UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-K

 

(Mark One)

 

☒ Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the fiscal year ended December 31, 2018

 

or

 

☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the transition period from              to             .

 

Commission File Number: 132-02824

 

AGILITI, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		82-1608463
(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)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☒ No ☐

 

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

 

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 the 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)		Emerging growth company ☐

 

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

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

 

The registrant was formed on August 1, 2018 in connection with the business combination between Federal Street Acquisition Corp. and Agiliti Holdco, Inc. The registrant’s common stock is not listed on a  stock exchange or on an over-the-counter market. Accordingly, there was no public market for the registrant’s common stock as of June 30, 2018 or as of the date of this report.

The number of shares of common stock, $0.0001 par value, outstanding as of March 8, 2019 was 98,939,072.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

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AGILITI, INC.

TABLE OF CONTENTS

 

 

 

 

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Introductory Note

 

Agiliti, Inc., a Delaware corporation (“Agiliti”) was formed on August 1, 2018.

 

On January 4, 2019, Agiliti consummated its business combination pursuant to that certain Amended and Restated Agreement and Plan of Merger, dated as of December 19, 2018 (“A&R Merger Agreement”), by and among Federal Street Acquisition Corp., a special purpose acquisition company affiliated with Thomas H. Lee Partners, L.P. (“FSAC”), Agiliti, Umpire SPAC Merger Sub, Inc., a Delaware corporation, Umpire Cash Merger Sub, Inc., a Delaware corporation, Agiliti Holdco, Inc. (previously known as UHS Holdco, Inc.), a Delaware corporation (“Agiliti Holdco” or “Parent”), solely in their capacities as Majority Stockholders, IPC/UHS, L.P. (“IPC/UHS”) and IPC/UHS Co-Investment Partners, L.P., each a Delaware limited partnership, solely in its capacity as the Stockholders’ Representative, IPC/UHS, and solely for the purposes stated therein, Umpire Equity Merger Sub, Inc., a Delaware corporation. The A&R Merger Agreement amended and restated the Agreement and Plan of Merger dated as of August 13, 2018. Pursuant to the A&R Merger Agreement, (i) FSAC became a wholly owned subsidiary of Agiliti and the holders of Class A common stock, par value $0.0001 per share, of FSAC (the “FSAC Class A Common Stock”) received shares of common stock, par value $0.0001 per share, of Agiliti (the “Agiliti Common Stock” or “Common Stock”); and (ii) Agiliti Holdco became a wholly owned subsidiary of FSAC and the equityholders of Agiliti Holdco received cash and/or shares of Agiliti Common Stock and/or fully-vested options to purchase shares of Agiliti Common Stock as merger consideration (the transactions contemplated by the A&R Merger Agreement are referred to herein as the “Business Combination”).   Upon the closing of the Business Combination due to the level of redemptions by FSAC’s public stockholders, Agiliti was unable to comply with the requirements to list on a national stock exchange, and therefore, the Agiliti Common Stock is not listed on a national securities exchange and Agiliti did not become subject to the reporting requirements of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Following the filing of this Annual Report on Form 10-K, we do not anticipate filing any reports with the Securities and Exchange Commission (the “SEC”).

 

On December 3, 2018, prior to the closing of the Business Combination, Agiliti Holdco changed its legal name from UHS Holdco, Inc. to Agiliti Holdco, Inc., and its operating subsidiary changed its legal name from Universal Hospital Services, Inc., to Agiliti Health, Inc. (“Agiliti Health”).

 

At December 31, 2018, Agiliti had no assets, no operations and only nominal capitalization. The historical financial information herein reflects the results of operation and financial position of Agiliti Health for all periods presented.

 

Unless otherwise specified in this Annual Report on Form 10-K, the terms, “we”, “our”, “us” and the “Company” refer to Agiliti Health or Agiliti Holdco prior to the closing of the Business Combination and Agiliti following the Business Combination.

 

PART I

 

ITEM 1:  Business

 

OUR COMPANY

 

We are a leading nationwide provider of end-to-end healthcare technology management and service solutions to the United States healthcare industry. We provide customers with access to high quality healthcare technology and implement comprehensive medical equipment management and service solutions to reduce capital and operating expenses, increase medical equipment and staff productivity and support improved patient safety and outcomes.

 

We commenced operations in 1939, originally incorporated in Minnesota in 1954 and reincorporated in Delaware in 2001. As of December 31, 2018, all of our outstanding capital stock was owned by Parent, which acquired the Company in a recapitalization in May 2007 (the “Transaction”). Following the Business Combination, Parent is controlled by THL Agiliti LLC, an affiliate of Thomas H. Lee Partners, L.P. (“THL Stockholder”).

 

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As of December 31, 2018,  we owned or managed more than 850,000 units of medical equipment consisting of over 350,000 units (including accessories) of owned medical equipment and over 500,000 units of customer-owned equipment. Our diverse customer base includes approximately 7,000 active national, regional and local acute care hospitals and alternate site providers (such as long-term acute care hospitals, skilled nursing facilities, surgery centers, specialty hospitals and home care providers). We also have relationships with more than 200 medical device manufacturers, many of the nation's largest group purchasing organizations ("GPOs") and many health system integrated delivery networks ("IDNs"). We deliver our solutions through our nationwide network of 86 service centers and five Centers of Excellence. Our fees are paid directly by our customers rather than by direct reimbursement from third-party payors, such as private insurers, Medicare or Medicaid.

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

Effective January 1, 2018, the Company changed its segment reporting to report its financial information under one reporting segment. The change in reporting was made to conform to the way the Company currently manages and executes the strategy and operations of the business. Specifically, the chief operating decision maker ("CODM") makes operating decisions and assesses performance using discrete financial information from one reportable segment, as our resources and infrastructure are shared, and as our go-to-market strategy has evolved with the introduction and validation of our Equipment Value Management ("EVM") solution strategy. Current financial information is based upon the transformation of the business model and the development of the Company's commercial framework, EVM—an end-to-end approach to medical equipment management that helps hospitals recover cost and time that today are wasted through inefficient medical equipment processes. EVM integrates customers supply chain, patient care and clinical engineering teams, connecting these siloed groups to streamline processes to improve stakeholder productivity and satisfaction while optimizing equipment utilization and lowering the total cost of ownership. EVM provides the customer with the equipment they need, when they need it, with assurances that the assets are serviced to the highest quality standards in the industry. EVM combines the capabilities of all our service offerings. Further, the Company maintains a   similar complement of services, type of customer for its services, method of distribution for its services, and operates within a similar regulatory environment in the United States. Accordingly, the Company migrated to a consolidated, single-segment reporting model that reflects its strategy and business operations. Finally, the Company analyzed its goodwill for potential impairment before and after the change in reporting units and concluded that there was no impairment.

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

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

Our service solutions consist of Equipment Solutions, Clinical Engineering Solutions and On-Site Managed Services.

Equipment Solutions:  Equipment Solutions primarily provides supplemental, peak need and per-case rental of general biomedical, specialty, and surgical equipment to approximately 7,000 acute care hospitals and alternate site providers in the U.S., including some of the nation's premier healthcare institutions. We contract for Equipment Solutions services directly with customers or through our contractual arrangements with the preeminent GPOs supplying hospital systems

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and alternate site facilities. We consistently achieve high customer satisfaction ratings for excellent service by delivering patient-ready equipment within our contracted equipment delivery times and by providing technical support and educational in-servicing for equipment as needed in clinical departments, including the emergency room, operating room, intensive care, rehabilitation and general patient care areas. We are committed to providing the highest quality of equipment to our customers, and we do so through the use of our comprehensive quality management system (QMS) based on the quality standards recognized worldwide for medical devices: 21 CFR 820 and ISO 13485:2016. This commitment ensures our customers have access to patient-ready equipment in support of provider goals to ensure optimal patient safety and outcomes.

Clinical Engineering Solutions:  Clinical Engineering Solutions provides maintenance, repair and remediation solutions for all types of medical equipment,  including general biomedical equipment and diagnostic imaging equipment,  through supplemental and outsourced offerings. Our supplemental offering helps customers manage their equipment backlog, assist with remediation and regulatory reporting and temporarily fill open positions. With our outsourced offering, we assume full management, staffing and clinical engineering service responsibilities for individual or system-wide customer sites. The outsourced model deploys a dedicated, on-site team to coordinate the management of customer-owned equipment utilizing our proprietary information systems, third party vendors of services and parts, and a broad range of professional services for capital equipment planning and regulatory compliance. We can leverage more than 400 technical resources from our 86 local market service centers and five Centers of Excellence to flex staff in and out of customer facilities on an as-needed basis, ensuring customers pay only for time spent directly servicing their equipment by an appropriately qualified technician. We utilize flex staffing for our supplemental clinical engineering solution and to augment support when additional technicians are needed to supplement our outsourced solution during peak work load. We contract our Clinical Engineering Solutions with acute care and alternate site facilities across the U.S., as well as with the federal government and many   medical device manufacturers that require a broad logistical footprint to support their large-scale service needs.

On-Site Managed Services:  On-Site Managed "360" Services are comprehensive programs that assume full responsibility for the management, processing and logistics of medical equipment at customer facilities and IDNs, with the added benefit of enhancing equipment utilization and freeing up non-value added clinician time for patient care. This solution monitors and adjusts equipment quantities to meet fluctuations in patient census and acuity. Our employees work on-site in customer facilities, augmenting clinical support by integrating proven equipment management processes, utilizing our proprietary management software and conducting daily rounds and unit-based training to ensure equipment is being used properly to optimize day-to-day operations and care outcomes. We assume full responsibility for ensuring equipment is available when and where it is needed, removing equipment when no longer in use, and decontaminating, testing and servicing equipment as needed between each patient use. We provide On-Site Managed Services in both our legacy Asset360 (A360) programs (utilizing our-owned equipment) and our faster growing Managed360 (M360) programs (managing customer-owned equipment).

 

VALUE OF OUR SOLUTIONS

 

Our solutions enable healthcare providers to replace the fixed costs of owning and/or leasing medical equipment with variable costs that are more closely related to their patient census and patient acuity. Our services can also eliminate significant capital costs associated with equipment acquisitions and liability associated with equipment ownership.  By partnering with us, our customers have the benefits of:

 

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In addition to providing significant flexibility, we employ technical, clinical and financial specialists that directly interact with our customers to ensure we are optimizing our equipment outsourcing solutions. We believe that these experts enhance our ability to deliver on the above-specified benefits to our customers.

 

BUSINESS OPERATIONS

 

Service Centers

 

As of December 31, 2018, we operated 86 local m arket service centers which allow us to provide our end-to-end healthcare technology management and service solutions to customers in virtually all markets throughout the United States.  Each service center is responsible for supporting the equipment management needs of its local healthcare market across all sites of care.  Each service center maintains an inventory of locally demanded equipment, parts, supplies and other items tailored to accommodate the needs of individual customers within its geographical area. Should additional or unusual equipment be required by one of our customers, a local service center can draw upon the resources of our other service centers.  With access to more than 850,000  owned or managed units of medical equipment available for customer use as of December 31, 2018, we can most often obtain the necessary equipment within 24 hours.

 

Depending on market size and demands, our service centers are staffed by multi-disciplined teams of sales professionals, service representatives, customer service technicians, clinical engineering (biomedical) equipment technicians and surgical services technologists trained to deliver on our complete portfolio of customer solutions. Employees providing resident-based services through our on-site managed programs are supported by local site managers and/or the service centers in the markets where those customers are located.

 

Centers of Excellence

 

Our local market service center network is supported by five strategically located Centers of Excellence.  These centers focus on providing highly specialized clinical engineering service and support.  The Centers of Excellence also provide overflow support, technical expertise, training programs and specialized service functions for our local service centers.  All specialized depot work required by our manufacturer customers resides within these Centers of Excellence.  All five of our Centers of Excellence are certified as being in compliance with the International Organization for Standardization (“ISO”) 13485:2016 as a quality commitment to our customers.

 

Centralized Functions

 

Our corporate office is located in Minneapolis, Minnesota. We have centralized many of the key elements of our equipment and service offerings in order to create standardization and to maximize our operating efficiencies and uniformity of service.  Some of the critical aspects of our business centralized within our corporate office include contract administration, marketing, purchasing, pricing, logistics, accounting and information technology.

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Medical Equipment Fleet

 

We acquire or manage medical equipment to meet our customers’ needs in some of the following product areas: respiratory therapy, infusion therapy, newborn care, critical care, patient monitors, specialty beds and therapy surfaces (which includes fall management equipment, bariatrics equipment,  pressure area management and wound therapy equipment, stretchers and wheelchairs) and surgical equipment. We believe we maintain one of the most technologically advanced and comprehensive equipment fleets in the industry, routinely acquiring new and certified pre-owned equipment to enhance our fleet.  Our specialized equipment portfolio managers evaluate new products each year to keep abreast of current market technology and to determine whether to add new products to our equipment fleet.  In making equipment purchases, we consider a variety of factors, including manufacturer credibility, repair and maintenance costs, anticipated user demand, equipment mobility and anticipated obsolescence.  During the year ended December 31, 2018, we owned or managed more than 850,000 units of medical equipment available for use by our customers.

 

In 2018, our ten largest manufacturers of medical equipment supplied approximately 73% (measured in dollars spent) of our direct medical equipment purchases.  In 2018, three of our largest medical equipment suppliers accounted for approximately 42% of our medical equipment purchases (measured in dollars spent).

 

We seek to ensure availability of equipment at favorable prices. We generally do not enter into long-term fixed price contracts with suppliers of our equipment.  We may receive price discounts related to the volume and timing of our purchases. The purchase price we pay for equipment generally ranges from $1,000 to $42,000 per item for general medical equipment and up to $550,000 per item for surgical equipment.

 

COMPETITIVE STRENGTHS

 

We believe our business model presents an attractive value proposition to our customers and that our end-to-end Equipment Value Management (EVM) solution has contributed to our growth in recent years. Our unique solution for end-to-end medical equipment management, delivered through our nationwide service and logistics infrastructure, differentiates us in the marketplace and is without comparable peer. We believe our more than 75 years of experience, our nationwide operating footprint and our reputation for service excellence has earned us a leading position in our industry.

 

We attribute our historical success to, and believe that our potential for future growth comes from, the following strengths:

 

Unique position in healthcare.   We believe we are unique in providing the largest breadth and depth of comprehensive healthcare technology management and service solutions to the U.S. healthcare industry.  While some competitors may offer products and services in various stages of the equipment lifecycle, we believe we are the only company that provides a comprehensive, end-to-end equipment management approach that solves significant challenges caused by a fragmented equipment management process across multiple hospital departments, including nursing, supply chain,  clinical engineering and information technology.  Our extensive relationships with approximately  7,000 hospitals and alternate site providers, more than 200 medical device manufacturers and many of the nation’s largest GPOs and IDNs, of which many are long-standing, present a unique position and value proposition in the healthcare arena.

 

We are uniquely positioned in the healthcare industry as a result of our:

 

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Large, modern equipment fleet.   We own or manage an extensive, modern fleet of medical equipment, which during the year ended December 31, 2018, consisted of more than 850,000  units available for use to our customers. This equipment fleet, along with our quality assurance programs, places us in a unique position to service “high end” acute care hospitals, such as teaching, research or specialty institutions that demand access to current and preferred technologies to meet the complex needs of their patients.

 

Nationwide infrastructure .   We have a broad, nationwide staff, facility, and vehicle service network coupled with focused and customized operations at the local level. Our extensive network of service centers and Centers of Excellence and our 24-hours-a-day, 365 days-a-year service capabilities enable us to compete effectively for large, national contracts as well as drive growth regionally and locally.

  

Proprietary software and asset management tools .   We have used our more than 75 years of experience and our extensive database of equipment management information to develop sophisticated software technology and management tools.  These tools have allowed us to become a leader in meeting the demands of customers by delivering sophisticated on-site managed services that we use to drive cost efficiencies and equipment productivity, while supporting the needs of caregivers.  We believe that our continued and significant investment in new tools and technology will help us to continue to distinguish our offerings to the healthcare industry.

 

Superior customer service.    We believe we have a long-standing reputation among our customers for outstanding service and quality.  This reputation is largely due to our strong customer service culture, which is continuously reinforced by management’s commitment to, and significant investment in, hiring and training resources.  We strive to seamlessly integrate our employees and solutions into the operations of our customers.  Our aggressive focus on the overall customer experience has helped us achieve a high customer retention rate and high customer satisfaction ratings.

 

Proven management team.   We have an industry leading management team with significant depth of experience.  Our management team has successfully supervised the development of our competitive strategy, continually enhanced and expanded our service and product offerings, reinforced our nationwide operating footprint and furthered our reputation as an industry leader in our category.

 

Industry with favorable fundamentals.   Our business benefits from the overall favorable trends in healthcare in general and our service solutions in particular.  There is a fundamental shift in the needs of hospitals and alternate site providers from supplemental and peak needs supply of medical equipment to full, on-site managed solutions.  This move to full outsourcing is not unlike trends in similar services at hospitals including food service, laundry, professional staffing and technology.  The strong fundamentals in our service solutions are being driven by the following trends:

 

 

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No direct third-party payor reimbursement risk.    Many healthcare providers rely on payment from patients or reimbursement from third-party payors. Our fees are paid directly by our customers, rather than by third-party payors, such as Medicare, Medicaid, managed care organizations or indemnity insurers. Accordingly, our exposure to uncollectible patient or reimbursement receivables or Medicare or Medicaid reimbursement changes is reduced, as evidenced by our bad debt expense of approximately 0.4%,  0.1% and 0.0% of total revenue for the years ended December 31, 2018,  2017 and 2016, respectively.

 

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Strong value proposition.    With our focus and expertise in comprehensive, end-to-end medical equipment management and service solutions, we offer a strong value proposition for customers.  Our comprehensive solutions focus on helping customers:

 

 

Technical, clinical and financial specialists.  We employ a number of technical, clinical and financial specialists that engage directly with our customers to drive improved cost, efficiency and clinical outcomes. Our specialists employ:

 

 

Commitment to quality.   Third-party service providers like our Company are not required to register with the FDA; therefore, there are no regulations that specifically apply to our work in maintaining medical devices. However, we choose to do the right thing for our customers and their patients by staffing a dedicated Quality team that has designed and implemented a quality management system (QMS) based on the quality standards recognized worldwide for medical devices: 21 CFR 820 and ISO 13485:2016. This commitment to quality ensures that patient safety and risk management are at the center of every quality decision, and that our equipment is serviced to the highest standards in the industry. All 86 local market service centers and five COEs utilize the same QMS, and we have elected to hire an outside independent notified body to audit our quality management system. As a sample of the entire QMS, British Standards Institute (BSI) audits our COEs annually and has certified them to ISO 13485:2016. We believe that ISO 13485:2016 provides the stringent guidelines specific to medical devices to ensure that our fleet of equipment, as well as the equipment we service, is maintained to the highest quality standards. Our commitment to quality extends to our exclusive use of Original Equipment Manufacturer (OEM) parts to repair FDA registered medical devices that we own, whenever available. We believe that this business decision and our robust QMS policies set us apart in our industry from those who may use less stringent quality practices on the equipment they own or maintain.

 

Performance and reliability in times of customer need.  We believe that many of our customers have come to rely on our ability to respond quickly to their needs with reliable, high quality customer service. We believe our ability to provide this level of service distinguishes us from our competitors. It also requires us to maintain inventories and infrastructure that we do not believe our competitors currently maintain.

 

GROWTH STRATEGY

 

Historically, we have experienced significant and sustained organic and strategic growth.  Our overall growth strategy is to continue to grow both organically and through strategic acquisitions.

 

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Organic Growth

 

We believe that the following external and market factors will provide us significant growth opportunities:

 

 

EMPLOYEES

 

We had 3,083 regular employees as of December 31, 2018, including 2,662 full-time and 421 part-time employees. Of such employees, 172 were sales representatives, 2,681 were operations personnel and 230 were employed in corporate support functions.

 

None of our employees are covered by a collective bargaining agreement, and we have experienced no work stoppages to date. We believe that our relations with our employees are good.

 

INTELLECTUAL PROPERTY

 

We have registrations with the United States Patent and Trademark Office for the following marks: Asset360® and BioMed360®; “Universal Hospital Services, Inc.,” ‘‘UHS®’’ and the UHS logo; “OnCare,” “Harmony,” “MedPrime Capital,” and “CHAMP.” We have applications pending with the United States Patent and Trademark Office for the following marks: “Quartet,” “Agiliti” and the Agiliti logo. United States service mark registrations are generally for a term of 10 years, renewable every 10 years if the mark is used in the regular course of business.

 

We have a domain name registration for agilitihealth.com, which serves as our main website, and UHS.com. In 2011, we registered the domain name OnCareMedical.com featuring our OnCare™ sub-brand for patient handling products. In 2012, we registered UHSSurgicalServices.com. In 2016, we acquired resxray.com.

 

We have developed a number of proprietary software programs to directly service or support our customers including “ in Care™” which is a medical equipment inventory management system that allows us to track the location and usage of equipment we are managing at a customer’s location in our 360 Solutions. “MyAgiliti™” is our online ordering and reporting site which accesses our proprietary programs specifically designed to help customers meet medical equipment documentation and reporting needs under applicable regulations and standards, such as those promulgated by the FDA and The Joint Commission. Additionally, this tool provides detailed reporting on utilization, compliance, and analytics for management. “ in Service™” is our equipment maintenance and planning system which houses our work order system and assists in our customers regulatory compliance recordkeeping.  “ Scheduler ™” is our web-based scheduling, tracking, reporting and physician preference system for Agiliti Surgical solutions. “ in Command™” encompasses the proprietary software tools that allow our employees to manage and maintain our extensive equipment fleet and serve our customers more effectively and efficiently.

 

MARKETING

 

We market our programs primarily through our direct sales force, which consisted of 172 professional sales representatives as of December 31, 2018.  Our direct sales force is organized into three regions and nine sales divisions.  We support our direct sales force with technical, clinical, surgical and financial specialists, who provide comprehensive solutions for our customers. Our national accounts team also supports our direct sales force through its focus on securing national and regional contracts. The members of the sales force are compensated with a combination of base pay and variable incentive pay. The percentage of each individual's overall compensation that is comprised of

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base pay versus variable incentive pay is dependent on the individual's position. Sales force members whose primary responsibility is account management receive a higher percentage of base pay, while sale force members whose primary responsibility is the generation of new business receive a higher percentage of variable incentive pay. The actual variable incentive pay received by an individual is based on his or her achievement of certain performance metrics, including revenue, earnings and/or new business milestones.

 

We also market through our websites ,  www.agilitihealth.com  and www.OnCareMedical.com and various social media platforms,  and we participate in numerous national and regional conventions where we interact with industry groups and opinion leaders. Information presented on our website is not incorporated by reference and should not be considered a part of our Annual Report on Form 10-K.

 

In our marketing efforts, we primarily target key decision makers such as administrators, chief executive officers, chief financial officers, chief technology officers, chief medical officers, and chief nursing officers as well as physicians, directors and managers of functional departments, such as supply chain, materials management, surgery, purchasing, pharmacy, biomedical services, and clinical engineering. We also promote solutions to IDNs, hospitals, surgery centers, manufacturers and alternate site provider groups and associations.

 

SEASONALITY AND BUSINESS INTERRUPTION

 

Quarterly operating results are typically affected by seasonal factors.  Historically, our first and fourth quarters are the strongest, reflecting increased hospital census and patient acuity during the fall and winter months.  Our business can also be impacted by natural disasters, such as hurricanes and earthquakes, which affect our ability to transfer equipment to and from our customers, and equipment recalls, which can cause equipment to be removed from market use.  We also see declines in our business in down economic cycles with high levels of unemployment. Our customers typically see weaker census and higher levels of indigent patients during these times, causing them to use fewer of our solutions.

 

REGULATORY MATTERS 

 

Regulation of Medical Equipment

 

Our customers are subject to documentation and safety reporting regulations and standards with respect to the medical equipment they use, including those established by the FDA, Centers for Medicare and Medicaid Services (“CMS”) and the NFPA. Various states and municipalities may also have similar regulations.

 

We monitor changes in regulations and standards to accommodate the needs of customers by providing specific product and manufacturer information upon request. Manufacturers of medical equipment are subject to regulation by agencies and organizations such as the FDA, Underwriters Laboratories and the NFPA. We believe that all medical equipment we outsource conforms to these regulations.

 

The Safe Medical Devices Act of 1990 (“SMDA”), which amended the Food, Drug and Cosmetic Act (“FDCA”), requires manufacturers, user facilities and importers of medical devices to report deaths and serious injuries which a device has or may have caused or to which a device has or may have contributed.  In addition, the SMDA requires the establishment and maintenance of adverse event files and various other FDA reports. Manufacturers and importers are also required to report certain device malfunctions. We work with our customers to assist them in meeting their reporting obligations under the FDCA, including those requirements added by the SMDA.

 

Besides the FDA, a number of states regulate medical device distributors and wholesalers either through pharmacy or device distributor licensure. Currently, we hold such licenses in 17 states. Some licensure regulations and statutes in additional states may apply to our activities. Although our failure to possess such licenses in these states for our existing operations may subject us to certain monetary fines, we do not believe the extent of such fines, in the aggregate, would be material to our liquidity, financial condition or results of operations.

 

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In addition, we are required to provide information to manufacturers regarding the permanent disposal or any change in ownership of certain categories of medical outsourcing equipment. We believe our medical equipment tracking systems are in compliance with these regulations.

 

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) applies to certain covered entities, including health plans, healthcare clearinghouses and healthcare providers, as well as to business associates such as us.  HIPAA regulations protect individually identifiable health information, including information in an electronic format, by, among other things, setting forth specific standards under which such information may be used and disclosed, providing patients rights to obtain and amend their health information, requiring notification to individuals, federal and state agencies and media outlets in the event of a breach of health information and establishing certain administrative requirements for covered entities. The Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”) created legal obligations for business associates and extended criminal and civil sanctions to business associates for violations of HIPAA requirements.

 

Because of our self-insured health plans, we are also a covered entity under the HIPAA regulations.  Also, we may be obligated to comply with certain HIPAA requirements as a business associate of various healthcare providers.  In addition, various state legislatures have enacted and may continue to enact additional privacy legislation that is not preempted by the federal law, which may impose additional burdens on us.  Moreover, other federal privacy legislation may be enacted.  Accordingly, we have made and, as new standards go into effect, we expect to continue to make administrative, operational and information infrastructure changes in order to comply with these requirements.

 

The Patient Protection and Affordable Care Act and The HealthCare and Education Responsibility Act of 2010 (together, the “Affordable Care Act”) have and will result in significant reforms to the U.S. healthcare system and the structure of the healthcare provider delivery system.  The Affordable Care Act calls for additional transparency around payments made by the pharmaceutical and medical device industries to doctors and teaching hospitals, which may include gifts, food, travel and speaking or consultancy fees. All U.S. manufacturers of drugs, devices, biologics or medical supplies, including distributors who hold title to such drugs, devices, biologics, or medical supplies, for which payment is available under government-funded health insurance programs (i.e., Medicare, Medicaid and the State Children’s Health Insurance Program) must report annually to the U.S. Department of Health and Human Services any payment or gift, which represents a “transfer of value,” to a physician or teaching hospital, including detailed information about the nature and value of remuneration provided, and the identity of the receiving physician or teaching hospital. Additionally, states may require manufacturers to report information that is not required or is exempted under the federal reporting requirements. For example, a state may require manufacturers to report advertising expenditures, loans of medical devices, in-kind gifts to charities and payments to other recipients, group purchasing organizations and retailers.  We identify applicable state reporting requirements as they become effective.

 

Although our business is not currently extensively regulated under healthcare laws, we are subject to certain regulatory requirements as discussed above and our customers are subject to direct regulation under the Federal False Claims Act, the Stark Law, the Anti-Kickback Law, rules and regulations of the CMS, and other federal and state healthcare laws and regulations. Promulgation of new laws and regulations, or changes in or re-interpretations of existing laws and regulations, could affect our business, operating results or financial condition. Our operations may be negatively impacted if we have to comply with additional complex government regulations.

 

Third-Party Reimbursement

 

Our fees are paid directly by our customers rather than through direct reimbursement from third-party payors, such as Medicare or Medicaid.  We do not bill the patient, the insurer or other third-party payors directly for services provided for hospital or alternate site provider inpatients or outpatients.  Sometimes our customers are eligible to receive third-party reimbursement for our services. Consequently, the reimbursement policies of such third-party payors have a direct effect on the ability of healthcare providers to pay for our services and an indirect effect on our level of charges.  Also, in certain circumstances, third-party payors may take regulatory or other action against service providers even though the service provider does not receive direct reimbursement from third-party payors.

 

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Hospitals and alternate site providers face cost containment pressures from public and private insurers and other managed care providers, such as health maintenance organizations, preferred provider organizations and managed fee-for-service plans, as these organizations continue to place controls on the reimbursement and utilization of healthcare services. We believe that these payors have followed or will follow the government in limiting the services that are reimbursed and in exerting downward pressure on prices. In addition to promoting managed care plans, employers are increasingly self-funding their benefit programs and shifting costs to employees through increased deductibles, co-payments and employee contributions.  Hospitals and healthcare facilities are also experiencing an increase in uncompensated care or “charity care,” which causes increased economic pressures on these organizations.  We believe that these cost reduction efforts will place additional pressures on healthcare providers’ operating margins and will encourage efficient equipment management practices such as the use of our outsourcing and 360 on-site managed solutions.

 

Liability and Insurance

 

Although we do not manufacture any medical equipment, our business entails the risk of claims related to the outsourcing, sale and service of medical equipment.  In addition, our instruction of hospital and alternate site provider employees with respect to the use of equipment and our professional consulting services are sources of potential claims.  We have not suffered a material loss due to a claim.  However, any such claim, if made, could have a material adverse effect on our business.  While we do not currently provide any services that require us to work directly with patients, expansion of services in the future could involve such activities and subject us to claims from patients.

 

We maintain a number of insurance policies, including commercial general liability coverage (product and premises liability insurance), automobile liability insurance, worker’s compensation insurance and professional liability insurance.  We also maintain excess liability coverage.  Our policies are subject to annual renewal.  We believe that our current insurance coverage is adequate.  Claims exceeding such coverage may be made and we may not be able to continue to obtain liability insurance at acceptable levels of cost and coverage.

 

ITEM 1A:  Risk Factors

 

Our business is subject to various risks and uncertainties. Any of the risks discussed below, or elsewhere in this Annual Report on Form 10-K or our other filings with the SEC, could materially adversely affect our business, financial condition or results of operations.

 

Risks Related to Our Business and Industry

 

Our competitors may engage in significant competitive practices, which could cause us to lose market share, reduce prices or increase expenditures.

 

Our competition may engage in competitive practices that could cause us to lose market share, reduce our prices, or increase our expenditures.  For example, competitors may sell significant amounts of surplus equipment or sell capital equipment at a lower gross margin to obtain the future repeat sales of disposables for a higher gross margin, thereby decreasing the demand for our equipment solutions. Additionally, the overall market for our services is very competitive and our competitors often compete by lowering prices, thus impacting gross margin.

 

Our competitors may bundle products and services offered to customers, some of which we do not offer.

 

If competitors offer their products and services to customers on a combined basis with reduced prices, and we do not offer some of these products or cannot offer them on comparable terms, we may have a competitive disadvantage that will lower the demand for our solutions.

 

If our customers’ patient census or services decrease, the revenue generated by our business could decrease.

 

Our operating results are dependent in part on the amount and types of equipment necessary to service our customers’ needs, which are heavily influenced by the number of patients our customers serve at any time (which we refer to as

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“patient census”) and the services those patients receive.  At times of lower patient census, our customers have a decreased need for our services on a supplemental or peak needs basis.  During severe economic downturns, the number of hospital admissions and inpatient surgeries declines as consumers reduce their use of non-essential healthcare services.  Our operating results can also vary depending on the timing and severity of the cold and flu season, local, regional or national epidemics, and the impact of national catastrophes, as well as other factors affecting patient census and service demand.

 

Another global economic downturn could adversely affect our customers and suppliers or have new, additional adverse effects on them, which could have further adverse effects on our operating results and financial position.

 

We believe our customers could be adversely affected by another global economic downturn. The impact of another downturn on our customers may result in, among other things, decreased patient census, decreased number of non-essential patient services, increased uncompensated care and bad debt, increased difficulty obtaining financing on favorable terms and tighter capital and operating budgets.  Many of our customers depend on investment income to supplement inadequate third-party payor reimbursement.  Further disruption in the capital and credit markets could adversely affect the value of many investments, reducing our customers’ ability to access cash reserves to fund their operations.  If economic conditions worsen, our customers may seek to further reduce their costs and may be unable to pay for our solutions, resulting in reduced orders, slower payment cycles, increased bad debt, and customer bankruptcies.

 

Our suppliers also may be negatively impacted by another economic downturn and tighter capital and credit markets.  If our key suppliers experience financial difficulty and are unable to deliver to us the equipment we require, we could be forced to seek alternative sources of medical equipment or to purchase equipment on less favorable terms, or we could be unable to fulfill our requirements.  A delay in procuring equipment or an increase in the cost to purchase equipment could limit our ability to provide equipment to customers on a timely and cost-effective basis. All of these factors are related to a general economic downturn, which is out of our control, and could have a negative impact on our financial condition.

 

If we are unable to maintain existing contracts or contract terms with, or enter into new contracts with our customers, we may lose customers and/or the associated revenues.

 

Our revenue maintenance and growth depend, in part, on continuing contracts with customers, including through GPOs and IDNs, with which certain of our customers are affiliated.  In the past, we have been able to maintain and renew the majority of such contracts and expand the solutions we offer under such contracts.  If we are unable to maintain our contracts, or if the GPOs or IDNs seek additional discounts or other more beneficial terms on behalf of their members, we may lose a portion or all of existing business with, or revenues from, customers that are members of such GPOs and IDNs.

 

One customer, Memorial Hermann Health System, accounted for approximately 13% of total revenue in 2018.  We are operating under multi-year agreements with customary terms and conditions with this customer. To the extent the contracts are not renewed or are terminated, our revenue and operating results would be significantly impacted.

 

Consolidation in the healthcare industry may lead to a reduction in the prices we charge, thereby decreasing our revenue.

 

Many hospitals and alternate site providers have combined to create health systems or IDNs.  We believe this trend may continue.  Any resulting IDN or health systems may have greater bargaining power over us, which could lead to a reduction in the prices we charge and a reduction in our revenue.

 

We have relationships with certain key suppliers, and adverse developments concerning these suppliers could delay our ability to procure equipment or provide certain services, or increase our cost of purchasing equipment.

 

We purchased medical equipment from approximately 148 manufacturers in 2018.  Our ten largest manufacturers of medical equipment accounted for approximately 73% of our direct medical equipment purchases in 2018.  Adverse developments concerning key suppliers or our relationships with them could force us to seek alternative sources for our

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medical equipment or to purchase such equipment on less favorable terms.  A delay in procuring equipment or an increase in our cost to purchase equipment could limit our ability to provide equipment to our customers on a timely and cost-effective basis.  In addition, if we do not have access to certain parts, or if manufacturers do not provide access to the appropriate equipment manuals or training, we may not be able to provide certain clinical engineering services.

 

If we are unable to change the manner in which healthcare providers traditionally procure medical equipment, we may not be able to achieve significant revenue growth.

 

We believe that the strongest competition to our solution offerings is the direct purchase or capital lease of medical equipment, and self-management of that equipment.  Many hospitals and alternate site providers view equipment rental primarily as a means of meeting short-term or peak supplemental needs, rather than as a long-term, effective and cost-efficient alternative to purchasing or leasing equipment.  Many healthcare providers may continue to purchase or lease a substantial portion of their medical equipment and to manage and maintain it on their own.

 

A substantial portion of our revenues come from customers with which we do not have long-term commitments, and cancellations by or disputes with customers could decrease the amount of revenue we generate, thereby reducing our ability to operate and expand our business.

 

For the year ended December 31, 2018, approximately 54% of our total revenue was derived from customers that purchased equipment or services from us through a GPO that contracted with us on behalf of its members.  The source of the remaining 46% of revenue was from customers that do not purchase equipment or services from us through a GPO contract.  Our customers are generally not obligated to outsource our equipment under long-term commitments.  In addition, many of our customers do not sign written contracts with us fixing the rights and obligations of the parties regarding matters such as billing, liability, warranty or use.  Therefore, we face risks such as fluctuations in usage, inaccurate or false reporting of usage by customers and disputes over liabilities related to equipment use.  The non-contracted services we provide could be terminated by the customer without notice or payment of any termination fee.  A large number of such terminations may adversely affect our ability to generate revenue growth and sufficient cash flows to support our growth plans.  In addition, those customers with long-term commitments may have contracts that do not permit us to raise our prices, yet our cost to serve may increase. Any of these risks could reduce our ability to operate and expand our business.

 

We depend on key personnel and our inability to attract and retain key personnel could harm our business.

 

Our financial performance is dependent in significant part on our ability to hire, develop and retain key personnel, including our senior executives, sales professionals, sales specialists, hospital management employees and other qualified workers.  We have experienced and will continue to experience intense competition for these resources.  The loss of the services of one or more of our senior executives or other key personnel could significantly undermine our management expertise, key relationships with customers and suppliers, and our ability to provide efficient, quality healthcare solutions. 

 

We may be unable to make attractive acquisitions or succesfully integrate acquired businesses, and any inability to do so may disrupt our business and hinder our ability to grow.

 

From time to time, we may evaluate acquisition candidates or other strategic relationships within the healthcare industry that may strategically fit our business objectives. However, there is no guarantee we will be able to identify attractive acquisition opportunities. In the event we are able to identify attractive acquisition opportunities, we may not be able to complete the acquisition or do so on commercially acceptable terms. We may not be successful in acquiring other businesses, and the businesses we do acquire in the future may not ultimately produce returns that justify our related investment.

 

 

 

 

 

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Acquisitions may involve numerous risks, including:

 

 

We may incur increased expenses related to our pension plan, which could impact our financial position.

 

We have a defined benefit pension plan covering certain current and former employees.  Although benefits under the pension plan were frozen in 2002, funding obligations under the pension plan continue to be impacted by the performance of the financial markets.  If the financial markets do not provide the long-term returns we have assumed, the likelihood of us being required to make additional contributions will increase.  The equity and debt markets can be, and recently have been, volatile, and therefore our estimate of future contribution requirements can change dramatically in relatively short periods of time.

 

Our cash flow fluctuates during the year because operating income as a percentage of revenue fluctuates with our quarterly operating results and we make semi-annual debt service payments.

 

Our results of operations have been and can be expected to be subject to quarterly fluctuations.  We may experience increased revenue in the first and fourth quarters of the year, depending upon the timing and severity of the cold and flu season and the related increased hospital census and medical equipment usage during that season. Because a significant portion of our expenses are relatively fixed over these periods, our operating income as a percentage of revenue tends to increase during the first and fourth quarter of each year.  If the cold and flu season is delayed by as little as one month, or is less severe than in prior periods, our quarterly operating results for a current period can vary significantly from prior periods.  Our quarterly results can also fluctuate as a result of such other factors as the timing of acquisitions, new on-site managed solution agreements or new service center openings.

 

A portion of our revenues are derived from home care providers and nursing homes, and these healthcare providers may pose additional credit risks.

 

Our nursing home and home care customers may pose additional credit risks since they are generally less financially sound than hospitals.  These customers continue to face cost pressures.  We may incur losses in the future due to the credit risks, including potential bankruptcy filings, associated with any of these customers.

 

Although we do not manufacture any medical equipment, our business entails the risk of claims related to the medical equipment that we outsource and service.  We may not have adequate insurance to cover a claim, and it may be more expensive or difficult for us to obtain adequate insurance in the future.

 

We may be liable for claims related to the use of our medical equipment or to our maintenance or repair of a customer’s medical equipment.  Any such claims, if made and upheld, could make our business more expensive to operate and therefore less profitable. We may be subject to claims exceeding our insurance coverage or we may not be able to continue to obtain liability insurance at acceptable levels of cost and coverage.  If we are found liable for any significant claims that are not covered by insurance, our liquidity and operating results could be materially adversely affected.  In addition, litigation relating to a claim could adversely affect our existing and potential customer relationships, create adverse public relations and divert management’s time and resources from the operation of the business.

 

We may incur increased costs that we cannot pass through to our customers.

 

Our customer contracts may include limitations on our ability to increase prices over the term of the contract. On the other hand, we rely on third parties, including subcontractors, to provide some of our services and supplies and we do not always have fixed pricing contracts with these subcontractors. Therefore, we are at risk of incurring increased costs that we are unable to pass through to our customers.

 

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Any failure of our management information systems could harm our business and operating results.

 

We depend on our management information systems to actively manage our medical equipment fleet, control capital spending, and provide fleet information, including equipment usage history, condition and availability of our medical equipment.  These functions enhance our ability to optimize fleet utilization and redeployment.  The inability of our management information systems to operate as we anticipate could damage our reputation with our customers, disrupt our business or result in, among other things, decreased revenue and increased overhead costs.  Any such failure could harm our business and results of operations.  Our results of operations could be adversely affected if these systems, or our customers' access to them, are interrupted, damaged by unforeseen events, cyber security incidents or other actions of third parties, or fail for any extended period of time.  In addition, data security breaches could adversely impact our operations, results of operations or our ability to satisfy legal requirements, including those related to patient-identifiable health information.

 

There are inherent limitations in all internal control systems over financial reporting, and misstatements due to error or fraud may occur and not be detected.

 

While we have taken actions designed to address compliance with the internal control over financial reporting and disclosure controls and other requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated by the SEC implementing these requirements, there are inherent limitations in our ability to control all circumstances.  We do not expect that our internal control over financial reporting and disclosure controls will prevent all error and all fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, in our Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes.  Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls.  The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, a control may be inadequate because of changes in conditions, such as growth of the Company or increased transaction volume, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

Risks Related to HealthCare and Other Legal Regulation Affecting Us

 

Uncertainty surrounding healthcare reform initiatives remains.  Depending on the scope, form, and implementation of final healthcare reform legislation, our business may be adversely affected.

 

The healthcare industry is undergoing significant change. In March 2010, the Congress adopted and President Obama signed into law the Affordable Care Act. The Affordable Care Act increased the number of Americans with health insurance and employer mandates and subsidies offered to lower income individuals. While the increase in coverage could translate into increased utilization of our products and services, healthcare reform and political uncertainty have historically resulted in changes in how our customers purchase our services and have adversely affected our revenue. Provider revenue per service may decline with reductions in Medicare and Medicaid reimbursement. Furthermore, the implementation of the Affordable Care Act may impose changes in healthcare delivery, reimbursement, operations or record keeping that are not compatible with our current offerings, which could force us to incur additional compliance costs. So far, starting in 2013, our business, along with that of some of our suppliers and customers that are manufacturers, came under direct regulation of the Open Payments Law, specifically the Physician Payments Sunshine Act. The Open Payments Law requires the annual reporting and publishing of all transfers of value to physicians and teaching hospitals to give greater transparency to financial relationships between manufacturers, physicians and teaching hospitals.  Federal and state governments also continue to enact and consider various legislative and regulatory proposals that could materially impact certain aspects of the healthcare system. We cannot predict with certainty what healthcare initiatives, if any, will be implemented or what the ultimate effect of federal healthcare reform (including, but not limited

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to, the Affordable Care Act) or any future legislation or regulation will have on our operating results or financial condition. Finally, we cannot quantify or predict with any certainty the likely impact of the repeal of the individual mandate, effective in 2019, under the Affordable Care Act on our business model, prospects, financial condition or results of operations.

 

Recently enacted amendments to federal privacy laws make us subject to more stringent penalties in the event we improperly use or disclose protected health information regarding our customers’ patients.

 

The HITECH Act expanded the scope of the privacy and security requirements under HIPAA and increased penalties for violations to “Business Associates,” which includes us. Business Associates such as Agiliti Health are required to comply with certain of the HIPAA privacy standards and are required to implement administrative, physical and technical security standards to protect the integrity, confidentiality and availability of certain electronic health information they receive, maintain or transmit. In addition, the HITECH Act enacted federal breach notification rules requiring notification to affected individuals and the Department of Health and Human Services (and in some cases, relevant media outlets) whenever a breach of personal health information occurs. In addition, the HIPAA rules now involve increased penalties, including mandatory penalties for “willful neglect” violations, starting at $100 per violation subject to a cap of $1.5 million for violations of the same standard in a single calendar year.  State attorneys general are also authorized to enforce federal HIPAA privacy and security rules. Our operations could be negatively impacted by a violation of the HIPAA privacy or security rules and our reputation could suffer in the event of a data breach involving a  significant number of individuals.

 

Many states in which we operate also have state laws that protect the privacy and security of confidential, personal information that have similar or even more protection than the federal provisions.  Some state laws impose fines and penalties upon violators in addition to allowing a private right of action to sue for damages for those who believe their personal information has been misused.

 

Our relationships with healthcare facilities and marketing practices are subject to the federal Anti-Kickback Statute and similar state laws.

 

We are subject to the federal Anti-Kickback Law, which prohibits the knowing and willful offer, payment, solicitation or receipt of any form of “remuneration” in return for, or to induce, the referral of business or ordering of services paid for by Medicare or other federal programs.  “Remuneration” has been broadly defined to include anything of value, including gifts, discounts, credit arrangements, and in-kind goods or services.  Certain federal courts have held that the Anti-Kickback Law can be violated if “one purpose” of a payment is to induce referrals.  The Anti-Kickback Law is broad and prohibits many arrangements and practices that are lawful in businesses outside the healthcare industry.  Violations can result in imprisonment, civil or criminal fines or exclusion from Medicare and other governmental programs.  The Office of Inspector General (“OIG”) issued a series of safe harbors that if met will help assure healthcare providers and other parties will not be prosecuted under the Anti-Kickback Law.  Contracts with healthcare facilities and other marketing practices or transactions may implicate the Anti-Kickback Law.  We have attempted to structure our contracts and marketing practices to comply with the Anti-Kickback Law along with providing training to our employees.  However, we cannot ensure that we will not have to defend against alleged violations from private entities or that OIG or other authorities will not find that our practices violate the Anti-Kickback Law.

 

Changes in third-party payor reimbursement for healthcare items and services, as well as economic hardships faced by other parties from which our customers obtain funding, may affect our customers’ ability to pay for our services, which could cause us to reduce our prices or adversely affect our ability to collect payments.

 

Although our customers are healthcare providers that pay us directly for the services we deliver, they rely on third-party payor reimbursement for a substantial portion of their operating revenue.  Third-party payors include government payors like Medicare and Medicaid and private payors like insurance companies and managed care organizations.  Third-party payors continue to engage in widespread efforts to control healthcare costs. Their cost containment initiatives include efforts to control utilization of services and limit reimbursement amounts. Reimbursement limitations can take many forms, including discounts, non-payment for certain care (for example, care associated with certain hospital-acquired conditions) and fixed payment rates for particular treatment modalities or plans, regardless of the provider’s actual costs

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in caring for a patient.  Reimbursement policies have a direct effect on our customers’ ability to pay us for our services and an indirect effect on the prices we charge.  Ongoing concerns about rising healthcare costs may cause more restrictive reimbursement policies to be implemented in the future.  Restrictions on the amounts or manner of reimbursements or funding to healthcare providers may affect the financial strength of our customers and the amount our customers are able to pay for our solutions.

 

In addition, a portion of our customers derive funding from state and local government sources, some of which are facing financial hardships, including decreased funding.  Any limitation or elimination of funding to our customers by these sources could also affect the financial strength of our customers and the amount they are able to pay for our services.

 

New healthcare laws or regulations could impact our business.

 

Although our business is not currently extensively regulated under healthcare laws, we are subject to certain regulatory requirements that continue to come under greater scrutiny and regulation.  Our customers are subject to direct regulation under the Federal False Claims Act, the Stark Law, the Anti-Kickback Law, rules and regulations of the CMS and other federal and state healthcare laws and regulations.  Promulgation of new laws and regulations, or changes in or re-interpretations of existing laws or regulations as they relate to our customers and our business, could affect our business, operating results or financial condition. Our operations may be negatively impacted if we have to comply with additional complex government regulations.

 

Our customers operate in a highly regulated environment.  Regulations affecting them could cause us to incur additional expenses associated with compliance and licensing. We could be assessed fines and face possible exclusion from participation in state and federal healthcare programs if we violate laws or regulations applicable to our business.

 

The healthcare industry is required to comply with extensive and complex laws and regulations at the federal, state and local government levels.  While the majority of these regulations do not directly apply to us, there are some that do, including the FDCA and certain state pharmaceutical licensing requirements. Although we believe we are in compliance with the FDCA, if the FDA expands the reporting requirements under the FDCA, we may be required to comply with the expanded requirements and may incur substantial additional expenses in doing so.  With respect to state requirements, we are currently licensed in 17 states and may be required to obtain additional licenses, permits and registrations as state requirements change.  Our failure to possess such licenses for our existing operations may subject us to certain additional expenses.

 

In addition to the FDCA and state licensing requirements, we are impacted by federal and state laws and regulations aimed at protecting the privacy of individually identifiable health information, among other things, and detecting and preventing fraud, abuse and waste with respect to federal and state healthcare programs.  Some of these laws and regulations apply directly to us.  Additionally, many of our customers require us to abide by their policies relating to patient privacy, state and federal anti-kickback acts, and state and federal false claim acts and whistleblower protections. Since the Affordable Care Act provides for further oversight over and detection of fraud and abuse activities, we expect many of our customers to continue to require us to abide by such policies.

 

Given that our industry is heavily regulated, we may be subject to additional regulatory requirements.  If our operations are found to be in violation of any governmental regulations to which we, or our customers, are subject, we may be subject to the applicable penalty associated with the violation.  Penalties, damages, fines, or curtailment of our operations could significantly increase our cost of doing business, leading to difficulty generating sufficient income to support our business.  Also, if we are found to have violated certain federal or state laws or regulations regarding Medicare, Medicaid or other governmental funding sources, we could be subject to fines and possible exclusion from participation in federal and state healthcare programs.

 

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Although we do not manufacture any medical equipment, we own a large fleet of medical equipment, which may be subject to equipment recalls or obsolescence.

 

We incur significant expenditures to maintain a large and modern equipment fleet.  Our equipment may be subject to recalls that could be expensive to implement and could result in revenue loss while the associated equipment is removed from service.  We may be required to incur additional costs to repair or replace the equipment at our own expense or we may choose to purchase incremental new equipment from a supplier not affected by the recall.  Additionally, our relationship with our customers may be damaged if we cannot promptly replace the equipment that has been recalled. We depend on manufacturers and other third parties to properly obtain and maintain FDA clearance for their equipment and products and their failure to maintain FDA clearance could have a material adverse effect on our business.

 

Our success depends, in part, on our ability to respond effectively to changes in technology.  Because we maintain a large fleet of equipment, we are subject to the risk of equipment obsolescence.  If advancements in technology render a substantial portion of our equipment fleet obsolete, or if a competing technology becomes available that our customers prefer, we may experience a decrease in demand for our products, which could adversely affect our operating results and cause us to invest in new technology to maintain our market share and operating margins.

   

Risks Related to Our Indebtedness

 

Following the Business Combination and refinancing our indebtedness completed on February 4, 2019, we had $694.0 million of outstanding debt, consisting of a seven-year senior secured delayed draw term loan facilitiy in an aggregate principal amount of $660.0 million and a five-year senior secured revolving credit facility in an aggregate principal amount of $150.0 million, of which $34.0 million has been drawn. Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our indebtedness.

 

This is a significant amount of indebtedness which could have important consequences. For example, it could:

 

 

Our ability to satisfy our debt obligations will depend on our future operating performance.  This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.  Our business may not continue to generate sufficient cash flow from operations and future borrowings may not be available to us in an amount sufficient to enable us to repay our indebtedness or to fund our other liquidity needs.  If we are unable to make our interest payments or to repay our debt at maturity, we may have to obtain alternative financing, which may not be available to us.

 

If we are unable to fund our significant cash needs, including capital expenditures, we may be unable to expand our business as planned or to service our debt.

 

We require substantial cash to operate our healthcare technology solutions and service our debt.  Our healthcare 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, borrowings under our senior secured credit facility or other financing sources, we may not be able to grow as currently planned.  We currently expect that over the next 12 months, we will make net investments of approximately $45 to $55 million in new and pre-owned medical

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equipment and other capital expenditures.  This estimate is subject to numerous assumptions, including revenue growth, the number of on-site managed solution signings, and any significant changes in customer contracts. In addition, a substantial portion of our cash flow from operations must be dedicated to servicing our debt and there are significant restrictions on our ability to incur additional indebtedness under the amended and restated credit agreement governing our senior secured credit facility.

 

Primarily because of our debt service obligations and debt refinancing charges and elevated depreciation and amortization charges we have incurred, we have had a history of net losses.  If we consistently incur net losses, it could result in our inability to finance our business in the future.  We had net (loss) income of $(31.9),  $8.8 and $(13.8) million during the years ended December 31, 2018,  2017 and 2016, respectively.  Our ability to use our United States federal income tax net operating loss carryforwards to offset our future taxable income may be limited.  If we are limited in our ability to use our net operating loss carryforwards in future years in which we have taxable income, we will pay more current taxes than if we were able to utilize our net operating loss carryforwards without limitation, which could harm our results of operations and liquidity.

 

We may not be able to obtain funding on acceptable terms or at all as a result of the credit and capital markets.  Thus, we may be unable to expand our business or to service our debt.

 

Depending on the global financial markets and economic conditions, the cost of raising money in the debt and equity capital markets may increase while the availability of funds from those markets may diminish.  Without adequate funding, we may be unable to execute our growth strategy, complete future acquisitions, or take advantage of other business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our revenues and results of operations.

 

Risks Related to Our Common Stock and Warrants

 

Agiliti’s Common Stock and Agiliti’s Warrants are not listed on a national securities exchange.

 

Due to the level of redemptions by FSAC public stockholders in the Business Combination, the Company was unable to comply with the NASDAQ listing requirements relating to the number of round lot holders at the closing of the Business Combination. Therefore Agiliti’s Common Stock as well as its warrants are not listed on a national securities exchange. Because of the lack of listing, the Company and its stockholders and warrant holders could face significant material adverse consequences including:

 

                    a limited availability of market quotations for the Company’s securities;

                    reduced liquidity for the Company’s securities;

                    a determination that the Common Stock is a “penny stock,” which will require brokers trading in the Common Stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for the Company’s securities;

                    a limited amount of news and analyst coverage; and

                    a decreased ability to issue additional securities or obtain additional financing in the future.

 

In addition, because we did not list our Common Stock or warrants on a national securities exchange at the closing of the Business Combination, we do not have securities registered under Section 12 of the Exchange Act and are not subject to the reporting requirements of the Exchange Act or the SEC’s proxy rules, and large holders of our capital stock are not subject to beneficial ownership reporting requirements under Sections 13 or 16 of the Exchange Act and their related rules. Following the filing of this Annual Report on Form 10-K, we do not anticipate filing any reports with the SEC. As a result, our stockholders and warrant holders will not have available to them as much or as robust information as they may have with respect to other companies.

 

 

 

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Agiliti is not subject to compliance with rules requiring the adoption of certain corporate governance measures and as a result Agiliti’s stockholders have limited protections against interested director transactions, conflicts of interest and similar matters.

 

The listing rules of the national stock exchanges require the implementation of various measures relating to corporate governance. These measures are designed to enhance the integrity of corporate management and the securities markets and apply to securities which are listed on those exchanges. Because the Company is not listed on a national stock exchange, the Company is not presently required to comply with many of the corporate governance provisions and has not adopted some of these measures. The absence of such standards of corporate governance may leave the Company’s stockholders and holders of warrants without protections against interested director transactions, conflicts of interest and similar matters.

 

THL Stockholder controls the Company and may have conflicts of interest with our stockholders.

 

THL Stockholder, an affiliate of Thomas H. Lee Partners, L.P., beneficially owns approximately 99.3% of our common stock. In addition, at the closing of the Business Combination, the Company entered into a Director Nomination Agreement with THL Stockholder pursuant to which for so long as THL Stockholder beneficially owns at least 5% of our Common Stock, THL Stockholder will have a right to appoint or nominate for election to the Company’s board of directors, as applicable, a number of individuals that, if elected, when compared to the authorized number of directors on the Company’s board of directors, is closest to but not less than proportional to the total number of shares of Common Stock over which THL Stockholder has direct or indirect voting control relative to the total number of shares of Agiliti Common Stock then outstanding. The current number of directors on our board is eight. Pursuant to the Director Nomination Agreement, THL Stockholder currently has a right to appoint or nominate substantially all members of the board of directors.

 

As a result of its beneficial ownership and the nomination rights under the Director Nomination Agreement, THL Stockholder will have control, subject to applicable law, over the Company’s and its subsidiaries’ decisions regarding their respective operations, plans, strategies, finances, and structure, including whether to enter into any corporate transaction, and will have the ability to prevent any transaction that requires the approval of stockholders. THL Stockholder will have the ability to implement its decisions regardless of whether or not other stockholders believe that any such decision is in their own best interests.

 

THL Stockholder and its affiliates are in the business of making investments in companies and may acquire and hold interests in businesses that compete directly or indirectly with us. THL Stockholder and its affiliates may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. In addition, our certificate of incorporation provides that we renounce any interest or expectancy in the business opportunities of THL Stockholder and its officers, directors, agents, stockholders, members, partners, affiliates and subsidiaries and each such party shall not have any obligation to offer us those opportunities unless presented to one of our directors or officers in his or her capacity as a director or officer.

 

There is no guarantee that Agiliti’s warrants will ever be in the money, and they may expire worthless, and the terms of Agiliti’s warrants may be amended.

 

The exercise price for Agiliti’s warrants is $11.50 per share of Agiliti Common Stock. There is no guarantee that the warrants will ever be in the money prior to their expiration, and as such, the warrants may expire worthless.

 

In addition, Agiliti’s warrants were issued in registered form under a warrant agreement with Continental Stock Transfer & Trust Company, as warrant agent. The warrant agreement provides that the terms of the warrants may be amended without the consent of any holder to cure any ambiguity or correct any defective provision, but requires the approval by the holders of at least 50% of the then outstanding warrants held by parties other than THL Stockholder to make any change that adversely affects the interests of the holders. Accordingly, Agiliti may amend the terms of the warrants in a manner adverse to a holder if holders of at least 50% of the then outstanding warrants (other than those held by THL Stockholder) approve of such amendment. Although Agiliti’s ability to amend the terms of the warrants with the consent of at least 50% of the then outstanding public warrants is unlimited, examples of such amendments

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could be amendments to, among other things, provide for an immediate mandatory cash redemption, increase the exercise price of the warrants, shorten the exercise period or decrease the number of shares of common stock purchasable upon exercise of a warrant.

 

The Company may not pay dividends on its Common Stock for the foreseeable future or ever.

 

Agiliti has no direct operations and no significant assets other than the ownership of 100% of Agiliti Health. Agiliti depends on Agiliti Health for distributions and other payments to generate the funds necessary to meet Agiliti’s financial obligations, including its expenses as a publicly traded company, and to pay any dividends with respect to its Common Stock. The earnings from, or other available assets of, Agiliti Health may not be sufficient to pay dividends or make distributions or loans to enable Agiliti to pay any dividends on its common stock or satisfy its other financial obligations.

 

Additionally, even if the Company is able, it may choose not to pay dividends on its Common Stock for the foreseeable future or ever. Any decision to declare and pay dividends in the future will be made at the discretion of the board of directors and will depend on, among other things, the Company’s results of operations, financial condition, cash requirements and other factors that the board of directors may deem relevant. In addition, the Company’s ability to pay dividends may be limited to the extent that covenants of any existing and future outstanding indebtedness that the Company or its subsidiaries incur, including its credit facilities prevent the payment of dividends by the Company, and applicable law. The Company may not pay dividends on its Common Stock in the foreseeable future or ever.

 

The Common Stock is subordinated to other liabilities and obligations of the Company.

 

The Common Stock is junior in right of payment to all of the Company’s existing and future liabilities and obligations. In the event of bankruptcy, liquidation, or reorganization of the Company, the Company’s assets will be available to pay obligations on its Common Stock after all indebtedness and other obligations of the Company and its subsidiaries have been paid in full.

 

ITEM 1B:  Unresolved Staff Comments

 

None.

 

ITEM 2:  Properties

 

As of December 31, 2018, we operated 86 full-service service centers nationwide and five Centers of Excellence.  We lease all of our service centers as well as Centers of Excellence. The average square footage of our non-corporate locations is approximately 10,000 square feet.  Our corporate office is located at a 55,000 square foot leased facility in a suburb of Minneapolis, Minnesota. 

 

ITEM 3:  Legal Proceedings

 

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

 

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 and seeking actual damages, trebled damages and punitive damages. Specifically, the Company alleged that the Defendants bundled contracts for the sale of standard hospital beds with contracts for bed rental and moveable medical equipment rental. On March 7, 2018, the Company and the Defendants entered into a confidential settlement agreement resolving all disputes and legal claims of the parties associated with the suit filed by the Company. In consideration for this release, terms of the confidential settlement agreement called for the Company to receive legal title

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to certain medical equipment of the Defendants as specified in the agreement on May 1, 2018. The Company recorded a gain on settlement of approximately $26.4 million during 2018 based on the fair value of the assets received of $23.4 million and $3.0 million of cash. The fair value of the assets was measured using inputs of replacement cost and market data, which are considered a Level 3 fair value measurement.

 

ITEM 4:  Mine Safety Disclosures

 

Not applicable.

 

PART II

 

ITEM 5:  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information for our Common Stock

 

There is currently  no established trading market for shares of our Common Stock and our warrants. Management does not expect any viable market to develop in our Common Stock and our warrants.

 

Holders of Record

 

On March 8, 2019, there were 7 holders of record of our Common Stock. This number does not include shareholders for whom shares are held in “nominee” or “street” name.

 

Issuer Purchases of Equity Securities

 

On February 4, 2019, our board of directors authorized the Company to repurchase shares of Common Stock from Agiliti stockholders who held publicly-traded FSAC common stock prior to the closing of the Business Combination and did not exercise redemption rights in connection with the closing of the Business Combination. We did not repurchase shares of our Common Stock in the months ended January 31, 2019, February 28, 2019 and between March 1, 2019 and March 8, 2019.

 

Re cent Sales of Unregistered Securities

 

None .

 

ITEM 6:  Selected Financial Data

 

The selected financial data of Agiliti Health is presented below under the captions “Consolidated Statements of Operations Data,” “Other Financial Data,” “Other Operating Data” and “Consolidated Balance Sheet Data” for and as of the periods presented below.  The selected financial data presented below is qualified in its entirety by, and should be read in conjunction with, the financial statements and notes thereto and other financial and statistical information included elsewhere in this Annual Report on Form 10-K, including the information contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report on Form 10-K.

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		Year Ended December 31,
(in thousands)		2018			2017			2016			2015			2014
Consolidated Statements of Operations Data:
Total revenue		$	565,246		$	514,783		$	479,501		$	448,681		$	436,664
Cost of revenue			367,837			343,028			322,649			303,889			309,903
Gross margin			197,409			171,755			156,852			144,792			126,761
Operating expenses:
Selling, general and administrative (6)			137,210			125,910			119,389			121,583			114,195
Restructuring			—			—			—			2,321			3,059
Gain on settlement			(26,391)			—			(3,074)			(5,718)			—
Intangible asset impairment charge			131,100			—			—			—			34,900
Total operating expenses			241,919			125,910			116,315			118,186			152,154
Operating (loss) income			(44,510)			45,845			40,537			26,606			(25,393)
Loss on extinguishment of debt			—			—			—			—			—
Interest expense (6)			53,390			53,762			53,043			54,066			53,686
Loss before income taxes and noncontrolling interest			(97,900)			(7,917)			(12,506)			(27,460)			(79,079)
(Benefit) provision for income taxes			(66,348)			(17,159)			946			756			(13,065)
Net income attributable to noncontrolling interest			327			414			308			432			503
Net (loss) income  attributable to Agiliti Health, Inc. and Subsidiaries		$	(31,879)		$	8,828		$	(13,760)		$	(28,648)		$	(66,517)

 

		Year Ended December 31,
(in thousands)		2018			2017			2016			2015			2014
Other Financial Data:
Net cash provided by operating activities		$	86,323		$	70,619		$	54,722		$	60,572		$	57,574
Net cash used in investing activities			(51,034)			(55,124)			(69,654)			(55,464)			(56,433)
Net cash (used in) provided by financing activities			(27,949)			(15,495)			14,932			(5,108)			(1,141)
Other Operating Data (as of end of period):
Medical equipment (approximate number of owned outsourcing units)			252,000			235,000			242,000			246,000			254,000
Service centers			86			84			83			83			83
Centers of Excellence			5			5			5			5			5
Depreciation and amortization of intangibles and contract costs		$	79,199		$	80,244		$	84,266		$	91,901		$	100,088
Adjusted EBITDA (1)(2)			152,703			137,782			129,650			122,871			120,117

 

		December 31,
(in thousands)		2018			2017			2016			2015			2014
Consolidated Balance Sheet Data:
Working capital (3)		$	15,756		$	6,245		$	1,650		$	(8,855)		$	782
Total assets (4) (5)			744,958			805,445			818,123			797,575			821,038
Total debt (5)			690,999			703,108			707,317			687,458			698,585
(Deficit) Equity			(67,659)			(44,378)			(59,485)			(49,158)			(48,747)

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		Year Ended December 31,
(in thousands)		2018			2017			2016			2015			2014
Net (loss) income attributable to Agiliti Health, Inc. and Subsidiaries		$	(31,879)		$	8,828		$	(13,760)		$	(28,648)		$	(66,517)
Interest expense (6)			53,390			53,762			53,043			54,066			53,686
(Benefit) provision for income taxes			(66,348)			(17,159)			946			756			(13,065)
Depreciation and amortization of intangibles and contract costs			79,199			80,244			84,266			91,901			100,088
EBITDA			34,362			125,675			124,495			118,075			74,192
Restructuring			—			—			—			2,321			3,136
Gain on settlement			(26,391)			—			(3,074)			(5,718)			—
Intangible asset impairment charge			131,100			—			—			—			34,900
Non-cash share-based compensation expense			3,010			3,039			3,066			2,435			2,301
Management, board and other (7)			10,622			9,068			5,163			5,758			5,588
Adjusted EBITDA		$	152,703		$	137,782		$	129,650		$	122,871		$	120,117

 

 

 

 

 

 

 

Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

For purposes of this Item 7, “we”, “us”, “our” and the “Company” refer to Agiliti Health.

 

OVERVIEW

 

We are a leading nationwide provider of end-to-end healthcare technology management and service solutions to the United States healthcare industry. Our diverse medical equipment solutions customer base includes approximately 7,000 acute care hospitals and alternate site providers.  We also have relationships with more than 200 medical device manufacturers and many of the nation’s largest GPOs and many of the IDNs.  All of our solutions leverage our nationwide network of 86 service centers and five Centers of Excellence together with our more than 75 years of experience managing and servicing all aspects of medical equipment.  During the year ended December 31, 2018, we owned or managed more than 850,000 units of medical equipment consisting of over 350,000 units (including

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accessories) of owned medical equipment and over 500,000 units of customer-owned equipment. Our fees are paid directly by our customers rather than from direct reimbursement from third-party payors, such as private insurers, Medicare, or Medicaid.  We commenced operations in 1939, originally incorporated in Minnesota in 1954 and reincorporated in Delaware in 2001.  Historically, we have experienced significant and sustained growth. Our overall growth strategy is to continue to grow both organically and through strategic acquisitions.

 

As one of the nation’s leading providers of healthcare technology management and service solutions, we design and offer comprehensive solutions for our customers that help reduce capital and operating expenses while increasing medical equipment and staff productivity and support improved patient safety and outcomes.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Agiliti Health,  Agiliti Surgical, Inc.  (formerly known as UHS Surgical Services, Inc.) and Agiliti Imaging, Inc.  (formerly known as Radiographic Equipment Services, Inc.), its 100%-owned subsidiaries. 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 intercompany transactions and balances have been eliminated through consolidation. As the primary beneficiary, we consolidate the limited liability companies (“LLCs”) referred to in Item 15, Note 12, Limited Liability Companies, as we effectively receive the majority of the benefits from such entities and we provide equipment lease guarantees for such entities.

 

Historically, the Company reported under three segments: Medical Equipment Solutions, Clinical Engineering Solutions and Surgical Services. Effective January 1, 2018, the Company changed its segment reporting to report its financial information under one reporting segment. The change in reporting was made to conform to the way the Company currently manages and executes the strategy and operations of the business. Specifically, the CODM makes operating decisions and assesses performance using discrete financial information from one reportable segment, as our resources and infrastructure are shared, and as our go-to-market strategy has evolved with the introduction and validation of our EVM solution strategy. Further, the Company maintains a similar complement of services, type of customer for its services, method of distribution for its services, and operates within a similar regulatory environment in the United States. Accordingly, the Company migrated to a consolidated, single-segment reporting model that reflects its strategy and business operations.

 

As of December 31, 2018, all of our outstanding capital stock was owned by Agiliti Holdco, Inc. (“Parent”), which acquired the Company in a recapitalization in May 2007.  Following the closing of the Business Combination, Parent is controlled by THL Stockholder.

 

CRITICAL ACCOUNTING POLICIES

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases these estimates on historical experience and other assumptions believed to be reasonable under the circumstances.  However, actual results could differ from these estimates. Management believes the critical accounting policies and areas that require more significant judgments and estimates used in the preparation of our consolidated financial statements to be:

 

 

The Company recognizes revenue when it satisfies performance obligations by transferring promised goods or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services.

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Customer arrangements typically have multiple performance obligations to provide equipment solutions, clinical engineering and/or on-site equipment managed services on a per use and/or over time basis. Consideration paid by the customer for each performance obligation is billed within the month the service is performed, and contractual prices are established within our customer arrangements that are representative of the stand-alone selling price. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. The Company’s performance obligations that are satisfied at a point in time are recognized when the service is performed or equipment is delivered to the customer. For performance obligations satisfied over time, the Company uses a straight line method to recognize revenues ratably over the contract period, as this coincides with the Company’s performance under the contract.

 

The Company incurs costs related to obtaining new contracts. Management expects those costs attributable to new revenue production are recoverable and therefore the Company capitalized them as contract costs and is amortizing them over the anticipated period of the new revenue production.

 

For goodwill and indefinite-lived intangible assets, including trade names, we review for impairment annually at the reporting unit level and upon the occurrence of certain events as required by Accounting Standards Codification (“ASC”) Topic 350, “ Intangibles — Goodwill and Other .” Indefinite-lived intangible assets are tested at least annually for impairment and more frequently if events or changes in circumstances indicate that the asset might be impaired. We adopted ASU 2017-04, Simplifying the Test for Goodwill Impairment during the fourth quarter of 2017.  Under the updated guidance, the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment is eliminated. Instead, entities must disclose the amount of goodwill allocated to each reporting unit with zero or negative carrying amounts and the related reportable segment. We review goodwill for impairment by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The Company does not aggregate any components into its reporting unit.  No impairments were recognized in 2018,  2017 or 2016 related to goodwill.

 

Fair value calculations contain significant judgments and estimates related to reporting unit's projected weighted average cost of capital, growth, profitability and cash flows. Management considers reporting unit's historical financial results, current financial condition and outlook for financial operating performance. These estimates are impacted by variable factors, including economics of the industry and competitive market position. We have sufficient current and historical information available to support our judgments and estimates. However, if actual results are not consistent with our estimates, future operating results may be materially impacted.

 

We review indefinite-lived intangible assets for impairment by first assessing qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, we conclude that it is not more likely than not that the indefinite-lived intangible asset is impaired, then we take no further action. 

 

On December 3, 2018, the Company changed its legal name from Universal Hospital Services, Inc. to Agiliti Health, Inc. and the brand identity to Agiliti. As a result, the indefinite-lived intangible assets related to UHS trade name of $131.1 million was written off. No impairments were recognized in 2017 or 2016 related to indefinite-life intangible assets. 

 

For property and equipment and amortizable intangible assets, impairment is evaluated when an event (such as those noted in ASC Topic 360, “ Property, Plant, and Equipment ”) is indicated.  This evaluation is conducted at the lowest level of identifiable cash flows.  If there is an indication of impairment based on this evaluation of undiscounted cash flows versus carrying value, impairment is measured based on the estimated fair value of the long-lived or amortizable asset in comparison to its carrying value.  Our amortizable intangible assets consist of the following discrete items:  customer relationships and non-compete agreements.  For property and equipment, primarily movable medical equipment, we continuously monitor specific makes/models for events such as product recalls or obsolescence. No impairment was recognized in 2018,  2017 and 2016 related to property and equipment and amortizable intangible assets.

 

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The Company’s current and deferred tax provision is based on estimates and assumptions that could materially differ from the actual results reflected in its income tax return(s) filed during the subsequent year and could materially affect the Company’s effective tax rate.

 

The Company had a valuation allowance of $0 and $44.4 million as of December 31, 2018 and 2017, respectively. We have reversed our valuation allowance in 2018 since it is more likely than not that we will be able to utilize our deferred tax assets. 

 

RESULTS OF OPERATIONS

 

		Percent to Total Revenue
		Year Ended December 31,
		2018		2017		2016
Revenue		100.0	%	100.0	%	100.0	%
Cost of revenue		65.1		66.5		67.3
Gross margin		34.9		33.5		32.7
Selling, general and administrative		24.3		24.5		24.9
Gain on settlement		(4.7)		—		(0.6)
Intangible asset impairment charge		23.2		—		—
Operating (loss) income		(7.9)		9.0		8.4
Interest expense		9.4		10.4		11.0
Loss before income taxes and noncontrolling interest		(17.3)		(1.4)		(2.6)
(Benefit) provision for income taxes		(11.7)		(3.3)		0.2
Consolidated net (loss) income		(5.6)	%	1.9	%	(2.8)	%

 

Results of Operations for the Year Ended December 31, 2018 compared to the Year Ended December 31, 2017

 

Total Revenue 

 

The following table presents revenue by service solution for the years ended December 31, 2018 and 2017 (in thousands).

 

		Year Ended December 31,
		2018			2017				% Change
Equipment Solutions		$	248,059		$	230,316			7.7	%
Clinical Engineering			161,492			137,109			17.8
On-Site Managed Services			155,695			147,358			5.7
Total Revenue		$	565,246		$	514,783			9.8	%

 

Total revenue for the year ended December 31, 2018 was $565.2 million, compared with $514.8 million for the year ended December 31, 2017, an increase of $50.4 million or 9.8%.  Equipment Solutions revenue increased 7.7% primarily driven by new customer contracts signed and implemented in 2018. These new contract signings include our traditional supplemental rental services as well as our surgical solutions. Clinical Engineering revenue increased 17.8% as we continue to see strong growth within this solution as a direct result of our continued success in signing and implementing new business contracts over the last several quarters, including the sizeable contract we signed in the third quarter of 2017. Finally, our On-Site Managed Services revenue increased 5.7% with the majority of growth coming from our managed only solution where we manage equipment owned by the customer as well as a favorable impact from  a stronger flu season.

 

Cost of Revenue

 

Total cost of revenue for the year ended December 31, 2018 was $367.8 million compared to $343.0 million for the year ended December 31, 2017, an increase of $24.8 million or 7.2%.  On a percentage of revenue basis, cost of revenue declined from 66.5% of revenue in 2017 to 65.1% in 2018. The decline as a percentage of revenue was driven primarily

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from revenue growth as we were able to leverage our fixed cost infrastructure resulting in our expenses growing at a lower rate than revenue growth. In addition, as we continue to reduce our capital expenditures as a percentage of revenue, our depreciation expense declined in 2018 compared to 2017. We continue to make necessary investments to support the growth in our Clinical Engineering solutions and, as a result, technician labor and vendor expenses increased in support of our new clinical engineering programs.

 

Gross Margin

 

Total gross margin for the year ended December 31, 2018 was $197.4 million, or 34.9% of total revenues compared to $171.8 million, or 33.5% of total revenues for the year ended December 31, 2017, an increase of $25.6 million or 14.9%.  The increase in gross margin as a percent of revenue was primarily impacted by positive leverage from volume growth in our three revenue service solutions as well as from a reduction in depreciation expense as a result of our continued efforts to lower the level of capital expenditures as a percentage of revenue as we continue to shift the Company’s mix of business.

 

Selling, General and Administrative, Gain on Settlement, Intangible Asset Impairment Charge and Interest Expense

(in thousands)

 

		Year Ended December 31,
		2018			2017			Change			% Change
Selling, general and administrative		$	137,210		$	125,910		$	11,300		9.0	%
Gain on settlement			(26,391)			—			(26,391)		*
Intangible asset impairment charge			131,100			—			131,100		*
Interest expense			53,390			53,762			(372)		(0.7)

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*Not meaningful

 

Selling, General and Administrative

 

Selling, general, and administrative expenses for the year ended December 31, 2018 increased by $11.3 million, or 9.0%, to $137.2 million as compared to the same period of 2017.  The increase was primarily due to higher incentive related costs based upon the Company's actual financial performance for 2018.  Selling, general and administrative expense as a percentage of total revenue was 24.3% and 24.5% for the years ended December 31, 2018 and 2017, respectively.

 

Gain on Settlement

 

Gain on settlement of $26.4 million in 2018 was related to a confidential litigation settlement agreement, which resolved all disputes and legal claims of the parties associated with the suit filed by the Company against Hill-Rom Holdings, Inc., Hill-Rom Company, Inc. and Hill-Rom Services, Inc. The amount of the gain recorded was based on the fair value of the assets received of $23.4 million and $3.0 million of cash. The fair value of the assets was measured using inputs of replacement cost and market data, which are considered a Level 3 fair value measurement.

 

Intangible Asset Impairment Charge

 

Intangible asset impairment charge of $131.1 million in 2018 was related to the UHS trade name write-off due to the change of the Company’s legal name to Agiliti Health, Inc and the brand identity to Agiliti.

 

Interest Expense

 

Interest expense for the year ended December 31, 2018 decreased by $0.4 million, or 0.7%, to $53.4 million as compared to the same period of 2017. Interest expense includes amortization of deferred financing fees associated with our debt of $2.3 and $2.3 million for years ended December 31, 2018 and 2017, respectively.

 

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Income Taxes

 

Income taxes were a benefit of $66.3 and $17.2 million for the years ended December 31, 2018 and 2017, respectively.  The tax benefit for the year ended 2018 was primarily related to the trade name impairment and the reversal of our valuation allowance.  The tax benefit for the year ended December 31, 2017 was primarily due to the revaluation of our net deferred tax liability .  

 

Consolidated Net (Loss) Income

 

Consolidated net (loss) income was $(31.6) and $9.2 million for the years ended December 31, 2018 and 2017, respectively. Net (loss) income was impacted primarily by the increase in revenue, gain on settlement and intangible asset impairment charge.

 

Adjusted EBITDA

 

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) was $152.7 and $137.8 million for the years ended December 31, 2018 and 2017, respectively.  Adjusted EBITDA for the year ended December 31, 2018 was higher primarily due to the increase in revenue.

 

Results of Operations for the Year Ended December 31, 2017 compared to the Year Ended December 31, 2016

 

Total Revenue 

 

The following table presents revenue by service solution for the years ended December 31, 2017 and 2016 (in thousands).

 

		Year Ended December 31,
		2017			2016				% Change
Equipment Solutions		$	230,316		$	237,137		$	(2.9)	%
Clinical Engineering			137,109			107,305			27.8
On-Site Managed Services			147,358			135,059			9.1
Total Revenue		$	514,783		$	479,501		$	7.4	%

 

Total revenue for the year ended December 31, 2017 was $514.8 million, compared with $479.5 million for the year ended December 31, 2016, an increase of $35.3 million or 7.4%. Equipment Solutions revenue decreased 2.9% partially driven by the shift away from one-time capital sales as well as focusing our investment on core equipment most utilized within healthcare. Clinical Engineering increased 27.8% driven by the combination of strong organic growth of new programs (including the government contract signed in the third quarter of 2017) and the acquisition of Agiliti Imaging. On-Site Managed Services increased 9.1% partially resulting from growth in our managed only programs where we manage equipment owned by the customer.

 

Cost of Revenue

 

Total cost of revenue for the year ended December 31, 2017 was $343.0 million compared to $322.6 million for the year ended December 31, 2016, an increase of $20.4 million or 6.3%. On a percentage of revenue basis, cost of revenue declined from 67.3% of revenue in 2016 to 66.5% in 2017. The decline was driven primarily from revenue growth as we were able to leverage our fixed cost infrastructure resulting in our expenses growing at a lower rate than revenue growth. In addition, as we continue to reduce our capital expenditures as a percentage of revenue, our depreciation expense declined in 2017 versus the comparable period in 2016. We continue to make necessary investments to support the growth in our Clinical Engineering solutions and technician labor and vendor expenses increased primarily to support our clinical engineering programs.

 

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Gross Margin

 

Total gross margin for the year ended December 31, 2017 was $171.8 million, or 33.5% of total revenue compared to $156.9 million, or 32.7% of total revenue for the year ended December 31, 2016, an increase of $14.9 million or 9.5%. The increase in gross margin as a percent of revenue was primarily impacted by positive leverage from volume growth and a reduction in the low margin capital sales revenue. 

 

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

(in thousands)

 

		Year Ended December 31,
		2017			2016			Change			% Change
Selling, general and administrative		$	125,910		$	119,389		$	6,521		5.5	%
Gain on settlement			—			(3,074)			3,074		*
Interest expense			53,762			53,043			719		1.4

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*Not meaningful

 

Selling, General and Administrative

 

Selling, general, and administrative expenses for the year ended December 31, 2017 increased by $6.5 million, or 5.5%, to $125.9 million as compared to the same period of 2016. The increase was primarily due to the acquisition of Agiliti Imaging and higher payroll related costs and legal expense.

 

Selling, general and administrative expense as a percentage of total revenue was 24.5% and 24.9% for the years ended December 31, 2017 and 2016, respectively.

 

Gain on Settlement

 

Gain on settlement of $3.1 million for the year ended December 31, 2016 was related to a settlement with a supplier.

 

Interest Expense

 

Interest expense for the year ended December 31, 2017 increased by $0.7 million, or 1.4%, to $53.8 million as compared to the same period of 2016. Interest expense includes amortization of deferred financing fees associated with our debt of $2.3 and $2.3 million for years ended December 31, 2017 and 2016, respectively.

 

Income Taxes

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act makes broad and complex changes to the U.S. Internal Revenue Code (“the Code”) that affects 2017, including, but not limited to, accelerated depreciation that will allow for full expensing of qualified property. The Tax Act also establishes new tax laws that will affect 2018 and after, including a reduction in the U.S. federal corporate income tax rate from 35% to 21%, as well as limitations on the deductibility of interest expense and executive compensation. The SEC issued Staff Accounting Bulletin No. 118, which allows companies to record reasonable estimates of enactment impacts where the underlying analysis and calculations are not yet complete. The provisional estimates must be finalized within a one-year measurement period. As a result of the reduction of the federal corporate income tax rate, we revalued our net deferred tax liability, which resulted in a provisional income tax benefit of approximately $18.3 million for the year ended December 31, 2017. As of December 31, 2018, the impacts of The Act have been finalized. The impact of the finalization of the provisional estimate associated with the revaluation of our net deferred tax liability was insignificant. All future impacts of future issued guidance will be appropriately accounted for in the period in which the law is enacted.

 

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Income taxes were a benefit of $17.2 and an expense of $0.9 million for the years ended December 31, 2017 and 2016, respectively. The tax benefit for the year ended December 31, 2017 was primarily due to the revaluation of our net deferred tax liability. Income taxes for the years ended 2016 also include state income taxes and tax amortization on indefinite-life intangibles. The Company will continue to incur deferred tax expense in the future as tax amortization occurs.

 

Consolidated Net Income (Loss)

 

Consolidated net income (loss) was $9.2 and $(13.5) million for the years ended December 31, 2017 and 2016, respectively. Net income was impacted primarily by growth in revenue and change in income tax.

 

Adjusted EBITDA

 

Adjusted EBITDA was $137.8 and $129.6 million for the years ended December 31, 2017 and 2016, respectively. Adjusted EBITDA for the year ended December 31, 2017 was positively impacted by revenue growth.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Financing Structure .  As of December 31, 2018, our major sources of funds were comprised of $425.0 million aggregate principal amount of our Original Notes (as defined below), $220.0 million aggregate principal amount of our Add-on Notes (as defined below), $235.0 million senior secured credit facility and $20.0 million of vehicle leases.

 

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 were originally scheduled to mature on August 15, 2020.

 

The 2012 Indenture provided that the 2012 Notes were our second lien senior secured obligations and were fully and unconditionally guaranteed on a second lien senior secured basis by our existing and certain of our future 100%-owned domestic subsidiaries. Our 2012 Notes were subject to certain debt covenants. We were in compliance with all financial covenants under the 2012 Indenture for all years presented.

Interest on the 2012 Notes was payable, entirely in cash, semiannually, in arrears, on February 15 and August 15 of each year. If we sell certain assets or undergo certain kinds of changes of control, we must offer to repurchase the 2012 Notes.

 

On February 4, 2019, Agiliti Health redeemed all of its outstanding $645.0 million aggregate principal amount of 2012 Notes at a redemption price equal to 100.00% of the aggregate principal amount of notes redeemed. On the same date, the 2012 Indenture was satisfied and discharged in accordance with its terms and the collateral securing the 2012 Notes was released.

Credit Facilities. 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 was a first lien senior secured asset based revolving credit facility that was 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

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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 were secured by a first priority security interest in substantially all of the assets of the Company, Parent, Agiliti Surgical and Agiliti Imaging, 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 were unconditionally guaranteed by the Parent, Agiliti Surgical and Agiliti Imaging.

 

At December 31, 2018, we had $25.9 million of borrowings outstanding accruing interest at a rate of 6.5%. We were in compliance with all financial debt covenants for all years presented.

 

On January 4, 2019, in connection with and substantially concurrent with the closing of the Business Combination, Agiliti Health entered into a credit agreement governing its new senior secured credit facilities (the “New Senior Secured Credit Facilities”) with JPMorgan Chase Bank, N.A. as administrative agent, collateral agent, and letter of credit issuer, Agiliti Holdco, certain subsidiaries of Agiliti Health acting as guarantors (the “Guarantors”), and the lenders from time to time party thereto.

 

The New Senior Secured Credit Facilities provide for a seven-year senior secured delayed draw term loan facility in an aggregate principal amount of $660,000,000 (the “New Term Loan Facility”) and a five-year senior secured revolving credit facility in an aggregate principal amount of $150,000,000 (the “New Revolving Facility”). Agiliti Health drew approximately $34.0 million of revolving loans on January 4, 2019 to pay certain fees and expenses in the Business Combination. The proceeds of the New Term Loan Facility were drawn on February 1, 2019, and used to redeem all 2012 Notes as described above. Agiliti Health called the 2012 Notes for redemption on January 4, 2019, prior to the consummation of the Business Combination. The 2012 Notes were redeemed on February 4, 2019.

 

The term loans under the New Term Loan Facility amortize in equal quarterly installments, commencing on June 30, 2019, in an aggregate annual amount equal to 1.00% of the original principal amount of such term loans, with the balance due and payable at maturity unless prepaid prior thereto.

 

Borrowings under the New Senior Secured Credit Facilities bear interest, at Agiliti Health’s option, at a rate per annum equal to an applicable margin over either (a) a base rate determined by reference to the highest of (1) the prime lending rate published in the Wall Street Journal, (2) the federal funds effective rate plus 1/2 of 1% and (3) the LIBOR rate for a one-month interest period, plus 1.00%, or (b) a LIBOR rate determined by reference to the LIBOR rate as set forth by the ICE Benchmark Administration for the interest period relevant to such borrowing, in each case, subject to interest rate floors.

 

The New Senior Secured Credit Facilities contain a number of negative covenants that, among other things, restrict, subject to certain exceptions, the ability of Agiliti Health and the guarantors thereunder to incur additional indebtedness and guarantee indebtedness; create or incur liens; engage in mergers or consolidations; sell, transfer or otherwise dispose of assets; pay dividends and distributions or repurchase capital stock; prepay, redeem or repurchase certain indebtedness; make investments, loans and advances; enter into agreements which limit the ability of Agiliti Health and the guarantors thereunder to incur lients on assets; and enter into amendments to certain junior lien and subordinated indebtedness in a manner materially adverse to the lenders.

 

Liquidity

 

Our principal sources of liquidity are expected to be cash flows from operating activities and borrowings under our New Revolving Facility, which provides loans in the amount of up to $150.0 million. 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 healthcare solutions and to service our debt.  Our healthcare 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 New Revolving Facility or other financing sources, we may not be able to conduct our business or grow as currently planned. We currently expect that over the next 12 months, we

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will make investments of approximately $45 to $55 million in medical equipment and other capital expenditures, net of asset sales.  This estimate is subject to numerous assumptions, including revenue growth, the number of on-site managed solutions signings, and any significant changes in customer contracts. 

 

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.

 

The following table sets forth selected historical information regarding our cash flows:

 

		Year Ended December 31,
(in thousands)		2018			2017			2016
Other Financial Data:
Net cash provided by operating activities		$	86,323		$	70,619		$	54,722
Net cash used in investing activities			(51,034)			(55,124)			(69,654)
Net cash (used in) provided by financing activities			(27,949)			(15,495)			14,932

 

Net cash provided by operating activities was $86.3,  $70.6 and $54.7 million for the years ended December 31, 2018,  2017 and 2016, respectively.  Net cash provided by operating activities increased in 2018 compared to 2017 primarily due to higher earnings before intangible asset impairment charge, and higher accrual and accounts payable which was partially offset by higher accounts receivable from growth in revenue and the timing of accounts receivable collections received by customers.  Consolidated net income for 2018, adjusted for the non-cash portion of the gain on settlement, intangible asset impairment charge, net of tax, and the removal of valuation allowance in 2018, was $8.5 million, compared to consolidated net loss of $9.1 million for 2017, adjusted for $18.3 million related to the comprehensive tax legislation. The increase was impacted primarily due to the 9.8% increase in revenue and the $3.0 million cash gain from the legal settlement. The timing of accounts payable payments in 2018 compared to the same period in 2017 resulted in an increase in net cash provided by operations of $4.5 million. The incentive accrual increased by $11.4 million in 2018 compared to an increase of $0.6 million in 2017, due to the Company's financial performance in 2018 compared to 2017. Net cash provided by operating activities increased in 2017 compared to 2016 primarily due to improved earnings and working capital improvements versus the prior year.   Consolidated net income for 2017, adjusted for the income tax benefit of $18.3 million related to the comprehensive tax legislation, was a loss of $9.1 million compared to a loss of $13.5 million for 2016. The improvement was primarily due to the 7.4% increase in revenue, partially offset by the $3.1 million gain on settlement in 2016. The working capital improvements were driven by timing of customer accounts receivable payments and reflect use of cash in 2017 of $5.7 million, compared to use of cash in 2016 of $11.2 million. In addition, other operating assets improved by $5.6 million, as 2016 reflected a use of cash of $5.5 million related to increases in prepaids related to software and vendor contracts. Other operating liabilities improved by $3.7 million primarily related to incentive accruals based on the Company's financial performance. 

 

Net cash used in investing activities was $51.0,  $55.1 and $69.7 million for the years ended December 31, 2018,  2017 and 2016, respectively.  The decrease in net cash used in investing activities in 2018 compared to 2017 was primarily due to a previous year acquisition, which resulted in a use of cash of $5.6 million. This acquisition was partially offset by cash inflows of $3.7 million related to the release of escrow funds from our acquisition in November 2016. The decrease in net cash used in investing activities in 2017 compared to 2016 was primarily due to lower acquisition costs and lower medical equipment purchases. In 2017, the Company had two acquisitions approximating $6.4 million, offset by an escrow refund of $3.7 million, compared to one acquisition in 2016 approximating $15.6 million. Medical equipment purchases declined by $9.9 million as we emphasized our service related business solutions. In addition, the proceeds from the disposition of property plant and equipment declined by $6.4 million due to our strategy to reduce one-time capital sales with customers. 

 

Net cash (used in) provided by financing activities was $(27.9),  $(15.5) and $14.9 million for the years ended December 31, 2018,  2017 and 2016, respectively. The increase in net cash used in financing activities in 2018 compared to 2017 was primarily due to higher payments on our senior secured credit facility. The Company's financial

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performance in 2018 has provided higher net cash from operating activities, which were used to pay down the senior secured credit facility. The increase in net cash used in financing activities in 2017 compared to 2016 was primarily due to lower net borrowings under the senior secured credit facility in 2017 and a reduction in book overdrafts. The lower net borrowings in 2017 were driven by the increase in cash provided by operating activities and the lower cash needed for acquisitions. 

 

Off-Balance Sheet Arrangements

 

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.  As of December 31, 2018, we did not have any unconsolidated SPEs.

 

Contractual Obligations

 

The following is a summary, as of December 31, 2018, of our future contractual obligations:

 

		Payments due by period
(in thousands)														2024 and
Contractual Obligations		Total			2019			2020 - 2021			2022 - 2023			beyond
Other Financial Data:
Long-term debt principal obligations (1)		$	670,933		$	—		$	670,933		$	—		$	—
Interest on notes (1)			79,920			49,181			30,738			—			—
Principal and interest on capital lease obligations			22,122			6,482			7,850			4,012			3,778
Operating lease obligations			35,397			9,914			15,451			7,717			2,315
Pension obligations (2)			515			515			—			—			—
Unrecognized tax positions (3)			1,365			—			—			—			—
Total contractual obligations		$	810,252		$	66,092		$	724,972		$	11,729		$	6,093
Other commercial commitments:
Stand by letter of credit		$	5,275		$	—		$	—		$	—		$	—

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Based on the level of operating performance expected in 2019, we believe our cash from operations and additional borrowings under our New Revolving 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.

 

Our levels of borrowing are further restricted by the financial covenants set forth in our New Revolving Facility, which covenants are summarized above. 

 

As of December 31, 2018, we were in compliance with all covenants for all years presented.

 

Our expansion and acquisition strategy may require substantial capital.  Sufficient funding for future acquisitions may not be available under our New Revolving Facility, and we may not be able to raise any necessary additional funds through bank financing or the issuance of equity or debt securities on terms acceptable to us, if at all.