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 March 31, 2012
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-20372
|
RES-CARE, INC.
(Exact name of registrant as specified in its charter)
KENTUCKY |
| 61-0875371 |
(State or other jurisdiction of |
| (IRS Employer Identification No.) |
incorporation or organization) |
|
|
9901 Linn Station Road |
| 40223-3808 |
Louisville, Kentucky |
| (Zip Code) |
(Address of principal executive offices) |
|
|
Registrant’s telephone number, including area code: (502) 394-2100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ü No .
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 ü No .
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 April 30, 2012 was 21,344,741.
RES-CARE, INC. AND SUBSIDIARIES
RES-CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(Unaudited)
|
| March 31 |
| December 31 |
| ||
|
| 2012 |
| 2011 |
| ||
ASSETS |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 13,253 |
| $ | 25,651 |
|
Accounts receivable, net of allowance for doubtful accounts of |
|
|
|
|
| ||
$7,958 in 2012 and $6,413 in 2011 |
| 234,078 |
| 221,089 |
| ||
Refundable income taxes |
| 7,130 |
| 11,432 |
| ||
Deferred income taxes |
| 14,068 |
| 13,668 |
| ||
Non-trade receivables |
| 7,529 |
| 6,684 |
| ||
Prepaid expenses and other current assets |
| 17,066 |
| 18,532 |
| ||
Total current assets |
| 293,124 |
| 297,056 |
| ||
Property and equipment, net |
| 84,308 |
| 84,893 |
| ||
Goodwill |
| 270,778 |
| 267,697 |
| ||
Other intangible assets, net |
| 314,652 |
| 314,954 |
| ||
Other assets |
| 33,798 |
| 27,658 |
| ||
Total assets |
| $ | 996,660 |
| $ | 992,258 |
|
LIABILITIES AND SHAREHOLDER’S EQUITY |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Trade accounts payable |
| $ | 42,732 |
| $ | 46,107 |
|
Accrued expenses |
| 120,565 |
| 122,632 |
| ||
Current portion of long-term debt |
| 4,016 |
| 4,540 |
| ||
Current portion of obligations under capital leases |
| 85 |
| 89 |
| ||
Accrued income taxes |
| 1,069 |
| 969 |
| ||
Total current liabilities |
| 168,467 |
| 174,337 |
| ||
Long-term liabilities |
| 57,130 |
| 55,200 |
| ||
Long-term debt |
| 364,260 |
| 364,854 |
| ||
Obligations under capital leases |
| 324 |
| 342 |
| ||
Deferred gains |
| 263 |
| 300 |
| ||
Deferred income taxes |
| 99,770 |
| 98,270 |
| ||
Total liabilities |
| 690,214 |
| 693,303 |
| ||
Shareholder’s 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, no shares issued |
|
|
|
|
| ||
and outstanding in 2012 and 2011 |
| — |
| — |
| ||
Common stock, no par value, authorized 40,000,000 shares, |
|
|
|
|
| ||
issued and outstanding 21,344,741 in 2012 and 2011 |
| — |
| — |
| ||
Additional paid-in capital |
| 241,684 |
| 240,509 |
| ||
Retained earnings |
| 64,796 |
| 58,611 |
| ||
Accumulated other comprehensive loss |
| (15 | ) | (176 | ) | ||
Total shareholder’s equity – Res-Care, Inc. |
| 306,465 |
| 298,944 |
| ||
Noncontrolling interest |
| (19 | ) | 11 |
| ||
Total shareholder’s equity |
| 306,446 |
| 298,955 |
| ||
Total liabilities and shareholder’s equity |
| $ | 996,660 |
| $ | 992,258 |
|
See accompanying notes to condensed consolidated financial statements.
RES-CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
|
| Three Months Ended |
| ||||
|
| March 31 |
| ||||
|
| 2012 |
| 2011 |
| ||
|
|
|
|
|
| ||
Revenues |
| $ | 397,342 |
| $ | 386,084 |
|
Cost of services |
| 298,890 |
| 293,386 |
| ||
Gross profit |
| 98,452 |
| 92,698 |
| ||
|
|
|
|
|
| ||
Operating expenses: |
|
|
|
|
| ||
Operational general and administrative |
| 60,285 |
| 57,988 |
| ||
Corporate general and administrative |
| 17,667 |
| 14,053 |
| ||
Total operating expenses |
| 77,952 |
| 72,041 |
| ||
|
|
|
|
|
| ||
Operating income |
| 20,500 |
| 20,657 |
| ||
|
|
|
|
|
| ||
Interest expense, net |
| 10,208 |
| 10,766 |
| ||
Income from continuing operations before income taxes |
| 10,292 |
| 9,891 |
| ||
Income tax expense |
| 4,137 |
| 3,061 |
| ||
Income from continuing operations |
| 6,155 |
| 6,830 |
| ||
Loss from discontinued operations, net of tax |
| — |
| (3,156 | ) | ||
Net income |
| 6,155 |
| 3,674 |
| ||
Net loss-noncontrolling interest |
| (30 | ) | (32 | ) | ||
Net income-Res-Care, Inc. |
| 6,185 |
| 3,706 |
| ||
|
|
|
|
|
| ||
Other comprehensive income: |
|
|
|
|
| ||
Foreign currency translation adjustments |
| 161 |
| 94 |
| ||
Comprehensive income attributable to Res-Care, Inc. |
| $ | 6,346 |
| $ | 3,800 |
|
|
|
|
|
|
| ||
Total comprehensive income |
| $ | 6,316 |
| $ | 3,768 |
|
See accompanying notes to condensed consolidated financial statements.
RES-CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
| Three Months Ended |
| ||||
|
| March 31 |
| ||||
|
| 2012 |
| 2011 |
| ||
|
|
|
|
|
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income |
| $ | 6,155 |
| $ | 3,674 |
|
Adjustments to reconcile net income to cash (used in) provided by |
|
|
|
|
| ||
operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
| 6,645 |
| 5,001 |
| ||
Amortization of discount and deferred debt issuance costs |
| 675 |
| 888 |
| ||
Share-based compensation |
| 1,174 |
| — |
| ||
Deferred income taxes, net |
| 1,100 |
| 1,773 |
| ||
Provision for losses on accounts receivable |
| 1,549 |
| 1,694 |
| ||
Loss on sale of assets |
| 35 |
| 23 |
| ||
Changes in operating assets and liabilities |
| (19,854 | ) | 9,382 |
| ||
Cash (used in) provided by operating activities |
| (2,521 | ) | 22,435 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Purchases of property and equipment |
| (4,261 | ) | (2,081 | ) | ||
Acquisitions of businesses, net of cash acquired |
| (4,550 | ) | (6,109 | ) | ||
Proceeds from sale of assets |
| 10 |
| — |
| ||
Cash used in investing activities |
| (8,801 | ) | (8,190 | ) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Long-term debt repayments |
| (1,188 | ) | (31,493 | ) | ||
Long-term debt borrowings |
| 71 |
| — |
| ||
Short-term borrowings-three months or less, net |
| — |
| 7,000 |
| ||
Payments on obligations under capital lease |
| (23 | ) | (23 | ) | ||
Funds contributed by co-investors |
| — |
| 1,400 |
| ||
Debt issuance costs |
| — |
| (129 | ) | ||
Cash used in financing activities |
| (1,140 | ) | (23,245 | ) | ||
|
|
|
|
|
| ||
Effect of exchange rate changes on cash and cash equivalents |
| 64 |
| 90 |
| ||
|
|
|
|
|
| ||
Decrease in cash and cash equivalents |
| (12,398 | ) | (8,910 | ) | ||
|
|
|
|
|
| ||
Cash and cash equivalents at beginning of period |
| 25,651 |
| 27,552 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at end of period |
| $ | 13,253 |
| $ | 18,642 |
|
|
|
|
|
|
| ||
Supplemental schedule of non-cash investing and financing activities: |
|
|
|
|
| ||
Notes issued in connection with acquisitions |
| $ | — |
| $ | 665 |
|
See accompanying notes to condensed consolidated financial statements.
RES-CARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
Note 1. Basis of Presentation
Res-Care, Inc. is a human service company that provides residential, therapeutic, job training and educational supports to people with developmental or other disabilities, youth with special needs, adults who are experiencing barriers to employment, and older people who need home care assistance. All references in this Quarterly Report on Form 10-Q to “ResCare”, “Company”, “our company”, “we”, “us”, or “our” mean Res-Care, Inc. and, unless the context otherwise requires, its consolidated subsidiaries.
The accompanying condensed consolidated financial statements of ResCare have been prepared in accordance with Article 10 of Regulation S-X and do not include all information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for comprehensive annual financial statements. In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of financial condition and results of operations for the interim periods have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full year.
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts and related disclosures of commitments and contingencies. We rely on historical experience and on various other assumptions that we believe to be reasonable under the circumstances to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
For further information refer to the consolidated financial statements and footnotes thereto in our 2011 Annual Report on Form 10-K filed February 16, 2012.
Reclassification
Effective in the quarter ended June 30, 2011, we ceased providing international services within the Workforce Services operating segment. In accordance with Accounting Standards Codification (“ASC”) 205-20, Discontinued Operations, we began accounting for the closure and sale of the international operations have been accounted for as discontinued operations in the Quarterly Report on Form 10-Q for the quarter ending June 30, 2011. Accordingly, the results of our international Workforce Services operations, loss on sale of the business and all exit costs have been classified as discontinued operations, net of taxes, for all periods presented, in the accompanying condensed consolidated statements of comprehensive income. Additional information regarding discontinued operations can be found in Note 10.
Certain immaterial reclassifications between segments, not affecting net income, have been made to 2011 amounts to conform to 2012 presentation.
Note 2. Onex Transaction
On November 16, 2010, an affiliate of Onex Partners III LP (“Purchaser”) purchased 21,044,765 shares of ResCare common stock in a tender offer. Upon the completion of the tender offer, affiliates of Onex Corporation (the “Onex Investors”) beneficially owned 87.4% of the issued and outstanding shares of ResCare’s common stock on an as-converted basis. On December 22, 2010, upon completion of a share exchange and other reorganization transactions, ResCare became a wholly owned subsidiary of Onex Rescare Holdings Corp. (“New Holdco”), which in turn, is owned by the Onex Investors, certain co-investors and members of our management team.
The total purchase price was $452.4 million based on 34.1 million outstanding ResCare shares (fully converted) at $13.25 per share. The purchase price allocation was finalized in 2011.
On December 22, 2010, ResCare entered into new senior secured credit facilities, comprised of a new $170 million term loan facility and an amended and restated $275 million revolving credit facility and ResCare issued $200 million of unsecured 10.75% Senior Notes due 2019 (the “Notes”) in a private placement under the Securities Act of 1933.
Note 3. Acquisitions
We completed one acquisition within our Residential Services segment during the first quarter of 2012. Aggregate consideration for this acquisition was approximately $4.6 million. The operating result of the acquisition is included in the condensed consolidated financial statements from the date of acquisition. Proforma results and other disclosures have not been included as the acquisition is considered immaterial.
The preliminary aggregate purchase price for this acquisition was allocated as follows:
Property and equipment |
| $ | 223 |
|
Other intangible assets |
| 1,319 |
| |
Goodwill |
| 2,958 |
| |
Other assets |
| 50 |
| |
Aggregate purchase price |
| $ | 4,550 |
|
The other intangible assets consist primarily of trade names and covenants not to compete. All intangible assets will be amortized over five years. We expect all of the $3.0 million of goodwill will be deductible for tax purposes.
Note 4. 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 three months ended March 31, 2012 is as follows:
|
| Residential |
| ResCare |
| Youth |
| Workforce |
|
|
| |||||
|
| Services |
| HomeCare |
| Services |
| Services |
| Total |
| |||||
Balance at December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
| |||||
Goodwill |
| $ | 147,648 |
| $ | 62,500 |
| $ | 24,829 |
| $ | 32,720 |
| $ | 267,697 |
|
Goodwill added through acquisitions |
| 2,958 |
| — |
| — |
| — |
| 2,958 |
| |||||
Other |
| 123 |
| — |
| — |
| — |
| 123 |
| |||||
Balance at March 31, 2012 |
| $ | 150,729 |
| $ | 62,500 |
| $ | 24,829 |
| $ | 32,720 |
| $ | 270,778 |
|
In February 2012, we were informed by the New York Human Resources Administration that our Workforce Services’ Wellness, Comprehensive Assessment, Rehabilitation and Employment (“WeCARE”) contract had been awarded to another operator through the competitive bid process. Our performance is scheduled to continue under a contract extension until December 2012. Annual revenues for this contract are $28 million. Our formal protest was denied and we are exploring all available options to challenge the contract award and the bid process. We considered this to be an indicator of potential impairment and performed an interim analysis on the Workforce Services reporting unit and concluded that its goodwill was not impaired at March 31, 2012. Our interim analysis did indicate that Workforce Services’ excess of fair value over its carrying value had decreased to approximately a three percent margin, therefore further deterioration of this business could lead to an impairment in the future.
Note 5. Debt
Long-term debt and obligations under capital leases consist of the following:
|
| March 31 |
| December 31 |
| ||
|
| 2012 |
| 2011 |
| ||
10.75% senior notes due 2019 |
| $ | 200,000 |
| $ | 200,000 |
|
Senior secured Term Loan B due 2016, net of discount of $2.7 million in 2012 and $2.8 million in 2011 |
| 165,204 |
| 165,487 |
| ||
Senior secured credit facility |
| — |
| — |
| ||
Obligations under capital leases |
| 409 |
| 431 |
| ||
Notes payable and other |
| 3,072 |
| 3,907 |
| ||
|
| 368,685 |
| 369,825 |
| ||
Less current portion |
| 4,101 |
| 4,629 |
| ||
|
| $ | 364,584 |
| $ | 365,196 |
|
On April 5, 2012, we entered into a new senior secured credit facility (the “Credit Agreement”) in an aggregate principal amount of $375 million, which replaced the 2010 senior secured credit facility and the Term Loan B. The new Credit Agreement consists of a Term Loan A (the “Term Loan A”) in an aggregate principal amount of $175 million and a revolving credit facility (the “Revolving Facility”) in an aggregate principal amount of $200 million. The Term Loan A and the Revolving Facility each mature on April 5, 2017. 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 as follows: (i) 5% during each of the first two years after funding, (ii) 10% during the third year after funding and (iii) 15% during each of the final two years of the term. The balance of the Term Loan A is payable at maturity. Pricing for the Term Loan A will be variable, at the London Interbank Offer Rate (LIBOR) plus 275 basis points. LIBOR is defined as having no minimum rate. The proceeds of the Term Loan A were used to refinance the Company’s prior Term Loan B and pay certain related fees and expenses. The proceeds of the Revolving Facility may be used for working capital and for other general corporate purposes permitted under the Credit Agreement, including certain acquisitions and investments. The 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 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 Credit Agreement contains various financial covenants relating to capital expenditures and rentals, and requires us to maintain specific ratios with respect to interest coverage and leverage. The new agreement continues to provide for the exclusion of charges incurred with the resolution of legal proceedings provided in Note 9 to Notes to the Condensed Consolidated Financial Statements, as well as any non-cash impairment charges, in the calculation of certain financial covenants.
Note 6. Income Taxes
The effective tax rate was 40.2% and 31.0% for the three months ended March 31, 2012 and 2011, respectively. The increase in the effective tax rate relates primarily to the impact of jobs tax credits (not renewed for 2012) and computational differences associated with the impact of discontinued operations. Renewal of the job tax credit is uncertain at this time. The computational differences associated with the impact of discontinued operations are expected to reverse in the second quarter.
Note 7. Financial Instruments
At March 31, 2012 and December 31, 2011, 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:
|
| March 31, 2012 |
| December 31, 2011 |
| ||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair |
| ||||
|
| Amount |
| Value |
| Amount |
| Value |
| ||||
Long-term debt: |
|
|
|
|
|
|
|
|
| ||||
10.75% senior notes |
| $ | 200,000 |
| $ | 222,000 |
| $ | 200,000 |
| $ | 205,750 |
|
Senior secured term loan |
| 165,204 |
| 167,036 |
| 165,487 |
| 159,044 |
| ||||
Notes payable and other |
| 3,072 |
| 3,017 |
| 3,907 |
| 3,823 |
| ||||
We estimated the fair value of the debt instruments using market quotes and calculations based on current market rates available to us (Level 2).
Note 8. Segment Information
The following table sets forth information about our reportable segments:
|
| Residential |
| ResCare |
| Youth |
| Workforce |
|
|
|
|
| ||||||
|
| Services |
| HomeCare |
| Services |
| Services |
| Corporate |
| Total |
| ||||||
Three months ended March 31: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Revenues |
| $ | 218,309 |
| $ | 86,250 |
| $ | 43,954 |
| $ | 48,829 |
| $ | — |
| $ | 397,342 |
|
Operating income (loss) (1) |
| 28,157 |
| 5,261 |
| 2,809 |
| 1,948 |
| (17,675 | ) | 20,500 |
| ||||||
Total assets |
| 525,926 |
| 202,191 |
| 91,919 |
| 87,825 |
| 88,799 |
| 996,660 |
| ||||||
Capital expenditures |
| 1,259 |
| 468 |
| 88 |
| 70 |
| 2,376 |
| 4,261 |
| ||||||
Depreciation and amortization |
| 3,266 |
| 584 |
| 347 |
| 306 |
| 2,142 |
| 6,645 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Revenues |
| $ | 206,339 |
| $ | 80,657 |
| $ | 43,077 |
| $ | 56,011 |
| $ | — |
| $ | 386,084 |
|
Operating income (loss) (1) |
| 22,013 |
| 5,641 |
| 2,762 |
| 4,458 |
| (14,217 | ) | 20,657 |
| ||||||
Total assets |
| 387,381 |
| 311,141 |
| 106,481 |
| 101,827 |
| 49,477 |
| 956,307 |
| ||||||
Capital expenditures |
| 1,061 |
| 117 |
| 43 |
| 114 |
| 746 |
| 2,081 |
| ||||||
Depreciation and amortization |
| 2,606 |
| 553 |
| 284 |
| 361 |
| 1,160 |
| 4,964 |
|
|
|
(1) Under Corporate, the operating loss is comprised of our corporate general and administrative expenses, as well as other operating income and expenses related to the corporate office.
Note 9. 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 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.
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. No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time regarding the matters specifically described below 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. Nevertheless, it is reasonably possible that the outcome of these matters may have a material adverse effect on our results of operations, financial position, and cash flows and may affect our reputation.
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 sought 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 were unsuccessful and a jury trial commenced on November 9, 2009 on the remaining issue of negligence. The jury returned a verdict of approximately $53.9 million in damages against the Company, consisting of approximately $4.7 million in compensatory damages and $49.2 million in punitive damages, which was entered as a judgment in December 2009. Ruling on various post trial motions, on February 19, 2010, the New Mexico trial court judge reduced the jury award to $15.5 million, consisting of approximately $10.8 million in punitive damages and $4.7 million in compensatory damages. We believe the parent company is not liable for the actions of its subsidiary or its employees and that both the compensatory and punitive amounts awarded are excessive and contradict various United States Supreme Court and New Mexico Supreme Court decisions which would warrant a
new trial or, in the alternative, would limit the amount of damages awarded to a significantly lower amount. We, as well as the plaintiffs, have appealed and we will continue to defend this matter vigorously. Oral arguments before the Court of Appeals were held on November 15, 2011. Although we have made provisions in our condensed consolidated financial statements for this self-insured matter, the amount of our legal reserve is less than the original amount of the damages awarded, plus accrued interest. The ultimate outcome of this matter could have a material adverse effect on our financial condition, results of operations and cash flows.
Note 10. Discontinued Operations
In our Form 10-Q for the quarter ended March 31, 2011, filed May 9, 2011 with the Securities and Exchange Commission, we disclosed that we had incurred costs associated with the closure of our international operations in Germany and the Netherlands. We also disclosed that since we were not awarded any contracts under the Work Programme bidding process, we were considering various strategic alternatives for our international operations in the United Kingdom, which included its sale, liquidation or continuation.
On July 1, 2011, we sold our operations in the United Kingdom for one euro. We recorded a charge of $2.2 million in the second quarter of 2011 to adjust assets and liabilities to their net realizable value for this operation. Gross assets were $4.3 million and gross liabilities were $2.1 million prior to the charge taken.
In accordance with ASC 205-20, the closure and sale of these international operations have been accounted for as discontinued operations. Accordingly, the results of the international operations of our Workforce Services reportable segment for all periods reported, loss on sale and exit costs have been classified as discontinued operations, net of income taxes, in the accompanying condensed consolidated statements of comprehensive income.
There were no additional charges related to the closure and sale activities noted above for the three months ended March 31, 2012. As of March 31, 2012, a liability of $0.5 million remains for the vendor and customer claims associated with the Netherlands and Germany closures and is included in accrued expenses on the condensed consolidated balance sheet.
Summarized financial information for the discontinued operations for the three months ended March 31, 2011, is set forth below:
Revenues |
| $ | 2,709 |
|
Cost of services |
| 3,096 |
| |
|
|
|
| |
Gross loss |
| (387 | ) | |
|
|
|
| |
Operational general and administrative expense (1) |
| (3,501 | ) | |
Other income |
| 62 |
| |
Interest expense, net |
| (66 | ) | |
Loss from discontinued operations, before income taxes |
| (3,892 | ) | |
Income tax benefit |
| 736 |
| |
Loss from discontinued operations, net of tax |
| $ | (3,156 | ) |
|
|
(1) The three months ended March 31, 2011 includes a $1.4 million charge in connection with the closures of the Netherlands and Germany operations.
Note 11. Noncontrolling Interest
As of March 31, 2012, 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 noncontrolling interest 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. There is no foreign currency translation adjustment related to Rest Assured. Balances are as follows:
Noncontrolling interest as of December 31, 2010 |
| $ | 182 |
|
Net loss-noncontrolling interest |
| (171 | ) | |
|
|
|
| |
Noncontrolling interest as of December 31, 2011 |
| 11 |
| |
Net loss-noncontrolling interest |
| (30 | ) | |
Noncontrolling interest as of March 31, 2012 |
| $ | (19 | ) |
Note 12. Impact of Recently Issued Accounting Pronouncements
We do not believe there are any new accounting pronouncements that have been issued that might have a material impact on our condensed consolidated financial position or results of operations.
Note 13. 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.
RES-CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2012
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
| Guarantor |
| Non-Guarantor |
|
|
| Consolidated |
| |||||
|
| ResCare, Inc. |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Total |
| |||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
| |||||
Current assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
| $ | 5,333 |
| $ | 5,516 |
| $ | 2,404 |
| $ | — |
| $ | 13,253 |
|
Accounts receivable, net |
| 27,103 |
| 206,741 |
| 234 |
| — |
| 234,078 |
| |||||
Refundable income taxes |
| 7,130 |
| — |
| — |
| — |
| 7,130 |
| |||||
Deferred income taxes |
| 14,068 |
| — |
| — |
| — |
| 14,068 |
| |||||
Non-trade receivables |
| 742 |
| 6,590 |
| 197 |
| — |
| 7,529 |
| |||||
Prepaid expenses and other current assets |
| 7,363 |
| 9,471 |
| 232 |
| — |
| 17,066 |
| |||||
Total current assets |
| 61,739 |
| 228,318 |
| 3,067 |
| — |
| 293,124 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Property and equipment, net |
| 45,712 |
| 38,111 |
| 485 |
| — |
| 84,308 |
| |||||
Goodwill |
| 237,175 |
| 28,197 |
| 5,406 |
| — |
| 270,778 |
| |||||
Other intangible assets, net |
| 306,317 |
| 8,335 |
| — |
| — |
| 314,652 |
| |||||
Investment in subsidiaries |
| 835,878 |
| 41,782 |
| — |
| (877,660 | ) | — |
| |||||
Other assets |
| 30,642 |
| 3,130 |
| 26 |
| — |
| 33,798 |
| |||||
Total assets |
| $ | 1,517,463 |
| $ | 347,873 |
| $ | 8,984 |
| $ | (877,660 | ) | $ | 996,660 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
LIABILITIES AND SHAREHOLDER’S EQUITY |
|
|
|
|
|
|
|
|
|
|
| |||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Trade accounts payable |
| $ | 24,534 |
| $ | 18,158 |
| $ | 40 |
| $ | — |
| $ | 42,732 |
|
Accrued expenses |
| 61,442 |
| 58,129 |
| 994 |
| — |
| 120,565 |
| |||||
Current portion of long-term debt |
| 1,700 |
| 289 |
| 2,027 |
| — |
| 4,016 |
| |||||
Current portion of obligations under |
|
|
|
|
|
|
|
|
|
|
| |||||
capital leases |
| — |
| 85 |
| — |
| — |
| 85 |
| |||||
Accrued income taxes |
| 1,184 |
| — |
| (115 | ) | — |
| 1,069 |
| |||||
Total current liabilities |
| 88,860 |
| 76,661 |
| 2,946 |
| — |
| 168,467 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Intercompany |
| 601,593 |
| (530,765 | ) | (70,828 | ) | — |
| — |
| |||||
Long-term liabilities |
| 57,022 |
| 108 |
| — |
| — |
| 57,130 |
| |||||
Long-term debt |
| 363,504 |
| 756 |
| — |
| — |
| 364,260 |
| |||||
Obligations under capital leases |
| — |
| 324 |
| — |
| — |
| 324 |
| |||||
Deferred gains |
| 263 |
| — |
| — |
| — |
| 263 |
| |||||
Deferred income taxes |
| 99,775 |
| — |
| (5 | ) | — |
| 99,770 |
| |||||
Total liabilities |
| 1,211,017 |
| (452,916 | ) | (67,887 | ) | — |
| 690,214 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total shareholder’s equity |
| 306,446 |
| 800,789 |
| 76,871 |
| (877,660 | ) | 306,446 |
| |||||
|
| $ | 1,517,463 |
| $ | 347,873 |
| $ | 8,984 |
| $ | (877,660 | ) | $ | 996,660 |
|
RES-CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2011
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
| Guarantor |
| Non-Guarantor |
|
|
| Consolidated |
| |||||
|
| ResCare, Inc. |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Total |
| |||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
| |||||
Current assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
| $ | 16,733 |
| $ | 6,547 |
| $ | 2,371 |
| $ | — |
| $ | 25,651 |
|
Accounts receivable, net |
| 22,947 |
| 197,925 |
| 217 |
| — |
| 221,089 |
| |||||
Refundable income taxes |
| 11,432 |
| — |
| — |
| — |
| 11,432 |
| |||||
Deferred income taxes |
| 13,668 |
| — |
| — |
| — |
| 13,668 |
| |||||
Non-trade receivables |
| 752 |
| 5,650 |
| 282 |
| — |
| 6,684 |
| |||||
Prepaid expenses and other current assets |
| 8,556 |
| 9,738 |
| 238 |
| — |
| 18,532 |
| |||||
Total current assets |
| 74,088 |
| 219,860 |
| 3,108 |
| — |
| 297,056 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Property and equipment, net |
| 45,827 |
| 38,628 |
| 438 |
| — |
| 84,893 |
| |||||
Goodwill |
| 237,075 |
| 25,338 |
| 5,284 |
| — |
| 267,697 |
| |||||
Other intangible assets, net |
| 307,566 |
| 7,388 |
| — |
| — |
| 314,954 |
| |||||
Investment in subsidiaries |
| 755,530 |
| 41,782 |
| — |
| (797,312 | ) | — |
| |||||
Other assets |
| 24,548 |
| 3,079 |
| 31 |
| — |
| 27,658 |
| |||||
Total assets |
| $ | 1,444,634 |
| $ | 336,075 |
| $ | 8,861 |
| $ | (797,312 | ) | $ | 992,258 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
LIABILITIES AND SHAREHOLDER’S EQUITY |
|
|
|
|
|
|
|
|
|
|
| |||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Trade accounts payable |
| $ | 26,293 |
| $ | 19,767 |
| $ | 47 |
| $ | — |
| $ | 46,107 |
|
Accrued expenses |
| 64,061 |
| 57,538 |
| 1,033 |
| — |
| 122,632 |
| |||||
Current portion of long-term debt |
| 1,700 |
| 697 |
| 2,143 |
| — |
| 4,540 |
| |||||
Current portion of obligations under capital leases |
| — |
| 89 |
| — |
| — |
| 89 |
| |||||
Accrued income taxes |
| 1,051 |
| — |
| (82 | ) | — |
| 969 |
| |||||
Total current liabilities |
| 93,105 |
| 78,091 |
| 3,141 |
| — |
| 174,337 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Intercompany |
| 535,101 |
| (546,532 | ) | 11,431 |
| — |
| — |
| |||||
Long-term liabilities |
| 55,112 |
| 88 |
| — |
| — |
| 55,200 |
| |||||
Long-term debt |
| 363,786 |
| 1,068 |
| — |
| — |
| 364,854 |
| |||||
Obligations under capital leases |
| — |
| 342 |
| — |
| — |
| 342 |
| |||||
Deferred gains |
| 300 |
| — |
| — |
| — |
| 300 |
| |||||
Deferred income taxes |
| 98,275 |
| — |
| (5 | ) | — |
| 98,270 |
| |||||
Total liabilities |
| 1,145,679 |
| (466,943 | ) | 14,567 |
| — |
| 693,303 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total shareholder’s equity |
| 298,955 |
| 803,018 |
| (5,706 | ) | (797,312 | ) | 298,955 |
| |||||
|
| $ | 1,444,634 |
| $ | 336,869 |
| $ | 8,067 |
| $ | (797,312 | ) | $ | 992,258 |
|
RES-CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
Three Months Ended March 31, 2012
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
| Guarantor |
| Non-Guarantor |
|
|
| Consolidated |
| |||||
|
| ResCare, Inc. |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Revenues |
| $ | 64,842 |
| $ | 331,763 |
| $ | 737 |
| $ | — |
| $ | 397,342 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating expenses |
| 71,017 |
| 304,966 |
| 859 |
| — |
| 376,842 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating (loss) income |
| (6,175 | ) | 26,797 |
| (122 | ) | — |
| 20,500 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other expenses (income): |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest, net |
| 10,304 |
| (94 | ) | (2 | ) | — |
| 10,208 |
| |||||
Equity in earnings of subsidiaries |
| (16,009 | ) | (43 | ) | — |
| 16,052 |
| — |
| |||||
Total other (income) expenses |
| (5,705 | ) | (137 | ) | (2 | ) | 16,052 |
| 10,208 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
(Loss) income before income taxes |
| (470 | ) | 26,934 |
| (120 | ) | (16,052) |
| 10,292 |
| |||||
Income tax (benefit) expense |
| (6,625 | ) | 10,810 |
| (48 | ) | — |
| 4,137 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income (loss) |
| 6,155 |
| 16,124 |
| (72 | ) | (16,052 | ) | 6,155 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net loss-noncontrolling interest |
| — |
| — |
| (30 | ) | — |
| (30 | ) | |||||
Net income (loss)-Res-Care, Inc. |
| 6,155 |
| 16,124 |
| (42 | ) | (16,052 | ) | 6,185 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
| |||||
Foreign currently translation adjustments |
| 161 |
| — |
| 161 |
| (161 | ) | 161 |
| |||||
Comprehensive income (loss) attributable to Res-Care, Inc. |
| $ | 6,316 |
| $ | 16,124 |
| $ | 119 |
| $ | (16,213 | ) | $ | 6,346 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total comprehensive income |
| $ | 6,316 |
| $ | 16,124 |
| $ | 89 |
| $ | (16,213 | ) | $ | 6,316 |
|
RES-CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
Three Months Ended March 31, 2011
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
| Guarantor |
| Non-Guarantor |
|
|
| Consolidated |
| |||||
|
| ResCare, Inc. |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Revenues |
| $ | 63,257 |
| $ | 322,226 |
| $ | 601 |
| $ | — |
| $ | 386,084 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating expenses |
| 67,020 |
| 298,162 |
| 245 |
| — |
| 365,427 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating (loss) income |
| (3,763 | ) | 24,064 |
| 356 |
| — |
| 20,657 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other expenses (income): |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest, net |
| 10,818 |
| (50 | ) | (2 | ) | — |
| 10,766 |
| |||||
Equity in earnings of subsidiaries |
| (13,007 | ) | (73 | ) | — |
| 13,080 |
| — |
| |||||
Total other (income) expenses |
| (2,189 | ) | (123 | ) | (2 | ) | 13,080 |
| 10,766 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
(Loss) income from continuing operations |
|
|
|
|
|
|
|
|
|
|
| |||||
before income taxes |
| (1,574 | ) | 24,187 |
| 358 |
| (13,080 | ) | 9,891 |
| |||||
Income tax (benefit) expense |
| (4,512 | ) | 7,462 |
| 111 |
| — |
| 3,061 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) from continuing operations |
| 2,938 |
| 16,725 |
| 247 |
| (13,080 | ) | 6,830 |
| |||||
Income (loss) from discontinued operations, |
|
|
|
|
|
|
|
|
|
|
| |||||
net of tax |
| 736 |
| — |
| (3,892 | ) | — |
| (3,156 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income (loss) |
| 3,674 |
| 16,725 |
| (3,645 | ) | (13,080 | ) | 3,674 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net loss-noncontrolling interest |
| — |
| — |
| (32 | ) | — |
| (32 | ) | |||||
Net income (loss)-Res-Care, Inc. |
| 3,674 |
| 16,725 |
| (3,613 | ) | (13,080 | ) | 3,706 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
| |||||
Foreign currently translation adjustments |
| 94 |
| — |
| 94 |
| (94 | ) | 94 |
| |||||
Comprehensive income (loss) attributable to Res-Care, Inc. |
| $ | 3,768 |
| $ | 16,725 |
| $ | (3,519 | ) | $ | (13,174 | ) | $ | 3,800 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total comprehensive income |
| $ | 3,768 |
| $ | 16,725 |
| $ | (3,551 | ) | $ | (13,174 | ) | $ | 3,768 |
|
RES-CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2012
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
| Guarantor |
| Non-Guarantor |
|
|
| Consolidated |
| |||||
|
| ResCare, Inc. |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net income (loss) |
| $ | 6,155 |
| $ | 16,124 |
| $ | (72 | ) | $ | (16,052 | ) | $ | 6,155 |
|
Adjustments to reconcile net income to cash |
|
|
|
|
|
|
|
|
|
|
| |||||
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Depreciation and amortization |
| 4,547 |
| 2,094 |
| 4 |
| — |
| 6,645 |
| |||||
Amortization of discount and deferred debt |
|
|
|
|
|
|
|
|
|
|
| |||||
issuance costs on notes |
| 675 |
| — |
| — |
| — |
| 675 |
| |||||
Share-based compensation |
| 1,174 |
| — |
| — |
| — |
| 1,174 |
| |||||
Deferred income taxes, net |
| 1,100 |
| — |
| — |
| — |
| 1,100 |
| |||||
Provision for losses on accounts receivable |
| 136 |
| 1,413 |
| — |
| — |
| 1,549 |
| |||||
Loss from sale of assets |
| — |
| 35 |
| — |
| — |
| 35 |
| |||||
Equity in earnings of subsidiaries |
| (16,009 | ) | (43 | ) | — |
| 16,052 |
| — |
| |||||
Changes in operating assets and liabilities |
| 58,503 |
| 4,024 |
| (82,381 | ) | — |
| (19,854 | ) | |||||
Cash provided by (used in) operating activities |
| 56,281 |
| 23,647 |
| (82,449 | ) | — |
| (2,521 | ) | |||||
Investing activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Purchases of property and equipment |
| (3,059 | ) | (1,151 | ) | (51 | ) | — |
| (4,261 | ) | |||||
Acquisitions of businesses, net of cash acquired |
| — |
| (4,550 | ) | — |
| — |
| (4,550 | ) | |||||
Proceeds from sale of assets |
| — |
| 10 |
| — |
| — |
| 10 |
| |||||
Cash used in investing activities |
| (3,059 | ) | (5,691 | ) | (51 | ) | — |
| (8,801 | ) | |||||
Financing activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Long-term debt (repayments) borrowings |
| (283 | ) | (718 | ) | (116 | ) | — |
| (1,117 | ) | |||||
Payments on obligations under capital leases |
| — |
| (23 | ) | — |
| — |
| (23 | ) | |||||
Net payments relating to intercompany financing |
| (64,339 | ) | (18,310 | ) | 82,649 |
| — |
| — |
| |||||
Cash (used in) provided by financing activities |
| (64,622 | ) | (19,051 | ) | 82,533 |
| — |
| (1,140 | ) | |||||
Effect of exchange rate changes on cash and |
|
|
|
|
|
|
|
|
|
|
| |||||
cash equivalents |
| — |
| 64 |
| — |
| — |
| 64 |
| |||||
(Decrease) increase in cash and cash equivalents |
| (11,400 | ) | (1,031 | ) | 33 |
| — |
| (12,398 | ) | |||||
Cash and cash equivalents at beginning of period |
| 16,733 |
| 6,547 |
| 2,371 |
| — |
| 25,651 |
| |||||
Cash and cash equivalents at end of period |
| $ | 5,333 |
| $ | 5,516 |
| $ | 2,404 |
| $ | — |
| $ | 13,253 |
|
RES-CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2011
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
| Guarantor |
| Non-Guarantor |
|
|
| Consolidated |
| |||||
|
| ResCare, Inc. |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net income (loss) |
| $ | 3,674 |
| $ | 16,725 |
| $ | (3,645 | ) | $ | (13,080 | ) | $ | 3,674 |
|
Adjustments to reconcile net income to cash |
|
|
|
|
|
|
|
|
|
|
| |||||
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Depreciation and amortization |
| 3,015 |
| 1,935 |
| 51 |
| — |
| 5,001 |
| |||||
Amortization of discount and deferred debt |
|
|
|
|
|
|
|
|
|
|
| |||||
issuance costs on notes |
| 888 |
| — |
| — |
| — |
| 888 |
| |||||
Deferred income taxes, net |
| 1,781 |
| — |
| (8 | ) | — |
| 1,773 |
| |||||
Provision for losses on accounts receivable |
| 845 |
| 836 |
| 13 |
| — |
| 1,694 |
| |||||
Loss on sale of assets |
| — |
| 23 |
| — |
| — |
| 23 |
| |||||
Equity in earnings of subsidiaries |
| (13,007 | ) | (73 | ) | — |
| 13,080 |
| — |
| |||||
Changes in operating assets and liabilities |
| 33,086 |
| (24.995 | ) | 1,291 |
| — |
| 9,382 |
| |||||
Cash provided by (used in) operating activities |
| 30,282 |
| (5,549 | ) | (2,298 | ) | — |
| 22,435 |
| |||||
Investing activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Purchases of property and equipment |
| (24,515 | ) | (22,337 | ) | 97 |
| — |
| (2,081 | ) | |||||
Acquisitions of businesses, net of cash acquired |
| — |
| (6,109 | ) | — |
| — |
| (6,109 | ) | |||||
Cash (used in) provided by investing activities |
| (24,515 | ) | 16,228 |
| 97 |
| — |
| (8,190 | ) | |||||
Financing activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Long-term debt (repayments) borrowings |
| (32,158 | ) | 665 |
| — |
| — |
| (31,493 | ) | |||||
Short-term borrowings (repayments)– |
|
|
|
|
|
|
|
|
|
|
| |||||
three months or less, net |
| 5,742 |
| (1,165 | ) | 2,423 |
| — |
| 7,000 |
| |||||
Payments on obligations under capital leases |
| — |
| (23 | ) | — |
| — |
| (23 | ) | |||||
Debt issuance costs |
| (129 | ) | — |
| — |
| — |
| (129 | ) | |||||
Funds contributed by co-investors |
| 1,400 |
| — |
| — |
| — |
| 1,400 |
| |||||
Net payments relating to intercompany financing |
| 12,595 |
| (10,585 | ) | (2,010 | ) | — |
| — |
| |||||
Cash (used in) provided by financing activities |
| (12,550 | ) | (11,108 | ) | 413 |
| — |
| (23,245 | ) | |||||
Effect of exchange rate changes on cash and |
|
|
|
|
|
|
|
|
|
|
| |||||
cash equivalents |
| — |
| 53 |
| 37 |
| — |
| 90 |
| |||||
Decrease in cash and cash equivalents |
| (6,783 | ) | (376 | ) | (1,751 | ) | — |
| (8,910 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents at beginning of period |
| 11,084 |
| 9,790 |
| 6,678 |
| — |
| 27,552 |
| |||||
Cash and cash equivalents at end of period |
| $ | 4,301 |
| $ | 9,414 |
| $ | 4,927 |
| $ | — |
| $ | 18,642 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand ResCare’s financial performance and condition. MD&A is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying notes. All references in MD&A to “ResCare”, “Company”, “our company”, “we”, “us”, or “our” mean Res-Care, Inc. and unless the context otherwise requires, its consolidated subsidiaries.
Preliminary Note Regarding Forward-Looking Statements
Statements in this report that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. In addition, we expect to make such forward-looking statements in future filings with the Securities and Exchange Commission, in press releases, and in oral and written statements made by us or with our approval. These forward-looking statements include, but are not limited to: (1) projections of revenues, income or loss, capital structure and other financial items; (2) statements of plans and objectives of ResCare or our management or Board of Directors; (3) statements of future actions or economic performance, including development activities; (4) statements of assumptions underlying such statements; and (5) statements about the limitations on the effectiveness of controls. Words such as “believes”, “anticipates”, “expects”, “intends”, “plans”, “targets”, and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Some of the events or circumstances that could cause actual results to differ from those discussed in the forward-looking statements are discussed in the “Risk Factors” section in Part II, Item 1A of this Report. Such forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date on which such statement is made.
Onex Transaction
As more fully described in our 2011 Annual Report on Form 10-K, on November 16, 2010, an affiliate of Onex Partners III LP (“Purchaser”) purchased 21,044,765 shares of ResCare common stock in a tender offer. Upon the completion of the tender offer, affiliates of Onex Corporation (the “Onex Investors”) beneficially owned 87.4% of the issued and outstanding shares of ResCare’s common stock on an as-converted basis. On December 22, 2010, upon completion of a share exchange and other reorganization transactions, ResCare became a wholly owned subsidiary of Onex Rescare Holdings Corp. (“New Holdco”), which in turn, is owned by the Onex Investors, certain co-investors and members of our management team.
On December 22, 2010, ResCare entered into new senior secured credit facilities, comprised of a new $170 million term loan facility and an amended and restated $275 million revolving credit facility and ResCare issued $200 million of unsecured 10.75% Senior Notes due 2019 (the “Notes”) in a private placement under the Securities Act of 1933.
Overview of Our Business
We receive revenues primarily from the delivery of residential, training, educational and support services to various populations with special needs. Our programs include an array of services provided in both residential and non-residential settings for adults and youths with intellectual, cognitive or other developmental disabilities, and youths who have special educational or support needs, are from disadvantaged backgrounds, or have severe emotional disorders, including some who have entered the juvenile justice system. We also offer, through drop-in or live-in services, personal care, meal preparation, housekeeping, transportation and some skilled nursing care to the elderly in their own homes. Additionally, we provide services to transition welfare recipients, young people and people who have been laid off or have special barriers to employment into the workforce and become productive employees.
We have four reportable operating segments: (i) Residential Services, (ii) ResCare HomeCare, (iii) Youth Services and (iv) Workforce Services. Residential Services primarily includes services for individuals with intellectual, cognitive or
other developmental disabilities in our community home settings. ResCare HomeCare primarily includes periodic in-home care services to the elderly, as well as persons with disabilities. Youth Services consists of our Job Corps centers, a variety of youth programs including foster care, alternative education programs and charter schools. Workforce Services is comprised of our domestic job training and placement programs that assist welfare recipients and disadvantaged job seekers in finding employment and improving their career prospects.
Revenues for our Residential Services operations are derived primarily from state Medicaid programs, other government agencies, commercial insurance companies and from management contracts with private operators, generally not-for-profit providers, who contract with state government agencies and are also reimbursed under the Medicaid program. Our services include social, functional and vocational skills training, 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 that are reimbursed on a unit-of-service basis.
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. Rates are periodically adjusted based upon state budgets or economic conditions and their impact on state budgets. At programs where we are the provider of record, we are directly reimbursed under state Medicaid programs for services we provide and such revenues are affected by occupancy levels. At most 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 Youth Services operations. Under Job Corps contracts, we are reimbursed for direct costs of services related to Job Corps center operations, allowable indirect costs for general and administrative costs, plus a predetermined management fee. The management fee takes the form of a fixed contractual amount plus a computed amount based on certain performance criteria. All of such amounts are reflected as revenue, and all such direct costs are reflected as cost of services. Final determination of amounts due under Job Corps contracts is subject to audit and review by the DOL, and renewals and extension of Job Corps contracts are based in part on performance reviews.
We operate job training and placement programs that assist disadvantaged job seekers in finding employment and improving their career prospects through our Workforce Services operations. These programs are administered under contracts with local and state governments. We are typically reimbursed for direct costs of services related to the job training centers, allowable indirect costs plus a fee for profit. The fee can take the form of a fixed contractual amount (rate or price) or be computed based on certain performance criteria. The contracts are funded by federal agencies, including the DOL and Department of Health and Human Services.
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 ongoing crisis 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 2011 Annual Report on Form 10-K filed February 16, 2012. Management has discussed the development, selection, and application of our critical accounting policies with our Audit Committee. During the first quarter of 2012, there were no material changes in the critical accounting policies and assumptions.
Results of Operations
|
| Three Months Ended |
| ||||
|
| March 31 |
| ||||
|
| 2012 |
| 2011 |
| ||
|
| (Dollars in thousands) |
| ||||
|
|
|
|
|
| ||
Revenues: |
|
|
|
|
| ||
Residential Services |
| $ | 218,309 |
| $ | 206,339 |
|
ResCare HomeCare |
| 86,250 |
| 80,657 |
| ||
Youth Services |
| 43,954 |
| 43,077 |
| ||
Workforce Services (1) |
| 48,829 |
| 56,011 |
| ||
Consolidated |
| $ | 397,342 |
| $ | 386,084 |
|
|
|
|
|
|
| ||
Operating income: |
|
|
|
|
| ||
Residential Services |
| $ | 28,157 |
| $ | 22,013 |
|
ResCare HomeCare |
| 5,261 |
| 5,641 |
| ||
Youth Services |
| 2,809 |
| 2,762 |
| ||
Workforce Services (1) |
| 1,948 |
| 4,458 |
| ||
Corporate (2) |
| (17,675 | ) | (14,217 | ) | ||
Consolidated |
| $ | 20,500 |
| $ | 20,657 |
|
|
|
|
|
|
| ||
Operating margin: |
|
|
|
|
| ||
Residential Services |
| 12.9 | % | 10.7 | % | ||
ResCare HomeCare |
| 6.1 | % | 7.0 | % | ||
Youth Services |
| 6.4 | % | 6.4 | % | ||
Workforce Services (1) |
| 4.0 | % | 8.0 | % | ||
Corporate (2) |
| (4.4 | %) | (3.7 | %) | ||
Consolidated |
| 5.2 | % | 5.4 | % |
|
|
(1) Excludes results for international operations, which were reclassified to discontinued operations for all periods presented.
(2) 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 ended March 31, 2012 increased $11.3 million, or 2.9%, from the same period in 2011. Revenues are more fully described in the segment discussions.
Consolidated operating income, which includes corporate general and administrative expenses, for the quarter ended March 31, 2012, was $20.5 million compared to operating income of $20.7 million from the same period in 2011. Consolidated operating margins were 5.2% and 5.4% for the quarterly periods in 2012 and 2011, respectively.
Net interest expense decreased $0.6 million for the first quarter of 2012 compared to the same period in 2011. The decrease was attributable to lower borrowing levels in 2012. Our effective income tax rate for the three months ended March 31, 2012 was 40.2% as compared to 31.0% over the same period in 2011. The 2012 rate was negatively impacted by the expiration of jobs tax credits (not renewed for 2012) and computational differences associated with the impact of discontinued operations.
Residential Services
Residential Services revenues for the quarter ended March 31, 2012 increased $12.0 million, or 5.8%, over the same period in 2011. This increase was due primarily to acquisition growth and a $2.9 million increase in our pharmacy business revenue, which was partially offset by rate and service cuts in certain states. Operating margin was 12.9% for the quarter ended March 31, 2012 compared to 10.7% for the same period in 2011. The margin improvement is attributable to the revenue growth, as well as effective leverage of general and administrative costs.
ResCare HomeCare
ResCare HomeCare revenues for the quarter ended March 31, 2012 increased $5.6 million, or 6.9%, over the same period in 2011. This increase was due primarily to acquisition growth, which was partially offset by rate and service cuts in certain states. Operating margin decreased from 7.0% in 2011 to 6.1% in 2012, due to higher payroll taxes and bad debt provisions.
Youth Services
Youth Services revenues for the quarter ended March 31, 2012 increased $0.9 million, or 2.0%, from the same period of 2011, due primarily to an increase in our Job Corps reporting unit revenues. Operating margin was 6.4% in the first quarter of 2011 and 2012.
Workforce Services
Workforce Services revenues for the quarter ended March 31, 2012 decreased $7.2 million, or 12.8%, from the same period in 2011, due primarily to lower referrals in certain contracts and funding cuts. Operating margin decreased from 8.0% in the first quarter of 2011 to 4.0% in the same period in 2012, due primarily to lower referrals in certain contracts and funding cuts.
In February 2012, we were informed by the New York City Human Resources Administration that the Wellness, Comprehensive Assessment, Rehabilitation, and Employment (“WeCARE”) contract had been awarded to another operator through the competitive bid process. Our performance is scheduled to continue under a contract extension until December 2012. Annual revenues for this contract are $28 million. Our formal protest was denied and we are exploring all available options to challenge the contract award and the bid process. We considered this to be an indicator of potential impairment and performed an interim analysis on the Workforce Services reporting unit and concluded that its goodwill of $32.7 million was not impaired at March 31, 2012. Our interim analysis did indicate that Workforce Services’ excess of fair value over its carrying value had decreased to approximately a three percent margin, so further deterioration of this business could lead to an impairment in the future.
Corporate
Total corporate operating expenses represent corporate general and administrative expenses, as well as other operating income and expenses. Total expenses in the first quarter of 2012 increased $3.5 million compared to first quarter of 2011 due primarily to an increase in depreciation expense, incentive compensation accruals and share-based compensation expenses of $1.0 million, $0.6 million and $1.2 million, respectively.
Financial Condition, Liquidity and Capital Resources
Total assets increased $4.4 million, or 0.4%, at March 31, 2012 over balances at December 31, 2011. This was primarily due to an increase in trade accounts receivable, offset by a decrease in cash as discussed below.
Cash and cash equivalents were $13.3 million at March 31, 2012, as compared to $25.7 million at December 31, 2011. Cash used in operations for the three months ended March 31, 2012 was ($2.5) million compared to $22.4 million for the three months ended March 31, 2011. This change was primarily due to the increase in trade accounts receivable. Also, in March 2012, we accrued $5.6 million of debt issuance costs for the refinancing of our credit agreement discussed below, which was finalized on April 5, 2012.
Net accounts receivable at March 31, 2012 increased to $234.1 million, compared to $221.1 million at December 31, 2011. Days of revenue in net accounts receivable were 50 days at March 31, 2012, compared with 49 days at December 31, 2011. The increase in days of revenue is due to temporary payment delays from several payors.
Our capital requirements relate primarily to our plans to expand through selective acquisitions and the development of new programs, and our need for sufficient working capital for general corporate purposes. Since most of our programs are operating at or near capacity, and budgetary pressures and other forces are expected to limit increases in reimbursement rates we receive, our ability to continue to grow at the current rate depends directly on our acquisition and development activity. We have historically satisfied our working capital requirements, capital expenditures and scheduled debt payments from our operating cash flows and borrowings under our revolving credit facility, and expect that this will continue for at least the next twelve months.
Cash used in investing activities at March 31, 2012 increased $0.6 million over the same period in 2011 primarily due to higher purchases of property and equipment. We used $4.6 million on business acquisitions during the first three months of 2012 compared to $6.1 million during the same period of 2011.
Our financing activities included a net payment of debt and capital lease obligations of $1.1 million for the first three months of 2012. This compares to a net payment of debt and capital lease obligations of $24.5 million for the same period in 2011. In January 2011, we paid the remainder due of $30.5 million on the 7.75% Senior Notes. During the first quarter of 2011, we received funds of $1.4 million from co-investors through the Onex transaction.
On December 22, 2010, we issued $200 million of 10.75% Senior Notes due January 15, 2019 in a private placement to qualified institutional buyers under the Securities Act of 1933. The 10.75% Senior Notes, which had an issue price of 100% of the principal amount, are unsecured obligations ranking equal to existing and future debt and are subordinate to existing and future secured debt. The effective interest rate for these notes is approximately 10.75%. Proceeds were used to fund $120 million of our tendered 7.75% Senior Notes due October 2013. The remaining $30 million of these Senior Notes that were not repurchased were satisfied and discharged by delivering to the trustee amounts sufficient to pay the applicable redemption price in January 2011. The 10.75% Senior Notes are jointly, severally, fully and unconditionally guaranteed, subject to certain automatic customary release provisions, by our domestic subsidiaries.
On December 22, 2010, we amended our senior secured revolving credit facility. The aggregate amount available under that revolving credit facility was $275 million until July 28, 2013, after which the revolving credit facility was to be extended until December 22, 2015 and the aggregate available amount reduced to $240 million. On December 22, 2010, we also issued a $170 million senior secured term loan (“Term Loan B”) due December 22, 2016, at a discounted price of 98% with realized net proceeds of $166.6 million.
On April 5, 2012, we entered into a new senior secured credit facility (the “Credit Agreement”) in an aggregate principal amount of $375 million, which replaced the 2010 senior secured credit facility and the Term Loan B. The new Credit Agreement consists of a Term Loan A (the “Term Loan A”) in an aggregate principal amount of $175 million and a revolving credit facility (the “Revolving Facility”) in an aggregate principal amount of $200 million. The Term Loan A and the Revolving Facility each mature on April 5, 2017. 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 as follows: (i) 5% during each of the first two years after funding, (ii) 10% during the third year after funding and (iii) 15% during each of the final two years of the term. The balance of the Term Loan A is payable at maturity. Pricing for the Term Loan A will be variable, at the London Interbank Offer Rate (LIBOR) plus 275 basis points. LIBOR is defined as having no minimum rate. The proceeds of the Term Loan A were used to refinance the Company’s prior Term Loan B and pay certain related fees and expenses. The proceeds of the Revolving Facility may be used for working capital and for other general corporate purposes permitted under the Credit Agreement, including certain acquisitions and investments. The 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 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 Credit Agreement contains various financial covenants relating to capital expenditures and rentals, and requires us to maintain specific ratios with respect to interest coverage and leverage. The new agreement continues to provide for the exclusion of charges incurred with the resolution of legal proceedings provided in Note 9 to Notes to the Condensed Consolidated Financial Statements, as well as any non-cash impairment charges, in the calculation of certain financial covenants. Our preliminary estimate of debt extinguishment losses to be recorded in the second quarter of 2012 is approximately $7 million, subject to finalization. These losses relate to an unamortized discount and deferred debt issuance costs on the old credit facility.
As of March 31, 2012, we had irrevocable standby letters of credit in the principal amount of $59.6 million issued primarily in connection with our insurance programs. As of March 31, 2012, we had $215.4 million available under the amended and restated revolving credit facility, with no outstanding balance. Outstanding balances bear interest at 3.75% over the LIBOR or other bank developed rates at our option. As of March 31, 2012, the weighted average interest rate was not applicable as there were no outstanding borrowings. Letters of credit had a borrowing rate of 3.875% as of March 31, 2012. The commitment fee on the unused balance was 0.50%. The margin over LIBOR and the commitment fee is determined quarterly based on our leverage ratio, as defined by the revolving credit facility.
We are in compliance with our debt covenants at March 31, 2012, 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 66% through Medicaid reimbursement, 8% from the DOL and 26% 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 2012 or 2011.
Impact of Recently Issued Accounting Pronouncements
See Note 12 of the Notes to Condensed Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The market risk inherent in our financial instruments and positions represents the potential loss arising from adverse changes in interest rates. While we are exposed to changes in interest rates as a result of any outstanding variable rate debt, we do not currently utilize any derivative financial instruments related to our interest rate exposures. Our senior secured term loan and senior secured credit facility, which have interest rates based on margins over LIBOR or prime, tiered based upon leverage calculations, had no outstanding borrowings as of March 31, 2012 and December 31, 2011.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
ResCare’s management, under the supervision and with the participation of the Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the CEO and CFO concluded that ResCare’s disclosure controls and procedures are effective in timely making known to them material information required to be disclosed in the reports filed or submitted under the Securities Exchange Act. There were no changes in ResCare’s internal control over financial reporting during the quarter ended March 31, 2012 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.
Information regarding the legal proceedings is provided 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.
The following sets forth changes from the risk factors previously disclosed in our 2011 Annual Report on Form 10-K filed February 16, 2012.
If the fair values of our reporting units decline, we may have to record a non-cash charge to earnings from impairment of our intangible assets.
In accordance with generally accepted accounting principles in the United States of America, goodwill and indefinite-lived intangible assets are not amortized but are reviewed for impairment on an annual basis or more frequently whenever events or changes in circumstances indicate that their carrying value may not be recoverable.
For our October 1, 2011 annual impairment test, all reporting units passed Step One. The Youth Services-Residential Youth and Workforce Services reporting units passed Step One with a fair value that exceeded its carrying value by 13 and 12 percent margins, respectively. The Youth Services-Residential Youth and Workforce Services reporting units had allocated goodwill balances of $9.6 million and $32.7 million, respectively, as of October 1, 2011. A 100 basis point increase in the discount rate for these two reporting units would decrease the fair value in excess of carrying value to a 5 percent margin for each reporting unit. A 100 basis point decrease in the long-term growth rate for these two reporting units would decrease the fair value in excess of carrying value to a 9 percent margin for each reporting unit.
In February 2012, we were informed by the New York City Human Resources Administration that the Wellness, Comprehensive Assessment, Rehabilitation and Employment (“WeCARE”) contract had been awarded to another operator through the competitive bid process. Our performance is scheduled to continue under a contract extension until December 2012. Annual revenues for this contract are $28 million. We filed a formal protest which was denied. We are exploring all available options to challenge the contract award and the bid process, in order to retain this contract. We performed an interim analysis on the Workforce Services reporting unit during the first quarter of 2012 and concluded that its goodwill of $32.7 million was not impaired as of March 31, 2012. Our interim analysis did indicate that Workforce Services’ excess of fair value over its carrying value had decreased to approximately a three percent margin, therefore further deterioration of this business could lead to an impairment in the future.
We may be required to record a non-cash charge to earnings in our financial statements during the period in which any impairment of our goodwill or indefinite-lived intangible assets is determined, which could have a material adverse effect on our operating results.
Our inability to maintain and renew our existing contracts and to obtain additional contracts would adversely affect our revenues.
Each of our operating segments derives a substantial amount of revenue from contracts with government agencies. They also have contracts with non-governmental entities. Our contracts are generally in effect for a specific term, and our ability to renew or retain them depends on our operating performance and reputation, as well as other factors over which we have less or no control. In the past we have had contracts that were terminated or not renewed. We may not be successful in obtaining, renewing or retaining contracts to operate Job Corps or Workforce Services training centers. As noted in the risk factor above, our WeCARE contract in our Workforce Services segment is currently at risk. Our Job Corps contracts are re-bid, regardless of operating performance, at least every five years and our Workforce Services contracts are typically re-bid every 3-60 months. Government contracts of the operations we acquire may be subject to termination upon such an event, and our ability to retain them may be affected by the performance of prior operators. Changes in the market for services and contracts, including increasing competition, changes in the political environment, transition costs or costs to implement awarded contracts, could adversely affect the timing and/or viability of future operating or development activities. Additionally, many of our contracts are subject to state or federal
government procurement rules and procedures. Changes in procurement policies that may be adopted by one or more of these agencies could also adversely affect our ability to obtain and retain these contracts. These contracts may not be renewed.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
| Exhibit |
| Description of Exhibit | |
|
|
|
| |
| 10 |
| $375,000,000 Credit Agreement dated as of April 5, 2012 (incorporated by reference by Exhibit 10 to Form 8-K filed April 6, 2012). | |
|
|
|
| |
* | 31.1 |
| Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended. | |
|
|
|
| |
* | 31.2 |
| Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended. | |
|
|
|
| |
* | 32 |
| Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
|
|
|
| |
* | 101 |
| The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements. | |
|
|
|
|
|
|
|
|
|
|
| * |
| Filed herewith |
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: | May 7, 2012 |
|
| By: | /s/ Ralph G. Gronefeld, Jr. |
|
|
| Ralph G. Gronefeld, Jr. | ||
|
|
| President and Chief Executive Officer | ||
|
|
| |||
|
|
| |||
|
|
| |||
Date: | May 7, 2012 |
|
| By: | /s/ David W. Miles |
|
|
| David W. Miles | ||
|
|
| Executive Vice President and Chief Financial Officer |