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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2007
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 Commission file number: 1-10858
 Manor Care, Inc.
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    34-1687107
(IRS Employer
Identification No.)333 N. Summit Street, Toledo, Ohio
(Address of principal executive offices)
    
    43604-2617
(Zip Code)
 Registrants telephone number, including area code: (419) 252-5500
 þ o
  þ o o
 o þ




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##### 



Manor Care, Inc.
Form 10-Q
Table of Contents
 PageNumberPart I.
    
    Financial InformationItem 1.
    
    Financial Statements (Unaudited)Consolidated Balance Sheets - March 31, 2007 and December 31, 2006
    
    
    3Consolidated Statements of Income - Three months ended March 31, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows - Three months ended March 31, 2007 and 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4.
    
    Controls and Procedures
    
    
    19Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    20Item 1A.
    
    Risk Factors
    
    
    20Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 3.
    
    Defaults Upon Senior Securities
    
    
    20Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    20Item 5.
    
    Other Information
    
    
    20Item 6.
    
    Exhibits
    
    
    20Signatures
    
    
    
    
    21Exhibit Index
    
    
    
    
    22EX-10.1EX-31.1EX-31.2EX-32.1EX-32.2
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Part I. Financial Information
 
 Financial Statements.
 Manor Care, Inc.
 
  March 31,
    
    
    December 31,2007
    
    
    2006(Unaudited)
    
    
    (Note 1)(In thousands, except per share data)AssetsCurrent assets:Cash and cash equivalents
    
    $
    37,022
    
    
    $
    17,658Receivables, less allowances for doubtful
accounts of $78,595 and $74,644, respectively
    
    
    618,257
    
    
    
    565,831Prepaid expenses and other assets
    
    
    33,581
    
    
    
    34,924Deferred income taxes
    
    
    5,091
    
    
    
    781Total current assets
    
    
    693,951
    
    
    
    619,194Property and equipment, net of accumulated depreciation of $882,004 and $844,471, respectively
    
    
    1,492,771
    
    
    
    1,493,576Goodwill
    
    
    134,256
    
    
    
    132,997Intangible assets, net of amortization of $2,050 and $1,862,
respectively
    
    
    5,594
    
    
    
    5,782Other assets
    
    
    101,673
    
    
    
    146,928Total assets
    
    $
    2,428,245
    
    
    $
    2,398,477Liabilities And Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    122,504
    
    
    $
    120,621Employee compensation and benefits
    
    
    163,573
    
    
    
    165,001Accrued insurance liabilities
    
    
    108,640
    
    
    
    109,538Income tax payable
    
    
    29,797
    
    
    
    10,118Other accrued liabilities
    
    
    82,495
    
    
    
    79,904Long-term debt due within one year
    
    
    140,512
    
    
    
    38,447Total current liabilities
    
    
    647,521
    
    
    
    523,629Long-term debt
    
    
    814,817
    
    
    
    955,211Deferred income taxes
    
    
    69,018
    
    
    
    78,741Other liabilities
    
    
    285,800
    
    
    
    267,703Shareholders equity:Preferred stock, $.01 par value, 5 million shares authorizedCommon stock, $.01 par value, 300 million shares authorized,
111.0 million shares issued
    
    
    1,110
    
    
    
    1,110Capital in excess of par value
    
    
    415,883
    
    
    
    407,506Retained earnings
    
    
    1,454,241
    
    
    
    1,437,145Accumulated other comprehensive loss
    
    
    (13,270
    )
    
    
    (29,217
    )1,857,964
    
    
    
    1,816,544Less treasury stock, at cost (37.9 and 38.3 million shares,
respectively)
    
    
    (1,246,875
    )
    
    
    (1,243,351
    )Total shareholders equity
    
    
    611,089
    
    
    
    573,193Total liabilities and shareholders equity
    
    $
    2,428,245
    
    
    $
    2,398,477
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Manor Care, Inc.
 
   Three Months Ended March 31,2007
    
    
    2006(In thousands, except per share data)Revenues
    
    $
    959,066
    
    
    $
    869,295Expenses:Operating
    
    
    790,124
    
    
    
    722,910General and administrative
    
    
    73,503
    
    
    
    52,105Depreciation and amortization
    
    
    36,987
    
    
    
    35,942Asset impairment
    
    
    
    
    
    
    11,082900,614
    
    
    
    822,039Income before other income (expenses) and income taxes
    
    
    58,452
    
    
    
    47,256Other income (expenses):Interest expense
    
    
    (8,670
    )
    
    
    (7,140
    )Gain (loss) on sale of assets
    
    
    (4,771
    )
    
    
    58Equity in earnings of affiliated companies
    
    
    459
    
    
    
    1,586Interest income and other
    
    
    (134
    )
    
    
    835Total other expenses, net
    
    
    (13,116
    )
    
    
    (4,661
    )Income before income taxes
    
    
    45,336
    
    
    
    42,595Income taxes
    
    
    15,477
    
    
    
    15,590Income before cumulative effect
    
    
    29,859
    
    
    
    27,005Cumulative effect of change in accounting principle, net of tax
    
    
    
    
    
    
    (2,476
    )Net income
    
    $
    29,859
    
    
    $
    24,529Earnings per share  basic:Income before cumulative effect
    
    $
    .41
    
    
    $
    .34Cumulative effect
    
    
    
    
    
    
    (.03
    )Net income
    
    $
    .41
    
    
    $
    .31Earnings per share  diluted:Income before cumulative effect
    
    $
    .39
    
    
    $
    .33Cumulative effect
    
    
    
    
    
    
    (.03
    )Net income
    
    $
    .39
    
    
    $
    .30Weighted-average shares:Basic
    
    
    73,044
    
    
    
    78,923Diluted
    
    
    76,900
    
    
    
    80,841Cash dividends declared per common share
    
    $
    .17
    
    
    $
    .16
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Manor Care, Inc.
 
   Three Months Ended March 31,2007
    
    
    2006(In thousands)Operating ActivitiesNet income
    
    $
    29,859
    
    
    $
    24,529Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    36,987
    
    
    
    35,942Asset impairment and other non-cash charges
    
    
    24,936
    
    
    
    15,050Stock option and restricted stock compensation
    
    
    4,161
    
    
    
    6,664Provision for bad debts
    
    
    13,215
    
    
    
    11,786Deferred income taxes
    
    
    (14,033
    )
    
    
    (12,263
    )Net (gain) loss on sale of assets
    
    
    4,771
    
    
    
    (58
    )Equity in earnings of affiliated companies
    
    
    (459
    )
    
    
    (1,586
    )Changes in assets and liabilities, excluding sold facilities and acquisitions:Receivables
    
    
    (27,069
    )
    
    
    (24,897
    )Prepaid expenses and other assets
    
    
    (2,374
    )
    
    
    1,758Liabilities
    
    
    23,898
    
    
    
    16,025Total adjustments
    
    
    64,033
    
    
    
    48,421Net cash provided by operating activities
    
    
    93,892
    
    
    
    72,950Investing ActivitiesInvestment in property and equipment
    
    
    (31,504
    )
    
    
    (30,023
    )Investment in systems development
    
    
    (510
    )
    
    
    (1,001
    )Investment in partnership
    
    
    
    
    
    
    (1,228
    )Acquisitions
    
    
    (2,535
    )
    
    
    (298
    )Proceeds from sale of assets
    
    
    487Net cash used in investing activities
    
    
    (34,062
    )
    
    
    (32,550
    )Financing ActivitiesNet repayments under revolving credit facility
    
    
    (36,000
    )
    
    
    (22,800
    )Principal payments of long-term debt
    
    
    (2,329
    )
    
    
    (456
    )Purchase of common stock for treasury
    
    
    
    
    
    
    (5,042
    )Dividends paid
    
    
    (12,414
    )
    
    
    (12,622
    )Proceeds from exercise of stock options
    
    
    3,978
    
    
    
    6,569Excess tax benefits from share-based payment arrangements
    
    
    6,299
    
    
    
    4,170Net cash used in financing activities
    
    
    (40,466
    )
    
    
    (30,181
    )Net increase in cash and cash equivalents
    
    
    19,364
    
    
    
    10,219Cash and cash equivalents at beginning of period
    
    
    17,658
    
    
    
    12,293Cash and cash equivalents at end of period
    
    $
    37,022
    
    
    $
    22,512
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Manor Care, Inc.
 
   Note 1  Accounting Policies
 Basis of Presentation
    Comprehensive Income
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Goodwill
   Long-TermCare and
    
    
    Hospice andRehabilitation
    
    
    Home Health
    
    
    Other
    
    
    Total(In thousands)Balance at January 1, 2006
    
    $
    66,522
    
    
    $
    36,384
    
    
    $
    451
    
    
    $
    103,357Goodwill from acquisitions
    
    
    10,290
    
    
    
    19,350
    
    
    
    
    
    
    
    29,640Balance at December 31, 2006
    
    
    76,812
    
    
    
    55,734
    
    
    
    451
    
    
    
    132,997Goodwill from acquisitions
    
    
    1,259
    
    
    
    
    
    
    
    
    
    
    
    1,259Balance at March 31, 2007
    
    $
    78,071
    
    
    $
    55,734
    
    
    $
    451
    
    
    $
    134,256
 Insurance Liabilities
  New Accounting Standards
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Note 2  Divestitures
  Note 3  Debt
  Note 4  Income Taxes
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Note 5  Contingencies
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Note 6  Stock-Based Compensation
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Note 7  Earnings Per Share
  Three months ended March 31,2007
    
    
    2006(In thousands, except earnings per share)Numerator:Numerator for basic EPS  income before
cumulative effect
    
    $
    29,859
    
    
    $
    27,005After-tax amount of interest expense on
Convertible Senior Notes (Old Notes)
    
    
    28
    
    
    
    27Numerator for diluted EPS
    
    $
    29,887
    
    
    $
    27,032Denominator:Denominator for basic EPS  weighted-
average shares
    
    
    73,044
    
    
    
    78,923Effect of dilutive securities:Stock options
    
    
    779
    
    
    
    951Restricted stock or units
    
    
    95
    
    
    
    19Convertible Senior Notes
    
    
    2,982
    
    
    
    948Denominator for diluted EPS 
adjusted for weighted-average
shares and assumed conversions
    
    
    76,900
    
    
    
    80,841EPS  Income before cumulative effect:Basic
    
    $
    .41
    
    
    $
    .34Diluted
    
    $
    .39
    
    
    $
    .33
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Note 8  Employee Benefit Plans
   Three months ended March 31,2007
    
    
    2006(In thousands)Service cost
    
    $
    678
    
    
    $
    1,108Interest cost
    
    
    722
    
    
    
    1,035Expected return on plan assets
    
    
    (394
    )
    
    
    (1,045
    )Amortization of unrecognized transition asset
    
    
    (12
    )
    
    
    (12
    )Amortization of prior service cost
    
    
    488
    
    
    
    490Amortization of net loss
    
    
    220
    
    
    
    249Settlement loss
    
    
    24,804Net pension cost
    
    $
    26,506
    
    
    $
    1,825
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Note 9  Segment Information
  Long-TermCare and
    
    Hospice andRehabilitation
    
    Home Health
    
    Other
    
    Total(In thousands)Three months ended March 31, 2007Revenues from external customers
    
    $
    821,669
    
    
    $
    132,617
    
    
    $
    4,780
    
    
    $
    959,066Depreciation and amortization
    
    
    35,715
    
    
    
    955
    
    
    
    317
    
    
    
    36,987Operating margin
    
    
    155,730
    
    
    
    14,146
    
    
    
    (934
    )
    
    
    168,942Three months ended March 31, 2006Revenues from external customers
    
    $
    756,790
    
    
    $
    104,800
    
    
    $
    7,705
    
    
    $
    869,295Intersegment revenues
    
    
    
    
    
    
    
    
    
    
    975
    
    
    
    975Depreciation and amortization
    
    
    34,406
    
    
    
    709
    
    
    
    827
    
    
    
    35,942Operating margin
    
    
    130,124
    
    
    
    16,364
    
    
    
    (103
    )
    
    
    146,385
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Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Critical Accounting Policies
 General and Professional Liability.
 Workers Compensation Liability.
 Results of Operations 
Quarter Ended March 31, 2007 Compared with Quarter Ended March 31, 2006
 Overview.
  ̈
    
    We recorded a non-cash charge of $24.9 million ($15.6 million after tax, or $.20 per
share) as a result of the termination and full settlement of an overfunded defined benefit
pension plan, as discussed in Note 8 to our consolidated financial statements. ̈
    
    Our stock-based compensation expense of $10.2 million and deferred compensation expense
of $3.3 million were higher than normal. The expense for the quarter was higher than
normal by $7.7 million, or $.06 per share, primarily because of our stock price increase
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of over 15
percent for the quarter. Of the stock-based compensation and deferred compensation expense,
we recorded approximately 26 percent in operating expenses and the remaining amount in
general and administrative expenses. ̈
    
    We recorded a loss of $4.7 million ($3.0 million after tax, or $.04 per share) related
to the sale of our investment in two hospitals, as discussed in Note 2 to our consolidated
financial statements. ̈
    
    The items above were partially offset by a tax benefit of $1.4 million, or $.02 per
share, related primarily to tax credits from prior periods.
   ̈
    
    Our stock-based compensation expense of $12.0 million and deferred compensation expense
of $3.6 million were higher than normal. The expense for the quarter was higher than
normal by $11.3 million, or $.09 per share, primarily because of our stock price increase
of over 11 percent for the quarter, stock option grants that vested immediately as a result
of an option reload feature, and executive retirements that accelerated the amortization of
restricted stock expense. Of the stock-based compensation and deferred compensation
expense, we recorded approximately 20 percent in operating expenses and the remaining
amount in general and administrative expenses. ̈
    
    The cumulative effect of the change in accounting for SARs of $4.0 million ($2.5 million
after tax, or $.03 per share) was a result of the adoption of Statement 123R, as reported
on a separate line item in our income statement. We were required to change the
measurement method for our SARs liability from intrinsic value to fair value on January 1,
2006. ̈
    
    We recorded a charge of $11.1 million ($7.0 million after tax, or $.09 per share)
related to the write-down of our transcription business, which we sold in the fourth
quarter of 2006. We reported the charge on a separate line item in our income statement.
 Revenues.
  First Quarter2007
    
    2006
    
    IncreaseMedicare
    
    $
    406.49
    
    
    $
    375.59
    
    
    
    8
    %Medicaid
    
    $
    158.71
    
    
    $
    150.79
    
    
    
    5
    %Private and other (skilled only)
    
    $
    238.44
    
    
    $
    223.74
    
    
    
    7
    %
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Operating Expenses.
   General and Administrative Expenses.
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Interest Expense.
 Income Taxes.
 Financial Condition  March 31, 2007 and December 31, 2006
   Liquidity and Capital Resources
 Cash Flows.
 Investing Activities.
 Debt Agreement.
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Stock Purchase.
 Cash Dividends.
  Cautionary Statement Concerning Forward-Looking Statements
  18




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Quantitative and Qualitative Disclosures About Market Risk
  
 Controls and Procedures
  19




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Part II. Other Information
 
 Legal Proceedings.
  
 Risk Factors.
  
 Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Defaults Upon Senior Securities.
  
 Submission of Matters to a Vote of Security Holders.
  
 Other Information.
  
 Exhibits.
 S-K Item601 No.10.1
    
    Employment Agreement by and among Richard A. Parr II, Heartland Employment Services, LLC, and
Manor Care, Inc.31.1
    
    Chief Executive Officer Certification31.2
    
    Chief Financial Officer Certification32.1
    
    Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
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Signatures
  Manor Care, Inc.
(Registrant)Date May 7, 2007
    
    By
    
    /s/ Steven M. CavanaughSteven M. Cavanaugh, Vice Presidentand Chief Financial Officer
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Exhibit Index
 Exhibit10.1
    
    Employment Agreement by and among Richard A. Parr II, Heartland Employment Services, LLC, and
Manor Care, Inc.31.1
    
    Chief Executive Officer Certification31.2
    
    Chief Financial Officer Certification32.1
    
    Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
 22