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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2014

 

or

 

o         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  o  No  x

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x  No  o

 

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

 

Large accelerated filer o

 

Accelerated filer o

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

Number of shares of common stock outstanding as of August 14, 2014:  1,000

 

 

 



Table of Contents

 

Universal Hospital Services, Inc.

Table of Contents

 

 

 

 

 

Page

PART I -  FINANCIAL INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Consolidated Financial Statements (unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets — June 30, 2014 and December 31, 2013

 

1

 

 

 

 

 

 

 

Consolidated Statements of Operations—Three and six months ended June 30, 2014 and 2013

 

2

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Loss —Three and six months ended June 30, 2014 and 2013

 

2

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows — Three and six months ended June 30, 2014 and 2013

 

3

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

4

 

 

 

 

 

ITEM 2.

 

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

 

25

 

 

 

 

 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

37

 

 

 

 

 

ITEM 4.

 

Controls and Procedures

 

38

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Legal Proceedings

 

38

 

 

 

 

 

ITEM 1A.

 

Risk Factors

 

38

 

 

 

 

 

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

39

 

 

 

 

 

ITEM 3.

 

Defaults Upon Senior Securities

 

39

 

 

 

 

 

ITEM 4.

 

Mine Safety Disclosures

 

39

 

 

 

 

 

ITEM 5.

 

Other Information

 

39

 

 

 

 

 

ITEM 6.

 

Exhibits

 

39

 

 

 

 

 

Signatures

 

 

 

40

 



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements — Unaudited

Universal Hospital Services, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share information)

(unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Accounts receivable, less allowance for doubtful accounts of $1,985 at June 30, 2014 and $2,185 at December 31, 2013

 

$

68,772

 

$

69,667

 

Inventories

 

9,919

 

9,481

 

Deferred income taxes, net

 

1,403

 

1,841

 

Other current assets

 

5,751

 

4,438

 

Total current assets

 

85,845

 

85,427

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

Medical equipment

 

591,869

 

584,078

 

Property and office equipment

 

83,218

 

80,696

 

Accumulated depreciation

 

(436,333

)

(405,443

)

Total property and equipment, net

 

238,754

 

259,331

 

 

 

 

 

 

 

Other long-term assets:

 

 

 

 

 

Goodwill

 

335,577

 

335,577

 

Other intangibles, net

 

179,127

 

220,631

 

Other, primarily deferred financing costs, net

 

13,513

 

14,649

 

Total assets

 

$

852,816

 

$

915,615

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

6,481

 

$

6,487

 

Book overdrafts

 

5,455

 

9,469

 

Accounts payable

 

24,119

 

32,502

 

Accrued compensation

 

13,589

 

11,714

 

Accrued interest

 

18,825

 

18,884

 

Dividend payable

 

50

 

73

 

Other accrued expenses

 

11,881

 

11,031

 

Total current liabilities

 

80,400

 

90,160

 

 

 

 

 

 

 

Long-term debt, less current portion

 

707,847

 

704,284

 

Pension and other long-term liabilities

 

6,993

 

7,425

 

Payable to Parent

 

23,157

 

22,669

 

Deferred income taxes, net

 

53,990

 

68,057

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

 

 

Equity (Deficit)

 

 

 

 

 

Common stock, $0.01 par value; 1,000 shares authorized, issued and outstanding at June 30, 2014 and December 31, 2013

 

 

 

Additional paid-in capital

 

214,502

 

214,505

 

Accumulated deficit

 

(230,424

)

(187,901

)

Accumulated other comprehensive loss

 

(3,884

)

(3,884

)

Total Universal Hospital Services, Inc. equity (deficit)

 

(19,806

)

22,720

 

Noncontrolling interest

 

235

 

300

 

Total equity (deficit)

 

(19,571

)

23,020

 

Total liabilities and equity (deficit)

 

$

852,816

 

$

915,615

 

 

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

 

1



Table of Contents

 

Universal Hospital Services, Inc.

Consolidated Statements of Operations

(in thousands)

(unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenue

 

 

 

 

 

 

 

 

 

Medical equipment solutions

 

$

72,188

 

$

70,986

 

$

148,910

 

$

146,786

 

Clinical engineering solutions

 

22,119

 

21,912

 

44,788

 

43,161

 

Surgical services

 

15,059

 

14,091

 

29,004

 

27,402

 

Total revenues

 

109,366

 

106,989

 

222,702

 

217,349

 

 

 

 

 

 

 

 

 

 

 

Cost of Revenue

 

 

 

 

 

 

 

 

 

Cost of medical equipment solutions

 

32,288

 

31,611

 

65,716

 

63,810

 

Cost of clinical engineering solutions

 

17,869

 

16,778

 

35,784

 

33,809

 

Cost of surgical services

 

8,236

 

7,886

 

16,436

 

15,254

 

Medical equipment depreciation

 

19,095

 

18,459

 

38,231

 

36,356

 

Total costs of revenues

 

77,488

 

74,734

 

156,167

 

149,229

 

Gross margin

 

31,878

 

32,255

 

66,535

 

68,120

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

29,587

 

30,653

 

58,877

 

60,180

 

Restructuring, acquisition and integration expenses

 

512

 

183

 

1,820

 

236

 

Intangible asset impairment charge

 

34,900

 

 

34,900

 

 

Operating (loss) income

 

(33,121

)

1,419

 

(29,062

)

7,704

 

 

 

 

 

 

 

 

 

 

 

Loss on extinguishment of debt

 

 

 

 

1,853

 

Interest expense

 

13,260

 

13,944

 

26,656

 

27,822

 

Loss before income taxes and noncontrolling interest

 

(46,381

)

(12,525

)

(55,718

)

(21,971

)

 

 

 

 

 

 

 

 

 

 

(Benefit) provision for income taxes

 

(13,671

)

183

 

(13,456

)

915

 

Consolidated net loss

 

(32,710

)

(12,708

)

(42,262

)

(22,886

)

Net income attributable to noncontrolling interest

 

131

 

135

 

261

 

315

 

Net loss attributable to Universal Hospital Services, Inc.

 

$

(32,841

)

$

(12,843

)

$

(42,523

)

$

(23,201

)

 

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

 

Universal Hospital Services, Inc.

Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Consolidated net loss

 

$

(32,710

)

$

(12,708

)

$

(42,262

)

$

(22,886

)

Total other comprehensive income

 

 

 

 

 

Comprehensive loss

 

(32,710

)

(12,708

)

(42,262

)

(22,886

)

Comprehensive income attributable to noncontrolling interest

 

131

 

135

 

261

 

315

 

Comprehensive loss attributable to Universal Hospital Services, Inc.

 

$

(32,841

)

$

(12,843

)

$

(42,523

)

$

(23,201

)

 

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

 

2



Table of Contents

 

Universal Hospital Services, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2014

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

Consolidated net loss

 

$

(42,262

)

$

(22,886

)

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

 

 

 

 

 

Depreciation

 

42,853

 

41,675

 

Assets impairment charges

 

2,025

 

 

Intangible asset impairment charge

 

34,900

 

 

Amortization of intangibles, deferred financing costs and bond premium

 

7,039

 

8,227

 

Non-cash write off of deferred financing cost

 

 

1,853

 

Provision for doubtful accounts

 

85

 

1,033

 

Provision for inventory obsolescence

 

38

 

95

 

Non-cash share-based compensation expense - net

 

538

 

195

 

Gain on sales and disposals of equipment

 

(1,234

)

(801

)

Deferred income taxes

 

(13,629

)

676

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

810

 

(321

)

Inventories

 

(476

)

(921

)

Other operating assets

 

(1,394

)

(792

)

Accounts payable

 

674

 

(1,465

)

Other operating liabilities

 

2,234

 

3,639

 

Net cash provided by operating activities

 

32,201

 

30,207

 

Cash flows from investing activities:

 

 

 

 

 

Medical equipment purchases

 

(34,766

)

(28,478

)

Property and office equipment purchases

 

(2,560

)

(4,178

)

Proceeds from disposition of property and equipment

 

5,970

 

1,929

 

Purchases of noncontrolling interests

 

(34

)

 

Holdback payment related to acquisition

 

 

(1,655

)

Net cash used in investing activities

 

(31,390

)

(32,382

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds under senior secured credit facility

 

76,129

 

43,300

 

Payments under senior secured credit facility

 

(69,129

)

(36,800

)

Payments of principal under capital lease obligations

 

(3,429

)

(4,150

)

Payments of floating rate notes

 

 

(230,000

)

Proceeds from issuance of bonds

 

 

234,025

 

Accrued interest received from bondholders

 

 

8,620

 

Accrued interest paid to bondholders

 

 

(8,620

)

Distributions to noncontrolling interests

 

(295

)

(379

)

Dividend and equity distribution payments

 

(73

)

 

Payment of deferred financing costs

 

 

(4,102

)

Change in book overdrafts

 

(4,014

)

281

 

Net cash (used in) provided by financing activities

 

(811

)

2,175

 

Net change in cash and cash equivalents

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at the beginning of period

 

 

 

Cash and cash equivalents at the end of period

 

$

 

$

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid

 

$

26,228

 

$

21,620

 

Income taxes paid

 

309

 

332

 

Non-cash activities:

 

 

 

 

 

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

 

$

4,598

 

$

8,008

 

Capital lease additions

 

768

 

4,438

 

 

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

 

3



Table of Contents

 

Universal Hospital Services, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.                                      Basis of Presentation

 

The interim consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared by Universal Hospital Services, Inc. (“we”, “our”, “us”, the “Company”, or “UHS”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted, pursuant to such rules and regulations.  These consolidated financial statements should be read in conjunction with the financial statements and related notes included in the Company’s 2013 Annual Report on Form 10-K filed with the SEC.

 

The interim consolidated financial statements presented herein as of June 30, 2014, 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 2013 Annual Report on Form 10-K. There have been no material changes to these policies for the quarter ended June 30, 2014.

 

Principles of Consolidation

 

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

 

Reclassifications

 

Certain amounts in the 2013 Consolidated Balance Sheets and Consolidated Statements of Operations have been reclassified to conform with the 2014 presentation.

 

2.                                      Recent Accounting Pronouncements

 

Standard Adopted

 

In July 2013, the FASB issued Accounting Standards Update (“ASU”) No. 2013-11 Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exist (“ASU 2013-11”). ASU 2013-11 requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss (“NOL”) carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. The ASU does not require new

 

4



Table of Contents

 

recurring disclosures. ASU 2013-11 is effective prospectively for fiscal years beginning after December 15, 2013 and interim periods within those years. The adoption of ASU 2013-11 did not have a material effect on our consolidated financial statements.

 

Standard Not Yet Adopted

 

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

 

3.                                      Fair Value Measurements

 

Financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013 are summarized in the following table by type of inputs applicable to the fair value measurements:

 

 

 

Fair Value at June 30, 2014

 

Fair Value at December 31, 2013

 

(in thousands)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent Consideration

 

$

 

$

 

$

177

 

$

177

 

$

 

$

 

$

215

 

$

215

 

 

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 2012, we recorded a contingent consideration liability, in the form of an earn-out payment, related to our acquisitions. The contingent consideration payments are based on achieving certain revenue results. The fair value of the liability was estimated using a discounted cash flow approach with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement. The significant inputs in the Level 3 measurement not supported by market activity included our assessments of expected future cash flows during the earn-out period, related to the assets acquired, appropriately discounted considering the uncertainties associated with the obligation, and calculated based on estimated revenues in accordance with the terms of the agreement. During the three months ended June 30, 2014 and 2013, we paid $0.02 and $0.02 million, respectively, in earn-outs. During the six months ended June 30, 2014 and 2013, we paid $0.04 and $0.05 million, respectively, in earn-outs.

 

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

 

5



Table of Contents

 

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

 

(in thousands)

 

 

 

Balance at December 31, 2013

 

$

215

 

Payments

 

(38

)

Balance at June 30, 2014

 

$

177

 

 

During the three and six months ended June 30, 2014, we recorded $0.8 and $2.0 million, respectively, of impairment charge on certain long-lived assets for which the carrying value of those assets may not be recoverable based upon our estimated cash flows. The fair value of the assets 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.  There were no asset impairments for the three and six months ended June 30, 2013. The fair value of those assets measured on a nonrecurring basis was $0 million as of June 30, 2014.

 

During the three and six months ended June 30, 2014, we recorded $34.9 million of intangible asset impairment charge, which was measured at fair value using Level 3 inputs. There were no intangible asset impairment charges for the three and six months ended June 30, 2013. Intangible asset impairment charge recorded during the second quarter of 2014 was discussed in Note 4, Goodwill and Other Intangible Assets.

 

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, 2014 and December 31, 2013, 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, 2014

 

December 31, 2013

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

(in millions)

 

Value

 

Value

 

Value

 

Value

 

 

 

 

 

 

 

 

 

 

 

Original notes - 7.625%

 

$

425.0

 

$

445.2

 

$

425.0

 

$

450.5

 

Add-on notes - 7.625% (1)

 

231.9

 

230.5

 

232.7

 

233.2

 

 


(1)  The carrying value of the Add-on notes - 7.625% includes unamortized bond premium of $11.9 and $12.7 million as of June 30, 2014 and December 31, 2013, respectively.

 

4.                                      Goodwill and Other Intangible Assets

 

Our goodwill as of June 30, 2014 and December 31, 2013, by reporting segment, consists of the following:

 

 

 

Medical

 

Clinical

 

 

 

 

 

 

 

Equipment

 

Engineering

 

Surgical

 

 

 

(in thousands)

 

Solutions

 

Solutions

 

Services

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

$

227,486

 

$

55,655

 

$

52,436

 

$

335,577

 

Acquisitions

 

 

 

 

 

Balance at June 30, 2014

 

$

227,486

 

$

55,655

 

$

52,436

 

$

335,577

 

 

Our other intangible assets as of June 30, 2014 and December 31, 2013 consist of the following:

 

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Table of Contents

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

(in thousands)

 

Cost

 

Amortization

 

Impairment

 

Net

 

Cost

 

Amortization

 

Impairment

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finite-life intangibles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationship

 

$

115,731

 

$

(76,013

)

$

 

$

39,718

 

$

115,731

 

$

(70,964

)

$

 

$

44,767

 

Supply agreement

 

26,000

 

(18,012

)

 

7,988

 

26,000

 

(16,560

)

 

9,440

 

Technology databases

 

7,217

 

(7,217

)

 

 

7,217

 

(7,199

)

 

18

 

Non-compete agreements

 

780

 

(459

)

 

321

 

780

 

(374

)

 

406

 

Favorable lease agreements

 

134

 

(134

)

 

 

134

 

(134

)

 

 

Total finite-life intangibles

 

149,862

 

(101,835

)

 

48,027

 

149,862

 

(95,231

)

 

54,631

 

Indefinite-life intangibles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade names

 

166,000

 

 

(34,900

)

131,100

 

166,000

 

 

 

166,000

 

Total intangible assets

 

$

315,862

 

$

(101,835

)

$

(34,900

)

$

179,127

 

$

315,862

 

$

(95,231

)

$

 

$

220,631

 

 

During the second quarter of 2014, the Company became aware of certain events that will have a negative impact on the future financial results of the Company (see Note 17, Subsequent Events).  The Company applies a fair value based impairment test to the net book value of goodwill and intangible assets with indefinite lives on an annual basis and on an interim basis if events or circumstances indicate that an impairment loss may have occurred. The review of indefinite-life intangibles for impairment during the second quarter of 2014 indicated that the carrying value of trade names in the MES segment exceeded its estimated fair values. The Company performed an interim impairment test and recorded a non-cash impairment charge of $34.9 million for the three and six months ended June 30, 2014. As a result of the trade names impairment, the Company’s equity went to a deficit causing the Company to undertake a step 2 goodwill impairment analysis. The preliminary step 2 analysis of the MES goodwill reflects no impairment, and therefore none has been recorded in the second quarter of 2014. The calculation of the preliminary step 2 goodwill analysis contain significant judgments and estimates including weighted average cost of capital, future revenue, profitability, cash flows and fair values of assets and liabilities. The preliminary analysis is subject to finalization which the Company will complete in the third quarter of 2014. The Company believes that the preliminary analysis of the step 2 goodwill is reasonable and represents the Company’s best estimate; however, it is possible that material adjustments to the preliminary estimate may be required as the calculation is finalized. There were no impairment charges during the three and six months ended June 30, 2013 with respect to trade names.

 

Total amortization expense related to intangible assets was $3.3 and $3.5 million for the three months ended June 30, 2014 and 2013, respectively, and $6.6 and $7.1 million for the six months ended June 30, 2014 and 2013, respectively.

 

The estimated future amortization expense for identifiable intangible assets during the remainder of 2014 and the next five years is as follows:

 

(in thousands)

 

 

 

 

 

 

 

Remainder of 2014

 

$

6,221

 

2015

 

11,931

 

2016

 

10,807

 

2017

 

7,514

 

2018

 

5,931

 

2019

 

3,364

 

 

5.                                      Equity (Deficit)

 

The following tables represent changes in equity (deficit) that are attributable to our shareholders and noncontrolling interests for the six month periods ended June 30, 2014 and 2013.

 

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Accumulated

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

Total

 

 

 

Paid-in

 

Accumulated

 

Comprehensive

 

Noncontrolling

 

Equity

 

(in thousands)

 

Capital

 

Deficit

 

Loss

 

Interests

 

(Deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

$

214,505

 

$

(187,901

)

$

(3,884

)

$

300

 

$

23,020

 

Net (loss) income

 

 

(42,523

)

 

261

 

(42,262

)

Cash distributions to noncontrolling interests

 

 

 

 

(295

)

(295

)

Purchases of noncontrolling interests

 

(3

)

 

 

(31

)

(34

)

Balance at June 30, 2014

 

$

214,502

 

$

(230,424

)

$

(3,884

)

$

235

 

$

(19,571

)

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

 

 

Paid-in

 

Accumulated

 

Comprehensive

 

Noncontrolling

 

Total

 

(in thousands)

 

Capital

 

Deficit

 

Loss

 

Interests

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2012

 

$

214,481

 

$

(144,864

)

$

(9,086

)

$

344

 

$

60,875

 

Net (loss) income

 

 

(23,201

)

 

315

 

(22,886

)

Cash distributions to noncontrolling interests

 

 

 

 

(379

)

(379

)

Balance at June 30, 2013

 

$

214,481

 

$

(168,065

)

$

(9,086

)

$

280

 

$

37,610

 

 

6.                                      Share-Based Compensation

 

During the six months ended June 30, 2014, activity under the 2007 Stock Option Plan (the “2007 Stock Option Plan”), of UHS Holdco, Inc., our parent company (“Parent”), was as follows:

 

(in thousands except exercise price and years)

 

Number of Options

 

Weighted
average
exercise price

 

Aggregate
intrinsic value

 

Weighted
average
remaining
contractual
term (years)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2013

 

38,116

 

$

1.17

 

$

9,611

 

5.5

 

Granted

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

Forfeited or expired

 

(2,568

)

1.40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2014

 

35,548

 

$

1.15

 

$

9,561

 

4.8

 

 

 

 

 

 

 

 

 

 

 

Exercisable at June 30, 2014

 

27,887

 

$

1.08

 

$

9,523

 

3.7

 

 

 

 

 

 

 

 

 

 

 

Remaining authorized options available for issue

 

8,138

 

 

 

 

 

 

 

 

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 expense on a straight-line basis over the options’ expected vesting periods. There were no stock options granted during the six months ended June 30, 2014.

 

Although Parent grants stock options, the Company recognizes compensation expense related to these options since the services are performed for its benefit.  Along with this expense, which is primarily included in Selling, General and Administrative expense, the Company records an offsetting Payable to Parent liability which is not expected to be settled within the next twelve months.

 

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At June 30, 2014, unearned non-cash share-based compensation that we expect to recognize as expense over a weighted average period of 2.2 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.

 

7.                                      Dividend and Equity Distribution

 

On June 8, 2011, the Board of Directors declared an equity distribution of $0.12 per option to holders of outstanding options on the Parent’s stock on June 10, 2011 that vested on December 31, 2011, 2012 and 2013 and are scheduled to vest on December 31, 2014 and 2015.

 

Our consolidated balance sheets as of June 30, 2014 and December 31, 2013 reflect the related current dividend payable and long-term dividend payable included in Payable to Parent for estimated amounts to be paid to holders of options expected to vest on December 31, 2014 through 2015 based on an estimated option forfeiture rate of 2% annually.

 

8.                                      Long-Term Debt

 

Long-term debt consists of the following:

 

 

 

June 30,

 

December 31,

 

(in thousands)

 

2014

 

2013

 

Original notes - 7.625%

 

$

425,000

 

$

425,000

 

Add-on notes - 7.625%

 

220,000

 

220,000

 

Unamortized bond premium

 

11,920

 

12,702

 

Senior secured credit facility

 

40,000

 

33,000

 

Capital lease obligations

 

17,408

 

20,069

 

 

 

714,328

 

710,771

 

Less: Current portion of long-term debt

 

(6,481

)

(6,487

)

Total long-term debt

 

$

707,847

 

$

704,284

 

 

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

 

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

 

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

 

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

 

In connection with the issuance of the 2012 Notes, we entered into a registration rights agreement with the initial purchasers of the 2012 Notes.  Pursuant to those agreements, we filed Registration Statements on Form S-4 to register the exchanges of the 2012 Notes for fully registered 2012 Notes. Following declaration of effectiveness by the SEC, we completed offers to exchange all of the then outstanding 2012 Notes for an equivalent amount of the 2012 Notes which have been registered under the Securities Act of 1933, as amended. We did not receive any additional proceeds from the exchange offers.

 

Senior Secured Credit Facility.  On July 31, 2012, we entered into a Second Amended and Restated Credit Agreement with Bank of America, N.A., as agent for the lenders, and the lenders party thereto (the “Second Amended Credit Agreement”), which amended our then-existing senior secured credit facility originally dated as of May 31, 2007 and amended and restated

 

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as of May 6, 2010. We refer to the second 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 Second Amended Credit Agreement increased the aggregate amount we may obtain under revolving loans from $195.0 million to $235.0 million and extended the maturity date to July 31, 2017.  Our obligations under the Second Amended Credit Agreement are secured by a first priority security interest in substantially all of our assets, excluding a pledge of our and Parent’s stock, any joint ventures and certain other exceptions.  Our obligations under the Second Amended Credit Agreement are unconditionally guaranteed by Parent and our restricted subsidiaries.

 

As of June 30, 2014, we had $139.6 million of availability under the senior secured credit facility based on a borrowing base of $183.8 million less borrowings of $40.0 million and after giving effect to $4.2 million used for letters of credit.

 

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

 

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

 

·                  incur indebtedness;

·                  create or permit liens;

·                  declare or pay dividends and certain other restricted payments;

·                  consolidate, merge or recapitalize;

·                  acquire or sell assets;

·                  make certain investments, loans or other advances;

·                  enter into transactions with affiliates;

·                  change our line of business; and

·                  enter into hedging transactions.

 

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

 

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

 

Borrowings under the senior secured credit facility accrue interest (including a credit spread varying with facility usage):

 

·                  at a per annum rate equal to 1.00% - 1.50% above the rate equal to the greater of (i) the “federal funds rate” plus one-half of one percent (0.50%) per annum, (ii) the “prime rate” announced from time to time by the administrative agent for such day and (iii) the “Eurodollar rate” for a one month interest period as determined on such day, plus one percent (1.0%) payable quarterly in arrears; and

 

·                  at a per annum rate equal to 2.00% - 2.50% above the adjusted British Bankers Association Interest Settlement Rate for deposits in Dollars rate used by the administrative agent with a term equivalent to the selected interest rate period, for the respective interest rate period determined at our option, payable in arrears upon cessation of the

 

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interest rate period elected, provided that for an interest rate period longer than three months, payable in arrears on the respective dates that fall every three months from the beginning of such interest rate period.

 

At June 30, 2014, we had $40.0 million of borrowings outstanding of which $33.0 million was accruing interest at a rate of 2.65175% and $7.0 million was accruing interest at a rate of 2.65325%.

 

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

 

2012 Indenture. Our 2012 Notes are guaranteed, jointly and severally, on a second priority senior secured basis, by Surgical Services, and are also similarly guaranteed by certain of our future 100%-owned domestic subsidiaries. The 2012 Notes are our second priority senior secured obligations and rank (i) equal in right of payment with all of our existing and future unsubordinated indebtedness, and effectively senior to any such unsecured indebtedness to the extent of the value of collateral; (ii) senior in right of payment to all of our and our guarantors’ existing and future subordinated 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, could be subject to liability claims related to employees and the equipment that it rents and services. Asserted claims are subject to many uncertainties and the outcome of individual matters is not predictable. While the ultimate resolution of these actions may have an impact on the Company’s financial results for a particular reporting period, management believes that any such resolution would not have a material adverse effect on the financial position, results of operations or cash flows of the Company and the chance of a negative outcome on outstanding litigation is considered remote.

 

10.                               Related Party Transactions

 

Management Agreement

 

On May 31, 2007, we and Irving Place Capital Merchant Manager III, L.P. (“IPC”) entered into a professional services agreement pursuant to which IPC provides general advisory and management services to us with respect to financial and operating matters.  IPC is a principal owner of Parent, and the following members of our board of directors are associated with IPC:  Michael Feiner, Robert Juneja, and Bret Bowerman. In addition, David Crane, a director, provides consulting services to IPC. The professional services agreement requires us to pay an annual fee for ongoing advisory and management

 

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services equal to the greater of $0.5 million or 0.75% of our Adjusted EBITDA (as defined in the professional services agreement) for the immediately preceding fiscal year, payable in quarterly installments. The professional services agreement provides that IPC will be reimbursed for its reasonable out-of-pocket expenses in connection with certain activities undertaken pursuant to the professional services agreement and will be indemnified for liabilities incurred in connection with its role under the professional services agreement, other than for liabilities resulting from its gross negligence or willful misconduct. The term of the professional services agreement commenced on May 31, 2007 and will remain in effect unless and until either party notifies the other of its desire to terminate, we are sold to a third-party purchaser or we consummate a qualified initial public offering, as defined in the professional services agreement. Total professional services fees incurred to IPC were $0.2 and $0.3 million for the three month periods ended June 30, 2014 and 2013, respectively and $0.5 and $0.6 million for the six month periods ended June 30, 2014 and 2013, respectively.

 

Business Relationship

 

In the ordinary course of business, we entered into an operating lease for our Minneapolis, Minnesota district service center with Ryan Fund V, LLC (“Ryan”), which began on May 1, 2007.  One member of our board of directors is also a limited partner in Ryan, which has ownership interest in an LLC that owns the property. Total rent expense to Ryan were $0.1 and $0.1 million during the three month periods ended June 30, 2014 and 2013, respectively and $0.2 and $0.2 million during the six month periods ended June 30, 2014 and 2013, respectively.

 

In the ordinary course of business, we entered into engagement letters with CTPartners, LLC (“CTPartners”) in September of 2012 and January of 2013 to conduct searches for certain executive positions.  One member of our board of directors  is also a director of CTPartners. Total fees incurred to CTPartners was $0.2 and $0.1 million for the three month periods ended June 30, 2014 and 2013, respectively and $0.2 and $0.2 million for the six month periods ended June 30, 2014 and 2013, respectively.

 

The Company believes that the aforementioned arrangements and relationships were provided in the ordinary course of business.

 

11.                               Limited Liability Companies

 

We participate with others in the formation of LLCs in which Surgical Services becomes a partner and shares the financial interest with the other investors. Surgical Services is the primary beneficiary of these LLCs. These LLCs acquire certain medical equipment for use in their respective business activities, which generally focus on surgical procedures. The LLCs will acquire medical equipment for rental purposes under equipment financing leases. At June 30, 2014, the LLCs had approximately $0.5 million of total assets. The third party investors in each respective LLC generally provide the lease financing company with individual proportionate lease guarantees based on their respective ownership percentages in the LLCs. In addition, Surgical Services will provide such financing companies with its corporate guarantee based on its respective ownership interest in each LLC. In certain instances, Surgical Services has provided such financing companies with an overall corporate guarantee in connection with equipment financing transactions. In such instances, the individual investors in each respective LLC will generally indemnify us against losses, if any, incurred in connection with its corporate guarantee. Additionally, we provide operational and administrative support to the LLCs in which it is a partner. As of June 30, 2014, we held interests in six active LLCs.

 

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

 

12.                               Segment Information

 

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

 

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Table of Contents

 

Medical Equipment Solutions

(in thousands)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenues

 

$

72,188

 

$

70,986

 

$

148,910

 

$

146,786

 

Cost of revenue

 

32,288

 

31,611

 

65,716

 

63,810

 

Medical equipment depreciation

 

17,698

 

16,944

 

35,504

 

33,431

 

Gross margin

 

$

22,202

 

$

22,431

 

$

47,690

 

$

49,545

 

 

Clinical Engineering Solutions

(in thousands)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenues

 

$

22,119

 

$

21,912

 

$

44,788

 

$

43,161

 

Cost of revenue

 

17,869

 

16,778

 

35,784

 

33,809

 

Gross margin

 

$

4,250

 

$

5,134

 

$

9,004

 

$

9,352

 

 

Surgical Services

(in thousands)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenues

 

$

15,059

 

$

14,091

 

$

29,004

 

$

27,402

 

Cost of revenue

 

8,236

 

7,886

 

16,436

 

15,254

 

Medical equipment depreciation

 

1,397

 

1,515

 

2,727

 

2,925

 

Gross margin

 

$

5,426

 

$

4,690

 

$

9,841

 

$

9,223

 

 

 

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

(in thousands)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Total gross margin

 

$

31,878

 

$

32,255

 

$

66,535

 

$

68,120

 

Selling, general and administrative

 

29,587

 

30,653

 

58,877

 

60,180

 

Restructuring, acquisition and integration expenses

 

512

 

183

 

1,820

 

236

 

Intangible asset impairment charge

 

34,900

 

 

34,900

 

 

Loss on extinguishment of debt

 

 

 

 

1,853

 

Interest expense

 

13,260

 

13,944

 

26,656

 

27,822

 

Loss before income taxes and noncontrolling interest

 

$

(46,381

)

$

(12,525

)

$

(55,718

)

$

(21,971

)

 

Total Assets By Reporting Segment

(in thousands)

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

Medical Equipment Solutions

 

$

640,446

 

$

701,507

 

Clinical Engineering Solutions

 

110,810

 

112,746

 

Surgical Services

 

101,560

 

101,362

 

Total Company Assets

 

$

852,816

 

$

915,615

 

 

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Table of Contents

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

MES

 

 

 

 

 

 

 

 

 

Equipment usage solutions

 

60.9

%

60.0

%

61.6

%

61.1

%

Equipment/disposable sales

 

5.1

 

6.3

 

5.3

 

6.4

 

 

 

66.0

 

66.3

 

66.9

 

67.5

 

CES

 

 

 

 

 

 

 

 

 

Service solutions

 

20.2

 

20.5

 

20.1

 

19.9

 

SS

 

 

 

 

 

 

 

 

 

Equipment usage solutions

 

13.6

 

13.1

 

12.8

 

12.5

 

Equipment/disposable sales

 

0.2

 

0.1

 

0.2

 

0.1

 

 

 

13.8

 

13.2

 

13.0

 

12.6

 

Total revenues

 

100.0

%

100.0

%

100.0

%

100.0

%

 

13.                               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 benefit for the three and six months ended June 30, 2014 primarily relates to intangible asset impairment charge, partially offset by state minimum fees. The expected tax benefit from operating loss during the three and six months ended June 30, 2014 was offset by the recording of additional valuation allowance. In future reporting periods, we will continue to assess the likelihood that deferred tax assets will be realizable.

 

At June 30, 2014, the Company had available unused federal net operating loss carryforwards of approximately $206.6 million. The net operating loss carryforwards will expire at various dates from 2020 through 2035.

 

14.                               Consolidating Financial Statements

 

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

 

14



Table of Contents

 

Universal Hospital Services, Inc.

Consolidating Balance Sheets

(in thousands, except share and per share  information)

(unaudited)

 

 

 

June 30, 2014

 

 

 

Parent

 

Subsidiary

 

 

 

 

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Accounts receivable, less allowance for doubtful accounts

 

$

60,099

 

$

8,673

 

$

 

$

68,772

 

Due from affiliates

 

30,469

 

 

(30,469

)

 

Inventories

 

5,265

 

4,654

 

 

9,919

 

Deferred income taxes, net

 

607

 

796

 

 

1,403

 

Other current assets

 

5,466

 

285

 

 

5,751

 

Total current assets

 

101,906

 

14,408

 

(30,469

)

85,845

 

 

 

 

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

 

 

 

 

Medical equipment

 

554,207

 

37,662

 

 

591,869

 

Property and office equipment

 

76,505

 

6,713

 

 

83,218

 

Accumulated depreciation

 

(409,108

)

(27,225

)

 

(436,333

)

Total property and equipment, net

 

221,604

 

17,150

 

 

238,754

 

 

 

 

 

 

 

 

 

 

 

Other long-term assets:

 

 

 

 

 

 

 

 

 

Goodwill

 

283,141

 

52,436

 

 

335,577

 

Investment in subsidiary

 

53,501

 

 

(53,501

)

 

Other intangibles, net

 

161,753

 

17,374

 

 

179,127

 

Other, primarily deferred financing costs, net

 

13,321

 

192

 

 

13,513

 

Total assets

 

$

835,226

 

$

101,560

 

$

(83,970

)

$

852,816

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

5,188

 

$

1,293

 

$

 

$

6,481

 

Book overdrafts

 

3,962

 

1,493

 

 

5,455

 

Due to affiliates

 

 

30,469

 

(30,469

)

 

Accounts payable

 

20,053

 

4,066

 

 

24,119

 

Accrued compensation

 

11,717

 

1,872

 

 

13,589

 

Accrued interest

 

18,825

 

 

 

18,825

 

Dividend payable

 

50

 

 

 

50

 

Other accrued expenses

 

11,721

 

160

 

 

11,881

 

Total current liabilities

 

71,516

 

39,353

 

(30,469

)

80,400

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, less current portion

 

706,304

 

1,543

 

 

707,847

 

Pension and other long-term liabilities

 

6,993

 

 

 

6,993

 

Payable to Parent

 

23,157

 

 

 

23,157

 

Deferred income taxes, net

 

47,059

 

6,931

 

 

53,990

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity (Deficit)

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

 

 

Additional paid-in capital

 

214,505

 

60,016

 

(60,019

)

214,502

 

Accumulated deficit

 

(223,906

)

(6,518

)

 

(230,424

)

Accumulated loss in subsidiary

 

(6,518

)

 

6,518

 

 

Accumulated other comprehensive loss

 

(3,884

)

 

 

(3,884

)

Total Universal Hospital Services, Inc. equity (deficit)

 

(19,803

)

53,498

 

(53,501

)

(19,806

)

Noncontrolling interest

 

 

235

 

 

235

 

Total equity (deficit)

 

(19,803

)

53,733

 

(53,501

)

(19,571

)

Total liabilities and equity (deficit)

 

$

835,226

 

$

101,560

 

$

(83,970

)

$

852,816

 

 

15



Table of Contents

 

Universal Hospital Services, Inc.

Consolidating Balance Sheets

(in thousands, except share and per share  information)

 

 

 

December 31, 2013

 

 

 

Parent

 

Subsidiary

 

 

 

 

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Accounts receivable, less allowance for doubtful accounts

 

$

61,709

 

$

7,958

 

$

 

$

69,667

 

Due from affiliates

 

28,299

 

 

(28,299

)

 

Inventories

 

5,887

 

3,594

 

 

9,481

 

Deferred income taxes, net

 

1,045

 

796

 

 

1,841

 

Other current assets

 

4,211

 

227

 

 

4,438

 

Total current assets

 

101,151

 

12,575

 

(28,299

)

85,427

 

 

 

 

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

 

 

 

 

Medical equipment

 

549,306

 

34,772

 

 

584,078

 

Property and office equipment

 

74,336

 

6,360

 

 

80,696

 

Accumulated depreciation

 

(381,387

)

(24,056

)

 

(405,443

)

Total property and equipment, net

 

242,255

 

17,076

 

 

259,331

 

 

 

 

 

 

 

 

 

 

 

Other long-term assets:

 

 

 

 

 

 

 

 

 

Goodwill

 

283,141

 

52,436

 

 

335,577

 

Investment in subsidiary

 

53,963

 

 

(53,963

)

 

Other intangibles, net

 

201,596

 

19,035

 

 

220,631

 

Other, primarily deferred financing costs, net

 

14,409

 

240

 

 

14,649

 

Total assets

 

$

896,515

 

$

101,362

 

$

(82,262

)

$

915,615

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

5,248

 

$

1,239

 

$

 

$

6,487

 

Book overdrafts

 

7,949

 

1,520

 

 

9,469

 

Due to affiliates

 

 

28,299

 

(28,299

)

 

Accounts payable

 

28,935

 

3,567

 

 

32,502

 

Accrued compensation

 

9,333

 

2,381

 

 

11,714

 

Accrued interest

 

18,884

 

 

 

18,884

 

Dividend payable

 

73

 

 

 

73

 

Other accrued expenses

 

10,950

 

81

 

 

11,031

 

Total current liabilities

 

81,372

 

37,087

 

(28,299

)

90,160

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, less current portion

 

702,381

 

1,903

 

 

704,284

 

Pension and other long-term liabilities

 

7,425

 

 

 

7,425

 

Payable to Parent

 

22,669

 

 

 

22,669

 

Deferred income taxes, net

 

59,948

 

8,109

 

 

68,057

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

 

 

Additional paid-in capital

 

214,505

 

60,019

 

(60,019

)

214,505

 

Accumulated deficit

 

(181,845

)

(6,056

)

 

(187,901

)

Accumulated loss in subsidiary

 

(6,056

)

 

6,056

 

 

Accumulated other comprehensive loss

 

(3,884

)

 

 

(3,884

)

Total Universal Hospital Services, Inc. equity

 

22,720

 

53,963

 

(53,963

)

22,720

 

Noncontrolling interest

 

 

300

 

 

300

 

Total equity

 

22,720

 

54,263

 

(53,963

)

23,020

 

Total liabilities and equity

 

$

896,515

 

$

101,362

 

$

(82,262

)

$

915,615

 

 

16



Table of Contents

 

Universal Hospital Services, Inc.

Consolidating Statements of Operations

(in thousands)

(unaudited)

 

 

 

Three Months Ended June 30, 2014

 

 

 

Parent

 

Subsidiary

 

 

 

 

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

 

Revenue

 

 

 

 

 

 

 

 

 

Medical equipment solutions

 

$

72,188

 

$

 

$

 

$

72,188

 

Clinical engineering solutions

 

22,119

 

 

 

22,119

 

Surgical services

 

 

15,059

 

 

15,059

 

Total revenues

 

94,307

 

15,059

 

 

109,366

 

 

 

 

 

 

 

 

 

 

 

Cost of Revenue

 

 

 

 

 

 

 

 

 

Cost of medical equipment solutions

 

32,288

 

 

 

32,288

 

Cost of clinical engineering solutions

 

17,869

 

 

 

17,869

 

Cost of surgical services

 

 

8,236

 

 

8,236

 

Medical equipment depreciation

 

17,698

 

1,397

 

 

19,095

 

Total costs of revenues

 

67,855

 

9,633

 

 

77,488

 

Gross margin

 

26,452

 

5,426

 

 

31,878

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

24,741

 

4,846

 

 

29,587

 

Restructuring, acquisition and integration expenses

 

512

 

 

 

512

 

Intangible asset impairment charge

 

34,900

 

 

 

34,900

 

Operating (loss) income

 

(33,701

)

580

 

 

(33,121

)

 

 

 

 

 

 

 

 

 

 

Equity in income of subsidiary

 

(335

)

 

335

 

 

Interest expense

 

12,734

 

526

 

 

13,260

 

(Loss) income before income taxes and noncontrolling interest

 

(46,100

)

54

 

(335

)

(46,381

)

 

 

 

 

 

 

 

 

 

 

Benefit for income taxes

 

(13,390

)

(281

)

 

(13,671

)

Consolidated net (loss) income

 

(32,710

)

335

 

(335

)

(32,710

)

Net income attributable to noncontrolling interest

 

 

131

 

 

131

 

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

 

$

(32,710

)

$

204

 

$

(335

)

$

(32,841

)

 

17



Table of Contents

 

Universal Hospital Services, Inc.

Consolidating Statements of Operations

(in thousands)

(unaudited)

 

 

 

Three Months Ended June 30, 2013

 

 

 

Parent

 

Subsidiary

 

 

 

 

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

 

Revenue

 

 

 

 

 

 

 

 

 

Medical equipment solutions

 

$

70,986

 

$

 

$

 

$

70,986

 

Clinical engineering solutions

 

21,912

 

 

 

21,912

 

Surgical services

 

 

14,091

 

 

14,091

 

Total revenues

 

92,898

 

14,091

 

 

106,989

 

 

 

 

 

 

 

 

 

 

 

Cost of Revenue

 

 

 

 

 

 

 

 

 

Cost of medical equipment solutions

 

31,611

 

 

 

31,611

 

Cost of clinical engineering solutions

 

16,778

 

 

 

16,778

 

Cost of surgical services

 

 

7,886

 

 

7,886

 

Medical equipment depreciation

 

16,944

 

1,515

 

 

18,459

 

Total costs of revenues

 

65,333

 

9,401

 

 

74,734

 

Gross margin

 

27,565

 

4,690

 

 

32,255

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

25,795

 

4,858

 

 

30,653

 

Restructuring, acquisition and integration expenses

 

108

 

75

 

 

183

 

Operating income (loss)

 

1,662

 

(243

)

 

1,419

 

 

 

 

 

 

 

 

 

 

 

Equity in loss of subsidiary

 

553

 

 

(553

)

 

Interest expense

 

13,375

 

569

 

 

13,944

 

Loss before income taxes and noncontrolling interest

 

(12,266

)

(812

)

553

 

(12,525

)

 

 

 

 

 

 

 

 

 

 

Provision (benefit) for income taxes

 

442

 

(259

)

 

183

 

Consolidated net loss

 

(12,708

)

(553

)

553

 

(12,708

)

Net income attributable to noncontrolling interest

 

 

135

 

 

135

 

Net loss attributable to Universal Hospital Services, Inc.

 

$

(12,708

)

$

(688

)

$

553

 

$

(12,843

)

 

18



Table of Contents

 

Universal Hospital Services, Inc.

Consolidating Statements of Operations

(in thousands)

(unaudited)

 

 

 

Six Months Ended June 30, 2014

 

 

 

Parent

 

Subsidiary

 

 

 

 

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

 

Revenue

 

 

 

 

 

 

 

 

 

Medical equipment solutions

 

$

148,910

 

$

 

$

 

$

148,910

 

Clinical engineering solutions

 

44,788

 

 

 

44,788

 

Surgical services

 

 

29,004

 

 

29,004

 

Total revenues

 

193,698

 

29,004

 

 

222,702

 

 

 

 

 

 

 

 

 

 

 

Cost of Revenue

 

 

 

 

 

 

 

 

 

Cost of medical equipment solutions

 

65,716

 

 

 

65,716

 

Cost of clinical engineering solutions

 

35,784

 

 

 

35,784

 

Cost of surgical services

 

 

16,436

 

 

16,436

 

Medical equipment depreciation

 

35,504

 

2,727

 

 

38,231

 

Total costs of revenues

 

137,004

 

19,163

 

 

156,167

 

Gross margin

 

56,694

 

9,841

 

 

66,535

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

49,264

 

9,613

 

 

58,877

 

Restructuring, acquisition and integration expenses

 

1,820

 

 

 

1,820

 

Intangible asset impairment charge

 

34,900

 

 

 

34,900

 

Operating (loss) income

 

(29,290

)

228

 

 

(29,062

)

 

 

 

 

 

 

 

 

 

 

Equity in loss of subsidiary

 

201

 

 

(201

)

 

Interest expense

 

25,595

 

1,061

 

 

26,656

 

Loss before income taxes and noncontrolling interest

 

(55,086

)

(833

)

201

 

(55,718

)

 

 

 

 

 

 

 

 

 

 

Benefit for income taxes

 

(12,824

)

(632

)

 

(13,456

)

Consolidated net loss

 

(42,262

)

(201

)

201

 

(42,262

)

Net income attributable to noncontrolling interest

 

 

261

 

 

261

 

Net loss attributable to Universal Hospital Services, Inc.

 

$

(42,262

)

$

(462

)

$

201

 

$

(42,523

)

 

19



Table of Contents

 

Universal Hospital Services, Inc.

Consolidating Statements of Operations

(in thousands)

(unaudited)

 

 

 

Six Months Ended June 30, 2013

 

 

 

Parent

 

Subsidiary

 

 

 

 

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

 

Revenue

 

 

 

 

 

 

 

 

 

Medical equipment solutions

 

$

146,786

 

$

 

$

 

$

146,786

 

Clinical engineering solutions

 

43,161

 

 

 

43,161

 

Surgical services

 

 

27,402

 

 

27,402

 

Total revenues

 

189,947

 

27,402

 

 

217,349

 

 

 

 

 

 

 

 

 

 

 

Cost of Revenue

 

 

 

 

 

 

 

 

 

Cost of medical equipment solutions

 

63,810

 

 

 

63,810

 

Cost of clinical engineering solutions

 

33,809

 

 

 

33,809

 

Cost of surgical services

 

 

15,254

 

 

15,254

 

Medical equipment depreciation

 

33,431

 

2,925

 

 

36,356

 

Total costs of revenues

 

131,050

 

18,179

 

 

149,229

 

Gross margin

 

58,897

 

9,223

 

 

68,120

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

50,685

 

9,495

 

 

60,180

 

Restructuring, acquisition and integration expenses

 

(129

)

365

 

 

236

 

Operating income (loss)

 

8,341

 

(637

)

 

7,704

 

 

 

 

 

 

 

 

 

 

 

Equity in loss of subsidiary

 

1,149

 

 

(1,149

)

 

Loss on extinguishment of debt

 

1,853

 

 

 

1,853

 

Interest expense

 

26,750

 

1,072

 

 

27,822

 

Loss before income taxes and noncontrolling interest

 

(21,411

)

(1,709

)

1,149

 

(21,971

)

 

 

 

 

 

 

 

 

 

 

Provision (benefit) for income taxes

 

1,475

 

(560

)

 

915

 

Consolidated net loss

 

(22,886

)

(1,149

)

1,149

 

(22,886

)

Net income attributable to noncontrolling interest

 

 

315

 

 

315

 

Net loss attributable to Universal Hospital Services, Inc.

 

$

(22,886

)

$

(1,464

)

$

1,149

 

$

(23,201

)

 

20



Table of Contents

 

Universal Hospital Services, Inc.

Consolidating Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

 

 

 

Three Months Ended June 30, 2014

 

Six Months Ended June 30, 2014

 

 

 

Parent

 

Subsidiary

 

 

 

 

 

Parent

 

Subsidiary

 

 

 

 

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated net (loss) income

 

$

(32,710

)

$

335

 

$

(335

)

$

(32,710

)

$

(42,262

)

$

(201

)

$

201

 

$

(42,262

)

Total other comprehensive income

 

 

 

 

 

 

 

 

 

Comprehensive (loss) income

 

(32,710

)

335

 

(335

)

(32,710

)

(42,262

)

(201

)

201

 

(42,262

)

Comprehensive income attributable to noncontrolling interest

 

 

131

 

 

131

 

 

261

 

 

261

 

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

 

$

(32,710

)

$

204

 

$

(335

)

$

(32,841

)

$

(42,262

)

$

(462

)

$

201

 

$

(42,523

)

 

 

 

Three Months Ended June 30, 2013

 

Six Months Ended June 30, 2013

 

 

 

Parent

 

Subsidiary

 

 

 

 

 

Parent

 

Subsidiary

 

 

 

 

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

 

Consolidated net loss

 

$

(12,708

)

$

(553

)

$

553

 

$

(12,708

)

$

(22,886

)

$

(1,149

)

$

1,149

 

$

(22,886

)

Total other comprehensive income

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

(12,708

)

(553

)

553

 

(12,708

)

(22,886

)

(1,149

)

1,149

 

(22,886

)

Comprehensive income attributable to noncontrolling interest

 

 

135

 

 

135

 

 

315

 

 

315

 

Comprehensive loss attributable to Universal Hospital Services, Inc.

 

$

(12,708

)

$

(688

)

$

553

 

$

(12,843

)

$

(22,886

)

$

(1,464

)

$

1,149

 

$

(23,201

)

 

21



Table of Contents

 

Universal Hospital Services, Inc.

Consolidating Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Six Months Ended June 30, 2014

 

 

 

Parent

 

Subsidiary

 

 

 

 

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

Consolidated net loss

 

$

(42,262

)

$

(201

)

$

201

 

$

(42,262

)

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

 

 

 

 

 

 

 

 

 

Depreciation

 

39,579

 

3,274

 

 

42,853

 

Assets impairment charges

 

2,025

 

 

 

2,025

 

Intangible asset impairment charge

 

34,900

 

 

 

34,900

 

Amortization of intangibles, deferred financing costs and bond premium

 

5,378

 

1,661

 

 

7,039

 

Equity in loss of subsidiary

 

201

 

 

(201

)

 

Provision for doubtful accounts

 

96

 

(11

)

 

85

 

Provision for inventory obsolescence

 

(2

)

40

 

 

38

 

Non-cash share-based compensation expense - net

 

421

 

117

 

 

538

 

Gain on sales and disposals of equipment

 

(1,295

)

61

 

 

(1,234

)

Deferred income taxes

 

(12,451

)

(1,178

)

 

(13,629

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

1,514

 

(704

)

 

810

 

Due from (to) affiliates

 

(2,053

)

2,053

 

 

 

Inventories

 

624

 

(1,100

)

 

(476

)

Other operating assets

 

(1,384

)

(10

)

 

(1,394

)

Accounts payable

 

257

 

417

 

 

674

 

Other operating liabilities

 

2,664

 

(430

)

 

2,234

 

Net cash provided by operating activities

 

28,212

 

3,989

 

 

32,201

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

Medical equipment purchases

 

(31,959

)

(2,807

)

 

(34,766

)

Property and office equipment purchases

 

(2,413

)

(147

)

 

(2,560

)

Proceeds from disposition of property and equipment

 

5,970

 

 

 

5,970

 

Purchases of noncontrolling interests

 

 

(34

)

 

(34

)

Net cash used in investing activities

 

(28,402

)

(2,988

)

 

(31,390

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

Proceeds under senior secured credit facility

 

76,129

 

 

 

76,129

 

Payments under senior secured credit facility

 

(69,129

)

 

 

(69,129

)

Payments of principal under capital lease obligations

 

(2,750

)

(679

)

 

(3,429

)

Distributions to noncontrolling interests

 

 

(295

)

 

(295

)

Dividend and equity distribution payments

 

(73

)

 

 

(73

)

Change in book overdrafts

 

(3,987

)

(27

)

 

(4,014

)

Net cash provided by (used in) financing activities

 

190

 

(1,001

)

 

(811

)

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

 

$

 

$

 

$

 

$

 

 

22



Table of Contents

 

Universal Hospital Services, Inc.

Consolidating Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Six Months Ended June 30, 2013

 

 

 

Parent

 

Subsidiary

 

 

 

 

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

Consolidated net loss

 

$

(22,886

)

$

(1,149

)

$

1,149

 

$

(22,886

)

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

 

 

 

 

 

 

 

 

 

Depreciation

 

38,393

 

3,282

 

 

41,675

 

Amortization of intangibles, deferred financing costs and bond premium

 

6,548

 

1,679

 

 

8,227

 

Non-cash write off of deferred financing cost

 

1,853

 

 

 

1,853

 

Equity in loss of subsidiary

 

1,149

 

 

(1,149

)

 

Provision for doubtful accounts

 

1,128

 

(95

)

 

1,033

 

Provision for inventory obsolescence

 

112

 

(17

)

 

95

 

Non-cash share-based compensation expense - net

 

120

 

75

 

 

195

 

Gain on sales and disposals of equipment

 

(783

)

(18

)

 

(801

)

Deferred income taxes

 

1,889

 

(1,213

)

 

676

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(694

)

373

 

 

(321

)

Due from (to) affiliates

 

(3,587

)

3,587

 

 

 

Inventories

 

(492

)

(429

)

 

(921

)

Other operating assets

 

(853

)

61

 

 

(792

)

Accounts payable

 

(588

)

(877

)

 

(1,465

)

Other operating liabilities

 

3,515

 

124

 

 

3,639

 

Net cash provided by operating activities

 

24,824

 

5,383

 

 

30,207

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

Medical equipment purchases

 

(25,487

)

(2,991

)

 

(28,478

)

Property and office equipment purchases

 

(4,042

)

(136

)

 

(4,178

)

Proceeds from disposition of property and equipment

 

1,909

 

20

 

 

1,929

 

Holdback payment related to acquisition

 

 

(1,655

)

 

(1,655

)

Net cash used in investing activities

 

(27,620

)

(4,762

)

 

(32,382

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

Proceeds under senior secured credit facility

 

43,300

 

 

 

43,300

 

Payments under senior secured credit facility

 

(36,800

)

 

 

(36,800

)

Payments of principal under capital lease obligations

 

(3,486

)

(664

)

 

(4,150

)

Payments of floating rate notes

 

(230,000

)

 

 

(230,000

)

Proceeds from issuance of bonds

 

234,025

 

 

 

234,025

 

Accrued interest received from bondholders

 

8,620

 

 

 

8,620

 

Accrued interest paid to bondholders

 

(8,620

)

 

 

(8,620

)

Distributions to noncontrolling interests

 

 

(379

)

 

(379

)

Payment of deferred financing costs

 

(4,102

)

 

 

(4,102

)

Change in book overdrafts

 

(141

)

422

 

 

281

 

Net cash provided by (used in) financing activities

 

2,796

 

(621

)

 

2,175

 

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

 

$

 

$

 

$

 

$

 

 

23



Table of Contents

 

15.          Restructuring

 

We incurred restructuring expense of $0.5 and $0.2 million during the three months ended June 30, 2014 and 2013, respectively and $1.8 and $0.3 million during the six months ended June 30, 2014 and 2013, respectively, the majority of which related to severances and other related expenses. In addition, we recorded $0.4 million during the six months ended June 30, 2013 for cancellation of outstanding stock options for certain terminated employees, which was recorded as reduction to Payable to Parent in the Consolidated Balance Sheets. The restructuring expense impact was recorded under the Corporate and Unallocated segment. As of December 31, 2013, we had $0.3 million of restructuring liability. For the six months ended June 30, 2014, $1.2 million in restructuring charges was paid. An additional provision of $1.8 million was recorded in the first two quarters of 2014 for new severance arrangements and the remaining liability of $0.9 million as of June 30, 2014 is expected to be paid out by the end of the third quarter of 2015 and is included in the Other accrued expenses in the Consolidated Balance Sheets. As of December 31, 2012, we had $4.8 million of restructuring liability. For the six months ended June 30, 2013, we incurred restructuring expense of $0.3 million and $2.9 million in restructuring charges was paid and the remaining $2.1 was a liability as of June 30, 2013.

 

16.          Concentration

 

One customer accounted for approximately 14% and 13% of total revenue for the six months ended June 30, 2014 and 2013, respectively.

 

17.          Subsequent Events

 

In June 2014, Smith & Nephew announced that it had ceased commercial distribution of the RENASYS Negative Pressure Wound Therapy (“NPWT”) product line in the United States following a request from the FDA to obtain additional regulatory clearances through the premarket notification 510(k) process with respect to certain design modifications made to the RENASYS product line.  Subsequently, the FDA authorized limited distribution by Smith & Nephew of these products under a Certificate of Medical Necessity (“CMN”) program.  The Company is unable to predict when or whether Smith & Nephew will resume full commercial distribution of the RENASYS product line but it has been informed by Smith & Nephew that the 510(k) clearances for these products will take at least three months and probably longer, and that Smith & Nephew is requesting that customers using a CMN transition to alternative NPWT providers by no later than August 31, 2014.  The RENASYS product line generated approximately $24 million in annual revenue for the prior twelve month period from device rental ($14 million) and disposable sales ($10 million) which was included in our MES segment.  The net book value of the equipment approximates $5 million as of the end of June 2014.  The Company is working with our customers to provide alternative solutions. In late July, the Company signed an agreement with a NPWT manufacturer to provide an alternative solution to our customers, and we have already secured over $1 million in annualized rental revenue contracts with our customers.  However, some of our customers have met, or may in the future seek to meet, their NPWT needs directly with other manufacturers or service providers.  The Company’s future financial results will be negatively impacted by the interruption of commercial distribution of the RENASYS product line and we anticipate losing the majority of the disposable portion of our revenue based on the new agreement with an alternative NPWT manufacturer. The gross margin on the disposable portion of the business is significantly lower than the overall MES segment gross margin. The potential impact will be highly dependent upon the outcome of the factors mentioned above.  The Company is currently assessing the financial impact to our business and, while highly sensitive to the outcome of the above factors, the Company estimates the net loss in revenue at $5 to $10 million for the balance of 2014.

 

In July 2014, the Company was notified that a national group purchasing organization (“GPO”) awarded a sole source agreement to a competitor of the Company, for all peak need rental equipment, therapy surfaces (wound and pulmonary) and bariatric equipment. This GPO currently has agreements for the purchase or rental of this equipment with multiple vendors, including from the Company under agreements that were supposed to expire on September 30, 2014.  Under these agreements, the Company supplies equipment to its GPO member customers.  The Company generated approximately $24 million of business (over the prior twelve month period) in the portions of the business covered under this new agreement which was included in our MES segment.  The Company is working with the national GPO and its members to develop an orderly transition and anticipates that this transition will occur over the next several months. The Company is currently assessing the financial impact to its business and the impact will be dependent upon several factors including the GPO members’ willingness to contract with the Company as a non-contracted vendor and the ability of the new service provider to service all of these GPO members.  The Company’s future results will be negatively impacted by the loss of this agreement and, while highly sensitive to the factors mentioned above, the loss in revenue is estimated at $3 to $6 million for the balance of 2014 and estimated at $15 to $20 million on an annual basis. The Company anticipates either selling or redeploying approximately $6 to $8 million in excess equipment currently supporting the existing business, which will reduce the on-going maintenance capital expenditures.

 

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Table of Contents

 

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

 

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

 

BUSINESS OVERVIEW

 

Our Company

 

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

 

We commenced operations in 1939, originally incorporated in Minnesota in 1954 and reincorporated in Delaware in 2001. All of our outstanding capital stock is owned by UHS Holdco, Inc. (“Parent”), which acquired the Company in a recapitalization in May 2007.  Parent is owned by affiliates of Irving Place Capital Merchant Manager III, L.P. (“IPC”) and certain members of our management.

 

UHS delivers health care solutions through three segments: Medical Equipment Solutions (“MES”), Clinical Engineering Solutions (“CES”) and Surgical Services (“SS”). As of June 30, 2014, we owned or managed over 700,000 units of medical equipment consisting of approximately 450,000 owned or managed units in our MES segment, over 250,000 units of customer-owned equipment we managed in our CES segment and over 4,000 units of owned or managed mobile surgical equipment in our SS segment. Our diverse customer base includes more than 8,000 national, regional and local acute care hospitals and alternate site providers (such as long-term acute care hospitals, skilled nursing facilities, surgery centers, specialty hospitals, nursing homes and home care providers). We also have relationships with more than 200 medical device manufacturers, many of the nation’s largest group purchasing organizations (“GPOs”) and many health system integrated delivery networks (“IDNs”).  All of our solutions leverage our nationwide network of 83 district service centers, six CES Centers of Excellence and an additional seven stand-alone SS service centers, together with our more than 75 years of experience managing and servicing all aspects of medical equipment.  Our fees are paid directly by our customers rather than by direct reimbursement from third-party payors, such as private insurers, Medicare or Medicaid.

 

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

 

In June 2014, Smith & Nephew announced that it had ceased commercial distribution of the RENASYS Negative Pressure Wound Therapy (“NPWT”) product line in the United States following a request from the FDA to obtain additional regulatory clearances through the premarket notification 510(k) process with respect to certain design modifications made to the RENASYS product line.  Subsequently, the FDA authorized limited distribution by Smith & Nephew of these products under a Certificate of Medical Necessity (“CMN”) program.  The Company is unable to predict when or whether Smith & Nephew will resume full commercial distribution of the RENASYS product line but it has been informed by Smith & Nephew that the 510(k) clearances for these products will take at least three months and probably longer, and that Smith & Nephew is requesting that customers using a CMN transition to alternative NPWT providers by no later than August 31, 2014.  The RENASYS product line generated approximately $24 million in annual revenue for the prior twelve month period from device rental ($14 million) and disposable sales ($10 million) which was included in our MES segment.  The net book value of the equipment approximates $5 million as of the end of June 2014.  The Company is working with our customers to provide alternative solutions. In late July, the Company signed an agreement with a NPWT manufacturer to provide an alternative solution to our customers, and we have already secured over $1 million in annualized rental revenue contracts with our customers.  However, some of our customers have met, or may in the future seek to meet, their NPWT needs directly with other manufacturers or service providers.  The Company’s future financial results will be negatively impacted by the interruption of commercial distribution of the RENASYS product line and we anticipate losing the majority of the disposable portion of our revenue based on the new agreement with an alternative NPWT manufacturer. The gross margin on the disposable portion of the business is significantly lower than the overall MES segment gross margin. The potential impact will be highly dependent upon the outcome of the factors mentioned above.  The Company is currently assessing the financial impact to our business and, while highly sensitive to the outcome of the above factors, the Company estimates the net loss in revenue at $5 to $10 million for the balance of 2014.

 

In July 2014, the Company was notified that a national group purchasing organization (“GPO”) awarded a sole source agreement to a competitor of the Company, for all peak need rental equipment, therapy surfaces (wound and pulmonary) and bariatric equipment. This GPO currently has agreements for the purchase or rental of this equipment with multiple vendors, including from the Company under agreements that were supposed to expire on September 30, 2014.  Under these agreements, the Company supplies equipment to its GPO member customers.  The Company generated approximately $24 million of business (over the prior twelve month period) in the portions of the business covered under this new agreement which was included in our MES segment.  The Company is working with the national GPO and its members to develop an

 

25



Table of Contents

 

orderly transition and anticipates that this transition will occur over the next several months. The Company is currently assessing the financial impact to its business and the impact will be dependent upon several factors including the GPO members’ willingness to contract with the Company as a non-contracted vendor and the ability of the new service provider to service all of these GPO members.  The Company’s future results will be negatively impacted by the loss of this agreement and, while highly sensitive to the factors mentioned above, the loss in revenue is estimated at $3 to $6 million for the balance of 2014 and estimated at $15 to $20 million on an annual basis. The Company anticipates either selling or redeploying approximately $6 to $8 million in excess equipment currently supporting the existing business, which will reduce the on-going maintenance capital expenditures.

 

Medical Equipment Solutions

 

Our MES segment accounted for $72.2 and $71.0 million, or approximately 66.0% and 66.3% of our revenues, for the three months ended June 30, 2014 and 2013, respectively and $148.9 and $146.8 million, or approximately 66.9% and 67.5% of our revenues, for the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, the MES segment owned or managed approximately 450,000 units of medical equipment ranging across hundreds of clinical categories, manufacturers and models.  These solutions are provided primarily to hospitals and other acute care providers for use through their facilities, including the emergency room, operating room, critical care, intensive care, rehabilitation and general patient care areas.

 

Our MES segment started more than 75 years ago as our leading medical equipment peak needs usage business and has transformed into providing comprehensive outsourced and on-site solutions that manage all aspects of medical equipment in a health care facility. We currently provide MES solutions to more than 8,000 acute care hospitals and alternate site providers in the United States, including some of the nation’s premier health care institutions. Historically, we have purchased and owned directly the equipment used in our MES programs. We expect much of our future growth in this segment to be driven by our customers outsourcing more of their medical equipment needs and taking full advantage of our diversified product offering, clinical education and support, customized agreements and 360 On-site Managed Solutions.

 

We have four primary solutions in our MES segment:

 

·                  Supplemental and Peak Needs Usage Solutions;

·                  Customized Equipment Agreements Solutions;

·                  360 On-site Managed Solutions; and

·                  Specialty Medical Equipment Sales, Distribution and Disposal Solutions.

 

Clinical Engineering Solutions

 

Our CES segment accounted for $22.1 and $21.9 million, or approximately 20.2% and 20.5% of our revenues, for the three months ended June 30, 2014 and 2013, respectively and $44.8 and $43.2 million, or approximately 20.1% and 19.9% of our revenues, for the six months ended June 30, 2014 and 2013, respectively. We offer a broad range of inspection, preventive maintenance, repair, logistic and consulting services through our team of over 360 technicians and professionals located throughout the United States in our nationwide network of service centers.  We managed over 250,000 units of customer owned equipment as of June 30, 2014.  In addition, as of June 30, 2014, we serviced approximately 450,000 units that we own or directly manage.

 

Our CES segment leverages our over 75 years of experience and our extensive equipment database in repairing and maintaining a broad range of health care technologies. Historically, we have been our own largest customer for CES services in order to repair and maintain approximately 450,000 units that we own or directly manage. However, we believe our CES segment has significant future growth potential by offering non-capital based comprehensive solutions as a stand-alone or complementary alternative for customers that own medical equipment but lack the infrastructure, expertise, or scale to perform routine maintenance, repair, record keeping, and lifecycle analysis and planning functions.  We also believe hospital and other facility-based clients will face increasing challenges in managing sophisticated medical equipment that requires connectivity and interoperability with information technology systems, compliance with the 10th revision of the International Statistical Classification of Diseases and Related Health Problems (ICD-10), regulatory requirements, integration with EMR, maintenance and management of software databases and management of other medical equipment patient information and safety features.

 

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Table of Contents

 

We have three primary solutions in our CES segment:

 

·                  Supplemental Maintenance and Repair Solutions;

·                  360 On-site Managed Solutions; and

·                  Health Care Technology Advisory Solutions.

 

Surgical Services

 

Our SS segment accounted for $15.1 and $14.1 million, or approximately 13.8% and 13.2% of our revenues, for the three months ended June 30, 2014 and 2013, respectively and $29.0 and $27.4 million, or approximately 13.0% and 12.6% of our revenues, for the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, we owned or managed over 4,000 units of mobile surgical equipment in our SS segment, primarily used in the practice of general surgery, orthopedic surgery, otolaryngology, urology, obstetrics, gynecology, podiatry, dermatology and plastic/cosmetics.

 

SS provides high end, state-of-the-art surgical equipment and associated products along with trained and certified Surgical Equipment Technologists (“technologists”) to assist in the procedural operation of the equipment. We provide these services to over 1,000 acute care hospitals and surgery centers through our nationwide network of 83 district service centers and an additional seven stand-alone SS service centers. Our technologists work in the operating room (“O.R.”) and support physicians and O.R. personnel. The services are offered on a per-procedure basis. Our technologists deliver, set up, and create a safe environment for hospital and clinical personnel operating the equipment and provide all necessary disposable materials needed. Our technologists work closely with our customers to confirm that all certifications and credentials meet requirements to provide on-site services. Our technologists also assist customers in the operation of facility-owned assets and supplement the training and staffing of their personnel.  As of June 30, 2014, SS provided solutions in 41 states.

 

We have two primary solutions in our SS segment:

 

·                  On-Demand and Scheduled Usage Solutions; and

·                  360 On-site Managed Solutions.

 

RESULTS OF OPERATIONS

 

The following discussion addresses:

 

·                  our financial condition as of June 30, 2014 and

·                  the results of operations for the three-month and six-month periods ended June 30, 2014 and 2013.

 

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 2013 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, 2014 and 2013.  The table below also indicates the percentage increase or decrease over the prior comparable period.

 

27



Table of Contents

 

 

 

Percent to Total Revenues

 

Percent

 

Percent to Total Revenues

 

Percent

 

 

 

Three Months Ended June 30,

 

Increase

 

Six Months Ended June 30,

 

Increase

 

 

 

2014

 

2013

 

(Decrease)

 

2014

 

2013

 

(Decrease)

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

Medical equipment solutions

 

66.0

%

66.3

%

1.7

%

66.9

%

67.5

%

1.4

%

Clinical engineering solutions

 

20.2

 

20.5

 

0.9

 

20.1

 

19.9

 

3.8

 

Surgical services

 

13.8

 

13.2

 

6.9

 

13.0

 

12.6

 

5.8

 

Total revenues

 

100.0

%

100.0

%

2.2

 

100.0

%

100.0

%

2.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of medical equipment solutions

 

29.5

 

29.5

 

2.1

 

29.5

 

29.4

 

3.0

 

Cost of clinical engineering solutions

 

16.3

 

15.7

 

6.5

 

16.1

 

15.6

 

5.8

 

Cost of surgical services

 

7.5

 

7.4

 

4.4

 

7.4

 

7.0

 

7.7

 

Medical equipment depreciation

 

17.5

 

17.3

 

3.4

 

17.2

 

16.7

 

5.2

 

Total costs of revenues

 

70.8

 

69.9

 

3.7

 

70.2

 

68.7

 

4.6

 

Gross margin

 

29.2

 

30.1

 

(1.2

)

29.8

 

31.3

 

(2.3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

27.1

 

28.7

 

(3.5

)

26.4

 

27.7

 

(2.2

)

Restructuring, acquisition and integration expenses

 

0.5

 

0.2

 

 

*

0.8

 

0.1

 

 

*

Intangible asset impairment charge

 

31.9

 

 

 

*

15.7

 

 

 

*

Operating income

 

(30.3

)

1.2

 

 

*

(13.1

)

3.5

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on extinguishment of debt

 

 

 

 

*

 

0.9

 

 

*

Interest expense

 

12.1

 

13.0

 

(4.9

)

12.0

 

12.8

 

(4.2

)

Loss before income taxes and noncontrolling interest

 

(42.4

)

(11.8

)

 

*

(25.1

)

(10.2

)

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

(12.5

)

0.2

 

 

*

(6.0

)

0.4

 

 

*

Consolidated net loss

 

(29.9

)%

(12.0

)%

 

*

(19.1

)%

(10.6

)%

 

*

 


*Not meaningful

 

Consolidated Results of Operations for the three months ended June 30, 2014 compared to the three months ended June 30, 2013

 

Total Revenue

 

Total revenue for the three months ended June 30, 2014 was $109.4 million, compared to $107.0 million for the three months ended June 30, 2013, an increase of $2.4 million or 2.2%.  The increase was primarily due to additional revenue in our MES segment related to growth in our 360 On-site Managed Solutions (“360 solutions”) of $4.3 million, partially offset by a decrease in peak need usage revenue of $2.0 million.

 

Cost of Revenue

 

Total cost of revenue for the three months ended June 30, 2014 was $77.5 million compared to $74.7 million for the three months ended June 30, 2013, an increase of $2.8 million or 3.7%. The increase was primarily in our MES segment due to an increase in 360 solutions cost of $1.8 million corresponding with the 360 solutions revenue growth and an impairment charge of $0.8 million for under-utilized patient handling equipment.

 

Gross Margin

 

Total gross margin for the three months ended June 30, 2014 was $31.9 million, or 29.2% of total revenues, compared to $32.3 million, or 30.1% of total revenues, for the three months ended June 30, 2013, a decrease of $0.4 million or 1.2%.  The decrease in gross margin as a percent of revenue for the quarter was primarily impacted by the asset impairment charge.

 

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Table of Contents

 

Medical Equipment Solutions

(in thousands)

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2014

 

2013

 

Change

 

% Change

 

Total revenue

 

$

72,188

 

$

70,986

 

$

1,202

 

1.7

%

Cost of revenue

 

32,288

 

31,611

 

677

 

2.1

 

Medical equipment depreciation

 

17,698

 

16,944

 

754

 

4.4

 

Gross margin

 

$

22,202

 

$

22,431

 

$

(229

)

(1.0

)

 

 

 

 

 

 

 

 

 

 

Gross margin %

 

30.8

%

31.6

%

 

 

 

 

 

Total revenue in the MES segment increased $1.2 million, or 1.7%, to $72.2 million in the second quarter of 2014 as compared to the same period of 2013.  The increase was primarily due to growth in our 360 solutions from both new programs and expansion of existing programs of $4.3 million, partially offset by decreases in peak need usage revenue of $2.0 million, and sales and remarketing revenue of $1.2 million. Many of our 360 Solution customers utilize more than one of our equipment management program offerings in areas such as infusion, patient handling and negative pressure wound therapy. As of June 30, 2014, we had 195 such active programs, up from 181 as of December 31, 2013. Peak need usage revenue was negatively impacted by soft patient census, rate concessions, and, to a lesser extent, conversion of customers to 360 solutions.

 

Total cost of revenue in the segment increased $0.7 million, or 2.1%, to $32.3 million in the second quarter of 2014 as compared to the same period of 2013.  This increase is due to an increase in costs to support growth in our 360 solutions of $1.8 million largely due to an increase in employee related expense of $1.3 million, partially offset by lower cost of sales for sales and remarketing of $1.2 million.

 

Medical equipment depreciation increased $0.8 million, or 4.4%, to $17.7 million in the second quarter of 2014 as compared to the same period of 2013. The increase in medical equipment depreciation was primarily due to an impairment charge of $0.8 million for under-utilized patient handling equipment.

 

Gross margin percentage for the MES segment decreased from 31.6% in the second quarter of 2013 to 30.8% in the same period of 2014. This decrease was primarily attributable to the increase in depreciation related to the impairment charge. Gross margin rate was also impacted by the growth in our 360 solutions, which has a lower margin rate than other medical equipment solutions.

 

Future revenue will be negatively impacted by the loss of revenues resulting from the pending FDA 510(k) clearances on RENASYS NPWT product line and the loss of the agreement related to a national GPO. See Item 1 of Part I, Note 17, Subsequent Events.

 

Clinical Engineering Solutions

(in thousands)

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2014

 

2013

 

Change

 

% Change

 

Total revenue

 

$

22,119

 

$

21,912

 

$

207

 

0.9

%

Cost of revenue

 

17,869

 

16,778

 

1,091

 

6.5

 

Gross margin

 

$

4,250

 

$

5,134

 

$

(884

)

(17.2

)

 

 

 

 

 

 

 

 

 

 

Gross margin %

 

19.2

%

23.4

%

 

 

 

 

 

Total revenue in the CES segment increased $0.2 million, or 0.9%, to $22.1 million in the second quarter of 2014 as compared to the same period of 2013. The increase was primarily due to growth in our managed 360 solutions, partially offset with weakness in services supporting key manufacturers. As of June 30, 2014, we had 360 solutions implemented in 139 programs in our CES segment, up from 131 programs as of December 31, 2013.

 

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Table of Contents

 

Total cost of revenue in the segment increased $1.1 million, or 6.5%, to $17.9 million in the second quarter of 2014 as compared to the same period of 2013. The increase is primarily attributable to an increase in employee related costs, repair parts and vendor expenses to support the revenue growth and mix shifts in type of service provided to customers.

 

Gross margin percentage for the CES segment decreased from 23.4% in the second quarter of 2013 to 19.2% in the same period of 2014. The decrease was primarily due to a higher level of employee related costs, repair parts and vendor expenses on supported equipment. Gross margin percentage will fluctuate based on the variability of third-party vendor expenses in our 360 solutions and supplemental service programs.

 

Surgical Services

(in thousands)

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2014

 

2013

 

Change

 

% Change

 

Total revenue

 

$

15,059

 

$

14,091

 

$

968

 

6.9

%

Cost of revenue

 

8,236

 

7,886

 

350

 

4.4

 

Medical equipment depreciation

 

1,397

 

1,515

 

(118

)

(7.8

)

Gross margin

 

$

5,426

 

$

4,690

 

$

736

 

15.7

 

 

 

 

 

 

 

 

 

 

 

Gross margin %

 

36.0

%

33.3

%

 

 

 

 

 

Total revenue in the SS segment increased $1.0 million, or 6.9%, to $15.1 million in the second quarter of 2014 as compared to the same period of 2013. The increase was driven by organic growth in our surgical services business.

 

Total cost of revenue in the segment increased $0.4 million, or 4.4%, to $8.2 million in the second quarter of 2014 as compared to the same period of 2013. The increase was primarily attributable to an increase in employee related costs to support growth in our surgical services business of $0.3 million.

 

Medical equipment depreciation decreased $0.1 million, or 7.8%, to $1.4 million in the second quarter of 2014 as compared to the same period of 2013.

 

Gross margin percentage for the SS segment increased from 33.3% in the second quarter of 2013 to 36.0% in the same period of 2014. The increase in gross margin percentage was primarily driven by both higher leverage from volume growth and some shift to higher margin modalities.

 

Selling, General and Administrative, Restructuring, Acqusition and Integration Expenses, Loss on Entinguishment of Debt and Interest Expense

(in thousands)

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2014

 

2013

 

Change

 

% Change

 

Selling, general and administrative

 

$

29,587

 

$

30,653

 

$

(1,066

)

(3.5

)%

Restructuring, acquisition and integration expenses

 

512

 

183

 

329

 

 

*

Intangible asset impairment charge

 

34,900

 

 

34,900

 

 

*

Interest expense

 

13,260

 

13,944

 

(684

)

(4.9

)

 


*Not meaningful

 

Selling, General and Administrative

 

Selling, general and administrative expense decreased $1.1 million, or 3.5%, to $29.6 million for the second quarter of 2014 as compared to the same period of 2013. The decrease was primarily due to decreases in consulting and travel expenses.

 

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Table of Contents

 

Selling, general and administrative expense as a percentage of total revenue was 27.1% and 28.7% for the quarter ended June 30, 2014 and 2013, respectively. The decrease was primarily due to decreases in consulting and travel expenses.

 

Restructuring, Acquisition and Integration Expenses

 

Restructuring, acquisition and integration expenses increased $0.3 million for the second quarter of 2014 as compared to the same period of 2013. The increase was primarily due to additional charges to realign the management team.

 

Intangible Asset Impairment Charge

 

During the second quarter of 2014, the Company became aware that future financial results of the Company will be negatively impacted by the loss of revenues resulted by pending FDA 510(k) clearances on RENASYS NPWT product line and the loss of the agreement related to a national GPO. The Company applies a fair value based impairment test to the net book value of goodwill and intangible assets with indefinite lives on an annual basis and on an interim basis if events or circumstances indicate that an impairment loss may have occurred. The review of indefinite-life intangibles for impairment during the second quarter of 2014 indicated that the carrying value of trade names in the MES segment exceeded its estimated fair values. As a result, the Company performed an interim impairment test and recorded a preliminary non-cash impairment charge of $34.9 million for the three months ended June 30, 2014. The calculation of the preliminary impairment charge contains significant judgments and estimates including weighted average cost of capital, future revenue, profitability, cash flows and fair values of assets and liabilities. The preliminary impairment charges are subject to finalization which the Company will complete in the third quarter of 2014. The Company believes that the preliminary estimate of the impairment charge is reasonable and represents the Company’s best estimate of the impairment charge to be incurred; however, it is possible that material adjustments to the preliminary estimate may be required as the calculation is finalized.

 

Interest Expense

 

Interest expense decreased $0.7 million to $13.3 million for the second quarter of 2014 as compared to the same period of 2013. This decrease was mainly attributable to the decrease in amortization of deferred financing costs combined with an increase in amortization of bond premium.

 

Income Taxes

 

Income taxes were a benefit of $13.7 million and an expense of $0.2 million for the three months ended June 30, 2014 and 2013, respectively. The tax benefit for the three months ended June 30, 2014 primarily relates to intangible asset impairment charge, partially offset by state minimum fees. The tax expense for the three months ended June 30, 2013 primarily relates to state minimum fees and amortization of indefinite-life intangibles. The Company will continue to incur deferred tax expense in the future as tax amortization occurs. The expected tax benefit from operating loss during the three months ended June 30, 2014 was offset by the recording of additional valuation allowance. In future reporting periods, we will continue to assess the likelihood that deferred tax assets will be realizable.

 

Consolidated Net Loss

 

Consolidated net loss increased $20.0 million to $32.7 million in the second quarter of 2014 as compared to the same period of 2013.  Net loss was impacted primarily by the intangible asset impairment charge recorded in the second quarter of 2014.

 

Consolidated Results of Operations for the six months ended June 30, 2014 compared to the six months ended June 30, 2013

 

Total Revenue

 

Total revenue for the six months ended June 30, 2014 was $222.7 million, compared to $217.3 million for the six months ended June 30, 2013, an increase of $5.4 million or 2.5%.  The increase was primarily due to additional revenue in our MES segment related to growth in our 360 solutions of $8.7 million, partially offset by a decrease in peak need usage revenue of $4.5 million.

 

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Table of Contents

 

Cost of Revenue

 

Total cost of revenue for the six months ended June 30, 2014 was $156.2 million compared to $149.2 million for the six months ended June 30, 2013, an increase of $7.0 million or 4.6%. The increase was primarily in our MES segment due to an increase in 360 solutions cost of $4.1 million corresponding with the 360 solutions revenue growth and an impairment charge of $2.0 million primarily due to the planned sale of certain pumps and under-utilized patient handling equipment.

 

Gross Margin

 

Total gross margin for the six months ended June 30, 2014 was $66.5 million, or 29.8% of total revenues, compared to $68.1 million, or 31.3% of total revenues, for the six months ended June 30, 2013, a decrease of $1.6 million or 2.3%.  The decrease in gross margin as a percent of revenue for the quarter was primarily impacted by the asset impairment charges.

 

Medical Equipment Solutions

(in thousands)

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2014

 

2013

 

Change

 

% Change

 

Total revenue

 

$

148,910

 

$

146,786

 

$

2,124

 

1.4

%

Cost of revenue

 

65,716

 

63,810

 

1,906

 

3.0

 

Medical equipment depreciation

 

35,504

 

33,431

 

2,073

 

6.2

 

Gross margin

 

$

47,690

 

$

49,545

 

$

(1,855

)

(3.7

)

 

 

 

 

 

 

 

 

 

 

Gross margin %

 

32.0

%

33.8

%

 

 

 

 

 

Total revenue in the MES segment increased $2.1 million, or 1.4%, to $148.9 million in the first six months of 2014 as compared to the same period of 2013.  The increase was primarily due to growth in our 360 solutions from both new programs and expansion of existing programs of $8.7 million, partially offset by decreases in peak need usage revenue of $4.5 million, and sales and remarketing revenue of $2.0 million. Many of our 360 Solution customers utilize more than one of our equipment management program offerings in areas such as infusion, patient handling, and negative pressure wound therapy. As of June 30, 2014, we had 195 such active programs, up from 181 as of December 31, 2013. Peak need usage revenue was negatively impacted by soft patient census, rate concessions, and, to a lesser extent, conversion of customers to 360 solutions.

 

Total cost of revenue in the segment increased $1.9 million, or 3.0%, to $65.7 million in the first six months of 2014 as compared to the same period of 2013.  This increase is due to an increase in costs to support growth in our 360 solutions of $4.1 million largely due to an increase in employee related expense of $2.9 million, partially offset by lower cost of disposable and infant security system sales of $2.2 million.

 

Medical equipment depreciation increased $2.1 million, or 6.2%, to $35.5 million in the first six months of 2014 as compared to the same period of 2013. The increase in medical equipment depreciation was primarily due to an impairment charge of $2.0 million taken on excess infusion equipment sold in the second quarter of 2014 and under-utilized patient handling equipment charge.

 

Gross margin percentage for the MES segment decreased from 33.8% in the first six months of 2013 to 32.0% in the same period of 2014. This decrease was primarily attributable to the increase in depreciation related to the impairment charges. Gross margin rate was also impacted by the growth in our 360 solutions, which has a lower margin rate than other medical equipment solutions.

 

Future revenue will be negatively impacted by the loss of revenues resulting from the pending FDA 510(k) clearances on RENASYS NPWT product line and the loss of the agreement related to a national GPO. See Item 1 of Part I, Note 17, Subsequent Events.

 

32



Table of Contents

 

Clinical Engineering Solutions

(in thousands)

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2014

 

2013

 

Change

 

% Change

 

Total revenue

 

$

44,788

 

$

43,161

 

$

1,627

 

3.8

%

Cost of revenue

 

35,784

 

33,809

 

1,975

 

5.8

 

Gross margin

 

$

9,004

 

$

9,352

 

$

(348

)

(3.7

)

 

 

 

 

 

 

 

 

 

 

Gross margin %

 

20.1

%

21.7

%

 

 

 

 

 

Total revenue in the CES segment increased $1.6 million, or 3.8%, to $44.8 million in the first six months of 2014 as compared to the same period of 2013. The increase was primarily due to growth in our managed 360 solutions partially offset by rate concessions. As of June 30, 2014, we had 360 solutions implemented in 139 programs in our CES segment, up from 131 programs as of December 31, 2013.

 

Total cost of revenue in the segment increased $2.0 million, or 5.8%, to $35.8 million in the first six months of 2014 as compared to the same period of 2013. The increase is primarily attributable to increases in employee related costs, repair parts and vendor expenses to support the revenue growth and mix shifts in type of service provided to customers.

 

Gross margin percentage for the CES segment decreased from 21.7% in the first six months of 2013 to 20.1% in the same period of 2014. The decrease was primarily due to a higher level of employee related costs, repair parts and vendor expenses on supported equipment. Gross margin percentage will fluctuate based on the variability of third-party vendor expenses in our 360 solutions and supplemental service programs.

 

Surgical Services

(in thousands)

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2014

 

2013

 

Change

 

% Change

 

Total revenue

 

$

29,004

 

$

27,402

 

$

1,602

 

5.8

%

Cost of revenue

 

16,436

 

15,254

 

1,182

 

7.7

 

Medical equipment depreciation

 

2,727

 

2,925

 

(198

)

(6.8

)

Gross margin

 

$

9,841

 

$

9,223

 

$

618

 

6.7

 

 

 

 

 

 

 

 

 

 

 

Gross margin %

 

33.9

%

33.7

%

 

 

 

 

 

Total revenue in the SS segment increased $1.6 million, or 5.8%, to $29.0 million in the first six months of 2014 as compared to the same period of 2013. The increase was driven by organic growth in our surgical services business.

 

Total cost of revenue in the segment increased $1.2 million, or 7.7%, to $16.4 million in the first six months of 2014 as compared to the same period of 2013. The increase was primarily attributable to an increase in employee-related costs to support growth in our surgical services business of $0.7 million.

 

Medical equipment depreciation decreased $0.2 million, or 6.8%, to $2.7 million in the first six months of 2014 as compared to the same period of 2013.

 

Gross margin percentage for the SS segment increased from 33.7% in the first six months of 2013 to 33.9% in the same period of 2014. The increase in gross margin percentage was primarily attributable to lower depreciation expense, higher leverage from volume growth and some shift to higher margin modalities.

 

33



Table of Contents

 

Selling, General and Administrative, Restructuring, Acqusition and Integration Expenses, Loss on Entinguishment of Debt and Interest Expense

(in thousands)

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2014

 

2013

 

Change

 

% Change

 

Selling, general and administrative

 

$

58,877

 

$

60,180

 

$

(1,303

)

(2.2

)%

Restructuring, acquisition and integration expenses

 

1,820

 

236

 

1,584

 

 

*

Intangible asset impairment charge

 

34,900

 

 

34,900

 

 

*

Loss on extinguishment of debt

 

 

1,853

 

(1,853

)

 

*

Interest expense

 

26,656

 

27,822

 

(1,166

)

(4.2

)

 


*Not meaningful

 

Selling, General and Administrative

 

Selling, general and administrative expense decreased $1.3 million, or 2.2%, to $58.9 million for the first six months of 2014 as compared to the same period of 2013. The decrease was primarily due to a decrease in consulting expense and bad debt expense, partially offset by decreases in other costs.

 

Selling, general and administrative expense as a percentage of total revenue was 26.4% and 27.7% for the six months ended June 30, 2014 and 2013, respectively.

 

Restructuring, Acquisition and Integration Expenses

 

Restructuring, acquisition and integration expenses increased $1.6 million for the first six months of 2014 as compared to the same period of 2013. The increase was primarily due to additional charges to realign the management team.

 

Intangible Asset Impairment Charge

 

During the second quarter of 2014, the Company became aware that future financial results of the Company will be negatively impacted by the loss of revenues resulted by pending FDA 510(k) clearances on RENASYS NPWT product line and the loss of the agreement related to a national GPO. The Company applies a fair value based impairment test to the net book value of goodwill and intangible assets with indefinite lives on an annual basis and on an interim basis if events or circumstances indicate that an impairment loss may have occurred. The review of indefinite-life intangibles for impairment during the second quarter of 2014 indicated that the carrying value of trade names in the MES segment exceeded its estimated fair values. As a result, the Company performed an interim impairment test and recorded a preliminary non-cash impairment charge of $34.9 million for the six months ended June 30, 2014. The calculation of the preliminary impairment charge contains significant judgments and estimates including weighted average cost of capital, future revenue, profitability, cash flows and fair values of assets and liabilities. The preliminary impairment charges are subject to finalization which the Company will complete in the third quarter of 2014. The Company believes that the preliminary estimate of the impairment charge is reasonable and represents the Company’s best estimate of the impairment charge to be incurred; however, it is possible that material adjustments to the preliminary estimate may be required as the calculation is finalized.

 

Loss on Extinguishment of Debt

 

For the six months ended 2013, we wrote off $1.9 million of unamortized deferred financing costs related to redemption of our floating rate notes.

 

Interest Expense

 

Interest expense decreased $1.2 million to $26.7 million for the first six months of 2014 as compared to the same period of 2013. This decrease was mainly attributable to the decrease in amortization of deferred financing costs combined with an increase in amortization of bond premium.

 

34



Table of Contents

 

Income Taxes

 

Income taxes were a benefit of $13.5 million and an expense of $0.9 million for the six months ended June 30, 2014 and 2013, respectively. The tax benefit for the six months ended June 30, 2014 primarily relates to intangible asset impairment charge, partially offset by state minimum fees. The tax expense for the six months ended June 30, 2013 primarily relates to an item to record a deferred tax liability for cumulative adjustments in connection with the tax amortization of indefinite-life goodwill and state minimum fees. The Company will continue to incur deferred tax expense in the future as tax amortization occurs. The expected tax benefit from operating loss during the six months ended June 30, 2014 was offset by the recording of additional valuation allowance. In future reporting periods, we will continue to assess the likelihood that deferred tax assets will be realizable.

 

Consolidated Net Loss

 

Consolidated net loss increased $19.4 million to $42.3 million in the first six months of 2014 as compared to the same period of 2013. Net loss was impacted primarily by the intangible asset impairment charge recorded in the second quarter of 2014.

 

EBITDA

 

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) was $57.1 and $54.3 million for the six months ended June 30, 2014 and 2013, respectively.  EBITDA for the six months ended June 30, 2014, was impacted by growth in our SS segment combined with lower selling, general and administrative expenses and a decrease in loss on extinguishment of debt, partially offset by an increase in restructuring expense.

 

Future cash flows from operations will be negatively impacted by the loss of revenues resulting from the pending FDA 510(k) clearances on RENASYS NPWT product line and the loss of agreement related to a national GPO. See Item 1 of Part I, Note 17, Subsequent Events.

 

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

 

 

 

Six Months Ended

 

 

 

June 30,

 

(in thousands)

 

2014

 

2013

 

Net loss attributable to Universal Hospital Services, Inc.

 

$

(42,523

)

$

(23,201

)

Interest expense

 

26,656

 

27,822

 

Provision for income taxes

 

(13,456

)

915

 

Depreciation, assets impairment and amortization of intangibles

 

51,482

 

48,731

 

Intangible asset impairment charge

 

34,900

 

 

EBITDA

 

$

57,059

 

$

54,267

 

 

 

 

 

 

 

Other Financial Data:

 

 

 

 

 

Net cash provided by operating activities

 

$

32,201

 

$

30,207

 

Net cash used in investing activities

 

(31,390

)

(32,382

)

Net cash (used in) provided by financing activities

 

(811

)

2,175

 

 

 

 

 

 

 

Other Operating Data (as of end of period):

 

 

 

 

 

Medical equipment (approximate number of owned outsourcing units)

 

269,000

 

274,000

 

District service centers

 

83

 

83

 

SS stand-alone service centers

 

7

 

7

 

Centers of Excellence

 

6

 

6

 

 

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

 

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

 

Future cash flows from operations will be negatively impacted by the loss of revenues resulting from the pending FDA 510(k) clearances on RENASYS NPWT product line and the loss of the agreement related to a national GPO. See Item 1 of Part I, Note 17, Subsequent Events.

 

Net cash provided by operating activities was $32.2 and $30.2 million for the six months ended June 30, 2014 and 2013, respectively. Net cash provided by operating activities increased during the six months ended June 30, 2014 compared to the same period of 2013 primarily impacted by the change in net working capital.

 

Net cash used in investing activities was $31.4 and $32.4 million for the six months ended June 30, 2014 and 2013, respectively.  The decrease in net cash used in investing activities was primarily due to higher proceeds from sale of medical equipment offset by higher medical equipment purchases to support the growth in 360 solutions during 2014 compared to the same period of 2013.

 

Net cash (used in) provided by financing activities was $(0.8) and $2.2 million for the six months ended June 30, 2014 and 2013, respectively.  The decrease in net cash provided by financing activities was primarily due to lower net borrowings in 2014 compared to the same period of 2013.

 

Based on the level of operating performance expected in 2014, 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, 2014, we had $139.6 million of availability under the senior secured credit facility based on a borrowing base of $183.8 million less borrowings of $40.0 million and after giving effect to $4.2 million used for letters of credit.  As of June 30, 2013, we had $159.2 million of

 

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availability under the senior secured credit facility based on a borrowing base of $197.9 million less borrowings of $34.5 million and after giving effect to $4.2 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.

 

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 new contracts with customers;

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

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

·                  our relationships with key suppliers;

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

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

·                  our dependence on key personnel;

·                  our ability to identify and manage acquisitions;

·                  increases in expenses related to our pension plan;

·                  our cash flow fluctuation;

·                  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;

·                  increases costs we cannot pass through;

·                  the failure of any management information system;

·                  the inherent limitations on internal controls of our financial reporting;

·                  the uncertainty surrounding health care reform initiatives;

·                  the federal Privacy law risks;

·                  the federal Anti-Kickback law risks;

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

·                  potential other new healthcare laws or regulations;

·                  our customers operate in a highly regulated environment;

·                  our fleet’s risk of recalls or obsolescence;

·                  our substantial debt service obligations;

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

·                  our history of net losses and substantial interest expense; and

·                  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.

 

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Interest Rates

 

We use both fixed and variable rate debt as sources of financing.  At June 30, 2014, we had approximately $714.3 million of total debt outstanding of which $40.0 million was bearing interest at variable rates. Based on variable debt levels at June 30, 2014, a 1.0 percentage point change in interest rates on variable rate debt would have resulted in annual interest expense fluctuating by approximately $0.4 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 2014 average price of unleaded gasoline, assuming gasoline usage levels for the six months ended June 30, 2014, would lead to an annual increase in fuel costs of approximately $0.6 million.

 

Pension

 

Our pension plan assets, which were approximately $19.6 million at December 31, 2013, are subject to volatility that can be caused by fluctuations in general economic conditions. Continued market volatility and disruption could cause further declines in asset values, and if this occurs, we may need to make additional pension plan contributions and our pension expense in future years may increase. A hypothetical 10% decrease in the fair value of plan assets at December 31, 2013 would lead to a decrease in the funded status of the plan of approximately $2.0 million.

 

Other Market Risk

 

As of June 30, 2014, we have no other material exposure to market risk.

 

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) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934 as amended (the “Exchange Act”)) 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, 2014.

 

(b)           Changes in internal control over financial reporting

 

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

 

PART II - OTHER INFORMATION

 

Item 1.   Legal Proceedings

 

The Company, in the ordinary course of business, could be subject to liability claims related to employees and the equipment that it rents and services. Asserted claims are subject to many uncertainties and the outcome of individual matters is not predictable. While the ultimate resolution of these actions may have an impact on the Company’s financial results for a particular reporting period, management believes that any such resolution would not have a material adverse effect on the financial position, results of operations or cash flows of the Company and the chance of a negative outcome on outstanding litigation is considered remote. See the additional information in Item 1 of Part I, Note 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 2013 Annual Report on Form 10-K, could materially adversely affect our business, financial condition or results of operations.

 

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

 

None.

 

Item 3.   Defaults upon Senior Securities

 

None.

 

Item 4.   Mine Safety Disclosures

 

Not applicable.

 

Item 5.   Other Information

 

None.

 

Item 6.   Exhibits

 

Number

 

Description

 

 

 

10.1

 

Mutual Termination Agreement and Release, dated April 2, 2014, between William C. Mixon and Universal Hospital Services, Inc. (incorporated by reference to Exhibit 10.1 to Form 8-K filed with the Security and Exchange Commission on April 18, 2014).

 

 

 

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, 2014, formatted in Extensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Loss, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements.

 

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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 14, 2014

 

Universal Hospital Services, Inc.

 

 

 

By

/s/ Gary D. Blackford

 

Gary D. Blackford,

 

Chairman of the Board and 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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