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EX-10.2 - EX-10.2 - Agiliti Health, Inc.uhsi-20180630ex102a17967.htm
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EX-32.1 - EX-32.1 - Agiliti Health, Inc.uhsi-20180630ex32118e86f.htm
EX-31.2 - EX-31.2 - Agiliti Health, Inc.uhsi-20180630ex312110cec.htm
EX-31.1 - EX-31.1 - Agiliti Health, Inc.uhsi-20180630ex311d35178.htm
EX-10.1 - EX-10.1 - Agiliti Health, Inc.uhsi-20180630ex101ab8fdd.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

 

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2018

 

or

 

 

 

Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                    to                  

 

Commission File Number: 000-20086

 

UNIVERSAL HOSPITAL SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

41-0760940

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

6625 West 78th Street, Suite 300

Minneapolis, Minnesota 55439-2604

(Address of principal executive offices, including zip code)

 

(952) 893-3200

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒  No ☐

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 August 13, 2018:  1,000

 

 

 


 

Universal Hospital Services, Inc. and Subsidiaries

Table of Contents

 

 

 

 

 

 

 

 

 

 

Page

PART I -  FINANCIAL INFORMATION 

 

 

 

 

 

 

 

ITEM 1. 

 

Consolidated Financial Statements (unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets —June 30, 2018 and December 31, 2017

 

2

 

 

 

 

 

 

 

Consolidated Statements of Operations—Three and six months ended June 30, 2018 and 2017

 

3

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) —Three and six months ended June 30, 2018 and 2017

 

4

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows —Six months ended June 30, 2018 and 2017

 

5

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

6

 

 

 

 

 

ITEM 2. 

 

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

 

28

 

 

 

 

 

ITEM 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

36

 

 

 

 

 

ITEM 4. 

 

Controls and Procedures

 

37

 

 

 

 

 

PART II - OTHER INFORMATION 

 

 

 

 

 

 

 

ITEM 1. 

 

Legal Proceedings

 

37

 

 

 

 

 

ITEM 1A. 

 

Risk Factors

 

37

 

 

 

 

 

ITEM 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

37

 

 

 

 

 

ITEM 3. 

 

Defaults Upon Senior Securities

 

37

 

 

 

 

 

ITEM 4. 

 

Mine Safety Disclosures

 

37

 

 

 

 

 

ITEM 5. 

 

Other Information

 

37

 

 

 

 

 

ITEM 6. 

 

Exhibits

 

38

 

 

 

 

 

Signatures 

 

 

 

39

 

1


 

PART I - FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements — Unaudited

Universal Hospital Services, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share and per share information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

2018

 

2017

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash

 

$

178

 

$

 —

Accounts receivable, less allowance for doubtful accounts of  $1,225 at June 30, 2018 and $1,234 at December 31, 2017

 

 

94,404

 

 

89,637

Inventories

 

 

9,995

 

 

9,760

Other current assets

 

 

7,034

 

 

6,836

Total current assets

 

 

111,611

 

 

106,233

Property and equipment:

 

 

 

 

 

 

Medical equipment

 

 

657,316

 

 

629,193

Property and office equipment

 

 

108,559

 

 

105,341

Accumulated depreciation

 

 

(560,818)

 

 

(536,520)

Total property and equipment, net

 

 

205,057

 

 

198,014

Other long-term assets:

 

 

 

 

 

 

Goodwill

 

 

346,168

 

 

346,168

Other intangibles, net

 

 

147,945

 

 

151,921

Other

 

 

10,576

 

 

3,109

Total assets

 

$

821,357

 

$

805,445

Liabilities and Deficit

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of long-term debt

 

$

5,214

 

$

5,043

Book overdrafts

 

 

 —

 

 

5,367

Accounts payable

 

 

27,428

 

 

36,689

Accrued compensation

 

 

25,131

 

 

21,498

Accrued interest

 

 

18,809

 

 

18,671

Other accrued expenses

 

 

18,221

 

 

17,763

Total current liabilities

 

 

94,803

 

 

105,031

Long-term debt, less current portion

 

 

687,664

 

 

698,065

Pension and other long-term liabilities

 

 

10,948

 

 

11,385

Deferred income taxes, net

 

 

35,506

 

 

35,342

Commitments and contingencies (Note 9)

 

 

 

 

 

 

Deficit

 

 

 

 

 

 

Common stock, $0.01 par value; 1,000 shares authorized, issued and outstanding at June 30, 2018 and December 31, 2017

 

 

 —

 

 

 —

Additional paid-in capital

 

 

250,661

 

 

250,018

Accumulated deficit

 

 

(252,204)

 

 

(287,998)

Accumulated other comprehensive loss

 

 

(6,214)

 

 

(6,638)

Total Universal Hospital Services, Inc. and Subsidiaries deficit

 

 

(7,757)

 

 

(44,618)

Noncontrolling interest

 

 

193

 

 

240

Total deficit

 

 

(7,564)

 

 

(44,378)

Total liabilities and deficit

 

$

821,357

 

$

805,445

 

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

 

2


 

 

Universal Hospital Services, Inc. and Subsidiaries

Consolidated Statements of Operations

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

    

2018

    

2017

    

2018

    

2017

Revenues

 

$

140,707

 

$

128,210

 

$

283,062

 

$

258,863

Cost of revenues

 

 

90,534

 

 

86,195

 

 

181,396

 

 

171,080

Gross margin

 

 

50,173

 

 

42,015

 

 

101,666

 

 

87,783

Selling, general and administrative

 

 

34,742

 

 

30,618

 

 

67,782

 

 

64,575

Gain on legal settlement

 

 

(23,474)

 

 

 —

 

 

(23,474)

 

 

 —

Operating income

 

 

38,905

 

 

11,397

 

 

57,358

 

 

23,208

Interest expense

 

 

13,537

 

 

13,415

 

 

26,988

 

 

26,894

Income (loss) before income taxes and noncontrolling interest

 

 

25,368

 

 

(2,018)

 

 

30,370

 

 

(3,686)

Provision for income taxes

 

 

369

 

 

275

 

 

631

 

 

497

Consolidated net income (loss)

 

 

24,999

 

 

(2,293)

 

 

29,739

 

 

(4,183)

Net income attributable to noncontrolling interest

 

 

81

 

 

98

 

 

166

 

 

170

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

 

$

24,918

 

$

(2,391)

 

$

29,573

 

$

(4,353)

 

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

3


 

Universal Hospital Services, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

    

2018

    

2017

    

2018

    

2017

Consolidated net income (loss)

 

$

24,999

 

$

(2,293)

 

$

29,739

 

$

(4,183)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

214

 

 

192

 

 

424

 

 

371

Total other comprehensive income

 

 

214

 

 

192

 

 

424

 

 

371

Comprehensive income (loss)

 

 

25,213

 

 

(2,101)

 

 

30,163

 

 

(3,812)

Comprehensive income attributable to noncontrolling interest

 

 

81

 

 

98

 

 

166

 

 

170

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

 

$

25,132

 

$

(2,199)

 

$

29,997

 

$

(3,982)

 

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

 

4


 

Universal Hospital Services, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30,

 

    

2018

    

2017

Cash flows from operating activities:

 

 

 

 

 

 

Consolidated net income (loss)

 

$

29,739

 

$

(4,183)

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

 

 

 

 

 

 

Depreciation

 

 

33,645

 

 

35,664

Gain on legal settlement

 

 

(21,474)

 

 

 —

Amortization of intangibles, contract costs, deferred financing costs and bond premium

 

 

5,013

 

 

5,460

Provision for doubtful accounts

 

 

406

 

 

73

Provision for inventory obsolescence

 

 

319

 

 

122

Non-cash share-based compensation expense

 

 

1,507

 

 

1,551

Gain on sales and disposals of equipment

 

 

(1,050)

 

 

(1,046)

Deferred income taxes

 

 

164

 

 

204

Interest on note receivable

 

 

(21)

 

 

(11)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(5,173)

 

 

158

Inventories

 

 

(554)

 

 

495

Other operating assets

 

 

38

 

 

(414)

Accounts payable

 

 

209

 

 

(3,639)

Other operating liabilities

 

 

3,057

 

 

(3,381)

Net cash provided by operating activities

 

 

45,825

 

 

31,053

Cash flows from investing activities:

 

 

 

 

 

 

Medical equipment purchases

 

 

(23,273)

 

 

(24,296)

Property and office equipment purchases

 

 

(4,316)

 

 

(3,309)

Proceeds from disposition of property and equipment

 

 

1,813

 

 

2,091

Issuance of note receivable from officer

 

 

(581)

 

 

(936)

Acquisition and refund of escrow

 

 

 —

 

 

(1,923)

Net cash used in investing activities

 

 

(26,357)

 

 

(28,373)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds under senior secured credit facility

 

 

104,448

 

 

83,200

Payments under senior secured credit facility

 

 

(113,598)

 

 

(79,692)

Payments of principal under capital lease obligations

 

 

(3,072)

 

 

(3,419)

Holdback payment related to acquisition

 

 

(624)

 

 

 —

Distributions to noncontrolling interests

 

 

(213)

 

 

(133)

Proceeds from exercise of parent company stock options

 

 

285

 

 

29

Contribution from Parent

 

 

 —

 

 

1,900

Shares forfeited for taxes

 

 

(1,149)

 

 

 —

Change in book overdrafts

 

 

(5,367)

 

 

(4,565)

Net cash used in financing activities

 

 

(19,290)

 

 

(2,680)

Net change in cash and cash equivalents

 

 

178

 

 

 —

Cash and cash equivalents at the beginning of period

 

 

 —

 

 

 —

Cash and cash equivalents at the end of period

 

$

178

 

$

 —

Supplemental cash flow information:

 

 

 

 

 

 

Interest paid

 

$

26,332

 

$

26,345

Income taxes paid

 

 

676

 

 

533

Non-cash activities:

 

 

 

 

 

 

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

 

$

3,920

 

$

4,493

Capital lease additions

 

 

1,858

 

 

3,179

 

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

 

5


 

Universal Hospital Services, Inc. and Subsidiaries

 

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. and Subsidiaries (“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 2017 Annual Report on Form 10-K filed with the SEC.

 

The interim consolidated financial statements presented herein as of June 30, 2018, 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 2017 Annual Report on Form 10-K. There have been no material changes to these policies for the quarter ended June 30, 2018, except for the adoption of ASU 2014-09, see Note 3, Revenue Recognition.

 

Historically, the Company reported under three segments.  Medical Equipment Solutions included supplemental and peak needs usage solutions, customized equipment agreement solutions, 360 On-site managed solutions, specialty medical equipment sale, distribution and disposable sales.  Clinical Engineering Solutions included supplemental maintenance, repair and remediation solutions, on-site biomed services, health care technology solutions, federal governmental services and clinical engineering capital sales.  Surgical Services included on-demand and scheduled usage solutions, on-site solutions for hospital and multi-facility health systems and disposable only sales.

 

Effective January 1, 2018, the Company changed its segment reporting to report its financial information under one reporting segment. The change in reporting was made to conform to the way the Company is currently managing and executing the business. Specifically, the chief operating decision maker (“CODM”) is making operating decisions and assessing performance using discrete financial information from one reportable segment, as our resources and infrastructure are shared and our go to market strategy have evolved with our Equipment Value Management (“EVM”) strategy. The current financial information is based upon the transformation of the business model that has occurred and the development of the new commercial framework – EVM.  EVM is an end-to-end approach to medical equipment management that helps hospitals recover cost and time that today are wasted through inefficient medical equipment processes.  EVM integrates customers supply chain, patient care and clinical engineering teams, connecting these siloed groups to streamline processes to improve stakeholder productivity and satisfaction while optimizing equipment utilization and lowering the total cost of ownership.  EVM provides the customer with the equipment they need, when they need it, with the assets serviced to the highest quality standards in the industry. EVM combines the capabilities of all service offerings.  The EVM solution links all of our service offerings at UHS. The Company has a similar compliment of services, type of customer for the Company’s services, method of distribution for the Company’s services and the regulatory environment is similar across the United States. Accordingly, we concluded that we operate as one

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reporting segment.  Finally, the Company analyzed its goodwill for potential impairment before and after the change in segments and concluded that there was no impairment.

 

Current year presentation of one reporting segment resulted in disaggregated revenue categories of Equipment Solutions which includes supplemental and peak needs usage solutions, surgical services on-demand and scheduled usage solutions, specialty medical equipment sale, distribution and disposable sales, clinical engineering capital sales and surgical disposable only sales.  Clinical Engineering includes supplemental maintenance, repair and remediation solutions, on-site biomed services, health care technology solutions and federal governmental services.  On-site Managed Services includes 360 On-site managed solutions and surgical services on-site solutions for hospital and multi-facility health systems.

 

The Company operates in one geographic region, the United States. As the Company is now reporting as one segment which equals the total Company’s results as reflected in the Consolidated Statement of Operations, restatement of prior periods was not necessary.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Universal Hospital Services, Inc and its 100%-owned subsidiaries, UHS Surgical Services, Inc. (“Surgical Services” or “SS”) 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 11, 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 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 replaced most existing revenue recognition guidance in GAAP when it became effective. The new standard is effective beginning after December 15, 2017 and interim periods within those years as stated in ASU 2015-14. The standard permits the use of either the full retrospective or cumulative effect (modified retrospective) transition method. We adopted this guidance on January 1, 2018 and selected the cumulative effect transition method.

 

We have performed a review of the requirements of the new guidance, codified by FASB in ASC Topic 606, and have applied the five-step model of the new standard to our contracts and have compared the results to our previous accounting practices under ASC Topic 605. Based on this analysis, the new standard did not have a material impact on the results of operations or cash flows of the Company. However, amendments to ASC Topic 340, Other Assets and Deferred Costs, require the capitalization of costs to obtain and fulfill customer contracts, which were previously expensed as incurred. The assets recognized for the costs to obtain and/or fulfill a contract will be amortized on a systematic basis that is consistent with the transfer of the services to which the asset relates. Accordingly, $6.2 million of prior year costs were capitalized as an asset upon adoption of this standard (effective January 1, 2018) and are being amortized over a period of five years.

 

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 became effective for annual and interim periods for fiscal years beginning after December 15, 2017.  The adoption of this standard did not 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

7


 

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 became effective for annual and interim periods for fiscal years beginning after December 15, 2017. The adoption of this standard did not have a material impact on our consolidated financial statements.

 

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 2017-07 requires that a company present service cost separately from the other components of the net benefit cost.  This ASU became effective for annual and interim periods for fiscal years beginning after December 15, 2017. We adopted ASU 2017-07 on January 1, 2018 and retrospectively applied this ASU to all periods presented. As a result, $0.2 and $0.4 million of pension costs were reclassified from selling, general and administrative to interest expense for the three and six months ended June 30, 2017.

 

In May 2017, the FASB issued ASU No. 2017-09 Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 clarifies what constitutes a modification of a share-based payment award. This ASU became effective for annual and interim periods for fiscal years beginning after December 15, 2017. The adoption of this standard did not have a material impact on our consolidated financial statements.

 

Standards Not Yet Adopted

 

In February 2016, the FASB issued ASU No. 2016-02 on Leases (ASC 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 have completed our internal evaluation and believe the adoption of this standard will have a material impact on our consolidated balance sheets.

 

In February 2018, the FASB issued ASU No. 2018-02 Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on our consolidated financial statements due to valuation allowance.

 

In March 2018, the FASB issued ASU No. 2018-05 Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (“ASU 2018-05”). ASU 2018-05 adds various SEC paragraphs pursuant to the issuance of SEC Staff Accounting Bulletin No. 118. See Note 12, Income Taxes.

 

In June 2018, the FASB issued ASU No. 2018-07 Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 expands the scope of Topic 718 to include share based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted but no earlier than an entity’s adoption date of Topic 606. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.

 

3.Revenue Recognition

 

The Company adopted ASU 2014-09, Revenue from Contracts with Customers, effective January 1, 2018, herein referred as ASC Topic 606. ASC Topic 606 is a comprehensive new revenue recognition model that requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the company expects to receive in exchange for those goods or services. The Company adopted ASU 2014-09 using the cumulative effect (also known as the modified retrospective) method by recognizing the cumulative effect of initially applying the ASU as an adjustment to the opening balance of Accumulated Deficit at January 1, 2018. Therefore, the comparative information for the second quarter and six months ended June 30, 2017 has not been adjusted and continues

8


 

to be reported under the previous accounting standards (ASC Topic 605). The details of the changes to our accounting policies and the quantitative impact of the changes are set out below.

 

Customer arrangements typically have multiple performance obligations to provide equipment solutions, clinical engineering and/or on-site equipment managed services on a per use and/or over time basis.  Equipment Solutions primarily consists of supplemental, peak needs and surgical equipment usage solutions. Clinical Engineering consists of supplemental maintenance, repair and remediation solutions, health care technology solutions, and federal government services.  On-site Managed Services consists of 360 on-site managed solutions in both our historical A360 program (using UHS-owned equipment) and our newer M360 program (managing customer-owned equipment).  Consideration paid by the customer for each performance obligation is billed within the month the service is performed, and contractual prices are established within our customer arrangements that are representative of the stand-alone selling price. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. There are no differences between revenue being earned under Topic 606 and the previous standard (ASC Topic 605).

 

The Company reports only its portion of revenues earned under certain revenue share arrangements in accordance with ASC Topic 606-10-55-36 to 606-10-55-40 “Principal versus Agent Considerations,” because, among other factors, the equipment manufacturer retains title to the equipment, maintains general inventory and physical loss risk of equipment on rental and because we earn a fixed percentage of the billings to customers.

 

In the following table, revenue is disaggregated by major service type.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

(in thousands)

 

2018

 

2017

 

2018

 

2017

Equipment Solutions

 

$

62,992

 

$

58,038

 

$

125,434

 

$

118,695

Clinical Engineering

 

 

39,303

 

 

34,413

 

 

79,048

 

 

67,754

On-Site Managed Services

 

 

38,412

 

 

35,759

 

 

78,580

 

 

72,414

 

 

$

140,707

 

$

128,210

 

$

283,062

 

$

258,863

 

Concurrent with the adoption of Topic 606 on January 1, 2018, the Company also adopted amendments to ASC Topic 340, Other Assets and Deferred Costs, which requires the costs to obtain and fulfill customer contracts to be capitalized, which were previously expensed as incurred. The Company incurs costs related to obtaining new contracts. Management expects those costs attributable to new revenue production are recoverable and therefore the Company capitalized them as contract costs in accordance with ASC Topic 340 and is amortizing them over the anticipated period of the new revenue production.

 

The Company capitalized the estimated costs to obtain a contract in the amount of $6.2 million at January 1, 2018 with a corresponding adjustment to accumulated deficit for the “Impact of Change in Accounting Policy”.  The Contract Asset included in other long-term assets in the Consolidated Balance Sheet at June 30, 2018 is $7.1 million.  Capitalized costs are amortized over the expected life of the related contracts which is estimated to be five years. Amortization is computed on a straight-line basis which coincides with the predominant expected life of the underlying contracts. Amortization costs are reflected in selling, general and administrative expenses. The amount of amortization was $0.5 and $0.9 million for the three and six months ended June 30, 2018, respectively There was no impairment loss in relation to the costs capitalized during the three and six months ended June 30, 2018.

 

4.Fair Value Measurements

 

Financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017 are summarized in the following table by type of inputs applicable to the fair value measurements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value at June 30, 2018

 

Fair Value at December 31, 2017

(in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

    

Level 1

    

Level 2

    

Level 3

    

Total

Contingent Consideration

 

$

 —

 

$

 —

 

$

200

 

$

200

 

$

 —

 

$

 —

 

$

133

 

$

133

9


 

 

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

 

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

 

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

 

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

 

During 2017, we recorded a contingent consideration liability, in the form of an earn-out payment, related to our December 6, 2017 acquisition in the total amount of $0.1 million. Additionally, $0.07 million of an earn-out liability was recorded during the quarter ended June 30, 2018. The contingent consideration is based on achieving certain revenue results. The fair value of the liability was estimated using a discounted cash flow approach with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement.  The significant inputs in the Level 3 measurement not supported by market activity included our assessments of expected future cash flows during the earn-out period related to the assets acquired, appropriately discounted considering the uncertainties associated with the obligation, and calculated based on estimated revenues in accordance with the terms of the agreement. There were no earn-out payments for the three and six months ended June 30, 2018.

 

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

 

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

 

 

 

 

 

(in thousands)

    

    

 

Balance at December 31, 2017

 

$

133

Addition

 

 

67

Balance at June 30, 2018

 

$

200

 

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 8, Long-Term Debt) as of June 30, 2018 and December 31, 2017, based on the quoted market price for the same or similar issues of debt, which represents a Level 2 fair value measurement, is approximately:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

December 31, 2017

 

    

Carrying

    

Fair

    

Carrying

    

Fair

(in thousands)

 

Value

 

Value

 

Value

 

Value

Original Notes - 7.625% (1)

 

$

422,397

 

$

425,000

 

$

421,772

 

$

426,063

Add-on Notes - 7.625% (2)

 

 

223,588

 

 

220,000

 

 

224,338

 

 

220,550


(1) The carrying value of the Original Notes - 7.625% is net of unamortized deferred financing costs of $2.6 and $3.2 million as of June 30, 2018 and December 31, 2017, respectively.

10


 

(2) The carrying value of the Add-on  Notes - 7.625% is net of unamortized deferred financing costs of $1.1 and $1.3 million as of June 30, 2018 and December 31, 2017, respectively, and includes unamortized bond premium of $4.7 and $5.7 million as of June 30, 2018 and December 31, 2017, respectively.

 

5.Goodwill and Other Intangible Assets

 

Our reporting segment has a negative carrying amount at June 30, 2018 and December 31, 2017. There were no impairments recorded in the three months and six months ended June 30, 2018 and 2017.

 

Our other intangible assets as of June 30, 2018 and December 31, 2017 consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

December 31, 2017

 

    

    

    

Accumulated

    

 

    

    

    

    

    

Accumulated

    

 

    

    

(in thousands)

 

Cost

 

Amortization

 

Impairment

 

Net

 

Cost

 

Amortization

 

Impairment

 

Net

Finite-life intangibles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationship

 

$

125,828

 

$

(109,701)

 

$

 —

 

$

16,127

 

$

125,828

 

$

(105,911)

 

$

 —

 

$

19,917

Non-compete agreements

 

 

2,101

 

 

(1,383)

 

 

 —

 

 

718

 

 

2,101

 

 

(1,197)

 

 

 —

 

 

904

Total finite-life intangibles

 

 

127,929

 

 

(111,084)

 

 

 —

 

 

16,845

 

 

127,929

 

 

(107,108)

 

 

 —

 

 

20,821

Indefinite-life intangibles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade names

 

 

166,000

 

 

 —

 

 

(34,900)

 

 

131,100

 

 

166,000

 

 

 —

 

 

(34,900)

 

 

131,100

Total intangible assets

 

$

293,929

 

$

(111,084)

 

$

(34,900)

 

$

147,945

 

$

293,929

 

$

(107,108)

 

$

(34,900)

 

$

151,921

 

Total amortization expense related to intangible assets was $2.0 and $2.3 million for the three months ended June 30, 2018 and 2017, respectively, and $4.0 and $5.3 million for the six months ended June 30, 2018 and 2017, respectively.

 

The estimated future amortization expense for identifiable intangible assets during the remainder of 2018 and the next five years is as follows:

 

 

 

 

 

 

(in thousands)

    

    

 

Remainder of 2018

 

$

3,619

2019

 

 

5,005

2020

 

 

2,765

2021

 

 

2,106

2022

 

 

1,376

2023

 

 

503

 

 

 

 

 

 

6.Deficit

 

The following tables represent changes in deficit that are attributable to our shareholder and noncontrolling interests for the six month periods ended June 30, 2018 and 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

Accumulated

    

    

 

    

    

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

 

 

Paid-in

 

Accumulated

 

Comprehensive

 

Noncontrolling

 

Total

(in thousands)

 

Capital

 

Deficit

 

Loss

 

Interests

 

Deficit

Balance at December 31, 2017

 

$

250,018

 

$

(287,998)

 

$

(6,638)

 

$

240

 

$

(44,378)

Impact of change in accounting policy

 

 

 —

 

 

6,221

 

 

 —

 

 

 —

 

 

6,221

Net income

 

 

 —

 

 

29,573

 

 

 —

 

 

166

 

 

29,739

Other comprehensive income

 

 

 —

 

 

 —

 

 

424

 

 

 —

 

 

424

Share-based compensation

 

 

1,507

 

 

 —

 

 

 —

 

 

 —

 

 

1,507

Stock options exercised

 

 

285

 

 

 —

 

 

 —

 

 

 —

 

 

285

Shares forfeited for taxes

 

 

(1,149)

 

 

 —

 

 

 —

 

 

 —

 

 

(1,149)

Cash distributions to noncontrolling interests

 

 

 —

 

 

 —

 

 

 —

 

 

(213)

 

 

(213)

Balance at June 30, 2018

 

$

250,661

 

$

(252,204)

 

$

(6,214)

 

$

193

 

$

(7,564)

 

 

 

11


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

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

 

 

 —

 

 

(4,353)

 

 

 —

 

 

170

 

 

(4,183)

Other comprehensive income

 

 

 —

 

 

 —

 

 

371

 

 

 —

 

 

371

Contribution from Parent

 

 

1,900

 

 

 —

 

 

 —

 

 

 —

 

 

1,900

Share-based compensation

 

 

1,551

 

 

 —

 

 

 —

 

 

 —

 

 

1,551

Stock options exercised

 

 

29

 

 

 —

 

 

 —

 

 

 —

 

 

29

Cash distributions to noncontrolling interests

 

 

 —

 

 

 —

 

 

 —

 

 

(133)

 

 

(133)

Balance at June 30, 2017

 

$

248,466

 

$

(301,179)

 

$

(7,455)

 

$

218

 

$

(59,950)

 

 

 

 

7.Share-Based Compensation

 

During the six months ended June 30, 2018, 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, 2017

 

37,673

 

$

0.79

 

$

40,875

 

6.8

Granted

 

715

 

 

1.87

 

 

 

 

 

Exercised

 

(398)

 

 

0.72

 

$

459

 

 

Forfeited or expired

 

(264)

 

 

0.79

 

 

 

 

 

Outstanding at June 30, 2018

 

37,726

 

$

0.81

 

$

40,131

 

6.4

Exercisable at June 30, 2018

 

23,246

 

$

0.75

 

$

26,060

 

6.4

Remaining authorized options available for issue

 

5,317

 

 

 

 

 

 

 

 

 

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 six months ended June 30, 2018 and 2017 under the Black-Scholes model.

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30,

 

 

2018

 

 

2017

 

Risk-free interest rate

 

1.62

%

 

 

1.62

%

Expected volatility

 

29.0

%

 

 

29.0

%

Dividend yield

 

N/A

 

 

 

N/A

 

Expected option life (years)

 

4.60

 

 

 

4.62

 

Black-Scholes Value of options

$

0.50

 

 

$

0.32

 

 

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. 

12


 

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 June 30, 2018, unearned non-cash share-based compensation that we expect to recognize as expense over a weighted average period of 1.6 years totals approximately $3.5 million, net of our estimated forfeiture rate of 2.0%. The expense could be accelerated upon the sale of Parent or the Company.

 

In April 2015, Parent granted the Company’s Chief Executive Officer 7.0 million restricted stock units which vest over four years. Total compensation expense related to this grant was $0.3 million and $0.3 million for the three months ended June 30, 2018 and 2017, respectively, and $0.6 million and $0.6 million for the six months ended June 30, 2018 and 2017, respectively.

 

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

 

On May 9, 2018, Parent adopted the 2018 Executive Management Stock Option Plan (the “2018 Plan”). Pursuant to the 2018 Plan, awards may be in the form of Non-Qualified Stock Options. The maximum number of shares for which options may be granted is 2,500,000 under the 2018 Plan. In the second quarter of 2018, 2,499,000 shares of common stock were issued to certain UHS executives, including Named Executive Officers other than the Chief Executive Officer pursuant to the 2018 Plan.

 

Options granted pursuant to the 2018 Plan have an exercise price of $0.71 per share and may only be exercised within 30 days after the signing of a binding agreement for the Company to undergo a Change in Control (as defined in the 2018 Plan) event.  No expense has been recorded for this plan in 2018.  Additionally, all awards of options granted pursuant to the 2018 Plan provide for a claw back of all proceeds received for such options in the event an award recipient voluntarily terminates his or her employment with the Company without Good Reason or has his or her employment terminated by the Company for Cause (as such terms are defined in the Company’s Executive Severance Pay Plan) within one year following a Change in Control of the Company. 

 

8.Long-Term Debt

 

Long-term debt consists of the following:

 

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

(in thousands)

 

2018

 

2017

Original Notes - 7.625% (1)

 

$

422,397

 

$

421,772

Add-on Notes - 7.625% (2)

 

 

223,588

 

 

224,338

Senior secured credit facility (3)

 

 

30,054

 

 

38,944

Capital lease obligations

 

 

16,839

 

 

18,054

 

 

 

692,878

 

 

703,108

Less: Current portion of long-term debt

 

 

(5,214)

 

 

(5,043)

Total long-term debt

 

$

687,664

 

$

698,065


(1)

The carrying value of the Original Notes - 7.625% is net of unamortized deferred financing costs of $2.6 and $3.2 million as of June 30, 2018 and December 31, 2017, respectively.

(2)

The carrying value of the Add-on Notes - 7.625% is net of unamortized deferred financing costs of $1.1 and $1.3 million as of June 30, 2018 and December 31, 2017, respectively, and includes unamortized bond premium of $4.7 and $5.7 million as of June 30, 2018 and December 31, 2017, respectively.

(3)

The carrying value of the senior secured credit facility is net of unamortized deferred financing costs of $1.0 and $1.3 million as of June 30, 2018 and December 31, 2017, 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

13


 

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 price of 101.906% before August 15, 2018, thereafter the redemption price is 100% as set forth in the 2012 Indenture (expressed as percentage of principal amount).  If we sell certain assets or undergo certain kinds of changes of control, we must offer to repurchase the 2012 Notes.

 

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

 

Senior Secured Credit Facility.  On November 24, 2015, we entered into a Third Amended and Restated Credit Agreement with Bank of America, N.A., as agent for the lenders, and the lenders party thereto (the “Third Amended Credit Agreement”), which amended our then-existing senior secured credit facility originally dated as of May 31, 2007 and amended and restated as of May 6, 2010 and as of July 31, 2012.  We refer to the third amended and restated senior secured credit facility as the “senior secured credit facility.” The senior secured credit facility is a first lien senior secured asset based revolving credit facility that is available for working capital and general corporate purposes, including permitted investments, capital expenditures and debt repayments, on a fully revolving basis, subject to the terms and conditions set forth in the credit documents in the form of revolving loans, swing line loans and letters of credit. The Third Amended Credit Agreement extended the maturity date of the revolving loans to the earliest of (i) November 24, 2020 and (ii) 90 days prior to the maturity of the 2012 Notes, and reduced (a) the interest rate applicable to borrowings under the Third Amended Credit Agreement to a per annum rate, determined based on our usage of the credit facility as provided in the Third Amended Credit Agreement, ranging from 1.50% to 2.00% above the adjusted LIBOR rate used by the agent or, at our option, 0.50% to 1.00% above the Base Rate as defined in the Third Amended Credit Agreement and (b) the unused line fee rate to 0.25%.  Our obligations under the Third Amended Credit Agreement are secured by a first priority security interest in substantially all of the assets of the Company, Parent, Surgical Services and RES, excluding a pledge of the Company’s and its subsidiaries’ stock, any joint ventures and certain other exceptions. Our obligations under the Third Amended Credit Agreement are unconditionally guaranteed by the Parent, 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 June 30, 2018, we had $138.5 million of availability under the senior secured credit facility based on a borrowing base of $174.8 million less borrowings of $31.1 million and after giving effect to $5.3 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

14


 

·

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 June 30, 2018, we had $31.1 million of borrowings outstanding of which $28.0 million was accruing interest at a rate of 4.1% and $3.1 million was accruing interest at a rate of 6.0%.

 

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 RES, 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 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.

 

9.Commitments and Contingencies

 

The Company, in the ordinary course of business, is 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

15


 

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”). On March 7, 2018, the Company entered into a confidential settlement agreement resolving all disputes and legal claims of the parties associated with the suit filed by the Company against the Defendants. In consideration for this release, terms of the confidential settlement agreement called for the Company to receive legal title to certain medical equipment of the Defendants as specified in the agreement on May 1, 2018. The Company recorded a gain on legal settlement of approximately $23.5 million during the second quarter of 2018 based on the fair value of the assets received, measured using inputs of replacement cost and market data, which are considered a Level 3 fair value measurement. The gain did not result in a discrete tax charge during the second quarter of 2018, as the expected tax expense from the gain was offset by the reduction of our valuation allowance.

 

10.Related Party Transactions

 

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, Bret Bowerman and Keith Zadourian 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 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 $0.3 and $0.3 million for the three month periods ended June 30, 2018 and 2017, respectively, and $0.6 and $0.5 million for the six month periods ended June 30, 2018 and 2017, 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 promissory note agreements with the officer dated April 13, 2016 for a total amount of $1.0 million, dated April 13, 2017 for a total amount of $0.9 million and dated April 13, 2018 for a total amount of $0.6 million which are included in other long-term assets in the Consolidated Balance Sheets. These note receivables bear annual interest at 1.45%-2.72%. The principal and accrued interest of these notes are 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 these notes was $0.012 and $0.007 million for the three month periods ended June 30, 2018 and 2017, respectively, and $0.021 and $0.011 million for the six month periods ended June 30, 2018 and 2017, respectively.

 

11.Limited Liability Companies

 

We participate with others in the formation of LLCs in which the Company becomes a partner and shares the financial interest with the other investors. The Company 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 June 30, 2018, 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, the Company will provide such financing companies with its corporate guarantee based on its respective ownership interest in each LLC. In certain instances, the Company has provided such financing companies

16


 

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 June 30, 2018, 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 the Company and the LLCs have been eliminated through consolidation.

 

 

 

 

 

12.Income Taxes

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We evaluate the recoverability of our deferred tax assets by scheduling the expected reversals of deferred tax assets and liabilities in order to determine whether net operating loss carry forwards are recoverable prior to expiration and have established a valuation allowance in accordance with ASC Topic 740,  “Income Taxes”. The tax expense for the three and six months ended June 30, 2018 primarily relates to state income taxes and tax amortization of indefinite-life intangibles. The expected tax expense from operating income during the three and six months ended June 30, 2018 was offset by the reduction of our valuation allowance. In future reporting periods, we will continue to assess the likelihood that deferred tax assets will be realizable.

 

In connection with our initial analysis of the impact of the Tax Cuts and Jobs Act, we recorded a provisional income tax benefit of approximately $18.3 million at December 31, 2017 for the revaluation of our net deferred tax liability. There were no changes recorded in the second quarter of 2018 to the provisional income tax benefit.

 

At June 30, 2018, the Company had available unused federal net operating loss carryforwards of approximately $171.8 million. The net operating loss carryforwards will expire at various dates from 2019 through 2038.

 

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.

17


 

Universal Hospital Services, Inc. and Subsidiaries

Consolidating Balance Sheets

(in thousands, except share and per share  information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantors

 

Consolidating

 

 

 

 

 

UHS

 

SS & RES

 

Adjustments

 

Consolidated

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

(755)

 

$

933

 

$

 —

 

$

178

Accounts receivable, less allowance for doubtful accounts

 

 

81,424

 

 

12,980

 

 

 —

 

 

94,404

Due from affiliates

 

 

27,138

 

 

 —

 

 

(27,138)

 

 

 —

Inventories

 

 

4,205

 

 

5,790

 

 

 —

 

 

9,995

Other current assets

 

 

6,078

 

 

956

 

 

 —

 

 

7,034

Total current assets

 

 

118,090

 

 

20,659

 

 

(27,138)

 

 

111,611

Property and equipment:

 

 

 

 

 

 

 

 

 

 

 

 

Medical equipment

 

 

589,813

 

 

67,503

 

 

 —

 

 

657,316

Property and office equipment

 

 

95,671

 

 

12,888

 

 

 —

 

 

108,559

Accumulated depreciation

 

 

(505,799)

 

 

(55,019)

 

 

 —

 

 

(560,818)

Total property and equipment, net

 

 

179,685

 

 

25,372

 

 

 —

 

 

205,057

Other long-term assets:

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

283,141

 

 

63,027

 

 

 —

 

 

346,168

Investment in subsidiary

 

 

79,770

 

 

 —

 

 

(79,770)

 

 

 —

Other intangibles, net

 

 

134,985

 

 

12,960

 

 

 —

 

 

147,945

Other

 

 

8,930

 

 

1,646

 

 

 —

 

 

10,576

Total assets

 

$

804,601

 

$

123,664

 

$

(106,908)

 

$

821,357

Liabilities and (Deficit) Equity

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

3,554

 

$

1,660

 

$

 —

 

$

5,214

Due to affiliates

 

 

 —

 

 

27,138

 

 

(27,138)

 

 

 —

Accounts payable

 

 

21,185

 

 

6,243

 

 

 —

 

 

27,428

Accrued compensation

 

 

21,439

 

 

3,692

 

 

 —

 

 

25,131

Accrued interest

 

 

18,809

 

 

 —

 

 

 —

 

 

18,809

Other accrued expenses

 

 

17,327

 

 

894

 

 

 —

 

 

18,221

Total current liabilities

 

 

82,314

 

 

39,627

 

 

(27,138)

 

 

94,803

Long-term debt, less current portion

 

 

684,507

 

 

3,157

 

 

 —

 

 

687,664

Pension and other long-term liabilities

 

 

10,942

 

 

 6

 

 

 —

 

 

10,948

Deferred income taxes, net

 

 

34,580

 

 

926

 

 

 —

 

 

35,506

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

(Deficit) Equity

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Additional paid-in capital

 

 

250,676

 

 

76,003

 

 

(76,018)

 

 

250,661

Accumulated deficit

 

 

(255,956)

 

 

3,752

 

 

 —

 

 

(252,204)

Accumulated loss in subsidiary

 

 

3,752

 

 

 —

 

 

(3,752)

 

 

 —

Accumulated other comprehensive loss

 

 

(6,214)

 

 

 —

 

 

 —

 

 

(6,214)

Total Universal Hospital Services, Inc. and Subsidiaries  (deficit) equity

 

 

(7,742)

 

 

79,755

 

 

(79,770)

 

 

(7,757)

Noncontrolling interest

 

 

 —

 

 

193

 

 

 —

 

 

193

Total (deficit) equity

 

 

(7,742)

 

 

79,948

 

 

(79,770)

 

 

(7,564)

Total liabilities and (deficit) equity

 

$

804,601

 

$

123,664

 

$

(106,908)

 

$

821,357

 

 

 

18


 

Universal Hospital Services, Inc. and Subsidiaries

Consolidating Balance Sheets

(in thousands, except share and per share  information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantors

 

Consolidating

 

 

 

 

 

UHS

 

SS & RES

 

Adjustments

 

Consolidated

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, less allowance for doubtful accounts

 

$

76,093

 

$

13,544

 

$

 —

 

$

89,637

Due from affiliates

 

 

31,590

 

 

 —

 

 

(31,590)

 

 

 —

Inventories

 

 

3,800

 

 

5,960

 

 

 —

 

 

9,760

Other current assets

 

 

6,127

 

 

709

 

 

 —

 

 

6,836

Total current assets

 

 

117,610

 

 

20,213

 

 

(31,590)

 

 

106,233

Property and equipment:

 

 

 

 

 

 

 

 

 

 

 

 

Medical equipment

 

 

564,316

 

 

64,877

 

 

 —

 

 

629,193

Property and office equipment

 

 

92,414

 

 

12,927

 

 

 —

 

 

105,341

Accumulated depreciation

 

 

(485,960)

 

 

(50,560)

 

 

 —

 

 

(536,520)

Total property and equipment, net

 

 

170,770

 

 

27,244

 

 

 —

 

 

198,014

Other long-term assets:

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

283,141

 

 

63,027

 

 

 —

 

 

346,168

Investment in subsidiary

 

 

76,606

 

 

 —

 

 

(76,606)

 

 

 —

Other intangibles, net

 

 

136,563

 

 

15,358

 

 

 —

 

 

151,921

Other

 

 

2,411

 

 

698

 

 

 —

 

 

3,109

Total assets

 

$

787,101

 

$

126,540

 

$

(108,196)

 

$

805,445

Liabilities and (Deficit) Equity

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

3,451

 

$

1,592

 

$

 —

 

$

5,043

Book overdrafts

 

 

5,345

 

 

22

 

 

 —

 

 

5,367

Due to affiliates

 

 

 —

 

 

31,590

 

 

(31,590)

 

 

 —

Accounts payable

 

 

29,842

 

 

6,847

 

 

 —

 

 

36,689

Accrued compensation

 

 

18,696

 

 

2,802

 

 

 —

 

 

21,498

Accrued interest

 

 

18,671

 

 

 —

 

 

 —

 

 

18,671

Other accrued expenses

 

 

16,018

 

 

1,745

 

 

 —

 

 

17,763

Total current liabilities

 

 

92,023

 

 

44,598

 

 

(31,590)

 

 

105,031

Long-term debt, less current portion

 

 

694,171

 

 

3,894

 

 

 —

 

 

698,065

Pension and other long-term liabilities

 

 

11,384

 

 

 1

 

 

 —

 

 

11,385

Deferred income taxes, net

 

 

34,126

 

 

1,216

 

 

 —

 

 

35,342

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

(Deficit) Equity

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Additional paid-in capital

 

 

250,033

 

 

76,003

 

 

(76,018)

 

 

250,018

Accumulated deficit

 

 

(288,586)

 

 

588

 

 

 —

 

 

(287,998)

Accumulated loss in subsidiary

 

 

588

 

 

 —

 

 

(588)

 

 

 —

Accumulated other comprehensive loss

 

 

(6,638)

 

 

 —

 

 

 —

 

 

(6,638)

Total Universal Hospital Services, Inc. and Subsidiaries (deficit) equity

 

 

(44,603)

 

 

76,591

 

 

(76,606)

 

 

(44,618)

Noncontrolling interest

 

 

 —

 

 

240

 

 

 —

 

 

240

Total (deficit) equity

 

 

(44,603)

 

 

76,831

 

 

(76,606)

 

 

(44,378)

Total liabilities and (deficit) equity

 

$

787,101

 

$

126,540

 

$

(108,196)

 

$

805,445

 

19


 

Universal Hospital Services, Inc. and Subsidiaries

Consolidating Statements of Operations

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2018

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantors

 

Consolidating

 

 

 

 

 

UHS

 

SS & RES

 

Adjustments

 

Consolidated

Revenues

 

$

113,789

 

$

26,918

 

$

 —

 

$

140,707

Cost of revenues

 

 

72,901

 

 

17,633

 

 

 —

 

 

90,534

Gross margin

 

 

40,888

 

 

9,285

 

 

 —

 

 

50,173

Selling, general and administrative

 

 

27,857

 

 

6,885

 

 

 —

 

 

34,742

Gain on legal settlement

 

 

(23,474)

 

 

 —

 

 

 —

 

 

(23,474)

Operating income

 

 

36,505

 

 

2,400

 

 

 —

 

 

38,905

Equity in earnings of subsidiary

 

 

(1,310)

 

 

 —

 

 

1,310

 

 

 —

Interest expense

 

 

13,028

 

 

509

 

 

 —

 

 

13,537

Income before income taxes and noncontrolling interest

 

 

24,787

 

 

1,891

 

 

(1,310)

 

 

25,368

(Benefit) provision for income taxes

 

 

(212)

 

 

581

 

 

 —

 

 

369

Consolidated net income

 

 

24,999

 

 

1,310

 

 

(1,310)

 

 

24,999

Net income attributable to noncontrolling interest

 

 

 —

 

 

81

 

 

 —

 

 

81

Net income attributable to Universal Hospital Services, Inc. and Subsidiaries

 

$

24,999

 

$

1,229

 

$

(1,310)

 

$

24,918

 

20


 

Universal Hospital Services, Inc. and Subsidiaries

Consolidating Statements of Operations

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2017

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantors

 

Consolidating

 

 

 

 

 

UHS

 

SS & RES

 

Adjustments

 

Consolidated

Revenues

 

$

104,786

 

$

23,424

 

$

 —

 

$

128,210

Cost of revenues

 

 

71,273

 

 

14,922

 

 

 —

 

 

86,195

Gross margin

 

 

33,513

 

 

8,502

 

 

 —

 

 

42,015

Selling, general and administrative

 

 

24,410

 

 

6,208

 

 

 —

 

 

30,618

Operating income

 

 

9,103

 

 

2,294

 

 

 —

 

 

11,397

Equity in earnings of subsidiary

 

 

(929)

 

 

 —

 

 

929

 

 

 —

Interest expense

 

 

12,781

 

 

634

 

 

 —

 

 

13,415

(Loss) income before income taxes and noncontrolling interest

 

 

(2,749)

 

 

1,660

 

 

(929)

 

 

(2,018)

(Benefit) provision for income taxes

 

 

(456)

 

 

731

 

 

 —

 

 

275

Consolidated net (loss) income

 

 

(2,293)

 

 

929

 

 

(929)

 

 

(2,293)

Net income attributable to noncontrolling interest

 

 

 —

 

 

98

 

 

 —

 

 

98

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

 

$

(2,293)

 

$

831

 

$

(929)

 

$

(2,391)

21


 

Universal Hospital Services, Inc. and Subsidiaries

Consolidating Statements of Operations

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2018

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantors

 

Consolidating

 

 

 

 

 

UHS

 

SS & RES

 

Adjustments

 

Consolidated

Revenues

 

$

230,986

 

$

52,076

 

$

 —

 

$

283,062

Cost of revenues

 

 

147,096

 

 

34,300

 

 

 

 

 

181,396

Gross margin

 

 

83,890

 

 

17,776

 

 

 —

 

 

101,666

Selling, general and administrative

 

 

54,576

 

 

13,206

 

 

 —

 

 

67,782

Gain on legal settlement

 

 

(23,474)

 

 

 —

 

 

 —

 

 

(23,474)

Operating income

 

 

52,788

 

 

4,570

 

 

 —

 

 

57,358

Equity in earnings of subsidiary

 

 

(2,428)

 

 

 —

 

 

2,428

 

 

 —

Interest expense

 

 

25,920

 

 

1,068

 

 

 —

 

 

26,988

Income before income taxes and noncontrolling interest

 

 

29,296

 

 

3,502

 

 

(2,428)

 

 

30,370

(Benefit) provision for income taxes

 

 

(443)

 

 

1,074

 

 

 —

 

 

631

Consolidated net income

 

 

29,739

 

 

2,428

 

 

(2,428)

 

 

29,739

Net income attributable to noncontrolling interest

 

 

 —

 

 

166

 

 

 —

 

 

166

Net income attributable to Universal Hospital Services, Inc. and Subsidiaries

 

$

29,739

 

$

2,262

 

$

(2,428)

 

$

29,573

 

22


 

 

Universal Hospital Services, Inc. and Subsidiaries

Consolidating Statements of Operations

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2017

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantors

 

Consolidating

 

 

 

 

 

UHS

 

SS & RES

 

Adjustments

 

Consolidated

Revenues

 

$

212,735

 

$

46,128

 

$

 

 

$

258,863

Cost of revenues

 

 

141,188

 

 

29,892

 

 

 —

 

 

171,080

Gross margin

 

 

71,547

 

 

16,236

 

 

 —

 

 

87,783

Selling, general and administrative

 

 

51,947

 

 

12,628

 

 

 —

 

 

64,575

Operating income

 

 

19,600

 

 

3,608

 

 

 —

 

 

23,208

Equity in earnings of subsidiary

 

 

(1,342)

 

 

 —

 

 

1,342

 

 

 —

Interest expense

 

 

25,714

 

 

1,180

 

 

 —

 

 

26,894

(Loss) income before income taxes and noncontrolling interest

 

 

(4,772)

 

 

2,428

 

 

(1,342)

 

 

(3,686)

(Benefit) provision for income taxes

 

 

(589)

 

 

1,086

 

 

 —

 

 

497

Consolidated net (loss) income

 

 

(4,183)

 

 

1,342

 

 

(1,342)

 

 

(4,183)

Net income attributable to noncontrolling interest

 

 

 —

 

 

170

 

 

 —

 

 

170

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

 

$

(4,183)

 

$

1,172

 

$

(1,342)

 

$

(4,353)

 

 

 

23


 

Universal Hospital Services, Inc. and Subsidiaries

Consolidating Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2018



Six Months Ended June 30, 2018

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantors

 

Consolidating

 

 

 

 

Issuer

 

Guarantors

 

Consolidating

 

 

 

 

  

UHS

 

SS & RES

 

Adjustments

 

Consolidated

    

UHS

 

SS & RES

 

Adjustments

 

Consolidated

Consolidated net income

 

$

24,999

 

$

1,310

 

$

(1,310)

 

$

24,999

 

$

29,739

 

$

2,428

 

$

(2,428)

 

$

29,739

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on minimum pension liability, net of tax

 

 

214

 

 

 —

 

 

 —

 

 

214

 

 

424

 

 

 —

 

 

 —

 

 

424

Total other comprehensive income

 

 

214

 

 

 —

 

 

 —

 

 

214

 

 

424

 

 

 —

 

 

 —

 

 

424

Comprehensive income

 

 

25,213

 

 

1,310

 

 

(1,310)

 

 

25,213

 

 

30,163

 

 

2,428

 

 

(2,428)

 

 

30,163

Comprehensive income attributable to noncontrolling interest

 

 

 —

 

 

81

 

 

 —

 

 

81

 

 

 —

 

 

166

 

 

 —

 

 

166

Comprehensive income attributable to Universal Hospital Services, Inc. and Subsidiaries

 

$

25,213

 

$

1,229

 

$

(1,310)

 

$

25,132

 

$

30,163

 

$

2,262

 

$

(2,428)

 

$

29,997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2017

   

Six Months Ended June 30, 2017

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantors

 

Consolidating

 

 

 

 

Issuer

 

Guarantors

 

Consolidating

 

 

 

 

 

UHS

 

SS & RES

 

Adjustments

 

Consolidated

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

Consolidated net (loss) income

 

$

(2,293)

 

$

929

 

$

(929)

 

$

(2,293)

 

$

(4,183)

 

$

1,342

 

$

(1,342)

 

$

(4,183)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on minimum pension liability, net of tax

 

 

192

 

 

 —

 

 

 —

 

 

192

 

 

371

 

 

 —

 

 

 —

 

 

371

Total other comprehensive income

 

 

192

 

 

 —

 

 

 —

 

 

192

 

 

371

 

 

 —

 

 

 —

 

 

371

Comprehensive (loss) income

 

 

(2,101)

 

 

929

 

 

(929)

 

 

(2,101)

 

 

(3,812)

 

 

1,342

 

 

(1,342)

 

 

(3,812)

Comprehensive income attributable to noncontrolling interest

 

 

 —

 

 

98

 

 

 —

 

 

98

 

 

 —

 

 

170

 

 

 —

 

 

170

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

 

$

(2,101)

 

$

831

 

$

(929)

 

$

(2,199)

 

$

(3,812)

 

$

1,172

 

$

(1,342)

 

$

(3,982)

                    

24


 

Universal Hospital Services, Inc. and Subsidiaries

Consolidating Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2018

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantors

 

Consolidating

 

 

 

 

 

UHS

 

SS & RES

 

Adjustments

 

Consolidated

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated net income

 

$

29,739

 

$

2,428

 

$

(2,428)

 

$

29,739

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

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

28,795

 

 

4,850

 

 

 —

 

 

33,645

Gain on legal settlement

 

 

(21,474)

 

 

 —

 

 

 —

 

 

(21,474)

Amortization of intangibles, contract costs, deferred financing costs and bond premium

 

 

2,505

 

 

2,508

 

 

 —

 

 

5,013

Equity in earnings of subsidiary

 

 

(2,428)

 

 

 —

 

 

2,428

 

 

 —

Provision for doubtful accounts

 

 

324

 

 

82

 

 

 —

 

 

406

Provision for inventory obsolescence

 

 

144

 

 

175

 

 

 —

 

 

319

Non-cash share-based compensation expense

 

 

1,256

 

 

251

 

 

 —

 

 

1,507

Gain on sales and disposals of equipment

 

 

(1,025)

 

 

(25)

 

 

 —

 

 

(1,050)

Deferred income taxes

 

 

454

 

 

(290)

 

 

 —

 

 

164

Interest on note receivable

 

 

(21)

 

 

 —

 

 

 —

 

 

(21)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(5,655)

 

 

482

 

 

 —

 

 

(5,173)

Due from affiliates

 

 

4,703

 

 

 —

 

 

(4,703)

 

 

 —

Inventories

 

 

(549)

 

 

(5)

 

 

 —

 

 

(554)

Other operating assets

 

 

129

 

 

(91)

 

 

 —

 

 

38

Accounts payable

 

 

(1,962)

 

 

2,171

 

 

 —

 

 

209

Other operating liabilities

 

 

2,701

 

 

356

 

 

 —

 

 

3,057

Net cash provided by operating activities

 

 

37,636

 

 

12,892

 

 

(4,703)

 

 

45,825

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Medical equipment purchases

 

 

(17,872)

 

 

(5,401)

 

 

 —

 

 

(23,273)

Property and office equipment purchases

 

 

(4,205)

 

 

(111)

 

 

 —

 

 

(4,316)

Proceeds from disposition of property and equipment

 

 

1,654

 

 

159

 

 

 —

 

 

1,813

Issuance of note receivable from officer

 

 

(581)

 

 

 —

 

 

 —

 

 

(581)

Net cash used in investing activities

 

 

(21,004)

 

 

(5,353)

 

 

 —

 

 

(26,357)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds under senior secured credit facility

 

 

104,448

 

 

 —

 

 

 —

 

 

104,448

Payments under senior secured credit facility

 

 

(113,598)

 

 

 —

 

 

 —

 

 

(113,598)

Payments of principal under capital lease obligations

 

 

(2,028)

 

 

(1,044)

 

 

 —

 

 

(3,072)

Holdback payment related to acquisition

 

 

 —

 

 

(624)

 

 

 —

 

 

(624)

Distributions to noncontrolling interests

 

 

 —

 

 

(213)

 

 

 —

 

 

(213)

Proceeds from exercise of parent company stock options

 

 

285

 

 

 —

 

 

 —

 

 

285

Shares forfeited for taxes

 

 

(1,149)

 

 

 —

 

 

 —

 

 

(1,149)

Due to affiliates

 

 

 —

 

 

(4,703)

 

 

4,703

 

 

 —

Change in book overdrafts

 

 

(5,345)

 

 

(22)

 

 

 —

 

 

(5,367)

Net cash used in financing activities

 

 

(17,387)

 

 

(6,606)

 

 

4,703

 

 

(19,290)

Net change in cash and cash equivalents

 

 

(755)

 

 

933

 

 

 —

 

 

178

Cash and cash equivalents at the beginning of period

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Cash and cash equivalents at the end of period

 

$

(755)

 

$

933

 

$

 —

 

$

178

 

25


 

Universal Hospital Services, Inc. and Subsidiaries

Consolidating Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2017

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantors

 

Consolidating

 

 

 

 

 

UHS

 

SS & RES

 

Adjustments

 

Consolidated

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated net (loss) income

 

$

(4,183)

 

$

1,342

 

$

(1,342)

 

$

(4,183)

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

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

31,538

 

 

4,126

 

 

 —

 

 

35,664

Amortization of intangibles, deferred financing costs and bond premium

 

 

2,929

 

 

2,531

 

 

 —

 

 

5,460

Equity in earnings of subsidiary

 

 

(1,342)

 

 

 —

 

 

1,342

 

 

 —

Provision for doubtful accounts

 

 

85

 

 

(12)

 

 

 —

 

 

73

Provision for inventory obsolescence

 

 

(10)

 

 

132

 

 

 —

 

 

122

Non-cash share-based compensation expense

 

 

1,305

 

 

246

 

 

 —

 

 

1,551

Gain on sales and disposals of equipment

 

 

(992)

 

 

(54)

 

 

 —

 

 

(1,046)

Deferred income taxes

 

 

788

 

 

(584)

 

 

 —

 

 

204

Interest on note receivable

 

 

(11)

 

 

 —

 

 

 —

 

 

(11)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(466)

 

 

624

 

 

 —

 

 

158

Due from affiliates

 

 

(5,731)

 

 

 —

 

 

5,731

 

 

 —

Inventories

 

 

14

 

 

481

 

 

 —

 

 

495

Other operating assets

 

 

(134)

 

 

(280)

 

 

 —

 

 

(414)

Accounts payable

 

 

(2,435)

 

 

(1,204)

 

 

 —

 

 

(3,639)

Other operating liabilities

 

 

(2,430)

 

 

(951)

 

 

 —

 

 

(3,381)

Net cash provided by operating activities

 

 

18,925

 

 

6,397

 

 

5,731

 

 

31,053

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Medical equipment purchases

 

 

(19,105)

 

 

(5,191)

 

 

 —

 

 

(24,296)

Property and office equipment purchases

 

 

(3,206)

 

 

(103)

 

 

 —

 

 

(3,309)

Proceeds from disposition of property and equipment

 

 

2,010

 

 

81

 

 

 —

 

 

2,091

Issuance of note receivable from officer

 

 

(936)

 

 

 —

 

 

 —

 

 

(936)

Acquisition and refund of escrow

 

 

3,691

 

 

(5,614)

 

 

 —

 

 

(1,923)

Net cash used in investing activities

 

 

(17,546)

 

 

(10,827)

 

 

 —

 

 

(28,373)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds under senior secured credit facility

 

 

83,200

 

 

 —

 

 

 —

 

 

83,200

Payments under senior secured credit facility

 

 

(79,692)

 

 

 —

 

 

 —

 

 

(79,692)

Payments of principal under capital lease obligations

 

 

(2,623)

 

 

(796)

 

 

 —

 

 

(3,419)

Distributions to noncontrolling interests

 

 

 —

 

 

(133)

 

 

 —

 

 

(133)

Proceeds from exercise of parent company stock options

 

 

29

 

 

 —

 

 

 —

 

 

29

Contribution from Parent

 

 

1,900

 

 

 —

 

 

 

 

 

1,900

Due to affiliates

 

 

 —

 

 

5,731

 

 

(5,731)

 

 

 —

Change in book overdrafts

 

 

(4,193)

 

 

(372)

 

 

 —

 

 

(4,565)

Net cash (used in) provided by financing activities

 

 

(1,379)

 

 

4,430

 

 

(5,731)

 

 

(2,680)

Net change in cash and cash equivalents

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Cash and cash equivalents at the beginning of period

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Cash and cash equivalents at the end of period

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

26


 

14.Concentration

 

One customer, Memorial Hermann Health System, accounted for approximately 13% and 15% of total revenue for the six months ended June 30, 2018 and 2017, respectively. The Company is operating under multi-year agreements with customary terms and conditions with this customer.

 

15.Subsequent Events

 

On August 9, 2018, we and IPC entered into a Second Amended and Restated Professional Services Agreement (the “Amended PSA”).  Pursuant to the Amended PSA, in addition to the services previously provided under the original agreement, IPC will provide services related to a possible transaction resulting in a qualified public offering or change of control and will receive a fee of $10 million payable upon the consummation of such transaction.  The Amended PSA also removes the acceleration of the advisory fee in the event of a sale of the Company or qualified public offering.  Additionally, the Amended PSA amends the agreement to terminate on the earliest of (a) consummation of a qualified public offering, (b) consummation of a change in control and (c) the tenth anniversary of the date of the Amended PSA, provided, however, that if no qualified public offering or change of control has been consummated prior to such tenth anniversary, the Amended PSA will automatically extend on a year to year basis until either party provides written notice of its desire to terminate the Amended PSA or at such time as a qualified public offering or change of control has been consummated.  The Amended PSA is attached as Exhibit 10.1 and incorporated herein by reference.

 

On August 9, 2018, the board of directors of the Parent approved and adopted an amendment to the 2018 Executive Management Stock Option Plan, dated May 9, 2018 (the “2018 Plan”) (a copy of which has been filed as Exhibit 10.1 on our Form 10-Q with the SEC on May 14, 2018) to confirm that any options granted under the 2018 Plan will only be exercisable upon a Change of Control of Parent (“Plan Amendment”). A copy of the Plan Amendment is filed with this Form 10-Q as Exhibit 10.2.

 

On August 13, 2018, Parent and Federal Street Acquisition Corp. (“FSAC”) entered into a definitive Merger Agreement.

 

For further information on the proposed Merger Agreement, please refer to our Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission (“SEC”) on August 13, 2018.

 

The transaction is expected to close in the fourth quarter of calendar year 2018 and is subject to customary and other closing conditions, including regulatory approvals and FSAC stockholder approval.

 

 

 

 

27


 

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

 

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

 

BUSINESS OVERVIEW

 

Our Company

 

Universal Hospital Services, Inc. and Subsidiaries (“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.

 

Universal Hospital Services, Inc. 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”).

 

As of June 30, 2018, we owned or managed more than 800,000 units of medical equipment consisting of over 350,000 units of owned medical equipment and over 450,000 units of customer-owned equipment. Our diverse customer base includes approximately 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 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 86 service centers and five Centers of Excellence. Our fees are paid directly by our customers rather than by direct reimbursement from third-party payors, such as private insurers, Medicare or Medicaid.

 

Historically, the Company reported under three segments.  Medical Equipment Solutions included supplemental and peak needs usage solutions, customized equipment agreement solutions, 360 On-site managed solutions, specialty medical equipment sale, distribution and disposable sales.  Clinical Engineering Solutions included supplemental maintenance, repair and remediation solutions, on-site biomed services, health care technology solutions, federal governmental services and clinical engineering capital sales.  Surgical Services included on-demand and scheduled usage solutions, on-site solutions for hospital and multi-facility health systems and disposable only sales.

 

Effective January 1, 2018, the Company changed its segment reporting to report its financial information under one reporting segment. The change in reporting was made to conform to the way the Company is currently managing and executing the business. Specifically, the chief operating decision maker (“CODM”) is making operating decisions and assessing performance using discrete financial information from one reportable segment, as our resources and infrastructure are shared and our go to market strategy have evolved with our Equipment Value Management (“EVM”) strategy. The current financial information is based upon the transformation of the business model that has occurred and the development of the new commercial framework – EVM.  EVM is an end to end approach to medical equipment management that helps hospitals recover cost and time that today are wasted through inefficient medical equipment processes.  EVM integrates customers supply chain, patient care and clinical engineering teams, connecting these siloed groups to streamline processes to improve stakeholder productivity and satisfaction while optimizing equipment utilization and lowering the total cost of ownership.  EVM provides the customer with the equipment they need, when they need it, with the assets serviced to the highest quality standards in the industry. EVM combines the capabilities of all service offerings.  The EVM solution links all of our service offerings at UHS. The Company has a similar compliment of services, type of customer for the Company’s services, method of distribution for the Company’s services and the regulatory environment is similar across the United States. Accordingly, we concluded that we operate as one reporting segment.  Finally, the Company analyzed its goodwill for potential impairment before and after the change in segments and concluded that there was no impairment.

 

Current year presentation of one reporting segment resulted in disaggregated revenue categories of Equipment Solutions which includes supplemental and peak needs usage solutions, surgical services on-demand and scheduled

28


 

usage,solutions, specialty medical equipment sale, distribution and disposable sales, clinical engineering capital sales and surgical disposable only sales.  Clinical Engineering includes supplemental maintenance, repair and remediation solutions, on-site biomed services, health care technology solutions and federal governmental services.  On-site Managed Services includes 360 On-site managed solutions and surgical services on-site solutions for hospital and multi-facility health systems.

 

The Company operates in one geographic region, the United States. As the Company is now reporting as one segment which equals the total Company’s results as reflected in the Consolidated Statement of Operations, restatement of prior periods was not necessary.

 

Our service lines consist of Equipment Solutions, Clinical Engineering and On-site Managed Services. 

 

Equipment Solutions primarily consists of providing supplemental, peak needs and surgical equipment usage solutions to approximately 7,000 acute care hospitals and alternate site providers in the United States, including some of the nation’s premier health care institutions.  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. 

 

Clinical Engineering consists of supplemental maintenance, repair and remediation solutions, health care technology solutions and the federal government services.  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 400,000 units of customer owned equipment as of June 30, 2018.

 

On-site Managed Services provide solutions that allow our customers to fully outsource the responsibilities and costs of effectively managing categories of medical equipment at their facilities, with the added benefit of enhancing equipment utilization and clinical support. With our 360 solutions, medical equipment types and quantities are adjusted to meet changes in patient census and acuity. Our employees work at the customers’ sites to integrate our equipment management process and proprietary management software technology tools into the customers’ day-to-day operations.  We assume full responsibility for having equipment where and when it is needed at the customer’s facility, removing equipment that is no longer in use and decontaminating, testing and repairing equipment as needed between each patient use. We also perform required training and ‘‘in service’’ sessions to keep our customers’ staffs fully-trained and knowledgeable about the use and operation of medical equipment covered by the 360 solutions. We provide 360 solutions in both our historical A360 program (using UHS-owned equipment) and our newer growing M360 program (managing customer owned equipment).

 

RESULTS OF OPERATIONS

 

The following discussion addresses:

 

·

our financial condition as of June 30, 2018;  and

·

the results of operations for the three-month and six-month periods ended June 30, 2018 and 2017.

 

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 2017 Annual Report on Form 10-K, filed with the Securities and Exchange Commission.

 

The following table provides information on the percentages of certain items of selected financial data compared to total revenues for the three-month and six-month periods ended June 30, 2018 and 2017.  As previously discussed in this Report, revenues, cost of revenues and selling, general and administrative expense for the first six months of 2018 were determined in accordance with ASC Topic 606, while comparative results for the first six months of 2017 were determined in accordance with ASC Topic 605. There are no differences for revenues and cost of revenues between ASC Topic 606 and the previous standard ASC Topic 605. For selling, general and administrative expense, the Company is now capitalizing certain contract costs that were previously expensed. See Note 3, Revenue Recognition, for discussion regarding contract costs.

29


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent to Total Revenues

 

 

Percent to Total Revenues

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

    

2018

    

2017

    

    

2018

    

2017

    

Revenues

 

100.0

%  

100.0

%  

 

100.0

%  

100.0

%  

Cost of revenues

 

64.3

 

67.2

 

 

64.1

 

66.1

 

Gross margin

 

35.7

 

32.8

 

 

35.9

 

33.9

 

Selling, general and administrative

 

24.7

 

23.8

 

 

23.9

 

24.9

 

Gain on legal settlement

 

(16.7)

 

 —

 

 

(8.3)

 

 —

 

Operating income

 

27.7

 

9.0

 

 

20.3

 

9.0

 

Interest expense

 

9.6

 

10.5

 

 

9.5

 

10.4

 

Income (loss) before income taxes and noncontrolling interest

 

18.1

 

(1.5)

 

 

10.8

 

(1.4)

 

Provision for income taxes

 

0.3

 

0.2

 

 

0.2

 

0.2

 

Consolidated net income (loss)

 

17.8

%

(1.7)

%

 

10.6

%

(1.6)

%

 

Consolidated Results of Operations for the three months ended June 30, 2018 compared to the three months ended June 30, 2017

 

Total Revenue

 

The following table presents revenues by major service type for the three months ended June 30, 2018 and 2017 (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

June 30,

 

 

 

 

 

    

2018

    

2017

    

 

% Change

    

Equipment Solutions

 

$

62,992

 

$

58,038

 

 

8.5

%  

Clinical Engineering

 

 

39,303

 

 

34,413

 

 

14.2

 

On-Site Managed Services

 

 

38,412

 

 

35,759

 

 

7.4

 

Total Revenue

 

$

140,707

 

$

128,210

 

 

9.7

%  

 

Total revenue for the three months ended June 30, 2018 was $140.7 million, compared to $128.2 million for the three months ended June 30, 2017, an increase of $12.5 million or 9.7%.  Equipment Solutions revenue increased 8.5% primarily driven by new customer contracts signed and implemented in the second quarter of 2018. These new contract signings include our traditional supplemental rental services as well as our surgical solutions.  Clinical Engineering revenue increased 14.2% as we continue to see strong growth within this solution as a direct result of our continued success in signing and implementing new business contracts over the last few quarters, including the sizeable contract we disclosed in the third quarter of 2017.  Finally, our On-site Managed Services revenue increased 7.4% with the majority of growth coming from our managed only solution where we manage equipment owned by the customer.

 

Cost of Revenue

 

Total cost of revenue for the three months ended June 30, 2018 was $90.5 million compared to $86.2 million for the three months ended June 30, 2017, an increase of $4.3 million or 5.0%.  On a percentage of revenue basis, cost of revenue declined from 67.2% of revenue in 2017 to 64.3% in 2018.  The decline was driven primarily from revenue growth as we were able to leverage our fixed cost infrastructure resulting in our expenses growing at a lower rate than revenue growth.  In addition, as we continue to reduce our capital expenditures as a percentage of revenue, our depreciation expense declined in 2018 versus the comparable period in 2017.  We continue to make necessary investments to support the growth in our Clinical Engineering solutions and technician labor and vendor expenses increased primarily to support our new clinical engineering programs. 

 

Gross Margin

 

Total gross margin for the three months ended June 30, 2018 was $50.2 million, or 35.7% of total revenues, compared to $42.0 million, or 32.8% of total revenues, for the three months ended June 30, 2017, an increase of $8.2 million or 19.5%.  The increase in gross margin as a percent of revenue for the quarter was primarily impacted by positive leverage from volume growth in our three major service types as well as from a  reduction in depreciation expense as a result of

30


 

our continued efforts to lower the level of capital expenditures as a percentage of revenue as we shift the mix of business to a lower capital intensity.

 

Selling, General and Administrative, Gain on Legal Settlement and Interest Expense

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

    

2018

    

2017

    

Change

    

% Change

 

Selling, general and administrative

 

$

34,742

 

$

30,618

 

$

4,124

 

13.5

%

Gain on legal settlement

 

 

(23,474)

 

 

 —

 

 

(23,474)

 

*

 

Interest expense

 

 

13,537

 

 

13,415

 

 

122

 

0.9

 

 

Selling, General and Administrative

 

Selling, general and administrative expense increased $4.1 million, or 13.5%, to $34.7 million for the second quarter of 2018 as compared to the same period of 2017. Selling, general and administrative expense as a percentage of total revenue was 24.7% and 23.8% for the quarters ended June 30, 2018 and 2017, respectively. The increase of $4.1 million and as a percentage of revenue was primarily due to higher incentive related costs based upon the Company’s financial performance for 2018.

 

Gain on Legal Settlement

 

Gain on legal settlement of $23.5 million for the second quarter of 2018 was related to a litigation settlement with Hill Rom. See Note 9, Commitments and Contingencies.

 

Interest Expense

 

Interest expense increased $0.1 million to $13.5 million for the second quarter of 2018 as compared to the same period of 2017.

 

Income Taxes

 

Income taxes were an expense of $0.4 and $0.3 million for the three months ended June 30, 2018 and 2017, respectively. The tax expense for the three months ended June 30, 2018 and 2017 primarily related to state minimum fees and tax amortization of indefinite-life intangibles. The expected tax expense from operating income during the three months ended June 30, 2018 was offset by the reduction of our valuation allowance. In future reporting periods, we will continue to assess the likelihood that deferred tax assets will be realizable. See Note 12, Income Taxes. 

 

Consolidated Net Income

 

Consolidated net income increased $27.3 million to $25.0 million in the second quarter of 2018 as compared to the same period of 2017.  Net income was impacted primarily by the increase in revenues and gain on legal settlement during the second quarter of 2018.

 

Consolidated Results of Operations for the six months ended June 30, 2018 compared to the six months ended June 30, 2017

 

Total Revenue

 

The following table presents revenues by major service type for the six months ended June 30, 2018 and 2017 (in thousands).

31


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

June 30,

 

 

 

 

 

    

2018

    

2017

    

 

% Change

    

Equipment Solutions

 

$

125,434

 

$

118,695

 

 

5.7

%  

Clinical Engineering

 

 

79,048

 

 

67,754

 

 

16.7

 

On-Site Managed Services

 

 

78,580

 

 

72,414

 

 

8.5

 

Total Revenue

 

$

283,062

 

$

258,863

 

 

9.3

%  

 

Total revenue for the six months ended June 30, 2018 was $283.1 million, compared to $258.9 million for the six months ended June 30, 2017, an increase of $24.2 million or 9.3%.  Equipment Solutions revenue increased 5.7% primarily driven by new customer contracts signed and implemented in the second quarter of 2018 and a favorable impact from a stronger flu season. These new contract signings include our traditional supplemental rental services as well as our surgical solutions.  Clinical Engineering revenue increased 16.7% as we continue to see strong growth within this solution as a direct result of our continued success in signing and implementing new business contracts over the last few quarters, including the sizeable contract we disclosed in the third quarter of 2017.  Finally, our On-site Managed Services increased 8.5% with the majority of growth coming from our managed only solution where we manage equipment owned by the customer as well as a favorable impact from a stronger flu season. 

 

Cost of Revenue

 

Total cost of revenue for the six months ended June 30, 2018 was $181.4 million compared to $171.1 million for the six months ended June 30, 2017, an increase of $10.3 million or 6.0%.  On a percentage of revenue basis, cost of revenue declined from 66.1% of revenue in 2017 to 64.1% in 2018.  The decline was driven primarily from revenue growth as we were able to leverage our fixed cost infrastructure resulting in our expenses growing at a lower rate than revenue growth.  In addition, as we continue to reduce our capital expenditures as a percentage of revenue, our depreciation expense declined in 2018 versus the comparable period in 2017.  We continue to make necessary investments to support the growth in our Clinical Engineering solutions and technician labor and vendor expenses increased primarily to support our new clinical engineering programs. 

 

Gross Margin

 

Total gross margin for the six months ended June 30, 2018 was $101.7 million, or 35.9% of total revenues, compared to $87.8 million, or 33.9% of total revenues, for the six months ended June 30, 2017, an increase of $13.9 million or 15.8%.  The increase in gross margin as a percent of revenue for the quarter was primarily impacted by positive leverage from volume growth in our three major service types as well as from a reduction in depreciation expense as a result of our continued efforts to lower the level of capital expenditures as a percentage of revenue as we shift the mix of business to a lower capital intensity.

 

Selling, General and Administrative, Gain on Legal Settlement and Interest Expense

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

    

2018

    

2017

    

Change

    

% Change

 

Selling, general and administrative

 

$

67,782

 

$

64,575

 

$

3,207

 

5.0

%

Gain on legal settlement

 

 

(23,474)

 

 

 —

 

 

(23,474)

 

*

 

Interest expense

 

 

26,988

 

 

26,894

 

 

94

 

0.3

 


*Not meaningful

 

Selling, General and Administrative

 

Selling, general and administrative expense increased $3.2 million, or 5.0%, to $67.8 million for the first six months of 2018 as compared to the same period of 2017. The increase of $3.2 million was primarily due to higher incentive related costs based upon the Company’s actual/forecasted financial performance for 2018. Selling, general and administrative expense as a percentage of total revenue was 23.9% and 24.9% for the six months ended June 30, 2018 and 2017, respectively.

32


 

Gain on Legal Settlement

 

Gain on legal settlement of $23.5 million for the first six months of 2017 was related to a  litigation settlement with Hill Rom. See Note 9, Commitments and Contingencies.

 

Interest Expense

 

Interest expense increased $0.1 million to $27.0 million for the first six months of 2018 as compared to the same period of 2017.

 

Income Taxes

 

Income taxes were an expense of $0.6 and $0.5 million for the six months ended June 30, 2018 and 2017, respectively. The tax expense for the six months ended June 30, 2018 and 2017 primarily related to state minimum fees and tax amortization of indefinite-life intangibles. The expected tax expense from operating income during the six months ended June 30, 2018 was offset by the reduction of our valuation allowance. In future reporting periods, we will continue to assess the likelihood that deferred tax assets will be realizable. See Note 12, Income Taxes.

 

Consolidated Net Income

 

Consolidated net income increased $33.9 million to $29.7 million in the first six months of 2018 as compared to the same period of 2017.  Net income was impacted primarily by the increase in revenues and gain on legal settlement.

 

Adjusted EBITDA

 

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) was $77.2 and $69.1 million for the six months ended June 30, 2018 and 2017, respectively.  Adjusted EBITDA for the six months ended June 30, 2018 was higher primarily due to the increase in revenue.

 

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 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 income (loss) attributable to UHS to Adjusted EBITDA is included below:

33


 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

(in thousands)

    

2018

    

2017

 

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

 

$

29,573

 

$

(4,353)

 

Interest expense

 

 

26,988

 

 

26,894

 

Provision for income taxes

 

 

631

 

 

497

 

Depreciation and amortization of intangibles and contract costs

 

 

38,523

 

 

40,927

 

EBITDA

 

 

95,715

 

 

63,965

 

Gain on legal settlement

 

 

(23,474)

 

 

 —

 

Non-cash share-based compensation expense

 

 

1,507

 

 

1,551

 

Management, board and other

 

 

3,500

 

 

3,608

 

Adjusted EBITDA

 

$

77,248

 

$

69,124

 

 

 

 

 

 

 

 

 

Other Financial Data:

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

45,825

 

$

31,053

 

Net cash used in investing activities

 

 

(26,357)

 

 

(28,373)

 

Net cash used in financing activities

 

 

(19,290)

 

 

(2,680)

 

 

 

 

 

 

 

 

 

Other Operating Data (as of end of period):

 

 

 

 

 

 

 

Medical equipment (approximate number of owned outsourcing units)

 

 

252,000

 

 

242,000

 

District service centers

 

 

86

 

 

86

 

Centers of Excellence

 

 

 5

 

 

 5

 

 

SEASONALITY

 

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

 

LIQUIDITY AND CAPITAL RESOURCES

 

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

 

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

 

Our principal sources of liquidity are expected to be cash flows from operating activities and borrowings under our senior secured credit facility, which provides for loans in an amount of up to $235.0 million, subject to our borrowing base. See Note 8, 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,

34


 

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 provided by operating activities was $45.8 and $31.1 million for the six months ended June 30, 2018 and 2017, respectively. The increase in net cash provided by operating activities was primarily due to higher earnings, higher incentive accrual and the timing of accounts payable payments in the first six months of 2018 compared to the same period in 2017

 

Net cash used in investing activities was $26.4 and $28.4 million for the six months ended June 30, 2018 and 2017, respectively. The decrease in  net cash used in investing activities was primarily due to a previous year acquisition.

 

Net cash used in financing activities was $19.3 and $2.7 million for the six months ended June 30, 2018 and 2017, respectively.  The increase in net cash used in financing activities was primarily due to higher payments on our senior secured credit facility.

 

Based on the level of operating performance expected in 2018, 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 June 30, 2018, we had $138.5 million of availability under the senior secured credit facility based on a borrowing base of $174.8 million less borrowings of $31.1 million and after giving effect to $5.3 million used for letters of credit.  As of June 30, 2017, we had $110.5 million of availability under the senior secured credit facility based on a borrowing base of $164.6 million less borrowings of $49.2 million and after giving effect to $4.9 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 8, Long-Term Debt.

 

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

 

RECENT ACCOUNTING PRONOUNCEMENT

 

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

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We do not have any off-balance sheet arrangements.

 

SAFE HARBOR STATEMENT

 

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

 

·

our competitors’ activities;

·

our customers’ patient census or service needs;

·

global economic conditions’ effect on our customers;

·

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

·

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

·

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

·

our relationships with key suppliers;

·

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

·

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

·

our dependence on key personnel;

·

our ability to identify and manage acquisitions;

35


 

·

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 health care 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 June 30, 2018, we had approximately $697.6 million of total debt outstanding before netting with deferred financing costs, of which $31.1 million was bearing interest at variable rates. Based on variable debt levels at June 30, 2018, a 1.0 percentage point change in interest rates on variable rate debt would have resulted in annual interest expense fluctuating by approximately $0.3 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 six months of 2018 average price of unleaded gasoline, assuming gasoline usage levels for the six months ended June 30, 2018, would lead to an annual increase in fuel costs of approximately $0.4 million.

 

Pension

 

Our pension plan assets, which were approximately $22.2 million at December 31, 2017, are subject to volatility that can be caused by fluctuations in general economic conditions. Continued market volatility and disruption could cause 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, 2017 would lead to a decrease in the funded status of the plan of approximately $2.2 million.

 

Other Market Risk

 

As of June 30, 2018, we have no other material exposure to market risk.

 

 

36


 

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 June 30, 2018.

 

(b)

Changes in internal control over financial reporting

 

Beginning January 1, 2018, we implemented ASU 2014-09. Although the adoption of the new revenue standard had no significant impact on our results of operations, cash flows, or financial position, we did implement changes to our controls related to revenue. These included the development of new policies based on the five-step model provided in the new revenue standard, enhanced contract review requirements and other ongoing monitoring activities. These controls were designed to provide assurance at a reasonable level of the fair presentation of our condensed consolidated financial statements and related disclosures. There was no other change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1.Legal Proceedings

 

The Company, in the ordinary course of business, is 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 9, 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 2017 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

 

On August 9, 2018, we and IPC entered into a Second Amended and Restated Professional Services Agreement (the “Amended PSA”).  Pursuant to the Amended PSA, in addition to the services previously provided under the original

37


 

agreement, IPC will provide services related to a possible transaction resulting in a qualified public offering or change of control and will receive a fee of $10,000,000 payable upon the consummation of such transaction.  The Amended PSA also removes the acceleration of the advisory fee in the event of a sale of the Company or qualified public offering.  Additionally, the Amended PSA amends the agreement to terminate on the earliest of (a) consummation of a qualified public offering, (b) consummation of a change in control and (c) the tenth anniversary of the date of the Amended PSA, provided, however, that if no qualified public offering or change of control has been consummated prior to such tenth anniversary, the Amended PSA will automatically extend on a year to year basis until either party provides written notice of its desire to terminate the Amended PSA or at such time as a qualified public offering or change of control has been consummated.  The Amended PSA is attached as Exhibit 10.1 and incorporated herein by reference.

 

On August 9, 2018, the board of directors of the Parent approved and adopted an amendment to the 2018 Executive Management Stock Option Plan, dated May 9, 2018 (the “2018 Plan”) (a copy of which has been filed as Exhibit 10.1 on our Form 10-Q with the SEC on May 14, 2018) to confirm that any options granted under the 2018 Plan will only be exercisable upon a Change of Control of Parent (“Plan Amendment”). A copy of the Plan Amendment is filed with this Form 10-Q as Exhibit 10.2.

 

Item 6.Exhibits

 

 

 

 

Number

 

Description

 

 

 

10.1

 

Second Amended and Restated Professional Services Agreement dated August 9, 2018 between Irving Place Capital Management, L.P. and Universal Hospital Services, Inc.

 

10.2

 

Amendment No. 1 to the Executive Management Stock Option Plan dated August 9, 2018.

 

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 June 30, 2018, formatted in Extensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (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:  August 13, 2018

 

 

 

 

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)

 

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