UNIVERSAL HOSPITAL SERVICES INC - 10-Q/A - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) The following should be read in conjunction with the accompanying consolidated financial statements and notes.

BUSINESS OVERVIEW Our Company Universal Hospital Services, Inc. ("we", "our", "us", the "Company", or "UHS") is a leading nationwide provider of medical equipment management and service solutions to the United States health care industry. Our customers include national, regional and local acute and long-term acute care hospitals, alternate site providers (such as long-term acute care hospitals, skilled nursing facilities, specialty hospitals, nursing homes, and home care providers) and medical equipment manufacturers. We provide our customers solutions across the spectrum of the equipment life cycle as a result of our position as one of the industry's largest purchasers and outsourcers of medical equipment. During the twelve months ended March 31, 2012, we owned or managed over 660,000 pieces of medical equipment consisting of 435,000 owned or managed pieces in our Medical Equipment Outsourcing segment and 225,000 pieces of customer owned equipment we managed in our Technical and Professional Services segment. Our diverse medical equipment outsourcing customer base includes more than 4,275 acute care hospitals and approximately 4,400 alternate site providers. We also have relationships with more than 200 medical equipment manufacturers and many of the nation's largest group purchasing organizations ("GPOs") and many of the integrated delivery networks ("IDNs"). All of our solutions leverage our nationwide network of 83 offices and our more than 70 years of experience managing and servicing all aspects of medical equipment. Our fees are paid directly by our customers rather than by direct reimbursement from third-party payors, such as private insurers, Medicare, or Medicaid.

We 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 24 -------------------------------------------------------------------------------- Table of Contents growth strategy is to continue to grow both organically, through strategic acquisitions, and potential international growth opportunities.

On April 1, 2011 we completed our acquisition of Emergent Group Inc. ("Emergent Group") for a total purchase price of approximately $65.3 million as described in Note 3, Acquisitions. The results of operations of this acquisition have been included in UHS's consolidated results of operations since the date of acquisition and also included in the medical equipment outsourcing segment.

Effective December 31, 2011, Emergent Group was merged into its principal operating subsidiary, PRI Medical Technologies, Inc. ("PRI Medical") with PRI Medical the surviving entity. Also, on December 31, 2011, PRI Medical's name was changed to UHS Surgical Services, Inc. ("Surgical Services").

On May 31, 2011 we acquired certain assets of an equipment rental division of a medical equipment manufacturer for approximately $6.5 million. The financial results of this acquisition are included in our medical equipment outsourcing segment since the date of acquisition.

On October 3, 2011, we completed the acquisition, effective October 1, 2011, of all of the outstanding stock of a surgical laser equipment service provider for approximately $5.5 million in cash consideration. The $5.5 million purchase price included $0.5 million of debt which was paid off at closing. The financial results of this acquisition are included in our medical equipment outsourcing segment since the date of acquisition.

On January 3, 2012, we completed the acquisition of all of the outstanding stock of a Florida-based laser surgical laser equipment service provider for total consideration of approximately $16.1 million, including a holdback of approximately $1.6 million, expected to be paid in January 2013, and approximately $3.2 million of debt, which was paid off at closing. The acquisition was funded through our $195.0 million Senior Secured Credit Facility.

On March 31, 2012 we completed the acquisition of certain assets of the southern California equipment rental division of a medical equipment manufacturer. Total purchase price of the transaction was approximately $0.8 million, including approximately $0.4 million in contingent consideration to be paid over four years based on future revenues. Assets acquired consist of medical equipment and customer relationship intangibles.

As one of the nation's leading medical equipment management and service solutions companies, we focus on offering our customers comprehensive solutions that help reduce capital and operating expenses, increase equipment and staff productivity and support improved patient safety and outcomes.

We report our financial results in three segments. Our reporting segments consist of Medical Equipment Outsourcing, Technical and Professional Services, and Medical Equipment Sales and Remarketing. We evaluate the performance of our reporting segments based on gross margin and gross margin, before purchase accounting adjustments. The accounting policies of the individual reporting segments are the same as those of the entire company.

We present the non-generally accepted accounting principles ("GAAP") financial measure gross margin, before purchase accounting adjustments, because we use this measure to monitor and evaluate the operational performance of our business and to assist analysts, investors and lenders in their comparisons of operational performance across companies, many of whose results will not include 25 -------------------------------------------------------------------------------- Table of Contents similar adjustments. A reconciliation of the non-GAAP financial measure to its equivalent GAAP measure is included in the respective tables.

The Company has restated certain amounts for the quarter ended March 31, 2012 and 2011. The Company's consolidated financial statements included in the Original Filing reflected $2.7 million and $1.3 million of gains from both non-monetary and cash refunds on recalled infusion pumps within revenues for the quarter ended March 31, 2012 and 2011, respectively. The Company has determined that the gains should have been presented as a reduction of cost of sales. As a result the Company is restating its consolidated financial statements and related disclosures to recognize a reduction of both revenue and costs of sales for the quarter ended March 31, 2012 and 2011 for this item. Such adjustments have no impact on gross margin, operating income, net income or cash flows. In addition, the Company also chose to correct certain tax items that were immaterial individually and in the aggregate. These other tax corrections related to a $1.0 million adjustment to deferred taxes recorded in connection with a 2011 acquisition and the corresponding impact on the goodwill and valuation allowance balances and $0.3 million decrease to the provision for income taxes.

Management's Discussion and Analysis has been revised for the effects of the restatement Medical Equipment Outsourcing Segment - Manage & Utilize Our flagship business is our Medical Equipment Outsourcing segment, which accounted for $77.4 million, or approximately 74.5 % of our revenues, for the quarter ended March 31, 2012 and $64.9 million, or approximately 79.8% of our revenues, for the three months ended March 31, 2011. As of March 31, 2012, we owned or managed over 435,000 pieces in our Medical Equipment Outsourcing segment, primarily in the categories of respiratory therapy, newborn care, critical care, patient monitors, patient handling (which includes fall management, bariatrics, beds, stretchers and wheelchairs), pressure area management (such as therapy surfaces), wound therapy, laser and mobile surgical services (such as CO2, Nd:YAG, Pulse Dye, KTP/YAG, Diode, Greenlight XPS and HPS, Holmium YAG, Lithotripsy and Cryosurgery technology). Historically, we have generally purchased and owned directly the equipment used in our Medical Equipment Outsourcing programs, though we have at times entered into revenue share agreements with certain equipment manufacturers, where the manufacturers retain ownership of the equipment, but UHS takes possession and manages the rental of the equipment to customers. Such arrangements are less capital intensive for us.

We have four primary outsourcing programs: † Supplemental and Peak Needs Usage; † Customized Outsourcing Agreements; † Asset360TM Equipment Management Program, ("Asset360 Program"); and † Laser and Mobile Surgical Services.

Our primary customer relationships are with local healthcare providers such as hospitals, surgery centers, long-term care providers, and nursing homes. These organizations may belong to regional or national groups of facilities, and often participate in GPOs. We contract at the local, regional and national level, as requested by our customers. We expect much of our future growth in this segment to be driven by our customers outsourcing more of their medical equipment needs and taking full advantage of our diversified product offering, customized outsourcing agreements and Asset360 Programs.

26 -------------------------------------------------------------------------------- Table of Contents On July 13, 2010, the U.S. Food and Drug Administration ("FDA") issued a final order and transition plan to a medical equipment manufacturer to recall all infusion pumps of a certain model currently in use in the United States. The FDA order established the framework for the recall by providing for a cash refund, generally, $1,500 for single channel pumps and $3,000 for triple channel pumps, or a replacement pump to owners within a two-year period. At the time of the recall notice, we owned approximately 11,900 of the applicable infusion pumps.

For the three months ended March 31, 2012, we recognized recalled equipment gains of approximately $2.5 million, net of costs associated with the retirement of the recalled pumps, of which approximately $1.4 million were non-cash gains.

Non-cash gains result from receiving a replacement pump for a recalled pump rather than receiving a direct cash reimbursement. The gains are a result of the fair market value of the replacement pump less the net book value of the recalled pump. Such gains have been recognized as an offset to cost of sales in our consolidated statements of operations.

At March 31, 2012, we owned approximately 4,575 of the applicable pumps. We are continuing the process of evaluating the course of action that best meets the infusion technology needs of our customers and our business. As such, we expect to continue to recognize gains and also expect to increase purchases of infusion pumps to replace recalled units as they are accepted by the equipment manufacturer. During the next two quarters of 2012, we recognized recalled equipment net gains of $16.1 million (originally disclosed that we expected to recognize between $4.5 and $7.5 million).

Technical and Professional Services Segment - Plan & Acquire; Maintain & Repair Our Technical and Professional Services segment accounted for $20.1 million, or approximately 19.4% of our revenues for the quarter ended March 31, 2012 and $10.9 million, or approximately 13.4% of our revenues for the three months ended March 31, 2011. We leverage our over 70 years of experience and our extensive equipment database in repairing and maintaining medical equipment. We offer a broad range of inspection, preventative maintenance, repair, logistic and consulting services through our team of over 325 technicians and professionals located throughout the United States in our nationwide network of offices and managed over 225,000 units of customer owned equipment during the twelve months ended March 31, 2012. In addition, during the twelve months ended March 31, 2012, we serviced over 435,000 units that we own or directly manage. Our Technical and Professional Service offerings provide a complementary alternative for customers that wish to own their medical equipment, but lack the infrastructure, expertise or scale to perform routine maintenance, repair, record-keeping and lifecycle analysis and planning functions.

Medical Equipment Sales and Remarketing Segment - Redeploy & Remarket Our Medical Equipment Sales and Remarketing segment accounted for $6.4 million, or approximately 6.1%, of our revenues for the quarter ended March 31, 2012 and $5.6 million, or approximately 6.8% of our revenues for the three months ended March 31, 2011. This segment includes three distinct business activities: Medical Equipment Remarketing and Disposal. We are one of the nation's largest buyers and sellers of pre-owned medical equipment. We buy, source, remarket and dispose of pre-owned medical equipment for our customers and for our own behalf.

We provide our customers with the ability to sell their unneeded medical equipment for immediate cash or credit. We provide fair market value assessments 27 -------------------------------------------------------------------------------- Table of Contents and buy-out proposals on equipment the customer intends to trade in for equipment upgrades so that the customer can evaluate the manufacturers' or alternative offers. Customers can also take advantage of our disposal services, where we dispose of equipment that has no remaining economic value in a safe and environmentally appropriate manner.

We remarket pre-owned medical equipment to hospitals, alternate site providers, veterinarians and equipment brokers. This segment of our business focuses on providing solutions to customers that have capital budget dollars available to purchase equipment. We offer a wide range of equipment including equipment we use in our outsourcing programs and diagnostic, ultrasound and x-ray equipment.

Specialty Medical Equipment Sales and Distribution. We use our national infrastructure to provide sales and distribution services to manufacturers of specialty medical equipment on a limited basis. Our distribution services include providing demonstration services and product maintenance services. We act as a distributor for only a limited number of products that are particularly suited to our national distribution network or that fit with our ability to provide technical support. We currently sell equipment in selected product lines including, but not limited to, respiratory percussion vests, continuous passive motion machines, patient monitors, patient handling equipment and infant security systems.

Sales of Disposables. We offer our customers single use disposable items. Most of these items are used in connection with our outsourced equipment. We offer these products as a convenience to customers and to complement our full medical equipment management and service solutions.

RESULTS OF OPERATIONS(1) The following discussion addresses: † our financial condition as of March 31, 2012 and † the results of operations for the three-month period ended March 31, 2012 and 2011.

This discussion should be read in conjunction with the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q/A and the Management's Discussion and Analysis of Financial Condition and Results of Operations section included in our 2011 Annual Report on Form 10-K/A, filed with the Securities and Exchange Commission.

The following table provides information on the percentages of certain items of selected financial data compared to total revenues for the three-month period ended March 31, 2012 and 2011. The table below also indicates the percentage increase or decrease over the prior comparable period.

28 -------------------------------------------------------------------------------- Table of Contents Three Months Ended March 31, Percent Percent of Total Revenues Increase 2012 2011 (Decrease) Revenue Medical equipment outsourcing 74.5 % 79.8 % 19.2 % Technical and professional services 19.4 13.4 85.2 Medical equipment sales and remarketing 6.1 6.8 13.6 Total revenues 100.0 % 100.0 % 27.6 Cost of Sales Cost of medical equipment outsourcing 28.2 28.4 26.9 Cost of technical and professional services 15.2 9.7 100.0 Cost of medical equipment sales and remarketing 4.6 5.3 10.5 Medical equipment depreciation 16.3 21.1 (1.5 ) Total costs of medical equipment outsourcing, technical and professional services and medical equipment sales and remarketing 64.3 64.5 27.2 Gross margin 35.7 35.5 28.4 Selling, general and administrative 26.6 27.5 23.6 Acquisition and intergration expenses 0.1 0.9 * Operating income 9.0 7.1 62.2 Interest expense 14.9 14.4 32.4 Loss before income taxes and non controlling interest (5.9 ) (7.3 ) 3.4 Provision (benefit) for income taxes (3.0 ) 0.3 * Consolidated net loss (2.9 )% (7.6 )% (51.8 ) -------------------------------------------------------------------------------- *Not meaningful (1) The Company has restated certain amounts for the quarter ended March 31, 2012 and 2011. The Company's consolidated financial statements included in the Original Filing reflected $2.7 million and $1.3 million of gains from both non-monetary and cash refunds on recalled infusion pumps within revenues for the quarter ended March 31, 2012 and 2011, respectively. The Company has determined that the gains should have been presented as a reduction of cost of sales. As a result the Company is restating its consolidated financial statements and related disclosures to recognize a reduction of both revenue and costs of sales for the quarter ended March 31, 2012 and 2011 for this item. Such adjustments have no impact on gross margin, operating income, net income or cash flows. In addition, the Company also chose to correct certain tax items that were immaterial individually and in the aggregate. These other tax corrections related to a $1.0 million adjustment to deferred taxes recorded in connection with a 2011 acquisition and the corresponding impact on the goodwill and valuation allowance balances and $0.3 million decrease to the provision for income taxes.

Consolidated Results of Operations for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 Total Revenue Total revenue for the three months ended March 31, 2012 was $103.9 million, compared with $81.4 million for the three months ended March 31, 2011, an increase of $22.5 million or 27.6%. The increase was primarily due to our medical equipment outsourcing segment related to acquisitions in our laser 29 -------------------------------------------------------------------------------- Table of Contents surgical services business, resulting in additional revenue of $11.8 million combined with an increase in revenue in our technical and professional services segment related to a large BioMed360 program which began in September 2011, and resulted in additional revenue of $8.9 million. In addition, the net addition of six Asset360TM Equipment Management Programs ("Asset360 Programs") and increased revenues driven by incremental business from new and existing technology, partially offset by sluggish patient census and what we believe has been a sustained customer effort to control outsourcing expenses affecting our peak need rental business.

Cost of Sales Total cost of sales for the three months ended March 31, 2012 was $66.8 million compared to $52.5 million for the three months ended March 31, 2011, an increase of $14.3 million or 27.2%. The increase was primarily due to an increase in our technical and professional services segment related to a large BioMed360 program, which resulted in additional costs of $7.6 million, combined with an increase in our medical equipment outsourcing segment related to acquisitions in our laser surgical services business, which resulted in additional costs of $6.5 million, partially offset by an increase in gains from that experienced in the prior year on recalled equipment of $1.2 million, net of costs associated with the retirement of the recalled pumps.

Gross Margin Total Gross margin for the three months ended March 31, 2012 was $37.1 million, or 35.7% of total revenues compared to $28.9 million, or 35.5% of total revenues, for the three months ended March 31, 2011, an increase of $8.2 million or 28.4%. Gross margin as a percent of revenue for the quarter was favorably impacted by higher margin on increased recall equipment gains from that experienced in the prior year and in our recently acquired laser surgical services business. Gross margin percentage, before purchase accounting adjustments, decreased from 41.3 % in the first quarter of 2011 to 39.0% in the first quarter of 2012. The higher gross margin from recalled equipment and laser surgical services business more than offset the decrease in gross margin on our traditional outsourcing business combined with lower margin in our technical and professional services segment due to a large BioMed360 Program, which began in September 2011, whose gross margin percentage is expected to be lower than our historical service gross margins 30 -------------------------------------------------------------------------------- Table of Contents Medical Equipment Outsourcing Segment - Manage & Utilize (in thousands) Three Months Ended March 31, 2012 2011 Change % Change Total revenue $ 77,384 $ 64,914 $ 12,470 19.2 % Cost of revenue 29,323 23,111 6,212 26.9 Medical equipment depreciation 16,906 17,166 (260 ) (1.5 ) Gross margin $ 31,155 $ 24,637 $ 6,518 26.5 Gross margin % 40.3 % 38.0 % Gross margin $ 31,155 $ 24,637 $ 6,518 26.5 Purchase accounting adjustments, primarily non-cash charges related to step-up in carrying value of medical equipment 84 2,724 (2,640 ) (96.9 ) Gross margin, before purchase accounting adjustments $ 31,239 $ 27,361 $ 3,878 14.2 Gross margin %, before purchase accounting adjustments 40.4 % 42.1 % Total revenue in the Medical Equipment Outsourcing segment increased $12.5 million, or 19.2%, to $77.4 million in the first quarter of 2012 as compared to the same period of 2011. The increase was primarily due to revenues of $11.8 million related to our laser surgical services businesses which we acquired on April 1, 2011, and the net addition of six Asset360TM Equipment Management Programs ("Asset360 Programs") and increased revenues driven by incremental business from new and existing technology, both owned and managed, partially offset by sluggish patient census and what we believe has been a sustained customer effort to control outsourcing expenses. Many of our Asset360 program customers utilize more than one of our equipment management program offerings in areas such as infusion, patient handling, and negative pressure wound therapy.

As of March 31, 2012, we had 111 such active programs within 76 hospitals, up from 107 of such programs as of December 31, 2011.

Total cost of revenue in the segment increased $6.2 million, or 26.9%, to $29.3 million in the first quarter of 2012 as compared to the same period of 2011.

This increase, incremental to the costs of $6.5 million related to our new laser surgical services business, is attributable to higher employee-related expenses to support growth initiatives in patient handling and wound therapy. This was partially offset by an increase in recalled equipment gains of $1.2 million from that experienced in the prior year, net of costs associated with the retirement of recalled pumps.

Medical equipment depreciation decreased $0.3 million, or 1.5%, to $16.9 million in the first quarter of 2012 as compared to the same period of 2011. The decrease in medical equipment depreciation was due to the decrease in purchase accounting adjustments related to the step-up in carrying value of our medical equipment related to our 2007 recapitalization. Depreciation of those purchase accounting adjustments was completed in May of 2011. Medical equipment depreciation for the quarter ended March 31, 2012 and 2011 included $0.1 million and $2.7 million, respectively, of purchase accounting adjustments related to the step-up in carrying value of our medical equipment.

Gross margin percentage for the Medical Equipment Outsourcing segment increased from 38.0% in the first quarter of 2011 to 40.3% in the first quarter of 2012.

This increase was attributable to higher margin on increased recalled equipment gains from that experienced in the prior year and in our recently acquired laser surgical services business. Gross margin percentage, before purchase accounting adjustments, decreased from 42.1 % in the first quarter of 2011 to 40.4% in the first quarter of 2012. The 31 -------------------------------------------------------------------------------- Table of Contents higher gross margin from recalled equipment and laser surgical services business more than offset the decrease in gross margin on our traditional outsourcing business.

Technical and Professional Services Segment - Plan & Acquire; Maintain & Repair (in thousands) Three Months Ended March 31, 2012 2011 Change % Change Total revenue $ 20,129 $ 10,870 $ 9,259 85.2 % Cost of revenue 15,768 7,884 7,884 100.0 Gross margin $ 4,361 $ 2,986 $ 1,375 46.0 Gross margin % 21.7 % 27.5 % Gross margin $ 4,361 $ 2,986 $ 1,375 46.0 Purchase accounting adjustments, primarily non-cash charges related to favorable lease commitments 3 1 2 * Gross margin, before purchase accounting adjustments $ 4,364 $ 2,987 $ 1,377 46.1 Gross margin %, before purchase accounting adjustments 21.7 % 27.5 % -------------------------------------------------------------------------------- *Not meaningful Total revenue in the Technical and Professional Services segment increased $9.3 million, or 85.2%, to $20.1 million in the first quarter of 2012 as compared to the same period of 2011. The increase was due to increased activity of $8.9 and $0.4 million in our provider and manufacturer services units, respectively. The increase in provider services revenues is related to a large BioMed360 Program, which began in September 2011.

Total cost of revenue in the segment increased $7.9 million, or 100.0%, to $15.8 million in the first quarter of 2012 as compared to the same period of 2011. The increase is attributable to expenses related to supporting the increased activity in our provider and manufacturer service units of $7.6 and $0.3 million, respectively.

Gross margin percentage for the Technical and Professional Services segment decreased from 27.5% for the first quarter of 2012 to 21.7% for the same period of 2011. Gross margin percentage will fluctuate based on the variability of third-party vendor expenses in our BioMed360 TM Equipment Management Programs ("BioMed360 Program") and supplemental service programs. Additionally, gross margin includes revenues and expenses related to a large BioMed360 Program, which began in September 2011, whose gross margin percentage is expected to be lower than our historical service gross margins.

32 -------------------------------------------------------------------------------- Table of Contents Medical Equipment Sales and Remarketing Segment - Redeploy & Remarket (in thousands) Three Months Ended March 31, 2012 2011 Change % Change Total revenue $ 6,368 $ 5,606 $ 762 13.6 % Cost of revenue 4,753 4,300 453 10.5 Gross margin $ 1,615 $ 1,306 $ 309 23.7 Gross margin % 25.4 % 23.3 % Gross margin $ 1,615 $ 1,306 $ 309 23.7 Purchase accounting adjustments, primarily non-cash charges related to the step-up in carrying value of our medical equipment 1 22 (21 ) (95.5 ) Gross margin, before purchase accounting adjustments $ 1,616 $ 1,328 $ 288 21.7 Gross margin %, before purchase accounting adjustments 25.4 % 23.7 % Total revenue in the Medical Equipment Sales and Remarketing segment increased $0.8 million, or 13.6%, to $6.4 million in the first quarter of 2012 as compared to the same period of 2011. The increase was driven by an increase in sales of disposables and used equipment of $0.7 and $0.7 million, respectively, offset by a decrease in new equipment sales of $0.6 million.

Total cost of revenue in the segment increased $0.5 million, or 10.5%, to $4.8 million in the first quarter of 2012 as compared to the same period of 2011. The increase was the result of increases in the cost of disposable and used sales of $0.7 and $0.1, respectively, offset by a decrease in the cost of new equipment sales of $0.3 million.

Gross margin percentage for the Medical Equipment Sales and Remarketing segment increased from 23.3% in the first quarter of 2011 to 25.4% for the same period of 2012. Gross margin percentage, before purchase accounting adjustments, increased from 23.7% in the first quarter of 2011 to 25.4% for the same period of 2012. We expect margins and activity in this segment to fluctuate based on the transactional nature of the business.

Selling, General and Administrative Selling, General and Administrative and Interest Expense (in thousands) Three Months Ended March 31, 2012 2011 Change % ChangeSelling, general and administrative $ 27,659 $ 22,381 $ 5,278 23.6 % Acquisition and integration expenses 104 774 (670 ) (86.6 ) Interest expense 15,499 11,706 3,793 32.4 -------------------------------------------------------------------------------- *Not meaningful Selling, general and administrative expense increased $5.3 million, or 23.6%, to $27.7 million for the first quarter of 2012 as compared to the same period of 2011. The increase was primarily due to an 33 -------------------------------------------------------------------------------- Table of Contents increase of $3.6 million related to our newly acquired laser surgical business, as well as increases in employee-related and other expenses of $2.2 and $0.6 million, respectively, offset by decreases in vehicle and strategic and board-related expenses of $0.6 and $0.5 million, respectively. Employee-related expenses increased as a result of certain clinical resources focusing on growth platforms, when they had previously been focused on equipment management.

Acquisition and integration expenses were $0.1 million for the three months ended March 31, 2012. These charges were related primarily to our acquisition of a Florida based surgical laser equipment service provider on January 3, 2012.

Selling, general and administrative expense as a percentage of total revenue was 26.0% and 28.0% for each of the quarters ended March 31, 2012 and 2011, respectively.

Interest Expense Interest expense increased $3.8 million to $15.5 million for the first quarter of 2012 as compared to the same period of 2011. This increase is primarily due to the interest expense related to the issuance of $175.0 million aggregate principal amount of our 8.50% / 9.25% Second Lien Senior Secured PIK Toggle Notes due 2015 ("PIK Toggle Notes") in the second quarter of 2011. See Note 8 Long-Term Debt.

Income Taxes Income taxes were a benefit of $3.2 million and an expense $0.2 million for the three months ended March 31, 2012 and 2011, respectively. Our January 3, 2012 acquisition resulted in the recording of deferred tax liabilities on the opening balance sheet due to higher book than tax basis for fixed assets and amortizable intangible assets. This discrete event had the one-time effect of reducing our valuation allowance by approximately $3.4 million on that date, though this amount was offset by approximately $2.5 million of additional valuation allowance resulting from year-to-date losses. In future reporting periods, we will continue to assess the likelihood that deferred tax assets will be realizable.

Consolidated Net Loss Consolidated net loss decreased $3.2 million to $3.0 million in the first quarter of 2012 as compared to the same period of 2011. Net loss was impacted primarily by higher operating income and income tax benefit partially offset by higher selling, general and administrative and interest expense.

EBITDA Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") was $32.8 and $28.5 million for the three months ended March 31, 2012 and 2011, respectively. EBITDA for the three months ended March 31, 2012, was impacted by the inclusion of our acquired surgical laser business, increased employee-related expenses, including costs related to our continued build of clinical resources to support growth initiatives in patient handling and wound therapy.

In addition to using EBITDA internally as a measure of operational performance, we disclose it externally to assist analysts, investors and lenders in their comparisons of operational performance, valuation and debt capacity across companies with differing capital, tax and legal structures. Management also understands that some industry analysts and investors consider EBITDA as a supplementary non-GAAP financial measure useful in analyzing a company's ability to service debt. EBITDA, however, is not a measure of financial performance under GAAP and should not be 34 -------------------------------------------------------------------------------- Table of Contents considered as an alternative to, or more meaningful than, net income as a measure of operating performance or to cash flows from operating, investing or financing activities or as a measure of liquidity. Since EBITDA is not a measure determined in accordance with GAAP and is thus susceptible to varying interpretations and calculations, EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. EBITDA does not represent an amount of funds that is available for management's discretionary use. A reconciliation of EBITDA to consolidated net loss is included below: Three Months Ended March 31, (in thousands) 2012 2011Net loss attributable to Universal Hospital Services, Inc $ (3,144 ) $ (6,146 ) Interest expense 15,499 11,706 Provision (benefit) for income taxes (3,169 ) 214 Depreciation and amortization 23,631 22,698 EBITDA $ 32,817 $ 28,472 Three Months Ended March 31, (in thousands) 2012 2011 EBITDA $ 32,817 $ 28,472 Other Financial Data: Net cash provided by operating activities $ 24,030 $ 25,182 Net cash used in investing activities (24,686 ) (26,483 ) Net cash provided by (used by) financing activities (303 ) 1,301 Other Operating Data (as of end of period): Medical equipment (approximate number of owned outsourcing units) 247,000 236,000 District offices 83 84 Number of outsourcing hospital customers 4,275 4,325 Number of total outsourcing customers 8,675 8,600 SEASONALITY Quarterly operating results are typically affected by seasonal factors.

Historically, our first and fourth quarters are the strongest, reflecting increased customer utilization during the fall and winter months.

LIQUIDITY AND CAPITAL RESOURCES PIK Toggle Notes. Our 8.50% / 9.25% Second Lien Senior Secured PIK Toggle Notes due 2015 (the "PIK Toggle Notes") consist of $230.0 million aggregate principal amount of PIK Toggle Notes issued on May 31, 2007 (the "Existing Notes"), and $175.0 million aggregate principal amount of PIK Toggle Notes issued on June 17, 2011 (the "Additional Notes") for a total aggregate outstanding principal 35 -------------------------------------------------------------------------------- Table of Contents amount of $405.0 million. All of the PIK Toggle Notes were issued under a Second Lien Senior Indenture dated as of May 31, 2007 (the "Second Lien Senior Indenture").

Our principal sources of liquidity are expected to be cash and cash equivalents, cash flows from operating activities, and borrowings under our Senior Secured Credit Facility, which provides for loans in an amount of up to $195.0 million, subject to our borrowing base. See Note 8, Long-Term Debt for details related to our Senior Secured Credit Facility. It is anticipated that our principal uses of liquidity will be to fund capital expenditures related to purchases of medical equipment, provide working capital, meet debt service requirements and finance our strategic plans.

We require substantial cash to operate our Medical Equipment Outsourcing programs and service our debt. Our outsourcing programs require us to invest a significant amount of cash in medical equipment purchases. To the extent that such expenditures cannot be funded from cash and cash equivalents, our operating cash flow, borrowing under our Senior Secured Credit Facility or other financing sources, we may not be able to conduct our business or grow as currently planned. We anticipate additional capital investment of approximately $55.0 million during the remaining nine months of 2012.

If we are unable to service our debt obligations through our cash and cash equivalents, generating sufficient cash flow from operations, and additional borrowings under our first lien senior secured asset-based revolving credit facility, 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.

Net cash provided by operating activities was $24.0 and $25.2 million for the three months ended March 31, 2012 and 2011, respectively. Net cash provided by operating activities during the three months ended March 31, 2012 was impacted by the increase in working capital compared to the same period of 2011.

Net cash used in investing activities was $24.7 and $26.5 million for the three months ended March 31, 2012 and 2011, respectively. The change in net cash used in investing activities was primarily the result of our January 3, 2012, acquisition of a surgical laser equipment service provider offset by lower medical equipment purchases during the same period.

Net cash provided by (used in) financing activities was ($0.3) and $1.3 million for the three months ended March 31, 2012 and 2011, respectively. During the three months ended March 31, 2012, the change in net cash used in financing activities was primarily impacted by our payment of debt acquired through our January 3,2012 acquisition of a surgical laser equipment service provider.

Our cash balances were $0.2 million as of March 31, 2012 compared to zero as of March 31, 2011.

Based on the level of operating performance expected in 2012, we believe our cash and cash equivalents, cash from operations, and additional borrowings under our Senior Secured Credit Facility, will meet our liquidity needs for the foreseeable future, exclusive of any borrowings that we may make to finance potential acquisitions. However, if during that period or thereafter we are not successful in generating sufficient cash flows from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to us, our business could be adversely affected. As of March 36 -------------------------------------------------------------------------------- Table of Contents 31, 2012, we had $163.4 million of availability under the Senior Secured Credit Facility based on a borrowing base of $190.7 million, after giving effect to $4.3 million used for letters of credit.

Our levels of borrowing are further restricted by the financial covenants set forth in our Senior Secured Credit Facility agreement and the Second Lien Senior Indenture governing our PIK Toggle Notes and Floating Rate Notes, as described in Note 8, Long-Term Debt. As of March 31, 2012, the Company was in compliance with all financial covenants under the Senior Secured Credit Facility and the second lien senior indenture which governs our PIK Toggle Notes and Floating Rate Notes.

RECENT ACCOUNTING PRONOUNCEMENT Standard Adopted In September 2011, the FASB issued an amendment to the authoritative guidance on goodwill impairment testing. The objective of this amendment is to simplify how entities, both public and nonpublic, test goodwill for impairment. The amendment permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, Intangibles - Goodwill and Other. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The adoption of this amendment did not have a material effect on our consolidated financial statements.

SAFE HARBOR STATEMENT Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: We believe statements in this Quarterly Report on Form 10-Q/A looking forward in time involve risks and uncertainties. The following factors, among others, could adversely affect our business, operations and financial condition, causing our actual results to differ materially from those expressed in any forward-looking statements: † our substantial indebtedness could adversely affect our financial health; † risks associated with our substantial leverage; † risk associated with our ability to fund our significant cash needs; † risks associated with the current economic environment, including the credit markets; † revenue generation related to decreases in patient census or services; † the effect of the global economic downturn on our customers and suppliers; † risks associated with supplier concentration; † health care providers willingness to alter their procurement of medical equipment; † risks associated with competition; † risk associated with bundling of products and services by competitors; † risks associated with our lack of long-term commitments from some customers; † consolidation in the health care industry; † our ability to successfully identify and manage our acquisitions; † uncertainties regarding the impact of U.S. healthcare reform on our business; † changes in third-party payor reimbursement for health care items and services; 37 -------------------------------------------------------------------------------- Table of Contents † our inability to attract or retain skilled employees and the loss of any of our key personnel; † our ability to maintain contracts with existing customers and enter into new contracts with our customers; † risks associated with cash flow fluctuations; † risks associated with credit risks posed by our home care provider and nursing home customers; † risk associated with our pension plan; † our customers being subject to extensive government regulation and our exposure to potential costs and fines associated with such regulations; † the effect of expenditures related to equipment recalls or obsolescence; † liabilities for legal claims associated with medical equipment that we outsource and service; † risks associated with the failure of our management information systems; † risks related to increased costs that cannot be passed on to our customers; † inherent limitations in our internal control systems over financial reporting; † conflicts of interest between our principal equity holder and our other security holders; and † the risk factors as set forth in Item 1A of Part II of this Quarterly Report on Form 10-Q/A.

[ Back To Technology News's Homepage ]