10-Q 1 a14-14006_110q.htm 10-Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

 

Form 10-Q

 

(Mark One)

[X]

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

 

 

For the quarterly period ended June 30, 2014

 

 

or

 

 

[ ]

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: 0-20372

 

RES-CARE, INC.

(Exact name of registrant as specified in its charter)

 

KENTUCKY

 

61-0875371

(State or other jurisdiction of

 

(IRS Employer Identification No.)

incorporation or organization)

 

 

 

 

 

9901 Linn Station Road

 

40223-3808

Louisville, Kentucky

 

(Zip Code)

(Address of principal executive offices)

 

 

 

Registrant’s telephone number, including area code:(502) 394-2100

 

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 twelve 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 üNo __.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes üNo __.

 

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” in Rule 12-b of the Act (Check one):

 

Large accelerated filer: __ Accelerated filer: __ Non-accelerated filer: ü Smaller reporting company: __

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes __No ü.

 

The number of shares outstanding of the registrant’s common stock, no par value, as of July 31, 2014 was 21,344,741.

 



Table of Contents

 

INDEX

 

RES-CARE, INC. AND SUBSIDIARIES

 

 

 

PAGE

PART I.

FINANCIAL INFORMATION

 

NUMBER

 

 

 

 

Item 1.

Condensed Consolidated Balance Sheets – June 30, 2014 and December 31, 2013

 

3

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income – Three Months Ended June 30, 2014 and 2013; Six Months Ended June 30, 2014 and 2013

 

4

 

 

 

 

 

Condensed Consolidated Statements of Shareholder’s Equity

 

5

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2014 and 2013

 

6

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements – June 30, 2014

 

7

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

21

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

27

 

 

 

 

Item 4.

Controls and Procedures

 

27

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

28

 

 

 

 

Item 1A.

Risk Factors

 

28

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

28

 

 

 

 

Item 3.

Defaults upon Senior Securities

 

28

 

 

 

 

Item 4.

Mine Safety Disclosures

 

28

 

 

 

 

Item 5.

Other Information

 

28

 

 

 

 

Item 6.

Exhibits

 

28

 

 

 

 

SIGNATURES

 

 

 

 

 

EXHIBITS

 

 

 

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Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1.                   Financial Statements

 

RES-CARE, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

(Unaudited)

 

 

 

June 30

 

December 31

 

 

 

2014

 

2013

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

36,868

 

 

$

29,997

 

Accounts receivable, net of allowance for doubtful accounts of $16,194 in 2014 and $11,900 in 2013

 

251,191

 

 

241,873

 

Refundable income taxes

 

926

 

 

 

Deferred income taxes

 

26,820

 

 

19,811

 

Non-trade receivables

 

4,503

 

 

6,852

 

Prepaid expenses and other current assets

 

17,916

 

 

19,578

 

Total current assets

 

338,224

 

 

318,111

 

Property and equipment, net

 

101,621

 

 

101,021

 

Goodwill

 

308,927

 

 

308,350

 

Other intangible assets, net

 

329,680

 

 

333,613

 

Other assets

 

26,068

 

 

25,182

 

Total assets

 

$

1,104,520

 

 

$

1,086,277

 

LIABILITIES AND SHAREHOLDER’S EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Trade accounts payable

 

$

37,503

 

 

$

34,089

 

Accrued expenses

 

133,168

 

 

120,803

 

Current portion of long-term debt

 

11,185

 

 

14,291

 

Current portion of obligations under capital leases

 

6,515

 

 

6,516

 

Accrued income taxes

 

3,218

 

 

 

Total current liabilities

 

191,589

 

 

175,699

 

Long-term liabilities

 

43,631

 

 

39,143

 

Long-term debt

 

450,036

 

 

345,506

 

Obligations under capital leases

 

14,485

 

 

13,724

 

Deferred income taxes

 

119,189

 

 

116,084

 

Total liabilities

 

818,930

 

 

690,156

 

Shareholder’s equity:

 

 

 

 

 

 

Common stock, no par value, authorized 40,000,000 shares, issued and outstanding 21,344,741 in 2014 and 2013

 

 

 

 

Additional paid-in capital

 

248,036

 

 

247,053

 

Retained earnings

 

38,132

 

 

149,617

 

Accumulated other comprehensive income (loss)

 

(578

)

 

(549

)

Total shareholder’s equity

 

285,590

 

 

396,121

 

Total liabilities and shareholder’s equity

 

$

1,104,520

 

 

$

1,086,277

 

 

See accompanying notes to condensed consolidated financial statements.

 

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RES-CARE, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30

 

June 30

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

431,434

 

$

396,233

 

$

852,917

 

$

785,687

 

Cost of services

 

326,834

 

295,107

 

644,432

 

589,450

 

Gross profit

 

104,600

 

101,126

 

208,485

 

196,237

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Operational general and administrative

 

55,496

 

57,343

 

115,206

 

112,379

 

Corporate general and administrative

 

29,277

 

20,011

 

57,237

 

38,888

 

Total operating expenses

 

84,773

 

77,354

 

172,443

 

151,267

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

19,827

 

23,772

 

36,042

 

44,970

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

8,500

 

7,665

 

16,574

 

16,202

 

Loss on extinguishment of debt

 

659

 

 

659

 

 

Income before income taxes

 

10,668

 

16,107

 

18,809

 

28,768

 

Income tax expense

 

4,380

 

5,868

 

7,846

 

7,233

 

Net income

 

6,288

 

10,239

 

10,963

 

21,535

 

Net loss-noncontrolling interest

 

 

(40

)

 

(76

)

Net income-Res-Care, Inc.

 

6,288

 

10,279

 

10,963

 

21,611

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

235

 

(223

)

(29

)

(414

)

Comprehensive income attributable to Res-Care, Inc.

 

$

6,523

 

$

10,056

 

$

10,934

 

$

21,197

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

6,523

 

$

10,016

 

$

10,934

 

$

21,121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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RES-CARE, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

Common Stock

 

Paid-In

 

Retained

 

Comprehensive

 

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income/(Loss)

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

21,345

 

 

$

247,053

 

$

149,617

 

$

(549

)

$

396,121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

10,963

 

 

10,963

 

Foreign currency translation adjustment arising during period

 

 

 

 

 

(29

)

(29

)

Cash dividends declared

 

 

 

 

(122,448

)

 

(122,448

)

Share-based compensation

 

 

 

983

 

 

 

983

 

Balance at June 30, 2014

 

21,345

 

 

$

248,036

 

$

38,132

 

$

(578

)

$

285,590

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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RES-CARE, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

June 30

 

 

 

2014

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

10,963

 

$

21,535

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

18,068

 

16,726

 

Amortization of deferred debt issuance costs

 

1,182

 

1,742

 

Share-based compensation

 

983

 

1,552

 

Deferred income taxes, net

 

(3,904

)

2,347

 

Provision for losses on accounts receivable

 

5,141

 

3,343

 

Loss on extinguishment of debt

 

659

 

 

Loss on sale of assets

 

96

 

100

 

Changes in operating assets and liabilities

 

11,552

 

(13,279

)

Cash provided by operating activities

 

44,740

 

34,066

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(9,976

)

(8,212

)

Acquisitions of businesses, net of cash acquired

 

(949

)

(2,234

)

Proceeds from sale of assets

 

203

 

184

 

Cash used in investing activities

 

(10,722

)

(10,262

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Long-term debt repayments

 

(172,600

)

(9,280

)

Long-term debt borrowings

 

275,000

 

 

Payments on obligations under capital leases

 

(3,692

)

(3,499

)

Dividend paid

 

(122,448

)

 

Debt issuance costs

 

(3,618

)

(2

)

Cash used in financing activities

 

(27,358

)

(12,781

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

211

 

(81

)

 

 

 

 

 

 

Increase in cash and cash equivalents

 

6,871

 

10,942

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

29,997

 

50,134

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

36,868

 

$

61,076

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

Notes issued in connection with acquisitions

 

$

98

 

$

336

 

Capital lease obligations

 

$

4,452

 

$

6,513

 

Settlement of Seller obligations in connection with an acquisition

 

$

 

$

1,240

 

Purchases of property and equipment in accounts payable

 

$

197

 

$

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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RES-CARE, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

 

Note 1.                   Basis of Presentation

 

Res-Care, Inc. is a human service company that provides residential, therapeutic, job training and educational supports to people with developmental or other disabilities, youth with special needs, adults who are experiencing barriers to employment, and older people who need home care assistance. All references in this Quarterly Report on Form 10-Q to “ResCare”, “Company”, “our company”, “we”, “us”, or “our” mean Res-Care, Inc. and, unless the context otherwise requires, its consolidated subsidiaries.

 

The accompanying condensed consolidated financial statements of ResCare have been prepared in accordance with Article 10 of Regulation S-X and do not include all information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for comprehensive annual financial statements. In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of financial condition and results of operations for the interim periods have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full year.

 

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts and related disclosures of commitments and contingencies. We rely on historical experience and on various other assumptions that we believe to be reasonable under the circumstances to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

 

For further information refer to the consolidated financial statements and footnotes thereto in our 2013 Annual Report on Form 10-K filed February 18, 2014.

 

Segments

 

Effective July 1, 2013, we made certain changes within our business lines to meet our future growth objectives.    Some of the components and structure within certain reportable segments changed and our Youth Services segment’s name changed to Education and Training Services.  The majority of our Residential Youth reporting unit moved from the Education and Training Services segment to the Residential Services segment.  We also moved a small operation from our ResCare HomeCare segment to our Education and Training Services segment.  Therefore, as of July 1, 2013, our reportable segments are: (i) Residential Services, (ii) ResCare HomeCare, (iii) Education and Training Services, (iv) Workforce Services and (v) Pharmacy Services.

 

Residential Services primarily includes services for individuals with intellectual, cognitive or other developmental disabilities in our community home settings. ResCare HomeCare primarily includes periodic in-home care services to the elderly, as well as persons with disabilities. Education and Training Services consists of our Job Corps centers, alternative education programs, charter schools, training for professionals working with children, training for potential foster and adoptive parents and other individual and family counseling and instruction.  Workforce Services is comprised of our domestic job training and placement programs that assist welfare recipients and disadvantaged job seekers in finding employment and improving their career prospects.  Pharmacy Services is a limited, closed-door pharmacy business focused on serving individuals with intellectual and developmental disabilities.  We believe the changes in our segments will allow us to serve our customers more efficiently and allow future growth and long-term sustainability.  We have presented prior periods to reflect the change in our segments.  Further information regarding our segments is included in Note 7.

 

Reclassification

 

Certain shared services related expenses have been reclassified from operational general and administrative expense to corporate general and administrative expense effective January 1, 2014.  These shared services include quality, human

 

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resources, government relations and certain accounting and finance oversight functions, as well as the business centers for our operations.  Prior periods have been reclassified for comparability.

 

A $2.4 million favorable health insurance adjustment was recorded as a credit to corporate general and administrative expenses in the three months ended March 31, 2014 due to favorable health claim trends.  In the three months ended June 30, 2014, it was determined that this favorable health insurance adjustment related to our operating segments, therefore we reclassified the $2.4 million from corporate general and administrative expenses to the operating segments.

 

 

Note 2.                   Acquisitions

 

We completed two acquisitions within our Residential Services and ResCare HomeCare segments during the first six months of 2014.  Aggregate consideration for these acquisitions was approximately $1.0 million, including $0.1 million of notes issued. The operating results of the acquisitions are included in the condensed consolidated financial statements from the date of acquisition.  Proforma results and other disclosure have not been included as the acquisitions are considered immaterial, individually and in the aggregate.

 

The preliminary aggregate purchase price for these acquisitions was allocated as follows:

 

Prepaid assets

 

$

9

 

Property and equipment

 

14

 

Other intangible assets

 

574

 

Goodwill

 

 

449

 

Aggregate purchase price

 

$

1,046

 

 

The other intangible assets consist primarily of customer relationships and covenants not to compete. All intangible assets will be amortized over five to twenty years. We expect all of the $0.4 million of goodwill will be deductible for tax purposes.

 

 

Note 3.                   Goodwill

 

 

Goodwill is tested for impairment on an annual basis and between annual tests if indicators of potential impairment exist. The date of our annual impairment test is October 1.  A summary of changes to goodwill during the six months ended June 30, 2014 is as follows:

 

 

 

 

 

 

 

Education

 

 

 

 

 

 

 

 

 

Residential

 

ResCare

 

& Training

 

Workforce

 

Pharmacy

 

 

 

 

 

Services

 

HomeCare

 

Services

 

Services

 

Services

 

Total

 

Balance at January 1, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

182,446

 

$

73,547

 

$

15,311

 

$

32,720

 

$

4,326

 

$

308,350

 

Goodwill added through acquisitions

 

263

 

186

 

 

 

 

449

 

Other (1)

 

128

 

 

 

 

 

128

 

Balance at June 30, 2014

 

$

182,837

 

$

73,733

 

$

15,311

 

$

32,720

 

$

4,326

 

$

308,927

 

 

(1)  Primarily relates to foreign currency translation adjustments.

 

For our October 1, 2013 annual impairment test, all reporting units passed Step One.  The ResCare HomeCare reporting unit passed Step One with a fair value that exceeded its carrying value by a 7 percent margin.  Inability to meet projected results utilized in the annual impairment test could lead to a potential impairment in the future.

 

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Note 4.                   Debt

 

Long-term debt and obligations under capital leases consist of the following:

 

 

 

 

June 30

 

December 31

 

 

2014

 

2013

 

 

 

 

 

10.75% senior notes due 2019

 

$

200,000

 

$

200,000

Senior secured Term Loan A due 2017

 

 

157,513

Senior secured Term Loan A due 2019

 

198,925

 

Senior secured Revolving Facility

 

60,000

 

Obligations under capital leases

 

21,000

 

20,240

Notes payable and other

 

2,296

 

2,284

 

 

482,221

 

380,037

Less current portion

 

17,700

 

20,807

 

 

$

464,521

 

$

359,230

 

On April 25, 2014, we entered into an amended and restated senior secured credit facility (the “2014 Credit Agreement”) in an aggregate principal amount of $650 million, which replaced our 2012 senior secured credit facility and the related term loan A. The 2014 Credit Agreement consists of a Term Loan A (the “Term Loan A”) in an aggregate principal amount of $200 million, a revolving credit facility (the “Revolving Facility”) in an aggregate principal amount of $250 million, and a Delayed-Draw Term Loan A (the “DDTL”) in an aggregate amount of $200 million.  At closing, proceeds from the new Term Loan A and Revolving Facility were used to (i) refinance the prior revolver and term loan A, (ii) fund a distribution to shareholders of approximately $130 million, and (iii) fund related transaction fees and expenses, and (iv) used for working capital and other general corporate purposes permitted under the 2014 Credit Agreement, including certain acquisitions and investments.  The Term Loan A, the Revolving Facility and the DDTL (if drawn upon) each mature on April 25, 2019. The Term Loan A will amortize in an aggregate annual amount equal to a percentage of the original principal amount of the Term Loan A beginning September 30, 2014 as follows: (i) 5% during each of the first two years after funding, (ii) 7.5% during the third year after funding, (iii) 10% during the fourth year after funding and, (iv) 12.5% during the final year of the term. The balance of the Term Loan A is payable at maturity.  Pricing for the Term Loan A, Revolving Facility and the DDTL (if drawn upon) will be variable, at the London Interbank Offer Rate (LIBOR) plus 225 basis points. LIBOR is defined as having no minimum rate. The DDTL may be drawn within 12 months from the closing date to call the 10.75% senior unsecured notes due 2019 (which are callable on January 15, 2015) and other uses allowed in the 2014 Credit Agreement.  The 2014 Credit Agreement also provides that, upon satisfaction of certain conditions, the Company may increase the aggregate principal amount of loans outstanding thereunder by up to $175 million, subject to receipt of additional lending commitments for such loans. The loans and other obligations under the 2014 Credit Agreement are (i) guaranteed by Onex Rescare Holdings Corp. (“Holdings”) and substantially all of its subsidiaries (subject to certain exceptions and limitations) and (ii) secured by substantially all of the assets of the Company, Holdings and substantially all of its subsidiaries (subject to certain exceptions and limitations). The 2014 Credit Agreement contains financial covenants which require us to maintain specific ratios with respect to interest coverage and leverage. This agreement provides for the exclusion of charges incurred with the resolution of certain named legal proceedings, as well as any non-cash impairment charges, in the calculation of certain financial covenants.

 

Our obligations under capital leases are $21.0 million as of June 30, 2014, due primarily to vehicle capital leases.  The current portion of these lease obligations was $6.5 million.

 

We recorded a loss on extinguishment of debt of $0.7 million for the three and six month periods ended June 30, 2014 associated with termination of the 2012 senior secured revolving credit facility and the Term Loan A prepayment.  Loss on extinguishment of debt consists principally of write-offs of deferred debt issuance costs.  This transaction was primarily accounted for as a modification and was analyzed on a lender by lender basis.

 

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Subsequent to receiving the proceeds from the 2014 Credit Agreement, we declared and paid a dividend of $122.4 million to Onex ResCare Holdings Corp shareholders.  We also recorded a one-time pre-tax charge of $7.6 million for the accrual of discretionary payments to stock option holders, of which $3.8 million was paid out prior to June 30, 2014.

 

 

 

Note 5.                   Income Taxes

 

The effective tax rate was 41.1% and 36.4% for the three months ended June 30, 2014 and 2013, respectively, and 41.7% and 25.1% for the six months ended June 30, 2014 and 2013, respectively. The 2014 rate was negatively impacted by the expiration of jobs tax credits (not renewed for 2014), while the 2013 rate was favorably impacted by the renewal of jobs tax credits.  On January 2, 2013, legislation was enacted that reinstated the jobs credit provisions retroactive to January 1, 2012.  The three months ended March 31, 2013 included that quarter’s jobs tax credit impact and $3.3 million related to 2012 and prior periods’ jobs tax credit impact.

 

 

 

Note 6.                   Financial Instruments

 

At June 30, 2014 and December 31, 2013, the fair values of cash and cash equivalents, accounts receivable and accounts payable approximated carrying value because of the short-term nature of these instruments. The fair value of our other financial instruments subject to fair value disclosures are as follows:

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

 

 

Amount

 

Value

 

Amount

 

Value

 

Long-term debt:

 

 

 

 

 

 

 

 

 

10.75% senior notes

 

$

200,000

 

$

218,500

 

$

200,000

 

$

223,500

 

Senior secured Term Loan A due 2017

 

 

 

157,513

 

157,513

 

Senior secured Term Loan A due 2019

 

198,925

 

198,925

 

 

 

Senior secured Revolving Facility

 

60,000

 

60,000

 

 

 

Notes payable and other

 

2,296

 

2,247

 

2,284

 

2,200

 

 

We estimated the fair value of the debt instruments using market quotes and calculations based on current market rates available to us (Level 2).

 

- 10 -



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Note 7.                   Segment Information

 

The following table sets forth information about our reportable segments:

 

 

 

 

 

 

 

Education

 

 

 

 

 

 

 

 

 

 

Residential

 

ResCare

 

& Training

 

Workforce

 

Pharmacy

 

 

 

 

 

 

Services

 

HomeCare

 

Services

 

Services

 

Services

 

Corporate

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

237,927

 

$

95,684

 

$

34,046

 

$

42,381

 

$

21,396

 

$

 

$

431,434

Operating income (loss) (1)

 

31,956

 

8,683

 

2,724

 

4,883

 

1,132

 

(29,551

)

19,827

Total assets

 

628,965

 

187,907

 

51,510

 

81,712

 

20,860

 

133,566

 

1,104,520

Capital expenditures

 

3,031

 

133

 

19

 

15

 

108

 

2,107

 

5,413

Depreciation and amortization

 

5,647

 

831

 

145

 

384

 

38

 

2,068

 

9,113

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

215,530

 

$

89,607

 

$

34,928

 

$

39,596

 

$

16,572

 

$

 

$

396,233

Operating income (loss) (1)

 

26,388

 

8,316

 

2,241

 

4,258

 

2,576

 

(20,007

)

23,772

Total assets

 

603,034

 

180,074

 

51,292

 

78,321

 

18,786

 

135,622

 

1,067,129

Capital expenditures

 

1,913

 

172

 

3

 

109

 

64

 

1,848

 

4,109

Depreciation and amortization

 

5,356

 

560

 

129

 

268

 

38

 

2,180

 

8,531

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

471,759

 

$

189,263

 

$

68,170

 

$

82,188

 

$

41,537

 

$

 

$

852,917

Operating income (loss) (1)

 

60,051

 

16,355

 

5,545

 

8,616

 

2,880

 

(57,405

)

36,042

Capital expenditures

 

5,585

 

322

 

24

 

135

 

194

 

3,716

 

9,976

Depreciation and amortization

 

11,153

 

1,634

 

290

 

762

 

77

 

4,152

 

18,068

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

428,057

 

$

177,039

 

$

69,418

 

$

79,414

 

$

31,759

 

$

 

$

785,687

Operating income (loss) (1)

 

52,600

 

15,021

 

4,897

 

8,054

 

3,604

 

(39,206

)

44,970

Capital expenditures

 

3,632

 

368

 

10

 

124

 

233

 

3,845

 

8,212

Depreciation and amortization

 

10,449

 

1,127

 

259

 

546

 

70

 

4,275

 

16,726

 

(1)   Under Corporate, the operating loss is comprised of our corporate general and administrative expenses, as well as other operating income and expenses related to the corporate office.

 

 

 

Note 8.                   Legal Proceedings

 

ResCare, or its affiliates, are parties to various legal and/or administrative proceedings arising out of the operation of our programs and arising in the ordinary course of business. We record accruals for such contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.  In June 2014, a settlement was reached on the wage/hour class-action lawsuit filed in 2009 in the Superior Court of the State of California styled Gloria Nelson, et al v. ResCare, Inc., et al, which results in no additional charge to our previously reserved amount.  The pre-tax charges recorded in connection with legal matters, including settlements in 2014 of a communication practices and wage/hour class-action lawsuit, increased by $10.8 million during the six months ended June 30, 2014, compared to the same period in 2013.  Court approval and payment of the settlements noted above are expected later in 2014.

 

No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time because the inherently unpredictable nature of legal proceedings may be exacerbated by various factors, including: (i) the damages sought

 

- 11 -



Table of Contents

 

in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants); or (vii) there is a wide range of potential outcomes.  While we do not believe the ultimate liability, if any, for these proceedings or claims, individually or in the aggregate, in excess of amounts already provided, will have a material adverse effect on our financial condition, results of operations or cash flows or may affect our reputation, it is reasonably possible they could.

 

Note 9.                   Noncontrolling Interest

 

Effective October 1, 2013, ResCare acquired the 33.3% interest in Rest Assured LLC that was held by an unrelated party for no cash compensation.  Prior to this transaction, ResCare held a 66.7% interest in Rest Assured LLC, a limited liability company comprised of public and private organizations providing remote monitoring services for persons with disabilities and the elderly. ASC 810, Noncontrolling Interests in Consolidated Financial Statements, (ASC 810) clarifies that a noncontrolling interest must be reported as a component separate from the parent’s equity and that changes in the parent’s ownership interest in a subsidiary must be recorded as equity transactions if the parent retains its controlling interest in the subsidiary. The statement also requires consolidated net income to include amounts attributable to both the parent and the noncontrolling interest on the face of the income statement. In addition, ASC 810 requires a parent to recognize a gain or loss in net income on the date the parent deconsolidates a subsidiary, or ceases to have a controlling financial interest in a subsidiary.  Balances are as follows:

 

Noncontrolling interest as of December 31, 2012

 

$

(99

)

Net loss-noncontrolling interest

 

(110

)

Acquisition of remaining noncontrolling interest

 

209

 

 

 

 

 

Noncontrolling interest as of December 31, 2013

 

$

 

 

 

Note 10.                 Impact of Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 that introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This standard is effective for fiscal years beginning after December 15, 2016 (early adoption is not permitted), including interim periods within that reporting period. The guidance permits the use of either a retrospective or cumulative effect transition method.  We have not yet selected a transition method and are currently evaluating the new guidance to determine the impact it will have on our consolidated financial statements.

 

 

Note 11.                 Subsidiary Guarantors

 

The Senior Notes are jointly, severally, fully and unconditionally guaranteed, subject to certain automatic customary release provisions, by our 100% owned U.S. subsidiaries. There are no restrictions on our ability to obtain funds from our U.S. subsidiaries by dividends or other means. The following are condensed consolidating financial statements of our company, including the guarantors. This information is provided pursuant to Rule 3 – 10 of Regulation S-X in lieu of separate financial statements of each subsidiary guaranteeing the Senior Notes. The following condensed consolidating financial statements present the balance sheet, statement of comprehensive income and cash flows of (i) Res-Care, Inc. (in each case, reflecting investments in its consolidated subsidiaries under the equity method of accounting), (ii) the guarantor subsidiaries, (iii) the non-guarantor subsidiaries, and (iv) the eliminations necessary to arrive at the information for our company on a consolidated basis. The condensed consolidating financial statements should be read in conjunction with the accompanying condensed consolidated financial statements.

 

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Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATING BALANCE SHEET

June 30, 2014

(In thousands)

 

 

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

Consolidated

 

 

 

ResCare, Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

35,450

 

$

505

 

$

913

 

$

 

$

36,868

 

Accounts receivable, net

 

31,100

 

220,022

 

69

 

 

251,191

 

Refundable income taxes

 

926

 

 

 

 

926

 

Deferred income taxes

 

26,820

 

 

 

 

26,820

 

Non-trade receivables

 

3,409

 

1,071

 

23

 

 

4,503

 

Prepaid expenses and other current assets

 

8,386

 

9,516

 

14

 

 

17,916

 

Total current assets

 

106,091

 

231,114

 

1,019

 

 

338,224

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

49,879

 

51,712

 

30

 

 

101,621

 

Goodwill

 

303,870

 

27

 

5,030

 

 

308,927

 

Other intangible assets, net

 

295,177

 

34,503

 

 

 

329,680

 

Intercompany

 

 

713,512

 

68,266

 

(781,778

)

 

Investment in subsidiaries

 

1,010,952

 

37,913

 

 

(1,048,865

)

 

Other assets

 

19,981

 

6,087

 

 

 

26,068

 

 

 

$

1,785,950

 

$

1,074,868

 

$

74,345

 

$

(1,830,643

)

$

1,104,520

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDER’S EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Trade accounts payable

 

$

22,739

 

$

14,741

 

$

23

 

$

 

$

37,503

 

Accrued expenses

 

73,629

 

58,943

 

596

 

 

133,168

 

Current portion of long-term debt

 

10,000

 

1,185

 

 

 

11,185

 

Current portion of obligations under capital leases

 

 

6,515

 

 

 

6,515

 

Accrued income taxes

 

3,218

 

 

 

 

3,218

 

Total current liabilities

 

109,586

 

81,384

 

619

 

 

191,589

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intercompany

 

779,684

 

 

 

(779,684

)

 

Long-term liabilities

 

42,976

 

655

 

 

 

43,631

 

Long-term debt

 

448,925

 

1,111

 

 

 

450,036

 

Obligations under capital leases

 

 

14,485

 

 

 

14,485

 

Deferred income taxes

 

119,189

 

 

 

 

119,189

 

Total liabilities

 

1,500,360

 

97,635

 

619

 

(779,684

)

818,930

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

 

 

 

Additional paid-in capital

 

248,036

 

478,422

 

122,023

 

(600,445

)

248,036

 

Retained earnings

 

38,132

 

498,829

 

(47,134

)

(451,695

)

38,132

 

Accumulated other comprehensive (loss) income

 

(578

)

(18

)

(1,163

)

1,181

 

(578

)

Total shareholder’s equity

 

285,590

 

977,233

 

73,726

 

(1,050,959

)

285,590

 

 

 

$

1,785,950

 

$

1,074,868

 

$

74,345

 

$

(1,830,643

)

$

1,104,520

 

 

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Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2013

(In thousands)

 

 

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

Consolidated

 

 

 

ResCare, Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

26,335

 

$

2,860

 

$

802

 

$

 

$

29,997

 

Accounts receivable, net

 

25,953

 

215,864

 

56

 

 

241,873

 

Refundable income taxes

 

 

 

 

 

 

Deferred income taxes

 

19,811

 

 

 

 

19,811

 

Non-trade receivables

 

4,592

 

2,237

 

23

 

 

6,852

 

Prepaid expenses and other current assets

 

10,793

 

8,765

 

20

 

 

19,578

 

Total current assets

 

87,484

 

229,726

 

901

 

 

318,111

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

50,854

 

50,160

 

7

 

 

101,021

 

Goodwill

 

303,270

 

27

 

5,053

 

 

308,350

 

Other intangible assets, net

 

297,535

 

36,078

 

 

 

333,613

 

Intercompany

 

 

695,097

 

68,427

 

(763,524

)

 

Investment in subsidiaries

 

990,793

 

37,913

 

 

(1,028,706

)

 

Other assets

 

18,746

 

6,436

 

 

 

25,182

 

 

 

$

1,748,682

 

$

1,055,437

 

$

74,388

 

$

(1,792,230

)

$

1,086,277

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDER’S EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Trade accounts payable

 

$

17,851

 

$

16,210

 

$

28

 

$

 

$

34,089

 

Accrued expenses

 

61,175

 

58,950

 

678

 

 

120,803

 

Current portion of long-term debt

 

13,125

 

1,166

 

 

 

14,291

 

Current portion of obligations under capital leases

 

 

6,516

 

 

 

6,516

 

Accrued income taxes

 

 

 

 

 

 

Total current liabilities

 

92,151

 

82,842

 

706

 

 

175,699

 

 

 

 

 

 

 

 

 

 

 

 

 

Intercompany

 

761,430

 

 

 

(761,430

)

 

Long-term liabilities

 

38,508

 

635

 

 

 

39,143

 

Long-term debt

 

344,388

 

1,118

 

 

 

345,506

 

Obligations under capital leases

 

 

13,724

 

 

 

13,724

 

Deferred income taxes

 

116,084

 

 

 

 

116,084

 

Total liabilities

 

1,352,561

 

98,319

 

706

 

(761,430

)

690,156

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

 

 

 

Additional paid-in capital

 

247,053

 

478,422

 

121,814

 

(600,236

)

247,053

 

Retained earnings

 

149,617

 

478,714

 

(47,178

)

(431,536

)

149,617

 

Accumulated other comprehensive (loss) income

 

(549

)

(18

)

(954

)

972

 

(549

)

Total shareholder’s equity

 

396,121

 

957,118

 

73,682

 

(1,030,800

)

396,121

 

 

 

$

1,748,682

 

$

1,055,437

 

$

74,388

 

$

(1,792,230

)

$

1,086,277

 

 

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Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

Three Months Ended June 30, 2014

(In thousands)

 

 

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

Consolidated

 

 

 

ResCare, Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

64,084

 

$

366,960

 

$

390

 

$

 

$

431,434

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

61,388

 

349,908

 

311

 

 

411,607

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

2,696

 

17,052

 

79

 

 

19,827

 

Other expenses (income):

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

8,168

 

333

 

(1

)

 

8,500

 

Loss on extinguishment of debt

 

659

 

 

 

 

659

 

Equity in earnings of subsidiaries

 

(9,945

)

 

 

9,945

 

 

Total other (income) expenses

 

(1,118

)

333

 

(1

)

9,945

 

9,159

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

3,814

 

16,719

 

80

 

(9,945

)

10,668

 

Income tax (benefit) expense

 

(2,474

)

6,820

 

34

 

 

4,380

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

6,288

 

9,899

 

46

 

(9,945

)

6,288

 

Net loss-noncontrolling interest

 

 

 

 

 

 

Net income (loss)-Res-Care, Inc.

 

6,288

 

9,899

 

46

 

(9,945

)

6,288

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Foreign currently translation adjustments

 

235

 

 

(235

)

235

 

235

 

Comprehensive income (loss) attributable to Res-Care, Inc.

 

$

6,523

 

$

9,899

 

$

(189

)

$

(9,710

)

$

6,523

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

$

6,523

 

$

9,899

 

$

(189

)

$

(9,710

)

$

6,523

 

 

- 15 -



Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

Six Months Ended June 30, 2014

(In thousands)

 

 

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

Consolidated

 

 

 

ResCare, Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

126,220

 

$

725,910

 

$

787

 

$

 

$

852,917

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

125,436

 

690,726

 

713

 

 

816,875

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

784

 

35,184

 

74

 

 

36,042

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expenses (income):

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

15,900

 

676

 

(2

)

 

16,574

 

Loss on extinguishment of debt

 

659

 

 

 

 

659

 

Equity in earnings of subsidiaries

 

(20,159

)

 

 

20,159

 

 

Total other (income) expenses

 

(3,600

)

676

 

(2

)

20,159

 

17,233

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

4,384

 

34,508

 

76

 

(20,159

)

18,809

 

Income tax (benefit) expense

 

(6,579

)

14,393

 

32

 

 

7,846

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

10,963

 

20,115

 

44

 

(20,159

)

10,963

 

Net loss-noncontrolling interest

 

 

 

 

 

 

Net income (loss)-Res-Care, Inc.

 

10,963

 

20,115

 

44

 

(20,159

)

10,963

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Foreign currently translation adjustments

 

(29

)

 

(29

)

29

 

(29

)

Comprehensive income (loss) attributable to Res-Care, Inc.

 

$

10,934

 

$

20,115

 

$

15

 

$

(20,130

)

$

10,934

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

$

10,934

 

$

20,115

 

$

15

 

$

(20,130

)

$

10,934

 

 

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Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

Three Months Ended June 30, 2013

(In thousands)

 

 

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

Consolidated

 

 

 

ResCare, Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

62,612

 

$

332,866

 

$

755

 

$

 

$

396,233

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

67,277

 

304,324

 

860

 

 

372,461

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

(4,665

)

28,542

 

(105

)

 

23,772

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expenses (income):

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

7,935

 

(327

)

57

 

 

7,665

 

Loss on extinguishment of debt

 

 

 

 

 

 

Equity in earnings of subsidiaries

 

(24,576

)

(304

)

 

24,880

 

 

Total other (income) expenses

 

(16,641

)

(631

)

57

 

24,880

 

7,665

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

11,976

 

29,173

 

(162

)

(24,880

)

16,107

 

Income tax (benefit) expense

 

1,697

 

4,195

 

(24

)

 

5,868

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

10,279

 

24,978

 

(138

)

(24,880

)

10,239

 

Net loss-noncontrolling interest

 

 

 

(40

)

 

(40

)

Net income (loss)-Res-Care, Inc.

 

10,279

 

24,978

 

(98

)

(24,880

)

10,279

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Foreign currently translation adjustments

 

(223

)

 

(223

)

223

 

(223

)

Comprehensive income (loss) attributable to Res-Care, Inc.

 

$

10,056

 

$

24,978

 

$

(321

)

$

(24,657

)

$

10,056

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

$

10,056

 

$

24,978

 

$

(361

)

$

(24,657

)

$

10,016

 

 

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Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

Six Months Ended June 30, 2013

(In thousands)

 

 

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

Consolidated

 

 

 

ResCare, Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

123,064

 

$

661,116

 

$

1,507

 

$

 

$

785,687

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

132,454

 

606,571

 

1,692

 

 

740,717

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

(9,390

)

54,545

 

(185

)

 

44,970

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expenses (income):

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

16,230

 

(142

)

114

 

 

16,202

 

Loss on extinguishment of debt

 

 

 

 

 

 

Equity in earnings of subsidiaries

 

(40,791

)

(447

)

 

41,238

 

 

Total other (income) expenses

 

(24,561

)

(589

)

114

 

41,238

 

16,202

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

15,171

 

55,134

 

(299

)

(41,238

)

28,768

 

Income tax (benefit) expense

 

(6,440

)

13,748

 

(75

)

 

7,233

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

21,611

 

41,386

 

(224

)

(41,238

)

21,535

 

Net loss-noncontrolling interest

 

 

 

(76

)

 

(76

)

Net income (loss)-Res-Care, Inc.

 

21,611

 

41,386

 

(148

)

(41,238

)

21,611

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Foreign currently translation adjustments

 

(414

)

 

(414

)

414

 

(414

)

Comprehensive income (loss) attributable to Res-Care, Inc.

 

$

21,197

 

$

41,386

 

$

(562

)

$

(40,824

)

$

21,197

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

$

21,197

 

$

41,386

 

$

(638

)

$

(40,824

)

$

21,121

 

 

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Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2014

(In thousands)

 

 

 

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

Consolidated

 

 

 

ResCare, Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

10,963

 

$

20,115

 

$

44

 

$

(20,159

)

$

10,963

 

Adjustments to reconcile net income, including

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest, to cash provided by

 

 

 

 

 

 

 

 

 

 

 

operating activities

 

6,165

 

7,728

 

(275

)

20,159

 

33,777

 

Cash provided by (used in) operating activities

 

17,128

 

27,843

 

(231

)

 

44,740

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(2,686

)

(7,260

)

(30

)

 

(9,976

)

Acquisitions of businesses, net of cash acquired

 

 

(949

)

 

 

(949

)

Proceeds from sale of assets

 

 

203

 

 

 

203

 

Cash used in investing activities

 

(2,686

)

(8,006

)

(30

)

 

(10,722

)

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

Long-term debt repayments

 

(172,515

)

(85

)

 

 

(172,600

)

Long-term debt borrowings

 

275,000

 

 

 

 

275,000

 

Payments on obligations under capital leases

 

 

(3,692

)

 

 

(3,692

)

Debt issuance costs

 

(3,618

)

 

 

 

(3,618

)

Dividend paid.

 

(122,448

)

 

 

 

(122,448

)

Net payments relating to intercompany financing

 

18,254

 

(18,415

)

161

 

 

 

Cash (used in) provided by financing activities

 

(5,327

)

(22,192

)

161

 

 

(27,358

)

Effect of exchange rate changes on cash and cash equivalents

 

 

 

211

 

 

211

 

Increase (decrease) in cash and cash equivalents

 

9,115

 

(2,355

)

111

 

 

6,871

 

Cash and cash equivalents at beginning of period

 

26,335

 

2,860

 

802

 

 

29,997

 

Cash and cash equivalents at end of period

 

$

35,450

 

$

505

 

$

913

 

$

 

$

36,868

 

 

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Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2013

(In thousands)

 

 

 

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

Consolidated

 

 

 

ResCare, Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

21,611

 

$

41,386

 

$

(224

)

$

(41,238

)

$

21,535

 

Adjustments to reconcile net income, including noncontrolling interest, to cash provided by operating activities

 

(35,175

)

5,948

 

520

 

41,238

 

12,531

 

Cash (used in) provided by operating activities

 

(13,564

)

47,334

 

296

 

 

34,066

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(4,242

)

(3,940

)

(30

)

 

(8,212

)

Acquisitions of businesses, net of cash acquired

 

 

(2,234

)

 

 

(2,234

)

Proceeds from sale of assets

 

 

184

 

 

 

184

 

Cash used in investing activities

 

(4,242

)

(5,990

)

(30

)

 

(10,262

)

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

Long-term debt repayments

 

(8,737

)

(179

)

(364

)

 

(9,280

)

Long-term debt borrowings

 

 

 

 

 

 

Debt issuance costs

 

(2

)

 

 

 

(2

)

Payments on obligations under capital leases

 

 

(3,499

)

 

 

(3,499

)

Net payments relating to intercompany financing

 

41,677

 

(39,687

)

(1,990

)

 

 

Cash provided by (used in) financing activities

 

32,938

 

(43,365

)

(2,354

)

 

(12,781

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(81

)

 

 

(81

)

Increase (decrease) in cash and cash equivalents

 

15,132

 

(2,102

)

(2,088

)

 

10,942

 

Cash and cash equivalents at beginning of period

 

42,633

 

4,795

 

2,706

 

 

50,134

 

Cash and cash equivalents at end of period

 

$

57,765

 

$

2,693

 

$

618

 

$

 

$

61,076

 

 

- 20 -



Table of Contents

 

Item 2.                                                         Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand ResCare’s financial performance and condition. MD&A is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying notes. All references in MD&A to “ResCare”, “Company”, “our company”, “we”, “us”, or “our” mean Res-Care, Inc. and unless the context otherwise requires, its consolidated subsidiaries.

 

Preliminary Note Regarding Forward-Looking Statements

 

Statements in this report that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. In addition, we expect to make such forward-looking statements in future filings with the Securities and Exchange Commission, in press releases, and in oral and written statements made by us or with our approval. These forward-looking statements include, but are not limited to: (1) projections of revenues, income or loss, capital structure and other financial items; (2) statements of plans and objectives of ResCare or our management or Board of Directors; (3) statements of future actions or economic performance, including development activities; (4) statements of assumptions underlying such statements; and (5) statements about the limitations on the effectiveness of controls. Words such as “believes”, “anticipates”, “expects”, “intends”, “plans”, “targets”, and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

 

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Some of the events or circumstances that could cause actual results to differ from those discussed in the forward-looking statements are discussed in the “Risk Factors” section in Part I, Item 1A of our Annual Report on Form 10-K and in Part II, Item 1A of this Report. Such forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date on which such statement is made.

 

 

Overview of Our Business

 

We receive revenues primarily from the delivery of residential, training, educational and support services to various populations with special needs. Our programs include an array of services provided in both residential and non-residential settings for adults and youths with intellectual, cognitive or other developmental disabilities, and youths who have special educational or support needs, are from disadvantaged backgrounds, or have severe emotional disorders, including some who have entered the juvenile justice system. We also offer, through drop-in or live-in services, personal care, meal preparation, housekeeping, transportation and some skilled nursing care to the elderly in their own homes. Additionally, we provide services to transition welfare recipients, young people and people who have been laid off or have special barriers to employment into the workforce and become productive employees.

 

Our reportable segments are: (i) Residential Services, (ii) ResCare HomeCare, (iii) Education and Training Services, (iv) Workforce Services and (v) Pharmacy Services.

 

Residential Services primarily includes services for individuals with intellectual, cognitive or other developmental disabilities in our community home settings. ResCare HomeCare primarily includes periodic in-home care services to the elderly, as well as persons with disabilities. Education and Training Services consists of our Job Corps centers, alternative education programs, charter schools, training for professionals working with children, training for potential foster and adoptive parents and other individual and family counseling and instruction.  Workforce Services is comprised of our domestic job training and placement programs that assist welfare recipients and disadvantaged job seekers in finding employment and improving their career prospects.  Pharmacy Services is a limited, closed-door pharmacy business focused on serving individuals with cognitive, intellectual and developmental disabilities.

 

We evaluate performance based on profit or loss from operations before corporate expenses and other income, interest and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment revenues and transfers are not significant. Further information regarding our segments is included in Notes 1 and 7 of the Notes to Consolidated Financial Statements.

 

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Revenues for our Residential Services operations are derived primarily from state Medicaid programs and other government agencies and from management contracts with private operators, generally not for profit providers, who contract with state government agencies and are reimbursed under the Medicaid programs. Our services include social, functional and vocational skills training, supported employment and emotional and psychological counseling for individuals with intellectual or other disabilities. Reimbursement varies by state and service type, and may be based on a variety of methods including flat rate, cost-based reimbursement, per person per diem, or unit of service basis based on published fee schedules. Rates are periodically adjusted based upon state budgets or economic conditions and their impact on state budgets. At programs where we are the provider of record, we are directly reimbursed under state Medicaid programs for services we provide and such revenues are affected by occupancy levels. For programs where we operate pursuant to management contracts, the management fee is negotiated with the provider of record.

 

Revenues for our HomeCare services are derived primarily from state Medicaid programs, Medicare, other governmental programs, commercial insurance programs and private pay agreements. We provide a range of services, both skilled and non-skilled, primarily for older people in their homes. These services are provided on an as needed basis and are reimbursed on a unit of service basis. We also provide these in-home services to seniors on a private pay basis. We are concentrating growth efforts in the home care private pay business to further diversify our revenue streams.

 

We operate vocational training centers under the federal Job Corps program administered by the Department of Labor (DOL) through our Education and Training Services operations. Under Job Corps contracts, we are reimbursed for direct costs of services related to Job Corps center operations, allowable indirect costs for general and administrative costs, plus a predetermined management fee. The management fee takes the form of a fixed contractual amount plus a computed amount based on certain performance criteria. All of such amounts are reflected as revenue, and all such direct costs are reflected as cost of services. Final determination of amounts due under Job Corps contracts is subject to audit and review by the DOL, and renewals and extension of Job Corps contracts are based in part on performance reviews.

 

We operate job training and placement programs that assist disadvantaged job seekers in finding employment and improving their career prospects through our Workforce Services operations. These programs are administered under contracts with local and state governments. We are typically reimbursed for direct costs of services related to the job training centers, allowable indirect costs plus a fee for profit. The fee can take the form of a fixed contractual amount (rate or price) or be computed based on certain performance criteria. The contracts are funded by federal agencies, including the DOL and Department of Health and Human Services.

 

Revenues for our Pharmacy Services operations are derived primarily from the Federal Medicare Part D plan, State Medicaid programs and other third-party payors.  Revenue is recognized in the period pharmaceutical medications are shipped or at the time consultant pharmacist services are rendered.

 

 

Outlook

 

We provide a variety of vital human services and derive a significant portion of our revenue from state and federal government sources. Despite cost containment efforts, many states are dealing with budget deficits or shortfalls as a result of recent economic conditions, including their Medicaid budgets that fund a significant portion of the services we provide.

 

 

Application of Critical Accounting Policies

 

Our discussion and analysis of the financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts and related disclosures of commitments and contingencies. We rely on historical experience and on various other assumptions that we believe to be reasonable under the circumstances to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

 

We continually review our accounting policies and financial information disclosures. A summary of our more significant accounting policies that require the use of estimates and judgments in preparing the financial statements was provided in our

 

- 22 -



Table of Contents

 

2013 Annual Report on Form 10-K filed February 18, 2014. Management has discussed the development, selection, and application of our critical accounting policies with our Audit Committee. During the first six months of 2014, there were no material changes in the critical accounting policies and assumptions.

 

 

Results of Operations

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30

 

June 30

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(Dollars in thousands)

 

Revenues:

 

 

 

 

 

 

 

 

 

Residential Services

 

$

237,927

 

$

215,530

 

$

471,759

 

$

428,057

 

ResCare HomeCare

 

95,684

 

89,607

 

189,263

 

177,039

 

Education & Training Services

 

34,046

 

34,928

 

68,170

 

69,418

 

Workforce Services

 

42,381

 

39,596

 

82,188

 

79,414

 

Pharmacy Services

 

21,396

 

16,572

 

41,537

 

31,759

 

Consolidated

 

$

431,434

 

$

396,233

 

$

852,917

 

$

785,687

 

Operating income:

 

 

 

 

 

 

 

 

 

Residential Services

 

$

31,956

 

$

26,388

 

$

60,051

 

$

52,600

 

ResCare HomeCare

 

8,683

 

8,316

 

16,355

 

15,021

 

Education & Training Services

 

2,724

 

2,241

 

5,545

 

4,897

 

Workforce Services

 

4,883

 

4,258

 

8,616

 

8,054

 

Pharmacy Services

 

1,132

 

2,576

 

2,880

 

3,604

 

Corporate (1)

 

(29,551

)

(20,007

)

(57,405

)

(39,206

)

Consolidated

 

$

19,827

 

$

23,772

 

$

36,042

 

$

44,970

 

Operating margin:

 

 

 

 

 

 

 

 

 

Residential Services

 

13.4%

 

12.2%

 

12.7%

 

12.3%

 

ResCare HomeCare

 

9.1%

 

9.3%

 

8.6%

 

8.5%

 

Education & Training Services

 

8.0%

 

6.4%

 

8.1%

 

7.1%

 

Workforce Services

 

11.5%

 

10.8%

 

10.5%

 

10.1%

 

Pharmacy Services

 

5.3%

 

15.5%

 

6.9%

 

11.3%

 

Corporate (1)

 

(6.8%

)

(5.0%

)

(6.7%

)

(5.0%

)

Consolidated

 

4.6%

 

6.0%

 

4.2%

 

5.7%

 

________

 

(1)     Represents corporate general and administrative expenses, as well as other operating income and expenses related to the corporate office.

 

 

Consolidated

 

Consolidated revenues for the quarter and six months ended June 30, 2014 increased $35.2 million and $67.2 million, or 8.9% and 8.6%, respectively, from the same periods in 2013.  Organic growth for the three months and six months ended June 30, 2014 was 3.8% and 3.2%, respectively.  Revenues are more fully described in the segment discussions.

 

Consolidated operating income, which includes corporate general and administrative expenses, for the quarter ended June 30, 2014, was $19.8 million compared to operating income of $23.8 million from the same period in 2013.  Consolidated operating margins were 4.6% and 6.0% for the quarterly periods in 2014 and 2013, respectively. The decrease in operating income and margin primarily resulted from higher corporate general and administrative expenses for incentive compensation for stock option holders and insurance costs, which were partially offset by improved results and margins in our Residential Services segment.

 

Consolidated operating income for the six months ended June 30, 2014 was $36.0 million compared to $45.0 million for the same period in 2013. Consolidated operating margins were 4.2% and 5.7% for the six month periods in 2014 and 2013, respectively.  The decrease in operating income and margin primarily resulted from higher corporate general and

 

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administrative expenses for legal costs and incentive compensation for stock option holders, which were partially offset by improved results and margins in all business segments except Pharmacy Services.

 

Net interest expense increased $0.8 million for the second quarter of 2014 and $0.4 million for the six months ended June 30, 2014, compared to the same periods in 2013. The increases for the three and six month periods were due primarily to higher borrowing levels.   The 2014 second quarter and six month periods also include $0.7 million related to a loss on extinguishment of debt from the refinancing that is further described in Note 4 to the Notes to the Condensed Consolidated Financial Statements. Our effective income tax rate for the six months ended June 30, 2014 was 41.7% as compared to 25.1% over the same period in 2013.  The 2014 rate was negatively impacted by the expiration of jobs tax credits (not renewed for 2014), while the 2013 rate was favorably impacted by the renewal of jobs tax credits.  Due to the retroactive application of the tax credit to January 1, 2012, our effective tax rate for the first six months of 2013 reflects not only the first six months impact, but also $3.3 million related to 2012 and prior periods.

 

Residential Services

 

Residential Services revenues for the quarter ended June 30, 2014 increased $22.4 million, or 10.4%, over the same period in 2013. This increase was due primarily to acquisitions of $16.0 million, organic growth of $5.7 million and rate increases of $0.7 million in certain states. Operating margin was 13.4% for the quarter ended June 30, 2014 compared to 12.2% for the same period in 2013. The increase in margin is primarily attributable to lower health insurance costs.

 

Residential Services revenues for the six months ended June 30, 2014 increased $43.7 million, or 10.2%, over the same period in 2013. This increase was due primarily to acquisition of $33.0 million, organic growth of $8.1 million and rate increases in certain states of $2.6 million.. Operating margin was 12.7% for the six months ended June 30, 2014 compared to 12.3% for the same period in 2013. The increase in margin is attributable to cost efficiencies and lower health insurance costs.

 

ResCare HomeCare

 

ResCare HomeCare revenues for the quarter ended June 30, 2014 increased $6.1 million, or 6.8%, over the same period in 2013. This increase was due primarily to acquisition growth of $4.3 million, organic growth of $1.4 million and rate/system changes of $0.4 million in certain states. Operating margin decreased from 9.3% in 2013 to 9.1% in 2014.

 

ResCare HomeCare revenues for the six months ended June 30, 2014 increased $12.2 million, or 6.9%, over the same period in 2013. This increase was due primarily to acquisition of $8.8 million, organic growth of $2.1 million and rate/system changes of $1.4 million in certain states. Operating margin increased from 8.5% in 2013 to 8.6% in 2014.

 

Education & Training Services

 

Education & Training Services revenues for the quarter ended June 30, 2014 decreased $0.9 million, or 2.5%, from the same period of 2013, due primarily to slot reduction across all Job Corps centers effective July 1, 2013.  Operating margin was 8.0% in the second quarter of 2014 and 6.4% for the same period in 2013.  The increase in margin is primarily attributable to improved census in certain education related operations.

 

Education & Training Services revenues for the six months ended June 30, 2014 decreased $1.2 million, or 1.8%, from the same period of 2013, due primarily to slot reduction across all Job Corps centers effective July 1, 2013.  Operating margin was 8.1% in the first six months of 2014 and 7.1% for the same period in 2013.  The improvement in margin is primarily attributable to improved census in certain education related operations.

 

Workforce Services

 

Workforce Services revenues for the quarter ended June 30, 2014 increased $2.8 million, or 7.0%, from the same period in 2013, due primarily to net contract wins/changes of $1.5 million and organic growth of $1.3 milion.  Operating margin increased from 10.8% in the second quarter of 2013 to 11.5% in the same period in 2014, due primarily to lower health insurance costs.

 

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Workforce Services revenues for the six months ended June 30, 2014 increased $2.8 million, or 3.5%, from the same period in 2013, due primarily to organic growth opportunities.  Operating margin increased from 10.1% in the first six months of 2013 to 10.5% in the same period in 2014, due primarily to higher margins on our organic growth opportunities.

 

Pharmacy Services

 

Pharmacy Services revenues for the quarter ended June 30, 2014 increased $4.8 million, or 29.1%, from the same period in 2013.  This increase was due primarily to organic growth in all the states we have pharmacy services, as well as new services in Kansas.  Operating margin decreased from 15.5% in the second quarter of 2013 to 5.3% in the same period in 2014.  The reduction in margin is primarily attributable to a favorable physical inventory valuation error that occurred in the second quarter of 2013 and was then reversed in the third quarter of 2013.

 

Pharmacy Services revenues for the six months ended June 30, 2014 decreased $9.8 million, or 30.8%, from the same period in 2013, due primarily to organic growth in all the states we have pharmacy services, as well as new services in Kansas. Operating margin decreased from 11.3% in the first six months of 2013 to 6.9% in the same period in 2014.  The reduction in margin is primarily attributable to a favorable physical inventory valuation error that occurred in the second quarter of 2013 and was then reversed in the third quarter of 2013.

 

Corporate

 

Total corporate operating expenses represent corporate general and administrative expenses, as well as other operating income and expenses. Total expenses in the quarter ended June 30, 2014 increased $9.5 million compared to same period in 2013 due primarily to $7.6 million of incentive compensation expense for stock option holders and $1.7 million of higher insurance related costs.  Total expenses in the first six months of 2014 increased $18.2 million compared to first six months of 2013 due primarily to $10.8 million of higher legal costs in our first quarter and the $7.6 million of incentive compensation mentioned above.

 

 

Financial Condition, Liquidity and Capital Resources

 

Total assets increased $18.2 million, or 1.7%, at June 30, 2014 over balances at December 31, 2013.

 

Cash and cash equivalents were $36.9 million at June 30, 2014, as compared to $30.0 million at December 31, 2013. Cash provided by operations for the six months ended June 30, 2014 was $44.7 million compared to $34.1 million for the six months ended June 30, 2013.

 

Net accounts receivable at June 30, 2014 increased to $251.2 million, compared to $241.9 million at December 31, 2013. Days of revenue in net accounts receivable were 51 days at June 30, 2014, compared with 50 days at December 31, 2013.

 

Our capital requirements relate primarily to our plans to expand through selective acquisitions and the development of new programs, and our need for sufficient working capital for general corporate purposes. Since most of our programs are operating at or near capacity, and budgetary pressures and other forces are expected to limit increases in reimbursement rates we receive, our ability to continue to grow at the current rate depends directly on our acquisition and development activity. We have historically satisfied our working capital requirements, capital expenditures and scheduled debt payments from our operating cash flows and borrowings under our revolving credit facility, and expect that this will continue for at least the next twelve months.

 

Cash used in investing activities at June 30, 2014 increased $0.5 million over the same period in 2013 primarily due to higher purchases of property and equipment in 2014, which were partially offset by lower amounts spent on acquisitions.

 

Our financing activities included a net proceeds of debt and capital lease obligations of $98.7 million for the first six months of 2014, which includes proceeds of $275 million related to the debt refinancing which is discussed below. This compares to a net payment of debt and capital lease obligations of $12.8 million for the same period in 2013.  During 2014, we paid a dividend to our shareholders of $122.4 million and paid $3.6 million in debt issuance costs due to the debt refinancing.  In addition to quarterly principal and seller note payments made in the six months ended June 30, 2013, we made an additional

 

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required $4.3 million principal payment resulting from the annual Excess Cash Flow calculation, which was part of our financial covenants under the previous agreement.

 

On December 22, 2010, we issued $200 million of 10.75% senior notes due January 15, 2019 in a private placement to qualified institutional buyers under the Securities Act of 1933. The 10.75% senior notes, which had an issue price of 100% of the principal amount, are unsecured obligations ranking equal to existing and future debt and are subordinate to existing and future secured debt. The 10.75% senior notes are jointly, severally, fully and unconditionally guaranteed by our domestic subsidiaries.

 

On April 25, 2014, we entered into an amended and restated senior secured credit facility (the “2014 Credit Agreement”) in an aggregate principal amount of $650 million, which replaced our 2012 senior secured credit facility and the related term loan A. The 2014 Credit Agreement consists of a Term Loan A (the “Term Loan A”) in an aggregate principal amount of $200 million, a revolving credit facility (the “Revolving Facility”) in an aggregate principal amount of $250 million, and a Delayed-Draw Term Loan A (the “DDTL”) in an aggregate amount of $200 million.  At closing, proceeds from the new Term Loan A and Revolving Facility were used to (i) refinance the prior revolver and term loan A, (ii) fund a distribution to shareholders of approximately $130 million, and (iii) fund related transaction fees and expenses, and (iv) used for working capital and other general corporate purposes permitted under the 2014 Credit Agreement, including certain acquisitions and investments.  The Term Loan A, the Revolving Facility and the DDTL (if drawn upon) each mature on April 25, 2019. The Term Loan A will amortize in an aggregate annual amount equal to a percentage of the original principal amount of the Term Loan A beginning September 30, 2014 as follows: (i) 5% during each of the first two years after funding, (ii) 7.5% during the third year after funding, (iii) 10% during the fourth year after funding and, (iv) 12.5% during the final year of the term. The balance of the Term Loan A is payable at maturity.  Pricing for the Term Loan A, Revolving Facility and the DDTL (if drawn upon) will be variable, at the London Interbank Offer Rate (LIBOR) plus 225 basis points. LIBOR is defined as having no minimum rate. The DDTL may be drawn within 12 months from the closing date to call the 10.75% senior unsecured notes due 2019 (which are callable on January 15, 2015) and other uses allowed in the 2014 Credit Agreement.  The 2014 Credit Agreement also provides that, upon satisfaction of certain conditions, the Company may increase the aggregate principal amount of loans outstanding thereunder by up to $175 million, subject to receipt of additional lending commitments for such loans. The loans and other obligations under the 2014 Credit Agreement are (i) guaranteed by Onex Rescare Holdings Corp. (“Holdings”) and substantially all of its subsidiaries (subject to certain exceptions and limitations) and (ii) secured by substantially all of the assets of the Company, Holdings and substantially all of its subsidiaries (subject to certain exceptions and limitations). The 2014 Credit Agreement contains financial covenants which require us to maintain specific ratios with respect to interest coverage and leverage. This agreement provides for the exclusion of charges incurred with the resolution of certain named legal proceedings, as well as any non-cash impairment charges, in the calculation of certain financial covenants.  We recorded a loss on extinguishment of debt of $0.7 million for the three and six month periods ended June 30, 2014 associated with termination of the 2012 senior secured revolving credit facility and the Term Loan A prepayment.  Loss on extinguishment of debt consists principally of write-offs of deferred debt issuance costs.

 

Subsequent to receiving the proceeds from the 2014 Credit Agreement, we declared and paid a dividend of $122.4 million to Onex ResCare Holdings Corp shareholders.  We also recorded a one-time pre-tax charge of $7.6 million for the accrual of discretionary payments to stock option holders, of which $3.8 million was paid out prior to June 30, 2014.

 

Our obligations under capital leases are $21.0 million and $20.2 million as of  June 30, 2014 and December 31,2013, respectively.  These primarily relate to vehicle capital leases.  The current portion of these lease obligations was $6.5 million as of June 30, 2014 and December 31, 2013.

 

As of June 30, 2014, we had irrevocable standby letters of credit in the principal amount of $42 million issued primarily in connection with our insurance programs. As of June 30, 2014, we had $148 million available under the amended and restated revolving credit facility, with an outstanding balance of $60 million. Outstanding balances bear interest at 2.25% over the LIBOR or other bank developed rates at our option. As of June 30, 2014, the weighted average interest rate was 4.0%. Letters of credit had a borrowing rate of 2.38% as of June 30, 2014. The commitment fee on the unused balance was .40%. The margin over LIBOR and the commitment fee is determined quarterly based on our leverage ratio, as defined by the revolving credit facility.

 

We are in compliance with our debt covenants at June 30, 2014, and we believe we will continue to be in compliance with these covenants over the next twelve months. Our ability to achieve the thresholds provided for in the financial covenants

 

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largely depends upon continued profitability, reductions of amounts borrowed under the facility and continued cash collections.

 

Operating funding sources were approximately 68% through Medicaid reimbursement, 7% from the DOL and 25% from other payors. We believe our sources of funds through operations and available through the credit facility described above will be sufficient to meet our working capital, planned capital expenditure and scheduled debt repayment requirements for the next twelve months.

 

We had no significant off-balance sheet transactions or interests in 2014 or 2013.

 

 

Impact of Recently Issued Accounting Pronouncements

 

See Note 10 of the Notes to Condensed Consolidated Financial Statements.

 

 

Item 3.                                                         Quantitative and Qualitative Disclosures about Market Risk

 

The market risk inherent in our financial instruments and positions represents the potential loss arising from adverse changes in interest rates. While we are exposed to changes in interest rates as a result of any outstanding variable rate debt, we do not currently utilize any derivative financial instruments related to our interest rate exposures. Our senior secured term loan and senior secured credit facility, which have interest rates based on margins over LIBOR or prime, tiered based upon leverage calculations, had an outstanding balance of $260 million as of June 30, 2014 and $157.5 million as of December 31, 2013.  A 100 basis point movement in the interest rate sustained for one year would result in an approximate $2.6 million annualized effect on interest expense and cash flows.

 

 

Item 4.                                                         Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

ResCare’s management, under the supervision and with the participation of the Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the CEO and CFO concluded that ResCare’s disclosure controls and procedures are effective in timely making known to them material information required to be disclosed in the reports filed or submitted under the Securities Exchange Act. There were no changes in ResCare’s internal control over financial reporting during the quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

 

 

Limitations on the Effectiveness of Controls

 

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, that breakdowns can occur because of simple errors or mistakes, and that controls can be circumvented by the acts of individuals or groups. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

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PART II.                                             OTHER INFORMATION

 

Item 1.                                                         Legal Proceedings

 

Information regarding the legal proceedings is provided in Note 8 to the condensed consolidated financial statements set forth in Part I of this report and incorporated by reference into this Part II, Item 1.

 

Item 1A.                                                Risk Factors

 

There have been no material changes from the risk factors previously disclosed in our 2013 Annual Report on Form 10-K filed February 18, 2014.

 

 

Item 2.                                                         Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

 

Item 3.                                                         Defaults upon Senior Securities

 

None.

 

 

Item 4.                                                         Mine Safety Disclosures

 

Not applicable.

 

 

Item 5.                                                         Other Information

 

None.

 

 

Item 6.                                                         Exhibits

 

Exhibit

 

Description of Exhibit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*

 

31.1

 

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended.

 

 

 

 

 

*

 

31.2

 

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended.

 

 

 

 

 

*

 

32

 

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

*

 

101

 

The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

*

 

Filed herewith

 

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SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

 

RES-CARE, INC.

 

 

 

Registrant

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date:

August 4, 2014

By:

/s/ Ralph G. Gronefeld, Jr.

 

 

 

Ralph G. Gronefeld, Jr.

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date:

August 4, 2014

By:

/s/ D. Ross Davison

 

 

 

D. Ross Davison

 

 

 

Chief Financial Officer

 

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