Res Care (RSCR) 10-Q 2014 Q3 Quarterly report

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)

KENTUCKY	61-0875371
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)
9901 Linn Station Road	40223-3808
Louisville, Kentucky	(Zip Code)
(Address of principal executive offices)

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

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

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

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

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

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

Yes __No ü.

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

INDEX

RES-CARE, INC. AND SUBSIDIARIES

		PAGE
PART I.	FINANCIAL INFORMATION	NUMBER
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets – September 30, 2014 and December 31, 2013	3
	Condensed Consolidated Statements of Comprehensive Income – Three Months Ended September 30, 2014 and 2013; Nine Months Ended September 30, 2014 and 2013	4
	Condensed Consolidated Statements of Shareholder’s Equity	5
	Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2014 and 2013	6
	Notes to Condensed Consolidated Financial Statements – September 30, 2014	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28
Item 4.	Controls and Procedures	28
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	30
SIGNATURES
EXHIBITS

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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)

	September 30			December 31
	2014			2013
ASSETS
Current assets:
Cash and cash equivalents	$	25,891		$	29,997
Accounts receivable, net of allowance for doubtful accounts of $17,401 in 2014 and $11,900 in 2013	260,952			241,873
Refundable income taxes	807			—
Deferred income taxes	29,076			19,811
Non-trade receivables	4,128			6,852
Prepaid expenses and other current assets	22,187			19,578
Total current assets	343,041			318,111
Property and equipment, net	104,618			101,021
Goodwill	313,416			308,350
Other intangible assets, net	336,267			333,613
Other assets	25,536			25,182
Total assets	$	1,122,878		$	1,086,277
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities:
Trade accounts payable	$	39,305		$	34,089
Accrued expenses	141,328			120,803
Current portion of long-term debt	11,109			14,291
Current portion of obligations under capital leases	6,594			6,516
Accrued income taxes	5,447			—
Total current liabilities	203,783			175,699
Long-term liabilities	43,897			39,143
Long-term debt	446,872			345,506
Obligations under capital leases	14,671			13,724
Deferred income taxes	121,291			116,084
Total liabilities	830,514			690,156
Shareholder’s equity:
Common stock, no par value, authorized 40,000,000 shares, issued and outstanding 21,344,741 in 2014 and 2013	—			—
Additional paid-in capital	248,563			247,053
Retained earnings	44,642			149,617
Accumulated other comprehensive income (loss)	(841		)	(549		)
Total shareholder’s equity	292,364			396,121
Total liabilities and shareholder’s equity	$	1,122,878		$	1,086,277

See accompanying notes to condensed consolidated financial statements.

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RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2014			2013			2014			2013
Revenues	$	437,807		$	409,934		$	1,290,724		$	1,195,621
Cost of services	333,809			305,508			978,241			894,958
Gross profit	103,998			104,426			312,483			300,663
Operating expenses:
Operational general and administrative	60,498			55,222			175,704			167,601
Corporate general and administrative	23,898			24,280			81,135			63,168
Total operating expenses	84,396			79,502			256,839			230,769
Operating income	19,602			24,924			55,644			69,894
Interest expense, net	8,571			8,140			25,145			24,342
Loss on extinguishment of debt	—			—			659			—
Income before income taxes	11,031			16,784			29,840			45,552
Income tax expense	4,521			5,450			12,367			12,683
Net income	6,510			11,334			17,473			32,869
Net loss-noncontrolling interest	—			(34		)	—			(110		)
Net income-Res-Care,��Inc.	6,510			11,368			17,473			32,979
Other comprehensive income:
Foreign currency translation adjustments	(263		)	56			(292		)	(358		)
Comprehensive income attributable to Res-Care, Inc.	$	6,247		$	11,424		$	17,181		$	32,621
Total comprehensive income	$	6,247		$	11,390		$	17,181		$	32,511

See accompanying notes to condensed consolidated financial statements.

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RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY

(In thousands)

(Unaudited)

								Accumulated
			Additional					Other
	Common Stock		Paid-In		Retained			Comprehensive
	Shares	Amount	Capital		Earnings			Income/(Loss)		Total
Balance at December 31, 2013	21,345	—	$	247,053	$	149,617		$	(549)	$	396,121
Net income	—	—	—		17,473			—		17,473
Foreign currency translation adjustment arising during period	—	—	—		—			(292)		(292		)
Cash dividends	—	—	—		(122,448		)	—		(122,448		)
Share-based compensation	—	—	1,510		—			—		1,510
Balance at September 30, 2014	21,345	—	$	248,563	$	44,642		$	(841)	$	292,364

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)

	Nine Months Ended
	September 30
	2014			2013
Cash flows from operating activities:
Net income	$	17,473		$	32,869
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	27,489			25,535
Amortization of deferred debt issuance costs	1,753			2,612
Share-based compensation	1,510			2,376
Deferred income taxes, net	(4,058		)	1,480
Provision for losses on accounts receivable	8,214			4,430
Loss on extinguishment of debt	659			—
Loss on sale of assets	207			81
Changes in operating assets and liabilities	7,469			(13,935		)
Cash provided by operating activities	60,716			55,448
Cash flows from investing activities:
Purchases of property and equipment	(17,980		)	(15,007		)
Acquisitions of businesses, net of cash acquired	(15,057		)	(19,995		)
Proceeds from sale of assets	555			344
Cash used in investing activities	(32,482		)	(34,658		)
Cash flows from financing activities:
Long-term debt repayments	(176,078		)	(14,190		)
Long-term debt borrowings	275,000			—
Payments on obligations under capital leases	(5,502		)	(5,446		)
Dividend paid	(122,448		)	—
Debt issuance costs	(3,631		)	(2		)
Cash used in financing activities	(32,659		)	(19,638		)
Effect of exchange rate changes on cash and cash equivalents	319			(96		)
(Decrease) increase in cash and cash equivalents	(4,106		)	1,056
Cash and cash equivalents at beginning of period	29,997			50,134
Cash and cash equivalents at end of period	$	25,891		$	51,190
Supplemental schedule of non-cash investing and financing activities:
Notes issued and contingent liabilities in connection with acquisitions	$	247		$	1,336
Capital lease obligations	$	6,710		$	8,409
Settlement of Seller obligations in connection with an acquisition	$	—		$	1,240
Purchases of property and equipment in accounts payable	$	27		$	—

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:

Prepaid assets	$	164
Property and equipment	441
Other intangible assets	9,524
Goodwill		5,175
Aggregate purchase price	$	15,304

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:

						Education
	Residential			ResCare		& Training		Workforce		Pharmacy
	Services			HomeCare		Services		Services		Services		Total
Balance at January 1, 2014
Goodwill	$	182,446		$	73,547	$	15,311	$	32,720	$	4,326	$	308,350
Goodwill added through acquisitions	4,989			186		—		—		—		5,175
Other (1)	(109		)	—		—		—		—		(109		)
Balance at September 30, 2014	$	187,326		$	73,733	$	15,311	$	32,720	$	4,326	$	313,416

(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:

	September 30		December 31
	2014		2013
10.75% senior notes due 2019	$	200,000	$	200,000
Senior secured Term Loan A due 2017	—		157,513
Senior secured Term Loan A due 2019	196,481		—
Senior secured Revolving Facility	60,000		—
Obligations under capital leases	21,265		20,240
Notes payable and other	1,500		2,284
	479,246		380,037
Less current portion	17,703		20,807
	$	461,543	$	359,230

On April 25, 2014, we entered into an amended and restated senior secured credit facility (the “2014 Credit Agreement”) in an aggregate principal amount of $650 million, which replaced our 2012 senior secured credit facility and the related term loan A. The 2014 Credit Agreement consists of a Term Loan A (the “Term Loan A”) in an aggregate principal amount of $200 million, a revolving credit facility (the “Revolving Facility”) in an aggregate principal amount of $250 million, and a Delayed-Draw Term Loan A (the “DDTL”) in an aggregate amount of $200 million.  At closing, proceeds from the new Term Loan A and Revolving Facility were used to (i) refinance the prior revolver and term loan A, (ii) fund 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:

	September 30, 2014				December 31, 2013
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Long-term debt:
10.75% senior notes	$	200,000	$	213,000	$	200,000	$	223,500
Senior secured Term Loan A due 2017	—		—		157,513		157,513
Senior secured Term Loan A due 2019	196,481		196,481		—		—
Senior secured Revolving Facility	60,000		60,000		—		—
Notes payable and other	1,500		1,526		2,284		2,200

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

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Note 7.             Segment Information

The following table sets forth information about our reportable segments:

					Education
	Residential		ResCare		& Training		Workforce		Pharmacy
	Services		HomeCare		Services		Services		Services		Corporate		Total
Three months ended September 30:
2014
Revenues	$	246,209	$	93,523	$	31,995	$	43,699	$	22,381	$	—	$	437,807
Operating income (loss) (1)	29,047		5,714		2,598		4,446		2,014		(24,217)		19,602
Total assets	646,116		217,180		36,261		91,412		22,196		109,713		1,122,878
Capital expenditures	3,216		89		41		16		80		4,562		8,004
Depreciation and amortization	5,964		837		141		239		41		2,199		9,421
2013
Revenues	$	225,407	$	93,061	$	31,074	$	42,257	$	18,135	$	—	$	409,934
Operating income (loss) (1)	30,670		9,837		2,949		5,096		844		(24,472)		24,924
Total assets	616,591		181,671		50,495		83,774		18,609		130,660		1,081,800
Capital expenditures	3,992		193		37		228		71		2,274		6,795
Depreciation and amortization	5,463		643		134		287		41		2,241		8,809
Nine months ended September 30:
2014
Revenues	$	717,968	$	282,786	$	100,165	$	125,887	$	63,918	$	—	$	1,290,724
Operating income (loss) (1)	89,098		22,069		8,143		13,062		4,894		(81,622)		55,644
Capital expenditures	8,801		411		65		151		274		8,278		17,980
Depreciation and amortization	17,117		2,471		431		1,001		118		6,351		27,489
2013
Revenues	$	653,464	$	270,100	$	100,492	$	121,671	$	49,894	$	—	$	1,195,621
Operating income (loss) (1)	83,270		24,858		7,846		13,150		4,448		(63,678)		69,894
Capital expenditures	7,623		560		47		353		304		6,120		15,007
Depreciation and amortization	15,897		1,777		401		833		111		6,516		25,535

(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:

Noncontrolling interest as of December 31, 2012	$	(99	)
Net loss-noncontrolling interest	(110		)
Acquisition of remaining noncontrolling interest	209
Noncontrolling interest as of December 31, 2013	$	—

Note 10.             Impact of Recently Issued Accounting Pronouncements

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

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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)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
ASSETS
Current assets:
Cash and cash equivalents	$	22,664		$	2,288		$	939		$	—		$	25,891
Accounts receivable, net	31,130			229,746			76			—			260,952
Refundable income taxes	807			—			—			—			807
Deferred income taxes	29,076			—			—			—			29,076
Non-trade receivables	3,251			856			21			—			4,128
Prepaid expenses and other current assets	11,958			10,213			16			—			22,187
Total current assets	98,886			243,103			1,052			—			343,041
Property and equipment, net	55,187			49,399			32			—			104,618
Goodwill	308,595			27			4,794			—			313,416
Other intangible assets, net	293,998			42,269			—			—			336,267
Intercompany	—			714,365			69,034			(783,399		)	—
Investment in subsidiaries	1,025,337			37,913			—			(1,063,250		)	—
Other assets	19,419			6,117			—			—			25,536
	$	1,801,422		$	1,093,193		$	74,912		$	(1,846,649	)	$	1,122,878
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities:
Trade accounts payable	$	23,625		$	15,645		$	35		$	—		$	39,305
Accrued expenses	77,780			62,392			1,156			—			141,328
Current portion of long-term debt	10,000			1,109			—			—			11,109
Current portion of obligations under capital leases	—			6,594			—			—			6,594
Accrued income taxes	5,447			—			—			—			5,447
Total current liabilities	116,852			85,740			1,191			—			203,783
Intercompany	781,305			—			—			(781,305		)	—
Long-term liabilities	43,129			768			—			—			43,897
Long-term debt	446,481			391			—			—			446,872
Obligations under capital leases	—			14,671			—			—			14,671
Deferred income taxes	121,291			—			—			—			121,291
Total liabilities	1,509,058			101,570			1,191			(781,305		)	830,514
Common stock	—			—			—			—			—
Additional paid-in capital	248,563			478,422			122,023			(600,445		)	248,563
Retained earnings	44,642			513,219			(47,140		)	(466,079		)	44,642
Accumulated other comprehensive (loss) income	(841		)	(18		)	(1,162		)	1,180			(841		)
Total shareholder’s equity	292,364			991,623			73,721			(1,065,344		)	292,364
	$	1,801,422		$	1,093,193		$	74,912		$	(1,846,649	)	$	1,122,878

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RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2013

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
ASSETS
Current assets:
Cash and cash equivalents	$	26,335		$	2,860		$	802		$	—		$	29,997
Accounts receivable, net	25,953			215,864			56			—			241,873
Refundable income taxes	—			—			—			—			—
Deferred income taxes	19,811			—			—			—			19,811
Non-trade receivables	4,592			2,237			23			—			6,852
Prepaid expenses and other current assets	10,793			8,765			20			—			19,578
Total current assets	87,484			229,726			901			—			318,111
Property and equipment, net	50,854			50,160			7			—			101,021
Goodwill	303,270			27			5,053			—			308,350
Other intangible assets, net	297,535			36,078			—			—			333,613
Intercompany	—			695,097			68,427			(763,524		)	—
Investment in subsidiaries	990,793			37,913			—			(1,028,706		)	—
Other assets	18,746			6,436			—			—			25,182
	$	1,748,682		$	1,055,437		$	74,388		$	(1,792,230	)	$	1,086,277
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities:
Trade accounts payable	$	17,851		$	16,210		$	28		$	—		$	34,089
Accrued expenses	61,175			58,950			678			—			120,803
Current portion of long-term debt	13,125			1,166			—			—			14,291
Current portion of obligations under capital leases	—			6,516			—			—			6,516
Accrued income taxes	—			—			—			—			—
Total current liabilities	92,151			82,842			706			—			175,699
Intercompany	761,430			—			—			(761,430		)	—
Long-term liabilities	38,508			635			—			—			39,143
Long-term debt	344,388			1,118			—			—			345,506
Obligations under capital leases	—			13,724			—			—			13,724
Deferred income taxes	116,084			—			—			—			116,084
Total liabilities	1,352,561			98,319			706			(761,430		)	690,156
Common stock	—			—			—			—			—
Additional paid-in capital	247,053			478,422			121,814			(600,236		)	247,053
Retained earnings	149,617			478,714			(47,178		)	(431,536		)	149,617
Accumulated other comprehensive (loss) income	(549		)	(18		)	(954		)	972			(549		)
Total shareholder’s equity	396,121			957,118			73,682			(1,030,800		)	396,121
	$	1,748,682		$	1,055,437		$	74,388		$	(1,792,230	)	$	1,086,277

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RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

Three Months Ended September 30, 2014

(In thousands)

				Guarantor		Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries		Subsidiaries			Eliminations			Total
Revenues	$	62,630		$	374,794	$	383		$	—		$	437,807
Operating expenses	67,785			350,025		395			—			418,205
Operating (loss) income	(5,155		)	24,769		(12		)	—			19,602
Other expenses (income):
Interest, net	8,227			345		(1		)	—			8,571
Loss on extinguishment of debt	—			—		—			—			—
Equity in earnings of subsidiaries	(14,384		)	—		—			14,384			—
Total other (income) expenses	(6,157		)	345		(1		)	14,384			8,571
Income (loss) before income taxes	1,002			24,424		(11		)	(14,384		)	11,031
Income tax (benefit) expense	(5,508		)	10,034		(5		)	—			4,521
Net income (loss)	6,510			14,390		(6		)	(14,384		)	6,510
Other comprehensive income (loss):
Foreign currently translation adjustments	(263		)	—		(263		)	263			(263		)
Comprehensive income (loss) attributable to Res-Care, Inc.	$	6,247		$	14,390	$	(269	)	$	(14,121	)	$	6,247
Total comprehensive income (loss)	$	6,247		$	14,390	$	(269	)	$	(14,121	)	$	6,247

- 16 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

Nine Months Ended September 30, 2014

(In thousands)

				Guarantor		Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries		Subsidiaries			Eliminations			Total
Revenues	$	188,850		$	1,100,704	$	1,170		$	—		$	1,290,724
Operating expenses	193,221			1,040,751		1,108			—			1,235,080
Operating (loss) income	(4,371		)	59,953		62			—			55,644
Other expenses (income):
Interest, net	24,127			1,021		(3		)	—			25,145
Loss on extinguishment of debt	659			—		—			—			659
Equity in earnings of subsidiaries	(34,543		)	—		—			34,543			—
Total other (income) expenses	(9,757		)	1,021		(3		)	34,543			25,804
Income (loss) before income taxes	5,386			58,932		65			(34,543		)	29,840
Income tax (benefit) expense	(12,087		)	24,427		27			—			12,367
Net income (loss)	17,473			34,505		38			(34,543		)	17,473
Other comprehensive income (loss):
Foreign currently translation adjustments	(292		)	—		(292		)	292			(292		)
Comprehensive income (loss) attributable to Res-Care, Inc.	$	17,181		$	34,505	$	(254	)	$	(34,251	)	$	17,181
Total comprehensive income (loss)	$	17,181		$	34,505	$	(254	)	$	(34,251	)	$	17,181

- 17 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

Three Months Ended September 30, 2013

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Revenues	$	59,873		$	349,309		$	752		$	—		$	409,934
Operating expenses	62,872			321,376			762			—			385,010
Operating (loss) income	(2,999		)	27,933			(10		)	—			24,924
Other expenses (income):
Interest, net	8,180			(104		)	64			—			8,140
Loss on extinguishment of debt	—			—			—			—			—
Equity in earnings of subsidiaries	(18,744		)	(311		)	—			19,055			—
Total other (income) expenses	(10,564		)	(415		)	64			19,055			8,140
Income (loss) before income taxes	7,565			28,348			(74		)	(19,055		)	16,784
Income tax (benefit) expense	(3,803		)	9,282			(29		)	—			5,450
Net income (loss)	11,368			19,066			(45		)	(19,055		)	11,334
Net loss-noncontrolling interest	—			—			(34		)	—			(34		)
Net income (loss)-Res-Care, Inc.	11,368			19,066			(11		)	(19,055		)	11,368
Other comprehensive income (loss):
Foreign currently translation adjustments	56			—			56			(56		)	56
Comprehensive income (loss) attributable to Res-Care, Inc.	$	11,424		$	19,066		$	45		$	(19,111	)	$	11,424
Total comprehensive income (loss)	$	11,424		$	19,066		$	11		$	(19,111	)	$	11,390

- 18 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

Nine Months Ended September 30, 2013

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Revenues	$	182,937		$	1,010,425		$	2,259		$	—		$	1,195,621
Operating expenses	195,326			927,947			2,454			—			1,125,727
Operating (loss) income	(12,389		)	82,478			(195		)	—			69,894
Other expenses (income):
Interest, net	24,410			(246		)	178			—			24,342
Loss on extinguishment of debt	—			—			—			—			—
Equity in earnings of subsidiaries	(59,535		)	(758		)	—			60,293			—
Total other (income) expenses	(35,125		)	(1,004		)	178			60,293			24,342
Income (loss) before income taxes	22,736			83,482			(373		)	(60,293		)	45,552
Income tax (benefit) expense	(10,243		)	23,030			(104		)	—			12,683
Net income (loss)	32,979			60,452			(269		)	(60,293		)	32,869
Net loss-noncontrolling interest	—			—			(110		)	—			(110		)
Net income (loss)-Res-Care, Inc.	32,979			60,452			(159		)	(60,293		)	32,979
Other comprehensive income (loss):
Foreign currently translation adjustments	(358		)	—			(358		)	358			(358		)
Comprehensive income (loss) attributable to Res-Care, Inc.	$	32,621		$	60,452		$	(517	)	$	(59,935	)	$	32,621
Total comprehensive income (loss)	$	32,621		$	60,452		$	(627	)	$	(59,935	)	$	32,511

- 19 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2014

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Operating activities:
Net income (loss)	$	17,473		$	34,505		$	38		$	(34,543	)	$	17,473
Adjustments to reconcile net income, including noncontrolling interest, to cash provided by operating activities	(5,506		)	13,786			420			34,543			43,243
Cash provided by (used in) operating activities	11,967			48,291			458			—			60,716
Investing activities:
Purchases of property and equipment	(9,421		)	(8,526		)	(33		)	—			(17,980		)
Acquisitions of businesses, net of cash acquired	—			(15,057		)	—			—			(15,057		)
Proceeds from sale of assets	—			555			—			—			555
Cash used in investing activities	(9,421		)	(23,028		)	(33		)	—			(32,482		)
Financing activities:
Long-term debt repayments	(175,013		)	(1,065		)	—			—			(176,078		)
Long-term debt borrowings	275,000			—			—			—			275,000
Payments on obligations under capital leases	—			(5,502		)	—			—			(5,502		)
Debt issuance costs	(3,631		)	—			—			—			(3,631		)
Dividend paid.	(122,448		)	—			—			—			(122,448		)
Net payments relating to intercompany financing	19,875			(19,268		)	(607		)	—			—
Cash (used in) provided by financing activities	(6,217		)	(25,835		)	(607		)	—			(32,659		)
Effect of exchange rate changes on cash and cash equivalents	—			—			319			—			319
Increase (decrease) in cash and cash equivalents	(3,671		)	(572		)	137			—			(4,106		)
Cash and cash equivalents at beginning of period	26,335			2,860			802			—			29,997
Cash and cash equivalents at end of period	$	22,664		$	2,288		$	939		$	—		$	25,891

- 20 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2013

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Operating activities:
Net income (loss)	$	32,979		$	60,452		$	(269	)	$	(60,293	)	$	32,869
Adjustments to reconcile net income, including noncontrolling interest, to cash provided by operating activities	(71,961		)	33,662			585			60,293			22,579
Cash (used in) provided by operating activities	(38,982		)	94,114			316			—			55,448
Investing activities:
Purchases of property and equipment	(8,602		)	(6,362		)	(43		)	—			(15,007		)
Acquisitions of businesses, net of cash acquired	—			(19,995		)	—			—			(19,995		)
Proceeds from sale of assets	—			344			—			—			344
Cash used in investing activities	(8,602		)	(26,013		)	(43		)	—			(34,658		)
Financing activities:
Long-term debt repayments	(10,929		)	(2,682		)	(579		)	—			(14,190		)
Long-term debt borrowings	—			—			—			—			—
Debt issuance costs	(2		)	—			—			—			(2		)
Payments on obligations under capital leases	—			(5,446		)	—			—			(5,446		)
Net payments relating to intercompany financing	62,646			(61,109		)	(1,537		)	—			—
Cash provided by (used in) financing activities	51,715			(69,237		)	(2,116		)	—			(19,638		)
Effect of exchange rate changes on cash and cash equivalents	—			—			(96		)	—			(96		)
Increase (decrease) in cash and cash equivalents	4,131			(1,136		)	(1,939		)	—			1,056
Cash and cash equivalents at beginning of period	42,633			4,795			2,706			—			50,134
Cash and cash equivalents at end of period	$	46,764		$	3,659		$	767		$	—		$	51,190

- 21 -

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

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

Preliminary Note Regarding Forward-Looking Statements

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

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

Overview of Our Business

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

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

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

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

- 22 -

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

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

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

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

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

Outlook

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

Application of Critical Accounting Policies

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

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

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

Results of Operations

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2014			2013			2014			2013
	(Dollars in thousands)
Revenues:
Residential Services	$	246,209		$	225,407		$	717,968		$	653,464
ResCare HomeCare	93,523			93,061			282,786			270,100
Education & Training Services	31,995			31,074			100,165			100,492
Workforce Services	43,699			42,257			125,887			121,671
Pharmacy Services	22,381			18,135			63,918			49,894
Consolidated	$	437,807		$	409,934		$	1,290,724		$	1,195,621
Operating income:
Residential Services	$	29,047		$	30,670		$	89,098		$	83,270
ResCare HomeCare	5,714			9,837			22,069			24,858
Education & Training Services	2,598			2,949			8,143			7,846
Workforce Services	4,446			5,096			13,062			13,150
Pharmacy Services	2,014			844			4,894			4,448
Corporate (1)	(24,217		)	(24,472		)	(81,622		)	(63,678		)
Consolidated	$	19,602		$	24,924		$	55,644		$	69,894
Operating margin:
Residential Services	11.8%			13.6%			12.4%			12.7%
ResCare HomeCare	6.1%			10.6%			7.8%			9.2%
Education & Training Services	8.1%			9.5%			8.1%			7.8%
Workforce Services	10.2%			12.1%			10.4%			10.8%
Pharmacy Services	9.0%			4.7%			7.7%			8.9%
Corporate (1)	(5.5%		)	(6.0%		)	(6.3%		)	(5.3%		)
Consolidated	4.5%			6.1%			4.3%			5.8%

________

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

Consolidated

Consolidated revenues for the quarter and nine months ended September 30, 2014 increased $27.9 million and $95.1 million, or 6.8% and 8.0%, respectively, from the same periods in 2013.  Organic growth for the three months and nine months ended September 30, 2014 was 2.7% and 2.4%, respectively.  Revenues are more fully described in the segment discussions.

Consolidated operating income, which includes corporate general and administrative expenses, for the quarter ended September 30, 2014, was $19.6 million compared to operating income of $24.9 million from the same period in 2013.  Consolidated operating margins were 4.5% and 6.1% for the quarterly periods in 2014 and 2013, respectively. The decrease in operating income and margin primarily resulted from lower operating income in our Residential Services, ResCare HomeCare and Workforce Services operations, which were partially offset by higher operating income in our Pharmacy Services operation.

Consolidated operating income for the nine months ended September 30, 2014 was $55.6 million compared to $69.9 million for the same period in 2013. Consolidated operating margins were 4.3% and 5.8% for the nine month periods in 2014 and 2013, respectively.  The decrease in operating income and margin primarily resulted from higher corporate general and

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administrative expenses for legal costs and incentive compensation for stock option holders, lower operating income from our ResCare HomeCare, which were partially offset by higher operating income in our Residential Services operation.

Net interest expense increased $0.4 million for the third quarter of 2014 and $0.8 million for the nine months ended September 30, 2014, compared to the same periods in 2013. The increases for the three and nine month periods were due primarily to higher borrowing levels.  The 2014 nine month period also included $0.7 million related to a loss on extinguishment of debt from the refinancing that is further described in Note 4 to the Notes to the Condensed Consolidated Financial Statements. Our effective income tax rate for the nine months ended September 30, 2014 was 41.4% as compared to 27.8% over the same period in 2013.  The 2014 rate was negatively impacted by the expiration of jobs tax credits (not renewed for 2014), while the 2013 rate was favorably impacted by the renewal of jobs tax credits.  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.

Residential Services

Residential Services revenues for the quarter ended September 30, 2014 increased $20.8 million, or 9.2%, over the same period in 2013. This increase was due primarily to acquisitions of $19.3 million and net organic growth of $1.4 million. Operating margin was 11.8% for the quarter ended September 30, 2014 compared to 13.6% for the same period in 2013. The decrease in margin is primarily attributable to weak operating performance in our Kentucky and Texas operations, as well as higher bad debt and medical costs.

Residential Services revenues for the nine months ended September 30, 2014 increased $64.5 million, or 9.9%, over the same period in 2013. This increase was due primarily to acquisition of $61.8 million and net organic growth of $2.7 million. Operating margin was 12.4% for the nine months ended September 30, 2014 compared to 12.7% for the same period in 2013. The decrease in margin is primarily attributable to weak operating performance in our Kentucky and Texas operations, as well as higher bad debt, which were partially offset by lower medical costs.

ResCare HomeCare

ResCare HomeCare revenues for the quarter ended September 30, 2014 increased $0.5 million, or 0.5%, over the same period in 2013. This increase was due primarily to acquisition growth of $2.7 million, net organic growth of $0.7 million and rate/system changes of $0.5 million in certain states, which were partially offset by $3.4 million of unfavorable revenue reversals incurred in our Iowa operation due to a billing compliance audit matter discussed in Note 1.  Operating margin was 6.1% for the quarter ended September 30, 2014 compared to 10.6% for the same period in 2013.  The decrease in margin is primarily attributable to the $3.4 million of unfavorable revenue reversals incurred in our Iowa operation.

ResCare HomeCare revenues for the nine months ended September 30, 2014 increased $12.7 million, or 4.7%, over the same period in 2013. This increase was due primarily to acquisition of $11.5 million, net organic growth of $2.9 million and rate/system changes of $1.7 million in certain states, which were partially offset by $3.4 million of unfavorable revenue reversals incurred in our Iowa operation.  Operating margin was 7.8% for the nine months ended September 30, 2014 compared to 9.2% for the same period in 2013.  The decrease in margin is primarily attributable to the $3.4 million of unfavorable revenue reversals incurred in our Iowa operation.

Education & Training Services

Education & Training Services revenues for the quarter ended September 30, 2014 increased $0.9 million, or 3.0%, from the same period of 2013, due primarily to organic growth.  Operating margin was 8.1% for the quarter ended September 30, 2014 compared to 9.5% for the same period in 2013.  The decrease in margin is primarily attributable to higher general and administrative expenses.

Education & Training Services revenues for the nine months ended September 30, 2014 decreased $0.3 million, or 0.3%, from the same period of 2013.  Operating margin was 8.1% for the nine months ended September 30, 2014 compared to 7.8% for the same period in 2013.  The improvement in margin is primarily attributable to improved census in certain education related operations.

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Workforce Services

Workforce Services revenues for the quarter ended September 30, 2014 increased $1.4 million, or 3.4%, from the same period in 2013, due primarily to net contract wins/changes of $1.4 million.  Operating margin was 10.2% for the quarter ended September 30, 2014 compared to 12.1% for the same period in 2013.  The decrease was due primarily to lower operating performance and higher bad debt expense in certain TANF contracts.

Workforce Services revenues for the nine months ended September 30, 2014 increased $4.2 million, or 3.5%, from the same period in 2013, due primarily to net contract wins/changes of $3.9 million and net organic growth of $0.3 million.  Operating margin was 10.4% for the nine months ended September 30, 2014 compared to 10.8% for the same period in 2013.  The decrease was due primarily to lower operating performance and higher bad debt expense in certain TANF contracts.

Pharmacy Services

Pharmacy Services revenues for the quarter ended September 30, 2014 increased $4.2 million, or 23.4%, from the same period in 2013.  This increase was due primarily to organic growth.  Operating margin was 9.0% for the quarter ended September 30, 2014 compared to 4.7% for the same period in 2013.  The improvement in margin is primarily attributable to a favorable physical inventory valuation error that occurred in the second quarter of 2013 and was then reversed in the third quarter of 2013.

Pharmacy Services revenues for the nine months ended September 30, 2014 increased $14.0 million, or 28.1%, from the same period in 2013, due primarily to organic growth.  Operating margin was 7.7% for the nine months ended September 30, 2014 compared to 8.9% for the same period in 2013.  The reduction in margin is primarily attributable to higher product cost.

Corporate

Total corporate operating expenses represent corporate general and administrative expenses, as well as other operating income and expenses. Total expenses in the third quarter ended September 30, 2014 decreased $0.3 million compared to same period in 2013 due primarily to lower insurance costs of $4.3 million and lower compensation costs of $0.7 million, which were partially offset by higher legal costs of $5.0 million.  Total expenses in the first nine months of 2014 increased $17.9 million compared to first nine months of 2013 due primarily to $15.6 million of higher legal costs and $7.6 million of incentive compensation, which were partially offset by $5.1 million of lower insurance related costs.

Financial Condition, Liquidity and Capital Resources

Total assets increased $36.6 million, or 3.4%, at September 30, 2014 over balances at December 31, 2013.

Cash and cash equivalents were $25.9 million at September 30, 2014, as compared to $30.0 million at December 31, 2013. Cash provided by operations for the nine months ended September 30, 2014 was $60.7 million compared to $55.4 million for the nine months ended September 30, 2013.

Net accounts receivable at September 30, 2014 increased to $261.0 million, compared to $241.9 million at December 31, 2013. Days of revenue in net accounts receivable were 50 days at September 30, 2014 and December 31, 2013.

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

Cash used in investing activities at September 30, 2014 decreased $2.2 million compared to the same period in 2013 primarily due to lower amounts spent on acquisitions in 2014, which were partially offset by higher purchases of property and equipment in 2014.

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Our financing activities included net proceeds of debt and capital lease obligations of $93.4 million for the first nine months of 2014, which includes proceeds of $275 million related to the debt refinancing which is discussed below. This compares to a net payment of debt and capital lease obligations of $19.6 million for the same period in 2013.  During 2014, we paid a dividend to our shareholders of $122.4 million and paid $3.6 million in debt issuance costs due to the debt refinancing.  In addition to quarterly principal and seller note payments made in the nine months ended September 30, 2013, we made an additional required $4.3 million principal payment resulting from the annual Excess Cash Flow calculation, which was part of our financial covenants under the previous agreement.

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

On April 25, 2014, we entered into an amended and restated senior secured credit facility (the “2014 Credit Agreement”) in an aggregate principal amount of $650 million, which replaced our 2012 senior secured credit facility and the related term loan A. The 2014 Credit Agreement consists of a Term Loan A (the “Term Loan A”) in an aggregate principal amount of $200 million, a revolving credit facility (the “Revolving Facility”) in an aggregate principal amount of $250 million, and a Delayed-Draw Term Loan A (the “DDTL”) in an aggregate amount of $200 million.  At closing, proceeds from the new Term Loan A and Revolving Facility were used to (i) refinance the prior revolver and term loan A, (ii) fund 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.  We recorded a loss on extinguishment of debt of $0.7 million for the second quarter of 2014 and 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.

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

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Our obligations under capital leases are $21.3 million and $20.2 million as of September 30, 2014 and December 31, 2013, respectively.  These primarily relate to vehicle capital leases.  The current portion of these lease obligations was $6.6 million as of September 30, 2014 and $6.5 million as of December 31, 2013.

As of September 30, 2014, we had irrevocable standby letters of credit in the principal amount of $46.2 million issued primarily in connection with our insurance programs. As of September 30, 2014, we had $143.8 million available under the amended and restated revolving credit facility, with an outstanding balance of $60.0 million. Outstanding balances bear interest at 2.00% over the LIBOR or other bank developed rates at our option. As of September 30, 2014, the weighted average interest rate was 4%. Letters of credit had a borrowing rate of 2.38% as of September 30, 2014. The commitment fee on the unused balance was 0.35%. 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 September 30, 2014, and we believe we will continue to be in compliance with these covenants over the next twelve months. Our ability to achieve the thresholds provided for in the financial covenants largely depends upon continued profitability, reductions of amounts borrowed under the facility and continued cash collections.

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

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

Impact of Recently Issued Accounting Pronouncements

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

Item 3.Quantitative and Qualitative Disclosures about Market Risk

The market risk inherent in our financial instruments and positions represents the potential loss arising from adverse changes in interest rates. While we are exposed to changes in interest rates as a result of any outstanding variable rate debt, we do not currently utilize any derivative financial instruments related to our interest rate exposures. Our senior secured term loan and senior secured credit facility, which have interest rates based on margins over LIBOR or prime, and tiered based upon leverage calculations, had an outstanding balance of $256.5 million as of September 30, 2014 and $157.5 million as of December 31, 2013.  A 100 basis point movement in the interest rate sustained for one year would result in an approximate $2.6 million annualized effect on interest expense and cash flows.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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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.

PART II.OTHER INFORMATION

Item 1.Legal Proceedings

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

Item 1A.Risk Factors

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

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

None.

Item 3.Defaults upon Senior Securities

None.

Item 4.Mine Safety Disclosures

Not applicable.

Item 5.Other Information

None.

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Item 6.Exhibits

Exhibit		Description of Exhibit
*	31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended.
*	31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended.
*	32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*	101	The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements.

* Filed herewith

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SIGNATURES

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

			RES-CARE, INC.
			Registrant
Date:	November 10, 2014	By:	/s/ Ralph G. Gronefeld, Jr.
			Ralph G. Gronefeld, Jr.
			President and Chief Executive Officer
Date:	November 10, 2014	By:	/s/ D. Ross Davison
			D. Ross Davison
			Chief Financial Officer

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