiums passed through to customers. The full impact
that COVID-19 will have on our future revenues is not yet known at this time.

Costs of services provided

Consolidated

Consolidated service costs decreased by 5.2% to $1.4 billion for the year ended December 31, 2021 compared to the corresponding period in 2020.

The following table presents a comparison of the key indicators that we take into account in the management of the consolidated costs of the services provided:

                                                                            Year Ended December 31,
Costs of Services Provided - Key Indicators as
a % of Consolidated Revenue                                 2021                      2020                     Change
Bad debt provision                                          0.6%                      0.5%                      0.1%
Self-insurance costs                                        3.0%                      1.9%                      1.1%


The increase in the bad debt provision is related to our current assessment of
the collectability of our accounts and notes receivable during the year ended
December 31, 2021. The increase in our self-insurance costs as a percentage of
consolidated revenue was primarily impacted by an unfavorable $0.2 million
adjustment to our self-insurance liability during 2021 after considering our
updated actuarial estimates for projected incurred losses on past claims as
compared to the $14.0 million favorable adjustment recorded in 2020.

Reportable Segments

Costs of services provided for Housekeeping, as a percentage of Housekeeping
revenues, increased to 90.3% for the year ended December 31, 2021 from 89.3% in
the corresponding period in 2020. Costs of services provided for Dietary, as a
percentage of Dietary revenues, increased to 94.4% for the year ended December
31, 2021 from 92.1% in the corresponding period in 2020.

The following table provides a comparison of the key indicators we consider when
managing costs of services provided at the segment level, as a percentage of the
respective segment's revenues:
                                                                             Year Ended December 31,
Costs of Services Provided - Key Indicators as
a % of Segment Revenue                                      2021                       2020                      Change
Housekeeping labor and other labor-related
costs                                                       80.9%                      80.5%                      0.4%
Housekeeping supplies                                       6.5%                       6.9%                      (0.4)%
Dietary labor and other labor-related costs                 64.0%                      63.7%                      0.3%
Dietary supplies                                            27.9%                      26.5%                      1.4%



Variations within these key indicators relate to the provision of services at
new facilities and changes in the mix of customers for whom we provide supplies
or do not provide supplies. Management focuses on building efficiencies and
managing labor and other costs at the facility level, as well as managing supply
chain costs, for new and existing facilities. The increase in dietary supplies
spend as a percentage of dietary revenues was driven by increases to our menu
costs, which are dependent on commodity pricing factors, during 2021.

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Consolidated Selling, General and Administrative Expense

Included in selling, general and administrative expense are gains and losses
associated with changes in the value of investments under our deferred
compensation liability. These investments represent the amounts held on behalf
of the participating employees as changes in the value of these investments
affect the amount of our deferred compensation liability. Gains on the plan
investments during the years ended December 31, 2021 and 2020 increased our
total selling, general and administrative expense for these periods.

Excluding the change in the deferred compensation plan described above,
consolidated selling, general and administrative expense increased $24.9 million
or 17.6% for the year ended December 31, 2021 compared to the corresponding
period in 2020. The increase was primarily a result of increased payroll costs,
increased travel and entertainment costs and increased legal and professional
fees incurred, including $6.0 million related to the settlement of the SEC
inquiry regarding the Company's earnings per share calculation practices and
$3.0 million related to a negotiated settlement of California labor and
employment matters. There is a possibility for additional increased selling,
general and administrative expense related to the pandemic.

The table below summarizes the changes in these components of selling, general
and administrative expense:
                                                                         Year Ended December 31,
                                                   2021                 2020             $ Change              % Change
                                                         (dollar amounts in thousands)
Selling, general and administrative expense
excluding change in deferred compensation
liability                                    $   166,432            $ 141,578          $  24,854                      17.6  %
Gain on deferred compensation plan
investments                                        6,676                9,200             (2,524)                    (27.4) %
Selling, general and administrative expense  $   173,108            $ 150,778          $  22,330                      14.8  %



Consolidated investment and interest income, net

Investment and other income decreased by 29.3% for $9.4 million for the year ended
December 31, 2021 compared to the corresponding period of 2020, primarily due to market fluctuations in the value of our investments in trading securities representing the funding of our deferred compensation plan.

Consolidated interest expense

Consolidated interest expense increased by 0.8% to $1.4 million for the year ended
December 31, 2021 compared to the corresponding 2020 period.

Consolidated income taxes

Our effective tax rate was 25.8% for the year ended December 31, 2021 compared to 23.6% in 2020. The increase in our 2021 tax rate compared to the corresponding period of 2020 was mainly impacted by the tax effect of our settlement with the SECOND to solve his investigation.

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Critical Accounting Policies and Estimates

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

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

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

Allowance for doubtful accounts

The allowance for doubtful accounts (the "Allowance") is established at the
origination of an account or note receivable in accordance with the Financial
Accounting Standards Board ("FASB") Accounting Standards Codification subtopic
326 Credit Losses - Measurement of Credit Losses on Financial Instruments ("ASC
326"). ASC 326 was adopted by the Company prospectively as of January 1, 2020.

In adopting ASC 326, the Company replaced its previous incurred loss impairment
model for estimating credit losses on accounts and notes receivables for its
reporting of quarterly and annual financial results with an expected loss model
prepared in accordance with ASC 326. While the incurred loss impairment model
had the Company recognize credit losses when it was probable that a loss had
been incurred, ASC 326 requires the Company to estimate the lifetime expected
credit losses on such instruments and to record an allowance to offset the
receivables. Accordingly, credit losses under ASC 326 are generally recognized
earlier in the life cycle of a receivable than under the Company's previous
incurred loss model.

The Allowance is evaluated quarterly based upon our financial models which
consider historical collections experience, current market conditions,
government funding of Medicare and Medicaid, and reasonable and supportable
economic forecasts to estimate lifetime expected credit losses. Portions of the
Allowance are inherently more sensitive to fluctuations in management's
assumptions than others, particularly any adjustments made to reflect reasonable
and supportable economic forecasts. Such qualitative assessments would be
expected to have a greater effect on aged accounts receivable and notes
receivable as compared to current receivables. Due to the prospective nature of
the Allowance under ASC 326, Management continues to review our portfolio of
accounts and notes receivable and any estimate of credit losses is inherently
subjective as it requires estimates that are susceptible to significant revision
as more information becomes available.

We have had varying collections experience with respect to our accounts and
notes receivable. We have at times elected to extend the period of payment for
certain customers beyond contractual terms. Such customers include those who
have terminated service agreements and slow payers experiencing financial
difficulties. In making credit evaluations, in addition to analyzing and
anticipating, where possible, the specific cases described above, we consider
customer-specific risks as well as the general collection risks associated with
trends in the long-term care industry. We establish credit limits through our
payment terms, perform ongoing credit evaluations, and monitor accounts to
minimize the risk of loss.

Despite our efforts to minimize credit risk exposure, our customers could be
adversely affected if future industry trends, as more fully discussed under
"Liquidity and Capital Resources" below, and in this Annual Report on Form 10-K
in Part I under "Government Regulation of Customers," "Service Agreements and
Collections" and "Risk Factors" change in such a manner as to negatively impact
the cash flows of our customers. If our customers experience a negative impact
in their cash flows, it could have a material adverse effect on our results of
operations and financial condition.

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Accrued Insurance Claims

We currently have a Paid Loss Retrospective Insurance Plan for general
liability, workers' compensation insurance and other self-insurance programs,
which comprise approximately 27.5% of our liabilities at December 31, 2021.
Under our insurance plans predetermined loss limits are arranged with our
insurance company to limit both our per occurrence cash outlay and annual
insurance plan cost. Our accounting for this plan utilizes current valuations
from a third party actuary, which include assumptions based on data such as
historical claims and pay-out experience, demographic factors, industry trends,
severity factors, and other actuarial calculations. In the event that our claims
experience and/or industry trends result in an unfavorable change in our
assumptions or outcomes, it would have an adverse effect on our results of
operations and financial condition. Recently, our claims experiences have been
favorable, as a result of our ongoing initiative to promote safety and accident
prevention in the workplace, as well as proactive management of workers'
compensation claims.

For general liability, workers' compensation and other self-insurance programs,
we record both a reserve for the estimated future cost of claims and related
expenses that have been reported but not settled, as well as an estimate of
claims incurred but not reported. General liability and workers' compensation
reserves for claims incurred but not reported are developed by a third party
actuary through review of our historical data and open claims.

A summary of the changes in our total self-insurance liability is as follows:
                                                      2021          2020          2019
                                                               (in thousands)
Accrued insurance claims - January 1,              $ 82,428      $ 87,622      $ 79,600
Claim payments                                      (29,061)      (30,828)      (35,834)
Reserve accruals:
Current year accruals                                35,830        39,638        45,934

Changes in provision for claims from prior years 197 (14,004)

(2,078)

Change in accrued insurance claims                    6,966        (5,194)  

8,022

Accrued insurance claims - December 31,            $ 89,394      $ 82,428   

$87,622

Cash and capital resources

Cash generated through operations is our primary source of liquidity. At
December 31, 2021, we had cash, cash equivalents and marketable securities of
$185.2 million and working capital of $355.3 million, compared to December 31,
2020 cash, cash equivalents and marketable securities of $264.3 million and
working capital of $410.1 million. Our current ratio was 2.9 to 1 at
December 31, 2021 versus 3.5 to 1 at December 31, 2020. Marketable securities
represent fixed income investments that are highly liquid and can be readily
purchased or sold through established markets. Such securities are held by HCSG
Insurance to satisfy capital requirements of the state regulator related to
captive insurance companies. As of December 31, 2021, the pandemic has not
negatively impacted the Company's liquidity position.

For the years ended December 31, 2021, 2020, and 2019 our cash flows were as
follows:
                                                      Year Ended December 31,
                                                2021           2020           2019
                                                          (in thousands)
Net cash provided by operating activities    $  37,108      $ 217,213      $  93,581
Net cash used in investing activities        $ (22,990)     $ (36,845)     $ (16,457)
Net cash used in financing activities        $ (82,654)     $ (68,367)     $ (75,820)



Operating Activities

Our primary sources of cash from operating activities are the revenues generated
from our Housekeeping and Dietary services. Our primary uses of cash from
operating activities are the funding of our payroll and other personnel-related
costs, as well as the costs of supplies used in providing our services. For the
year ended December 31, 2021 cash flow from operations included a $52.8 million
decrease in net income, a payment of $22.1 million of payroll taxes previously
deferred under the Coronavirus Aid, Relief, and Economic Security Act (the
"CARES Act"), and a $37.2 million increase in outstanding accounts and notes
receivable. Such activity, along with the timing of cash receipts and cash
payments, are the primary drivers of the period-over-period changes in net cash
provided by operating activities.

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Table of Contents We have not changed our expectations for future cash flows from operating activities due to COVID-19. We anticipate that many of our customers may experience changes in their cash flow, but we will continue to pursue collections in accordance with our service agreements.

Investing activities

Our principal uses of cash for investing activities are the purchases of
marketable securities and capital expenditures such as housekeeping and food
service equipment, computer software and equipment, and furniture and fixtures
(see "Capital Expenditures" below for additional information). Such uses of cash
are partially offset by proceeds from sales of marketable securities.

Our investments in marketable securities are primarily comprised of tax-exempt
municipal bonds and are intended to achieve our goal of preserving principal,
maintaining adequate liquidity and maximizing returns subject to our investment
guidelines. Our investment policy limits investment to certain types of
instruments issued by institutions primarily with investment-grade ratings and
places restrictions on concentration by type and issuer.

In addition, in 2021, the Company completed two business acquisitions which resulted in the investment of cash outflows of $23.9 million.

Fundraising activities

The primary use of cash for financing activities is the payment of dividends. We
have paid regular quarterly cash dividends since the second quarter of 2003.
During 2021, we paid regular quarterly cash dividends to shareholders totaling
$62.2 million as follows:

                                                                       Quarter Ended
                             December 31, 2021          September 30, 2021           June 30, 2021            March 31, 2021
                                                       (amounts in thousands, except per share data)
Cash dividend per common
share                      $          0.21000          $          0.20875          $      0.20750          $          0.20625
Total cash dividends paid  $           15,554          $           15,640          $       15,560          $           15,472
Record date                    November 19, 2021             August 20, 2021            May 21, 2021           February 26, 2021
Payment date                   December 23, 2021          September 24, 2021           June 25, 2021              March 26, 2021


Moreover, on February 8, 2022our Board of Directors has declared a regular quarterly cash dividend of $0.21125 per common share, which will be paid on
March 25, 2022 to shareholders of record at the close of business on
February 25, 2022.

The dividends paid to shareholders during the year ended December 31, 2021 were
funded by cash generated from operations and cash reserves. Our Board of
Directors reviews our dividend policy on a quarterly basis. Although there can
be no assurance that we will continue to pay dividends or regarding the amount
of future dividend payments, we expect to continue to pay a regular quarterly
cash dividend. In connection with the establishment of our dividend policy, we
adopted a Dividend Reinvestment Plan in 2003.

The main source of cash from financing activities is net borrowings under our bank line of credit. We borrow for general corporate purposes as needed throughout the year.

We remain authorized to repurchase 0.6 million shares of our Common Stock
pursuant to previous Board of Directors' authorization. During the year ended
December 31, 2021 and 2020, we repurchased our Common Stock as part of the
dividend reinvestment related to treasury shares held within the Deferred
Compensation Plan. In 2021, we entered into the Plan. The Plan was adopted under
the safe harbor provided by Rule 10b5-1 and Rule 10b-18 of the Exchange Act, in
order to assist the Company in implementing its share repurchase plans. Pursuant
to the Company's share repurchase program and as authorized by the Board of
Directors on March 12, 2021, we have purchased 1.0 million shares of the
Company's common stock during the year ended December 31, 2021 for a total cost
of $21.5 million inclusive of transaction costs. The number of shares and value
of shares repurchased were immaterial for the year ended December 31, 2020.

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Contractual Obligations

Our future contractual obligations and commitments to December 31, 2021
primarily consist of minimum payments under our operating leases, as disclosed in Note 9 – Lease Commitments. From December 31, 2021the Company had no other minimum purchase or capital expenditure commitments with respect to our day-to-day operations or our existing financing arrangements.

Credit line

At December 31, 2021, we had a $475 million bank line of credit on which to draw
for general corporate purposes. Amounts drawn under the line of credit are
payable upon demand and generally bear interest at a floating rate, based on our
leverage ratio, and starting at LIBOR plus 115 basis points (or if LIBOR becomes
unavailable, the higher of the Overnight Bank Funding Rate, plus 50 basis points
and the Prime Rate). At December 31, 2021, there were no borrowings under the
line of credit.

The line of credit requires us to comply with two financial covenants. Restrictive covenants and their respective status at December 31, 2021 were as follows: Commitment Descriptions and Requirements

                                        As of December 31, 2021
Funded debt 1 to EBITDA 2 ratio: less than 3.50 to 1.00                                0.37
EBITDA2 to Interest Expense ratio: not less than 3.00 to 1.00                          58.31


1.All indebtedness for borrowed money including, but not limited to,
reimbursement obligations in respect of letters of credit and guarantees of any
such indebtedness.
2.Net income plus interest expense, income tax expense, depreciation,
amortization, share compensation expense and extraordinary non-recurring
losses/gains.

As noted above, we were in compliance with our financial covenants at
December 31, 2021 and we expect to remain in compliance. The line of credit
expires on December 21, 2023. We believe that our existing capacity under the
line of credit and our favorable operating cash flows provide adequate liquidity
to fund our operations for the next twelve months following the date of this
report, inclusive of the potential impact of COVID-19.

Our line of credit agreement provides procedures for determining a replacement
or alternative rate in the event that LIBOR is unavailable (i.e., the higher of
the Overnight Bank Funding Rate, plus 50 basis points and Prime Rate). However,
there can be no assurances as to whether such replacement or alternative rate
will be more or less favorable than LIBOR. We intend to monitor the developments
with respect to the phasing out of LIBOR and will work with our lenders to
ensure the transition away from LIBOR will have minimal impact on our financial
condition. We however can provide no assurances regarding the impact of the
discontinuation of LIBOR on the interest rate that we would be required to pay
or on our financial condition.

At December 31, 2021, we also had outstanding $64.9 million in irrevocable
standby letters of credit, which relate to payment obligations under our
insurance programs. In connection with the issuance of the letters of credit,
the amount available under the line of credit was reduced by $64.9 million to
$410.1 million at December 31, 2021. On November 22, 2021 the letters of credit
were renewed and expire on January 4, 2023.

Accounts and notes receivable

Decisions to grant or to extend credit to customers are made on a case-by-case
basis and based on a number of qualitative and quantitative factors related to
the particular customer as well as the general risks associated with operating
within the healthcare industry.

Fluctuations in net accounts and notes receivable are attributable to a variety
of factors including, but not limited to, the timing of cash receipts from
customers, the Company's assessment of collectability and corresponding
provision for bad debt expense and the inception, transition, modification or
termination of customer relationships.

We deploy significant resources and have invested in tools and processes to
optimize our credit and collections efforts. When appropriate, the Company
utilizes interest-bearing promissory notes to enhance the collectability of
amounts due, by instituting definitive repayment plans and providing a means by
which to further evidence the amounts owed. In addition, the Company may amend
contracts from full service to management-only arrangements, or adjust
contractual payment terms, to accommodate customers who have in good faith
established clearly-defined plans for addressing cash flow issues. These efforts
are intended to minimize the Company's collections risk.

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In order to provide for collections issues and the general risk associated with
the granting of credit terms, we recorded a bad debt provision (in an Allowance
for Doubtful Accounts) of $10.5 million, $9.6 million and $25.5 million in the
years ended December 31, 2021, 2020 and 2019, respectively. As a percentage of
total revenues, these provisions represented approximately 0.6%, 0.5% and 1.4%
for the years ended December 31, 2021, 2020 and 2019, respectively.

Insurance programs

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

For general liability and workers' compensation, we record a reserve for the
estimated future cost of claims and related expenses that have been reported but
not settled, including an estimate of claims incurred but not reported that are
developed as a result of a review of our historical data and open claims, which
is based on estimates provided by a third party actuary.

Capital expenditure

The level of capital expenditures is generally dependent on the number of new
customers obtained. Such capital expenditures primarily consist of housekeeping
and food service equipment purchases, laundry and linen equipment installations,
computer hardware and software, and furniture and fixtures. Our capital
expenditures totaled $5.7 million in 2021. Although we have no specific material
commitments for capital expenditures through the end of calendar year 2022, we
estimate that for 2022 we will have capital expenditures of approximately $4.0
million to $6.0 million.

Although there can be no assurance, we believe that our cash from operations,
existing cash and cash equivalents balance and credit line will be adequate for
the foreseeable future to satisfy the needs of our operations and to fund our
anticipated growth. However, should these sources not be sufficient, we would
seek to obtain necessary capital from such sources as long-term debt or equity
financing.

Significant off-balance sheet arrangements

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

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