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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 September 30, 2009

 

or

 

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

 

For the transition period from        to        

 

Commission File Number: 0-20372

 


 

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

 

 

Louisville, Kentucky

 

40223-3808

(Address of principal executive offices)

 

(Zip Code)

 

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 x  No o.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No o.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12-b of the Act (Check one):

 

Large accelerated filer:  o

 

Accelerated filer: x

 

 

 

Non-accelerated filer: o

 

Smaller reporting company:  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o   No x.

 

The number of shares outstanding of the registrant’s common stock, no par value, as of October 31, 2009, was 29,466,112.

 

 

 



Table of Contents

 

INDEX

 

RES-CARE, INC. AND SUBSIDIARIES

 

 

 

 

 

 

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Condensed Consolidated Balance Sheets — September 30, 2009 and December 31, 2008

 

 

 

 

 

Condensed Consolidated Statements of Income —
Three Months Ended September 30, 2009 and 2008;
Nine Months Ended September 30, 2009 and 2008

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows —
Nine Months Ended September 30, 2009 and 2008

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements — September 30, 2009

 

 

 

 

Item 2.

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

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

 

 

 

 

Item 1A.

Risk Factors

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

Item 5.

Other Information

 

 

 

 

Item 6.

Exhibits

 

 

 

 

SIGNATURES

 

 

 

EXHIBITS

 

 

1



Table of Contents

 

PART I.         FINANCIAL INFORMATION

 

Item 1.    Financial Statements

 

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

September 30

 

December 31

 

 

 

2009

 

2008

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

4,677

 

$

13,594

 

Accounts receivable, net of allowance for doubtful accounts of $21,773 in 2009 and $20,306 in 2008

 

240,139

 

230,976

 

Refundable income taxes

 

1,326

 

1,781

 

Deferred income taxes

 

25,185

 

22,702

 

Non-trade receivables

 

4,958

 

4,021

 

Prepaid expenses and other current assets

 

15,854

 

18,409

 

Total current assets

 

292,139

 

291,483

 

Property and equipment, net

 

83,183

 

84,157

 

Goodwill

 

490,107

 

476,196

 

Other intangible assets, net

 

47,317

 

45,985

 

Other assets

 

14,643

 

16,322

 

Total assets

 

$

927,389

 

$

914,143

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Trade accounts payable

 

$

50,251

 

$

49,216

 

Accrued expenses

 

107,664

 

103,520

 

Current portion of long-term debt

 

2,329

 

2,008

 

Current portion of obligations under capital leases

 

95

 

78

 

Accrued income taxes

 

1,988

 

1,099

 

Total current liabilities

 

162,327

 

155,921

 

Long-term liabilities

 

36,507

 

31,596

 

Long-term debt

 

210,882

 

254,827

 

Obligations under capital leases

 

539

 

559

 

Deferred gains

 

3,221

 

3,966

 

Deferred income taxes

 

40,264

 

30,397

 

Total liabilities

 

453,740

 

477,266

 

Shareholders’ equity:

 

 

 

 

 

Preferred shares, authorized 1,000,000 shares, no par value, except 48,095 shares designated as Series A with stated value of $1,050 per share, 48,095 shares issued and outstanding in 2009 and 2008

 

46,609

 

46,609

 

Common stock, no par value, authorized 40,000,000 shares, issued 29,851,194 in 2009 and 29,864,949 in 2008, outstanding 29,483,106 in 2009 and 29,470,734 in 2008

 

50,577

 

50,550

 

Additional paid-in capital

 

94,431

 

91,786

 

Retained earnings

 

290,487

 

258,134

 

Accumulated other comprehensive loss

 

(7,877

)

(10,202

)

Total shareholders’ equity – Res-Care, Inc.

 

474,227

 

436,877

 

Noncontrolling interests

 

(578

)

 

Total shareholders’ equity

 

473,649

 

436,877

 

Total liabilities and shareholders’ equity

 

$

927,389

 

$

914,143

 

 

See accompanying notes to condensed consolidated financial statements.

 

2



Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

395,837

 

$

387,923

 

$

1,191,927

 

$

1,148,700

 

Facility and program expenses

 

358,829

 

350,165

 

1,083,763

 

1,056,102

 

Facility and program contribution

 

37,008

 

37,758

 

108,164

 

92,598

 

 

 

 

 

 

 

 

 

 

 

Corporate general and administrative expenses

 

14,382

 

15,085

 

44,810

 

44,342

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

22,626

 

22,673

 

63,354

 

48,256

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

3,972

 

4,531

 

12,475

 

13,628

 

Income from continuing operations before income taxes

 

18,654

 

18,142

 

50,879

 

34,628

 

Income tax expense

 

7,158

 

6,514

 

19,104

 

12,469

 

Income from continuing operations

 

11,496

 

11,628

 

31,775

 

22,159

 

Loss from discontinued operations, net of tax

 

 

(122

)

 

(279

)

Net income – including noncontrolling interests

 

11,496

 

11,506

 

31,775

 

21,880

 

Net loss – noncontrolling interests

 

(159

)

 

(578

)

 

Net income – Res-Care, Inc.

 

11,655

 

11,506

 

32,353

 

21,880

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to preferred shareholders

 

1,665

 

1,650

 

4,636

 

3,149

 

Net income attributable to common shareholders

 

$

9,990

 

$

9,856

 

$

27,717

 

$

18,731

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

From continuing operations

 

$

0.35

 

$

0.35

 

$

0.96

 

$

0.67

 

From discontinued operations

 

 

(0.00

)

 

(0.01

)

Basic earnings per common share

 

$

0.35

 

$

0.35

 

$

0.96

 

$

0.66

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

From continuing operations

 

$

0.35

 

$

0.35

 

$

0.96

 

$

0.66

 

From discontinued operations

 

 

(0.01

)

 

(0.01

)

Diluted earnings per common share

 

$

0.35

 

$

0.34

 

$

0.96

 

$

0.65

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

Basic

 

28,858

 

28,553

 

28,757

 

28,425

 

Diluted

 

28,858

 

28,747

 

28,757

 

28,617

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income – including noncontrolling interests

 

$

31,775

 

$

21,880

 

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

 

 

 

 

 

Depreciation and amortization

 

19,658

 

16,454

 

Amortization of discount and deferred debt issuance costs on notes

 

909

 

891

 

Share-based compensation

 

3,413

 

3,577

 

Deferred income taxes

 

7,384

 

1,450

 

Excess tax benefit from share-based compensation

 

 

(1,049

)

Provision for losses on accounts receivable

 

5,666

 

5,221

 

Gain on purchase of business

 

(559

)

 

Loss on sale of assets

 

248

 

11

 

Changes in operating assets and liabilities

 

(1,546

)

(1,111

)

Cash provided by operating activities

 

66,948

 

47,324

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(12,654

)

(14,150

)

Acquisitions of businesses

 

(17,994

)

(38,979

)

Proceeds from sale of assets

 

169

 

571

 

Cash used in investing activities

 

(30,479

)

(52,558

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Long-term debt repayments

 

(981

)

(1,589

)

Short-term (repayments) borrowings – three months or less, net

 

(43,800

)

10,000

 

Payments on obligations under capital lease

 

(70

)

(57

)

Debt issuance costs

 

(38

)

(118

)

Excess tax benefit from share-based compensation

 

 

1,049

 

Proceeds received from exercise of stock options

 

415

 

1,339

 

Employee withholding payments on share-based compensation

 

(1,302

)

(1,446

)

Cash (used in) provided by financing activities

 

(45,776

)

9,178

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

390

 

(432

)

 

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

(8,917

)

3,512

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

13,594

 

10,809

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

4,677

 

$

14,321

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

Notes issued in connection with acquisitions

 

$

1,224

 

$

1,784

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

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, to youth with special needs, to adults who are experiencing barriers to employment and to older people who need home care assistance. All references in this Quarterly Report on Form 10-Q to “ResCare”, “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 the instructions to Form 10-Q and 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 of normal recurring accruals) considered necessary for a fair presentation 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. During this quarter we eliminated the one-month lag between the reporting periods of our international operations and the rest of the company. Therefore, our international results include one additional month for the quarter and year to date periods ended September 30, 2009. This adjustment, a $0.5 million loss, did not have a material effect on our results of operations.

 

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 2008 Annual Report on Form 10-K.

 

Note 2.           Acquisitions

 

We completed eleven acquisitions during the first nine months of 2009, all of which are within our Community Services segment. Aggregate consideration for these acquisitions was approximately $19.2 million, including $1.2 million of notes issued. These acquisitions are expected to generate annual revenues of approximately $40.1 million. The operating results of the acquisitions are included in the condensed consolidated financial statements from the date of acquisition.

 

5



Table of Contents

 

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

 

Receivables

 

$

255

 

Property and equipment

 

1,015

 

Goodwill

 

13,316

 

Other intangible assets

 

5,204

 

Other assets

 

67

 

Liabilities assumed

 

(80

)

Gain on purchase of business

 

(559

)

Aggregate purchase price

 

$

19,218

 

 

The other intangible assets consist primarily of customer relationships, licenses, covenants not to compete and company name. All intangible assets will be amortized up to ten years except licenses, which have an indefinite life.

 

Note 3.           Goodwill

 

A summary of changes to goodwill during the nine months ended September 30, 2009 are as follows:

 

 

 

 

 

Job Corps

 

Employment

 

 

 

 

 

 

 

Community

 

Training

 

Training

 

 

 

 

 

 

 

Services

 

Services

 

Services

 

Other (2)

 

Total

 

Balance at December 31, 2008

 

$

368,182

 

$

7,589

 

$

62,053

 

$

38,372

 

$

476,196

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill added through acquisitions

 

13,316

 

 

 

 

13,316

 

Adjustments to previously recorded goodwill (1)

 

(606

)

 

5

 

1,196

 

595

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2009

 

$

380,892

 

$

7,589

 

$

62,058

 

$

39,568

 

$

490,107

 

 


(1)          Adjustments to previously recorded goodwill primarily relate to foreign currency translation and purchase price allocation adjustments.

(2)          Other is comprised of international and school operations.

 

Note 4.           Comprehensive Income

 

The following table sets forth the computation of comprehensive income attributable to Res-Care, Inc.:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Net income – Res-Care, Inc.

 

$

11,655

 

$

11,506

 

$

32,353

 

$

21,880

 

Foreign currency translation adjustments arising during the period

 

207

 

(3,369

)

2,325

 

(4,732

)

Comprehensive income

 

$

11,862

 

$

8,137

 

$

34,678

 

$

17,148

 

 

6



Table of Contents

 

Note 5.           Debt

 

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

 

 

 

Sept. 30

 

Dec. 31

 

 

 

2009

 

2008

 

7.75% senior notes due 2013, net of discount of approximately $0.6 million and $0.7 million in 2009 and 2008, respectively

 

$

149,446

 

$

149,342

 

Senior secured credit facility

 

60,000

 

103,800

 

Obligations under capital leases

 

634

 

637

 

Notes payable and other

 

3,765

 

3,693

 

 

 

213,845

 

257,472

 

Less current portion

 

2,424

 

2,086

 

 

 

$

 211,421

 

$

255,386

 

 

Note 6.           Financial Instruments

 

At September 30, 2009, 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:

 

 

 

September 30, 2009

 

December 31, 2008

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

 

 

Amount

 

Value

 

Amount

 

Value

 

Long-term debt:

 

 

 

 

 

 

 

 

 

7.75% senior notes

 

$

149,446

 

$

144,000

 

$

149,342

 

$

127,050

 

Senior secured credit facility

 

60,000

 

60,000

 

103,800

 

103,800

 

Notes payable and other

 

3,765

 

3,712

 

3,693

 

3,619

 

 

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

 

7



Table of Contents

 

Note 7.           Earnings Per Share

 

The following data shows the amounts used in computing earnings per common share and the effect on income and the weighted average number of shares of dilutive potential common stock attributable to Res-Care, Inc.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

11,655

 

$

11,628

 

$

32,353

 

$

22,159

 

Attributable to preferred shareholders

 

1,665

 

1,667

 

4,636

 

3,189

 

Attributable to common shareholders

 

$

9,990

 

$

9,961

 

$

27,717

 

$

18,970

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax

 

$

 

$

(122

)

$

 

$

(279

)

Attributable to preferred shareholders

 

 

(17

)

 

(40

)

Attributable to common shareholders

 

$

 

$

(105

)

$

 

$

(239

)

 

 

 

 

 

 

 

 

 

 

Net income

 

$

11,655

 

$

11,506

 

$

32,353

 

$

21,880

 

Attributable to preferred shareholders

 

1,665

 

1,650

 

4,636

 

3,149

 

Attributable to common shareholders

 

$

9,990

 

$

9,856

 

$

27,717

 

$

18,731

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares used in basic earnings per common share

 

28,858

 

28,553

 

28,757

 

28,425

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock options

 

 

79

 

 

97

 

Restricted stock

 

 

115

 

 

95

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares and dilutive potential common shares used in diluted earnings per common share

 

28,858

 

28,747

 

28,757

 

28,617

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

From continuing operations

 

$

0.35

 

$

0.35

 

$

0.96

 

$

0.67

 

From discontinued operations

 

 

(0.00

)

 

(0.01

)

Basic earnings per common share

 

$

0.35

 

$

0.35

 

$

0.96

 

$

0.66

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

From continuing operations

 

$

0.35

 

$

0.35

 

$

0.96

 

$

0.66

 

From discontinued operations

 

 

(0.01

)

 

(0.01

)

Diluted earnings per common share

 

$

0.35

 

$

0.34

 

$

0.96

 

$

0.65

 

 

The average shares listed below were not included in the computation of diluted earnings per common share because to do so would have been anti-dilutive for the period presented:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

 

 

2009

 

2008

 

2009

 

2008

 

Stock options

 

243

 

 

243

 

 

Restricted shares

 

344

 

 

344

 

 

 

8


 


Table of Contents

 

Note 8.           Segment Information

 

The following table sets forth information about reportable segment operating results and assets:

 

 

 

 

 

Job Corps

 

Employment

 

 

 

 

 

 

 

Community

 

Training

 

Training

 

All

 

Consolidated

 

 

 

Services

 

Services

 

Services

 

Other (1)

 

Totals

 

Three months ended September 30:

 

 

 

 

 

 

 

 

 

 

 

2009

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

292,138

 

$

31,966

 

$

61,167

 

$

10,566

 

$

395,837

 

Operating income

 

30,747

 

2,241

 

5,009

 

(15,371

)

22,626

 

Total assets

 

617,689

 

38,249

 

152,546

 

118,905

 

927,389

 

Capital expenditures

 

2,274

 

 

660

 

2,469

 

5,403

 

Depreciation and amortization

 

2,859

 

 

611

 

3,034

 

6,504

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

282,619

 

$

39,952

 

$

55,140

 

$

10,212

 

$

387,923

 

Operating income

 

30,185

 

2,974

 

5,229

 

(15,715

)

22,673

 

Total assets

 

607,724

 

30,960

 

133,873

 

118,631

 

891,188

 

Capital expenditures

 

3,080

 

 

382

 

1,305

 

4,767

 

Depreciation and amortization

 

2,507

 

 

613

 

2,491

 

5,611

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30:

 

 

 

 

 

 

 

 

 

 

 

2009

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

864,188

 

$

113,378

 

$

175,457

 

$

38,904

 

$

1,191,927

 

Operating income

 

87,604

 

8,346

 

12,611

 

(45,207

)

63,354

 

Capital expenditures

 

6,748

 

 

1,320

 

4,586

 

12,654

 

Depreciation and amortization

 

8,342

 

 

1,833

 

9,483

 

19,658

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

825,219

 

$

122,270

 

$

166,641

 

$

34,570

 

$

1,148,700

 

Operating income (2)

 

64,709

 

8,836

 

17,439

 

(42,728

)

48,256

 

Capital expenditures

 

6,571

 

 

767

 

6,812

 

14,150

 

Depreciation and amortization

 

7,222

 

 

1,684

 

7,548

 

16,454

 

 


(1)

All Other is comprised of our international operations, schools and corporate general and administrative expenses. Our international results include one additional month for the quarter and year to date periods ended September 30, 2009 in order to eliminate the one-month lag period. This adjustment did not have a material effect on our results of operations.

 

 

(2)

Nine months ended September 30, 2008 includes a $24.4 million charge related to four legal matters within our Community Services segment. See Note 10 in our Form 10-Q for the period ended September 30, 2008 for further discussion.

 

Note 9.           Legal Proceedings

 

From time to time, we, or a provider with whom we have a management agreement, become a party to legal and/or administrative proceedings that, in the event of unfavorable outcomes, may adversely affect revenues and period to period comparisons.

 

In March 2007, a lawsuit was filed in Bernalillo County, New Mexico State Court styled Larry Selk, by and through his legal guardian, Rani Rubio v. Res-Care New Mexico, Inc., Res-Care, Inc., et al. The lawsuit seeks compensatory and punitive damages for negligence, negligence per se, violations of the Unfair Practices Act and violations of the Resident Abuse and Neglect Act. Settlement discussions to date have been unsuccessful. A jury trial has been set for November 9, 2009 on the remaining issue of negligence. We have made provisions in our condensed consolidated financial statements for the final adjudication of this matter. We do not believe that the ultimate resolution of this matter will have a material adverse effect on our condensed consolidated financial condition, results of operations or cash flows.

 

ResCare, or its affiliates, are parties to various legal and/or administrative proceedings arising out of the operation of our facilities and programs and arising in the ordinary course of business. 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 condensed consolidated financial condition, results of operations or cash flows.

 

Note 10.         Impact of Recently Issued Accounting Pronouncements

 

In September 2006, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification 820, Fair Value Measurements and Disclosures (ASC 820). ASC 820 defines fair value, establishes a framework for measuring fair value under U.S. GAAP and expands disclosures about fair value measurements. In February 

 

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2008, the FASB issued ASC 820-10-55-23A which deferred the effective date of ASC 820 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. We adopted ASC 820 at the beginning of 2009 for nonfinancial assets and liabilities, which include goodwill and intangibles. The adoption of ASC 820 did not have a material impact on our condensed consolidated financial statements.

 

In December 2007, the FASB issued ASC 805, Business Combinations (ASC 805). ASC 805 retains the fundamental requirements of purchase method accounting for acquisitions set forth previously. However, this statement defines the acquirer as the entity that obtains control of a business in the business combination. ASC 805 also requires several changes in the way assets and liabilities are recognized and measured in purchase accounting including expensing acquisition-related costs as incurred, recognizing assets and liabilities arising from contractual contingencies at the acquisition date, and capitalizing in-process research and development. ASC 805 also requires the acquirer to recognize a gain in earnings for bargain purchases, or the excess of the fair value of net assets over the consideration transferred plus any noncontrolling interest in the acquiree, a departure from the concept of “negative goodwill”. We adopted ASC 805 effective January 1, 2009. This statement applies prospectively to business combinations completed on or after that date. ASC 805 has not had a material impact on our condensed consolidated financial statements.

 

In April 2008, the FASB issued ASC 350-30-35, Determining the Useful Life of an Intangible Asset (ASC 350-30-35). ASC 350-30-35 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This change is intended to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset under ASC 805 and other U.S. GAAP. ASC 350-30-35 was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The requirement for determining useful lives and the disclosure requirements must be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements must also be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. The adoption of ASC 350-30-35 did not have a material impact on our condensed consolidated financial statements.

 

In April 2009, the FASB issued ASC 825-10-50, Disclosures about Fair Value of Financial Instruments (ASC 825-10-50). ASC 825-10-50 requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies, as well as in annual financial statements. This statement also amends ASC 270, Interim Reporting, to require those disclosures in summarized financial information at interim reporting periods beginning after June 15, 2009. We adopted the provisions of ASC 825-10-50 on June 30, 2009. See Notes 6 and 12 for information related to the fair value of our financial instruments.

 

In May 2009, the FASB issued ASC 855, Subsequent Events (ASC 855). This standard establishes general standards of accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued. The adoption of ASC 855 did not impact our financial position or results of operations. All events or transactions that occurred after September 30, 2009 up through November 6, 2009, the date these financials were issued, have been evaluated. See Note 14 for disclosure of subsequent events.

 

In June 2009, the FASB issued ASC 860-10-05, Transfers and Servicing of Financial Assets (ASC 860-10-05) which eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. ASC 860-10-05 is effective for fiscal years beginning after November 15, 2009. We are currently evaluating the impact of ASC 860-10-05.

 

In June 2009, the FASB issued ASC 105, General Accepted Accounting Principles (ASC 105). This standard establishes two levels of U.S. GAAP, authoritative and nonauthoritative. The FASB Accounting Standards

 

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Codification (the Codification) became the source of authoritative, nongovernmental U.S. GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (SEC), which are sources of authoritative U.S. GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative. This standard was effective for financial statements for interim or annual reporting periods ending after September 15, 2009. As the Codification was not intended to change or alter existing U.S. GAAP, it did not have an impact on our condensed consolidated financial statements.

 

In October 2009, the FASB issued Accounting Standard Update 2009-13, Multiple-Deliverable Revenue Arrangements (ASU 2009-13). ASU 2009-13 amends ASC 650-25 to eliminate the requirement that all undelivered elements have vendor-specific objective evidence (VSOE) or third-party evidence (TPE) before an entity can recognize the portion of an overall arrangement fee that is attributable to items that already have been delivered. The new guidance eliminates the residual method of revenue recognition and allows the use of management’s best estimate of selling price for individual elements of an arrangement when VSOE or TPE is unavailable. This amendment will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted as of the beginning of a fiscal year. We are currently evaluating the impact of ASU 2009-13.

 

Note 11.         Derivative Instruments

 

We are exposed to certain market risks related to our ongoing business operations, including the effects of changes in foreign currency exchange rates. Beginning in the third quarter of 2009, we entered into foreign currency forward contracts with the objective of reducing our exposure to cash flow volatility arising from foreign currency fluctuations associated with certain foreign currency denominated inter-company short-term receivables and payables. The notional amount, maturity date, and currency of these contracts match those of the underlying receivables and payables.

 

Foreign currency forward contracts are recognized in the Condensed Consolidated Balance Sheet at fair value. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. For derivative instruments not designated as a hedging instrument, or any ineffective portion of the gain or loss on a derivative instrument, the gain or loss is immediately recognized in the results of operations.

 

As a result of the use of derivative instruments, we are exposed to risk that the counterparties will fail to meet their contractual obligations. To mitigate the counterparty credit risk, we only enter into contracts with carefully selected major financial institutions based upon their credit ratings and other factors, and continually assess the creditworthiness of counterparties. At September 30, 2009, our counterparty had an investment grade rating.

 

At September 30, 2009, the foreign currency forward contracts outstanding had a total notional value of $4.8 million. The change in fair value of the foreign currency forwards, which was less than $0.1 million, was recognized in our results of operations as the derivative instrument was not designated as a hedging instrument in accordance with ASC-815-30.

 

 

 

Fair

 

Condensed Consolidated

 

 

 

Value

 

Balance Sheet Location

 

 

 

 

 

 

 

Foreign currency forwards – Asset

 

$

17

 

Other Current Assets

 

 

We did not enter into any foreign currency forward contracts during 2008.

 

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Note 12.         Fair Value

 

The following table presents the fair value for those assets or liabilities measured at fair value on a recurring basis:

 

 

 

 

 

Quoted Prices

 

Other

 

 

 

 

 

Fair Value

 

in Active

 

Observable

 

Unobservable

 

 

 

at

 

Markets

 

Inputs

 

Inputs

 

 

 

09/30/2009

 

Level 1 (a)

 

Level 2 (b)

 

Level 3 (c)

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forwards — Asset

 

$

17

 

$

 

$

17

 

$

 

 

The three levels of hierarchy are:

 

(a)

Level 1

Quoted prices in active markets for identified assets or liabilities.

(b)

Level 2

Inputs other than quoted prices included within Level 1 that are observable for the asset or liability.

(c)

Level 3

Unobservable inputs used in valuations in which there is little market activity for the asset or liability at the measurement date.

 

Fair value measurements of assets or liabilities are assigned a level within the fair value hierarchy based on the lowest level of any input that is significant to the fair value measurement in its entirety. We utilize the market approach to measure fair value for our derivative assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities, and therefore are classified as Level 2.

 

Note 13.         Noncontrolling Interests

 

In December 2007, the FASB issued ASC 810, Noncontrolling Interests in Consolidated Financial Statements (ASC 810). ASC 810 applies to all companies that prepare consolidated financial statements but only affects companies that have a noncontrolling interest in a subsidiary or that deconsolidate a subsidiary. ASC 810 clarifies that noncontrolling interests be reported as a component separate from the parent’s equity and that changes in the parent’s ownership interest in a subsidiary 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.

 

A reconciliation of the beginning and ending carrying amount of the equity attributable to noncontrolling interests is as follows:

 

Noncontrolling interests as of December 31, 2008

 

$

 

Net loss — noncontrolling interests

 

(578

)

Noncontrolling interests as of September 30, 2009

 

$

(578

)

 

 

Note 14.         Subsequent Events

 

On October 16, 2009, we were advised by the State of Indiana that our Employment Training Services contract with IBM would end on December 14, 2009. This contract was originally scheduled to run through 2016 with revenues totaling $109 million from 2010 through 2016. Indiana’s Family and Social Services Administration (FSSA) informed us that we will be a vital part of the welfare service delivery system going forward. At this time, we are in the process of negotiating a contract with FSSA and evaluating the impact, if any, the contract cancellation may have on our condensed consolidated financial statements

 

There were no other material recognizable or disclosable subsequent events.

 

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Note 15.         Subsidiary Guarantors

 

The Senior Notes are jointly, severally, fully and unconditionally guaranteed 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 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

September 30, 2009

(In thousands)

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

Consolidated

 

 

 

ResCare, Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

(1,961

)

$

2,496

 

$

4,142

 

$

 

$

4,677

 

Accounts receivable, net

 

48,841

 

187,275

 

4,023

 

 

240,139

 

Refundable income taxes

 

1,167

 

 

159

 

 

1,326

 

Deferred income taxes

 

25,177

 

 

8

 

 

25,185

 

Non-trade receivables

 

877

 

3,795

 

286

 

 

4,958

 

Prepaid expenses and other current assets

 

8,487

 

7,037

 

330

 

 

15,854

 

Total current assets

 

82,588

 

200,603

 

8,948

 

 

292,139

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

35,829

 

46,678

 

676

 

 

83,183

 

Goodwill

 

93,482

 

366,960

 

29,665

 

 

490,107

 

Other intangible assets, net

 

7,564

 

34,870

 

4,883

 

 

47,317

 

Investment in subsidiaries

 

710,551

 

41,794

 

80,255

 

(832,600

)

 

Other assets

 

9,186

 

5,267

 

190

 

 

14,643

 

 

 

$

 939,200

 

$

696,172

 

$

124,617

 

$

(832,600

)

$

927,389

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Trade accounts payable

 

$

26,786

 

$

21,517

 

$

1,948

 

$

 

$

50,251

 

Accrued expenses

 

45,964

 

60,910

 

790

 

 

107,664

 

Current portion of long-term debt

 

 

1,694

 

635

 

 

2,329

 

Current portion of obligations under capital leases

 

14

 

81

 

 

 

95

 

Accrued income taxes

 

1,817

 

 

171

 

 

1,988

 

Total current liabilities

 

74,581

 

84,202

 

3,544

 

 

162,327

 

 

 

 

 

 

 

 

 

 

 

 

 

Intercompany

 

105,539

 

(105,143

)

(396

)

 

 

Long-term liabilities

 

34,419

 

1,840

 

248

 

 

36,507

 

Long-term debt

 

209,446

 

1,436

 

 

 

210,882

 

Obligations under capital leases

 

8

 

531

 

 

 

539

 

Deferred gains

 

1,289

 

1,932

 

 

 

3,221

 

Deferred income taxes

 

40,269

 

 

(5

)

 

40,264

 

Total liabilities

 

465,551

 

(15,202

)

3,391

 

 

453,740

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

473,649

 

711,374

 

121,226

 

(832,600

)

473,649

 

 

 

$

 939,200

 

$

696,172

 

$

124,617

 

$

(832,600

)

$

927,389

 

 

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Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2008

(In thousands)

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

Consolidated

 

 

 

ResCare, Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

146

 

$

4,048

 

$

9,400

 

$

 

$

13,594

 

Accounts receivable, net

 

50,172

 

177,149

 

3,655

 

 

230,976

 

Refundable income taxes

 

2,222

 

 

(441

)

 

1,781

 

Deferred income taxes

 

22,694

 

 

8

 

 

22,702

 

Non-trade receivables

 

475

 

3,710

 

(164

)

 

4,021

 

Prepaid expenses and other current assets

 

12,102

 

6,060

 

247

 

 

18,409

 

Total current assets

 

87,811

 

190,967

 

12,705

 

 

291,483

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

38,195

 

45,410

 

552

 

 

84,157

 

Goodwill

 

94,785

 

353,474

 

27,937

 

 

476,196

 

Other intangible assets

 

6,876

 

32,880

 

6,229

 

 

45,985

 

Investment in subsidiaries

 

572,440

 

41,741

 

80,228

 

(694,409

)

 

Other assets

 

10,614

 

5,246

 

462

 

 

16,322

 

 

 

$

 810,721

 

$

669,718

 

$

128,113

 

$

(694,409

)

$

914,143

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Trade accounts payable

 

$

26,623

 

$

19,205

 

$

3,388

 

$

 

$

49,216

 

Accrued expenses

 

49,565

 

53,450

 

505

 

 

103,520

 

Current portion of long-term debt

 

 

2,008

 

 

 

2,008

 

Current portion of obligations under capital leases

 

13

 

65

 

 

 

78

 

Accrued income taxes

 

849

 

 

250

 

 

1,099

 

Total current liabilities

 

77,050

 

74,728

 

4,143

 

 

155,921

 

 

 

 

 

 

 

 

 

 

 

 

 

Intercompany

 

(18,190

)

12,286

 

5,904

 

 

 

Long-term liabilities

 

29,799

 

1,559

 

238

 

 

31,596

 

Long-term debt

 

253,142

 

1,685

 

 

 

254,827

 

Obligations under capital leases

 

19

 

540

 

 

 

559

 

Deferred gains

 

1,623

 

2,343

 

 

 

3,966

 

Deferred income taxes

 

30,401

 

 

(4

)

 

30,397

 

Total liabilities

 

373,844

 

93,141

 

10,281

 

 

477,266

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

436,877

 

576,577

 

117,832

 

(694,409

)

436,877

 

 

 

$

 810,721

 

$

669,718

 

$

128,113

 

$

(694,409

)

$

914,143

 

 

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RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Three Months Ended September 30, 2009

(In thousands)

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

Consolidated

 

 

 

ResCare, Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

66,990

 

$

321,846

 

$

7,001

 

$

 

$

395,837

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

70,313

 

295,331

 

7,567

 

 

373,211

 

Operating (loss) income

 

(3,323

)

26,515

 

(566

)

 

22,626

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (income) expenses:

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

3,919

 

(6

)

59

 

 

3,972

 

Equity in earnings of subsidiaries

 

(15,977

)

 

 

15,977

 

 

Total other (income) expenses

 

(12,058

)

(6

)

59

 

15,977

 

3,972

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations, before income taxes

 

8,735

 

26,521

 

(625

)

(15,977

)

18,654

 

Income tax (benefit) expense

 

(2,761

)

10,158

 

(239

)

 

7,158

 

Income (loss) from continuing operations

 

11,496

 

16,363

 

(386

)

(15,977

)

11,496

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) – including noncontrolling interests

 

11,496

 

16,363

 

(386

)

(15,977

)

11,496

 

Net loss – noncontrolling interests

 

 

(37

)

(122

)

 

(159

)

Net income (loss) – Res-Care, Inc.

 

$

11,496

 

$

16,400

 

$

(264

)

$

(15,977

)

$

11,655

 

 

16



Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Nine Months Ended September 30, 2009

(In thousands)

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

Consolidated

 

 

 

ResCare, Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

221,572

 

$

952,606

 

$

17,749

 

$

 

$

1,191,927

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

234,960

 

874,158

 

19,455

 

 

1,128,573

 

Operating (loss) income

 

(13,388

)

78,448

 

(1,706

)

 

63,354

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (income) expenses:

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

12,432

 

(39

)

82

 

 

12,475

 

Equity in earnings of subsidiaries

 

(47,947

)

 

 

47,947

 

 

Total other (income) expenses

 

(35,515

)

(39

)

82

 

47,947

 

12,475

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations, before income taxes

 

22,127

 

78,487

 

(1,788

)

(47,947

)

50,879

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax (benefit) expense

 

(9,648

)

29,422

 

(670

)

 

19,104

 

Income (loss) from continuing operations

 

31,775

 

49,065

 

(1,118

)

(47,947

)

31,775

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) – including noncontrolling interests

 

31,775

 

49,065

 

(1,118

)

(47,947

)

31,775

 

Net loss – noncontrolling interests

 

 

(110

)

(468

)

 

(578

)

Net income (loss) – Res-Care, Inc.

 

$

31,775

 

$

49,175

 

$

(650

)

$

(47,947

)

$

32,353

 

 

17



Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Three Months Ended September 30, 2008

(In thousands)

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

Consolidated

 

 

 

ResCare, Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

73,669

 

$

307,172

 

$

7,082

 

$

 

$

387,923

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

75,038

 

283,324

 

6,888

 

 

365,250

 

Operating (loss) income

 

(1,369

)

23,848

 

194

 

 

22,673

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (income) expenses:

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

4,576

 

5

 

(50

)

 

4,531

 

Equity in earnings of subsidiaries

 

(15,348

)

 

 

15,348

 

 

Total other (income) expenses

 

(10,772

)

5

 

(50

)

15,348

 

4,531

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations, before income taxes

 

9,403

 

23,843

 

244

 

(15,348

)

18,142

 

Income tax (benefit) expense

 

(2,103

)

8,531

 

86

 

 

6,514

 

Income (loss) from continuing operations

 

11,506

 

15,312

 

158

 

(15,348

)

11,628

 

Loss from discontinued operations, net of tax

 

 

(122

)

 

 

(122

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

11,506

 

$

15,190

 

$

158

 

$

(15,348

)

$

11,506

 

 

18



Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Nine Months Ended September 30, 2008

(In thousands)

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

Consolidated

 

 

 

ResCare, Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

222,337

 

$

903,364

 

$

22,999

 

$

 

$

1,148,700

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

248,790

 

830,150

 

21,504

 

 

1,100,444

 

Operating (loss) income

 

(26,453

)

73,214

 

1,495

 

 

48,256

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (income) expenses:

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

13,790

 

(54

)

(108

)

 

13,628

 

Equity in earnings of subsidiaries

 

(47,632

)

 

 

47,632

 

 

Total other (income) expenses

 

(33,842

)

(54

)

(108

)

47,632

 

13,628

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations, before income taxes

 

7,389

 

73,268

 

1,603

 

(47,632

)

34,628

 

Income tax (benefit) expense

 

(14,491

)

26,383

 

577

 

 

12,469

 

Income (loss) from continuing operations

 

21,880

 

46,885

 

1,026

 

(47,632

)

22,159

 

Loss from discontinued operations, net of tax

 

 

(279

)

 

 

(279

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

21,880

 

$

46,606

 

$

1,026

 

$

(47,632

)

$

21,880

 

 

19



Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2009

(In thousands)

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

Consolidated

 

 

 

ResCare, Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)–including noncontrolling interests

 

$

31,775

 

$

49,065

 

$

(1,118

)

$

(47,947

)

$

31,775

 

Adjustments to reconcile net income to cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

8,662

 

9,255

 

1,741

 

 

19,658

 

Amortization of discount and deferred debt issuance costs on notes

 

909

 

 

 

 

909

 

Share-based compensation

 

3,413

 

 

 

 

3,413

 

Deferred income tax expense

 

7,385

 

 

(1

)

 

7,384

 

Provision for losses on accounts receivable

 

 

5,666

 

 

 

5,666

 

Gain on purchase of business

 

 

(559

)

 

 

(559

)

Loss on sale of assets

 

 

248

 

 

 

248

 

Equity in earnings of subsidiaries

 

(47,947

)

 

 

47,947

 

 

Changes in operating assets and liabilities

 

134,045

 

(124,776

)

(10,815

)

 

(1,546

)

Cash provided by (used in) operating activities

 

138,242

 

(61,101

)

(10,193

)

 

66,948

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(5,554

)

(6,797

)

(303

)

 

(12,654

)

Acquisitions of businesses

 

 

(17,994

)

 

 

(17,994

)

Proceeds from sale of assets

 

 

169

 

 

 

169

 

Cash used in investing activities

 

(5,554

)

(24,622

)

(303

)

 

(30,479

)

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

Long-term debt (repayments) borrowings

 

(2,205

)

1,224

 

 

 

(981

)

Short-term (repayments) borrowings – three months or less, net

 

(41,501

)

(2,934

)

635

 

 

(43,800

)

Payments on obligations under capital leases, net

 

 

(70

)

 

 

(70

)

Debt issuance costs

 

(38

)

 

 

 

(38

)

Net payments relating to intercompany financing

 

(90,164

)

85,679

 

4,485

 

 

 

Proceeds received from exercise of stock options

 

415

 

 

 

 

415

 

Employee withholding payments on share-based compensation

 

(1,302

)

 

 

 

(1,302

)

Cash (used in) provided by financing activities

 

(134,795

)

83,899

 

5,120

 

 

(45,776

)

Effect of exchange rate changes on cash and cash equivalents

 

 

272

 

118

 

 

390

 

Decrease in cash and cash equivalents

 

(2,107

)

(1,552

)

(5,258

)

 

(8,917

)

Cash and cash equivalents at beginning of period

 

146

 

4,048

 

9,400

 

 

13,594

 

Cash and cash equivalents at end of period

 

$

(1,961

)

$

2,496

 

$

4,142

 

$

 

$

4,677

 

 

20



Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2008

(In thousands)

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

Consolidated

 

 

 

ResCare, Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

21,880

 

$

46,606

 

$

1,026

 

$

(47,632

)

$

21,880

 

Adjustments to reconcile net income to cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

7,949

 

8,017

 

488

 

 

16,454

 

Amortization of discount and deferred debt issuance costs on notes

 

891

 

 

 

 

891

 

Share-based compensation

 

3,577

 

 

 

 

3,577

 

Deferred income tax expense

 

1,459

 

 

(9

)

 

1,450

 

Excess tax benefit from share-based compensation

 

(1,049

)

 

 

 

(1,049

)

Provision for losses on accounts receivable

 

 

5,221

 

 

 

5,221

 

Loss on sale of assets

 

 

11

 

 

 

11

 

Equity in earnings of subsidiaries

 

(47,632

)

 

 

47,632

 

 

Changes in operating assets and liabilities

 

82,983

 

(89,024

)

968

 

3,962

 

(1,111

)

Cash provided by (used in) operating activities

 

70,058

 

(29,169

)

2,473

 

3,962

 

47,324

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(8,213

)

(5,770

)

(167

)

 

(14,150

)

Acquisitions of businesses

 

 

(38,979

)

 

 

(38,979

)

Proceeds from sale of assets

 

 

571

 

 

 

571

 

Cash used in investing activities

 

(8,213

)

(44,178

)

(167

)

 

(52,558

)

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

Long-term debt repayments

 

(1,589

)

 

 

 

(1,589

)

Short-term borrowings (repayments) – three months or less, net

 

10,053

 

(1,410

)

5,319

 

(3,962

)

10,000

 

Payments on obligations under capital leases, net

 

 

(57

)

 

 

(57

)

Debt issuance costs

 

(118

)

 

 

 

(118

)

Net payments relating to intercompany financing

 

(75,511

)

79,927

 

(4,416

)

 

 

Excess tax benefit from share-based compensation

 

1,049

 

 

 

 

1,049

 

Proceeds received from exercise of stock options

 

1,339

 

 

 

 

1,339

 

Employee withholding payments on share-based compensation

 

(1,446

)

 

 

 

(1,446

)

Cash (used in) provided by financing activities

 

(66,223

)

78,460

 

903

 

(3,962

)

9,178

 

Effect of exchange rate on cash and cash equivalents

 

 

 

(432

)

 

(432

)

(Decrease) increase in cash and cash equivalents

 

(4,378

)

5,113

 

2,777

 

 

3,512

 

Cash and cash equivalents at beginning of period

 

1,379

 

3,724

 

5,706

 

 

10,809

 

Cash and cash equivalents at end of period

 

$

(2,999

)

$

8,837

 

$

8,483

 

$

 

$

14,321

 

 

21



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 complements, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying notes. All references in MD&A to “ResCare”, “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, earnings or loss per share, 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 II, Item 1A of this Report and in our 2008 Annual Report on Form 10-K. 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 recognize 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 and transportation to the elderly in their own homes. Additionally, we provide services to welfare recipients, young people and people who have been laid off or have special barriers to employment, to transition into the workforce and become productive employees.

 

We have three reportable operating segments: (i) Community Services, (ii) Job Corps Training Services and (iii) Employment Training Services. Management’s discussion and analysis of each segment is included below. Further information regarding our segments is included in the notes to condensed consolidated financial statements.

 

Revenues for our Community Services operations are derived primarily from state Medicaid programs, other government agencies, commercial insurance companies, private pay home care and management contracts with not-for-profit or other providers that contract with state government agencies. Our services include activities of daily living, functional and vocational skills training, socialization, supported employment and emotional and psychological counseling for individuals with intellectual or other disabilities. We also provide respite, therapeutic and other services to individuals with special needs and to older people in their homes. These services are provided on an as-needed basis or hourly basis through our periodic in-home services programs.

 

22



Table of Contents

 

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. Generally, rates are adjusted annually based upon historical costs experienced by us and by other service providers, or economic conditions and their impact on state budgets. At facilities and 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. At most facilities and programs that we operate pursuant to management contracts, the management fee is negotiated with the provider of record. Through ResCare HomeCare, we also provide 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 Job Corps Training Services operations. Under Job Corps contracts, we are reimbursed for direct facility and program costs 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 facility and program costs. 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 Employment Training Services and international operations. These programs are administered under contracts with local and state governments. We are typically reimbursed for direct facility and program costs 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 generally funded by government agencies.

 

Outlook

 

We provide a variety of vital human services and derive a significant portion of our revenue from state and federal government sources. Historically, strong demand for the services we provide continues during cyclical economic downturns such as the current challenges in the financial markets and general recessionary environment. Despite cost containment efforts, many states are dealing with budget deficits or shortfalls as a result of current 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 2008 Annual Report on Form 10-K. Management has discussed the development, selection, and application of our critical accounting policies with our Audit Committee. During the first nine months of 2009, there were no material changes in the critical accounting policies and assumptions.

 

23



Table of Contents

 

Results of Operations

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(Dollars in thousands)

 

Revenues:

 

 

 

 

 

 

 

 

 

Community Services

 

$

292,138

 

$

282,619

 

$

864,188

 

$

825,219

 

Job Corps Training Services

 

31,966

 

39,952

 

113,378

 

122,270

 

Employment Training Services

 

61,167

 

55,140

 

175,457

 

166,641

 

Other (2)

 

10,566

 

10,212

 

38,904

 

34,570

 

Consolidated

 

$

395,837

 

$

387,923

 

$

1,191,927

 

$

1,148,700

 

 

 

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

 

 

Community Services (1)

 

$

30,747

 

$

30,185

 

$

87,604

 

$

64,709

 

Job Corps Training Services

 

2,241

 

2,974

 

8,346

 

8,836

 

Employment Training Services

 

5,009

 

5,229

 

12,611

 

17,439

 

Other (2)

 

(1,132

)

(685

)

(347

)

1,715

 

Total Operating Expenses (3)

 

(14,239

)

(15,030

)

(44,860

)

(44,443

)

Consolidated

 

$

22,626

 

$

22,673

 

$

63,354

 

$

48,256

 

 

 

 

 

 

 

 

 

 

 

Operating margin:

 

 

 

 

 

 

 

 

 

Community Services (1)

 

10.5

%

10.7

%

10.1

%

7.8

%

Job Corps Training Services

 

7.0

%

7.4

%

7.4

%

7.2

%

Employment Training Services

 

8.2

%

9.5

%

7.2

%

10.5

%

Other (2)

 

(10.7

)%

(6.7

)%

(0.9

)%

5.0

%

Total Operating Expenses (3)

 

(3.6

)%

(3.9

)%

(3.8

)%

(3.9

)%

Consolidated

 

5.7

%

5.8

%

5.3

%

4.2

%

 


(1)          Nine months ended September 30, 2008 includes a $24.4 million charge related to four legal matters within our Community Services segment. See Note 10 in our Form 10-Q for the period ended September 30, 2008 for further discussion.

(2)          Other is comprised of our international operations and schools. Our international results include one additional month for the quarter and year to date periods ended September 30, 2009, in order to eliminate the one-month lag period. This adjustment did not have a material effect on our results of operations.

(3)          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 nine months ended September 30, 2009 increased $7.9 million and $43.2 million, or 2.0% and 3.8%, respectively, over the same periods in 2008. These increases were primarily related to acquisitions in the Community Services segment, new contracts in the Employment Training Services segment and a December 2008 school acquisition included in Other, offset by loss of the Pittsburgh and Treasure Island Job Corps Training Services contracts. Revenues are more fully described in the segment discussions.

 

Consolidated operating income, which includes corporate general and administrative expenses, for the quarter ended September 30, 2009, was $22.6 million compared to $22.7 million over the same period in 2008. Consolidated operating margins were 5.7% and 5.8% for the quarterly periods in 2009 and 2008, respectively.

 

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Consolidated operating income for the nine months ended September 30, 2009 was $63.4 million compared to $48.3 million for the same period in 2008. Consolidated operating margins were 5.3% and 4.2% for the nine month periods in 2009 and 2008, respectively. The increases in 2009 operating income and margins were primarily related to the $24.4 million legal charge recorded in June 2008 and 2009 acquisition growth of approximately $3.2 million, offset by an incremental increase of $12.9 million in 2009 insurance costs.

 

Net interest expense decreased $0.6 million for the third quarter and $1.2 million for the nine months ended September 30, 2009, compared to the same periods in 2008. The decreases were attributable to lower rates and debt levels. Our effective income tax rate for the nine months ended September 30, 2009 was 37.5% as compared to 36.0% over the same period in 2008 due to the impact of the international operating results.

 

Community Services

 

Community Services revenues for the quarter and nine months ended September 30, 2009 increased by $9.5 million and $39.0 million, or 3.4% and 4.7%, respectively, over the same periods in 2008. These increases were due primarily to acquisition growth in the HomeCare and residential businesses. Operating margin decreased from 10.7% in the third quarter of 2008 to 10.5% in the same period in 2009 and increased from 7.8% to 10.1% for the nine months ended September 30, 2008 and 2009. The increase was due primarily to the 2008 legal charge and 2009 acquisitions of approximately $2.5 million for the nine months ended, offset by an incremental increase in 2009 insurance costs totaling $10.8 million.

 

Job Corps Training Services

 

Job Corps Training Services revenues for the quarter and nine months ended September 30, 2009 decreased $8.0 million and $8.9 million, or 20.0% and 7.3%, respectively, over the same periods in 2008 due to the loss of the Pittsburgh and Treasure Island contracts during the second quarter of 2009. Total annual revenue for these contracts was approximately $34 million. Operating margin decreased from 7.4% in the third quarter of 2008 to 7.0% in the same period in 2009 primarily due to higher expenses related to the closeout of the Pittsburgh and Treasure Island contracts. Operating margins increased from 7.2% to 7.4% for the nine months ended September 30, 2008 as compared to September 30, 2009, primarily due to a reduction in general and administrative expenses related to travel and professional services.

 

Employment Training Services

 

Employment Training Services revenues increased $6.0 million and $8.8 million, or 10.9% and 5.3%, respectively, in the quarter and nine months ended September 30, 2009 over the same periods in 2008. The increase for the quarter change is due to $6.3 million of American Recovery and Reimbursement Act of 2009 (ARRA) funding for youth services program and $2.3 million for new contracts in Texas, offset by shortfalls in the WeCare contract and the loss of Florida contracts in 2008. The increase for the nine months ended September 30, 2009 is primarily due to $12.9 million for new contracts in Texas, $6.3 million for ARRA funding and $3.4 million for the Indiana contract, offset primarily by the loss of Florida contracts of $10.2 million. Operating margin decreased from 9.5% in the third quarter of 2008 to 8.2% in the same period in 2009 and decreased from 10.5% in the nine months ended September 30, 2008 to 7.2% in the same period in 2009 due to increased current year expenses incurred in connection with our contracts in New York and Indiana, and an additional $1.6 million in insurance costs. On October 16, 2009, we were advised by the State of Indiana that our Employment Training Services contract with IBM would end on December 14, 2009. This contract was originally scheduled to run through 2016 with revenues totaling $109 million from 2010 through 2016. Indiana’s Family and Social Services Administration (FSSA) informed us that we will be a vital part of the welfare service delivery system going forward. At this time, we are in the process of negotiating a contract with FSSA.

 

Other

 

A portion of our business is dedicated to alternative education and international job training and job placement assistance. Revenues increased from $10.2 million in the third quarter of 2008 to $10.6 million in the same period in 2009 primarily due to an acquisition within schools completed in December 2008, which increased revenue $1.5 million, offset by loss of revenue of $1.1 million due to the closing of six Florida Excel schools. Revenues increased from $34.6 million for the nine month period ended September 30, 2008 to $38.9 million in the same period in 2009,

 

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primarily due to the acquisition completed in December 2008, which increased revenues year to date by approximately $8.1 million, offset by a reduction of international revenues of approximately $4.7 million due to winding down of certain contracts. Operating loss in the third quarter of 2008 of $0.7 million increased to a loss of $1.1 million for the same period in 2009 principally due to the elimination of the one-month lag period, which was a loss of $0.5 million. Operating income decreased from $1.7 million in the nine months ended September 30, 2008 to a loss of $0.3 million in the 2009 nine month period due primarily to out-of-period adjustments within the international business totaling $1.8 million related to foreign exchange losses and amortization on intangible assets and the additional month of results included in international.

 

In October 2009, we were awarded five contracts under the Flexible New Deal initiative to operate job training and development programs serving adults in the United Kingdom. The contracts have five-year terms and we expect to have combined total revenues of approximately $90 million over the next five years.

 

Total Operating Expenses

 

Total operating expenses represent corporate general and administrative expenses, as well as other operating income and expenses. Total operating expenses were $0.8 million, or 5.3%, less than the 2008 quarter due to a reduction in wage and benefit expenses. The increase of $0.4 million, or 0.9%, for the nine months ended September 30, 2009, compared to the same period in 2008 is principally due to increased depreciation and maintenance expense of $0.8 million due to new and updated systems, offset by a decrease in travel expense.

 

Financial Condition, Liquidity and Capital Resources

 

Total assets increased $13.2 million, or 1.5%, in 2009 over balances at December 31, 2008. This was primarily due to the $13.9 million increase in goodwill and $1.3 million of net intangible assets due to 2009 acquisitions and an increase in net accounts receivable totaling $9.2 million, offset by a decrease of $8.9 million in cash and $1.7 million of other assets.

 

Cash and cash equivalents were $4.7 million at September 30, 2009, as compared to $13.6 million at December 31, 2008. Cash provided from operations for the nine months ended September 30, 2009 was $66.9 million compared to $47.3 million for the nine months ended September 30, 2008. The increase is primarily due to the increase in net income, change in deferred income taxes and increase in depreciation and amortization.

 

Net accounts receivable at September 30, 2009 increased to $240.1 million, compared to $231.0 million at December 31, 2008. Days of revenue in net accounts receivable increased 0.3 days to 51.4 days at September 30, 2009 compared with 51.1 days at December 31, 2008.

 

Our capital requirements relate primarily to our plans to expand through selective acquisitions and the development of new facilities and programs, and our need for sufficient working capital for general corporate purposes. Since most of our facilities and 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.

 

Our investing activities at September 30, 2009 decreased $22.1 million over the same period in 2008. We invested $12.7 million during the first nine months of 2009 on purchases of property and equipment as compared to $14.2 million during the same period in 2008. We also used $18.0 million on eleven acquisitions during the first nine months of 2009 compared to $39.0 million on fourteen acquisitions during the same period in 2008.

 

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Our financing activities included a net payment of debt and capital lease obligations of $44.9 million for the first nine months of 2009. This compares to a net borrowing of $10.0 million, offset by a net payment of debt and capital lease obligations of $1.6 million for the same period in 2008. Stock option exercise activity resulted in $0.4 million in proceeds for the 2009 period versus $1.3 million in 2008.

 

The 2007 amendment to our senior secured revolving credit facility increased our borrowing capacity by $50 million to a total of $250 million. Additional capacity of $50 million remains in place, subject to certain limitations in our $150 million 7.75% Senior Notes due 2013, which allows us to expand our total borrowing capacity to $300 million. The credit facility expires on October 3, 2010 and will be used primarily for working capital purposes, letters of credit required under our insurance programs and for acquisitions. The credit facility is secured by a lien on all of our assets and, through secured guarantees, on all of our domestic subsidiaries’ assets.

 

As of September 30, 2009, we had $131.1 million available under the revolver with an outstanding balance of $60.0 million. Outstanding balances bear interest at 1.125% over the London Interbank Offered Rate (LIBOR) or other bank developed rates at our option. As of September 30, 2009, the weighted average interest rate was 1.59%. As of September 30, 2009, we had irrevocable standby letters of credit in the principal amount of $58.9 million issued primarily in connection with our insurance programs. Letters of credit had a borrowing rate of 1.25% as of September 30, 2009. The commitment fee on the unused balance was 0.25%. The margin over LIBOR and the commitment fee are determined quarterly based on our leverage ratio, as defined by the revolving credit facility.

 

The capital markets remain challenging due to the recessionary environment and may impede our ability to expand and grow our business if credit conditions remain tight or our access to these markets becomes limited. State budgetary pressures from the recessionary environment may put further pressure on reimbursement rates and limit our ability to receive rate increases. We are negotiating new terms for our $250 million senior secured revolving credit facility and may face significant rate and pricing increases when the refinancing is completed, as well as more restrictive debt covenants over the terms in place currently. Some members of our bank lending group, due to pressure from the financial crisis, may have more limited lending capacity than reflected in the current credit facility or may not have the ability to participate in a new credit facility. We may see a significant change among the lenders participating in the credit facility and the credit underwritten by each participant.

 

The credit facility contains various financial covenants relating to net worth, capital expenditures and rentals and requires us to maintain specified ratios with respect to our interest and leverage. We are in compliance with our debt covenants as of September 30, 2009 and we believe we will continue to be in compliance with our bank covenants over the next twelve months. Our ability to achieve the thresholds provided for in the financial covenants largely depends upon continued profitability, reductions of amounts borrowed under the facility and continued cash collections.

 

Operating funding sources were approximately 63% through Medicaid reimbursement, 10% from the DOL and 27% 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 2009 or 2008.

 

Impact of Recently Issued Accounting Pronouncements

 

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

 

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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 and foreign currency exchange rates.

 

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 credit facility, which has an interest rate based on margins over LIBOR or prime, tiered based upon leverage calculations, had an outstanding balance of $60 million as of September 30, 2009 and $103.8 million as of December 31, 2008. A 100 basis point movement in the interest rate would result in an approximate $0.6 million annualized effect on interest expense and cash flows.

 

Foreign Currency Exchange Risk

 

Revenues, operating expenses and other financial transactions with our international operations are denominated in their respective functional currencies. As a result, our results of operations and certain receivables and payables are subject to fluctuations in exchange rates between the local currencies and the U.S. dollar. The primary currencies to which we are exposed include the Canadian dollar, the British pound sterling and the Euro. At September 30, 2009, we had $4.8 million notional amount of foreign currency forward contracts outstanding to hedge our risk of foreign currency rate fluctuation. International net assets are an immaterial portion of our consolidated net assets. See Note 11 for disclosure of our derivative instruments.

 

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 defined by Rules 13a-15(e) and 15(d)-15(e) under the Securities and Exchange Act of 1934, 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. There were no changes in ResCare’s internal control over financial reporting during the quarter ended September 30, 2009 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 described in Note 9 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

 

The following sets forth changes from the risk factors previously disclosed in our 2008 Annual Report on Form 10-K and our 2009 Quarterly Reports on Form 10-Q.

 

Federal, state and local budgetary shortfalls or changes in reimbursement policies could adversely affect our revenues and profitability and collectibility of receivables.

 

We derive a substantial amount of our revenues from federal, state and local government agencies, including state Medicaid programs and employment training programs. Our revenues therefore depend to a large degree on the size of the governmental appropriations for the services we provide. Budgetary pressures, as well as economic, industry, political and other factors, could influence governments to decrease or eliminate appropriations for these services, which could reduce our revenues materially. The majority of states have forecasted budget shortfalls as a result of the recessionary environment. Many state governments also continue to experience shortfalls in their Medicaid budgets despite cost containment efforts. Future federal or state initiatives could institute managed care programs for individuals we serve or otherwise make material changes to the Medicaid program as it now exists. Future revenues may be affected by changes in rate-setting structures, methodologies or interpretations that may be proposed or are under consideration in states where we operate.

 

Our ability to collect accounts receivable is also subject to developments at state payor agencies, state budget pressures, economic conditions and other factors outside our control which may cause payment delays. Changes in reimbursement procedures by the states, including engaging new agents to manage the reimbursement function, may delay reimbursement payments and create backlogs. Paying aged receivables may have a lower priority for states experiencing budgetary pressures despite our meeting applicable billing requirements. Events that delay or prevent our collection of accounts receivable could have a material adverse effect on our revenues.

 

Furthermore, federal, state and local government agencies generally condition their contracts with us upon a sufficient budgetary appropriation. If a government agency does not receive an appropriation sufficient to cover its contractual obligations with us, it may terminate a contract or defer or reduce our reimbursement. Previously appropriated funds could also be reduced through subsequent legislation. The loss or reduction of reimbursement under our contracts could have a material adverse effect on our business, financial condition and operating results.

 

If the fair values of our reporting units decline, we may have to record a material non-cash charge to earnings from impairment of our goodwill.

 

The current recessionary environment continues to be challenging, and we cannot be certain of the duration of these conditions and their potential impact on our stock price performance. At September 30, 2009, we had $490 million of goodwill recorded. We expect to recover the carrying value of this goodwill through our future cash flows. On an ongoing basis, we evaluate whether the carrying value of our goodwill is impaired, based on estimates of the fair values of our reporting units. If the carrying value of our goodwill is impaired, we may incur a material non-cash charge to earnings.

 

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For our 2008 annual impairment test, our Employment Training Services and International reporting units had fair values that exceeded their respective carrying values by approximately 5%. These reporting units have goodwill balances at September 30, 2009 of $62 million and $25 million, respectively. While the operating results for the nine months ended September 30, 2009 for these two reporting units were below our expectations, we do not consider this to be a triggering event at this time. All reporting units are subject to an annual impairment analysis during the fourth quarter.

 

When we are a subcontractor, we can be adversely affected by, but unable to control or influence, disputes arising between the principal parties to the contract.

 

Occasionally, we may be engaged as a subcontractor to provide services to the prime contractor’s customers. We currently have this relationship in our Job Corps, International and Employment Training Services businesses. As a subcontractor, we may not be able to influence or control issues that arise between the prime contractor and its customer. Disputes between the prime contractor and its customer could result in a customer terminating the contract, which could negatively impact our operating results. At this time, a contract we have with IBM as a subcontractor to provide job training services in Indiana through 2016 will cease on December 14, 2009. Indiana’s Family Social Services Administration (FSSA) informed us that we will be a vital part of the welfare service delivery system going forward. We are in the process of negotiating a new contract with FSSA.

 

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

 

Unregistered Sales of Equity Securities                                         None

 

Issuer Repurchases of Securities:

 

 

 

 

 

 

 

 

 

Maximum

 

 

 

 

 

 

 

 

 

Number (or Approximate

 

 

 

(1)

 

 

 

Total Number of Shares

 

Dollar Value) of Shares

 

 

 

Total Number of

 

Average Price

 

Purchased as Part of Publicly

 

That May Yet Be Purchased

 

 

 

Shares Purchased

 

Paid per Share

 

Announced Plans or Programs

 

under the Plans or Programs

 

July 1-31, 2009

 

300

 

$

15.19

 

N/A

 

N/A

 

August 1-31, 2009

 

 

 

N/A

 

N/A

 

September 1-30, 2009

 

 

 

N/A

 

N/A

 

 

 

300

 

$

15.19

 

N/A

 

N/A

 

 


(1)         These repurchases are made under a provision in our restricted stock compensation programs for the indirect repurchase of shares through a net-settlement feature upon the vesting of shares in order to satisfy minimum statutory tax-withholding requirements.

 

Item 5.                   Other Information

 

From time to time executive officers and directors of ResCare may adopt non-discretionary, written trading plans that comply with SEC Rule 10b5-1, which provides executives with a method to monetize their equity-based compensation in an automatic and non-discretionary manner over time. The trading plans adopted by our executives must comply with our compensation and trading policies, and applicable laws and regulations. Consistent with ResCare’s philosophy of open communication with our shareholders, we post information about any trading plans of our executive officers and directors in effect from time to time on our corporate website.

 

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Item 6.                   Exhibits

 

(a) Exhibits

 

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.

 

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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:

November 6, 2009

 

By:

/s/ Ralph G. Gronefeld, Jr.

 

 

 

 

Ralph G. Gronefeld, Jr.

 

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

Date:

November 6, 2009

 

By:

/s/ David W. Miles

 

 

 

 

David W. Miles

 

 

 

 

Executive Vice President and Chief Financial Officer

 

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