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EX-31.2 - EX-31.2 - Agiliti Health, Inc.uhsi-20160930ex3125f1c9d.htm
EX-32.2 - EX-32.2 - Agiliti Health, Inc.uhsi-20160930ex32223d378.htm
EX-32.1 - EX-32.1 - Agiliti Health, Inc.uhsi-20160930ex3218d3443.htm
EX-31.1 - EX-31.1 - Agiliti Health, Inc.uhsi-20160930ex31136e62a.htm
EX-10.3 - EX-10.3 - Agiliti Health, Inc.uhsi-20160930ex1033ee79f.htm
EX-10.2 - EX-10.2 - Agiliti Health, Inc.uhsi-20160930ex102f83037.htm
EX-10.1 - EX-10.1 - Agiliti Health, Inc.uhsi-20160930ex10186ff69.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

 

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2016

 

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: 000-20086

 

UNIVERSAL HOSPITAL SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

41-0760940

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

6625 West 78th Street, Suite 300

Minneapolis, Minnesota 55439-2604

(Address of principal executive offices, including zip code)

 

(952) 893-3200

(Registrant’s telephone number, including area code)

 

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 12 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 ☒  No ☐

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

 

 

 

 

 

 

 

Large accelerated filer

 

 

Accelerated filer

 

Non-accelerated filer

 

 

Smaller reporting company

 

(Do not check if a smaller reporting company)

 

 

 

 

 

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

 

Number of shares of common stock outstanding as of November 7, 2016:  1,000

 

 

 


 

Universal Hospital Services, Inc.

Table of Contents

 

 

 

 

 

 

 

 

 

 

Page

PART I -  FINANCIAL INFORMATION 

 

 

 

 

 

 

 

ITEM 1. 

 

Consolidated Financial Statements (unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets —September 30, 2016 and December 31, 2015

 

 

 

 

 

 

 

 

Consolidated Statements of Operations—Three and nine months ended September 30, 2016 and 2015

 

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Loss —Three and nine months ended September 30, 2016 and 2015

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows — Three and nine months ended September 30, 2016 and 2015

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

 

 

ITEM 2. 

 

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

 

28 

 

 

 

 

 

ITEM 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

39 

 

 

 

 

 

ITEM 4. 

 

Controls and Procedures

 

40 

 

 

 

 

 

PART II - OTHER INFORMATION 

 

 

 

 

 

 

 

ITEM 1. 

 

Legal Proceedings

 

40 

 

 

 

 

 

ITEM 1A. 

 

Risk Factors

 

40 

 

 

 

 

 

ITEM 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

40 

 

 

 

 

 

ITEM 3. 

 

Defaults Upon Senior Securities

 

40 

 

 

 

 

 

ITEM 4. 

 

Mine Safety Disclosures

 

40 

 

 

 

 

 

ITEM 5. 

 

Other Information

 

40 

 

 

 

 

 

ITEM 6. 

 

Exhibits

 

42 

 

 

 

 

 

Signatures 

 

 

 

42 

 

1


 

PART I - FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements — Unaudited

Universal Hospital Services, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

2016

 

2015

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Accounts receivable, less allowance for doubtful accounts of  $1,400 at September 30, 2016 and $1,500 at December 31, 2015

 

$

82,013

 

$

71,252

Inventories

 

 

8,547

 

 

8,506

Other current assets

 

 

6,836

 

 

5,834

Total current assets

 

 

97,396

 

 

85,592

Property and equipment:

 

 

 

 

 

 

Medical equipment

 

 

596,533

 

 

590,091

Property and office equipment

 

 

91,644

 

 

85,341

Accumulated depreciation

 

 

(491,382)

 

 

(462,818)

Total property and equipment, net

 

 

196,795

 

 

212,614

Other long-term assets:

 

 

 

 

 

 

Goodwill

 

 

336,595

 

 

336,595

Other intangibles, net

 

 

153,992

 

 

162,354

Other

 

 

1,609

 

 

420

Total assets

 

$

786,387

 

$

797,575

Liabilities and Deficit

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of long-term debt

 

$

5,562

 

$

4,867

Book overdrafts

 

 

3,559

 

 

6,444

Accounts payable

 

 

23,507

 

 

31,073

Accrued compensation

 

 

13,979

 

 

23,600

Accrued interest

 

 

6,405

 

 

18,742

Dividend payable

 

 

 —

 

 

24

Other accrued expenses

 

 

16,660

 

 

14,564

Total current liabilities

 

 

69,672

 

 

99,314

Long-term debt, less current portion

 

 

707,309

 

 

682,591

Pension and other long-term liabilities

 

 

11,655

 

 

11,869

Deferred income taxes, net

 

 

53,140

 

 

52,959

Commitments and contingencies (Note 8)

 

 

 

 

 

 

Deficit

 

 

 

 

 

 

Common stock, $0.01 par value; 1,000 shares authorized, issued and outstanding at September 30, 2016 and December 31, 2015

 

 

 —

 

 

 —

Additional paid-in capital

 

 

244,183

 

 

241,833

Accumulated deficit

 

 

(292,165)

 

 

(283,066)

Accumulated other comprehensive loss

 

 

(7,610)

 

 

(8,165)

Total Universal Hospital Services, Inc. deficit

 

 

(55,592)

 

 

(49,398)

Noncontrolling interest

 

 

203

 

 

240

Total deficit

 

 

(55,389)

 

 

(49,158)

Total liabilities and deficit

 

$

786,387

 

$

797,575

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

2


 

 

Universal Hospital Services, Inc.

Consolidated Statements of Operations

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

    

2016

    

2015

    

2016

    

2015

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Medical equipment solutions

 

$

73,463

 

$

68,985

 

$

228,633

 

$

214,154

Clinical engineering solutions

 

 

26,926

 

 

25,401

 

 

77,968

 

 

74,581

Surgical services

 

 

17,559

 

 

16,727

 

 

51,091

 

 

48,154

Total revenues

 

 

117,948

 

 

111,113

 

 

357,692

 

 

336,889

Cost of Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Cost of medical equipment solutions

 

 

33,146

 

 

30,134

 

 

104,640

 

 

92,466

Cost of clinical engineering solutions

 

 

21,278

 

 

20,063

 

 

61,946

 

 

59,333

Cost of surgical services

 

 

9,461

 

 

8,780

 

 

27,183

 

 

25,681

Medical equipment depreciation

 

 

15,545

 

 

16,590

 

 

46,792

 

 

50,225

Total costs of revenues

 

 

79,430

 

 

75,567

 

 

240,561

 

 

227,705

Gross margin

 

 

38,518

 

 

35,546

 

 

117,131

 

 

109,184

Selling, general and administrative

 

 

28,757

 

 

30,633

 

 

88,853

 

 

91,825

(Gain) on settlement

 

 

 —

 

 

 —

 

 

(2,750)

 

 

(5,718)

Operating income

 

 

9,761

 

 

4,913

 

 

31,028

 

 

23,077

Interest expense

 

 

13,081

 

 

13,250

 

 

39,210

 

 

39,810

Loss before income taxes and noncontrolling interest

 

 

(3,320)

 

 

(8,337)

 

 

(8,182)

 

 

(16,733)

Provision for income taxes

 

 

290

 

 

210

 

 

677

 

 

559

Consolidated net loss

 

 

(3,610)

 

 

(8,547)

 

 

(8,859)

 

 

(17,292)

Net income attributable to noncontrolling interest

 

 

105

 

 

121

 

 

240

 

 

341

Net loss attributable to Universal Hospital Services, Inc.

 

$

(3,715)

 

$

(8,668)

 

$

(9,099)

 

$

(17,633)

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

3


 

Universal Hospital Services, Inc.

Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

    

2016

    

2015

    

2016

    

2015

Consolidated net loss

 

$

(3,610)

 

$

(8,547)

 

$

(8,859)

 

$

(17,292)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

Gain on minimum pension liability, net of tax of $0

 

 

185

 

 

244

 

 

555

 

 

732

Total other comprehensive income

 

 

185

 

 

244

 

 

555

 

 

732

Comprehensive loss

 

 

(3,425)

 

 

(8,303)

 

 

(8,304)

 

 

(16,560)

Comprehensive income attributable to noncontrolling interest

 

 

105

 

 

121

 

 

240

 

 

341

Comprehensive loss attributable to Universal Hospital Services, Inc.

 

$

(3,530)

 

$

(8,424)

 

$

(8,544)

 

$

(16,901)

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

4


 

Universal Hospital Services, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30,

 

    

2016

    

2015

Cash flows from operating activities:

 

 

 

 

 

 

Consolidated net loss

 

$

(8,859)

 

$

(17,292)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation

 

 

54,966

 

 

57,413

Asset impairment charges

 

 

 —

 

 

2,339

Amortization of intangibles, deferred financing costs and bond premium

 

 

8,736

 

 

9,664

Provision for doubtful accounts

 

 

3

 

 

208

Provision for inventory obsolescence

 

 

255

 

 

299

Non-cash share-based compensation expense

 

 

2,272

 

 

1,902

Gain on sales and disposals of equipment

 

 

(2,990)

 

 

(3,547)

Deferred income taxes

 

 

181

 

 

697

Interest on note receivable

 

 

(7)

 

 

 —

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(10,764)

 

 

(2,533)

Inventories

 

 

(296)

 

 

(405)

Other operating assets

 

 

(1,201)

 

 

542

Accounts payable

 

 

(763)

 

 

595

Other operating liabilities

 

 

(19,021)

 

 

(6,636)

Net cash provided by operating activities

 

 

22,512

 

 

43,246

Cash flows from investing activities:

 

 

 

 

 

 

Medical equipment purchases

 

 

(41,293)

 

 

(38,771)

Property and office equipment purchases

 

 

(3,655)

 

 

(3,148)

Proceeds from disposition of property and equipment

 

 

8,907

 

 

10,799

Issuance of note receivable from officer

 

 

(983)

 

 

 —

Acquisition

 

 

 —

 

 

(2,600)

Net cash used in investing activities

 

 

(37,024)

 

 

(33,720)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds under senior secured credit facility

 

 

131,700

 

 

104,952

Payments under senior secured credit facility

 

 

(108,800)

 

 

(108,900)

Payments of principal under capital lease obligations

 

 

(4,683)

 

 

(5,756)

Payments of deferred financing costs

 

 

(97)

 

 

 —

Holdback payment related to acquisition

 

 

(500)

 

 

 —

Distributions to noncontrolling interests

 

 

(277)

 

 

(360)

Contributions from new members to limited liability company

 

 

 —

 

 

70

Dividend and equity distribution payments

 

 

(24)

 

 

(39)

Proceeds from exercise of parent company stock options

 

 

78

 

 

 —

Change in book overdrafts

 

 

(2,885)

 

 

507

Net cash provided by (used in) financing activities

 

 

14,512

 

 

(9,526)

Net change in cash and cash equivalents

 

 

 —

 

 

 —

Cash and cash equivalents at the beginning of period

 

 

 —

 

 

 —

Cash and cash equivalents at the end of period

 

$

 —

 

$

 —

Supplemental cash flow information:

 

 

 

 

 

 

Interest paid

 

$

51,119

 

$

51,432

Income taxes paid

 

 

619

 

 

728

Non-cash activities:

 

 

 

 

 

 

Medical equipment purchases included in accounts payable (at end of period)

 

$

4,788

 

$

10,906

Capital lease additions

 

 

6,920

 

 

7,108

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

5


 

Universal Hospital Services, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.Basis of Presentation

 

The interim consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared by Universal Hospital Services, Inc. (“we”, “our”, “us”, the “Company”, or “UHS”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted, pursuant to such rules and regulations.  These consolidated financial statements should be read in conjunction with the financial statements and related notes included in the Company’s 2015 Annual Report on Form 10-K filed with the SEC.

 

The interim consolidated financial statements presented herein as of September 30, 2016, reflect, in the opinion of management, all adjustments necessary for a fair presentation of the financial position and the results of operations and cash flows for the periods presented.  These adjustments are all of a normal, recurring nature.  The results of operations for any interim period are not necessarily indicative of results for the full year.

 

We are required to make estimates and assumptions about future events in preparing consolidated financial statements in conformity with GAAP.  These estimates and assumptions affect the amounts of assets, liabilities, revenues and expenses at the date of the unaudited consolidated financial statements.  While we believe that our past estimates and assumptions have been materially accurate, our current estimates are subject to change if different assumptions as to the outcome of future events are made.  We evaluate our estimates and judgments on an ongoing basis and predicate those estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances.  We make adjustments to our assumptions and judgments when facts and circumstances dictate.  Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates used in preparing the accompanying unaudited consolidated financial statements.

 

A description of our significant accounting policies is included in our 2015 Annual Report on Form 10-K. There have been no material changes to these policies for the quarter ended September 30, 2016.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of UHS and its 100%-owned subsidiary, UHS Surgical Services, Inc. (“Surgical Services”). In addition, in accordance with guidance issued by the Financial Accounting Standards Board (“FASB”), we have accounted for our equity investments in entities in which we are the primary beneficiary under the full consolidation method. All significant intercompany transactions and balances have been eliminated through consolidation. As the primary beneficiary, we consolidate the limited liability companies (“LLCs”) referred to in Note 10, Limited Liability Companies, as we effectively receive the majority of the benefits from such entities and we provide equipment lease guarantees for such entities.

 

2.Recent Accounting Pronouncements

 

Standards Adopted

 

In November 2015, the FASB issued ASU No. 2015-17 Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”) to simplify the presentation of deferred income taxes. ASU 2015-17 requires an entity with a classified balance sheet to present all deferred tax assets and liabilities as noncurrent. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2016. Early adoption is permitted. We have elected to early adopt ASU 2015-17 as of December 31, 2015 and retrospectively applied ASU 2015-17 to all periods presented. 

 

In April 2015, the FASB issued ASU No. 2015-03 Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The ASU is

6


 

effective for annual and interim periods in fiscal years beginning after December 15, 2015. We adopted ASU 2015-03 as of January 1, 2016 and retrospectively applied ASU 2015-03 to all periods presented. As a result, $10.3 million of deferred financing costs in other long-term assets were netted to long-term debt on the 2015 Consolidated Balance Sheets.

 

In February 2015, the FASB issued ASU No. 2015-02 Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 changes the evaluation of whether limited partnerships (and similar legal entities) are variable interest entities (VIEs) and eliminates the presumption that a general partner should consolidate a limited partnership that is a voting interest entity. The new guidance also alters the analysis for determining when fees paid to a decision maker or service provider represent a variable interest in a VIE and how interests of related parties affect the primary beneficiary determination. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2015. The adoption of this standard does not have a material impact on our consolidated financial statements.

 

Standards Not Yet Adopted

 

In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in the GAAP when it becomes effective. The new standard is effective beginning after December 15, 2016 and interim periods within those years. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting. On July 9, 2015, the FASB approved a one-year deferral of the effective date for ASU 2014-09, but would permit companies to adopt the standard as of the original effective date.

 

In August 2014, the FASB issued ASU No. 2014-15 Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern  (“ASU 2014-15”), which requires management to evaluate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern and whether or not it is probable that the entity will be unable to meet its obligations as they become due within one year after the date the financial statements are issued. The new standard is effective beginning after December 15, 2016 and interim periods within those years. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.

 

In July 2015, the FASB issued ASU No. 2015-11 Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-03 changes the measurement principle for inventory from lower of cost or market to lower of cost and net realizable value for entities that do not measure inventory using the last in, first out or retail inventory method. The ASU also eliminates the requirement for these entities to consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02 on Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liability on the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted. We are evaluating the effect that ASU 2016-02 will have on our consolidated financial statements and related disclosures.

 

In March 2016, the FASB issued ASU No. 2016-08 Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”). ASU 2016-08 amends the principal versus agent guidance in ASU 2014-09, Revenue from Contracts with Customers, and clarifies that the analysis must focus on whether the entity has control of the goods and services before they are transferred to the customer. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted but not before annual reporting periods beginning after December 15, 2016. We are evaluating the effect that ASU 2016-08 will have on our consolidated financial statements and related disclosures.

 

7


 

In March 2016, the FASB issued ASU No. 2016-09 Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 was issued as part of the FASB’s simplification initiative and intends to improve the accounting for share-based payment transactions. The areas for simplification in this ASU involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2016. Early adoption is permitted in any interim or annual period provided that the entire ASU is adopted. If an entity early adopts the ASU in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.

 

In April 2016, the FASB issued ASU No. 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”). ASU 2016-10 amends the guidance in ASU 2014-09 about identifying performance obligations and accounting for licenses of intellectual property. The ASU is effective on adoption of ASU 2014-09.

 

In May 2016, the FASB issued ASU No. 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”). ASU 2016-12 makes narrow-scope amendments to ASU 2014-09 and provides practical expedients to simplify the transition to the new standard and to clarify certain aspects of the standard. The ASU is effective on adoption of ASU 2014-09.

 

In August 2016, the FASB issued ASU No. 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.

 

3.Fair Value Measurements

 

Financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015 are summarized in the following table by type of inputs applicable to the fair value measurements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value at September 30, 2016

 

Fair Value at December 31, 2015

(in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

    

Level 1

    

Level 2

    

Level 3

    

Total

Contingent Consideration

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

502

 

$

502

 

A description of the inputs used in the valuation of assets and liabilities is summarized as follows:

 

Level 1 — Inputs represent unadjusted quoted prices for identical assets or liabilities exchanged in active markets.

 

Level 2 — Inputs include directly or indirectly observable inputs other than Level 1 inputs such as quoted prices for similar assets or liabilities exchanged in active or inactive markets; quoted prices for identical assets or liabilities exchanged in inactive markets; other inputs that are considered in fair value determinations of the assets or liabilities, such as interest rates and yield curves that are observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks and default rates; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

Level 3 — Inputs include unobservable inputs used in the measurement of assets and liabilities. Management is required to use its own assumptions regarding unobservable inputs because there is little, if any, market activity in the assets or liabilities or related observable inputs that can be corroborated at the measurement date. Measurements of non-exchange traded derivative contract assets and liabilities are primarily based on valuation models, discounted cash flow models or other valuation techniques that are believed to be used by market participants. Unobservable inputs require management to make certain projections and assumptions about the information that would be used by market participants in pricing assets or liabilities.

 

8


 

During 2012, we recorded a contingent consideration liability, in the form of an earn-out payment, related to our acquisitions. During 2015, we recorded a holdback liability related to our acquisition. The contingent consideration and holdback payments are based on achieving certain revenue results. The fair value of the liability was estimated using a discounted cash flow approach with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement.  The significant inputs in the Level 3 measurement not supported by market activity included our assessments of expected future cash flows during the earn-out period, related to the assets acquired, appropriately discounted considering the uncertainties associated with the obligation, and calculated based on estimated revenues in accordance with the terms of the agreements. During the three months ended September 30, 2016 and 2015, we made no payment in earn-outs and holdback.  During the nine months ended September 30, 2016 and 2015, we paid $0.5 and $0.02 million, respectively, in earn-outs and holdback. 

 

The assumptions used in preparing the discounted cash flow analysis included estimates of interest rates and the timing and amount of incremental cash flows.

 

A reconciliation of the beginning and ending balance for the Level 3 measurement are as follows:

 

 

 

 

 

 

(in thousands)

    

    

 

Balance at December 31, 2015

 

$

502

Payments

 

 

(502)

Balance at September 30, 2016

 

$

 —

 

Fair Value of Other Financial Instruments

 

The Company considers that the carrying amount of financial instruments, including accounts receivable, accounts payable, accrued liabilities and senior secured credit facility, approximates fair value due to their short maturities. The fair value of our outstanding Original Notes and Add-on Notes (each as defined in Note 7, Long-Term Debt) as of September 30, 2016 and December 31, 2015, based on the quoted market price for the same or similar issues of debt, which represents a Level 2 fair value measurement, is approximately:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

December 31, 2015

 

    

Carrying

    

Fair

    

Carrying

    

Fair

(in thousands)

 

Value

 

Value

 

Value

 

Value

Original notes - 7.625% (1)

 

$

420,211

 

$

404,813

 

$

419,274

 

$

401,094

Add-on notes - 7.625% (2)

 

 

226,076

 

 

209,550

 

 

227,029

 

 

207,625

(1) The carrying value of the Original notes - 7.625% is net of unamortized deferred financing costs of $4.8 and $5.7 million as of September 30, 2016 and December 31, 2015, respectively.

(2) The carrying value of the Add-on notes - 7.625% is net of unamortized deferred financing costs of $2.0 and $2.4 million as of September 30, 2016 and December 31, 2015, respectively, and includes unamortized bond premium of $8.1 and $9.4 million as of September 30, 2016 and December 31, 2015, respectively.

 

4.Goodwill and Other Intangible Assets

 

Our goodwill as of September 30, 2016 and December 31, 2015, by reporting segment, consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Medical

    

Clinical

    

    

    

    

 

 

 

Equipment

 

Engineering

 

Surgical

 

 

 

(in thousands)

 

Solutions

 

Solutions

 

Services

 

Total

Balance at December 31, 2015

 

$

227,486

 

$

55,655

 

$

53,454

 

$

336,595

Acquisition

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Balance at September 30, 2016

 

$

227,486

 

$

55,655

 

$

53,454

 

$

336,595

 

9


 

Our other intangible assets as of September 30, 2016 and December 31, 2015 consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

December 31, 2015

 

    

    

    

Accumulated

    

 

    

    

    

    

    

Accumulated

    

 

    

    

(in thousands)

 

Cost

 

Amortization

 

Impairment

 

Net

 

Cost

 

Amortization

 

Impairment

 

Net

Finite-life intangibles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationship

 

$

117,039

 

$

(95,742)

 

$

 —

 

$

21,297

 

$

117,039

 

$

(89,663)

 

$

 —

 

$

27,376

Supply agreement

 

 

26,000

 

 

(24,548)

 

 

 —

 

 

1,452

 

 

26,000

 

 

(22,369)

 

 

 —

 

 

3,631

Non-compete agreements

 

 

948

 

 

(805)

 

 

 —

 

 

143

 

 

948

 

 

(701)

 

 

 —

 

 

247

Total finite-life intangibles

 

 

143,987

 

 

(121,095)

 

 

 —

 

 

22,892

 

 

143,987

 

 

(112,733)

 

 

 —

 

 

31,254

Indefinite-life intangibles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade names

 

 

166,000

 

 

 —

 

 

(34,900)

 

 

131,100

 

 

166,000

 

 

 —

 

 

(34,900)

 

 

131,100

Total intangible assets

 

$

309,987

 

$

(121,095)

 

$

(34,900)

 

$

153,992

 

$

309,987

 

$

(112,733)

 

$

(34,900)

 

$

162,354

 

Total amortization expense related to intangible assets were $2.6 and $3.0 million for the three months ended September 30, 2016 and 2015, respectively, and $8.4 and $9.1 million for the nine months ended September 30, 2016 and 2015, respectively.

 

The estimated future amortization expense for identifiable intangible assets during the remainder of 2016 and the next five years is as follows:

 

 

 

 

 

 

(in thousands)

    

    

 

Remainder of 2016

 

$

2,609

2017

 

 

7,679

2018

 

 

6,095

2019

 

 

3,529

2020

 

 

1,537

2021

 

 

877

 

 

 

 

5.Deficit

 

The following tables represent changes in deficit that are attributable to our shareholders and noncontrolling interests for the nine month periods ended September 30, 2016 and 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

Accumulated

    

    

 

    

    

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

 

 

Paid-in

 

Accumulated

 

Comprehensive

 

Noncontrolling

 

Total

(in thousands)

 

Capital

 

Deficit

 

Loss

 

Interests

 

Deficit

Balance at December 31, 2015

 

$

241,833

 

$

(283,066)

 

$

(8,165)

 

$

240

 

$

(49,158)

Net (loss) income

 

 

 —

 

 

(9,099)

 

 

 —

 

 

240

 

 

(8,859)

Other comprehensive income

 

 

 —

 

 

 —

 

 

555

 

 

 —

 

 

555

Share-based compensation

 

 

2,272

 

 

 —

 

 

 —

 

 

 —

 

 

2,272

Stock options exercised

 

 

78

 

 

 —

 

 

 —

 

 

 —

 

 

78

Cash distributions to noncontrolling interests

 

 

 —

 

 

 —

 

 

 —

 

 

(277)

 

 

(277)

Balance at September 30, 2016

 

$

244,183

 

$

(292,165)

 

$

(7,610)

 

$

203

 

$

(55,389)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

Accumulated

    

    

 

    

    

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

 

 

Paid-in

 

Accumulated

 

Comprehensive

 

Noncontrolling

 

Total

(in thousands)

 

Capital

 

Deficit

 

Loss

 

Interests

 

Deficit

Balance at December 31, 2014

 

$

214,514

 

$

(254,418)

 

$

(9,062)

 

$

219

 

$

(48,747)

Net (loss) income

 

 

 —

 

 

(17,633)

 

 

 —

 

 

341

 

 

(17,292)

Other comprehensive income

 

 

 —

 

 

 —

 

 

732

 

 

 —

 

 

732

Cash distributions to noncontrolling interests

 

 

 —

 

 

 —

 

 

 —

 

 

(360)

 

 

(360)

Contributions from new members to limited liability company

 

 

 —

 

 

 —

 

 

 —

 

 

70

 

 

70

Balance at September 30, 2015

 

$

214,514

 

$

(272,051)

 

$

(8,330)

 

$

270

 

$

(65,597)

 

10


 

 

 

 

6.Share-Based Compensation

 

During the nine months ended September 30, 2016, activity under the 2007 Stock Option Plan (the “2007 Stock Option Plan”), of UHS Holdco, Inc., our parent company (“Parent”), was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

 

    

Weighted

 

 

 

 

 

 

 

 

 

 

average

 

 

 

 

Weighted

 

Aggregate

 

remaining

 

 

Number of

 

average

 

intrinsic

 

contractual

(in thousands, except exercise price and years)

 

options

 

exercise price

 

value

 

term (years)

Outstanding at December 31, 2015

 

33,889

 

$

0.71

 

$

10,506

 

8.9

Granted

 

5,823

 

 

1.02

 

 

 

 

 

Exercised

 

(111)

 

 

0.71

 

$

34

 

 

Forfeited or expired

 

(3,460)

 

 

0.71

 

 

 

 

 

Outstanding at September 30, 2016

 

36,141

 

$

0.76

 

$

9,414

 

8.1

Exercisable at September 30, 2016

 

12,074

 

$

0.71

 

$

3,743

 

8.1

Remaining authorized options available for issue

 

7,434

 

 

 

 

 

 

 

 

 

The exercise price of the stock option award is equal to the market value of Parent’s common stock on the grant date as determined reasonably and in good faith by Parent’s Board of Directors and compensation committee and based on an analysis of a variety of factors, including peer group multiples, merger and acquisition multiples, and discounted cash flow analyses.

 

The intrinsic value of a stock award is the amount by which the market value of the underlying stock exceeds the exercise price of the award.

 

We determine the fair value of stock options using the Black-Scholes option pricing model. The estimated fair value of options, including the effect of estimated forfeitures, is recognized as an expense on a straight-line basis over the options’ expected vesting periods. The following assumptions were used in determining the fair value of stock options granted during the nine months ended September 30, 2016 and 2015 under the Black-Scholes model.

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30,

 

 

2016

 

 

2015

 

Risk-free interest rate

 

1.50

%

 

 

1.70

%

Expected volatility

 

30.9

%

 

 

27.0

%

Dividend yield

 

N/A

 

 

 

N/A

 

Expected option life (years)

 

5.83

 

 

 

5.23

 

Black-Scholes Value of options

$

0.33

 

 

$

0.20

 

 

Expected volatility is based on an independent valuation of the stock of companies within our peer group. Given the lack of a true comparable company, the peer group consists of selected public health care companies representing our suppliers, customers and competitors within certain product lines. The risk free-interest rate is based on the U.S. Treasury yield curve in effect at the grant date based on the expected option life. The expected option life is estimated based on foreseeable trends.

 

At September 30, 2016, unearned non-cash share-based compensation that we expect to recognize as expense over a weighted average period of 1.9 years totals approximately $5.5 million, net of our estimated forfeiture rate of 2.0%. The expense could be accelerated upon the sale of Parent or the Company.

 

In April 2015, Parent granted the Company’s Chief Executive Officer 7.0 million restricted stock units which vest over four years. Total compensation expense related to this grant was $0.3 million and $0.3 million for the three months ended September 30, 2016 and 2015, respectively, and $0.9 million and $0.6 million for the nine months ended September 30, 2016 and 2015, respectively.

11


 

 

Although Parent grants stock options and restricted stock units, the Company recognizes compensation cost, primarily included in Selling, General and Administrative expense, related to these options and units since the services are performed for its benefit.

 

7.Long-Term Debt

 

Long-term debt consists of the following:

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

(in thousands)

 

2016

 

2015

Original notes - 7.625% (1)

 

$

420,211

 

$

419,274

Add-on notes - 7.625% (2)

 

 

226,076

 

 

227,029

Senior secured credit facility (3)

 

 

49,005

 

 

25,811

Capital lease obligations

 

 

17,579

 

 

15,344

 

 

 

712,871

 

 

687,458

Less: Current portion of long-term debt

 

 

(5,562)

 

 

(4,867)

Total long-term debt

 

$

707,309

 

$

682,591

(1)

The carrying value of the Original notes - 7.625% is net of unamortized deferred financing costs of $4.8 and $5.7 million as of September 30, 2016 and December 31, 2015, respectively.

(2)

The carrying value of the Add-on notes - 7.625% is net of unamortized deferred financing costs of $2.0 and $2.4 million as of September 30, 2016 and December 31, 2015, respectively, and includes unamortized bond premium of $8.1 and $9.4 million as of September 30, 2016 and December 31, 2015, respectively.

(3)

The carrying value of the Senior secured credit facility is net of unamortized deferred financing costs of $1.9 and $2.2 million as of September 30, 2016 and December 31, 2015, respectively.

 

Original Notes and Add-on Notes — 7.625%. On August 7, 2012, we issued $425.0 million in aggregate principal amount of 7.625% Second Lien Senior Secured Notes due 2020 (the “Original Notes”) under an indenture dated as of August 7, 2012 (the “2012 Indenture”). On February 12, 2013, we issued $220.0 million in aggregate principal amount of 7.625% Second Lien Senior Secured Notes due 2020 (the “Add-on Notes”, and along with the Original Notes, the “2012 Notes”) as “additional notes” pursuant to the 2012 Indenture. The 2012 Notes mature on August 15, 2020.

 

The 2012 Indenture provides that the 2012 Notes are our second lien senior secured obligations and are fully and unconditionally guaranteed on a second lien senior secured basis by our existing and certain of our future 100%-owned domestic subsidiaries.

 

Interest on the 2012 Notes is payable entirely in cash, semiannually, in arrears, on February 15 and August 15 of each year, beginning on February 15, 2013. We may redeem some or all of the 2012 Notes at the redemption prices set forth in the 2012 Indenture.  If we sell certain assets or undergo certain kinds of changes of control, we must offer to repurchase the 2012 Notes.

 

Our 2012 Notes are subject to certain debt covenants which are described below under the heading “2012 Indenture”.

 

Senior Secured Credit Facility.  On November 24, 2015, we entered into a Third Amended and Restated Credit Agreement with Bank of America, N.A., as agent for the lenders, and the lenders party thereto (the “Third Amended Credit Agreement”), which amended our then-existing senior secured credit facility originally dated as of May 31, 2007 and amended and restated as of May 6, 2010 and as of July 31, 2012.  We refer to the third amended and restated senior secured credit facility as the “senior secured credit facility.” The senior secured credit facility is a first lien senior secured asset based revolving credit facility that is available for working capital and general corporate purposes, including permitted investments, capital expenditures and debt repayments, on a fully revolving basis, subject to the terms and conditions set forth in the credit documents in the form of revolving loans, swing line loans and letters of credit. The Third Amended Credit Agreement extended the maturity date of the revolving loans to the earliest of (i) November 24, 2020 and (ii) 90 days prior to the maturity of the 2012 Notes, and reduced (a) the interest rate applicable to borrowings under the Third Amended Credit Agreement to a per annum rate, determined based on our usage of the credit facility as provided in the Third Amended Credit Agreement, ranging from 1.50% to 2.00% above the adjusted LIBOR rate used by

12


 

the agent or, at our option, 0.50% to 1.00% above the Base Rate as defined in the Third Amended Credit Agreement and (b) the unused line fee rate to 0.25%.  Our obligations under the Third Amended Credit Agreement are secured by a first priority security interest in substantially all of the assets of the Company, Parent and Surgical Services, excluding a pledge of the Company’s and its subsidiaries’ stock, any joint ventures and certain other exceptions. Our obligations under the Third Amended Credit Agreement are unconditionally guaranteed by the Parent and Surgical Services.

 

Our senior secured credit facility provides the aggregate amount we may borrow under revolving loans up to $235.0 million, subject to our borrowing base.

 

As of September 30, 2016, we had $111.7 million of availability under the senior secured credit facility based on a borrowing base of $167.1 million less borrowings of $50.9 million and after giving effect to $4.5 million used for letters of credit.

 

The senior secured credit facility requires our compliance with various affirmative and negative covenants. Pursuant to the affirmative covenants, we and Parent agreed to, among other things, deliver financial and other information to the administrative agent, provide notice of certain events (including events of default), pay our obligations, maintain our properties, maintain the security interest in the collateral for the benefit of the administrative agent and the lenders and maintain insurance.

 

Among other restrictions, and subject to certain definitions and exceptions, the senior secured credit facility restricts our ability to:

 

·

incur indebtedness;

·

create or permit liens;

·

declare or pay dividends and certain other restricted payments;

·

consolidate, merge or recapitalize;

·

acquire or sell assets;

·

make certain investments, loans or other advances;

·

enter into transactions with affiliates;

·

change our line of business; and

·

enter into hedging transactions.

 

The senior secured credit facility also contains a financial covenant that is triggered if our available borrowing capacity is less than $20.0 million for a certain period, which consists of a minimum ratio of trailing four-quarter Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) to cash interest expense, as such terms are defined in the senior secured credit facility.

 

The senior secured credit facility specifies certain events of default, including, among others, failure to pay principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, bankruptcy events, certain ERISA-related events, cross-defaults to other material agreements, change of control events and invalidity of guarantees or security documents.  Some events of default will be triggered only after certain cure periods have expired, or will provide for materiality thresholds.  If such a default occurs, the lenders under the senior secured credit facility would be entitled to take various actions, including all actions permitted to be taken by a secured creditor and the acceleration of amounts due under the senior secured credit facility.

 

At September 30, 2016, we had $50.9 million of borrowings outstanding of which $25.0 million was accruing interest at a rate of 2.5277%,  $14.0 million was accruing interest at a rate of 2.5182% and $11.9 million was accruing interest at a rate of 4.5%.  

 

We were in compliance with all financial debt covenants for all periods presented.

 

2012 Indenture. Our 2012 Notes are guaranteed, jointly and severally, on a second priority senior secured basis, by Surgical Services, and are also similarly guaranteed by certain of our future 100%-owned domestic subsidiaries. The 2012 Notes are our second priority senior secured obligations and rank (i) equal in right of payment with all of our existing and future unsubordinated indebtedness, and effectively senior to any such unsecured indebtedness to the extent of the value of collateral; (ii) senior in right of payment to all of our and our guarantors’ existing and future subordinated

13


 

indebtedness; (iii) effectively junior to our senior secured credit facility; and (iv) structurally subordinated to any indebtedness and other liabilities (including trade payables) of any of our future subsidiaries that are not guarantors.

 

The 2012 Indenture governing the 2012 Notes contains covenants that limit our and our guarantors’ ability, subject to certain definitions and exceptions, and certain of our future subsidiaries’ ability to:

 

·

incur additional indebtedness;

·

pay cash dividends or distributions on our capital stock or repurchase our capital stock or subordinated debt;

·

issue redeemable stock or preferred stock;

·

issue stock of subsidiaries;

·

make certain investments;

·

transfer or sell assets;

·

create liens on our assets to secure debt;

·

enter into transactions with affiliates; and

·

merge or consolidate with another company.

 

The 2012 Indenture specifies certain events of default, including among others, failure to pay principal, interest or premium, violation of covenants and agreements, cross-defaults to other material agreements, bankruptcy events, invalidity of guarantees, and a default in the performance by us of the security documents relating to the 2012 Indenture. Some events of default will be triggered only after certain grace or cure periods have expired, or provide for materiality thresholds. In the event certain bankruptcy-related defaults occur, the 2012 Notes will become due and payable immediately. If any other default occurs, the Trustee (and in some cases the noteholders) would be entitled to take various actions, including acceleration of amounts due under the 2012 Indenture.

 

We were in compliance with all financial debt covenants for all periods presented.

 

8.Commitments and Contingencies

 

The Company, in the ordinary course of business, could be subject to liability claims related to employees and the equipment that it rents and services. Asserted claims are subject to many uncertainties and the outcome of individual matters is not predictable. Certain claims where the loss is probable, a provision is recorded based on the Company’s best estimate. While the ultimate resolution of these actions may have an impact on the Company’s financial results for a particular reporting period, management believes that any such resolution would not have a material adverse effect on the financial position, results of operations or cash flows of the Company and the chance of a negative outcome on outstanding litigation is considered remote.

 

In May 2016,  the Company entered into an amendment to an agreement with a supplier. Between the original agreement and this amendment, certain end users  described in the original agreement have entered into a direct agreement with the supplier or have elected to participate in a group purchasing organization agreement with the supplier. As a result, the supplier agreed to make a payment of $2.75 million to the Company. The Company recorded a net gain of $2.75 million related to this settlement which is reflected as a Gain on settlement in the Consolidated Statements of Operations during the nine month periods ended September 30, 2016.

 

On January 13, 2015, the Company filed suit in the Western District of Texas against Hill-Rom Holdings, Inc., Hill-Rom Company, Inc. and Hill-Rom Services, Inc. (the “Defendants”) alleging that the Defendants violated federal and state antitrust laws by willfully and unlawfully engaging in a pattern of exclusionary and predatory conduct in order to foreclose market competition and seeking actual damages, trebled damages and punitive damages.  On March 4, 2015, the Defendants filed a motion to transfer the case to another venue.  On March 23, 2015, the Defendants filed a motion to dismiss the case.  On July 2, 2015, the Court denied the Defendants’ motion to transfer.  On October 15, 2015, the Court denied the Defendants motion to dismiss. The litigation is currently early in the discovery phase.

 

14


 

9.Related Party Transactions

 

Management Agreement

 

On May 31, 2007, we and an affiliate of Irving Place Capital (together with its affiliates, “IPC”) entered into a professional services agreement pursuant to which IPC provides general advisory and management services to us with respect to financial and operating matters.  IPC is a principal owner of Parent, and the following members of our board of directors are associated with IPC:  Robert Juneja and Bret Bowerman. The professional services agreement requires us to pay an annual fee for ongoing advisory and management services equal to the greater of $0.5 million or 0.75% of our Adjusted EBITDA (as defined in the professional services agreement) for the immediately preceding fiscal year, payable in quarterly installments. The professional services agreement provides that IPC will be reimbursed for its reasonable out-of-pocket expenses in connection with certain activities undertaken pursuant to the professional services agreement and will be indemnified for liabilities incurred in connection with its role under the professional services agreement, other than for liabilities resulting from its gross negligence or willful misconduct. The term of the professional services agreement commenced on May 31, 2007 and will remain in effect unless and until either party notifies the other of its desire to terminate, we are sold to a third-party purchaser or we consummate a qualified initial public offering, as defined in the professional services agreement. Total professional services fees incurred to IPC were $0.2 and $0.2 million for the three month periods ended September 30, 2016 and 2015, respectively,  and $0.6 and $0.7 million for the nine month periods ended September 30, 2016 and 2015, respectively.

 

We entered into engagement letters with CTPartners, LLC (“CTPartners”) to conduct searches for certain executive positions.  One member of our board of directors was a former director of CTPartners. No fees incurred to CTPartners for the three month periods ended September 30, 2016 and 2015. Total fees incurred to CT Partners was $0 and $0.2 million during the nine month periods ended September 30, 2016 and 2015, respectively.

 

In connection with the Restricted Stock Unit Award Agreement, dated as of April 13, 2015, between an officer and the Company, we entered into a promissory note agreement with the officer dated April 13, 2016 for a total amount of $1.0 million which is included in other long-term assets in the Consolidated Balance Sheets. This note receivable bears annual interest at 1.45%. The principal and accrued interest of this note is due on the earliest of (i) the seventh anniversary of the date of this loan, (ii) any event with respect to borrower, which, in any such case of the loan were to remain outstanding on and after such date, would result in violation of Section 402 of the Sarbanes-Oxley Act of 2002, (iii) and certain events of default or (iv) a change in control. Interest income for this note was $0.004 and $0.007 million for the three and nine month periods ended September 30, 2016.

 

10.Limited Liability Companies

 

We participate with others in the formation of LLCs in which Surgical Services becomes a partner and shares the financial interest with the other investors. Surgical Services is the primary beneficiary of these LLCs. These LLCs acquire certain medical equipment for use in their respective business activities, which generally focus on surgical procedures. The LLCs will acquire medical equipment for rental purposes under equipment financing leases. At September 30, 2016, the LLCs had approximately $0.9 million of total assets. The third party investors in each respective LLC generally provide the lease financing company with individual proportionate lease guarantees based on their respective ownership percentages in the LLCs. In addition, Surgical Services will provide such financing companies with its corporate guarantee based on its respective ownership interest in each LLC. In certain instances, Surgical Services has provided such financing companies with an overall corporate guarantee in connection with equipment financing transactions. In such instances, the individual investors in each respective LLC will generally indemnify us against losses, if any, incurred in connection with its corporate guarantee. Additionally, we provide operational and administrative support to the LLCs in which it is a partner. As of September 30, 2016, we held interests in seven active LLCs.

 

In accordance with guidance issued by the FASB, we account for equity investments in LLCs (in which we are the primary beneficiary) under the full consolidation method whereby transactions between Surgical Services and the LLCs have been eliminated through consolidation.

 

15


 

11.Segment Information

 

Our reporting segments consist of Medical Equipment Solutions (“MES”), Clinical Engineering Solutions (“CES”) and Surgical Services (“SS”). Certain operating information for our segments as well as a reconciliation of total Company gross margin to loss before income taxes and noncontrolling interest was as follows:

 

Medical Equipment Solutions

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

    

2016

    

2015

    

2016

    

2015

Revenues

 

$

73,463

 

$

68,985

 

$

228,633

 

$

214,154

Cost of revenue

 

 

33,146

 

 

30,134

 

 

104,640

 

 

92,466

Medical equipment depreciation

 

 

14,008

 

 

15,043

 

 

42,389

 

 

45,712

Gross margin

 

$

26,309

 

$

23,808

 

$

81,604

 

$

75,976

 

Clinical Engineering Solutions

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

    

2016

    

2015

    

2016

    

2015

Revenues

 

$

26,926

 

$

25,401

 

$

77,968

 

$

74,581

Cost of revenue

 

 

21,278

 

 

20,063

 

 

61,946

 

 

59,333

Gross margin

 

$

5,648

 

$

5,338

 

$

16,022

 

$

15,248

 

Surgical Services

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

    

2016

    

2015

    

2016

    

2015

Revenues

 

$

17,559

 

$

16,727

 

$

51,091

 

$

48,154

Cost of revenue

 

 

9,461

 

 

8,780

 

 

27,183

 

 

25,681

Medical equipment depreciation

 

 

1,537

 

 

1,547

 

 

4,403

 

 

4,513

Gross margin

 

$

6,561

 

$

6,400

 

$

19,505

 

$

17,960

 

Total Gross Margin and Reconciliation to Loss Before Income Taxes and Noncontrolling Interest

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

    

2016

    

2015

    

2016

    

2015

Total gross margin

 

$

38,518

 

$

35,546

 

$

117,131

 

$

109,184

Selling, general and administrative

 

 

28,757

 

 

30,633

 

 

88,853

 

 

91,825

(Gain) on settlement

 

 

 —

 

 

 —

 

 

(2,750)

 

 

(5,718)

Interest expense

 

 

13,081

 

 

13,250

 

 

39,210

 

 

39,810

Loss before income taxes and noncontrolling interest

 

$

(3,320)

 

$

(8,337)

 

$

(8,182)

 

$

(16,733)

 

16


 

Total Assets by Reporting Segment

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2016

 

2015

 

Medical Equipment Solutions

 

$

574,166

 

$

585,990

 

Clinical Engineering Solutions

 

 

113,190

 

 

110,588

 

Surgical Services

 

 

99,031

 

 

100,997

 

Total Company Assets

 

$

786,387

 

$

797,575

 

 

The following table provides additional detail on percentage of revenue for each group of similar products sold or services provided in the MES, CES and SS segments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

2015

 

    

2016

 

2015

 

MES

 

 

 

 

 

 

 

 

 

 

Equipment usage solutions

 

59.1

%  

59.4

%  

 

60.0

%  

60.6

%  

Equipment/disposable sales

 

3.2

 

2.7

 

 

3.9

 

3.0

 

 

 

62.3

 

62.1

 

 

63.9

 

63.6

 

CES

 

 

 

 

 

 

 

 

 

 

Service solutions

 

22.8

 

22.9

 

 

21.8

 

22.1

 

SS

 

 

 

 

 

 

 

 

 

 

Equipment usage solutions

 

14.7

 

14.7

 

 

14.1

 

14.1

 

Equipment/disposable sales

 

0.2

 

0.3

 

 

0.2

 

0.2

 

 

 

14.9

 

15.0

 

 

14.3

 

14.3

 

Total revenues

 

100.0

%  

100.0

%  

 

100.0

%  

100.0

%  

 

 

 

 

 

12.Income Taxes

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We evaluate the recoverability of our deferred tax assets by scheduling the expected reversals of deferred tax assets and liabilities in order to determine whether net operating loss carry forwards are recoverable prior to expiration and have established a valuation allowance in accordance with ASC Topic 740,  “Income Taxes”. The tax expense for the three and nine months ended September 30, 2016 primarily relates to state minimum fees. The expected tax benefit from operating loss during the three and nine months ended September 30, 2016 was offset by the recording of additional valuation allowance. In future reporting periods, we will continue to assess the likelihood that deferred tax assets will be realizable.

 

At September 30, 2016, the Company had available unused federal net operating loss carryforwards of approximately $205.2 million. The net operating loss carryforwards will expire at various dates from 2018 through 2036.

 

13.Consolidating Financial Statements

 

In accordance with the provisions of the 2012 Indenture, as a 100%-owned subsidiary of UHS, Surgical Services has jointly and severally guaranteed all the Company’s Obligations (as defined in the 2012 Indenture) on a full and unconditional basis. Consolidating financial information of UHS and the guarantor is presented on the following pages.

17


 

Universal Hospital Services, Inc.

Consolidating Balance Sheets

(in thousands, except share and per share  information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, less allowance for doubtful accounts

 

$

72,704

 

$

9,309

 

$

 —

 

$

82,013

Due from affiliates

 

 

29,520

 

 

 —

 

 

(29,520)

 

 

 —

Inventories

 

 

5,630

 

 

2,917

 

 

 —

 

 

8,547

Other current assets

 

 

6,604

 

 

232

 

 

 —

 

 

6,836

Total current assets

 

 

114,458

 

 

12,458

 

 

(29,520)

 

 

97,396

Property and equipment:

 

 

 

 

 

 

 

 

 

 

 

 

Medical equipment

 

 

545,117

 

 

51,416

 

 

 —

 

 

596,533

Property and office equipment

 

 

81,243

 

 

10,401

 

 

 —

 

 

91,644

Accumulated depreciation

 

 

(451,051)

 

 

(40,331)

 

 

 —

 

 

(491,382)

Total property and equipment, net

 

 

175,309

 

 

21,486

 

 

 —

 

 

196,795

Other long-term assets:

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

283,141

 

 

53,454

 

 

 —

 

 

336,595

Investment in subsidiary

 

 

56,100

 

 

 —

 

 

(56,100)

 

 

 —

Other intangibles, net

 

 

142,709

 

 

11,283

 

 

 —

 

 

153,992

Other

 

 

1,259

 

 

350

 

 

 —

 

 

1,609

Total assets

 

$

772,976

 

$

99,031

 

$

(85,620)

 

$

786,387

Liabilities and (Deficit) Equity

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

4,165

 

$

1,397

 

$

 —

 

$

5,562

Book overdrafts

 

 

3,583

 

 

(24)

 

 

 —

 

 

3,559

Due to affiliates

 

 

 —

 

 

29,520

 

 

(29,520)

 

 

 —

Accounts payable

 

 

20,437

 

 

3,070

 

 

 —

 

 

23,507

Accrued compensation

 

 

11,934

 

 

2,045

 

 

 —

 

 

13,979

Accrued interest

 

 

6,405

 

 

 —

 

 

 —

 

 

6,405

Other accrued expenses

 

 

16,475

 

 

185

 

 

 —

 

 

16,660

Total current liabilities

 

 

62,999

 

 

36,193

 

 

(29,520)

 

 

69,672

Long-term debt, less current portion

 

 

703,320

 

 

3,989

 

 

 —

 

 

707,309

Pension and other long-term liabilities

 

 

11,649

 

 

6

 

 

 —

 

 

11,655

Deferred income taxes, net

 

 

50,585

 

 

2,555

 

 

 —

 

 

53,140

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

(Deficit) Equity

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Additional paid-in capital

 

 

244,198

 

 

60,004

 

 

(60,019)

 

 

244,183

Accumulated deficit

 

 

(288,246)

 

 

(3,919)

 

 

 —

 

 

(292,165)

Accumulated loss in subsidiary

 

 

(3,919)

 

 

 —

 

 

3,919

 

 

 —

Accumulated other comprehensive loss

 

 

(7,610)

 

 

 —

 

 

 —

 

 

(7,610)

Total Universal Hospital Services, Inc. (deficit) equity

 

 

(55,577)

 

 

56,085

 

 

(56,100)

 

 

(55,592)

Noncontrolling interest

 

 

 —

 

 

203

 

 

 —

 

 

203

Total (deficit) equity

 

 

(55,577)

 

 

56,288

 

 

(56,100)

 

 

(55,389)

Total liabilities and (deficit) equity

 

$

772,976

 

$

99,031

 

$

(85,620)

 

$

786,387

 

 

 

18


 

Universal Hospital Services, Inc.

Consolidating Balance Sheets

(in thousands, except share and per share  information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, less allowance for doubtful accounts

 

$

62,288

 

$

8,964

 

$

 —

 

$

71,252

Due from affiliates

 

 

29,145

 

 

 —

 

 

(29,145)

 

 

 —

Inventories

 

 

4,533

 

 

3,973

 

 

 —

 

 

8,506

Other current assets

 

 

5,670

 

 

164

 

 

 —

 

 

5,834

Total current assets

 

 

101,636

 

 

13,101

 

 

(29,145)

 

 

85,592

Property and equipment:

 

 

 

 

 

 

 

 

 

 

 

 

Medical equipment

 

 

541,200

 

 

48,891

 

 

 —

 

 

590,091

Property and office equipment

 

 

76,436

 

 

8,905

 

 

 —

 

 

85,341

Accumulated depreciation

 

 

(425,574)

 

 

(37,244)

 

 

 —

 

 

(462,818)

Total property and equipment, net

 

 

192,062

 

 

20,552

 

 

 —

 

 

212,614

Other long-term assets:

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

283,141

 

 

53,454

 

 

 —

 

 

336,595

Investment in subsidiary

 

 

54,383

 

 

 —

 

 

(54,383)

 

 

 —

Other intangibles, net

 

 

148,520

 

 

13,834

 

 

 —

 

 

162,354

Other

 

 

364

 

 

56

 

 

 —

 

 

420

Total assets

 

$

780,106

 

$

100,997

 

$

(83,528)

 

$

797,575

Liabilities and (Deficit) Equity

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

3,801

 

$

1,066

 

$

 —

 

$

4,867

Book overdrafts

 

 

5,875

 

 

569

 

 

 —

 

 

6,444

Due to affiliates

 

 

 —

 

 

29,145

 

 

(29,145)

 

 

 —

Accounts payable

 

 

25,260

 

 

5,813

 

 

 —

 

 

31,073

Accrued compensation

 

 

21,266

 

 

2,334

 

 

 —

 

 

23,600

Accrued interest

 

 

18,742

 

 

 —

 

 

 —

 

 

18,742

Dividend payable

 

 

24

 

 

 —

 

 

 —

 

 

24

Other accrued expenses

 

 

13,913

 

 

651

 

 

 —

 

 

14,564

Total current liabilities

 

 

88,881

 

 

39,578

 

 

(29,145)

 

 

99,314

Long-term debt, less current portion

 

 

679,321

 

 

3,270

 

 

 —

 

 

682,591

Pension and other long-term liabilities

 

 

11,850

 

 

19

 

 

 —

 

 

11,869

Deferred income taxes, net

 

 

49,437

 

 

3,522

 

 

 —

 

 

52,959

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

(Deficit) Equity

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Additional paid-in capital

 

 

241,848

 

 

60,004

 

 

(60,019)

 

 

241,833

Accumulated deficit

 

 

(277,430)

 

 

(5,636)

 

 

 —

 

 

(283,066)

Accumulated loss in subsidiary

 

 

(5,636)

 

 

 —

 

 

5,636

 

 

 —

Accumulated other comprehensive loss

 

 

(8,165)

 

 

 —

 

 

 —

 

 

(8,165)

Total Universal Hospital Services, Inc. (deficit) equity

 

 

(49,383)

 

 

54,368

 

 

(54,383)

 

 

(49,398)

Noncontrolling interest

 

 

 —

 

 

240

 

 

 —

 

 

240

Total (deficit) equity

 

 

(49,383)

 

 

54,608

 

 

(54,383)

 

 

(49,158)

Total liabilities and (deficit) equity

 

$

780,106

 

$

100,997

 

$

(83,528)

 

$

797,575

 

19


 

Universal Hospital Services, Inc.

Consolidating Statements of Operations

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2016

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Medical equipment solutions

 

$

73,463

 

$

 —

 

$

 —

 

$

73,463

Clinical engineering solutions

 

 

26,926

 

 

 —

 

 

 —

 

 

26,926

Surgical services

 

 

 —

 

 

17,559

 

 

 —

 

 

17,559

Total revenues

 

 

100,389

 

 

17,559

 

 

 —

 

 

117,948

Cost of Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Cost of medical equipment solutions

 

 

33,146

 

 

 —

 

 

 —

 

 

33,146

Cost of clinical engineering solutions

 

 

21,278

 

 

 —

 

 

 —

 

 

21,278

Cost of surgical services

 

 

 —

 

 

9,461

 

 

 —

 

 

9,461

Medical equipment depreciation

 

 

14,008

 

 

1,537

 

 

 —

 

 

15,545

Total costs of revenues

 

 

68,432

 

 

10,998

 

 

 —

 

 

79,430

Gross margin

 

 

31,957

 

 

6,561

 

 

 —

 

 

38,518

Selling, general and administrative

 

 

23,926

 

 

4,831

 

 

 —

 

 

28,757

Operating income

 

 

8,031

 

 

1,730

 

 

 —

 

 

9,761

Equity in earnings of subsidiary

 

 

(689)

 

 

 —

 

 

689

 

 

 —

Interest expense

 

 

12,539

 

 

542

 

 

 —

 

 

13,081

(Loss) income before income taxes and noncontrolling interest

 

 

(3,819)

 

 

1,188

 

 

(689)

 

 

(3,320)

(Benefit) provision for income taxes

 

 

(209)

 

 

499

 

 

 —

 

 

290

Consolidated net (loss) income

 

 

(3,610)

 

 

689

 

 

(689)

 

 

(3,610)

Net income attributable to noncontrolling interest

 

 

 —

 

 

105

 

 

 —

 

 

105

Net (loss) income attributable to Universal Hospital Services, Inc.

 

$

(3,610)

 

$

584

 

$

(689)

 

$

(3,715)

 

20


 

Universal Hospital Services, Inc.

Consolidating Statements of Operations

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2015

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Medical equipment solutions

 

$

68,985

 

$

 —

 

$

 —

 

$

68,985

Clinical engineering solutions

 

 

25,401

 

 

 —

 

 

 —

 

 

25,401

Surgical services

 

 

 —

 

 

16,727

 

 

 —

 

 

16,727

Total revenues

 

 

94,386

 

 

16,727

 

 

 —

 

 

111,113

Cost of Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Cost of medical equipment solutions

 

 

30,134

 

 

 —

 

 

 —

 

 

30,134

Cost of clinical engineering solutions

 

 

20,063

 

 

 —

 

 

 —

 

 

20,063

Cost of surgical services

 

 

 —

 

 

8,780

 

 

 —

 

 

8,780

Medical equipment depreciation

 

 

15,043

 

 

1,547

 

 

 —

 

 

16,590

Total costs of revenues

 

 

65,240

 

 

10,327

 

 

 —

 

 

75,567

Gross margin

 

 

29,146

 

 

6,400

 

 

 —

 

 

35,546

Selling, general and administrative

 

 

25,956

 

 

4,677

 

 

 —

 

 

30,633

Operating income

 

 

3,190

 

 

1,723

 

 

 —

 

 

4,913

Equity in earnings of subsidiary

 

 

(442)

 

 

 —

 

 

442

 

 

 —

Interest expense

 

 

12,718

 

 

532

 

 

 —

 

 

13,250

(Loss) income before income taxes and noncontrolling interest

 

 

(9,086)

 

 

1,191

 

 

(442)

 

 

(8,337)

(Benefit) provision for income taxes

 

 

(539)

 

 

749

 

 

 —

 

 

210

Consolidated net (loss) income

 

 

(8,547)

 

 

442

 

 

(442)

 

 

(8,547)

Net income attributable to noncontrolling interest

 

 

 —

 

 

121

 

 

 —

 

 

121

Net (loss) income attributable to Universal Hospital Services, Inc.

 

$

(8,547)

 

$

321

 

$

(442)

 

$

(8,668)

21


 

Universal Hospital Services, Inc.

Consolidating Statements of Operations

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2016

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Medical equipment solutions

 

$

228,633

 

$

 —

 

$

 —

 

$

228,633

Clinical engineering solutions

 

 

77,968

 

 

 —

 

 

 —

 

 

77,968

Surgical services

 

 

 —

 

 

51,091

 

 

 —

 

 

51,091

Total revenues

 

 

306,601

 

 

51,091

 

 

 —

 

 

357,692

Cost of Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Cost of medical equipment solutions

 

 

104,640

 

 

 —

 

 

 —

 

 

104,640

Cost of clinical engineering solutions

 

 

61,946

 

 

 —

 

 

 —

 

 

61,946

Cost of surgical services

 

 

 —

 

 

27,183

 

 

 —

 

 

27,183

Medical equipment depreciation

 

 

42,389

 

 

4,403

 

 

 —

 

 

46,792

Total costs of revenues

 

 

208,975

 

 

31,586

 

 

 —

 

 

240,561

Gross margin

 

 

97,626

 

 

19,505

 

 

 —

 

 

117,131

Selling, general and administrative

 

 

74,385

 

 

14,468

 

 

 —

 

 

88,853

(Gain) on settlement

 

 

(2,750)

 

 

 —

 

 

 —

 

 

(2,750)

Operating income

 

 

25,991

 

 

5,037

 

 

 —

 

 

31,028

Equity in earnings of subsidiary

 

 

(1,957)

 

 

 —

 

 

1,957

 

 

 —

Interest expense

 

 

37,592

 

 

1,618

 

 

 —

 

 

39,210

(Loss) income before income taxes and noncontrolling interest

 

 

(9,644)

 

 

3,419

 

 

(1,957)

 

 

(8,182)

(Benefit) provision for income taxes

 

 

(785)

 

 

1,462

 

 

 —

 

 

677

Consolidated net (loss) income

 

 

(8,859)

 

 

1,957

 

 

(1,957)

 

 

(8,859)

Net income attributable to noncontrolling interest

 

 

 —

 

 

240

 

 

 —

 

 

240

Net (loss) income attributable to Universal Hospital Services, Inc.

 

$

(8,859)

 

$

1,717

 

$

(1,957)

 

$

(9,099)

 

22


 

 

Universal Hospital Services, Inc.

Consolidating Statements of Operations

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2015

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Medical equipment solutions

 

$

214,154

 

$

 —

 

$

 —

 

$

214,154

Clinical engineering solutions

 

 

74,581

 

 

 —

 

 

 —

 

 

74,581

Surgical services

 

 

 —

 

 

48,154

 

 

 —

 

 

48,154

Total revenues

 

 

288,735

 

 

48,154

 

 

 —

 

 

336,889

Cost of Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Cost of medical equipment solutions

 

 

92,466

 

 

 —

 

 

 —

 

 

92,466

Cost of clinical engineering solutions

 

 

59,333

 

 

 —

 

 

 —

 

 

59,333

Cost of surgical services

 

 

 —

 

 

25,681

 

 

 —

 

 

25,681

Medical equipment depreciation

 

 

45,712

 

 

4,513

 

 

 —

 

 

50,225

Total costs of revenues

 

 

197,511

 

 

30,194

 

 

 —

 

 

227,705

Gross margin

 

 

91,224

 

 

17,960

 

 

 —

 

 

109,184

Selling, general and administrative

 

 

77,975

 

 

13,850

 

 

 —

 

 

91,825

(Gain) on settlement

 

 

(5,718)

 

 

 —

 

 

 —

 

 

(5,718)

Operating income

 

 

18,967

 

 

4,110

 

 

 —

 

 

23,077

Equity in earnings of subsidiary

 

 

(1,201)

 

 

 —

 

 

1,201

 

 

 —

Interest expense

 

 

38,244

 

 

1,566

 

 

 —

 

 

39,810

(Loss) income before income taxes and noncontrolling interest

 

 

(18,076)

 

 

2,544

 

 

(1,201)

 

 

(16,733)

(Benefit) provision for income taxes

 

 

(784)

 

 

1,343

 

 

 —

 

 

559

Consolidated net (loss) income

 

 

(17,292)

 

 

1,201

 

 

(1,201)

 

 

(17,292)

Net income attributable to noncontrolling interest

 

 

 —

 

 

341

 

 

 —

 

 

341

Net (loss) income attributable to Universal Hospital Services, Inc.

 

$

(17,292)

 

$

860

 

$

(1,201)

 

$

(17,633)

 

 

 

23


 

Universal Hospital Services, Inc.

Consolidating Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2016



Nine Months Ended September 30, 2016

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

  

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

    

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

Consolidated net (loss) income

 

$

(3,610)

 

$

689

 

$

(689)

 

$

(3,610)

 

$

(8,859)

 

$

1,957

 

$

(1,957)

 

$

(8,859)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on minimum pension liability, net of tax

 

 

185

 

 

 —

 

 

 —

 

 

185

 

 

555

 

 

 —

 

 

 —

 

 

555

Total other comprehensive income

 

 

185

 

 

 —

 

 

 —

 

 

185

 

 

555

 

 

 —

 

 

 —

 

 

555

Comprehensive (loss) income

 

 

(3,425)

 

 

689

 

 

(689)

 

 

(3,425)

 

 

(8,304)

 

 

1,957

 

 

(1,957)

 

 

(8,304)

Comprehensive income attributable to noncontrolling interest

 

 

 —

 

 

105

 

 

 —

 

 

105

 

 

 —

 

 

240

 

 

 —

 

 

240

Comprehensive (loss) income attributable to Universal Hospital Services, Inc.

 

$

(3,425)

 

$

584

 

$

(689)

 

$

(3,530)

 

$

(8,304)

 

$

1,717

 

$

(1,957)

 

$

(8,544)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2015

   

Nine Months Ended September 30, 2015

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

Consolidated net (loss) income

 

$

(8,547)

 

$

442

 

$

(442)

 

$

(8,547)

 

$

(17,292)

 

$

1,201

 

$

(1,201)

 

$

(17,292)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on minimum pension liability, net of tax

 

 

244

 

 

 —

 

 

 —

 

 

244

 

 

732

 

 

 —

 

 

 —

 

 

732

Total other comprehensive income

 

 

244

 

 

 —

 

 

 —

 

 

244

 

 

732

 

 

 —

 

 

 —

 

 

732

Comprehensive (loss) income

 

 

(8,303)

 

 

442

 

 

(442)

 

 

(8,303)

 

 

(16,560)

 

 

1,201

 

 

(1,201)

 

 

(16,560)

Comprehensive income attributable to noncontrolling interest

 

 

 —

 

 

121

 

 

 —

 

 

121

 

 

 —

 

 

341

 

 

 —

 

 

341

Comprehensive (loss) income attributable to Universal Hospital Services, Inc.

 

$

(8,303)

 

$

321

 

$

(442)

 

$

(8,424)

 

$

(16,560)

 

$

860

 

$

(1,201)

 

$

(16,901)

                    

24


 

Universal Hospital Services, Inc.

Consolidating Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2016

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated net (loss) income

 

$

(8,859)

 

$

1,957

 

$

(1,957)

 

$

(8,859)

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

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

49,447

 

 

5,519

 

 

 —

 

 

54,966

Amortization of intangibles, deferred financing costs and bond premium

 

 

6,185

 

 

2,551

 

 

 —

 

 

8,736

Equity in earnings of subsidiary

 

 

(1,957)

 

 

 —

 

 

1,957

 

 

 —

Provision for doubtful accounts

 

 

(14)

 

 

17

 

 

 —

 

 

3

Provision for inventory obsolescence

 

 

167

 

 

88

 

 

 —

 

 

255

Non-cash share-based compensation expense

 

 

2,272

 

 

 —

 

 

 —

 

 

2,272

Gain on sales and disposals of equipment

 

 

(3,136)

 

 

146

 

 

 —

 

 

(2,990)

Deferred income taxes

 

 

1,148

 

 

(967)

 

 

 —

 

 

181

Interest on note receivable

 

 

(7)

 

 

 —

 

 

 —

 

 

(7)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(10,402)

 

 

(362)

 

 

 —

 

 

(10,764)

Due from affiliates

 

 

(375)

 

 

 —

 

 

375

 

 

 —

Inventories

 

 

(1,264)

 

 

968

 

 

 —

 

 

(296)

Other operating assets

 

 

(839)

 

 

(362)

 

 

 —

 

 

(1,201)

Accounts payable

 

 

323

 

 

(1,086)

 

 

 —

 

 

(763)

Other operating liabilities

 

 

(18,753)

 

 

(268)

 

 

 —

 

 

(19,021)

Net cash provided by operating activities

 

 

13,936

 

 

8,201

 

 

375

 

 

22,512

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Medical equipment purchases

 

 

(35,210)

 

 

(6,083)

 

 

 —

 

 

(41,293)

Property and office equipment purchases

 

 

(3,619)

 

 

(36)

 

 

 —

 

 

(3,655)

Proceeds from disposition of property and equipment

 

 

8,868

 

 

39

 

 

 —

 

 

8,907

Issuance of note receivable from officer

 

 

(983)

 

 

 —

 

 

 —

 

 

(983)

Net cash used in investing activities

 

 

(30,944)

 

 

(6,080)

 

 

 —

 

 

(37,024)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds under senior secured credit facility

 

 

131,700

 

 

 —

 

 

 —

 

 

131,700

Payments under senior secured credit facility

 

 

(108,800)

 

 

 —

 

 

 —

 

 

(108,800)

Payments of principal under capital lease obligations

 

 

(3,557)

 

 

(1,126)

 

 

 —

 

 

(4,683)

Payments of deferred financing costs

 

 

(97)

 

 

 —

 

 

 —

 

 

(97)

Holdback payment related to acquisition

 

 

 —

 

 

(500)

 

 

 —

 

 

(500)

Distributions to noncontrolling interests

 

 

 —

 

 

(277)

 

 

 —

 

 

(277)

Dividend and equity distribution payments

 

 

(24)

 

 

 —

 

 

 —

 

 

(24)

Proceeds from exercise of parent company stock options

 

 

78

 

 

 —

 

 

 —

 

 

78

Due to affiliates

 

 

 —

 

 

375

 

 

(375)

 

 

 —

Change in book overdrafts

 

 

(2,292)

 

 

(593)

 

 

 —

 

 

(2,885)

Net cash provided by (used in) financing activities

 

 

17,008

 

 

(2,121)

 

 

(375)

 

 

14,512

Net change in cash and cash equivalents

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Cash and cash equivalents at the beginning of period

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Cash and cash equivalents at the end of period

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

25


 

Universal Hospital Services, Inc.

Consolidating Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2015

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated net (loss) income

 

$

(17,292)

 

$

1,201

 

$

(1,201)

 

$

(17,292)

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

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

51,931

 

 

5,482

 

 

 —

 

 

57,413

Asset impairment charges

 

 

2,339

 

 

 —

 

 

 —

 

 

2,339

Amortization of intangibles, deferred financing costs and bond premium

 

 

7,146

 

 

2,518

 

 

 —

 

 

9,664

Equity in earnings of subsidiary

 

 

(1,201)

 

 

 —

 

 

1,201

 

 

 —

Provision for doubtful accounts

 

 

145

 

 

63

 

 

 —

 

 

208

Provision for inventory obsolescence

 

 

195

 

 

104

 

 

 —

 

 

299

Non-cash share-based compensation expense

 

 

1,902

 

 

 —

 

 

 —

 

 

1,902

Gain on sales and disposals of equipment

 

 

(3,404)

 

 

(143)

 

 

 —

 

 

(3,547)

Deferred income taxes

 

 

2,096

 

 

(1,399)

 

 

 —

 

 

697

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,175)

 

 

(1,358)

 

 

 —

 

 

(2,533)

Due from affiliates

 

 

267

 

 

 —

 

 

(267)

 

 

 —

Inventories

 

 

(269)

 

 

(136)

 

 

 —

 

 

(405)

Other operating assets

 

 

471

 

 

71

 

 

 —

 

 

542

Accounts payable

 

 

(238)

 

 

833

 

 

 —

 

 

595

Other operating liabilities

 

 

(6,615)

 

 

(21)

 

 

 —

 

 

(6,636)

Net cash provided by operating activities

 

 

36,298

 

 

7,215

 

 

(267)

 

 

43,246

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Medical equipment purchases

 

 

(35,432)

 

 

(3,339)

 

 

 —

 

 

(38,771)

Property and office equipment purchases

 

 

(3,132)

 

 

(16)

 

 

 —

 

 

(3,148)

Proceeds from disposition of property and equipment

 

 

10,578

 

 

221

 

 

 —

 

 

10,799

Acquisition

 

 

 —

 

 

(2,600)

 

 

 —

 

 

(2,600)

Net cash used in investing activities

 

 

(27,986)

 

 

(5,734)

 

 

 —

 

 

(33,720)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds under senior secured credit facility

 

 

104,952

 

 

 —

 

 

 —

 

 

104,952

Payments under senior secured credit facility

 

 

(108,900)

 

 

 —

 

 

 —

 

 

(108,900)

Payments of principal under capital lease obligations

 

 

(4,946)

 

 

(810)

 

 

 —

 

 

(5,756)

Distributions to noncontrolling interests

 

 

 —

 

 

(360)

 

 

 —

 

 

(360)

Contributions from new members to limited liability company

 

 

 —

 

 

70

 

 

 —

 

 

70

Dividend and equity distribution payments

 

 

(39)

 

 

 —

 

 

 —

 

 

(39)

Due to affiliates

 

 

 —

 

 

(267)

 

 

267

 

 

 —

Change in book overdrafts

 

 

621

 

 

(114)

 

 

 —

 

 

507

Net cash used in financing activities

 

 

(8,312)

 

 

(1,481)

 

 

267

 

 

(9,526)

Net change in cash and cash equivalents

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Cash and cash equivalents at the beginning of period

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Cash and cash equivalents at the end of period

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

26


 

14.Restructuring

 

We incurred no restructuring expense during the three months and nine months ended September 30, 2016 and 2015. As of December 31, 2015, we had $2.4 million of restructuring liability. For the nine months ended September 30, 2016,  $2.2 million in restructuring charges was paid. No additional restructuring was recorded in the first three quarters of 2016 for new severance arrangements and the remaining liability of $0.2 million as of September 30, 2016 is expected to be paid out by the end of the first quarter of 2017 and is included in the “other accrued expenses” in the Consolidated Balance Sheets. As of December 31, 2014, we had $1.6 million of restructuring liability. For the nine months ended September 30, 2015,  $1.4 million in restructuring charges was paid. No additional restructuring was recorded in the first three quarters of 2015 for new severance arrangements and the remaining $0.2 million was a liability as of September 30, 2015.

 

15.Concentration

 

One customer accounted for approximately 16% and 14% of total revenue for the nine months ended September 30, 2016 and 2015, respectively.

 

 

 

 

27


 

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

 

The following should be read in conjunction with the accompanying consolidated financial statements and notes.

 

BUSINESS OVERVIEW

 

Our Company

 

Universal Hospital Services, Inc. (“we”, “our”, “us”, the “Company”, or “UHS”) is a leading nationwide provider of health care technology management and service solutions to the United States health care industry. We provide our customers comprehensive health care technology management, service and clinical solutions that we believe help reduce capital and operating expenses, increase medical equipment and staff productivity, and support improved patient safety and outcomes.

 

We commenced operations in 1939, originally incorporated in Minnesota in 1954 and reincorporated in Delaware in 2001. All of our outstanding capital stock is owned by UHS Holdco, Inc. (“Parent”), which acquired the Company in a recapitalization in May 2007.  Parent is controlled by affiliates of IPC.

 

UHS delivers health care solutions through three segments: Medical Equipment Solutions (“MES”), Clinical Engineering Solutions (“CES”) and Surgical Services (“SS”). As of September 30, 2016, we owned or managed over 700,000 units of medical equipment consisting of approximately 400,000 owned or managed units in our MES segment, over 300,000 units of customer-owned equipment we managed in our CES segment and over 7,000 units of owned or managed mobile surgical equipment in our SS segment. Our diverse customer base includes more than 7,000 national, regional and local acute care hospitals and alternate site providers (such as long-term acute care hospitals, skilled nursing facilities, surgery centers, specialty hospitals, nursing homes and home care providers). We also have relationships with more than 200 medical device manufacturers, many of the nation’s largest group purchasing organizations (“GPOs”) and many health system integrated delivery networks (“IDNs”).  All of our solutions leverage our nationwide network of 83 district service centers, five CES Centers of Excellence and an additional five stand-alone SS service centers, together with our more than 75 years of experience managing and servicing all aspects of medical equipment.  Our fees are paid directly by our customers rather than by direct reimbursement from third-party payors, such as private insurers, Medicare or Medicaid.

 

We report our financial results in three segments. Our reporting segments consist of MES, CES and SS. We evaluate the performance of our reportable segments based on gross margin. The accounting policies of the individual reportable segments are the same as those of the entire company.

 

Medical Equipment Solutions

 

Our MES segment accounted for $73.5 and $69.0 million, or approximately 62.3% and 62.1% of our revenues, for the three months ended September 30, 2016 and 2015, respectively and $228.6 and $214.2 million, or approximately 63.9% and 63.6% of our revenues, for the nine months ended September 30, 2016 and 2015, respectively. As of September 30, 2016,  the MES segment owned or managed approximately 400,000 units of medical equipment ranging across many clinical categories, manufacturers and models.  These solutions are provided primarily to hospitals and other acute care providers for use through their facilities, including the emergency room, operating room, critical care, intensive care, rehabilitation and general patient care areas.

 

Our MES segment started more than 75 years ago as our leading medical equipment peak needs usage business and has transformed into providing comprehensive outsourced and on-site solutions that manage all aspects of medical equipment in a health care facility. We currently provide MES solutions to more than 7,000 acute care hospitals and alternate site providers in the United States, including some of the nation’s premier health care institutions. We expect much of our future growth in this segment to be driven by our customers outsourcing more of their medical equipment needs and taking full advantage of our diversified product offering, clinical education and support, customized agreements and 360 On-site Managed Solutions.

 

28


 

We have four primary solutions in our MES segment:

 

·

Supplemental and Peak Needs Usage Solutions;

·

Customized Equipment Agreements Solutions;

·

360 On-site Managed Solutions; and

·

Specialty Medical Equipment Sales, Distribution and Disposal Solutions.

 

Clinical Engineering Solutions

 

Our CES segment accounted for $26.9 and $25.4 million, or approximately 22.8% and 22.9% of our revenues, for the three months ended September 30, 2016 and 2015, respectively and $78.0 and $74.6 million, or approximately 21.8% and 22.1% of our revenues, for the nine months ended September 30, 2016 and 2015, respectively. We offer a broad range of inspection, preventive maintenance, repair, logistic and consulting services through our team of over 390 technicians and professionals located throughout the United States in our nationwide network of service centers.  We managed over 300,000 units of customer owned equipment as of September 30, 2016.  In addition, as of September 30, 2016, we serviced approximately 400,000 units that we own or directly manage in our MES segment.

 

Our CES segment leverages our over 75 years of experience and our extensive equipment database in repairing and maintaining a broad range of health care technologies. Historically, we have been our own largest customer for CES services in order to repair and maintain approximately 400,000 units that we own or directly manage. However, we believe our CES segment has significant future growth potential by offering non-capital based comprehensive solutions as a stand-alone or complementary alternative for customers that own medical equipment but lack the infrastructure, expertise, or scale to perform routine maintenance, repair, record keeping, and lifecycle analysis and planning functions.  We also believe hospital and other facility-based clients will face increasing challenges in managing sophisticated medical equipment that requires connectivity and interoperability with information technology systems, compliance with the 10th revision of the International Statistical Classification of Diseases and Related Health Problems (ICD-10), regulatory requirements, integration with electronic medical records (EMR), maintenance and management of software databases and management of other medical equipment patient information and safety features.

 

We have three primary solutions in our CES segment:

 

·

Supplemental Maintenance and Repair Solutions;

·

360 On-site Managed Solutions; and

·

Manufacturer Solutions.

 

Surgical Services

 

Our SS segment accounted for $17.6 and $16.7 million, or approximately 14.9% and 15.0% of our revenues, for the three months ended September 30, 2016 and 2015,  respectively and $51.1 and $48.2 million, or approximately 14.3% and 14.3% of our revenues, for the nine months ended September 30, 2016 and 2015, respectively. As of September 30, 2016, we owned or managed over 7,000 units of mobile surgical equipment in our SS segment, primarily used in the practice of general surgery, orthopedic surgery, otolaryngology, urology, obstetrics, gynecology, podiatry, dermatology and plastic/cosmetics.

 

SS provides high end, state-of-the-art surgical equipment and associated products along with trained and certified Surgical Equipment Technologists (“technologists”) to assist in the procedural operation of the equipment. We provide these services to over 1,000 acute care hospitals and surgery centers through our nationwide network of 83 district service centers and an additional five stand-alone SS service centers. Our technologists work in the operating room (“O.R.”) and support physicians and O.R. personnel. The services are offered on a per-procedure basis. Our technologists deliver, set up, and create a safe environment for hospital and clinical personnel operating the equipment and provide all necessary disposable materials needed. Our technologists work closely with our customers to confirm that all certifications and credentials meet requirements to provide on-site services. Our technologists also assist customers in the operation of facility-owned assets and supplement the training and staffing of their personnel.  As of September 30, 2016, SS provided solutions in 42 states.

 

29


 

We have two primary solutions in our SS segment:

 

·

On-Demand and Scheduled Usage Solutions; and

·

360 On-site Managed Solutions.

 

RESULTS OF OPERATIONS

 

The following discussion addresses:

 

·

our financial condition as of September 30, 2016 and

·

the results of operations for the three-month and nine-month periods ended September 30, 2016 and 2015.

 

This discussion should be read in conjunction with the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and the Management’s Discussion and Analysis of Financial Condition and Results of Operations section included in our 2015 Annual Report on Form 10-K, filed with the Securities and Exchange Commission.

 

The following table provides information on the percentages of certain items of selected financial data compared to total revenues for the three-month and nine-month periods ended September 30, 2016 and 2015.  The table below also indicates the percentage increase or decrease over the prior comparable period.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent to Total Revenues

 

Percent

 

Percent to Total Revenues

 

Percent

 

 

 

Three Months Ended September 30,

 

Increase

 

Nine Months Ended September 30,

 

Increase

 

 

    

2016

    

2015

    

(Decrease)

    

2016

    

2015

    

(Decrease)

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

Medical equipment solutions

 

62.3

%  

62.1

%  

6.5

%  

63.9

%  

63.6

%  

6.8

%  

Clinical engineering solutions

 

22.8

 

22.9

 

6.0

 

21.8

 

22.1

 

4.5

 

Surgical services

 

14.9

 

15.0

 

5.0

 

14.3

 

14.3

 

6.1

 

Total revenues

 

100.0

%  

100.0

%  

6.2

 

100.0

%  

100.0

%  

6.2

 

Cost of Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of medical equipment solutions

 

28.1

 

27.1

 

10.0

 

29.3

 

27.4

 

13.2

 

Cost of clinical engineering solutions

 

18.0

 

18.1

 

6.1

 

17.3

 

17.6

 

4.4

 

Cost of surgical services

 

8.0

 

7.9

 

7.8

 

7.6

 

7.6

 

5.8

 

Medical equipment depreciation

 

13.2

 

14.9

 

(6.3)

 

13.1

 

14.9

 

(6.8)

 

Total costs of revenues

 

67.3

 

68.0

 

5.1

 

67.3

 

67.5

 

5.6

 

Gross margin

 

32.7

 

32.0

 

8.4

 

32.7

 

32.5

 

7.3

 

Selling, general and administrative

 

24.4

 

27.6

 

(6.1)

 

24.8

 

27.3

 

(3.2)

 

(Gain) on settlement

 

 —

 

 —

 

 —

 

(0.8)

 

(1.7)

 

*

 

Operating income

 

8.3

 

4.4

 

98.7

 

8.7

 

6.9

 

34.5

 

Interest expense

 

11.1

 

11.9

 

(1.3)

 

11.0

 

11.8

 

(1.5)

 

Loss before income taxes and noncontrolling interest

 

(2.8)

 

(7.5)

 

(60.2)

 

(2.3)

 

(4.9)

 

(51.1)

 

Provision for income taxes

 

0.2

 

0.2

 

*

 

0.2

 

0.2

 

*

 

Consolidated net loss

 

(3.0)

%

(7.7)

%

(57.8)

 

(2.5)

%

(5.1)

%

(48.8)

 


*Not meaningful

 

30


 

Consolidated Results of Operations for the three months ended September 30, 2016 compared to the three months ended September 30, 2015

 

Total Revenue

 

Total revenue for the three months ended September 30, 2016 was $117.9 million, compared to $111.1 million for the three months ended September 30, 2015, an increase of $6.8 million or 6.2%.  The net increase was primarily due to additional revenue within our MES segment related to growth in our 360 Solutions of $3.4 million,  growth in our CES segment of $1.5 million related to growth in providing existing and new customers with services on their equipment and growth in our SS segment of $0.8 million. These increases were partially offset by customer losses in the MES segment.

 

Cost of Revenue

 

Total cost of revenue for the three months ended September 30, 2016 was $79.4 million compared to $75.6 million for the three months ended September 30, 2015, an increase of $3.8 million or 5.1%. The increase was primarily in our MES segment due to increases in 360 solutions cost of $1.6 million and other rental costs of $1.3 million and the increase in CES 360 solutions cost of $1.2 million. The increase was partially offset with the decrease in medical equipment depreciation of $1.0 million.

 

Gross Margin

 

Total gross margin for the three months ended September 30, 2016 was $38.5 million, or 32.7% of total revenues, compared to $35.5 million, or 32.0% of total revenues, for the three months ended September 30, 2015, an increase of $3.0 million or 8.4%.  The increase in gross margin as a percent of revenue for the quarter was primarily impacted by growth in our 360 solutions and lower depreciation expense.

 

Medical Equipment Solutions

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

    

2016

    

2015

    

Change

    

% Change

 

Total revenue

 

$

73,463

 

$

68,985

 

$

4,478

 

6.5

%  

Cost of revenue

 

 

33,146

 

 

30,134

 

 

3,012

 

10.0

 

Medical equipment depreciation

 

 

14,008

 

 

15,043

 

 

(1,035)

 

(6.9)

 

Gross margin

 

$

26,309

 

$

23,808

 

$

2,501

 

10.5

 

Gross margin %

 

 

35.8

%  

 

34.5

%  

 

 

 

 

 

 

Total revenue in the MES segment increased $4.5 million, or 6.5%, to $73.5 million in the third quarter of 2016 as compared to the same period of 2015.  The increase was primarily due to the growth in our 360 solutions from both new programs and expansion of existing programs of $3.4 million and growth in our sales and remarketing revenue of $0.7 million. The increases were partially offset by the loss of certain customers. Many of our 360 solution customers utilize more than one of our equipment management program offerings in areas such as infusion, patient handling and negative pressure wound therapy. As of September 30, 2016,  we had 238 such active programs, up from 230 as of December 31, 2015.

 

Total cost of revenue in the segment increased $3.0 million, or 10.0%, to $33.1 million in the third quarter of 2016 as compared to the same period of 2015.  This increase was due to the increases in costs to support growth in our 360 solutions of $1.6 million largely due to the increase in employee related cost and an increase in rental costs of $1.3 million largerly due to the higher technician costs and repair parts expense.  

 

Medical equipment depreciation decreased $1.0 million, or 6.9%, to $14.0 million in the third quarter of 2016 as compared to the same period of 2015. The decrease in medical equipment depreciation was primarily due to reduced depreciation resulting from disposals of certain medical equipment.

 

31


 

Gross margin percentage for the MES segment increased from 34.5% in the third quarter of 2015 to 35.8% in the same period of 2016. Gross margin rate was impacted by lower depreciation and growth in our 360 solutions.

 

Clinical Engineering Solutions

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

    

2016

    

2015

    

Change

    

% Change

 

Total revenue

 

$

26,926

 

$

25,401

 

$

1,525

 

6.0

%  

Cost of revenue

 

 

21,278

 

 

20,063

 

 

1,215

 

6.1

 

Gross margin

 

$

5,648

 

$

5,338

 

$

310

 

5.8

 

Gross margin %

 

 

21.0

%  

 

21.0

%  

 

 

 

 

 

 

Total revenue in the CES segment increased $1.5 million, or 6.0%, to $26.9 million in the third quarter of 2016 as compared to the same period of 2015. The increase was primarily due to growth in our managed 360 solutions.  As of September 30, 2016, we had 360 solutions implemented in 203 programs in our CES segment, up from 180 programs as of December 31, 2015.

 

Total cost of revenue in the segment increased $1.2 million, or 6.1%, to $21.3 million in the third quarter of 2016 as compared to the same period of 2015. The increase was primarily attributable to increases in repair parts and vendor expenses to support the revenue growth and mix shifts in type of service provided to customers.

 

Gross margin percentage for the CES segment was consistent at 21.0% in the third quarter of 2016 and 2015.

 

Surgical Services

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

    

2016

    

2015

    

Change

    

% Change

 

Total revenue

 

$

17,559

 

$

16,727

 

$

832

 

5.0

%  

Cost of revenue

 

 

9,461

 

 

8,780

 

 

681

 

7.8

 

Medical equipment depreciation

 

 

1,537

 

 

1,547

 

 

(10)

 

(0.6)

 

Gross margin

 

$

6,561

 

$

6,400

 

$

161

 

2.5

 

Gross margin %

 

 

37.4

%  

 

38.3

%  

 

 

 

 

 

 

Total revenue in the SS segment increased $0.8 million, or 5.0%, to $17.6 million in the third quarter of 2016 as compared to the same period of 2015. The increase was primarily driven by organic growth in our surgical services business.

 

Total cost of revenue in the segment increased $0.7 million, or 7.8%, to $9.5 million in the third quarter of 2016 as compared to the same period of 2015. The increase was primarily attributable to an increase in employee related costs to support growth in our surgical services business.

 

Medical equipment depreciation decreased $0.01 million, or 0.6%, to $1.5 million in the third quarter of 2016 as compared to the same period of 2015.  

 

Gross margin percentage for the SS segment decreased from 38.3% in the third quarter of 2015 to 37.4% in the same period of 2016. The decrease in gross margin percentage was primarily driven by higher employee related costs.

 

32


 

Selling, General and Administrative and Interest Expense

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

    

2016

    

2015

    

Change

    

% Change

 

Selling, general and administrative

 

$

28,757

 

$

30,633

 

$

(1,876)

 

(6.1)

%

Interest expense

 

 

13,081

 

 

13,250

 

 

(169)

 

(1.3)

 

 

Selling, General and Administrative

 

Selling, general and administrative expense decreased $1.9 million, or 6.1%, to $28.8 million for the third quarter of 2016 as compared to the same period of 2015. The decrease was primarily due to lower travel, payroll, depreciation and amortization expenses.

 

Selling, general and administrative expense as a percentage of total revenue was 24.4% and 27.6% for the quarters ended September 30, 2016 and 2015, respectively.

 

Interest Expense

 

Interest expense decreased $0.2 million to $13.1 million for the third quarter of 2016 as compared to the same period of 2015.

 

Income Taxes

 

Income taxes were an expense of $0.3 and $0.2 million for the three months ended September 30, 2016 and 2015, respectively. The tax expense for the three months ended September 30, 2016 and 2015 primarily related to state minimum fees. The expected tax benefit from operating loss during the three months ended September 30, 2016 was offset by the recording of additional valuation allowance. In future reporting periods, we will continue to assess the likelihood that deferred tax assets will be realizable.

 

Consolidated Net Loss

 

Consolidated net loss decreased $4.9 million to $3.6 million in the third quarter of 2016 as compared to the same period of 2015.  Net loss was impacted by the growth in revenue as well as the decrease in selling, general and administrative expenses during the third quarter of 2016.

 

Consolidated Results of Operations for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015

 

Total Revenue

 

Total revenue for the nine months ended September 30, 2016 was $357.7 million, compared to $336.9 million for the nine months ended September 30, 2015, an increase of $20.8 million or 6.2%.  The net increase was primarily due to additional revenue within our MES segment related to growth in our 360 solutions of $9.8 million and sales and remarketing revenue of $4.1 million, growth in our CES segment of $3.4 million related to growth in providing existing and new customers with services on their equipment and growth in our SS segment of $2.9 million. These increases were partially offset by customer losses in our MES segment.

 

Cost of Revenue

 

Total cost of revenue for the nine months ended September 30, 2016 was $240.6 million compared to $227.7 million for the nine months ended September 30, 2015, an increase of $12.9 million or 5.6%. The increase was primarily in our MES segment due to the increases in 360 solutions cost of $5.3 million, other rental costs of $3.6 million and cost of equipment sales of $3.2 million, an increase in our CES 360 solutions cost of $2.6 million corresponding with the 360 solutions revenue growth and an increase in our SS cost of $1.5 million. The increases were partially offset by a decrease in medical equipment depreciation of $3.4 million.

33


 

 

Gross Margin

 

Total gross margin for the nine months ended September 30, 2016 was $117.1 million, or 32.7% of total revenues, compared to $109.2 million, or 32.5% of total revenues, for the nine months ended September 30, 2015, an increase of $7.9 million or 7.3%.  The increase in gross margin as a percent of revenue was primarily impacted by lower depreciation expense and growth in our 360 solutions.

 

Medical Equipment Solutions

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

    

2016

    

2015

    

Change

    

% Change

 

Total revenue

 

$

228,633

 

$

214,154

 

$

14,479

 

6.8

%  

Cost of revenue

 

 

104,640

 

 

92,466

 

 

12,174

 

13.2

 

Medical equipment depreciation

 

 

42,389

 

 

45,712

 

 

(3,323)

 

(7.3)

 

Gross margin

 

$

81,604

 

$

75,976

 

$

5,628

 

7.4

 

Gross margin %

 

 

35.7

%  

 

35.5

%  

 

 

 

 

 

 

Total revenue in the MES segment increased $14.5 million, or 6.8%, to $228.6 million in the first nine months of 2016 as compared to the same period of 2015.  The increase was primarily due to the growth in our 360 solutions from both new programs and expansion of existing programs of $9.8 million and growth in sales and remarketing of $4.1 million.  Many of our 360 Solution customers utilize more than one of our equipment management program offerings in areas such as infusion, patient handling and negative pressure wound therapy. As of September 30, 2016, we had 238 such active programs, up from 230 as of December 31, 2015.

 

Total cost of revenue in the segment increased $12.2 million, or 13.2%, to $104.6 million in the first nine months of 2016 as compared to the same period of 2015.  This increase was due to  an increase in costs to support growth in our 360 solutions of $5.3 million largely due to increases in employee related expense of $3.1 million and repair parts of $0.8 million, an increase in other supplemental rental costs of $3.6 million largely due to higher repair parts expense and an increase in cost of equipment sales of $3.3 million.  

 

Medical equipment depreciation decreased $3.3 million, or 7.3%, to $42.4 million in the first nine months of 2016 as compared to the same period of 2015. The decrease in medical equipment depreciation was primarily due to reduced depreciation resulting from disposals of certain medical equipment.

 

Gross margin percentage for the MES segment increased from 35.5% in the first nine months of 2015 to 35.7% in the same period of 2016. Gross margin rate was impacted by sales mix and lower depreciation.

 

Clinical Engineering Solutions

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

    

2016

    

2015

    

Change

    

% Change

 

Total revenue

 

$

77,968

 

$

74,581

 

$

3,387

 

4.5

%  

Cost of revenue

 

 

61,946

 

 

59,333

 

 

2,613

 

4.4

 

Gross margin

 

$

16,022

 

$

15,248

 

$

774

 

5.1

 

Gross margin %

 

 

20.5

%  

 

20.4

%  

 

 

 

 

 

 

Total revenue in the CES segment increased $3.4 million, or 4.5%, to $78.0 million in the first nine months of 2016 as compared to the same period of 2015. The increase was primarily due to growth in our managed 360 solutions.  As of September 30, 2016, we had 360 solutions implemented in 203 programs in our CES segment, up from 180 programs as of December 31, 2015.

 

34


 

Total cost of revenue in the segment increased $2.6 million, or 4.4%, to $61.9 million in the first nine months of 2016 as compared to the same period of 2015. The increase is primarily attributable to increases in vendor expenses and employee related costs to support the revenue growth and mix shifts in type of service provided to customers.

 

Gross margin percentage for the CES segment increased from 20.4% in the first nine months of 2015 to 20.5% in the same period of 2016.  Gross margin percentage will fluctuate based on the variability of third-party vendor expenses in our 360 solutions and supplemental service programs, as well as fluctuation of services being performed for manufacturer services.

 

Surgical Services

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

    

2016

    

2015

    

Change

    

% Change

 

Total revenue

 

$

51,091

 

$

48,154

 

$

2,937

 

6.1

%  

Cost of revenue

 

 

27,183

 

 

25,681

 

 

1,502

 

5.8

 

Medical equipment depreciation

 

 

4,403

 

 

4,513

 

 

(110)

 

(2.4)

 

Gross margin

 

$

19,505

 

$

17,960

 

$

1,545

 

8.6

 

Gross margin %

 

 

38.2

%  

 

37.3

%  

 

 

 

 

 

 

Total revenue in the SS segment increased $2.9 million, or 6.1%, to $51.1 million in the first nine months of 2016 as compared to the same period of 2015. The increase was driven primarily by organic growth in our surgical services business and to a lesser extent from an acquisition completed in the second quarter of 2015.

 

Total cost of revenue in the segment increased $1.5 million, or 5.8%, to $27.2 million in the first nine months of 2016 as compared to the same period of 2015. The increase was primarily attributable to the increases in employee related costs to support growth in our surgical services business and cost of disposables.

 

Medical equipment depreciation decreased $0.1 million, or 2.4%, to $4.4 million in the first nine months of 2016 as compared to the same period of 2015.

 

Gross margin percentage for the SS segment increased from 37.3% in the first nine months of 2015 to 38.2% in the same period of 2016. The increase in gross margin percentage was primarily driven by both positive operating leverage from volume growth and some shift to higher margin modalities.

 

Selling, General and Administrative, Gain on Settlement, Restructuring, Acquisition and Integration Expenses, Intangible Asset Impairment Charge and Interest Expense

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

    

2016

    

2015

    

Change

    

% Change

 

Selling, general and administrative

 

$

88,853

 

$

91,825

 

$

(2,972)

 

(3.2)

%

(Gain) on settlement

 

 

(2,750)

 

 

(5,718)

 

 

2,968

 

*

 

Interest expense

 

 

39,210

 

 

39,810

 

 

(600)

 

(1.5)

 


*Not meaningful

 

Selling, General and Administrative

 

Selling, general and administrative expense decreased $3.0 million, or 3.2%, to $88.9 million for the first nine months of 2016 as compared to the same period of 2015. The decrease was primarily due to lower consulting costs.

 

Selling, general and administrative expense as a percentage of total revenue was 24.8% and 27.3% for the nine months ended September 30, 2016 and 2015, respectively.

35


 

 

Gain on Settlement

 

Gain on settlement of $2.8 and $5.7 million for the first nine months of 2016 and 2015, respectively was related to settlements with a supplier and former supplier.

 

Interest Expense

 

Interest expense decreased $0.6 million to $39.2 million for the first nine months of 2016 as compared to the same period of 2015.

 

Income Taxes

 

Income taxes were an expense of $0.7 and $0.6 million for the nine months ended September 30, 2016 and 2015, respectively. The tax expense for the nine months ended September 30, 2016 and 2015 primarily related to state minimum fees. The expected tax benefit from operating loss during the nine months ended September 30, 2016 was offset by the recording of additional valuation allowance. In future reporting periods, we will continue to assess the likelihood that deferred tax assets will be realizable.

 

Consolidated Net Loss

 

Consolidated net loss decreased $8.4 million to $8.9 million in the first nine months of 2016 as compared to the same period of 2015.  Net loss was impacted by the growth in revenue as well as the decreases in medical equipment depreciation and selling, general and administrative expenses.

 

EBITDA

 

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) was $94.1 and $91.6 million for the nine months ended September 30, 2016 and 2015, respectively.  EBITDA for the nine months ended September 30, 2016 was higher primarily due to lower medical equipment depreciation and selling, general and administration expenses.

 

In addition to using EBITDA internally as a measure of operational performance, we disclose it externally to assist analysts, investors and lenders in their comparisons of operational performance, valuation and debt capacity across companies with differing capital, tax and legal structures. EBITDA, however, is not a measure of financial performance under accounting principles generally accepted in the United States of America (“GAAP”) and should not be considered as an alternative to, or more meaningful than, net income as a measure of operating performance or to cash flows from operating, investing or financing activities or as a measure of liquidity.  Since EBITDA is not a measure determined in accordance with GAAP and is thus susceptible to varying interpretations and calculations, EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. EBITDA does not represent an amount of funds that is available for management’s discretionary use. A reconciliation of net loss attributable to UHS to EBITDA is included below:

36


 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

(in thousands)

    

2016

    

2015

 

Net loss attributable to Universal Hospital Services, Inc.

 

$

(9,099)

 

$

(17,633)

 

Interest expense

 

 

39,210

 

 

39,810

 

Provision for income taxes

 

 

677

 

 

559

 

Depreciation and amortization of intangibles

 

 

63,328

 

 

68,850

 

EBITDA

 

$

94,116

 

$

91,586

 

 

 

 

 

 

 

 

 

Other Financial Data:

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

22,512

 

$

43,246

 

Net cash used in investing activities

 

 

(37,024)

 

 

(33,720)

 

Net cash provided by (used in) financing activities

 

 

14,512

 

 

(9,526)

 

 

 

 

 

 

 

 

 

Other Operating Data (as of end of period):

 

 

 

 

 

 

 

Medical equipment (approximate number of owned outsourcing units)

 

 

246,000

 

 

254,000

 

District service centers

 

 

83

 

 

83

 

SS stand-alone service centers

 

 

5

 

 

4

 

Centers of Excellence

 

 

5

 

 

5

 

 

SEASONALITY

 

Quarterly operating results are typically affected by seasonal factors.  Historically, our first and fourth quarters are the strongest, reflecting increased customer utilization during the fall and winter months.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Original Notes and Add-on Notes — 7.625%. On August 7, 2012, we issued $425.0 million in aggregate principal amount of 7.625% Second Lien Senior Secured Notes due 2020 (the “Original Notes”) under an indenture dated as of August 7, 2012 (the “2012 Indenture”).  On February 12, 2013, we issued $220.0 million in aggregate principal amount of 7.625% Second Lien Senior Secured Notes due 2020 (the “Add-on Notes”, and along with the Original Notes, the “2012 Notes”) as “additional notes” pursuant to the 2012 Indenture. The 2012 Notes mature on August 15, 2020.

 

The 2012 Indenture provides that the 2012 Notes are our second lien senior secured obligations and are fully and unconditionally guaranteed on a second lien senior secured basis by our existing and certain of our future 100%-owned domestic subsidiaries.

 

Our principal sources of liquidity are expected to be cash flows from operating activities and borrowings under our senior secured credit facility, which provides for loans in an amount of up to $235.0 million, subject to our borrowing base. See Note 7, Long-Term Debt, for details related to our senior secured credit facility. It is anticipated that our principal uses of liquidity will be to fund capital expenditures related to purchases of medical equipment, provide working capital, meet debt service requirements and finance our strategic plans.

 

We require substantial cash to operate our health care technology solutions and service our debt.  Our health care technology solutions require us to invest a significant amount of cash in medical equipment purchases.  To the extent that such expenditures cannot be funded from our operating cash flow, borrowing under our senior secured credit facility or other financing sources, we may not be able to conduct our business or grow as currently planned.

 

If we are unable to generate sufficient cash flow from operations in order to service our debt, we will be forced to take actions, such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing our debt, or seeking additional equity capital.  This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.  If we are unable to repay our debt at maturity, we may have to obtain alternative financing, which may not be available to us.

 

37


 

Net cash provided by operating activities was $22.5 and $43.2 million for the nine months ended September 30, 2016 and 2015, respectively. The decrease in net cash provided by operating activities was primarily from higher incentive payments in 2016, the timing of accounts receivable colletions from specific customers and working capital increases primarily related to timing.

 

Net cash used in investing activities was $37.0 and $33.7 million for the nine months ended September 30, 2016 and 2015, respectively. The increase in  net cash used in investing activities was primarily due to higher medical equipment purchases and lower proceeds from sale of medical equipment in 2016 compared to the same period of 2015.

 

Net cash provided by (used in) financing activities was $14.5 and $(9.5) million for the nine months ended September 30, 2016 and 2015, respectively.  The increase in net cash provided by financing activities was primarily due to higher net borrowings in 2016 compared to the same period of 2015.

 

Based on the level of operating performance expected in 2016, we believe our cash from operations and additional borrowings under our senior secured credit facility will meet our liquidity needs for the foreseeable future, exclusive of any borrowings that we may make to finance potential acquisitions.  However, if during that period or thereafter we are not successful in generating sufficient cash flows from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to us, our business could be adversely affected.  As of September 30, 2016, we had $111.7 million of availability under the senior secured credit facility based on a borrowing base of $167.1 million less borrowings of $50.9 million and after giving effect to $4.5 million used for letters of credit.  As of September 30, 2015, we had $129.7 million of availability under the senior secured credit facility based on a borrowing base of $168.7 million less borrowings of $35.1 million and after giving effect to $3.9 million used for letters of credit.

 

Our levels of borrowing are further restricted by the financial covenants set forth in our senior secured credit facility agreement and the 2012 Indenture governing our 2012 Notes, as described in Note 7, Long-Term Debt.

 

The Company was in compliance with all financial covenants for all periods presented.

 

RECENT ACCOUNTING PRONOUNCEMENT

 

See Item 1 of Part I, Note 2, Recent Accounting Pronouncements.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We do not have any off-balance sheet arrangements.

 

SAFE HARBOR STATEMENT

 

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: We believe statements in this Quarterly Report on Form 10-Q looking forward in time involve risks and uncertainties.  The following factors, among others, could adversely affect our business, operations and financial condition, causing our actual results to differ materially from those expressed in any forward-looking statements:

 

·

our competitors’ activities;

·

our customers’ patient census or service needs;

·

global economic conditions’ effect on our customers;

·

our ability to maintain existing contracts or contract terms and enter into new contracts with customers;

·

uncertainties as to the effect of non-renewal of existing contracts;

·

consolidation in the health care industry and its effect on prices;

·

our relationships with key suppliers;

·

our ability to change the manner in which health care providers procure medical equipment;

·

the absence of long-term commitments and cancellations by or disputes with customers;

·

our dependence on key personnel;

·

our ability to identify and manage acquisitions;

·

increases in expenses related to our pension plan;

·

our cash flow fluctuation;

38


 

·

the increased credit risks associated with doing business with home care providers and nursing homes;

·

the risk of claims associated with medical equipment we outsource and service;

·

increased costs we cannot pass through;

·

the failure of any management information system;

·

the inherent limitations on internal controls of our financial reporting;

·

the uncertainty surrounding health care reform initiatives;

·

the federal Privacy law risks;

·

the federal Anti-Kickback law risks;

·

changes to third-party payor reimbursement for health care items and services;

·

potential other new healthcare laws or regulations;

·

our customers operate in a highly regulated environment;

·

our fleet’s risk of recalls or obsolescence;

·

our substantial debt service obligations;

·

our need for substantial cash to operate and expand our business as planned; and

·

our history of net losses and substantial interest expense.

 

For further information on risks applicable to us, please see the disclosure regarding the risk factors as set forth in Item 1A of Part II of this Quarterly Report on Form 10-Q.

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

We are exposed to market risk arising from adverse changes in interest rates, fuel costs and pension valuation.  We do not enter into derivatives or other financial instruments for speculative purposes.

 

Interest Rates

 

We use both fixed and variable rate debt as sources of financing.  At September 30, 2016, we had approximately $721.6 million of total debt outstanding of which $50.9 million was bearing interest at variable rates. Based on variable debt levels at September 30, 2016, a 1.0 percentage point change in interest rates on variable rate debt would have resulted in annual interest expense fluctuating by approximately $0.5 million.

 

Fuel Costs

 

We are also exposed to market risks related to changes in the price of gasoline used to fuel our fleet of delivery and sales vehicles.  A hypothetical 10% increase in the first nine months of 2016 average price of unleaded gasoline, assuming gasoline usage levels for the nine months ended September 30, 2016, would lead to an annual increase in fuel costs of approximately $0.3 million.

 

Pension

 

Our pension plan assets, which were approximately $19.5 million at December 31, 2015, are subject to volatility that can be caused by fluctuations in general economic conditions. Continued market volatility and disruption could cause further declines in asset values, and if this occurs, we may need to make additional pension plan contributions and our pension expense in future years may increase. A hypothetical 10% decrease in the fair value of plan assets at December 31, 2015 would lead to a decrease in the funded status of the plan of approximately $2.0 million.

 

Other Market Risk

 

As of September 30, 2016, we have no other material exposure to market risk.

39


 

Item 4.  Controls and Procedures

 

(a)

Evaluation of disclosure controls and procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2016.

 

(b)

Changes in internal control over financial reporting

 

There were no changes that occurred during the most recent fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1.Legal Proceedings

 

The Company, in the ordinary course of business, could be subject to liability claims related to employees and the equipment that it rents and services. Asserted claims are subject to many uncertainties and the outcome of individual matters is not predictable. While the ultimate resolution of these actions may have an impact on the Company’s financial results for a particular reporting period, management believes that any such resolution would not have a material adverse effect on the financial position, results of operations or cash flows of the Company and the chance of a negative outcome on outstanding litigation is considered remote. See the additional information in Item 1 of Part I, Note 8, Commitments and Contingencies.

 

Item 1A.  Risk Factors

 

Our business is subject to various risks and uncertainties.  Any of the risks discussed elsewhere in this Quarterly Report on Form 10-Q or our other filings with the Securities and Exchange Commission, including the risk factors set forth in our 2015 Annual Report on Form 10-K, could materially adversely affect our business, financial condition or results of operations.

 

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

 

(a) Pursuant to this Item 5 of our Quarterly Report on Form 10-Q (the “Form 10-Q”), the Company is reporting information relating to the below-described amendments to existing compensatory plans, contracts and arrangements with certain of its named executive officers that would otherwise be required to be disclosed pursuant to Item 5.02(e) of a Current Report on Form 8-K. 

 

On November 2, 2016, the Company made changes to the Employment Agreement with Thomas J. Leonard, our Chief Executive Officer, dated April 8, 2015 and amended on March 30, 2016 (as amended, the “Employment Agreement”), and its employment arrangements with James B. Pekarek, our Executive Vice President and Chief Financial Officer,

40


 

which includes a Severance Arrangement dated April 11, 2013 (the “Severance Arrangement”), each of whom is one of our named executive officers. 

 

The changes relative to Mr. Leonard, which are set forth in the Second Amendment to the Employment Agreement (the “Second Amendment”), include changes in the way Mr. Leonard’s bonus is calculated and when it is paid, as well as changes relative to payments related to Mr. Leonard’s health care insurance coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), if  Mr. Leonard’s employment is terminated by the Company without “Cause” or by Mr. Leonard for “Good Reason” (each as defined in the Employment Agreement).  This disclosure is qualified in its entirety by reference to the Second Amendment, a copy of which is filed as Exhibit 10.2 to this Form 10-Q and is incorporated herein by this reference.  The changes relative to Mr. Pekarek, which are set forth in an amended Severance Arrangement (the “Amended Severance Arrangement”), include  changing the amount and timing of the payment of the bonus that would be payable to Mr. Pekarek if the Company terminates him without “Cause” (as defined in the Amended Severance Arrangement).  This disclosure is qualified in its entirety by reference to the Amended Severance Arrangement, a copy of which is filed as Exhibit 10.3 to this Form 10-Q and is incorporated herein by this reference. 

 

A description of Mr. Leonard’s Employment Agreement and Mr. Pekarek’s existing Severance Arrangement are contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, under the caption “Executive Compensation- Potential Payments Upon Termination Or Change in Control – Potential Payments Under Employment Agreements” and are incorporated herein by this reference.

 

On November 2, 2016, the Company also made changes to its existing Executive Severance Pay Plan dated June 1, 2007 and amended on December 31, 2008, February 2011, October 2011 and March 17, 2015 (as previously amended, the “Executive Severance Pay Plan”), which provides severance benefits for our senior executives, including our named executive officers (other than Mr. Leonard, who is entitled to the severance benefits provided in his Employment Agreement, as amended by the Second Amendment, and Mr. Pekarek, who is entitled to the severance benefits provided in his Amended Severance Arrangement), who currently are Kevin E. Ketzel, President, and Robert L. Creviston, Chief Human Resources Officer.  The changes to the Executive Severance Pay Plan (as so amended, the “Amended Executive Severance Pay Plan”) include changes to the severance benefits to which such persons are entitled upon an “Involuntary Termination” (as defined in the Amended Executive Severance Pay Plan) from the Company relating to the amount and timing of the bonus, the payments required to be made by the Company to such executive relating to the continued cost of health care insurance coverage under COBRA, and the amounts that would be payable to the executive if the executive’s “Involuntary Termination” were to occur during the “Change of Control Period” (as defined in the Amended Executive Severance Pay Plan).  This disclosure is qualified in its entirety by reference to the Amended Executive Severance Pay Plan, a copy of which is filed as Exhibit 10.1 to this Form 10-Q and is incorporated herein by this reference. 

A description of the Executive Severance Pay Plan is contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, under the caption “Executive Compensation- Potential Payments Upon Termination Or Change in Control – Potential Payments Under Our Executive Severance Pay Plan” and is incorporated herein by this reference.

 

 

 

41


 

Item 6.Exhibits

 

 

 

 

Number

 

Description

 

 

 

10.1 

 

Universal Hospital Services, Inc. Executive Severance Pay Plan, dated November 2, 2016.

 

10.2 

 

Amendment Two to the Employment Agreement, dated November 4, 2016, between Thomas Leonard and Universal Hospital Services, Inc.

 

10.3 

 

Severance Arrangement, dated November 2, 2016, between James B. Pekarek and Universal Hospital Services, Inc.

 

31.1 

 

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2 

 

Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1 

 

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  *

 

 

 

32.2 

 

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  *

 

 

 

101 

 

 

Financial Statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2016, formatted in Extensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Loss, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements.

 

 


* Furnished, not filed

 

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.

 

Date:  November 7, 2016

 

 

 

 

Universal Hospital Services, Inc.

 

 

 

By

/s/ Thomas J. Leonard

 

Thomas J. Leonard

 

Chief Executive Officer

 

(Principal Executive Officer and Duly Authorized Officer)

 

 

 

By

/s/ James B. Pekarek

 

James B. Pekarek

 

Executive Vice President and Chief Financial Officer

 

(Principal Financial Officer)

 

42