UNIVERSAL HOSPITAL SERVICES INC – 10-K – : Management’s Discussion and Analysis of Financial Condition and Results of Operations
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OVERVIEW
We are a leading nationwide provider of medical equipment management and service solutions to the health care industry. Our customers include national, regional and local acute care hospitals, alternate site providers (such as skilled nursing facilities, specialty hospitals, nursing homes, and home care providers), surgery centers, physicians 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 year endedDecember 31, 2011 , we owned or managed over 615,000 pieces of medical equipment consisting of 395,000 owned or managed pieces in our medical equipment outsourcing 35 --------------------------------------------------------------------------------
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segment and 220,000 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 4,425 alternate site providers. We also have relationships with more than 175 medical equipment manufacturers and all 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 84 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 from direct reimbursement from third-party payors, such as private insurers,Medicare , orMedicaid . We commenced operations in 1939, originally incorporated inMinnesota in 1954 and reincorporated inDelaware in 2001. Historically, we have experienced significant and sustained growth. Our overall growth strategy is to continue to grow both organically and through strategic acquisitions. In 2011, we continued our focus on acquisitions and international growth opportunities. As one of the nation's leading medical equipment lifecycle services companies, we design and offer comprehensive solutions for our customers that help reduce capital and operating expenses while increasing equipment and staff productivity and support improved patient safety and outcomes. OnApril 1, 2011 we completed our acquisition ofEmergent Group Inc. ("Emergent Group ") for a total purchase price of approximately$65.3 million , as described in Item 15, 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. EffectiveDecember 31, 2011 ,Emergent Group was merged into its principal operating subsidiary,PRI Medical Technologies, Inc. ("PRI Medical") withPRI Medical the surviving entity. Also, onDecember 31, 2011 ,PRI Medical's name was changed toUHS Surgical Services, Inc. ("Surgical Services"). OnMay 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. OnOctober 3, 2011 , we completed the acquisition, effectiveOctober 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. Principles of Consolidation The consolidated financial statements include the accounts of UHS and of Surgical Services, its wholly owned subsidiary. In addition, in accordance with guidance issued by theFinancial Accounting Standards Board ("FASB"), we have accounted for our equity investments in entities in which we are the primary beneficiary under the full consolidation method. All significant intercompany transactions and balances have been eliminated through consolidation. As the primary beneficiary, we consolidate the limited liability companies ("LLCs") referred to in Item 15, Note 13, Limited Liability Companies, as we effectively receive the majority of the benefits from such entities and we provide equipment lease guarantees for such entities.
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
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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. Our revenue, profits, and assets for our reporting segments for each of the last five fiscal years endedDecember 31 are described in "Item 6 - Selected Financial Data." We present the non-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 Generally Accepted Accounting Principals ("GAAP") measure is therefore included in the respective tables. All of our outstanding capital stock is owned byUHS Holdco, Inc. ("Parent"), which acquired the Company in a recapitalization inMay 2007 , (the "Transaction"). Parent is owned by affiliates ofIrving Place Capital Merchant Manager III, L.P. , "IPC", and certain members of our management.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted inthe United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases these estimates on historical experience and other assumptions believed to be reasonable under the circumstances. However, actual results could differ from these estimates. Management believes the critical accounting policies and areas that require more significant judgments and estimates used in the preparation of our consolidated financial statements to be: † allowance for doubtful accounts;
† recoverability and valuation of long-lived and intangible assets, including goodwill;
† self-insurance reserves for worker's compensation, employee health care and auto insurance plans;
† potential litigation liabilities; and † income taxes.
We estimate the allowance for doubtful accounts considering a number of factors, including:
† historical experience; † aging of the accounts receivable; and
† specific information obtained by us on the condition and the current creditworthiness of our customers.
If the financial condition of our customers were to deteriorate and affect the ability of our customers to make payments on their accounts, we may be required to increase our allowance by recording additional bad debt expense. Likewise, should the financial condition of our customers improve and result in payments or settlements of previously reserved amounts, we may be required to record a reduction in bad debt expense to reverse the recorded allowance. 37 --------------------------------------------------------------------------------
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For indefinite lived intangible assets, including goodwill and trade names, we review for impairment annually and upon the occurrence of certain events as required by Accounting Standards Codification ("ASC") Topic 350, "Intangibles - Goodwill and Other." We monitor the occurrence of certain events quarterly. For goodwill, possible impairment is evaluated based on the estimated fair value of each reporting unit. Our reporting units are medical equipment outsourcing, technical and professional services, and medical equipment sales and remarketing. The fair value of each reporting unit incorporates multiple inputs including discounted cash flow calculations, peer company earnings multiples, and assumptions that market participants would make in valuing the reporting unit. Other assumptions include future business growth, earnings projections, capital expenditures, changes in working capital and the weighted average cost of capital used for purposes of discounting. Projecting discounted future cash flows requires us to make significant estimates regarding the assumptions noted above. The projections also take into account several factors including current and estimated economic trends and outlook, and other factors which are beyond our control. Each reporting unit constitutes a business for which discrete financial information is available and management reviews its operating results. As ofDecember 31, 2011 , the fair value of goodwill for each reporting unit significantly exceeded its respective carrying value. No goodwill impairments have been recognized in 2011, 2010, or 2009. We annually review for impairment our trade names that have indefinite lives and are not amortized. Our calculation of estimated fair value is made using the "relief from royalty method," which assumes that a trade name has a fair value equal to the present value of the royalty attributed to it. The royalty income attributable to a trade name represents the hypothetical cost savings that are derived from owning the trade name versus paying royalties to license the trade name from another owner. Accordingly, we estimate a fair royalty that a licensee would pay, on a percentage of revenue basis, to obtain a license to utilize the trade name for each of our medical equipment outsourcing and technical and professional services segments. As ofDecember 31, 2011 , the estimated fair values of our medical equipment outsourcing segment trade name and our technical and professional services segment trade name exceeded their respective carrying value. During the fourth quarter of 2011, the Company implemented a rebranding strategy with respect to its laser surgical services business whereby the Company changed the legal name ofPRI Medical Technologies, Inc. toUHS Surgical Services, Inc. and ceased using thePRI Medical trade name as ofDecember 31, 2011 (see Item 15, Note 3, Acquisitions). Accordingly, management determined in the fourth quarter of 2011 that it was appropriate to change the estimated remaining useful life of thePRI Medical trade name from 114 months to 3 months. For long-lived and amortizable intangible assets, an impairment is evaluated when an event (such as those noted in ASC 360) is indicated. This evaluation is conducted at the lowest level of identifiable cash flows for the long-lived and amortizable asset subject to evaluation. If there is an indication of impairment based on this evaluation of undiscounted cash flows versus carrying value, impairment is measured based on the estimated fair value of the long-lived or amortizable asset in comparison to its carrying value. Our amortizable intangible assets consist of the following discrete items: customer relationships, a supply agreement, a technology databases, non-compete agreements and favorable lease agreements. For other long-lived assets, primarily movable medical equipment, we continuously monitor specific makes/models for events such as product recalls or obsolescence. We estimate our liability for worker's compensation and auto self-insurance plans by applying insurance industry standard loss development factors to our experienced claims information. Significant changes in claims activity would have a direct impact on the amount of expense we 38 --------------------------------------------------------------------------------
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recognize in association with these self-insurance programs. Self-insurance costs related to our employee health care are accrued based upon the aggregate of the liability for reported claims and estimated liability for claims development and incurred but not reported. As disclosed in Item 3, the Company, from time to time, may become involved in litigation arising out of operations in the normal course of business. Accruals for loss contingencies associated with these matters are made when it is determined that a liability is probable and the amount can be reasonably estimated. The assessment of the probable liabilities is based on the facts and circumstances known at the time that the financial statements are being prepared. For cases in which it is determined that a liability has been incurred but only a range for the potential loss exists, the minimum amount of the range is recorded and subsequently adjusted as better information becomes available. Accruals for defense related costs are made upon becoming informed of potential litigation and once we have sufficient information to reasonably estimate our defense costs. Judgment, uncertainty, and estimates are significant aspects of our income tax accrual process that accounts for the effects of current and deferred income taxes. Uncertainty associated with the application of tax statutes and regulations and the outcomes of tax audits and appeals require that judgment and estimates be made in the accrual process and in the calculation of our Effective Tax Rate ("ETR"). Our ETR is also highly impacted by assumptions. ETR calculations are revised based on the best available year-end tax assumptions (income levels, deductions, credits, etc.); adjusted in the following year after returns are filed, with the tax accrual estimates being trued-up to the actual amounts claimed on the tax returns; and further adjusted after examinations by taxing authorities have been completed. We evaluate the recoverability of our deferred tax assets by scheduling the expected reversals of non-tax deferred tax assets and liabilities in order to determine whether net operating loss carry forwards are recoverable prior to expiration. If future earnings or other assumptions are required in order for such future tax benefits to be realized, we evaluate whether a valuation allowance is required. Guidance related to accounting for uncertainty in income taxes, now codified as ASC Topic 740, "Income Taxes," has impacted the income tax accrual process in that the new accounting rule requires that only tax benefits that meet the "more likely than not" recognition threshold can be recognized or continue to be recognized. The change in the unrecognized tax benefits needs to be reasonably estimated based on evaluation of the nature of uncertainty, the nature of events that could cause the change and an estimate of the range of reasonably possible changes. At any period end, and as new developments occur, management will use prudent business judgment to cease recognition of appropriate amounts of tax benefits. Unrecognized tax benefits can be recognized as issues are favorably resolved and loss exposures decline. As disputes with theIRS and state tax authorities are resolved over time, we may need to adjust our unrecognized tax benefits to the updated estimates needed to satisfy tax and interest obligations for the related issues. These adjustments may be favorable or unfavorable. 39 --------------------------------------------------------------------------------
Table of Contents RESULTS OF OPERATIONS The following table provides information on the percentages of certain items of selected financial data compared to total revenues. The table also indicates the percentage increase or decrease comparing fiscal 2011 to 2010 and 2010 to 2009. Percent of Total Revenues Percent Increase (Decrease) Year Ended December 31, Year Ended December 31, 2011 2010 2009 2011 vs. 2010 2010 vs. 2009 Revenue Medical equipment outsourcing 78.6 % 78.9 % 78.3 % 16.5 % 7.7 % Technical and professional services 14.6 14.0 14.2 21.7 4.8 Medical equipment sales and remarketing 6.8 7.1 7.5 11.7 1.6 Total revenues 100.0 % 100.0 % 100.0 % 16.9 % 6.8 % Cost of Revenue Cost of medical equipment outsourcing 30.6 28.8 28.1 24.1 9.5 Cost of technical and professional services 10.9 10.0 10.3 27.9 3.8 Cost of medical equipment sales and remarketing 5.3 5.2 6.1 20.8 (10.1 )
Medical equipment depreciation 18.3 21.9 21.6
(2.1 ) 8.1 Total costs of medical equipment outsourcing, technical and professional services and medical equipment sales and remarketing 65.1 65.9 66.1 15.7 6.4 Gross margin 34.9 34.1 33.9 19.2 7.7 Selling, general and administrative 27.2 28.1 28.4 13.0 6.1 Acquisition and intergration expenses 1.0 - - * * Operating income (loss) 6.7 6.0 5.5 29.9 15.8 Interest expense 14.8 14.6 15.6 18.4 (0.1 ) Loss before income taxes (8.1 ) (8.6 ) (10.1 ) 10.4 (8.8 ) Provision (benefit) for income taxes (2.6 ) 0.6 3.9 * * Net Loss (5.5 )% (9.2 )% (6.2 )% (29.2 )% 56.7 %
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Results of Operations for the Year Ended
Medical Equipment Outsourcing Segment - Manage & Utilize
(in thousands) Year Ended December 31, 2011 2010 Change % Change Total revenue $ 291,753 $ 250,455 $ 41,298 16.5 % Cost of revenue 113,546 91,520 22,026 24.1 Medical equipment depreciation 68,032 69,496 (1,464 ) (2.1 ) Gross margin $ 110,175 $ 89,439 $ 20,736 23.2 Gross margin % 37.8 % 35.7 % Gross margin $ 110,175 $ 89,439 $ 20,736 23.2 Purchase accounting adjustments, primarily non-cash charges related to step-up in carrying value of medical equipment 4,825 12,713 (7,888 ) (62.0 ) Gross margin, before purchase accounting adjustments $ 115,000 $ 102,152 $ 12,848 12.6 % Gross margin %, before purchase accounting adjustments 39.4 % 40.8 % Total revenue in the medical equipment outsourcing segment for the year endedDecember 31, 2011 increased by$41.3 million , or 16.5%, to$291.8 million as compared to the same period of 2010. The increase was primarily due to revenues of$25.4 million from our laser surgical services business, which we acquired onApril 1, 2011 , as well as revenue related to recalled equipment of$15.8 million , the net addition of seven Asset360TM Program ("Asset360") customers and increased revenues driven by incremental business from new and existing technology, both owned and managed. Total cost of revenue in the segment for the year endedDecember 31, 2011 increased by$22.0 million , or 24.1%, to$113.5 million as compared to the same period of 2010. Cost of revenue in this segment relates primarily to employee-related expenses, equipment repair and maintenance charges related to our movable medical equipment fleet, occupancy and freight charges. The increase, in addition to the costs of$13.6 million related to our new laser surgical services business, is attributable to increased employee-related, vehicle, equipment repair, and other expenses of$5.2 ,$1.4 ,$1.0 and$0.8 million , respectively. Medical equipment depreciation for the year endedDecember 31, 2011 decreased by$1.5 million , or 2.1%, to$68.0 million as compared to the same period of 2010. The decrease 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 years endedDecember 31, 2011 and 2010 includes$4.4 and$12.0 million , respectively, of charges relating to purchase accounting adjustments related to the 2007 step-up in carrying value of medical equipment.
Gross margin percentage for the medical equipment outsourcing segment was 37.8% and 35.7%, for the years ended
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Gross margin percentage, before purchase accounting adjustments was 39.4% and 40.8%, for the years ended
Technical and Professional Services Segment - Plan & Acquire; Maintain & Repair (in thousands) Year Ended December 31, 2011 2010 Change % Change Total revenue $ 54,058 $ 44,426 $ 9,632 21.7 % Cost of revenue 40,518 31,690 8,828 27.9 Gross margin $ 13,540 $ 12,736 $ 804 6.3 Gross margin % 25.0 % 28.7 % Gross margin $ 13,540 $ 12,736 $ 804 6.3 Purchase accounting adjustments, primarily non-cash charges related to favorable lease commitments 9 11 (2 ) (18.2 ) Gross margin, before purchase accounting adjustments $ 13,549 $ 12,747 $ 802 6.3 % Gross margin %, before purchase accounting adjustments 25.1 % 28.7 % Total revenue in the technical and professional services segment for the year endedDecember 31, 2011 increased by$9.6 million , or 21.7% to$54.1 million as compared to the same period of 2010. During the year endedDecember 31, 2011 , we experienced an increase of$7.8 and$2.4 million in our provider and manufacturer service businesses, respectively, offset by a decrease in other revenues of$0.6 million . The manufacturer service increase was primarily attributable to securing longer term and higher value contracts. Total cost of revenue in the segment for the year endedDecember 31, 2011 increased by$8.8 million , or 27.9%, to$40.5 million as compared to the same period of 2010. Cost of revenue consists primarily of employee-related expenses, vendor expenses and occupancy charges. This increase was primarily attributable to increases in expenses associated with our provider and manufacturer services unit of$7.1 and$2.3 million , partially offset by a$0.6 million decrease in other charges of$0.6 million , respectively. Gross margin percentage for the technical and professional services segment was 25.0% and 28.7% for the years endedDecember 31, 2011 and 2010, respectively. Gross margin percentage will fluctuate based on the variability of third-party vendor expenses in our BioMed360TM equipment management programs ("BioMed360 Program"), and supplemental service programs. Additionally, gross margin includes revenues and expenses related to a large BioMed360 Program, which began during the third quarter of 2011, whose gross margin percentage is expected to be lower than our historical service gross margins. 42 --------------------------------------------------------------------------------
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Medical Equipment Sales and Remarketing Segment - Redeploy & Remarket
(in thousands) Year Ended December 31, 2011 2010 Change % Change Total revenue $ 25,188 $ 22,541 $ 2,647 11.7 % Cost of revenue 19,734 16,342 3,392 20.8 Gross margin $ 5,454 $ 6,199 $ (745 ) (12.0 ) Gross margin % 21.7 % 27.5 % Gross margin $ 5,454 $ 6,199 $ (745 ) (12.0 ) Purchase accounting adjustments, primarily non-cash charges related to step-up in carrying value of our medical equipment 33 233 (200 ) (85.7 ) Gross margin, before purchase accounting adjustments $ 5,487 $ 6,432 $ (945 ) (14.7 )% Gross margin %, before purchase accounting adjustments 21.8 % 28.5 % Total revenue in the medical equipment sales and remarketing segment for the year endedDecember 31, 2011 increased by$2.6 million , or 11.7%, to$25.2 million as compared to the same period of 2010. The increase was primarily driven by an increase in disposable sales of$4.4 million offset by decreases in new and pre-owned equipment sales of$1.2 and$0.6 million , respectively. Total cost of revenue in the segment for the year endedDecember 31, 2011 increased by$3.4 million , or 20.8%, to$19.7 million as compared to the same period of 2010. The increase was due to increases in the costs of disposable and other sales of$3.7 and$0.3 million , respectively, offset by a decrease in the cost of new equipment sales of$0.6 million .
Gross margin percentage for the medical equipment sales and remarketing segment was 21.7% and 27.5% for the years ended
Gross margin percentage, before purchase accounting adjustments, for the medical equipment sales and remarketing segment was 21.8% and 28.5% for the years endedDecember 31, 2011 and 2010, respectively.
During the year ended
Selling, General and Administrative and Interest Expense
(in thousands) Year Ended December 31, 2011 2010 $ Change % Change
Selling, general and administrative
13.0 % Acquisition and integration expenses 3,483 - 3,483 * Interest expense 55,020 46,457 8,563 18.4
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Selling, General and Administrative
Selling, general, and administrative expenses for the year endedDecember 31, 2011 increased by$11.6 million , or 13.0%, to$100.9 million as compared to the same period of 2010. Selling, general, and administrative expenses consist primarily of employee-related expenses, professional fees, occupancy charges, bad debt expense, depreciation and amortization. The increase is due to the inclusion of$9.6 million of selling, general, and administrative expenses related to Surgical Services, which includes the accelerated amortization of$4.1 million related to the associated trade name. In conjunction with a rebranding strategy implemented in the fourth quarter related to our laser surgical services business, the former name (PRI Medical Technologies, Inc. ) was retired and the related amortization was accelerated over the remaining estimated life, which endedDecember 31, 2011 . In addition to the items listed above, the increase was primarily due to increases in outside services and employee-related expenses of$3.4 and$0.7 million , respectively. These increases were partially offset by a decrease in non-cash stock compensation expense of$2.9 million , which was primarily related to anAugust 2010 amendment to our stock option plan. Additionally, selling, general, and administrative expenses were negatively impacted by$0.8 million related to the Company providing notice of termination of our corporate headquarters lease. Selling, general, and administrative expense as a percentage of total revenue was 27.2% and 28.1% for the years endedDecember 31, 2011 and 2010, respectively. Interest Expense Interest expense for the year endedDecember 31, 2011 increased by$8.6 million , or 18.4%, to$55.0 million as compared to the same period of 2010. This increase was mainly attributable to the interest and deferred financing costs related to the$175.0 million in PIK Toggle Notes that were issued during the second quarter of 2011. Interest expense includes amortization of deferred financing fees associated with our debt of$3.1 and$2.6 million for years endedDecember 31, 2011 and 2010, respectively. Income Taxes Income taxes were a benefit of$9.7 million and an expense of$1.7 million for the years endedDecember 31, 2011 and 2010, respectively. The 2011 tax benefit is primarily attributable to discrete tax benefits resulting from our acquisitions of the stock ofEmergent Group in the 2011 second quarter and the stock of surgical laser equipment service provider in the 2011 fourth quarter. We evaluate the recoverability of our deferred tax assets by scheduling the expected reversals of deferred tax assets and liabilities in order to determine whether net operating loss carry forwards are recoverable prior to expiration. During 2010, we determined that it was no longer more likely than not that all of our net operating loss carry forwards will be recovered prior to their expiration based on the expected reversals of these deferred tax assets and liabilities, future earnings, or other assumptions. Accordingly, we established a valuation allowance in 2010 and, since that time, we have continued to recognize this uncertainty. In future reporting periods, we will continue to assess the likelihood that deferred tax assets will be realizable. Net Loss
Net loss was
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Table of Contents EBITDA Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") was$120.9 and$110.8 million for the years endedDecember 31, 2011 and 2010, respectively. EBITDA for the year endedDecember 31, 2011 was positively impacted by increased activity in our medical equipment outsourcing segment, gains related to recalled equipment, and the inclusion of Surgical Services. EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization. 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. For a reconciliation of EBITDA to net cash provided by operating activities see note (2) under the caption "Selected Financial Data" in Item 6 of this Annual Report on Form 10-K. 45
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Results of Operations for the Year Ended
Medical Equipment Outsourcing Segment - Manage & Utilize
(in thousands) Year Ended December 31, 2010 2009 Change % Change Total revenue $ 250,455 $ 232,623 $ 17,832 7.7 % Cost of revenue 91,520 83,553 7,967 9.5
Medical equipment depreciation 69,496 64,267 5,229
8.1 Gross margin $ 89,439 $ 84,803 $ 4,636 5.5 Gross margin % 35.7 % 36.5 % Gross margin $ 89,439 $ 84,803 $ 4,636 5.5 Purchase accounting adjustments, primarily non-cash charges related to step-up in carrying value of medical equipment 12,713 14,147 (1,434 ) (10.1 ) Gross margin, before purchase accounting adjustments $ 102,152 $ 98,950 $ 3,202 3.2 % Gross margin %, before purchase accounting adjustments 40.8 % 42.5 % Total revenue in the medical equipment outsourcing segment for the year endedDecember 31, 2010 increased by$17.8 million , or 7.7%, to$250.5 million as compared to the same period of 2009. The increase was primarily driven through the net addition of nine Asset360TM Program customers, revenue related to recalled equipment of$5.3 million , and increased revenues driven by incremental business from new and existing technology, both owned and managed. Total cost of revenue in the segment for the year endedDecember 31, 2010 increased by$8.0 million , or 9.5%, to$91.5 million as compared to the same period of 2009. Cost of revenue in this segment relates primarily to employee-related expenses, equipment repair and maintenance charges related to our movable medical equipment fleet, occupancy and freight charges. During the year endedDecember 31, 2010 , we experienced increased employee-related, vehicle, and occupancy expense of$6.5 ,$1.0 and$0.5 million , respectively. Medical equipment depreciation for the year endedDecember 31, 2010 increased by$5.2 million , or 8.1%, to$69.5 million as compared to the same period of 2009. The increase is primarily attributable to theJanuary 2010 purchase of medical equipment formerly managed under a revenue share agreement. This resulted in a full year of depreciation expense related to these assets for the year endedDecember 31, 2010 . Medical equipment depreciation for the years endedDecember 31, 2010 and 2009 includes$12.0 and$13.3 million , respectively, of charges relating to purchase accounting adjustments related to the 2007 step-up in carrying value of medical equipment.
Gross margin percentage for the medical equipment outsourcing segment was 35.7% and 36.5%, for the years ended
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Gross margin percentage, before purchase accounting adjustments was 40.8% and 42.5%, for the years endedDecember 31, 2010 and 2009, respectively. Our gross margin percentage was positively impacted by recalled equipment net gains of$4.5 million . Technical and Professional Services Segment - Plan & Acquire; Maintain & Repair (in thousands) Year Ended December 31, 2010 2009 Change % Change Total revenue $ 44,426 $ 42,395 $ 2,031 4.8 % Cost of revenue 31,690 30,539 1,151 3.8 Gross margin $ 12,736 $ 11,856 $ 880 7.4 Gross margin % 28.7 % 28.0 % Gross margin $ 12,736 $ 11,856 $ 880 7.4 Purchase accounting adjustments, primarily non-cash charges related to favorable lease commitments 11 17 (6 ) (35.3 ) Gross margin, before purchase accounting adjustments $ 12,747 $ 11,873 $ 874 7.4 % Gross margin %, before purchase accounting adjustments 28.7 % 28.0 % Total revenue in the technical and professional services segment for the year endedDecember 31, 2010 increased by$2.0 million , or 4.8% to$44.4 million as compared to the same period of 2009. During the year endedDecember 31, 2010 , we experienced an increase of$2.3 million in our manufacturer service business offset by a decrease in other revenues of$0.3 million . The manufacturer service increase was primarily attributable to securing longer term and higher value contracts. Total cost of revenue in the segment for the year endedDecember 31, 2010 increased by$1.2 million , or 3.8%, to$31.7 million as compared to the same period of 2009. Cost of revenue consists primarily of employee-related expenses, vendor expenses and occupancy charges. This increase was primarily attributable to an increase in expenses associated with our manufacturer services unit of$1.7 million , partially offset by a decrease in other charges of$0.5 million , respectively. Gross margin percentage for the technical and professional services segment was 28.7% and 28.0% for the years endedDecember 31, 2010 and 2009, respectively. Gross margin percentage will fluctuate based on the variability of third-party vendor expenses in our BioMed360TM equipment management programs, or "BioMed360 Program" and supplemental service programs. 47 --------------------------------------------------------------------------------
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Medical Equipment Sales and Remarketing Segment - Redeploy & Remarket
(in thousands) Year Ended December 31, 2010 2009 Change % Change Total revenue $ 22,541 $ 22,186 $ 355 1.6 % Cost of revenue 16,342 18,177 (1,835 ) (10.1 ) Gross margin $ 6,199 $ 4,009 $ 2,190 54.6 Gross margin % 27.5 % 18.1 % Gross margin $ 6,199 $ 4,009 $ 2,190 54.6 Purchase accounting adjustments, primarily non-cash charges related to step-up in carrying value of our medical equipment 233 877 (644 ) (73.4 ) Gross margin, before purchase accounting adjustments $ 6,432 $ 4,886 $ 1,546 31.6 % Gross margin %, before purchase accounting adjustments 28.5 % 22.0 % Total revenue in the medical equipment sales and remarketing segment for the year endedDecember 31, 2010 increased by$0.4 million , or 1.6%, to$22.5 million as compared to the same period of 2009. The increase was primarily driven by an increase in disposable and pre-owned equipment sales of$1.7 and$0.5 million , respectively, partially offset by a decrease in new equipment sales of$1.8 million . Total cost of revenue in the segment for the year endedDecember 31, 2010 decreased by$1.8 million , or 10.1%, to$16.3 million as compared to the same period of 2009. The decrease was primarily due to a decrease in the cost of new and pre-owned equipment and other expenses of$1.7 ,$1.1 and$0.1 million , respectively, offset by an increase in the cost of disposable sales of$1.1 million . During the years endedDecember 31, 2010 and 2009, purchase accounting adjustments of$0.2 and$0.9 million , respectively, primarily related to the increase in the carrying value of medical equipment and inventory, impacted the cost of revenue.
Gross margin percentage for the medical equipment sales and remarketing segment was 27.5% and 18.1% for the years ended
Gross margin percentage, before purchase accounting adjustments, for the medical equipment sales and remarketing segment was 28.5% and 22.0% for the years endedDecember 31, 2010 and 2009, respectively. During the year endedDecember 31, 2010 , gross margin percentage and gross margin percentage, before purchase accounting adjustments, were positively impacted by an increase in our disposable sales. Margins and activity in this segment will fluctuate based on the transactional nature and product mix of the business. 48
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Selling, General and Administrative and Interest Expense
(in thousands) Year Ended December 31, 2010 2009 $ Change % Change
Selling, general and administrative
6.1 % Interest expense 46,457 46,505 (48 ) (0.1 )
Selling, General and Administrative
Selling, general, and administrative expenses for the year endedDecember 31, 2010 increased by$5.1 million , or 6.1%, to$89.3 million as compared to the same period of 2009. Selling, general, and administrative expenses consist primarily of employee-related expenses, professional fees, occupancy charges, bad debt expense, depreciation and amortization. The increase is primarily attributable to higher stock option, employee-related, and other expenses of$6.0 ,$1.2 and$0.8 million , respectively. These increases were partially offset by a decrease in bad debt and outside services expense of$1.3 and$1.6 million , respectively. During the third quarter of 2010, an amendment of option agreement vesting provisions resulted in the acceleration of vesting of options to purchase approximately 2,996,000 shares of stock of our parent company, as described in Item 15, Note 11 of our financial statements under Part IV, Item 15, of this Annual Report on Form 10-K. The amendment accounts for$5.8 million of the$7.3 million of non-cash stock compensation expense recorded for the year endedDecember 31, 2010 . Selling, general, and administrative expense as a percentage of total revenue was 28.1% and 28.4% for the years endedDecember 31, 2010 and 2009, respectively. Interest Expense Interest expense for the year endedDecember 31, 2010 remained relatively flat at$46.5 million as compared to the same period of 2009. Interest expense includes amortization of deferred financing fees associated with our debt of$2.6 and$2.4 million for years endedDecember 31, 2010 and 2009, respectively. Income Taxes Income taxes were an expense of$1.7 million and a benefit of$11.5 million for the years endedDecember 31, 2010 and 2009, respectively. We evaluate the recoverability of our deferred tax assets by scheduling the expected reversals of deferred tax assets and liabilities in order to determine whether net operating loss carry forwards are recoverable prior to expiration. During 2010, we determined that it was no longer more likely than not that all of our net operating loss carry forwards will be recovered prior to their expiration based on the expected reversals of these deferred tax assets and liabilities, future earnings, or other assumptions. Accordingly, we established a valuation allowance of$12.0 million to recognize this uncertainty and, in future reporting periods, will continue to assess the likelihood that deferred tax assets will be realizable. Net Loss
Net loss was
49 --------------------------------------------------------------------------------
Table of Contents EBITDA EBITDA was$110.8 and$103.5 million for the years endedDecember 31, 2010 and 2009, respectively. EBITDA for the year endedDecember 31, 2010 was positively impacted by increased activity in our medical equipment outsourcing segment offset by purchase accounting adjustments related to the Transaction. EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization. In addition to using EBITDA internally as 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. For a reconciliation of EBITDA to net cash provided by operating activities see note (2) under the caption "Selected Financial Data" in Item 6 of this Annual Report on Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
Financing Structure. Our major sources of funds are comprised of$405.0 million aggregate principal amount of notes,$230.0 million aggregate principal amount of floating rate notes,$195.0 million senior secured credit facility, and$18.2 million of vehicle leases. Our remaining$9.9 million 10.125% Senior Notes were redeemed in 2010. PIK Toggle Notes. Our 8.50% / 9.25% PIK Toggle Notes due 2015 (the "PIK Toggle Notes") consist of$230.0 million aggregate principal amount of PIK Toggle Notes issued onMay 31, 2007 (the "Existing Notes"), and$175.0 million aggregate principal amount of PIK Toggle Notes issued onJune 17, 2011 (the "Additional Notes") 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 ofMay 31, 2007 (the "Second Lien Senior Indenture"). The Additional Notes were issued in a private placement, at a premium of 102.250% for an aggregate total of$178.9 million in proceeds and are subject to the same terms as the Existing Notes under the Second Lien Senior Indenture. The premium is being amortized over the remaining life of the Additional Notes using the effective interest rate of 7.824%. The proceeds of the issuance of the Additional Notes were used to (i) repay the revolving borrowings under our Senior Secured Credit Facility, (ii) pay fees and expenses relating to the offering of the Additional Notes and (iii) pay a dividend as declared by the Company and Parent's Board of Directors onJune 8, 2011 (see Item 15, Note 7, Divided Declared). In connection with the issuance of the Additional Notes, the Company entered into a registration rights agreement with the initial purchasers of the Additional Notes. OnSeptember 12, 2011 , the Company's Registration Statement on Form S-4, filed to register the exchange of the Additional Notes for fully registered Additional Notes, and was declared effective by theSEC --------------------------------------------------------------------------------Table of Contents
expired onOctober 12, 2011 and onOctober 18, 2011 we completed an offer to exchange all of the then outstanding Additional Notes for an equivalent amount of new Additional Notes which have been registered under the Securities Act of 1933, as amended. We did not receive any additional proceeds from the exchange offer. The PIK Toggle Notes mature onJune 1, 2015 . Interest on the PIK Toggle Notes is payable semiannually in arrears on eachJune 1 andDecember 1 . BeginningJune 1, 2011 , the Company was required to make all interest payments on the PIK Toggle Notes entirely as cash interest. Cash interest on the PIK Toggle Notes accrues at the rate of 8.50% per annum. The PIK Toggle Notes are redeemable, at the Company's option, in whole or in part, at specified redemption prices (as defined in the Second Lien Senior Indenture) plus accrued interest to the date of redemption. We may redeem some or all of the PIK Toggle Notes at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest, if any, on the PIK Toggle Notes redeemed, to the applicable redemption date, if redeemed during the 12-month period beginning onJune 1 of the years indicated below, subject to the rights of noteholders: Year Percentage 2011 104.250 % 2012 102.125 % 2013 and thereafter 100.000 % In addition, the PIK Toggle Notes have a change of control provision, which gives each holder the right to require the Company to purchase all or a portion of such holders' PIK Toggle Notes upon a change in control, as defined in the Second Lien Senior Indenture, at a purchase price equal to 101% of the principal amount plus accrued interest to the date of purchase. The PIK Toggle Notes, subject to certain definitions and exceptions, have covenants that restrict, among other things, the incurrence of additional debt, the payment of dividends and the issuance of preferred stock. Floating Rate Notes. OnMay 31, 2007 , we issued$230.0 million aggregate principal amount of floating rate notes (the "Floating Rate Notes") under the Second Lien Senior Indenture (see "Second Lien Senior Indenture" below). Interest on the Floating Rate Notes is reset for each semi-annual interest period and is calculated at the currentLIBOR rate plus 3.375%. AtDecember 31, 2011 , ourLIBOR -based rate was 3.450%, which includes the credit spread noted above. Interest on the Floating Rate Notes is payable semiannually, in arrears, on eachJune 1 andDecember 1 . The Floating Rate Notes mature onJune 1, 2015 .We may currently redeem some or all of the Floating Rate Notes at par plus accrued and unpaid interest, if any, to the applicable redemption date, if redeemed, subject to the rights of noteholders.
Upon the occurrence of a change of control, each holder of the Floating Rate Notes has the right to require us to repurchase some or all of such holder's Floating Rate Notes at a price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase. 51--------------------------------------------------------------------------------Table of Contents
Our Floating Rate Notes are subject to certain debt covenants which are described below under the heading "Second Lien Senior Indenture."
Interest Rate Swap. InJune 2007 , we entered into an interest rate swap agreement for$230.0 million , which has the effect of converting the interest rate applicable to our$230.0 million of Floating Rate Notes to fixed interest rates. The effective date for the interest rate swap agreement wasDecember 2007 and the expiration date isMay 2012 . The interest rate swap agreement qualifies for cash flow hedge accounting under ASC Topic 815, "Derivatives and Hedging." Both at inception and on an on-going basis, we must perform an effectiveness test. In accordance with ASC Topic 815, the fair value of the interest rate swap agreement atDecember 31, 2011 is included as a cash flow hedge on our consolidated balance sheet. The change in fair value was recorded as a component of accumulated other comprehensive loss on our consolidated balance sheet, net of tax, since the instrument was determined to be an effective hedge atDecember 31, 2011 . We have not recorded any amounts due to ineffectiveness for any periods presented. We will reclass$2.8 million into earnings, currently recorded in accumulated other comprehensive loss, in the next five months.As a result of our interest rate swap agreement, we expect the effective interest rate on our
$230.0 million Floating Rate Notes to be 9.065% throughMay 2012 .Second Lien Senior Indenture. Our PIK Toggle Notes and Floating Rate Notes, (the "Notes"), are guaranteed, jointly and severally, on a second priority senior secured basis by our subsidiary Surgical Services and are similarly guaranteed by certain of our future domestic subsidiaries. The Notes are our second priority senior secured obligations and rank:† equal in right of payment with all of our existing and future unsecured and unsubordinated indebtedness, and effectively senior to any such unsecured indebtedness to the extent of the value of collateral;
† senior in right of payment to all of our and our guarantor's existing and future subordinated indebtedness;
† effectively junior to our senior secured credit facility and other obligations that are secured by first priority liens on the collateral securing the Notes or that are secured by a lien on assets that are not part of the collateral securing the Notes, in each case, to the extent of the value of such collateral or assets; and† structurally subordinated to any indebtedness and other liabilities (including trade payables) of any of our future subsidiaries that are not guarantors.
The Second Lien Senior Indenture governing the Notes contains covenants that limit our and our guarantors' ability, subject to certain definitions and exceptions, and certain of our future subsidiaries' ability to:
† incur additional indebtedness;† pay cash dividends or distributions on our capital stock or repurchase our capital stock or subordinated debt;
† issue redeemable stock or preferred stock; † issue stock of subsidiaries; † make certain investments; † transfer or sell assets; † create liens on our assets to secure debt; 52--------------------------------------------------------------------------------Table of Contents
† enter into transactions with affiliates; and † merge or consolidate with another company. The Second Lien Senior Indenture specifies certain events of default, including among others, failure to pay principal, interest or premium, violation of covenants and agreements, cross-defaults to other material agreements, bankruptcy events, invalidity of guarantees, and a default in the performance by us of the security documents relating to the Second Lien Senior Indenture. Some events of default will be triggered only after certain grace or cure periods have expired, or provide for materiality thresholds. In the event certain bankruptcy-related defaults occur, the Notes will become due and payable immediately. If any other default occurs, the Trustee (and in some cases the noteholders) would be entitled to take various actions, including acceleration of amounts due under the Second Lien Senior Indenture. Senior Secured Credit Facility. OnMay 6, 2010 we entered into an Amended and Restated Credit Agreement withGE Business Financial Services, Inc. , as agent for the lenders, and the lenders party thereto, which amended and restated our senior secured credit facility dated as ofMay 31, 2007 . We refer to the amended and restated senior secured credit facility as the "senior secured credit facility." The senior secured credit facility is a first lien senior secured asset based revolving credit facility that is available for working capital and general corporate purposes, including permitted investments, capital expenditures and debt repayments, on a fully revolving basis, subject to the terms and conditions set forth in the credit documents in the form of revolving loans, swing line loans and letters of credit. The senior secured credit facility provides for financing of up to$195.0 million , subject to a borrowing base calculated on the basis of certain of our eligible accounts receivable, inventory and equipment. The maturity date of the facility isNovember 30, 2014 . In connection with our entry into the Amended and Restated Credit Agreement onMay 6, 2010 , we capitalized deferred financing costs related to the Amended and Restated Credit Agreement in the amount of$1.7 million . As of December, 31, 2011, we had$170.9 million of unused borrowing availability under our senior secured credit facility based on a borrowing base of$189.7 million less borrowings of$14.5 million and after giving effect to$4.3 million used for letters of credit. Our obligations under the senior secured credit facility are secured by a first priority security interest in substantially all of our assets, excluding a pledge of our and Parent's capital stock, any joint ventures and certain other exceptions. Our obligations under the senior secured credit facility are unconditionally guaranteed by Parent. The senior secured credit facility requires our compliance with various affirmative and negative covenants. Pursuant to the affirmative covenants, we and Parent agreed to, among other things, deliver financial and other information to the agent, provide notice of certain events (including events of default), pay our obligations, maintain our properties, maintain the security interest in the collateral for the benefit of the agent and the lenders and maintain insurance. Overdue principal, interest and other amounts will bear interest at a rate per annum equal to 2.000% in excess of the applicable interest rate. The applicable margins of the senior secured credit facility will be subject to adjustment based upon leverage ratios. The senior secured credit facility also provides for customary letter of credit fees, closing fees, unused line fees and other fees.Among other restrictions, and subject to certain definitions and exceptions, the senior secured credit facility restricts our ability to:
53 -------------------------------------------------------------------------------- Table of Contents † incur indebtedness; † create or permit liens; † declare or pay dividends and certain other restricted payments; † consolidate, merge or recapitalize; † acquire or sell assets; † make certain investments, loans or other advances; † enter into transactions with affiliates; † change our line of business; and † enter into hedging transactions. The senior secured credit facility also contains a financial covenant that is triggered if our available borrowing capacity is less than$15.0 million for a certain period, which consists of a minimum ratio of trailing four-quarter EBITDA to cash interest expense, as such terms are defined in the senior secured credit facility. The senior secured credit facility specifies certain events of default, including, among others, failure to pay principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, bankruptcy events, certain ERISA-related events, cross-defaults to other material agreements, change of control events and invalidity of guarantees or security documents. Some events of default will be triggered only after certain cure periods have expired, or will provide for materiality thresholds. If such a default occurs, the lenders under the senior secured credit facility would be entitled to take various actions, including all actions permitted to be taken by a secured creditor and the acceleration of amounts due under the senior secured credit facility.Borrowings under the senior secured credit facility accrue interest (including a credit spread varying with facility usage):
† at a per annum rate equal to 1.750% above the rate announced from time to time by the agent as the "prime rate" payable quarterly in arrears; and
† at a per annum rate equal to 2.750% above the adjustedLIBOR rate used by the agent, for the respective interest rate period determined at our option, payable in arrears upon cessation of the interest rate period elected. AtDecember 31, 2011 , we had$4.5 million of borrowings outstanding that were accruing interest at our prime rate, which was 5.250%, which includes the credit spread noted above. AtDecember 31, 2011 , we had$10.0 million of borrowings outstanding that were accruing interest at ourLIBOR -based rate, which was 3.270%, which includes the credit spread noted above. Redemption of 10.125% Senior Notes. OnJune 14, 2010 , we redeemed, at par value plus accrued interest to the redemption date, all remaining notes of our 10.125% Senior Notes. The funds used to redeem our 10.125% Senior Notes were obtained from our senior secured credit facility. The 10.125% Senior Notes were redeemable, at our option, in whole or in part of, at specified redemption prices (as defined) plus accrued interest to the date of redemption. The transaction resulted in a redemption price of$10.0 million of which$9.9 million related to principal and$0.1 million related to interest. LiquidityOur principal sources of liquidity are expected to be cash flows from operating activities and borrowings under our senior secured credit facility, which matures in
November 2014 . It is anticipated that our principal uses of liquidity will be to fund capital expenditures related to54 --------------------------------------------------------------------------------Table of Contents
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 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 currently expect that over the next 12 months, we will invest approximately$70.0 million in new medical equipment and other capital expenditures. This estimate is subject to numerous assumptions, including revenue growth and the number of Asset360 Program signings. If we are unable to generate sufficient cash flow from operations in order to service our debt, we will be forced to take actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing our debt, or seeking additional equity capital. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If we are unable to repay our debt at maturity, we may have to obtain alternative financing, which may not be available to us. The following table sets forth selected historical information regarding our cash flows: Years Ended December 31, (dollars in thousands) 2011 2010 2009 Other Financial Data: Net cash provided by operating activities $ 57,691 $ 76,156 $ 55,988 Net cash used in investing activities (153,219 ) (74,205) (50,550 ) Net cash provided by (used in) financing activities
$ 96,689 $ (1,951 ) $ (17,444 )Net cash provided by operating activities was$57.7 ,$76.2 and$56.0 million for the years endedDecember 31, 2011 , 2010 and 2009, respectively. Net cash provided by operating activities was primarily impacted by earnings before income taxes, higher year end balances of accounts receivable in 2011 due to higher levels of fourth quarter revenue and the effects of cash-based gains related to recalled equipment. Net cash used in investing activities was$153.2 ,$74.2 and$51.0 million for the years endedDecember 31, 2011 , 2010 and 2009, respectively. During the year endedDecember 31, 2011 net cash used in investing activities was primarily impacted by acquisitions during the year, including the acquisition of Surgical Services. Additionally, net cash used in investing activities was impacted by medical equipment purchases to support our growth initiatives. Net cash provided by (used in) financing activities was$96.7 ,$(2.0) and$(17.4) million for the years endedDecember 31, 2011 , 2010 and 2009, respectively. During the year endedDecember 31, 2011 net cash provided by financing activities was primarily impacted by the issuance of our$175.0 million aggregate principal amount of Additional Notes, a net pay down of our Senior Secured Credit Facility of$38.4 million , and the effects of the dividend and equity distributions of$32.8 million . 55 --------------------------------------------------------------------------------Table of Contents
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities ("SPEs"), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As ofDecember 31, 2011 , we do not have any unconsolidated SPEs.Contractual Obligations. The following is a summary as of
December 31, 2011 , of our future contractual obligations:Payments due by period (in thousands) 2017 and Contractual Obligations Total 2012 2013-2014 2015-2016 Beyond Long-term debt principal obligations $ 667,664 $ 5,627 $ 22,558 $ 637,462 $ 2,017 Interest on Notes (1) 128,044 44,850 68,850 14,344 - Interest on capital lease obligations 1,228 480 501 202 45 Operating lease obligations 36,347 6,579 10,925 8,065 10,778 Purchase obligations 12,141 12,141 - - - Pension obligations (2) 1,595 1,595 - - - Unrecognized tax positions (3) 3,753 - - - - Total contractual obligations $ 850,772 $ 71,272 $ 102,834 $ 660,073 $ 12,840 Other commercial commitments: Stand by letter of credit $ 4,300 $ - $ - $ - $ ---------------------------------------------------------------------------------
(1) In
June 2007 , we entered into an interest rate swap agreement that is accounted for as a cash flow hedge. The interest rate swap agreement is effective throughMay 2012 . Interest rates through the interest rate swap agreement period were prepared using our expected effective interest rate.Interest rates subsequent to the termination date of the interest rate swap agreement have not been included as we cannot reasonably estimate future interest payments (See "Interest Rate Swap" above). Under the current terms of our interest rate swap, our annual interest payment is$20.8 million . If the interest rate on our$230.0 million of Floating Rate Notes was 4.121%, after the expiration of the swap, interest payments on these Floating Rate Notes would be$9.4 million annually. (2) While our net pension liability atDecember 31, 2011 was approximately$9.8 million , we cannot reasonably estimate required payments beyond 2012 due to changing actuarial and market conditions.(3) We cannot reasonably determine the exact timing of payments related to our unrecognized tax positions.
Based on the level of operating performance expected in 2011, we believe our cash from operations, together with 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 December, 31, 2011, we had$170.9 million of unused borrowing availability under our senior 56 --------------------------------------------------------------------------------Table of Contents
secured credit facility based on a borrowing base of
$189.7 million less borrowings of$14.5 million and 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 Notes, which covenants are summarized above. As ofDecember 31, 2011 , we were in compliance with all covenants under the senior secured credit facility.Our expansion and acquisition strategy may require substantial capital.
Sufficient funding for future acquisitions may not be available under our existing revolving credit facility, and we may not be able to raise any necessary additional funds through bank financing or the issuance of equity or debt securities on terms acceptable to us, if at all.
OnJanuary 3, 2012 , we completed the acquisition, effectiveJanuary 1, 2012 , of all of the outstanding stock of a surgical laser equipment service provider for approximately$16.4 million in cash consideration, funded primarily from the Senior Secured Credit Facility. This 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.RECENT ACCOUNTING PRONOUNCEMENTS
Standards Adopted InOctober 2009 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2009-13, Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements - A Consensus of theFASB Emerging Issues Task Force . This update provides application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting. This update establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. We prospectively adopted this standard inJanuary 2011 . The adoption did not have a material impact on our consolidated financial statements. InJune 2011 , the FASB issued an amendment to the authoritative guidance on comprehensive income. The amendment eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders' equity or include the components in the notes to the consolidated financial statements, and instead requires the presentation of comprehensive income in either a continuous statement of comprehensive income or a separate but consecutive statement. Although the amendment is not effective until the quarter endingMarch 31, 2012 , we elected to adopt the amendment early. The adoption of this amendment did not have a material effect on our consolidated financial statements. Standard Not Yet Adopted InSeptember 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 57 --------------------------------------------------------------------------------Table of Contents
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 amendment will be effective for our quarter endingMarch 31, 2012 . The adoption of this amendment is not expected to have a material effect on our consolidated financial statements. FORWARD LOOKING STATEMENTSSafe Harbor Statement under the Private Securities Litigation Reform Act of 1995
We believe statements in this Annual Report on Form 10-K 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 history of net losses and substantial interest expense; † our substantial outstanding debt and debt service obligations; † our need for substantial cash to operate and expand our business as planned; † restrictions imposed by the terms of our debt; † a decrease in the number of patients our customers are serving;† the effect of prolonged negative changes in domestic and global economic conditions;
† our ability to effect change in the manner in which health care providers traditionally procure medical equipment;
† the absence of long-term commitments with customers;
† difficulties or delays in our continued expansion into certain of our businesses/geographic markets and developments of new businesses/geographic markets;
† the impact of health care reform initiatives;† changes in third-party payor reimbursement rates for health care items and services;
† our ability to maintain existing contracts with GPOs and IDNs and enter into new contracts with additional GPOs and IDNs ;
† additional credit risks in increasing business with home care providers and nursing homes;
† the impact of significant regulation of the health care industry and the need to comply with those regulations;
† impacts of equipment product recalls or obsolescence;
† increases in vendor costs that cannot be passed through to our customers; and
† the risk factors as set forth in Item 1A.
We undertake no obligation, and specifically decline any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events included in this Annual Report on Form 10-K might not occur.
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