Agiliti Health, Inc. - FORM 10-Q

Attached files

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EX-32.2 - EX-32.2 - Agiliti Health, Inc.	uhsi-20170331ex322ef00f3.htm
EX-32.1 - EX-32.1 - Agiliti Health, Inc.	uhsi-20170331ex321fe1872.htm
EX-31.2 - EX-31.2 - Agiliti Health, Inc.	uhsi-20170331ex312501503.htm
EX-31.1 - EX-31.1 - Agiliti Health, Inc.	uhsi-20170331ex31198aa6b.htm

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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 March 31, 2017


☐	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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
(Do not check if a smaller reporting company)		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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 May 8, 2017: 1,000

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Universal Hospital Services, Inc.

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		Page
PART I - FINANCIAL INFORMATION

ITEM 1.	Consolidated Financial Statements (unaudited)

	Consolidated Balance Sheets — March 31, 2017 and December 31, 2016	2

	Consolidated Statements of Operations—Three months ended March 31, 2017 and 2016	3

	Consolidated Statements of Comprehensive Loss —Three months ended March 31, 2017 and 2016	4

	Consolidated Statements of Cash Flows — Three months ended March 31, 2017 and 2016	5

	Notes to Consolidated Financial Statements	6

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	33

ITEM 4.	Controls and Procedures	34

PART II - OTHER INFORMATION

ITEM 1.	Legal Proceedings	34

ITEM 1A.	Risk Factors	34

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34

ITEM 3.	Defaults Upon Senior Securities	34

ITEM 4.	Mine Safety Disclosures	34

ITEM 5.	Other Information	34

ITEM 6.	Exhibits	35

Signatures		36

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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)


	March 31,		December 31,
	2017		2016
Assets
Current assets:
Accounts receivable, less allowance for doubtful accounts of $1,515 at March 31, 2017 and $1,530 at December 31, 2016	$	83,893	$	84,264
Inventories		10,591		11,085
Other current assets		7,037		11,098
Total current assets		101,521		106,447
Property and equipment:
Medical equipment		616,404		618,052
Property and office equipment		96,621		94,846
Accumulated depreciation		(514,751)		(504,249)
Total property and equipment, net		198,274		208,649
Other long-term assets:
Goodwill		343,980		343,766
Other intangibles, net		154,366		157,371
Other		2,173		1,890
Total assets	$	800,314	$	818,123
Liabilities and Deficit
Current liabilities:
Current portion of long-term debt	$	5,281	$	5,454
Book overdrafts		4,635		10,700
Accounts payable		23,563		38,819
Accrued compensation		11,886		19,906
Accrued interest		6,436		18,696
Other accrued expenses		14,741		16,676
Total current liabilities		66,542		110,251
Long-term debt, less current portion		728,835		701,863
Pension and other long-term liabilities		12,107		12,277
Deferred income taxes, net		53,323		53,217
Commitments and contingencies (Note 8)
Deficit
Common stock, $0.01 par value; 1,000 shares authorized, issued and outstanding at March 31, 2017 and December 31, 2016		—		—
Additional paid-in capital		245,766		244,986
Accumulated deficit		(298,789)		(296,826)
Accumulated other comprehensive loss		(7,647)		(7,826)
Total Universal Hospital Services, Inc. deficit		(60,670)		(59,666)
Noncontrolling interest		177		181
Total deficit		(60,493)		(59,485)
Total liabilities and deficit	$	800,314	$	818,123

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

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Universal Hospital Services, Inc.

Consolidated Statements of Operations

(in thousands)

(unaudited)


	Three Months Ended
	March 31,
	2017		2016
Revenue
Medical equipment solutions	$	78,660	$	80,230
Clinical engineering solutions		34,662		25,578
Surgical services		17,330		16,318
Total revenues		130,652		122,126
Cost of Revenue
Cost of medical equipment solutions		33,797		38,282
Cost of clinical engineering solutions		26,506		20,024
Cost of surgical services		9,456		8,766
Medical equipment depreciation		15,126		15,169
Total costs of revenues		84,885		82,241
Gross margin		45,767		39,885
Selling, general and administrative		34,141		31,298
Operating income		11,626		8,587
Interest expense		13,294		13,068
Loss before income taxes and noncontrolling interest		(1,668)		(4,481)
Provision for income taxes		222		159
Consolidated net loss		(1,890)		(4,640)
Net income attributable to noncontrolling interest		73		60
Net loss attributable to Universal Hospital Services, Inc.	$	(1,963)	$	(4,700)

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

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Universal Hospital Services, Inc.

Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)


	Three Months Ended
	March 31,
	2017		2016
Consolidated net loss	$	(1,890)	$	(4,640)
Other comprehensive income:
Gain on minimum pension liability, net of tax of $0		179		186
Total other comprehensive income		179		186
Comprehensive loss		(1,711)		(4,454)
Comprehensive income attributable to noncontrolling interest		73		60
Comprehensive loss attributable to Universal Hospital Services, Inc.	$	(1,784)	$	(4,514)

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

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Universal Hospital Services, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Three Months Ended
	March 31,
	2017		2016
Cash flows from operating activities:
Consolidated net loss	$	(1,890)	$	(4,640)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		17,894		17,922
Amortization of intangibles, deferred financing costs and bond premium		3,107		3,062
Provision for doubtful accounts		220		92
Provision for inventory obsolescence		22		144
Non-cash share-based compensation expense		758		757
Gain on sales and disposals of equipment		(747)		(1,255)
Deferred income taxes		106		60
Interest on note receivable		(4)		—
Changes in operating assets and liabilities:
Accounts receivable		151		(3,801)
Inventories		472		46
Other operating assets		(123)		(598)
Accounts payable		(3,064)		(30)
Other operating liabilities		(22,206)		(24,509)
Net cash used in operating activities		(5,304)		(12,750)
Cash flows from investing activities:
Medical equipment purchases		(17,476)		(14,209)
Property and office equipment purchases		(1,063)		(1,057)
Proceeds from disposition of property and equipment		1,402		5,328
Acquisition and refund of escrow		3,691		—
Net cash used in investing activities		(13,446)		(9,938)
Cash flows from financing activities:
Proceeds under senior secured credit facility		70,029		60,200
Payments under senior secured credit facility		(43,492)		(34,200)
Payments of principal under capital lease obligations		(1,667)		(1,512)
Payments of deferred financing costs		—		(97)
Holdback payment related to acquisition		—		(500)
Distributions to noncontrolling interests		(77)		(120)
Dividend and equity distribution payments		—		(24)
Proceeds from exercise of parent company stock options		22		7
Change in book overdrafts		(6,065)		(1,066)
Net cash provided by financing activities		18,750		22,688
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	$	25,435	$	25,229
Income taxes paid		14		69
Non-cash activities:
Medical equipment purchases included in accounts payable (at end of period)	$	3,299	$	8,373
Capital lease additions		1,827		1,154

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

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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 2016 Annual Report on Form 10-K filed with the SEC.

The interim consolidated financial statements presented herein as of March 31, 2017, 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 2016 Annual Report on Form 10-K. There have been no material changes to these policies for the quarter ended March 31, 2017.

Principles of Consolidation

The consolidated financial statements include the accounts of UHS and its 100%-owned subsidiaries, UHS Surgical Services, Inc. (“Surgical Services”) and Radiographic Equipment Services, Inc. (“RES”). 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 July 2015, the FASB issued ASU No. 2015-11 Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 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 did not have a material impact on our consolidated financial statements.

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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 did 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. 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. We expect to adopt this guidance on January 1, 2018 and have selected a retrospective transition method. We are currently assessing our contracts with customers and related financial disclosures to evaluate the impact of the amended guidance on our existing revenue recognition policies and procedures. We expect to complete our assessment by the third quarter of 2017.

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 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.

In January 2017, the FASB issued ASU No. 2017-01 Business Combination (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. 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.

In January 2017, the FASB issued ASU No. 2017-04 Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this standard will eliminate the Step 2 goodwill impairment test and require us to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets.

In March 2017, the FASB issued ASU No. 2017-07 Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-01”). ASU 2017-

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07 requires that a company to present service cost separately from the other components of the net benefit cost. This ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.

3.Fair Value Measurements

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 March 31, 2017 and December 31, 2016, based on the quoted market price for the same or similar issues of debt, which represents a Level 2 fair value measurement, is approximately:


	March 31, 2017				December 31, 2016
	Carrying		Fair		Carrying		Fair
(in thousands)	Value		Value		Value		Value
Original notes - 7.625% (1)	$	420,835	$	425,000	$	420,523	$	420,750
Add-on notes - 7.625% (2)		225,404		220,000		225,743		217,800

(1)

The carrying value of the Original notes - 7.625% is net of unamortized deferred financing costs of $4.2 and $4.5 million as of March 31, 2017 and December 31, 2016, respectively.

(2)

The carrying value of the Add-on notes - 7.625% is net of unamortized deferred financing costs of $1.7 and $1.9 million as of March 31, 2017 and December 31, 2016, respectively, and includes unamortized bond premium of $7.1 and $7.6 million as of March 31, 2017 and December 31, 2016, respectively.

4.Goodwill and Other Intangible Assets

Our goodwill as of March 31, 2017 and December 31, 2016, by reporting segment, consists of the following:


	Medical		Clinical
	Equipment		Engineering		Surgical
(in thousands)	Solutions		Solutions		Services		Total
Balance at December 31, 2016	$	227,486	$	62,826	$	53,454	$	343,766
Acquisition		—		214		—		214
Balance at March 31, 2017	$	227,486	$	63,040	$	53,454	$	343,980

Our other intangible assets as of March 31, 2017 and December 31, 2016 consist of the following:


	March 31, 2017								December 31, 2016
			Accumulated								Accumulated
(in thousands)	Cost		Amortization		Impairment		Net		Cost		Amortization		Impairment		Net
Finite-life intangibles
Customer relationship	$	122,109	$	(99,828)	$	—	$	22,281	$	122,109	$	(97,704)	$	—	$	24,405
Supply agreement		26,000		(26,000)		—		—		26,000		(25,274)		—		726
Non-compete agreements		1,758		(932)		—		826		1,758		(856)		—		902
Trade names		238		(79)		—		159		238		—		—		238
Total finite-life intangibles		150,105		(126,839)		—		23,266		150,105		(123,834)		—		26,271
Indefinite-life intangibles
Trade names		166,000		—		(34,900)		131,100		166,000		—		(34,900)		131,100
Total intangible assets	$	316,105	$	(126,839)	$	(34,900)	$	154,366	$	316,105	$	(123,834)	$	(34,900)	$	157,371

Total amortization expense related to intangible assets were $3.0 and $2.9 million for the three months ended March 31, 2017 and 2016, respectively.

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The estimated future amortization expense for identifiable intangible assets during the remainder of 2017 and the next five years is as follows:


(in thousands)
Remainder of 2017	$	6,268
2018		7,154
2019		4,565
2020		2,325
2021		1,665
2022		973

5.Deficit

The following tables represent changes in deficit that are attributable to our shareholders and noncontrolling interests for the three month periods ended March 31, 2017 and 2016.


					Accumulated
	Additional				Other
	Paid-in		Accumulated		Comprehensive		Noncontrolling		Total
(in thousands)	Capital		Deficit		Loss		Interests		Deficit
Balance at December 31, 2016	$	244,986	$	(296,826)	$	(7,826)	$	181	$	(59,485)
Net (loss) income		—		(1,963)		—		73		(1,890)
Other comprehensive income		—		—		179		—		179
Share-based compensation		758		—		—		—		758
Stock options exercised		22		—		—		—		22
Cash distributions to noncontrolling interests		—		—		—		(77)		(77)
Balance at March 31, 2017	$	245,766	$	(298,789)	$	(7,647)	$	177	$	(60,493)


					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		—		(4,700)		—		60		(4,640)
Other comprehensive income		—		—		186		—		186
Share-based compensation		757		—		—		—		757
Stock options exercised		7		—		—		—		7
Cash distributions to noncontrolling interests		—		—		—		(120)		(120)
Balance at March 31, 2016	$	242,597	$	(287,766)	$	(7,979)	$	180	$	(52,968)

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6.Share-Based Compensation

During the three months ended March 31, 2017, 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, 2016	36,973	$	0.77	$	9,315	7.8
Granted	565		1.19
Exercised	(31)		0.71	$	15
Forfeited or expired	(46)		0.71
Outstanding at March 31, 2017	37,461	$	0.77	$	15,564	7.6
Exercisable at March 31, 2017	14,879	$	0.74	$	6,759	7.6
Remaining authorized options available for issue	6,072

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 three months ended March 31, 2017 and 2016 under the Black-Scholes model.


	Three Months Ended
	March 31,
	2017			2016
Risk-free interest rate		1.51	%		1.50	%
Expected volatility		28.9	%		31.0	%
Dividend yield		N/A			N/A
Expected option life (years)		4.23			6.00
Black-Scholes Value of options	$	0.30		$	0.33

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 March 31, 2017, unearned non-cash share-based compensation that we expect to recognize as expense over a weighted average period of 2.1 years totals approximately $5.2 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 March 31, 2017 and 2016, respectively.

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Although Parent grants stock options and restricted stock units, the Company recognizes compensation cost, primarily 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:


	March 31,		December 31,
(in thousands)	2017		2016
Original notes - 7.625% (1)	$	420,835	$	420,523
Add-on notes - 7.625% (2)		225,404		225,743
Senior secured credit facility (3)		70,584		43,917
Capital lease obligations		17,293		17,134
		734,116		707,317
Less: Current portion of long-term debt		(5,281)		(5,454)
Total long-term debt	$	728,835	$	701,863

(1)

The carrying value of the Original notes - 7.625% is net of unamortized deferred financing costs of $4.2 and $4.5 million as of March 31, 2017 and December 31, 2016, respectively.

(2)

(3)

The carrying value of the Senior secured credit facility is net of unamortized deferred financing costs of $1.6 and $1.8 million as of March 31, 2017 and December 31, 2016, 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 (i) 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 the agent or, at our option, 0.50% to 1.00% above the Base Rate as defined in the Third

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Amended Credit Agreement and (ii) 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 Parent, Surgical Services and RES.

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 March 31, 2017, we had $90.0 million of availability under the senior secured credit facility based on a borrowing base of $166.7 million less borrowings of $72.2 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 March 31, 2017, we had $72.2 million of borrowings outstanding of which $13.0 million was accruing interest at a rate of 2.7322%, $40.0 million was accruing interest at a rate of 2.6622%, $16.0 million was accruing interest at a rate of 2.6928% and $3.2 million was accruing interest at a rate of 4.75%.

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

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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.

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 in the discovery phase.

9.Related Party Transactions

Management Agreement

On May 31, 2007, we and affiliates 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 each of Robert Juneja and Bret Bowerman are members of our board of directors and are associated with IPC. 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

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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 March 31, 2017 and 2016, 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 million for the three month period ended March 31, 2017.

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 March 31, 2017, the LLCs had approximately $0.8 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 March 31, 2017, we held interests in four 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.

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
	March 31,
	2017		2016
Revenues	$	78,660	$	80,230
Cost of revenue		33,797		38,282
Medical equipment depreciation		13,543		13,752
Gross margin	$	31,320	$	28,196

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Clinical Engineering Solutions

(in thousands)


	Three Months Ended
	March 31,
	2017		2016
Revenues	$	34,662	$	25,578
Cost of revenue		26,506		20,024
Gross margin	$	8,156	$	5,554

Surgical Services

(in thousands)


	Three Months Ended
	March 31,
	2017		2016
Revenues	$	17,330	$	16,318
Cost of revenue		9,456		8,766
Medical equipment depreciation		1,583		1,417
Gross margin	$	6,291	$	6,135

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

(in thousands)


	Three Months Ended
	March 31,
	2017		2016
Total gross margin	$	45,767	$	39,885
Selling, general and administrative		34,141		31,298
Interest expense		13,294		13,068
Loss before income taxes and noncontrolling interest	$	(1,668)	$	(4,481)

Total Assets by Reporting Segment

(in thousands)


	March 31,		December 31,
	2017		2016
Medical Equipment Solutions	$	568,481	$	584,597
Clinical Engineering Solutions		130,662		131,537
Surgical Services		101,171		101,989
Total Company Assets	$	800,314	$	818,123

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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
	March 31,
	2017		2016
MES
Equipment usage solutions	58.3	%	59.7	%
Equipment/disposable sales	1.9		6.0
	60.2		65.7
CES
Service solutions	26.5		20.9
SS
Equipment usage solutions	13.1		13.3
Equipment/disposable sales	0.2		0.1
	13.3		13.4
Total revenues	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 months ended March 31, 2017 and 2016 primarily relates to state minimum fees and indefinite-life intangibles. The expected tax benefit from operating loss during the three months ended March 31, 2017 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 March 31, 2017, the Company had available unused federal net operating loss carryforwards of approximately $211.6 million. The net operating loss carryforwards will expire at various dates from 2018 through 2037.

13.Consolidating Financial Statements

In accordance with the provisions of the 2012 Indenture, as 100%-owned subsidiaries of UHS, Surgical Services and RES have 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 guarantors is presented on the following pages.

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Universal Hospital Services, Inc.

Consolidating Balance Sheets

(in thousands, except share and per share information)

(unaudited)


	March 31, 2017
	Parent		Subsidiaries
	Issuer		Guarantors		Consolidating
	UHS		SS & RES		Adjustments		Consolidated
Assets
Current assets:
Accounts receivable, less allowance for doubtful accounts	$	72,738	$	11,155	$	—	$	83,893
Due from affiliates		30,922		—		(30,922)		—
Inventories		4,762		5,829		—		10,591
Other current assets		6,479		558		—		7,037
Total current assets		114,901		17,542		(30,922)		101,521
Property and equipment:
Medical equipment		559,632		56,772		—		616,404
Property and office equipment		85,563		11,058		—		96,621
Accumulated depreciation		(471,232)		(43,519)		—		(514,751)
Total property and equipment, net		173,963		24,311		—		198,274
Other long-term assets:
Goodwill		283,141		60,839		—		343,980
Investment in subsidiary		73,179		—		(73,179)		—
Other intangibles, net		139,179		15,187		—		154,366
Other		1,350		823		—		2,173
Total assets	$	785,713	$	118,702	$	(104,101)	$	800,314
Liabilities and (Deficit) Equity
Current liabilities:
Current portion of long-term debt	$	3,849	$	1,432	$	—	$	5,281
Book overdrafts		4,406		229		—		4,635
Due to affiliates		—		30,922		(30,922)		—
Accounts payable		19,802		3,761		—		23,563
Accrued compensation		10,000		1,886		—		11,886
Accrued interest		6,436		—		—		6,436
Other accrued expenses		13,805		936		—		14,741
Total current liabilities		58,298		39,166		(30,922)		66,542
Long-term debt, less current portion		725,399		3,436		—		728,835
Pension and other long-term liabilities		12,107		—		—		12,107
Deferred income taxes, net		50,564		2,759		—		53,323
Commitments and contingencies
(Deficit) Equity
Common stock		—		—		—		—
Additional paid-in capital		245,781		76,013		(76,028)		245,766
Accumulated deficit		(295,940)		(2,849)		—		(298,789)
Accumulated loss in subsidiary		(2,849)		—		2,849		—
Accumulated other comprehensive loss		(7,647)		—		—		(7,647)
Total Universal Hospital Services, Inc. (deficit) equity		(60,655)		73,164		(73,179)		(60,670)
Noncontrolling interest		—		177		—		177
Total (deficit) equity		(60,655)		73,341		(73,179)		(60,493)
Total liabilities and (deficit) equity	$	785,713	$	118,702	$	(104,101)	$	800,314

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Universal Hospital Services, Inc.

Consolidating Balance Sheets

(in thousands, except share and per share information)

(unaudited)


	December 31, 2016
	Parent		Subsidiaries
	Issuer		Guarantors		Consolidating
	UHS		SS & RES		Adjustments		Consolidated
Assets
Current assets:
Accounts receivable, less allowance for doubtful accounts	$	71,802	$	12,462	$	—	$	84,264
Due from affiliates		28,523		—		(28,523)		—
Inventories		4,754		6,331		—		11,085
Other current assets		10,501		597		—		11,098
Total current assets		115,580		19,390		(28,523)		106,447
Property and equipment:
Medical equipment		562,422		55,630		—		618,052
Property and office equipment		83,716		11,130		—		94,846
Accumulated depreciation		(462,167)		(42,082)		—		(504,249)
Total property and equipment, net		183,971		24,678		—		208,649
Other long-term assets:
Goodwill		283,141		60,625		—		343,766
Investment in subsidiary		72,624		—		(72,624)		—
Other intangibles, net		140,944		16,427		—		157,371
Other		1,397		493		—		1,890
Total assets	$	797,657	$	121,613	$	(101,147)	$	818,123
Liabilities and (Deficit) Equity
Current liabilities:
Current portion of long-term debt	$	3,990	$	1,464	$	—	$	5,454
Book overdrafts		9,834		866		—		10,700
Due to affiliates		—		28,523		(28,523)		—
Accounts payable		31,586		7,233		—		38,819
Accrued compensation		17,196		2,710		—		19,906
Accrued interest		18,696		—		—		18,696
Other accrued expenses		15,426		1,250		—		16,676
Total current liabilities		96,728		42,046		(28,523)		110,251
Long-term debt, less current portion		698,050		3,813		—		701,863
Pension and other long-term liabilities		12,274		3		—		12,277
Deferred income taxes, net		50,256		2,961		—		53,217
Commitments and contingencies
(Deficit) Equity
Common stock		—		—		—		—
Additional paid-in capital		245,001		75,799		(75,814)		244,986
Accumulated deficit		(293,636)		(3,190)		—		(296,826)
Accumulated loss in subsidiary		(3,190)		—		3,190		—
Accumulated other comprehensive loss		(7,826)		—		—		(7,826)
Total Universal Hospital Services, Inc. (deficit) equity		(59,651)		72,609		(72,624)		(59,666)
Noncontrolling interest		—		181		—		181
Total (deficit) equity		(59,651)		72,790		(72,624)		(59,485)
Total liabilities and (deficit) equity	$	797,657	$	121,613	$	(101,147)	$	818,123

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Universal Hospital Services, Inc.

Consolidating Statements of Operations

(in thousands)

(unaudited)


	Three Months Ended March 31, 2017
	Parent		Subsidiaries
	Issuer		Guarantors		Consolidating
	UHS		SS & RES		Adjustments		Consolidated
Revenue
Medical equipment solutions	$	78,660	$	—	$	—	$	78,660
Clinical engineering solutions		29,289		5,373		—		34,662
Surgical services		—		17,330		—		17,330
Total revenues		107,949		22,703		—		130,652
Cost of Revenue
Cost of medical equipment solutions		33,797		—		—		33,797
Cost of clinical engineering solutions		22,575		3,931		—		26,506
Cost of surgical services		—		9,456		—		9,456
Medical equipment depreciation		13,543		1,583		—		15,126
Total costs of revenues		69,915		14,970		—		84,885
Gross margin		38,034		7,733		—		45,767
Selling, general and administrative		27,722		6,419		—		34,141
Operating income		10,312		1,314		—		11,626
Equity in earnings of subsidiary		(414)		—		414		—
Interest expense		12,749		545		—		13,294
(Loss) income before income taxes and noncontrolling interest		(2,023)		769		(414)		(1,668)
(Benefit) provision for income taxes		(133)		355		—		222
Consolidated net (loss) income		(1,890)		414		(414)		(1,890)
Net income attributable to noncontrolling interest		—		73		—		73
Net (loss) income attributable to Universal Hospital Services, Inc.	$	(1,890)	$	341	$	(414)	$	(1,963)

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Universal Hospital Services, Inc.

Consolidating Statements of Operations

(in thousands)

(unaudited)


	Three Months Ended March 31, 2016
	Parent		Subsidiary
	Issuer		Guarantor		Consolidating
	UHS		Surgical Services		Adjustments		Consolidated
Revenue
Medical equipment solutions	$	80,230	$	—	$	—	$	80,230
Clinical engineering solutions		25,578		—		—		25,578
Surgical services		—		16,318		—		16,318
Total revenues		105,808		16,318		—		122,126
Cost of Revenue
Cost of medical equipment solutions		38,282		—		—		38,282
Cost of clinical engineering solutions		20,024		—		—		20,024
Cost of surgical services		—		8,766		—		8,766
Medical equipment depreciation		13,752		1,417		—		15,169
Total costs of revenues		72,058		10,183		—		82,241
Gross margin		33,750		6,135		—		39,885
Selling, general and administrative		26,336		4,962		—		31,298
Operating income		7,414		1,173		—		8,587
Equity in earnings of subsidiary		(367)		—		367		—
Interest expense		12,525		543		—		13,068
(Loss) income before income taxes and noncontrolling interest		(4,744)		630		(367)		(4,481)
(Benefit) provision for income taxes		(104)		263		—		159
Consolidated net (loss) income		(4,640)		367		(367)		(4,640)
Net income attributable to noncontrolling interest		—		60		—		60
Net (loss) income attributable to Universal Hospital Services, Inc.	$	(4,640)	$	307	$	(367)	$	(4,700)

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Universal Hospital Services, Inc.

Consolidating Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)


	Three Months Ended March 31, 2017
	Parent		Subsidiaries
	Issuer		Guarantors		Consolidating
	UHS		SS & RES		Adjustments		Consolidated
Consolidated net (loss) income	$	(1,890)	$	414	$	(414)	$	(1,890)
Other comprehensive income:
Gain on minimum pension liability, net of tax		179		—		—		179
Total other comprehensive income		179		—		—		179
Comprehensive (loss) income		(1,711)		414		(414)		(1,711)
Comprehensive income attributable to noncontrolling interest		—		73		—		73
Comprehensive (loss) income attributable to Universal Hospital Services, Inc.	$	(1,711)	$	341	$	(414)	$	(1,784)


	Three Months Ended March 31, 2016
	Parent		Subsidiary
	Issuer		Guarantor		Consolidating
	UHS		Surgical Services		Adjustments		Consolidated
Consolidated net (loss) income	$	(4,640)	$	367	$	(367)	$	(4,640)
Other comprehensive income:
Gain on minimum pension liability, net of tax		186		—		—		186
Total other comprehensive income		186		—		—		186
Comprehensive (loss) income		(4,454)		367		(367)		(4,454)
Comprehensive income attributable to noncontrolling interest		—		60		—		60
Comprehensive (loss) income attributable to Universal Hospital Services, Inc.	$	(4,454)	$	307	$	(367)	$	(4,514)

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Universal Hospital Services, Inc.

Consolidating Statements of Cash Flows

(in thousands)

(unaudited)


	Three Months Ended March 31, 2017
	Parent		Subsidiaries
	Issuer		Guarantors		Consolidating
	UHS		SS & RES		Adjustments		Consolidated
Cash flows from operating activities:
Consolidated net (loss) income	$	(1,890)	$	414	$	(414)	$	(1,890)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation		15,899		1,995		—		17,894
Amortization of intangibles, deferred financing costs and bond premium		1,867		1,240		—		3,107
Equity in earnings of subsidiary		(414)		—		414		—
Provision for doubtful accounts		228		(8)		—		220
Provision for inventory obsolescence		23		(1)		—		22
Non-cash share-based compensation expense		638		120		—		758
Gain on sales and disposals of equipment		(712)		(35)		—		(747)
Deferred income taxes		308		(202)		—		106
Interest on note receivable		(4)		—		—		(4)
Changes in operating assets and liabilities:
Accounts receivable		(1,164)		1,315		—		151
Due from affiliates		(2,279)		—		2,279		—
Inventories		(31)		503		—		472
Other operating assets		168		(291)		—		(123)
Accounts payable		(1,768)		(1,296)		—		(3,064)
Other operating liabilities		(21,065)		(1,141)		—		(22,206)
Net cash (used in) provided by operating activities		(10,196)		2,613		2,279		(5,304)
Cash flows from investing activities:
Medical equipment purchases		(13,704)		(3,772)		—		(17,476)
Property and office equipment purchases		(1,004)		(59)		—		(1,063)
Proceeds from disposition of property and equipment		1,340		62		—		1,402
Acquisition and refund of escrow		3,691		—		—		3,691
Net cash used in investing activities		(9,677)		(3,769)		—		(13,446)
Cash flows from financing activities:
Proceeds under senior secured credit facility		70,029		—		—		70,029
Payments under senior secured credit facility		(43,492)		—		—		(43,492)
Payments of principal under capital lease obligations		(1,258)		(409)		—		(1,667)
Distributions to noncontrolling interests		—		(77)		—		(77)
Proceeds from exercise of parent company stock options		22		—		—		22
Due to affiliates		—		2,279		(2,279)		—
Change in book overdrafts		(5,428)		(637)		—		(6,065)
Net cash provided by financing activities		19,873		1,156		(2,279)		18,750
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	$	—	$	—	$	—	$	—

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Universal Hospital Services, Inc.

Consolidating Statements of Cash Flows

(in thousands)

(unaudited)


	Three Months Ended March 31, 2016
	Parent		Subsidiary
	Issuer		Guarantor		Consolidating
	UHS		Surgical Services		Adjustments		Consolidated
Cash flows from operating activities:
Consolidated net (loss) income	$	(4,640)	$	367	$	(367)	$	(4,640)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation		16,160		1,762		—		17,922
Amortization of intangibles, deferred financing costs and bond premium		2,209		853		—		3,062
Equity in earnings of subsidiary		(367)		—		367		—
Provision for doubtful accounts		56		36		—		92
Provision for inventory obsolescence		111		33		—		144
Non-cash share-based compensation expense		757		—		—		757
Gain on sales and disposals of equipment		(1,286)		31		—		(1,255)
Deferred income taxes		408		(348)		—		60
Changes in operating assets and liabilities:
Accounts receivable		(4,072)		271		—		(3,801)
Due from affiliates		(2,285)		—		2,285		—
Inventories		(428)		474		—		46
Other operating assets		(435)		(163)		—		(598)
Accounts payable		303		(333)		—		(30)
Other operating liabilities		(23,467)		(1,042)		—		(24,509)
Net cash (used in) provided by operating activities		(16,976)		1,941		2,285		(12,750)
Cash flows from investing activities:
Medical equipment purchases		(11,124)		(3,085)		—		(14,209)
Property and office equipment purchases		(1,047)		(10)		—		(1,057)
Proceeds from disposition of property and equipment		5,324		4		—		5,328
Net cash used in investing activities		(6,847)		(3,091)		—		(9,938)
Cash flows from financing activities:
Proceeds under senior secured credit facility		60,200		—		—		60,200
Payments under senior secured credit facility		(34,200)		—		—		(34,200)
Payments of principal under capital lease obligations		(1,211)		(301)		—		(1,512)
Payments of deferred financing costs		(97)		—		—		(97)
Holdback payment related to acquisition		—		(500)		—		(500)
Distributions to noncontrolling interests		—		(120)		—		(120)
Dividend and equity distribution payments		(24)		—		—		(24)
Proceeds from exercise of parent company stock options		7		—		—		7
Due to affiliates		—		2,285		(2,285)		—
Change in book overdrafts		(852)		(214)		—		(1,066)
Net cash used in financing activities		23,823		1,150		(2,285)		22,688
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	$	—	$	—	$	—	$	—

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14.Restructuring

We incurred no restructuring expense during the three months ended March 31, 2017 and 2016. As of December 31, 2016, we had $0.1 million of restructuring liability. For the three months ended March 31, 2017, $0.1 million in restructuring charges was paid. As of December 31, 2015, we had $2.4 million of restructuring liability. For the three months ended March 31, 2016, we incurred no restructuring expense and $0.4 million in restructuring charges was paid and the remaining $2.0 was a liability as of March 31, 2016.

15.Concentration

One customer accounted for approximately 15% and 17% of total revenue for the three months ended March 31, 2017 and 2016, respectively.

16.Subsequent Event

On April 28, 2017, we completed the acquisition of certain assets of a surgical laser equipment service provider for $6.2 million with a potential earn out not to exceed $0.3 million. The acquisition was funded from the Senior Secured Credit Facility. The acquisition expands our national footprint in the laser and mobile surgical services market and is not expected to have a material impact on our results of operations or our financial position for the 2017 fiscal year.

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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 end-to-end health care technology management and service solutions to the United States health care industry. We provide our customers access to high quality health care technology and implement comprehensive medical equipment management and service solutions to 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 Irving Place Capital (together with its affiliates, “IPC”).

UHS delivers health care solutions through three segments: Medical Equipment Solutions (“MES”), Clinical Engineering Solutions (“CES”) and Surgical Services (“SS”). As of March 31, 2017, we owned or managed more than 700,000 units of medical equipment consisting of approximately 400,000 units of medical equipment in our MES segment, approximately 300,000 units of customer-owned equipment in our CES segment and approximately 7,000 units of owned or managed mobile surgical equipment in our SS segment. Our diverse customer base includes more than 7,000 active 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”). We deliver our solutions through our nationwide network of 82 district service centers, five CES Centers of Excellence and an additional four stand-alone SS service centers. 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 $78.7 and $80.2 million, or approximately 60.2% and 65.7% of our revenues, for the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017, 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 technology 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.

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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 $34.7 and $25.6 million, or approximately 26.5% and 20.9% of our revenues, for the three months ended March 31, 2017 and 2016, respectively. We offer a broad range of inspection, preventive maintenance, repair, logistic and consulting services through our team of more than 400 technicians and professionals located throughout the United States in our nationwide network of service centers. We managed more than 300,000 units of customer owned equipment as of March 31, 2017. In addition, as of March 31, 2017, we serviced approximately 400,000 units that we own or directly manage in our MES segment.

Our CES segment leverages our more than 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 to repair and maintain the medical equipment that we own. 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, increasing 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;

On-site Managed Solutions; and

Health Care Technology Advisory Solutions.

Surgical Services

Our SS segment accounted for $17.3 and $16.3 million, or approximately 13.3% and 13.4% of our revenues, for the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017, we owned or managed more than 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 more than 1,000 acute care hospitals and surgery centers through our nationwide network of 82 district service centers and an additional four stand-alone SS service centers. Our technologists work in the operating room (“OR”) and support physicians and OR 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 March 31, 2017, SS provided solutions in 42 states.

We have two primary solutions in our SS segment:

On-Demand and Scheduled Usage Solutions; and

On-site Managed Solutions for hospitals and multi-facility health systems.

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RESULTS OF OPERATIONS

The following discussion addresses:

our financial condition as of March 31, 2017 and

the results of operations for the three-month periods ended March 31, 2017 and 2016.

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 2016 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 periods ended March 31, 2017 and 2016. The table below also indicates the percentage increase or decrease over the prior comparable period.


	Percent to Total Revenues				Percent
	Three Months Ended March 31,				Increase
	2017		2016		(Decrease)
Revenue
Medical equipment solutions	60.2	%	65.7	%	(2.0)	%
Clinical engineering solutions	26.5		20.9		35.5
Surgical services	13.3		13.4		6.2
Total revenues	100.0	%	100.0	%	7.0
Cost of Revenue
Cost of medical equipment solutions	25.9		31.3		(11.7)
Cost of clinical engineering solutions	20.3		16.4		32.4
Cost of surgical services	7.2		7.2		7.9
Medical equipment depreciation	11.6		12.4		(0.3)
Total costs of revenues	65.0		67.3		3.2
Gross margin	35.0		32.7		14.7
Selling, general and administrative	26.1		25.6		9.1
Operating income	8.9		7.1		35.4
Interest expense	10.2		10.7		1.7
Loss before income taxes and noncontrolling interest	(1.3)		(3.6)		(62.8)
Provision for income taxes	0.2		0.1		*
Consolidated net loss	(1.5)	%	(3.7)	%	(59.3)

*Not meaningful

Consolidated Results of Operations for the three months ended March 31, 2017 compared to the three months ended March 31, 2016

Total Revenue

Total revenue for the three months ended March 31, 2017 was $130.7 million, compared to $122.1 million for the three months ended March 31, 2016, an increase of $8.6 million or 7.0%. The increase within our MES segment was due to additional revenue related to growth in our 360 On-site Managed Solutions (“360 solutions”) of $3.8 million. The CES segment growth is primarily related to the acquisition of RES of $5.4 million and growth in our on-site clinical engineering solutions of $2.9 million. In addition, we saw growth in our SS segment of $1.0 million as we continue to drive organic growth in our existing modalities. These increases were partially offset with the decline in our sales and remarketing of $4.8 million in the MES segment.

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Cost of Revenue

Total cost of revenue for the three months ended March 31, 2017 was $84.9 million compared to $82.2 million for the three months ended March 31, 2016, an increase of $2.7 million or 3.2%. The net increase was primarily in our CES segment of $6.5 million due to the acquisition of RES and the growth of our on-site clinical engineering solutions, and an increase in our MES segment related to 360 solutions cost of $1.1 million. The increases were partially offset by the decrease in in cost of equipment sales of $4.7 million.

Gross Margin

Total gross margin for the three months ended March 31, 2017 was $45.8 million, or 35.0% of total revenues, compared to $39.9 million, or 32.7% of total revenues, for the three months ended March 31, 2016, an increase of $5.9 million or 14.7%. The increase in gross margin as a percent of revenue for the quarter was primarily impacted by positive operating leverage from volume growth and a reduction in the low margin sales and remarketing revenue.

Medical Equipment Solutions

(in thousands)


	Three Months Ended
	March 31,
	2017			2016			Change		% Change
Total revenue	$	78,660		$	80,230		$	(1,570)	(2.0)	%
Cost of revenue		33,797			38,282			(4,485)	(11.7)
Medical equipment depreciation		13,543			13,752			(209)	(1.5)
Gross margin	$	31,320		$	28,196		$	3,124	11.1
Gross margin %		39.8	%		35.1	%

Total revenue in the MES segment decreased $1.6 million, or 2.0%, to $78.7 million in the first quarter of 2017 as compared to the same period of 2016. The decrease was primarily due to the decline in sales and remarketing revenue of $4.8 million mostly due to a one time capital sale in the prior year. The decrease was partially offset by the growth in our 360 solutions from both new programs and expansion of existing programs of $3.8 million.

Total cost of revenue in the segment decreased $4.5 million, or 11.7%, to $33.8 million in the first quarter of 2017 as compared to the same period of 2016. The decrease was primarily from the cost of equipment sales of $4.7 million and a decrease in rental costs of $1.0 million largely due to lower repair parts. The decreases were partially offset with the increase in costs to support growth in our 360 solutions of $1.1 million largely due to increases in employee related costs.

Medical equipment depreciation decreased $0.2 million, or 1.5%, to $13.5 million in the first quarter of 2017 as compared to the same period of 2016.

Gross margin percentage for the MES segment increased from 35.1% in the first quarter of 2016 to 39.8% in the same period of 2017. Gross margin rate was impacted by the decline in sales and remarketing revenue as these revenues usually have lower margins.

Clinical Engineering Solutions

(in thousands)


	Three Months Ended
	March 31,
	2017			2016			Change		% Change
Total revenue	$	34,662		$	25,578		$	9,084	35.5	%
Cost of revenue		26,506			20,024			6,482	32.4
Gross margin	$	8,156		$	5,554		$	2,602	46.8
Gross margin %		23.5	%		21.7	%

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Total revenue in the CES segment increased $9.1 million, or 35.5%, to $34.7 million in the first quarter of 2017 as compared to the same period of 2016. The increases were primarily due to the acquisition of RES and growth in our on-site clinical engineering solutions.

Total cost of revenue in the segment increased $6.5 million, or 32.4%, to $26.5 million in the first quarter of 2017 as compared to the same period of 2016. The increase was primarily attributable to the acquisition of RES and the growth of our on-site clinical engineering solutions. These expenses are primarily related to vendor 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 21.7% in the first quarter of 2016 to 23.5% in the same period of 2017. Gross margin percentage will fluctuate based on the variability of third-party vendor expenses in our on-site clinical engineering solutions and supplemental service programs, as well as fluctuation of services being performed in house for manufacturer services.

Surgical Services

(in thousands)


	Three Months Ended
	March 31,
	2017			2016			Change		% Change
Total revenue	$	17,330		$	16,318		$	1,012	6.2	%
Cost of revenue		9,456			8,766			690	7.9
Medical equipment depreciation		1,583			1,417			166	11.7
Gross margin	$	6,291		$	6,135		$	156	2.5
Gross margin %		36.3	%		37.6	%

Total revenue in the SS segment increased $1.0 million, or 6.2%, to $17.3 million in the first quarter of 2017 as compared to the same period of 2016. 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 7.9%, to $9.5 million in the first quarter of 2017 as compared to the same period of 2016. The increase was primarily attributable to an increase in employee related costs to support growth in our surgical services business.

Medical equipment depreciation increased $0.2 million, or 11.7%, to $1.6 million in the first quarter of 2017 as compared to the same period of 2016. The increase in medical equipment depreciation was primarily due to higher capital expenditures to support the growth of the business.

Gross margin percentage for the SS segment decreased from 37.6% in the first quarter of 2016 to 36.3% in the same period of 2017. The decrease in gross margin percentage was primarily due to investments in labor and capital to support the growth of the business.

Selling, General and Administrative and Interest Expense

(in thousands)


	Three Months Ended
	March 31,
	2017		2016		Change		% Change
Selling, general and administrative	$	34,141	$	31,298	$	2,843	9.1	%
Interest expense		13,294		13,068		226	1.7

Selling, General and Administrative

Selling, general and administrative expense increased $2.8 million, or 9.1%, to $34.1 million for the first quarter of 2017 as compared to the same period of 2016. The increase was primarily related to the acquisition of RES and increases in payroll related costs to support the growth of the business.

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Selling, general and administrative expense as a percentage of total revenue was 26.1% and 25.6% for the quarters ended March 31, 2017 and 2016, respectively.

Interest Expense

Interest expense increased $0.2 million to $13.3 million for the first quarter of 2017 as compared to the same period of 2016.

Income Taxes

Income taxes were an expense of $0.2 million and $0.2 million for the three months ended March 31, 2017 and 2016, respectively. The tax expense for the three months ended March 31, 2017 and 2016 primarily related to state minimum fees and indefinite-life intangibles. The expected tax benefit from operating loss during the three months ended March 31, 2017 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 $2.8 million to $1.9 million in the first quarter of 2017 as compared to the same period of 2016. Net loss was impacted primarily by the increase in revenues.

Adjusted EBITDA

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) was $34.6 and $30.8 million for the three months ended March 31, 2017 and 2016, respectively. Adjusted EBITDA for the three months ended March 31, 2017 was higher primarily due to the increase in revenues.

Adjusted EBITDA is defined as earnings attributable to UHS before interest expense, income taxes, depreciation and amortization and excludes non-cash share-based compensation expense, management, board and strategic fees and other nonrecurring gain, expenses or loss. In addition to using Adjusted 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. Adjusted 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 Adjusted EBITDA is not a measure determined in accordance with GAAP and is thus susceptible to varying interpretations and calculations, Adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. Adjusted 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 Adjusted EBITDA is included below:

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	Three Months Ended
	March 31,
(in thousands)	2017		2016
Net loss attributable to Universal Hospital Services, Inc.	$	(1,963)	$	(4,700)
Interest expense		13,294		13,068
Provision for income taxes		222		159
Depreciation and amortization of intangibles		20,899		20,850
EBITDA		32,452		29,377
Non-cash share-based compensation expense		758		757
Management, board and strategic fees		1,434		688
Adjusted EBITDA	$	34,644	$	30,822


Other Financial Data:
Net cash used in operating activities	$	(5,304)	$	(12,750)
Net cash used in investing activities		(13,446)		(9,938)
Net cash provided by financing activities		18,750		22,688

Other Operating Data (as of end of period):
Medical equipment (approximate number of owned outsourcing units)		242,000		246,000
District service centers		82		83
SS stand-alone service centers		4		5
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

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,

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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.

Net cash used in operating activities was $5.3 and $12.8 million for the three months ended March 31, 2017 and 2016, respectively. The decrease in net cash used in operating activities was primarily due to higher earnings and timing of accounts receivable collections in the first quarter of 2017.

Net cash used in investing activities was $13.4 and $9.9 million for the three months ended March 31, 2017 and 2016, respectively. The increase in net cash used in investing activities was primarily due to lower proceeds from sale of medical equipment and higher medical equipment purchases during 2017 compared to the same period of 2016, offset by collection of the escrow receivable in the first quarter of 2017.

Net cash provided by financing activities was $18.8 and $22.7 million for the three months ended March 31, 2017 and 2016, respectively. The decrease in net cash provided by financing activities was primarily due to lower book overdrafts at March 31, 2017 compared to the same period in 2016.

Based on the level of operating performance expected in 2017, 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 March 31, 2017, we had $90.0 million of availability under the senior secured credit facility based on a borrowing base of $166.7 million less borrowings of $72.2 million and after giving effect to $4.5 million used for letters of credit. As of March 31, 2016, we had $109.0 million of availability under the senior secured credit facility based on a borrowing base of $166.9 million less borrowings of $54.0 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;

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our ability to identify and manage acquisitions;

increases in expenses related to our pension plan;

our cash flow fluctuation;

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 March 31, 2017, we had approximately $741.6 million of total debt outstanding before netting with deferred financing costs, of which $72.2 million was bearing interest at variable rates. Based on variable debt levels at March 31, 2017, a 1.0 percentage point change in interest rates on variable rate debt would have resulted in annual interest expense fluctuating by approximately $0.7 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 three months of 2017 average price of unleaded gasoline, assuming gasoline usage levels for the three months ended March 31, 2017, would lead to an annual increase in fuel costs of approximately $0.4 million.

Pension

Our pension plan assets, which were approximately $19.6 million at December 31, 2016, 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, 2016 would lead to a decrease in the funded status of the plan of approximately $2.0 million.

Other Market Risk

As of March 31, 2017, we have no other material exposure to market risk.

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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 March 31, 2017.

(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 2016 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

None.

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Item 6.Exhibits


Number		Description

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 March 31, 2017, 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

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SIGNATURES

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

Date: May 8, 2017


	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)

Agiliti Health, Inc. - FORM 10-Q - May 8, 2017

Attached files

Agiliti Health, Inc. Reports