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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, 2014

or

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

For the transition period from        to       

Commission File Number: 0-20372

RES-CARE, INC.

(Exact name of registrant as specified in its charter)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes üNo __.

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

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

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

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

Yes __No ü.

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

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INDEX

RES-CARE, INC. AND SUBSIDIARIES

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PART I.                 FINANCIAL INFORMATION

Item 1.                   Financial Statements

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY

(In thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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RES-CARE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

Note 1.                   Basis of Presentation

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

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

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

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

Out-of-Period Items

During the third quarter of 2013, we recorded an out-of-period adjustment which increased our costs of services by approximately $1 million and decreased net income by approximately $0.6 million.  This item related to the second quarter of 2013 and resulted from a physical inventory adjustment in our Pharmacy operation. We also identified and recorded another out-of-period adjustment during the third quarter of 2013 which decreased revenues by approximately $1.3 million, of which $0.5 million related to 2012 and $0.8 million related to the first half of 2013. The net impact of these combined items decreased pre-tax income for the third quarter of 2013 by approximately $2.3 million before tax ($1.4 million after tax). We evaluated the total out-of-period adjustments impacting the third quarter and year-to-date 2013, both individually and in the aggregate, in relation to the third quarter 2013, when they were corrected, as well as the periods in which they originated and concluded that these adjustments are not material to any financial statements for all impacted periods.

Reclassification

Certain shared services related expenses have been reclassified from operational general and administrative expense to corporate general and administrative expense effective January 1, 2014.  These shared services include quality, human resources, government relations and certain accounting and finance oversight functions, as well as the business centers for our operations.  Prior periods have been reclassified for comparability.

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HomeCare Iowa operation

In September 2014, ResCare provided the results of a billing compliance audit of its Iowa home health agency as well as supporting documentation in response to an investigation by the United States Attorney’s Office in Iowa. The audit was specifically related to the home health agency’s participation in the Medicaid program and revealed a potential overpayment obligation. We made provisions to lower our revenue by $3.4 million in the three and nine month periods ended September 30, 2014, in our condensed consolidated financial statements based on our estimate of this potential obligation.

Note 2.                   Acquisitions

We completed four acquisitions within our Residential Services and ResCare HomeCare segments during the first nine months of 2014, two of which occurred in the third quarter.  Aggregate consideration for these acquisitions was approximately $15.3 million, including $0.1 million of notes issued and $0.2 million of contingent liabilities. The operating results of the acquisitions are included in the condensed consolidated financial statements from the date of acquisition.  Proforma results and other disclosure have not been included as the acquisitions are considered immaterial, individually and in the aggregate.

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

The other intangible assets consist primarily of customer relationships and covenants not to compete. All intangible assets will be amortized over five to twenty years. We expect all of the $5.2 million of goodwill will be deductible for tax purposes.

Note 3.                   Goodwill

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

(1)  Primarily relates to foreign currency translation adjustments.

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

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Note 4.                   Debt

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

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

Our obligations under capital leases are $21.3 million as of September 30, 2014, due primarily to vehicle capital leases.  The current portion of these lease obligations was $6.6 million.

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

Subsequent to receiving the proceeds from the 2014 Credit Agreement, we declared and paid a dividend of $122.4 million to Onex ResCare Holdings Corp shareholders in April 2014.  In the three month period ended June 30, 2014, we also recorded a one-time pre-tax charge of $7.6 million for the accrual of discretionary payments to stock option holders, of which $3.8 million was paid out as of September 30, 2014.  The remaining accrued amount will be paid over the vesting period.

On November 5, 2014, the Company delivered notice for the full redemption of the $200 million outstanding 10.75% senior notes due January 15, 2019.  The redemption date is December 29, 2014.  The redemption amount is equal to the sum of the $200 million aggregate principal at a make-whole premium amount calculated within the terms of the related indenture estimated to be 105.82% plus accrued and unpaid interest through the date of redemption.  We will finance the redemption with the DDTL and additional revolver borrowings.

Note 5.                   Income Taxes

The effective tax rate was 41.0% and 32.5% for the three months ended September 30, 2014 and 2013, respectively, and 41.4% and 27.8% for the nine months ended September 30, 2014 and 2013, respectively. The 2014 rate was negatively impacted by the expiration of jobs tax credits (not yet renewed for 2014), while the 2013 rate was favorably impacted by the renewal of jobs tax credits.  On January 2, 2013, legislation was enacted that reinstated the jobs credit provisions retroactive to January 1, 2012.  The first nine months of 2013 reflects not only the 2013 year-to-date impact of jobs tax credit, but also $3.4 million related to 2012 and prior periods’ jobs tax credit impact.

Note 6.                   Financial Instruments

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

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

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Note 7.             Segment Information

The following table sets forth information about our reportable segments:

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

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Note 8.             Legal Proceedings

ResCare, or its affiliates, are parties to various legal and/or administrative proceedings arising out of the operation of our programs and arising in the ordinary course of business. We record accruals for such contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.  The pre-tax charges recorded in connection with legal and administrative matters, including settlements in 2014 of communication practices and wage/hour class-action lawsuits, as well as accrual of our best estimate of the anticipated settlement cost for the Iowa matter as discussed in Note 1, increased by $15.6 million during the nine months ended September 30, 2014, compared to the same period in 2013.  Court approval and payment of certain settlements noted above are expected in late 2014 through early 2015.

No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time because the inherently unpredictable nature of legal proceedings may be exacerbated by various factors, including: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants); or (vii) there is a wide range of potential outcomes.  While we do not believe the ultimate liability, if any, for these proceedings or claims, individually or in the aggregate, in excess of amounts already provided, will have a material adverse effect on our financial condition, results of operations or cash flows or may affect our reputation, it is reasonably possible they could.

Note 9.             Noncontrolling Interest

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

Note 10.             Impact of Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 that introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be

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entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This standard is effective for fiscal years beginning after December 15, 2016 (early adoption is not permitted), including interim periods within that reporting period. The guidance permits the use of either a retrospective or cumulative effect transition method.  We have not yet selected a transition method and are currently evaluating the new guidance to determine the impact it will have on our consolidated financial statements.

Note 11.             Subsidiary Guarantors

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

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RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

September 30, 2014

(In thousands)