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EX-31.2 - EX-31.2 - Agiliti Health, Inc.uhsi-20160331ex312cb5e5a.htm
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EX-32.2 - EX-32.2 - Agiliti Health, Inc.uhsi-20160331ex32235e10e.htm
EX-32.1 - EX-32.1 - Agiliti Health, Inc.uhsi-20160331ex321105795.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

 

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2016

 

or

 

 

 

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

 

Commission File Number: 000-20086

 

UNIVERSAL HOSPITAL SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

41-0760940

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

6625 West 78th Street, Suite 300

Minneapolis, Minnesota 55439-2604

(Address of principal executive offices, including zip code)

 

(952) 893-3200

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

 

 

 

 

 

 

 

Large accelerated filer

 

 

Accelerated filer

 

Non-accelerated filer

 

 

Smaller reporting company

 

(Do not check if a smaller reporting company)

 

 

 

 

 

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

 

Number of shares of common stock outstanding as of May 9, 2016:  1,000

 

 

 


 

Universal Hospital Services, Inc.

Table of Contents

 

 

 

 

 

 

 

 

 

 

Page

PART I -  FINANCIAL INFORMATION 

 

 

 

 

 

 

 

ITEM 1. 

 

Consolidated Financial Statements (unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets — March 31, 2016 and December 31, 2015

 

 

 

 

 

 

 

 

Consolidated Statements of Operations—Three months ended March 31, 2016 and 2015

 

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Loss —Three months ended March 31, 2016 and 2015

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows — Three months ended March 31, 2016 and 2015

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

 

 

ITEM 2. 

 

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

 

26 

 

 

 

 

 

ITEM 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

34 

 

 

 

 

 

ITEM 4. 

 

Controls and Procedures

 

34 

 

 

 

 

 

PART II - OTHER INFORMATION 

 

 

 

 

 

 

 

ITEM 1. 

 

Legal Proceedings

 

35 

 

 

 

 

 

ITEM 1A. 

 

Risk Factors

 

35 

 

 

 

 

 

ITEM 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

35 

 

 

 

 

 

ITEM 3. 

 

Defaults Upon Senior Securities

 

35 

 

 

 

 

 

ITEM 4. 

 

Mine Safety Disclosures

 

35 

 

 

 

 

 

ITEM 5. 

 

Other Information

 

35 

 

 

 

 

 

ITEM 6. 

 

Exhibits

 

36 

 

 

 

 

 

Signatures 

 

 

 

37 

 

1


 

PART I - FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements — Unaudited

Universal Hospital Services, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

2016

 

2015

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

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

 

$

74,961

 

$

71,252

Inventories

 

 

8,316

 

 

8,506

Other current assets

 

 

6,407

 

 

5,834

Total current assets

 

 

89,684

 

 

85,592

Property and equipment:

 

 

 

 

 

 

Medical equipment

 

 

590,368

 

 

590,091

Property and office equipment

 

 

86,514

 

 

85,341

Accumulated depreciation

 

 

(473,062)

 

 

(462,818)

Total property and equipment, net

 

 

203,820

 

 

212,614

Other long-term assets:

 

 

 

 

 

 

Goodwill

 

 

336,595

 

 

336,595

Other intangibles, net

 

 

159,426

 

 

162,354

Other

 

 

445

 

 

420

Total assets

 

$

789,970

 

$

797,575

Liabilities and Deficit

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of long-term debt

 

$

4,887

 

$

4,867

Book overdrafts

 

 

5,378

 

 

6,444

Accounts payable

 

 

27,824

 

 

31,073

Accrued compensation

 

 

10,986

 

 

23,600

Accrued interest

 

 

6,425

 

 

18,742

Dividend payable

 

 

 —

 

 

24

Other accrued expenses

 

 

14,405

 

 

14,564

Total current liabilities

 

 

69,905

 

 

99,314

Long-term debt, less current portion

 

 

708,250

 

 

682,591

Pension and other long-term liabilities

 

 

11,764

 

 

11,869

Deferred income taxes, net

 

 

53,019

 

 

52,959

Commitments and contingencies (Note 8)

 

 

 

 

 

 

Deficit

 

 

 

 

 

 

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

 

 

 —

 

 

 —

Additional paid-in capital

 

 

242,597

 

 

241,833

Accumulated deficit

 

 

(287,766)

 

 

(283,066)

Accumulated other comprehensive loss

 

 

(7,979)

 

 

(8,165)

Total Universal Hospital Services, Inc. deficit

 

 

(53,148)

 

 

(49,398)

Noncontrolling interest

 

 

180

 

 

240

Total deficit

 

 

(52,968)

 

 

(49,158)

Total liabilities and deficit

 

$

789,970

 

$

797,575

 

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

 

2


 

 

Universal Hospital Services, Inc.

Consolidated Statements of Operations

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

    

    

2016

    

2015

Revenue

 

 

 

 

 

 

 

Medical equipment solutions

 

 

$

80,230

 

$

74,084

Clinical engineering solutions

 

 

 

25,578

 

 

24,395

Surgical services

 

 

 

16,318

 

 

15,007

Total revenues

 

 

 

122,126

 

 

113,486

Cost of Revenue

 

 

 

 

 

 

 

Cost of medical equipment solutions

 

 

 

38,282

 

 

31,279

Cost of clinical engineering solutions

 

 

 

20,024

 

 

19,229

Cost of surgical services

 

 

 

8,766

 

 

8,179

Medical equipment depreciation

 

 

 

15,169

 

 

18,135

Total costs of revenues

 

 

 

82,241

 

 

76,822

Gross margin

 

 

 

39,885

 

 

36,664

Selling, general and administrative

 

 

 

31,298

 

 

30,152

Operating income

 

 

 

8,587

 

 

6,512

Interest expense

 

 

 

13,068

 

 

13,310

Loss before income taxes and noncontrolling interest

 

 

 

(4,481)

 

 

(6,798)

Provision for income taxes

 

 

 

159

 

 

168

Consolidated net loss

 

 

 

(4,640)

 

 

(6,966)

Net income attributable to noncontrolling interest

 

 

 

60

 

 

125

Net loss attributable to Universal Hospital Services, Inc.

 

 

$

(4,700)

 

$

(7,091)

 

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

3


 

Universal Hospital Services, Inc.

Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2016

    

2015

    

Consolidated net loss

 

$

(4,640)

 

$

(6,966)

 

Other comprehensive income:

 

 

 

 

 

 

 

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

 

 

186

 

 

 —

 

Total other comprehensive income

 

 

186

 

 

 —

 

Comprehensive loss

 

 

(4,454)

 

 

(6,966)

 

Comprehensive income attributable to noncontrolling interest

 

 

60

 

 

125

 

Comprehensive loss attributable to Universal Hospital Services, Inc.

 

$

(4,514)

 

$

(7,091)

 

 

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

 

4


 

Universal Hospital Services, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2016

    

2015

Cash flows from operating activities:

 

 

 

 

 

 

Consolidated net loss

 

$

(4,640)

 

$

(6,966)

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

 

 

 

 

 

 

Depreciation

 

 

17,922

 

 

19,645

Asset impairment charges

 

 

 —

 

 

1,703

Amortization of intangibles, deferred financing costs and bond premium

 

 

3,062

 

 

3,305

Provision for doubtful accounts

 

 

92

 

 

(27)

Provision for inventory obsolescence

 

 

144

 

 

123

Non-cash share-based compensation expense

 

 

757

 

 

318

Gain on sales and disposals of equipment

 

 

(1,255)

 

 

(249)

Deferred income taxes

 

 

60

 

 

54

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(3,801)

 

 

(2,938)

Inventories

 

 

46

 

 

(145)

Other operating assets

 

 

(598)

 

 

540

Accounts payable

 

 

(30)

 

 

2,807

Other operating liabilities

 

 

(24,509)

 

 

(6,365)

Net cash (used in) provided by operating activities

 

 

(12,750)

 

 

11,805

Cash flows from investing activities:

 

 

 

 

 

 

Medical equipment purchases

 

 

(14,209)

 

 

(20,120)

Property and office equipment purchases

 

 

(1,057)

 

 

(856)

Proceeds from disposition of property and equipment

 

 

5,328

 

 

2,200

Net cash used in investing activities

 

 

(9,938)

 

 

(18,776)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds under senior secured credit facility

 

 

60,200

 

 

44,200

Payments under senior secured credit facility

 

 

(34,200)

 

 

(33,200)

Payments of principal under capital lease obligations

 

 

(1,512)

 

 

(1,988)

Payments of deferred financing costs

 

 

(97)

 

 

 —

Holdback payment related to acquisition

 

 

(500)

 

 

 —

Distributions to noncontrolling interests

 

 

(120)

 

 

(117)

Dividend and equity distribution payments

 

 

(24)

 

 

(39)

Proceeds from exercise of parent company stock options

 

 

7

 

 

 —

Change in book overdrafts

 

 

(1,066)

 

 

(1,885)

Net cash provided by financing activities

 

 

22,688

 

 

6,971

Net change in cash and cash equivalents

 

 

 —

 

 

 —

Cash and cash equivalents at the beginning of period

 

 

 —

 

 

 —

Cash and cash equivalents at the end of period

 

$

 —

 

$

 —

Supplemental cash flow information:

 

 

 

 

 

 

Interest paid

 

$

25,229

 

$

25,399

Income taxes paid

 

 

69

 

 

80

Non-cash activities:

 

 

 

 

 

 

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

 

$

8,373

 

$

5,364

Capital lease additions

 

 

1,154

 

 

5,738

 

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

 

5


 

Universal Hospital Services, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.Basis of Presentation

 

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

 

The interim consolidated financial statements presented herein as of March 31, 2016, reflect, in the opinion of management, all adjustments necessary for a fair presentation of the financial position and the results of operations and cash flows for the periods presented.  These adjustments are all of a normal, recurring nature.  The results of operations for any interim period are not necessarily indicative of results for the full year.

 

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

 

A description of our significant accounting policies is included in our 2015 Annual Report on Form 10-K. There have been no material changes to these policies for the quarter ended March 31, 2016.

 

Principles of Consolidation

 

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

 

2.Recent Accounting Pronouncements

 

Standards Adopted

 

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

 

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

6


 

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

 

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

 

Standards Not Yet Adopted

 

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

 

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

 

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

 

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

 

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

 

7


 

In March 2016, the FASB issued ASU No. 2016-09 Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 was issued as part of the FASB’s simplification initiative and intends to improve the accounting for share-based payment transactions. The areas for simplification in this ASU involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2016. Early adoption is permitted in any interim or annual period provided that the entire ASU is adopted. If an entity early adopts the ASU in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. We are evaluating the effect that ASU 2016-09 will have on our consolidated financial statements and related disclosures.

 

3.Fair Value Measurements

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value at March 31, 2016

 

Fair Value at December 31, 2015

(in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

    

Level 1

    

Level 2

    

Level 3

    

Total

Contingent Consideration

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

502

 

$

502

 

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

 

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

 

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

 

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

 

During 2012, we recorded a contingent consideration liability, in the form of an earn-out payment, related to our acquisitions. During 2015, we recorded a holdback liability related to our acquisition. The contingent consideration and holdback payments are based on achieving certain revenue results. The fair value of the liability was estimated using a discounted cash flow approach with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement.  The significant inputs in the Level 3 measurement not supported by market activity included our assessments of expected future cash flows during the earn-out period, related to the assets acquired, appropriately discounted considering the uncertainties associated with the obligation, and calculated based on estimated revenues in accordance with the terms of the agreements. During the three months ended March 31, 2016 and 2015, we paid $0.5 and $0.01 million, respectively, in earn-out and holdback.

 

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

 

8


 

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

 

 

 

 

 

 

(in thousands)

    

    

 

Balance at December 31, 2015

 

$

502

Payments

 

 

(502)

Balance at March 31, 2016

 

$

 —

 

Fair Value of Other Financial Instruments

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

December 31, 2015

 

    

Carrying

    

Fair

    

Carrying

    

Fair

(in thousands)

 

Value

 

Value

 

Value

 

Value

Original notes - 7.625% (1)

 

$

419,586

 

$

391,000

 

$

419,274

 

$

401,094

Add-on notes - 7.625% (2)

 

 

226,718

 

 

202,400

 

 

227,029

 

 

207,625

(1)

The carrying value of the Original notes - 7.625% is net of unamortized deferred financing costs of $5.4 and $5.7 million as of March 31, 2016 and December 31, 2015, respectively.

(2)

The carrying value of the Add-on notes - 7.625% is net of unamortized deferred financing costs of $2.3 and $2.4 million as of March 31, 2016 and December 31, 2015, respectively, and includes unamortized bond premium of $9.0 and $9.4 million as of March 31, 2016 and December 31, 2015, respectively.

 

4.Goodwill and Other Intangible Assets

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Medical

    

Clinical

    

    

    

    

 

 

 

Equipment

 

Engineering

 

Surgical

 

 

 

(in thousands)

 

Solutions

 

Solutions

 

Services

 

Total

Balance at December 31, 2015

 

$

227,486

 

$

55,655

 

$

53,454

 

$

336,595

Acquisition

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Balance at March 31, 2016

 

$

227,486

 

$

55,655

 

$

53,454

 

$

336,595

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

December 31, 2015

 

    

    

    

Accumulated

    

 

    

    

    

    

    

Accumulated

    

 

    

    

(in thousands)

 

Cost

 

Amortization

 

Impairment

 

Net

 

Cost

 

Amortization

 

Impairment

 

Net

Finite-life intangibles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationship

 

$

117,039

 

$

(91,827)

 

$

 —

 

$

25,212

 

$

117,039

 

$

(89,663)

 

$

 —

 

$

27,376

Supply agreement

 

 

26,000

 

 

(23,095)

 

 

 —

 

 

2,905

 

 

26,000

 

 

(22,369)

 

 

 —

 

 

3,631

Technology databases

 

 

7,217

 

 

(7,217)

 

 

 —

 

 

 —

 

 

7,217

 

 

(7,217)

 

 

 —

 

 

 —

Non-compete agreements

 

 

948

 

 

(739)

 

 

 —

 

 

209

 

 

948

 

 

(701)

 

 

 —

 

 

247

Favorable lease agreements

 

 

134

 

 

(134)

 

 

 —

 

 

 —

 

 

134

 

 

(134)

 

 

 —

 

 

 —

Total finite-life intangibles

 

 

151,338

 

 

(123,012)

 

 

 —

 

 

28,326

 

 

151,338

 

 

(120,084)

 

 

 —

 

 

31,254

Indefinite-life intangibles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade names

 

 

166,000

 

 

 —

 

 

(34,900)

 

 

131,100

 

 

166,000

 

 

 —

 

 

(34,900)

 

 

131,100

Total intangible assets

 

$

317,338

 

$

(123,012)

 

$

(34,900)

 

$

159,426

 

$

317,338

 

$

(120,084)

 

$

(34,900)

 

$

162,354

 

Total amortization expense related to intangible assets were $2.9 and $3.1 million for the three months ended March 31, 2016 and 2015, respectively.

9


 

 

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

 

 

 

 

 

 

(in thousands)

    

    

 

Remainder of 2016

 

$

8,044

2017

 

 

7,679

2018

 

 

6,095

2019

 

 

3,529

2020

 

 

1,537

2021

 

 

877

 

 

 

 

5.Deficit

 

The following tables represent changes in deficit that are attributable to our shareholders and noncontrolling interests for the three month periods ended March 31, 2016 and 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

Accumulated

    

    

 

    

    

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

 

 

Paid-in

 

Accumulated

 

Comprehensive

 

Noncontrolling

 

Total

(in thousands)

 

Capital

 

Deficit

 

Loss

 

Interests

 

Deficit

Balance at December 31, 2015

 

$

241,833

 

$

(283,066)

 

$

(8,165)

 

$

240

 

$

(49,158)

Net (loss) income

 

 

 —

 

 

(4,700)

 

 

 —

 

 

60

 

 

(4,640)

Other comprehensive income

 

 

 —

 

 

 —

 

 

186

 

 

 —

 

 

186

Share-based compensation

 

 

757

 

 

 —

 

 

 —

 

 

 —

 

 

757

Stock option exercised

 

 

7

 

 

 —

 

 

 —

 

 

 —

 

 

7

Cash distributions to noncontrolling interests

 

 

 —

 

 

 —

 

 

 —

 

 

(120)

 

 

(120)

Balance at March 31, 2016

 

$

242,597

 

$

(287,766)

 

$

(7,979)

 

$

180

 

$

(52,968)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

Accumulated

    

    

 

    

    

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

 

 

Paid-in

 

Accumulated

 

Comprehensive

 

Noncontrolling

 

Total

(in thousands)

 

Capital

 

Deficit

 

Loss

 

Interests

 

Deficit

Balance at December 31, 2014

 

$

214,514

 

$

(254,418)

 

$

(9,062)

 

$

219

 

$

(48,747)

Net (loss) income

 

 

 —

 

 

(7,091)

 

 

 —

 

 

125

 

 

(6,966)

Cash distributions to noncontrolling interests

 

 

 —

 

 

 —

 

 

 —

 

 

(117)

 

 

(117)

Balance at March 31, 2015

 

$

214,514

 

$

(261,509)

 

$

(9,062)

 

$

227

 

$

(55,830)

 

 

 

 

6.Share-Based Compensation

 

During the three months ended March 31, 2016, activity under the 2007 Stock Option Plan (the “2007 Stock Option Plan”), of UHS Holdco, Inc., our parent company (“Parent”), was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

 

    

Weighted

 

 

 

 

 

 

 

 

 

 

average

 

 

 

 

Weighted

 

Aggregate

 

remaining

 

 

Number of

 

average

 

intrinsic

 

contractual

(in thousands, except exercise price and years)

 

options

 

exercise price

 

value

 

term (years)

Outstanding at December 31, 2015

 

33,889

 

$

0.71

 

$

10,506

 

8.9

Granted

 

5,378

 

 

1.02

 

 

 

 

 

Exercised

 

(10)

 

 

0.71

 

$

3

 

 

Forfeited or expired

 

(2,576)

 

 

0.71

 

 

 

 

 

Outstanding at March 31, 2016

 

36,681

 

$

0.76

 

$

9,704

 

8.6

Exercisable at March 31, 2016

 

9,627

 

$

0.71

 

$

2,984

 

8.6

Remaining authorized options available for issue

 

6,995

 

 

 

 

 

 

 

 

 

10


 

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

 

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

 

We determine the fair value of stock options using the Black-Scholes option pricing model. The estimated fair value of options, including the effect of estimated forfeitures, is recognized as an expense on a straight-line basis over the options’ expected vesting periods. The following assumptions were used in determining the fair value of stock options granted during the three months ended March 31, 2016 and 2015 under the Black-Scholes model.

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

 

2016

 

 

2015

 

Risk-free interest rate

 

1.50

%

 

 

1.00

%

Expected volatility

 

31.0

%

 

 

32.4

%

Dividend yield

 

N/A

 

 

 

N/A

 

Expected option life (years)

 

6.00

 

 

 

3.10

 

Black-Scholes Value of options

$

0.33

 

 

$

0.17

 

 

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

 

At March 31, 2016, unearned non-cash share-based compensation that we expect to recognize as expense over a weighted average period of 2.4 years totals approximately $6.4 million, net of our estimated forfeiture rate of 2.0%. The expense could be accelerated upon the sale of Parent or the Company.

 

In April 2015, Parent granted the Company’s Chief Executive Officer 7.0 million restricted stock units which vest over four years. Total compensation expense related to this grant was $0.3 million and $0 million for the three months ended March 31, 2016 and 2015, respectively.

 

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

 

7.Long-Term Debt

 

Long-term debt consists of the following:

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

(in thousands)

 

2016

 

2015

Original notes - 7.625% (1)

 

$

419,586

 

$

419,274

Add-on notes - 7.625% (2)

 

 

226,718

 

 

227,029

Senior secured credit facility (3)

 

 

51,847

 

 

25,811

Capital lease obligations

 

 

14,986

 

 

15,344

 

 

 

713,137

 

 

687,458

Less: Current portion of long-term debt

 

 

(4,887)

 

 

(4,867)

Total long-term debt

 

$

708,250

 

$

682,591

11


 

(1)

The carrying value of the Original notes - 7.625% is net of unamortized deferred financing costs of $5.4 and $5.7 million as of March 31, 2016 and December 31, 2015, respectively.

(2)

The carrying value of the Add-on notes - 7.625% is net of unamortized deferred financing costs of $2.3 and $2.4 million as of March 31, 2016 and December 31, 2015, respectively, and includes unamortized bond premium of $9.0 and $9.4 million as of March 31, 2016 and December 31, 2015, respectively.

(3)

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As of March 31, 2016, we had $109.0 million of availability under the senior secured credit facility based on a borrowing base of $166.9 million less borrowings of $54.0 million and after giving effect to $3.9 million used for letters of credit.

 

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.

12


 

 

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

 

·

incur indebtedness;

·

create or permit liens;

·

declare or pay dividends and certain other restricted payments;

·

consolidate, merge or recapitalize;

·

acquire or sell assets;

·

make certain investments, loans or other advances;

·

enter into transactions with affiliates;

·

change our line of business; and

·

enter into hedging transactions.

 

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

 

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

 

At March 31, 2016, we had $54.0 million of borrowings outstanding of which $19.0 million was accruing interest at a rate of 2.4381%, $25.0 million was accruing interest at a rate of 2.4413%, $6.0 million was accruing interest at a rate of 2.4329% and $4.0 million was accruing interest at a rate of 4.5%.

 

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

 

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

 

13


 

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

 

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

 

8.Commitments and Contingencies

 

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

 

On January 13, 2015, the Company filed suit in the Western District of Texas against Hill-Rom Holdings, Inc., Hill-Rom Company, Inc. and Hill-Rom Services, Inc. (the “Defendants”) alleging that the Defendants violated federal and state antitrust laws by willfully and unlawfully engaging in a pattern of exclusionary and predatory conduct in order to foreclose market competition and seeking actual damages, trebled damages and punitive damages.  On March 4, 2015, the Defendants filed a motion to transfer the case to another venue.  On March 23, 2015, the Defendants filed a motion to dismiss the case.  On July 2, 2015, the Court denied the Defendants’ motion to transfer.  On October 15, 2015, the Court denied the Defendants motion to dismiss. At this early stage in the litigation, the Company does not believe the expense of litigation will have a material impact on the Company's operating expenses or financial results.

 

9.Related Party Transactions

 

Management Agreement

 

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

 

We entered into engagement letters with CTPartners, LLC (“CTPartners”) to conduct searches for certain executive positions.  One member of our board of directors is also a director of CTPartners. Total fees incurred to CTPartners was $0 and $0.02 million for the three month periods ended March 31, 2016 and 2015, respectively.

 

10.Limited Liability Companies

 

We participate with others in the formation of LLCs in which Surgical Services becomes a partner and shares the financial interest with the other investors. Surgical Services is the primary beneficiary of these LLCs. These LLCs

14


 

acquire certain medical equipment for use in their respective business activities, which generally focus on surgical procedures. The LLCs will acquire medical equipment for rental purposes under equipment financing leases. At March 31, 2016, the LLCs had approximately $ 0.9 million of total assets. The third party investors in each respective LLC generally provide the lease financing company with individual proportionate lease guarantees based on their respective ownership percentages in the LLCs. In addition, Surgical Services will provide such financing companies with its corporate guarantee based on its respective ownership interest in each LLC. In certain instances, Surgical Services has provided such financing companies with an overall corporate guarantee in connection with equipment financing transactions. In such instances, the individual investors in each respective LLC will generally indemnify us against losses, if any, incurred in connection with its corporate guarantee. Additionally, we provide operational and administrative support to the LLCs in which it is a partner. As of March 31, 2016, we held interests in seven active LLCs.

 

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

 

11.Segment Information

 

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

 

Medical Equipment Solutions

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2016

    

2015

    

Revenues

 

$

80,230

 

$

74,084

 

Cost of revenue

 

 

38,282

 

 

31,279

 

Medical equipment depreciation

 

 

13,752

 

 

16,660

 

Gross margin

 

$

28,196

 

$

26,145

 

 

Clinical Engineering Solutions

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2016

    

2015

    

Revenues

 

$

25,578

 

$

24,395

 

Cost of revenue

 

 

20,024

 

 

19,229

 

Gross margin

 

$

5,554

 

$

5,166

 

 

Surgical Services

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2016

    

2015

    

Revenues

 

$

16,318

 

$

15,007

 

Cost of revenue

 

 

8,766

 

 

8,179

 

Medical equipment depreciation

 

 

1,417

 

 

1,475

 

Gross margin

 

$

6,135

 

$

5,353

 

 

15


 

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

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2016

    

2015

    

Total gross margin

 

$

39,885

 

$

36,664

 

Selling, general and administrative

 

 

31,298

 

 

30,152

 

Interest expense

 

 

13,068

 

 

13,310

 

Loss before income taxes and noncontrolling interest

 

$

(4,481)

 

$

(6,798)

 

 

Total Assets by Reporting Segment

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2016

 

2015

 

Medical Equipment Solutions

 

$

579,919

 

$

585,990

 

Clinical Engineering Solutions

 

 

110,240

 

 

110,588

 

Surgical Services

 

 

99,811

 

 

100,997

 

Total Company Assets

 

$

789,970

 

$

797,575

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

 

2016

 

2015

 

    

MES

 

 

 

 

 

 

Equipment usage solutions

 

59.7

%  

62.3

%  

 

Equipment/disposable sales

 

6.0

 

3.0

 

 

 

 

65.7

 

65.3

 

 

CES

 

 

 

 

 

 

Service solutions

 

20.9

 

21.5

 

 

SS

 

 

 

 

 

 

Equipment usage solutions

 

13.3

 

13.1

 

 

Equipment/disposable sales

 

0.1

 

0.1

 

 

 

 

13.4

 

13.2

 

 

Total revenues

 

100.0

%  

100.0

%  

 

 

 

 

 

 

12.Income Taxes

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We evaluate the recoverability of our deferred tax assets by scheduling the expected reversals of deferred tax assets and liabilities in order to determine whether net operating loss carry forwards are recoverable prior to expiration and have established a valuation allowance in accordance with ASC Topic 740, “Income Taxes”. The tax expense for the three months ended March 31, 2016 and 2015 primarily relates to state minimum fees. The expected tax benefit from operating loss during the three months ended March 31, 2016 was offset by the recording of additional valuation allowance. In future reporting periods, we will continue to assess the likelihood that deferred tax assets will be realizable.

 

At March 31, 2016, the Company had available unused federal net operating loss carryforwards of approximately $213.9 million. The net operating loss carryforwards will expire at various dates from 2018 through 2036.

 

16


 

13.Consolidating Financial Statements

 

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

17


 

Universal Hospital Services, Inc.

Consolidating Balance Sheets

(in thousands, except share and per share  information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, less allowance for doubtful accounts

 

$

66,304

 

$

8,657

 

$

 —

 

$

74,961

Due from affiliates

 

 

31,430

 

 

 —

 

 

(31,430)

 

 

 —

Inventories

 

 

4,850

 

 

3,466

 

 

 —

 

 

8,316

Other current assets

 

 

6,181

 

 

226

 

 

 —

 

 

6,407

Total current assets

 

 

108,765

 

 

12,349

 

 

(31,430)

 

 

89,684

Property and equipment:

 

 

 

 

 

 

 

 

 

 

 

 

Medical equipment

 

 

540,034

 

 

50,334

 

 

 —

 

 

590,368

Property and office equipment

 

 

77,294

 

 

9,220

 

 

 —

 

 

86,514

Accumulated depreciation

 

 

(434,378)

 

 

(38,684)

 

 

 —

 

 

(473,062)

Total property and equipment, net

 

 

182,950

 

 

20,870

 

 

 —

 

 

203,820

Other long-term assets:

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

283,141

 

 

53,454

 

 

 —

 

 

336,595

Investment in subsidiary

 

 

54,690

 

 

 —

 

 

(54,690)

 

 

 —

Other intangibles, net

 

 

146,445

 

 

12,981

 

 

 —

 

 

159,426

Other

 

 

288

 

 

157

 

 

 —

 

 

445

Total assets

 

$

776,279

 

$

99,811

 

$

(86,120)

 

$

789,970

Liabilities and (Deficit) Equity

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

3,767

 

$

1,120

 

$

 —

 

$

4,887

Book overdrafts

 

 

5,023

 

 

355

 

 

 —

 

 

5,378

Due to affiliates

 

 

 —

 

 

31,430

 

 

(31,430)

 

 

 —

Accounts payable

 

 

23,733

 

 

4,091

 

 

 —

 

 

27,824

Accrued compensation

 

 

9,626

 

 

1,360

 

 

 —

 

 

10,986

Accrued interest

 

 

6,425

 

 

 —

 

 

 —

 

 

6,425

Other accrued expenses

 

 

14,317

 

 

88

 

 

 —

 

 

14,405

Total current liabilities

 

 

62,891

 

 

38,444

 

 

(31,430)

 

 

69,905

Long-term debt, less current portion

 

 

704,926

 

 

3,324

 

 

 —

 

 

708,250

Pension and other long-term liabilities

 

 

11,750

 

 

14

 

 

 —

 

 

11,764

Deferred income taxes, net

 

 

49,845

 

 

3,174

 

 

 —

 

 

53,019

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

(Deficit) Equity

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Additional paid-in capital

 

 

242,612

 

 

60,004

 

 

(60,019)

 

 

242,597

Accumulated deficit

 

 

(282,437)

 

 

(5,329)

 

 

 —

 

 

(287,766)

Accumulated loss in subsidiary

 

 

(5,329)

 

 

 —

 

 

5,329

 

 

 —

Accumulated other comprehensive loss

 

 

(7,979)

 

 

 —

 

 

 —

 

 

(7,979)

Total Universal Hospital Services, Inc. (deficit) equity

 

 

(53,133)

 

 

54,675

 

 

(54,690)

 

 

(53,148)

Noncontrolling interest

 

 

 —

 

 

180

 

 

 —

 

 

180

Total (deficit) equity

 

 

(53,133)

 

 

54,855

 

 

(54,690)

 

 

(52,968)

Total liabilities and (deficit) equity

 

$

776,279

 

$

99,811

 

$

(86,120)

 

$

789,970

 

 

 

18


 

Universal Hospital Services, Inc.

Consolidating Balance Sheets

(in thousands, except share and per share  information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, less allowance for doubtful accounts

 

$

62,288

 

$

8,964

 

$

 —

 

$

71,252

Due from affiliates

 

 

29,145

 

 

 —

 

 

(29,145)

 

 

 —

Inventories

 

 

4,533

 

 

3,973

 

 

 —

 

 

8,506

Other current assets

 

 

5,670

 

 

164

 

 

 —

 

 

5,834

Total current assets

 

 

101,636

 

 

13,101

 

 

(29,145)

 

 

85,592

Property and equipment:

 

 

 

 

 

 

 

 

 

 

 

 

Medical equipment

 

 

541,200

 

 

48,891

 

 

 —

 

 

590,091

Property and office equipment

 

 

76,436

 

 

8,905

 

 

 —

 

 

85,341

Accumulated depreciation

 

 

(425,574)

 

 

(37,244)

 

 

 —

 

 

(462,818)

Total property and equipment, net

 

 

192,062

 

 

20,552

 

 

 —

 

 

212,614

Other long-term assets:

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

283,141

 

 

53,454

 

 

 —

 

 

336,595

Investment in subsidiary

 

 

54,383

 

 

 —

 

 

(54,383)

 

 

 —

Other intangibles, net

 

 

148,520

 

 

13,834

 

 

 —

 

 

162,354

Other

 

 

364

 

 

56

 

 

 —

 

 

420

Total assets

 

$

780,106

 

$

100,997

 

$

(83,528)

 

$

797,575

Liabilities and (Deficit) Equity

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

3,801

 

$

1,066

 

$

 —

 

$

4,867

Book overdrafts

 

 

5,875

 

 

569

 

 

 —

 

 

6,444

Due to affiliates

 

 

 —

 

 

29,145

 

 

(29,145)

 

 

 —

Accounts payable

 

 

25,260

 

 

5,813

 

 

 —

 

 

31,073

Accrued compensation

 

 

21,266

 

 

2,334

 

 

 —

 

 

23,600

Accrued interest

 

 

18,742

 

 

 —

 

 

 —

 

 

18,742

Dividend payable

 

 

24

 

 

 —

 

 

 —

 

 

24

Other accrued expenses

 

 

13,913

 

 

651

 

 

 —

 

 

14,564

Total current liabilities

 

 

88,881

 

 

39,578

 

 

(29,145)

 

 

99,314

Long-term debt, less current portion

 

 

679,321

 

 

3,270

 

 

 —

 

 

682,591

Pension and other long-term liabilities

 

 

11,850

 

 

19

 

 

 —

 

 

11,869

Deferred income taxes, net

 

 

49,437

 

 

3,522

 

 

 —

 

 

52,959

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

(Deficit) Equity

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Additional paid-in capital

 

 

241,848

 

 

60,004

 

 

(60,019)

 

 

241,833

Accumulated deficit

 

 

(277,430)

 

 

(5,636)

 

 

 —

 

 

(283,066)

Accumulated loss in subsidiary

 

 

(5,636)

 

 

 —

 

 

5,636

 

 

 —

Accumulated other comprehensive loss

 

 

(8,165)

 

 

 —

 

 

 —

 

 

(8,165)

Total Universal Hospital Services, Inc. (deficit) equity

 

 

(49,383)

 

 

54,368

 

 

(54,383)

 

 

(49,398)

Noncontrolling interest

 

 

 —

 

 

240

 

 

 —

 

 

240

Total (deficit) equity

 

 

(49,383)

 

 

54,608

 

 

(54,383)

 

 

(49,158)

Total liabilities and (deficit) equity

 

$

780,106

 

$

100,997

 

$

(83,528)

 

$

797,575

 

19


 

Universal Hospital Services, Inc.

Consolidating Statements of Operations

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2016

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Medical equipment solutions

 

$

80,230

 

$

 —

 

$

 —

 

$

80,230

Clinical engineering solutions

 

 

25,578

 

 

 —

 

 

 —

 

 

25,578

Surgical services

 

 

 —

 

 

16,318

 

 

 —

 

 

16,318

Total revenues

 

 

105,808

 

 

16,318

 

 

 —

 

 

122,126

Cost of Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Cost of medical equipment solutions

 

 

38,282

 

 

 —

 

 

 —

 

 

38,282

Cost of clinical engineering solutions

 

 

20,024

 

 

 —

 

 

 —

 

 

20,024

Cost of surgical services

 

 

 —

 

 

8,766

 

 

 —

 

 

8,766

Medical equipment depreciation

 

 

13,752

 

 

1,417

 

 

 —

 

 

15,169

Total costs of revenues

 

 

72,058

 

 

10,183

 

 

 —

 

 

82,241

Gross margin

 

 

33,750

 

 

6,135

 

 

 —

 

 

39,885

Selling, general and administrative

 

 

26,336

 

 

4,962

 

 

 —

 

 

31,298

Operating income

 

 

7,414

 

 

1,173

 

 

 —

 

 

8,587

Equity in earnings of subsidiary

 

 

(367)

 

 

 —

 

 

367

 

 

 —

Interest expense

 

 

12,525

 

 

543

 

 

 —

 

 

13,068

(Loss) income before income taxes and noncontrolling interest

 

 

(4,744)

 

 

630

 

 

(367)

 

 

(4,481)

(Benefit) provision for income taxes

 

 

(104)

 

 

263

 

 

 —

 

 

159

Consolidated net (loss) income

 

 

(4,640)

 

 

367

 

 

(367)

 

 

(4,640)

Net income attributable to noncontrolling interest

 

 

 —

 

 

60

 

 

 —

 

 

60

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

 

$

(4,640)

 

$

307

 

$

(367)

 

$

(4,700)

 

20


 

Universal Hospital Services, Inc.

Consolidating Statements of Operations

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2015

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Medical equipment solutions

 

$

74,084

 

$

 —

 

$

 —

 

$

74,084

Clinical engineering solutions

 

 

24,395

 

 

 —

 

 

 —

 

 

24,395

Surgical services

 

 

 —

 

 

15,007

 

 

 —

 

 

15,007

Total revenues

 

 

98,479

 

 

15,007

 

 

 —

 

 

113,486

Cost of Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Cost of medical equipment solutions

 

 

31,279

 

 

 —

 

 

 —

 

 

31,279

Cost of clinical engineering solutions

 

 

19,229

 

 

 —

 

 

 —

 

 

19,229

Cost of surgical services

 

 

 —

 

 

8,179

 

 

 —

 

 

8,179

Medical equipment depreciation

 

 

16,660

 

 

1,475

 

 

 —

 

 

18,135

Total costs of revenues

 

 

67,168

 

 

9,654

 

 

 —

 

 

76,822

Gross margin

 

 

31,311

 

 

5,353

 

 

 —

 

 

36,664

Selling, general and administrative

 

 

25,582

 

 

4,570

 

 

 —

 

 

30,152

Operating income

 

 

5,729

 

 

783

 

 

 —

 

 

6,512

Equity in earnings of subsidiary

 

 

(186)

 

 

 —

 

 

186

 

 

 —

Interest expense

 

 

12,791

 

 

519

 

 

 —

 

 

13,310

(Loss) income before income taxes and noncontrolling interest

 

 

(6,876)

 

 

264

 

 

(186)

 

 

(6,798)

Provision for income taxes

 

 

90

 

 

78

 

 

 —

 

 

168

Consolidated net (loss) income

 

 

(6,966)

 

 

186

 

 

(186)

 

 

(6,966)

Net income attributable to noncontrolling interest

 

 

 —

 

 

125

 

 

 —

 

 

125

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

 

$

(6,966)

 

$

61

 

$

(186)

 

$

(7,091)

 

21


 

Universal Hospital Services, Inc.

Consolidating Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2016



 

    

Parent

    

Subsidiary

    

    

    

    

 

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

  

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

    

Consolidated net (loss) income

 

$

(4,640)

 

$

367

 

$

(367)

 

$

(4,640)

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on minimum pension liability, net of tax

 

 

186

 

 

 —

 

 

 —

 

 

186

 

Total other comprehensive income

 

 

186

 

 

 —

 

 

 —

 

 

186

 

Comprehensive (loss) income

 

 

(4,454)

 

 

367

 

 

(367)

 

 

(4,454)

 

Comprehensive income attributable to noncontrolling interest

 

 

 —

 

 

60

 

 

 —

 

 

60

 

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

 

$

(4,454)

 

$

307

 

$

(367)

 

$

(4,514)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2015

   

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

 

Consolidated net (loss) income

 

$

(6,966)

 

$

186

 

$

(186)

 

$

(6,966)

 

Total other comprehensive income

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Comprehensive (loss) income

 

 

(6,966)

 

 

186

 

 

(186)

 

 

(6,966)

 

Comprehensive income attributable to noncontrolling interest

 

 

 —

 

 

125

 

 

 —

 

 

125

 

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

 

$

(6,966)

 

$

61

 

$

(186)

 

$

(7,091)

 

                    

22


 

Universal Hospital Services, Inc.

Consolidating Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2016

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated net (loss) income

 

$

(4,640)

 

$

367

 

$

(367)

 

$

(4,640)

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

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

16,160

 

 

1,762

 

 

 —

 

 

17,922

Amortization of intangibles, deferred financing costs and bond premium

 

 

2,209

 

 

853

 

 

 —

 

 

3,062

Equity in earnings of subsidiary

 

 

(367)

 

 

 —

 

 

367

 

 

 —

Provision for doubtful accounts

 

 

56

 

 

36

 

 

 —

 

 

92

Provision for inventory obsolescence

 

 

111

 

 

33

 

 

 —

 

 

144

Non-cash share-based compensation expense

 

 

757

 

 

 —

 

 

 —

 

 

757

Gain on sales and disposals of equipment

 

 

(1,286)

 

 

31

 

 

 —

 

 

(1,255)

Deferred income taxes

 

 

408

 

 

(348)

 

 

 —

 

 

60

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(4,072)

 

 

271

 

 

 —

 

 

(3,801)

Due from affiliates

 

 

(2,285)

 

 

 —

 

 

2,285

 

 

 —

Inventories

 

 

(428)

 

 

474

 

 

 —

 

 

46

Other operating assets

 

 

(435)

 

 

(163)

 

 

 —

 

 

(598)

Accounts payable

 

 

303

 

 

(333)

 

 

 —

 

 

(30)

Other operating liabilities

 

 

(23,467)

 

 

(1,042)

 

 

 —

 

 

(24,509)

Net cash (used in) provided by operating activities

 

 

(16,976)

 

 

1,941

 

 

2,285

 

 

(12,750)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Medical equipment purchases

 

 

(11,124)

 

 

(3,085)

 

 

 —

 

 

(14,209)

Property and office equipment purchases

 

 

(1,047)

 

 

(10)

 

 

 —

 

 

(1,057)

Proceeds from disposition of property and equipment

 

 

5,324

 

 

4

 

 

 —

 

 

5,328

Net cash used in investing activities

 

 

(6,847)

 

 

(3,091)

 

 

 —

 

 

(9,938)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds under senior secured credit facility

 

 

60,200

 

 

 —

 

 

 —

 

 

60,200

Payments under senior secured credit facility

 

 

(34,200)

 

 

 —

 

 

 —

 

 

(34,200)

Payments of principal under capital lease obligations

 

 

(1,211)

 

 

(301)

 

 

 —

 

 

(1,512)

Payments of deferred financing costs

 

 

(97)

 

 

 —

 

 

 —

 

 

(97)

Holdback payment related to acquisition

 

 

 —

 

 

(500)

 

 

 —

 

 

(500)

Distributions to noncontrolling interests

 

 

 —

 

 

(120)

 

 

 —

 

 

(120)

Dividend and equity distribution payments

 

 

(24)

 

 

 —

 

 

 —

 

 

(24)

Proceeds from exercise of parent company stock options

 

 

7

 

 

 —

 

 

 —

 

 

7

Due to affiliates

 

 

 —

 

 

2,285

 

 

(2,285)

 

 

 —

Change in book overdrafts

 

 

(852)

 

 

(214)

 

 

 —

 

 

(1,066)

Net cash provided by financing activities

 

 

23,823

 

 

1,150

 

 

(2,285)

 

 

22,688

Net change in cash and cash equivalents

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Cash and cash equivalents at the beginning of period

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Cash and cash equivalents at the end of period

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

23


 

Universal Hospital Services, Inc.

Consolidating Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2015

 

    

Parent

    

Subsidiary

    

    

    

    

 

 

 

Issuer

 

Guarantor

 

Consolidating

 

 

 

 

 

UHS

 

Surgical Services

 

Adjustments

 

Consolidated

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated net (loss) income

 

$

(6,966)

 

$

186

 

$

(186)

 

$

(6,966)

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

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

17,869

 

 

1,776

 

 

 —

 

 

19,645

Asset impairment charges

 

 

1,703

 

 

 —

 

 

 —

 

 

1,703

Amortization of intangibles, deferred financing costs and bond premium

 

 

2,484

 

 

821

 

 

 —

 

 

3,305

Equity in earnings of subsidiary

 

 

(186)

 

 

 —

 

 

186

 

 

 —

Provision for doubtful accounts

 

 

(32)

 

 

5

 

 

 —

 

 

(27)

Provision for inventory obsolescence

 

 

80

 

 

43

 

 

 —

 

 

123

Non-cash share-based compensation expense

 

 

318

 

 

 —

 

 

 —

 

 

318

Gain on sales and disposals of equipment

 

 

(285)

 

 

36

 

 

 —

 

 

(249)

Deferred income taxes

 

 

551

 

 

(497)

 

 

 —

 

 

54

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,894)

 

 

(44)

 

 

 —

 

 

(2,938)

Due from (to) affiliates

 

 

1,204

 

 

(1,204)

 

 

 —

 

 

 —

Inventories

 

 

(550)

 

 

405

 

 

 —

 

 

(145)

Other operating assets

 

 

585

 

 

(45)

 

 

 —

 

 

540

Accounts payable

 

 

2,399

 

 

408

 

 

 —

 

 

2,807

Other operating liabilities

 

 

(6,788)

 

 

423

 

 

 —

 

 

(6,365)

Net cash provided by operating activities

 

 

9,492

 

 

2,313

 

 

 —

 

 

11,805

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Medical equipment purchases

 

 

(19,359)

 

 

(761)

 

 

 —

 

 

(20,120)

Property and office equipment purchases

 

 

(851)

 

 

(5)

 

 

 —

 

 

(856)

Proceeds from disposition of property and equipment

 

 

2,223

 

 

(23)

 

 

 —

 

 

2,200

Net cash used in investing activities

 

 

(17,987)

 

 

(789)

 

 

 —

 

 

(18,776)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds under senior secured credit facility

 

 

44,200

 

 

 —

 

 

 —

 

 

44,200

Payments under senior secured credit facility

 

 

(33,200)

 

 

 —

 

 

 —

 

 

(33,200)

Payments of principal under capital lease obligations

 

 

(1,750)

 

 

(238)

 

 

 —

 

 

(1,988)

Distributions to noncontrolling interests

 

 

 —

 

 

(117)

 

 

 —

 

 

(117)

Dividend and equity distribution payments

 

 

(39)

 

 

 —

 

 

 —

 

 

(39)

Change in book overdrafts

 

 

(716)

 

 

(1,169)

 

 

 —

 

 

(1,885)

Net cash provided by (used in) financing activities

 

 

8,495

 

 

(1,524)

 

 

 —

 

 

6,971

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

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

24


 

14.Restructuring

 

We incurred no restructuring expense during the three months ended March 31, 2016 and 2015. As of December 31, 2015, we had $2.4 million of restructuring liability. For the three months ended March 31, 2016, $0.4 million in restructuring charges was paid. No additional restructuring was recorded in the first quarter of 2016 for new severance arrangements and the remaining liability of $2.0 million as of March 31, 2016 is expected to be paid out by the end of the first quarter of 2017 and is included in “other accrued expenses” in the Consolidated Balance Sheets. As of December 31, 2014, we had $1.6 million of restructuring liability. For the three months ended March 31, 2015, we incurred no restructuring expense and $0.4 million in restructuring charges was paid and the remaining $1.2 was a liability as of March 31, 2015.

 

15.Concentration

 

One customer accounted for approximately 17% and 14% of total revenue for the three months ended March 31, 2016 and 2015, respectively.

 

16.Subsequent Event

 

In connection with the Restricted Stock Unit Award Agreement, dated as of April 13, 2015, between Thomas Leonard and the Company, we entered into a promissory note agreement with Mr. Leonard dated April 13, 2016 for a total amount of $1.0 million. This note receivable bears annual interest at 1.45%. The principal and accrued interest of this note is due on the earliest of (i) the seventh anniversary of the date of this loan, (ii) any event with respect to borrower, which, in any such case of the loan were to remain outstanding on and after such date, would result in violation of Section 402 of the Sarbanes-Oxley Act of 2002, (iii) and certain events of default or (iv) a change in control.

 

 

 

 

25


 

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

 

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

 

BUSINESS OVERVIEW

 

Our Company

 

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

 

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

 

UHS delivers health care solutions through three segments: Medical Equipment Solutions (“MES”), Clinical Engineering Solutions (“CES”) and Surgical Services (“SS”). As of March 31, 2016, we owned or managed over 700,000 units of medical equipment consisting of approximately 400,000 owned or managed units in our MES segment, over 300,000 units of customer-owned equipment we managed in our CES segment and over 7,000 units of owned or managed mobile surgical equipment in our SS segment. Our diverse customer base includes more than 7,000 national, regional and local acute care hospitals and alternate site providers (such as long-term acute care hospitals, skilled nursing facilities, surgery centers, specialty hospitals, nursing homes and home care providers). We also have relationships with more than 200 medical device manufacturers, many of the nation’s largest group purchasing organizations (“GPOs”) and many health system integrated delivery networks (“IDNs”).  All of our solutions leverage our nationwide network of 83 district service centers, five CES Centers of Excellence and an additional five stand-alone SS service centers, together with our more than 75 years of experience managing and servicing all aspects of medical equipment.  Our fees are paid directly by our customers rather than by direct reimbursement from third-party payors, such as private insurers, Medicare or Medicaid.

 

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

 

Medical Equipment Solutions

 

Our MES segment accounted for $80.2 and $74.1 million, or approximately 65.7% and 65.3% of our revenues, for the three months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, the MES segment owned or managed approximately 400,000 units of medical equipment ranging across many clinical categories, manufacturers and models.  These solutions are provided primarily to hospitals and other acute care providers for use through their facilities, including the emergency room, operating room, critical care, intensive care, rehabilitation and general patient care areas.

 

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

26


 

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 $25.6 and $24.4 million, or approximately 20.9% and 21.5% of our revenues, for the three months ended March 31, 2016 and 2015, respectively. We offer a broad range of inspection, preventive maintenance, repair, logistic and consulting services through our team of over 400 technicians and professionals located throughout the United States in our nationwide network of service centers.  We managed over 300,000 units of customer owned equipment as of March 31, 2016.  In addition, as of March 31, 2016, we serviced approximately 400,000 units that we own or directly manage in our MES segment.

 

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

 

We have three primary solutions in our CES segment:

 

·

Supplemental Maintenance and Repair Solutions;

·

360 On-site Managed Solutions; and

·

Health Care Technology Advisory Solutions.

 

Surgical Services

 

Our SS segment accounted for $16.3 and $15.0 million, or approximately 13.4% and 13.2% of our revenues, for the three months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, we owned or managed over 7,000 units of mobile surgical equipment in our SS segment, primarily used in the practice of general surgery, orthopedic surgery, otolaryngology, urology, obstetrics, gynecology, podiatry, dermatology and plastic/cosmetics.

 

SS provides high end, state-of-the-art surgical equipment and associated products along with trained and certified Surgical Equipment Technologists (“technologists”) to assist in the procedural operation of the equipment. We provide these services to over 1,000 acute care hospitals and surgery centers through our nationwide network of 83 district service centers and an additional five stand-alone SS service centers. Our technologists work in the operating room (“O.R.”) and support physicians and O.R. personnel. The services are offered on a per-procedure basis. Our technologists deliver, set up, and create a safe environment for hospital and clinical personnel operating the equipment and provide all necessary disposable materials needed. Our technologists work closely with our customers to confirm that all certifications and credentials meet requirements to provide on-site services. Our technologists also assist customers in the operation of facility-owned assets and supplement the training and staffing of their personnel.  As of March 31, 2016, 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.

27


 

RESULTS OF OPERATIONS

 

The following discussion addresses:

 

·

our financial condition as of March 31, 2016 and

·

the results of operations for the three-month periods ended March 31, 2016 and 2015.

 

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

 

The following table provides information on the percentages of certain items of selected financial data compared to total revenues for the three-month periods ended March 31, 2016 and 2015.  The table below also indicates the percentage increase or decrease over the prior comparable period.

 

 

 

 

 

 

 

 

 

 

 

 

Percent to Total Revenues

 

Percent

 

 

 

Three Months Ended March 31,

 

Increase

 

 

    

2016

    

2015

    

(Decrease)

    

Revenue

 

 

 

 

 

 

 

Medical equipment solutions

 

65.7

%  

65.3

%  

8.3

%  

Clinical engineering solutions

 

20.9

 

21.5

 

4.8

 

Surgical services

 

13.4

 

13.2

 

8.7

 

Total revenues

 

100.0

%  

100.0

%  

7.6

 

Cost of Revenue

 

 

 

 

 

 

 

Cost of medical equipment solutions

 

31.3

 

27.6

 

22.4

 

Cost of clinical engineering solutions

 

16.4

 

16.9

 

4.1

 

Cost of surgical services

 

7.2

 

7.2

 

7.2

 

Medical equipment depreciation

 

12.4

 

16.0

 

(16.4)

 

Total costs of revenues

 

67.3

 

67.7

 

7.1

 

Gross margin

 

32.7

 

32.3

 

8.8

 

Selling, general and administrative

 

25.6

 

26.6

 

3.8

 

Operating income

 

7.1

 

5.7

 

31.9

 

Interest expense

 

10.7

 

11.7

 

(1.8)

 

Loss before income taxes and noncontrolling interest

 

(3.6)

 

(6.0)

 

(34.1)

 

Provision for income taxes

 

0.1

 

0.1

 

*

 

Consolidated net loss

 

(3.7)

%

(6.1)

%

(33.4)

 


*Not meaningful

 

Consolidated Results of Operations for the three months ended March 31, 2016 compared to the three months ended March 31, 2015

 

Total Revenue

 

Total revenue for the three months ended March 31, 2016 was $122.1 million, compared to $113.5 million for the three months ended March 31, 2015, an increase of $8.6 million or 7.6%.  The net increase was primarily due to additional revenue within our MES segment related to growth in our 360 On-site Managed Solutions (“360 solutions”) of $3.2 million, growth in our sales and remarketing of $3.9 million, growth in our CES segment of $1.2 million related to growth in our 360 solutions and growth in our SS segment of $1.3 million. These increases were partially offset due to customer losses in the MES segment.

 

28


 

Cost of Revenue

 

Total cost of revenue for the three months ended March 31, 2016 was $82.2 million compared to $76.8 million for the three months ended March 31, 2015, an increase of $5.4 million or 7.1%. The net increase was primarily in our MES segment due to the increases in cost of equipment sales of $3.9 million, 360 solutions cost of $1.8 million and other rental costs of $1.4 million. The increases were partially offset by the decrease in the medical equipment depreciation of $2.9 million due to reduced depreciation resulting from disposals of certain medical equipment.

 

Gross Margin

 

Total gross margin for the three months ended March 31, 2016 was $39.9 million, or 32.7% of total revenues, compared to $36.7 million, or 32.3% of total revenues, for the three months ended March 31, 2015, an increase of $3.2 million or 8.8%.  The increase in gross margin as a percent of revenue for the quarter was primarily impacted by the lower depreciation expense and positive operating leverage from volume growth.

 

Medical Equipment Solutions

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

    

2016

    

2015

    

Change

    

% Change

 

Total revenue

 

$

80,230

 

$

74,084

 

$

6,146

 

8.3

%  

Cost of revenue

 

 

38,282

 

 

31,279

 

 

7,003

 

22.4

 

Medical equipment depreciation

 

 

13,752

 

 

16,660

 

 

(2,908)

 

(17.5)

 

Gross margin

 

$

28,196

 

$

26,145

 

$

2,051

 

7.8

 

Gross margin %

 

 

35.1

%  

 

35.3

%  

 

 

 

 

 

 

Total revenue in the MES segment increased $6.1 million, or 8.3%, to $80.2 million in the first quarter of 2016 as compared to the same period of 2015.  The increase was primarily due to the growth in our 360 solutions from both new programs and expansion of existing programs of $3.2 million and growth in our sales and remarketing of $3.9 million. The increases were partially offset by the loss of certain customers. Many of our 360 solution customers utilize more than one of our equipment management program offerings in areas such as infusion, patient handling and negative pressure wound therapy. As of March 31, 2016, we had 232 such active programs, up from 230 as of December 31, 2015.

 

Total cost of revenue in the segment increased $7.0 million, or 22.4%, to $38.3 million in the first quarter of 2016 as compared to the same period of 2015.  The increase was primarily from the cost of equipment sales of $3.9 million, increases in costs to support growth in our 360 solutions of $1.8 million largely due to increases in employee related costs and increase in rental costs of $1.4 million largely due to higher repair parts and labor costs.

 

Medical equipment depreciation decreased $2.9 million, or 17.5%, to $13.8 million in the first quarter of 2016 as compared to the same period of 2015. The decrease in medical equipment depreciation was primarily due to reduced depreciation resulting from disposals of certain medical equipment and lower capital expenditures.

 

Gross margin percentage for the MES segment decreased from 35.3% in the first quarter of 2015 to 35.1% in the same period of 2016. Gross margin rate was impacted by the growth in used equipment sales, which have lower margins.

29


 

 

Clinical Engineering Solutions

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

    

2016

    

2015

    

Change

    

% Change

 

Total revenue

 

$

25,578

 

$

24,395

 

$

1,183

 

4.8

%  

Cost of revenue

 

 

20,024

 

 

19,229

 

 

795

 

4.1

 

Gross margin

 

$

5,554

 

$

5,166

 

$

388

 

7.5

 

Gross margin %

 

 

21.7

%  

 

21.2

%  

 

 

 

 

 

 

Total revenue in the CES segment increased $1.2 million, or 4.8%, to $25.6 million in the first quarter of 2016 as compared to the same period of 2015. The increase was primarily due to growth in our managed 360 solutions and manufacturer service.  As of March 31, 2016, we had 360 solutions implemented in 185 programs in our CES segment, up from 180 programs as of December 31, 2015.

 

Total cost of revenue in the segment increased $0.8 million, or 4.1%, to $20.0 million in the first quarter of 2016 as compared to the same period of 2015. The increase was primarily attributable to increase in employee related costs to support the revenue growth and mix shifts in type of service provided to customers.

 

Gross margin percentage for the CES segment increased from 21.2% in the first quarter of 2015 to 21.7% in the same period of 2016. Gross margin percentage will fluctuate based on the variability of third-party vendor expenses in our 360 solutions and supplemental service programs, as well as fluctuation of services being performed in house for manufacturer services.

 

Surgical Services

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

    

2016

    

2015

    

Change

    

% Change

 

Total revenue

 

$

16,318

 

$

15,007

 

$

1,311

 

8.7

%  

Cost of revenue

 

 

8,766

 

 

8,179

 

 

587

 

7.2

 

Medical equipment depreciation

 

 

1,417

 

 

1,475

 

 

(58)

 

(3.9)

 

Gross margin

 

$

6,135

 

$

5,353

 

$

782

 

14.6

 

Gross margin %

 

 

37.6

%  

 

35.7

%  

 

 

 

 

 

 

Total revenue in the SS segment increased $1.3 million, or 8.7%, to $16.3 million in the first quarter of 2016 as compared to the same period of 2015. The increase was primarily driven by organic growth in our surgical services business and to a lesser extent from an acquisition completed in the second quarter of 2015.

 

Total cost of revenue in the segment increased $0.6 million, or 7.2%, to $8.8 million in the first quarter of 2016 as compared to the same period of 2015. The increase was primarily attributable to an increase in cost of disposables and employee related costs to support growth in our surgical services business.

 

Medical equipment depreciation decreased $0.1 million, or 3.9%, to $1.4 million in the first quarter of 2016 as compared to the same period of 2015.

 

Gross margin percentage for the SS segment increased from 35.7% in the first quarter of 2015 to 37.6% in the same period of 2016. The increase in gross margin percentage was primarily driven by both positive operating leverage from volume growth and some shift to higher margin modalities.

 

30


 

Selling, General and Administrative and Interest Expense

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

    

2016

    

2015

    

Change

    

% Change

 

Selling, general and administrative

 

$

31,298

 

$

30,152

 

$

1,146

 

3.8

%

Interest expense

 

 

13,068

 

 

13,310

 

 

(242)

 

(1.8)

 

 

Selling, General and Administrative

 

Selling, general and administrative expense increased $1.1 million, or 3.8%, to $31.3 million for the first quarter of 2016 as compared to the same period of 2015. The increase was primarily due to investments in the Company’s sales organization as well as timing for certain meetings which occurred later in the prior year.

 

Selling, general and administrative expense as a percentage of total revenue was 25.6% and 26.6% for the quarters ended March 31, 2016 and 2015, respectively.

 

Interest Expense

 

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

 

Income Taxes

 

Income taxes were an expense of $0.2 and $0.2 million for the three months ended March 31, 2016 and 2015, respectively. The tax expense for the three months ended March 31, 2016 and 2015 primarily related to state minimum fees. The expected tax benefit from operating loss during the three months ended March 31, 2016 was offset by the recording of additional valuation allowance. In future reporting periods, we will continue to assess the likelihood that deferred tax assets will be realizable.

 

Consolidated Net Loss

 

Consolidated net loss decreased $2.3 million to $4.6 million in the first quarter of 2016 as compared to the same period of 2015.  Net loss was impacted primarily by higher margin rates as a result of the decrease in medical equipment depreciation during the first quarter of 2016.

 

EBITDA

 

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) was $29.4 and $30.8 million for the three months ended March 31, 2016 and 2015, respectively.  EBITDA for the three months ended March 31, 2016 was lower primarily due to the increase in selling, general and administrative expenses.

 

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

31


 

that is available for management’s discretionary use. A reconciliation of net loss attributable to UHS to EBITDA is included below:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

(in thousands)

    

2016

    

2015

 

Net loss attributable to Universal Hospital Services, Inc.

 

$

(4,700)

 

$

(7,091)

 

Interest expense

 

 

13,068

 

 

13,310

 

Provision for income taxes

 

 

159

 

 

168

 

Depreciation and amortization of intangibles

 

 

20,850

 

 

24,457

 

EBITDA

 

$

29,377

 

$

30,844

 

 

 

 

 

 

 

 

 

Other Financial Data:

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

$

(12,750)

 

$

11,805

 

Net cash used in investing activities

 

 

(9,938)

 

 

(18,776)

 

Net cash provided by financing activities

 

 

22,688

 

 

6,971

 

 

 

 

 

 

 

 

 

Other Operating Data (as of end of period):

 

 

 

 

 

 

 

Medical equipment (approximate number of owned outsourcing units)

 

 

246,000

 

 

254,000

 

District service centers

 

 

83

 

 

83

 

SS stand-alone service centers

 

 

5

 

 

5

 

Centers of Excellence

 

 

5

 

 

5

 

 

SEASONALITY

 

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

 

LIQUIDITY AND CAPITAL RESOURCES

 

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

 

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

 

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

 

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

 

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

32


 

 

Net cash (used in) provided by operating activities was $(12.8) and $11.8 million for the three months ended March 31, 2016 and 2015, respectively. The increase in net cash used in operating activities was primarily from the timing of payment of accrued incentives in the first quarter of 2016.

 

Net cash used in investing activities was $9.9 and $18.8 million for the three months ended March 31, 2016 and 2015, respectively.  The decrease in net cash used in investing activities was primarily due to higher proceeds from sale of medical equipment and lower medical equipment purchases during 2016 compared to the same period of 2015.

 

Net cash provided by financing activities was $22.7 and $7.0 million for the three months ended March 31, 2016 and 2015, respectively.  The increase in net cash provided by financing activities was primarily due to higher net borrowings in 2016 compared to the same period of 2015.

 

Based on the level of operating performance expected in 2016, we believe our cash from operations and additional borrowings under our senior secured credit facility will meet our liquidity needs for the foreseeable future, exclusive of any borrowings that we may make to finance potential acquisitions.  However, if during that period or thereafter we are not successful in generating sufficient cash flows from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to us, our business could be adversely affected.  As of March 31, 2016, we had $109.0 million of availability under the senior secured credit facility based on a borrowing base of $166.9 million less borrowings of $54.0 million and after giving effect to $3.9 million used for letters of credit.  As of March 31, 2015, we had $123.6 million of availability under the senior secured credit facility based on a borrowing base of $177.2 million less borrowings of $50.0 million and after giving effect to $3.6 million used for letters of credit.

 

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

 

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

 

RECENT ACCOUNTING PRONOUNCEMENT

 

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

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We do not have any off-balance sheet arrangements.

 

SAFE HARBOR STATEMENT

 

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

 

·

our competitors’ activities;

·

our customers’ patient census or service needs;

·

global economic conditions’ effect on our customers;

·

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

·

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

·

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

·

our relationships with key suppliers;

·

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

·

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

·

our dependence on key personnel;

·

our ability to identify and manage acquisitions;

·

increases in expenses related to our pension plan;

·

our cash flow fluctuation;

33


 

·

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

·

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

·

increased costs we cannot pass through;

·

the failure of any management information system;

·

the inherent limitations on internal controls of our financial reporting;

·

the uncertainty surrounding health care reform initiatives;

·

the federal Privacy law risks;

·

the federal Anti-Kickback law risks;

·

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

·

potential other new healthcare laws or regulations;

·

our customers operate in a highly regulated environment;

·

our fleet’s risk of recalls or obsolescence;

·

our substantial debt service obligations;

·

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

·

our history of net losses and substantial interest expense.

 

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

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

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

 

Interest Rates

 

We use both fixed and variable rate debt as sources of financing.  At March 31, 2016, we had approximately $722.9 million of total debt outstanding before netting with deferred financing costs, of which $54.0 million was bearing interest at variable rates. Based on variable debt levels at March 31, 2016, a 1.0 percentage point change in interest rates on variable rate debt would have resulted in annual interest expense fluctuating by approximately $0.5 million.

 

Fuel Costs

 

We are also exposed to market risks related to changes in the price of gasoline used to fuel our fleet of delivery and sales vehicles.  A hypothetical 10% increase in the first three months of 2016 average price of unleaded gasoline, assuming gasoline usage levels for the three months ended March 31, 2016, would lead to an annual increase in fuel costs of approximately $0.3 million.

 

Pension

 

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

 

Other Market Risk

 

As of March 31, 2016, we have no other material exposure to market risk.

 

Item 4.  Controls and Procedures

 

(a)

Evaluation of disclosure controls and procedures

 

34


 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2016.

 

(b)

Changes in internal control over financial reporting

 

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

 

PART II - OTHER INFORMATION

 

Item 1.Legal Proceedings

 

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

 

Item 1A.  Risk Factors

 

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

 

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

 

None.

 

Item 3.Defaults upon Senior Securities

 

None.

 

Item 4.Mine Safety Disclosures

 

Not applicable.

 

Item 5.Other Information

 

In connection with the Restricted Stock Unit Award Agreement, dated as of April 13, 2015, between Thomas Leonard and the Company, we entered into a promissory note agreement with Mr. Leonard dated April 13, 2016 for a total amount of $1.0 million. This note receivable bears annual interest at 1.45%. The principal and accrued interest of this note is due on the earliest of (i) the seventh anniversary of the date of this loan, (ii) any event with respect to borrower, which, in any such case of the loan were to remain outstanding on and after such date, would result in violation of Section 402 of the Sarbanes-Oxley Act of 2002, (iii) and certain events of default or (iv) a change in control.

 

35


 

Item 6.Exhibits

 

 

 

 

Number

 

Description

 

 

 

10.1 

 

Amendment One to the Employment Agreement, dated March 29, 2016, between Thomas Leonard and Universal Hospital Services, Inc.

 

 

 

10.2 

 

Promissory Note, dated April 13, 2016, between Thomas Leonard and Universal Hospital Services, Inc.

 

 

 

10.3 

 

Joinder to Securityholders Agreement, effective April 13, 2016, between Thomas Leonard and UHS Holdco, Inc.

 

 

 

31.1 

 

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

 

 

 

31.2 

 

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

 

 

 

32.1 

 

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

 

 

 

32.2 

 

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

 

 

 

101 

 

Financial Statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2016, formatted in Extensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Loss, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements.

 


* Furnished, not filed

36


 

SIGNATURES

 

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

 

Date: May 9, 2016

 

 

 

 

Universal Hospital Services, Inc.

 

 

 

By

/s/ Thomas J. Leonard

 

Thomas J. Leonard

 

Chief Executive Officer

 

(Principal Executive Officer and Duly Authorized Officer)

 

 

 

By

/s/ James B. Pekarek

 

James B. Pekarek

 

Executive Vice President and Chief Financial Officer

 

(Principal Financial Officer)

 

37