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 June 30, 2012, we owned or managed over 670,000 pieces of medical equipment consisting of 440,000 owned or managed pieces in our Medical Equipment Outsourcing segment and 230,000 pieces of customer owned equipment we managed in our Technical and Professional Services segment. Our diverse medical equipment outsourcing customer base includes more than 4,300 acute care hospitals and approximately 4,425 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 33 -------------------------------------------------------------------------------- Table of Contents 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 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 have been 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 have been 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 surgical laser equipment service provider for total consideration of approximately $16.1 million, including a holdback of approximately $1.9 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.

On July 9, 2012, we completed the acquisition of certain assets of a surgical laser equipment service provider for $3.6 million with an estimated earn out of approximately $1.2 million. The acquisition was funded from the Senior Secured Credit Facility. The acquisition expands our national footprint in the laser and mobile surgical services market and is not expected to have a material impact on our results of operations or our financial position for the 2012 fiscal year.

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.

34 -------------------------------------------------------------------------------- Table of Contents 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 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 three and six-month periods ended June 30, 2012 and 2011. The Company's consolidated financial statements included in the Original Filing reflected $13.4 million and $16.0 million of gains from both non-monetary and cash refunds on recalled infusion pumps within revenues for the three and six-month periods ended June 30, 2012, respectively.

The three and six-month periods ended June 30, 2011 included $2.6 million and $3.9 million, 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 three and six-month periods ended June 30, 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 related to the first quarter of 2012.

Medical Equipment Outsourcing Segment - Manage & Utilize Our flagship business is our Medical Equipment Outsourcing segment, which accounted for $75.1 million, or approximately 70.4% of our revenues, for the quarter ended June 30, 2012 and $152.5 million, or approximately 72.4% of our revenues, for the six months ended June 30, 2012. As of June 30, 2012, we owned or managed over 440,000 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 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; 35 -------------------------------------------------------------------------------- Table of Contents † 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.

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 six months ended June 30, 2012, we recognized recalled equipment gains of approximately $15.4 million, net of costs associated with the retirement of the recalled pumps, of which approximately $14.1 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 June 30, 2012, we owned approximately 1,460 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 third quarter of 2012, we expect to recognize recalled equipment net gains between $2.0 and $4.0 million.

Technical and Professional Services Segment - Plan & Acquire; Maintain & Repair Our Technical and Professional Services segment accounted for $22.4 million, or approximately 20.9% of our revenues for the quarter ended June 30, 2012 and $42.5 million, or approximately 20.2% of our revenues for the six months ended June 30, 2012. 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 230,000 units of customer owned equipment during the twelve months ended June 30, 2012. In addition, during the twelve months ended June 30, 2012, we serviced over 440,000 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.

36 -------------------------------------------------------------------------------- Table of Contents Medical Equipment Sales and Remarketing Segment - Redeploy & Remarket Our Medical Equipment Sales and Remarketing segment accounted for $9.3 million, or approximately 8.7%, of our revenues for the quarter ended June 30, 2012 and $15.6 million, or approximately 7.4% of our revenues for the six months ended June 30, 2012. 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 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 June 30, 2012 and † the results of operations for the three-month and six-month periods ended June 30, 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.

37 -------------------------------------------------------------------------------- Table of Contents The following table provides information on the percentages of certain items of selected financial data compared to total revenues for the three-month and six-month periods ended June 30, 2012 and 2011. The table below also indicates the percentage increase or decrease over the prior comparable period.

Three Months Ended June 30, Six Months Ended June 30, Percent Percent Percent of Total Revenues Increase Percent of Total Revenues Increase 2012 2011 (Decrease) 2012 2011 (Decrease) Revenue Medical equipment outsourcing 70.4 % 80.5 % 5.4 % 72.4 % 80.2 % 12.0 % Technical and professional services 20.9 12.8 96.7 20.2 13.1 91.1 Medical equipment sales and remarketing 8.7 6.7 57.7 7.4 6.7 36.1 Total revenues 100.0 % 100.0 % 20.6 100.0 % 100.0 % 24.0 Cost of Sales Cost of medical equipment outsourcing 18.0 29.2 (25.7 ) 23.1 28.8 (0.9 ) Cost of technical and professional services 15.8 9.3 105.2 15.5 9.5 102.7 Cost of medical equipment sales and remarketing 6.9 5.2 59.7 5.7 5.2 35.9 Medical equipment depreciation 16.2 19.8 (1.1 ) 16.3 20.5 (1.3 ) Total costs of medical equipment outsourcing, technical and professional services and medical equipment sales and remarketing 56.9 63.5 8.1 60.6 64.0 17.4 Gross margin 43.1 36.5 42.3 39.4 36.0 35.7 Selling, general and administrative 26.9 30.6 5.9 26.8 29.1 13.9 Acquisition and integration expenses 0.2 1.4 (84.5 ) 0.1 1.2 (85.3 ) Operating income 16.0 4.5 331.2 12.5 5.7 171.4 Interest expense 13.6 14.4 13.8 14.2 14.4 22.7 Income (loss) before income taxes and non controlling interest 2.4 (9.9 ) * (1.7 ) (8.7 ) * Provision (benefit) for income taxes 0.2 (7.3 ) * (1.4 ) (3.7 ) (52.6 ) Consolidated net income (loss) 2.2 % (2.6 ) * (0.3 )% (5.0 )% * -------------------------------------------------------------------------------- *Not meaningful (1) The Company has restated certain amounts for the three and six-month periods ended June 30, 2012 and 2011. The Company's consolidated financial statements included in the Original Filing reflected $13.4 million and $16.0 million of gains from both non-monetary and cash refunds on recalled infusion pumps within revenues for the three and six-month periods ended June 30, 2012, respectively.

The three and six-month periods ended June 30, 2011 included $2.6 million and $3.9 million, 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 three and six-month periods ended June 30, 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 related to the first quarter of 2012.

Consolidated Results of Operations for the three months ended June 30, 2012 compared to the three months ended June 30, 2011 Total Revenue Total revenue for the three months ended June 30, 2012 was $106.7 million, compared with $88.5 million for the three months ended June 30, 2011, an increase of $18.2 million or 20.6%. The increase was primarily due to our technical and professional services segment related to a large BioMed360 program which began in September 2011, and resulted in additional revenue of $10.9 million, combined 38 -------------------------------------------------------------------------------- Table of Contents with an increase in our medical equipment outsourcing segment related to acquisitions in our laser surgical services business, resulting in additional revenue of $4.7 million. In addition, the net addition of 7 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 June 30, 2012 was $60.8 million compared to $56.2 million for the three months ended June 30, 2011, an increase of $4.6 million or 8.1%. 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 $8.5 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 $2.6 million. In addition, our medical equipment sales and remarketing segment costs increased $2.7 million due to an increase in costs associated with disposable and used equipment sales. This was mostly offset by an increase in gains from that experienced in the prior year on recalled equipment of $10.3 million, net of costs associated with the retirement of the recalled pumps.

Gross Margin Total Gross margin for the three months ended June 30, 2012 was $45.9 million, or 43.0% of total revenues compared to $32.3 million, or 36.5% of total revenues, for the three months ended June 30, 2011, an increase of $13.6 million or 42.3%. 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 of $10.3 million, net of costs associated with the retirement of the recalled pumps.

Medical Equipment Outsourcing Segment - Manage & Utilize (in thousands) Three Months Ended June 30, 2012 2011 Change % Change Total revenue $ 75,081 $ 71,242 $ 3,839 5.4 % Cost of revenue 19,212 25,861 (6,649 ) (25.7 ) Medical equipment depreciation 17,321 17,505 (184 ) (1.1 ) Gross margin $ 38,548 $ 27,876 $ 10,672 38.3 Gross margin % 51.3 % 39.1 % Gross margin $ 38,548 $ 27,876 $ 10,672 38.3 Purchase accounting adjustments, primarily non-cash charges related to step-up in carrying value of medical equipment 112 1,870 (1,758 ) (94.0 ) Gross margin, before purchase accounting adjustments $ 38,660 $ 29,746 $ 8,914 30.0 Gross margin %, before purchase accounting adjustments 51.5 % 41.8 % 39 -------------------------------------------------------------------------------- Table of Contents Total revenue in the Medical Equipment Outsourcing segment increased $3.8 million, or 5.4%, to $75.1 million in the second quarter of 2012 as compared to the same period of 2011. The increase was primarily due to an increase in revenues related to our laser surgical services business from additional acquisitions, the net addition of 7 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 June 30, 2012, we had 113 such active programs within 80 hospitals, up from 107 of such programs as of December 31, 2011.

Total cost of revenue in the segment decreased $6.6 million, or 25.7%, to $19.2 million in the second quarter of 2012 as compared to the same period of 2011.

This decrease in costs is primarily attributable an increase in gains from that experienced in the prior year on recalled equipment of $10.3 million, net of costs associated with the retirement of the recalled pumps, partially offset by higher employee-related expenses to support growth initiatives in patient handling and wound therapy.

Medical equipment depreciation decreased $0.2 million, or 1.1%, to $17.3 million in the second quarter of 2012 as compared to the same period of 2011. The decrease in medical equipment depreciation was due primarily 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. The remaining purchase accounting adjustments relate to step up in value of medical equipment from our April 1, 2011 acquisition of Emergent Group. Medical equipment depreciation for the quarters ended June 30, 2012 and 2011 included $0.1 million and $1.9 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 39.1% in the second quarter of 2011 to 51.3% in the second quarter of 2012.

This increase was primarily attributable to higher margin on increased recalled equipment gains from that experienced in the prior year of $10.3 million, net of costs associated with the retirement of the recalled pumps. Gross margin percentage for the Medical Equipment Outsourcing segment increased from 39.1% in the second quarter of 2011 to 51.3% in the second quarter of 2012. This increase was primarily attributable to higher margin on net gains from recalled equipment of $10.3 million. Gross margin percentage, before purchase accounting adjustments, increased from 41.8% in the second quarter of 2011 to 51.5% in the second quarter of 2012. The increase in gross margin after purchase accounting adjustments is attributable to higher margin on net gains from recalled equipment.

40 -------------------------------------------------------------------------------- Table of Contents Technical and Professional Services Segment - Plan & Acquire; Maintain & Repair (in thousands) Three Months Ended June 30, 2012 2011 Change % Change Total revenue $ 22,350 $ 11,361 $ 10,989 96.7 % Cost of revenue 16,885 8,227 8,658 105.2 Gross margin $ 5,465 $ 3,134 $ 2,331 74.4 Gross margin % 24.5 % 27.6 % Gross margin $ 5,465 $ 3,134 $ 2,331 74.4 Purchase accounting adjustments, primarily non-cash charges related to favorable lease commitments 1 3 (2 ) (66.7 ) Gross margin, before purchase accounting adjustments $ 5,466 $ 3,137 $ 2,329 74.2 Gross margin %, before purchase accounting adjustments 24.5 % 27.6 % Total revenue in the Technical and Professional Services segment increased $11.0 million, or 96.7%, to $22.4 million in the second quarter of 2012 as compared to the same period of 2011. The increase was due to increased activity of $10.9 million in our provider services unit. The increase is attributable to a large BioMed360TM Equipment Management Programs ("BioMed360 Program"), which began in September 2011.

Total cost of revenue in the segment increased $8.7 million, or 105.2%, to $16.9 million in the second 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 service unit of $8.5 million.

Gross margin percentage for the Technical and Professional Services segment decreased from 27.6% for the second quarter of 2011 to 24.5% for the same period of 2012. Gross margin percentage will fluctuate based on the variability of third-party vendor expenses in our 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 percentages.

Medical Equipment Sales and Remarketing Segment - Redeploy & Remarket (in thousands) Three Months Ended June 30, 2012 2011 Change % Change Total revenue $ 9,264 $ 5,876 $ 3,388 57.7 % Cost of revenue 7,345 4,600 2,745 59.7 Gross margin $ 1,919 $ 1,276 $ 643 50.4 Gross margin % 20.7 % 21.7 % Gross margin $ 1,919 $ 1,276 $ 643 50.4 Purchase accounting adjustments, primarily non-cash charges related to the step-up in carrying value of our medical equipment 1 8 (7 ) (87.5 ) Gross margin, before purchase accounting adjustments $ 1,920 $ 1,284 $ 636 49.5 Gross margin %, before purchase accounting adjustments 20.7 % 21.9 % 41 -------------------------------------------------------------------------------- Table of Contents Total revenue in the Medical Equipment Sales and Remarketing segment increased $3.4 million, or 57.7%, to $9.3 million in the second quarter of 2012 as compared to the same period of 2011. The increase was driven by an increase in sales of disposables, and new and used equipment of $1.2 and $2.2 million, respectively.

Total cost of revenue in the segment increased $2.7 million, or 59.7%, to $7.3 million in the second 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 $2.0 million, respectively.

Gross margin percentage for the Medical Equipment Sales and Remarketing segment decreased from 21.7% in the second quarter of 2011 to 20.7% 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 June 30, 2012 2011 Change % ChangeSelling, general and administrative $ 28,709 $ 27,111 $ 1,598 5.9 % Acquisition and integration expenses 190 1,225 (1,035 ) (84.5 ) Interest expense 14,504 12,745 1,759 13.8 Selling, general and administrative expense increased $1.6 million, or 5.9%, to $28.7 million for the second quarter of 2012 as compared to the same period of 2011. The increase was primarily due to increases in employee-related and other expenses of $1.0 and $0.6 million, respectively. Acquisition and integration expenses were $0.2 million for the three months ended June 30, 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 23.9% and 29.8% for each of the quarters ended June 30, 2012 and 2011, respectively.

Interest Expense Interest expense increased $1.8 million to $14.5 million for the second 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 June of 2011. See Note 8 Long-Term Debt.

Income Taxes Income taxes were an expense of $0.2 million and a benefit of $6.5 million for the three months ended June 30, 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 $1.4 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.

42 -------------------------------------------------------------------------------- Table of Contents Consolidated Net Income Consolidated net income increased $4.6 million to $2.3 million in the second quarter of 2012 as compared to the same period of 2011. Net income was impacted primarily by gains on recalled equipment.

Consolidated Results of Operations for the six months ended June 30, 2012 compared to the six months ended June 30, 2011 Total Revenue Total revenue for the six months ended June 30, 2012 was $210.6 million, compared with $169.9 million for the six months ended June 30, 2011, an increase of $40.7 million or 24.0%. The increase was primarily due to our technical and professional services segment related to a large BioMed360 program which began in September 2011, and resulted in additional revenue of $20.3 million, combined with an increase in our medical equipment outsourcing segment related to acquisitions in our laser surgical services business, resulting in additional revenue of $8.2 million. In addition, the net addition of 13 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 six months ended June 30, 2012 was $127.5 million compared to $108.7 million for the six months ended June 30, 2011, an increase of $18.8 million or 17.4%. 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 $16.5 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 $2.9 million. In addition, our medical equipment sales and remarketing segment costs increased $3.2 million due to the increase in cost associated with disposable and used equipment sales. This was mostly offset by an increase in gains from that experienced in the prior year on recalled equipment of $11.5 million, net of costs associated with the retirement of the recalled pumps.

Gross Margin Total Gross margin for the six months ended June 30, 2012 was $83.1 million, or 39.4% of total revenues compared to $61.2 million, or 36.0% of total revenues, for the six months ended June 30, 2011, an increase of $21.9 million or 35.7%.

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 of $11.5 million, net of costs associated with the retirement of the recalled pumps.

43 -------------------------------------------------------------------------------- Table of Contents Medical Equipment Outsourcing Segment - Manage & Utilize (in thousands) Six Months Ended June 30, 2012 2011 Change % Change Total revenue $ 152,465 $ 136,157 $ 16,308 12.0 % Cost of revenue 48,537 48,971 (434 ) (0.9 ) Medical equipment depreciation 34,225 34,673 (448 ) (1.3 ) Gross margin $ 69,703 $ 52,513 $ 17,190 32.7 Gross margin % 45.7 % 38.6 % Gross margin $ 69,703 $ 52,513 $ 17,190 32.7 Purchase accounting adjustments, primarily non-cash charges related to step-up in carrying value of medical equipment 196 4,594 (4,398 ) (95.7 ) Gross margin, before purchase accounting adjustments $ 69,899 $ 57,107 $ 12,792 22.4 Gross margin %, before purchase accounting adjustments 45.8 % 41.9 % Total revenue in the Medical Equipment Outsourcing segment increased $16.3 million, or 12.0%, to $152.5 million in the first six months of 2012 as compared to the same period of 2011. The increase was primarily due to revenues of $8.2 million related to our laser surgical business, which we acquired on April 1, 2011 through our acquisition of Emergent Group, the net addition of 13 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. As of June 30, 2012, we had 113 such active programs within 80 hospitals, up from 107 of such programs as of December 31, 2011.

Total cost of revenue in the segment decreased $0.4 million, or 0.9%, to $48.5 million in the first six months of 2012 as compared to the same period of 2011.

This decrease in costs is primarily attributable an increase in gains from that experienced in the prior year on recalled equipment of $11.5 million, net of costs associated with the retirement of the recalled pumps. The costs were partially offset by costs of $2.9 million related to our new laser surgical business, and higher employee-related expenses, including costs related to our continued build of clinical resources to support growth initiatives in patient handling and wound therapy.

Medical equipment depreciation decreased $0.4 million, or 1.3%, to $34.2 million in the first six months of 2012 as compared to the same period of 2011. The decrease in medical equipment depreciation was primarily due to the decrease in purchase accounting adjustments related to the step-up in the carrying value of our medical equipment. Medical equipment depreciation for the six months ended June 30, 2012 and 2011 included $0.2 million and $4.6 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 38.6% in the first six months of 2011 to 45.7% in the first six months of 2012. Gross margin percentage, before purchase accounting adjustments, increased from 41.9% in the first six months of 2011 to 45.8% in the first six months of 2012. These increases resulted primarily from an increase in net gains from that experienced in the prior year on recall equipment of $11.5 million and the decrease in depreciation related to purchase accounting adjustments.

44 -------------------------------------------------------------------------------- Table of Contents Technical and Professional Services Segment - Plan & Acquire; Maintain & Repair (in thousands) Six Months Ended June 30, 2012 2011 Change % Change Total revenue $ 42,479 $ 22,231 $ 20,248 91.1 % Cost of revenue 32,654 16,110 16,544 102.7 Gross margin $ 9,825 $ 6,121 $ 3,704 60.5 Gross margin % 23.1 % 27.5 % Gross margin $ 9,825 $ 6,121 $ 3,704 60.5 Purchase accounting adjustments, primarily non-cash charges related to favorable lease commitments 4 4 - - Gross margin, before purchase accounting adjustments $ 9,829 $ 6,125 $ 3,704 60.5 Gross margin %, before purchase accounting adjustments 23.1 % 27.6 % Total revenue in the Technical and Professional Services segment increased $20.2 million, or 91.1%, to $42.5 million in the first six months of 2012 as compared to the same period of 2011. The increase was driven by increased activity of $20.3 million in our provider services unit. The increase is attributable to a large BioMed360 Program, which began in September 2011.

Total cost of revenue in the segment increased $16.5 million, or 102.7%, to $32.7 million in the first six months 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 service unit.

Gross margin percentage for the Technical and Professional Services segment decreased from 27.5% for the first six months of 2011 to 23.1% for the same period of 2012. Gross margin percentage will fluctuate based on the variability of third-party vendor expenses in our 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.

Medical Equipment Sales and Remarketing Segment - Redeploy & Remarket (in thousands) Six Months Ended June 30, 2012 2011 Change % Change Total revenue $ 15,631 $ 11,482 $ 4,149 36.1 % Cost of revenue 12,099 8,900 3,199 35.9 Gross margin $ 3,532 $ 2,582 $ 950 36.8 Gross margin % 22.6 % 22.5 % Gross margin $ 3,532 $ 2,582 $ 950 36.8 Purchase accounting adjustments, primarily non-cash charges related to the step-up in carrying value of our medical equipment 2 30 (28 ) (93.3 ) Gross margin, before purchase accounting adjustments $ 3,534 $ 2,612 $ 922 35.3 Gross margin %, before purchase accounting adjustments 22.6 % 22.7 % 45 -------------------------------------------------------------------------------- Table of Contents Total revenue in the Medical Equipment Sales and Remarketing segment increased $4.1 million, or 36.1%, to $15.6 million in the first six months of 2012 as compared to the same period of 2011. The increase was primarily driven by disposable and used equipment sales of $2.0 and $2.9 million, respectively, partially offset by decreases in new equipment sales.

Total cost of revenue in the segment increased $3.2 million, or 35.9%, to $12.1 million in the first six months of 2012 as compared to the same period of 2011.

The cost of revenue was impacted by an increase in the cost of disposable and used equipment sales of $1.4 and $2.0 million, respectively, offset by decreases in the cost of new equipment sales.

Gross margin percentage for the Medical Equipment Sales and Remarketing segment increased from 22.5% in the first six months of 2011 to 22.6% for the same period of 2012. Gross margin percentage, before purchase accounting adjustments, decreased from 22.7% in the first six months of 2011 to 22.6% 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 Six Months Ended June 30, (in thousands) 2012 2011 Change % Change Selling, general and administrative $ 56,367 $ 49,491 $ 6,876 13.9 % Acquisition and integration expenses 294 1,999 (1,705 ) (85.3 ) Interest expense 30,003 24,450 5,553 22.7 Selling, general and administrative expense increased $6.9 million, or 13.9%, to $56.4 million for the first six months of 2012 as compared to the same period of 2011. This increase was due to employee related expense and incremental costs to support the laser surgical business that was acquired on April 1, 2011.

Acquisition and integration expenses were $0.3 and $2.0 million for the six months ended June 30, 2012 and 2011, respectively. The current period charges were related primarily to our acquisition of a Florida based surgical laser equipment service provider on January 3, 2012, while the prior year expenses related primarily to the acquisition of Emergent Group on April 1, 2011.

Selling, general and administrative expense as a percentage of total revenue was 24.9% and 28.5% for each of the six month periods ended June 30, 2012 and 2011, respectively.

Interest Expense Interest expense increased $5.6 million to $30.0 million for the first six months 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 $3.0 million and $6.3 million for the six months ended June 30, 2012 and 2011, respectively. Our January 3, 2012 acquisition resulted in the recording of deferred tax liabilities on 46 -------------------------------------------------------------------------------- Table of Contents 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 $1.4 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 $7.8 million to $0.6 million in the first six months of 2012 as compared to the same period of 2011. Net loss was impacted primarily by net gains on recall equipment.

EBITDA Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") was $73.6 and $56.4 million for the six months ended June 30, 2012 and 2011, respectively. EBITDA for the six months ended June 30, 2012, was impacted by the inclusion of our acquired surgical laser business on April 1, 2011, and increase in recalled equipment gains partially offset by 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 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: Six Months Ended June 30, (in thousands) 2012 2011Net loss attributable to Universal Hospital Services, Inc. $ (998 ) $ (8,596 ) Interest expense 30,003 24,450 Provision (benefit) for income taxes (2,972 ) (6,266 ) Depreciation and amortization 47,607 46,855 EBITDA $ 73,640 $ 56,443 47 -------------------------------------------------------------------------------- Table of Contents Six Months Ended June 30, (in thousands) 2012 2011 EBITDA $ 73,640 $ 56,443 Other Financial Data: Net cash provided by operating activities $ 17,674 $ 31,090 Net cash (used in) investing activities (43,229 ) (114,894 ) Net cash provided by financing activities 24,726 121,551 Other Operating Data (as of end of period): Medical equipment (approximate number of owned outsourcing units) 265,000 244,000 District offices 83 84 Number of outsourcing hospital customers 4,300 4,300 Number of total outsourcing customers 8,725 8,650 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, and $175.0 million aggregate principal amount of PIK Toggle Notes issued on June 17, 2011 for a total aggregate outstanding principal 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 $36.2 million during the remaining six 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 48 -------------------------------------------------------------------------------- Table of Contents 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 Company was in compliance with all financial debt covenants for all periods presented.

Net cash provided by operating activities was $17.7 and $31.1 million for the six months ended June 30, 2012 and 2011, respectively. Net cash provided by operating activities during the six months ended June 30, 2012 was impacted by the increase in working capital compared to the same period of 2011.

Net cash used in investing activities was $43.2 and $114.9 million for the six months ended June 30, 2012 and 2011, respectively. The change in net cash used in investing activities was primarily the result of our April 1, 2011 acquisition of Emergent Group, a laser surgical solutions provider.

Net cash provided by financing activities was $24.7 and $121.6 million for the six months ended June 30, 2012 and 2011, respectively. During the six months ended June 30, 2012, the change in net cash used in financing activities was primarily impacted by the issuance of bonds in June of 2011.

Our cash balances were $0.3 million as of June 30, 2012 compared to $37.7 million as of June 30, 2011. The change in cash balances was impacted by the issuance of bonds in June of 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 June 30, 2012, we had $142.5 million of availability under the Senior Secured Credit Facility after giving effect to $5.0 million used for letters of credit, based on a borrowing base of $195.0 million.

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 June 30, 2012, the Company was in compliance with all covenants under the Senior Secured Credit Facility and the second lien senior indenture.

On July 31, 2012, we entered into a Second Amended and Restated Credit Agreement with Bank of America, N.A., as agent for the lenders, and the lenders party thereto (the "Second Amended Credit Agreement"), which amended the senior secured credit facility originally dated as of May 31, 2007 and amended and restated as of May 6, 2010. The amendment increased the aggregate amount the Company may obtain under revolving loans from $195.0 million to $235.0 million and extended the maturity date to the earliest of (i) July 30, 2017, (ii) 90 days prior to the maturity of the Second Lien Senior Secured Floating Rate Notes due 2015 or (iii) 90 days prior to the maturity of the 7.625% Second Lien Senior Secured Notes due 2020. The Company's obligations under the Second Amended Credit Agreement are secured by a first priority security interest in substantially all of the Company's assets, excluding a pledge of its and Parent's stock, any joint ventures and certain other exceptions. The Company's obligations under the Second Amended Credit Agreement are unconditionally guaranteed by the Company's parent, UHS Holdco, Inc. and the Company's restricted subsidiaries.

49 -------------------------------------------------------------------------------- Table of Contents On August 7, 2012, we issued $425 million in aggregate principal amount of 7.625% Second Lien Senior Secured Notes (the "2012 Notes") under an indenture.

The 2012 Notes mature on August 15, 2020. In connection with the issuance of the 2012 Notes, the Company entered into a registration rights agreement with the initial purchasers of the 2012 Notes. The net proceeds from the 2012 Notes will be used primarily to fund the cash tender offer announced on July 24, 2012 to purchase $405 million of the Company's 8.50%/9.25% PIK Toggle Notes due 2015 (the "PIK Toggle Notes"). In conjunction with the tender offer, we solicited and received consent from the requisite number of holders that tendered the PIK Toggle Notes to eliminate the right of the remaining holders to benefit from substantially all restrictive covenants and certain event of default provisions of the PIK Toggle 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 ability to fund our significant cash needs; † risks associated with our pension plan; † revenue generation related to decreases in patient census or services; † risks associated with the current economic environment, including the credit markets; † 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; † †† -------------------------------------------------------------------------------- Table of Contents † † changes in third-party payor reimbursement for health care items and services; † 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; † our customers being subject to extensive government regulation and our exposure to potential costs and fines associated with such regulations; † risks associated with regulation related to our limited liability companies; † the effect of expenditures related to equipment recalls or obsolescence; † liabilities for legal claims associated with medical equipment that we outsource and service; † risks related to increased costs that cannot be passed on to our customers; † risks associated with the failure of our management information systems; † 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 our 2011 Annual Report on Form 10-K/A.

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