ITEM 1: Business
OUR COMPANY
Universal Hospital Services, Inc. (“we”, “our”, “us”, the “Company”, or “UHS”) is a leading nationwide provider of health care technology management and service solutions to the United States health care industry. We provide our customers comprehensive health care technology management, service and clinical solutions that we believe help reduce capital and operating expenses, increase medical equipment and staff productivity and support improved patient safety and outcomes.
UHS commenced operations in 1939, originally incorporated in Minnesota in 1954 and reincorporated in Delaware in 2001. All of our outstanding capital stock is owned by UHS Holdco, Inc. (“Parent”), which acquired the Company in a recapitalization in May 2007 (the “Transaction”). Parent is owned by affiliates of Irving Place Capital Merchant Manager III, L.P. (“IPC”).
UHS delivers health care solutions through three segments: Medical Equipment Solutions (“MES”), Clinical Engineering Solutions (“CES”) and Surgical Services (“SS”). During the year ended December 31, 2014, we owned or managed over 700,000 units of medical equipment consisting of approximately 400,000 owned or managed units in our MES segment, over 300,000 units of customer-owned equipment we managed in our CES segment and over 5,000 units of owned or managed mobile surgical equipment in our SS segment. Our diverse customer base includes more than 7,000 active national, regional and local acute care hospitals and alternate site providers (such as long-term acute care hospitals, skilled nursing facilities, surgery centers, specialty hospitals, nursing homes and home care providers). In the prior year, we had over 7,000 active customers and approximately 1,000 customers in our customer count that only had access to online ordering and reporting through MyUHS™. We also have relationships with more than 200 medical device manufacturers, many of the nation’s largest group purchasing organizations (“GPOs”) and many health system integrated delivery networks (“IDNs”). All of our solutions leverage our nationwide network of 83 district service centers, five CES Centers of Excellence and an additional five stand-alone SS service centers, together with our more than 75 years of experience managing and servicing all aspects of medical equipment. Our fees are paid directly by our customers rather than by direct reimbursement from third-party payors, such as private insurers, Medicare or Medicaid.
As one of the nation’s leading health care technology management and service solutions companies, UHS utilizes our greatest asset - our people - as trusted advisors to provide our customers unbiased information and best practices that drive operational, clinical and financial value. Our solutions employ processes proven through decades of experience, proprietary information technology systems and best-in-class equipment to deliver our customers quantifiable results. Frontline caregivers rely on UHS to provide just-in-time, patient-ready medical equipment with exemplary service while ensuring quick access to educational support, accurate data and performance metrics. We believe this allows caregivers more time at the patient bedside to achieve optimal patient outcomes. Health care executives consult with UHS at the facility and system-wide level to reduce costs, increase operational efficiency and enhance financial viability.
UHS’ business has significantly evolved over the last ten years, moving from an on-demand equipment rental vendor to a provider of comprehensive solutions in partnership with our diverse health care provider customers. Our solutions - delivered on-site in health care facilities and through our network of 83 district service centers, five CES Centers of Excellence and an additional five stand-alone SS service centers - align with the significant evolution in the health care market around lowering risks, reducing readmissions and hospital acquired conditions, supporting outcome-based population health management and delivering better health care outcomes. We believe we are uniquely positioned to lead the convergence between information technology systems and networks, electronic medical records (“EMR”) and medical equipment. Our focus is to create meaningful solutions that meet the current needs in health care today, as well as usher in transformative change for cost effective, efficient care with optimal health care outcomes.
UHS SEGMENTS
UHS reports financial results in three operating segments: MES, CES and SS, each of which is also a reportable segment. Our revenue, profits, and assets for our reporting segments for each of the last three fiscal years ended December 31 are described in “Item 6 - Selected Financial Data.”
Each segment shares a common corporate support function.
Medical Equipment Solutions
Our MES segment accounted for $285.5 million, or 65.4%, of our revenues for the year ended December 31, 2014. This segment represented 66.6% and 68.1% of total revenue for the years ended December 31, 2013 and 2012, respectively. As of December 31, 2014, the MES segment owned or managed approximately 400,000 units of medical equipment ranging across many clinical categories, manufacturers and models. These solutions are provided primarily to hospitals and other acute care providers for use through their facilities, including the emergency room, operating room, critical care, intensive care, rehabilitation and general patient care areas.
Our MES segment started more than 75 years ago as our leading medical equipment peak needs usage business and has transformed into providing comprehensive outsourced and on-site solutions that manage all aspects of medical equipment in a health care facility. We currently provide MES solutions to more than 7,000 acute care hospitals and alternate site providers in the United States, including some of the nation’s premier health care institutions. We expect much of our future growth in this segment to be driven by our customers outsourcing more of their medical equipment needs and taking full advantage of our diversified product offering, clinical education and support, customized agreements and 360 on-site managed solutions.
We have four primary solutions in our MES segment:
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Supplemental and Peak Needs Usage Solutions;
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Customized Equipment Agreements Solutions;
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360 On-site Managed Solutions; and
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Specialty Medical Equipment Sales, Distribution and Disposal Solutions.
Our Medical Equipment Solutions segment provides a range of solutions for our customers:
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Supplemental and Peak Needs Usage Solutions. Our traditional medical equipment solution for customers is providing a broad and expanding range of patient-ready medical equipment on a supplemental or peak needs basis. Many of our customers have traditionally owned only the amounts and types of such equipment necessary to service their usual and customary patient census and their typical range of clinical treatment offerings. Our customers rely on UHS to fulfill many of their equipment needs when they experience a spike or peak in patient census, do not have the resources to maintain their owned equipment in patient-ready condition or require equipment for less common treatments. We provide equipment on a daily, monthly or pay-per-use basis through our nationwide network of 83 district service centers. Supplemental and peak needs activity is impacted by changes in hospital patient census and patient acuity, which typically fluctuates on a seasonal basis. We believe many of our customers have come to rely on our ability to respond quickly and with significant resources in times of emergency, such as hurricanes, tornadoes, floods, and epidemics to provide needed medical equipment in critical situations. We believe our ability to deliver critical service in extreme situations distinguishes us from our competitors. It also requires us to maintain inventories and infrastructure that we do not believe our competitors currently maintain.
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Customized Equipment Agreement Solutions. We also offer our customers the opportunity to obtain medical equipment through tailored equipment agreement solutions. By committing to a tailored equipment agreement solution, our customers are able to secure the availability of an identified pool of patient-ready equipment and to pay for it on a monthly, yearly or pay-per-use basis. We maintain and repair the equipment during the term of the agreement.
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360 On-site Managed Solutions (“360 solutions”). Our 360 solutions allow our customers to fully outsource the responsibilities and costs of effectively managing categories of medical equipment at their facilities, with the added benefit of enhancing equipment utilization and clinical support. With our 360 solutions, medical equipment types and quantities are adjusted to meet changes in patient census and acuity. Our employees work at the customers’ sites to integrate our equipment management process and proprietary management software technology tools into the customers’ day-to-day operations. We assume full responsibility for having equipment where and when it is needed at the customer’s facility, removing equipment that is no longer in use and decontaminating, testing and repairing equipment as needed between each patient use. We also perform required training and ‘‘in service’’ sessions to keep our customers’ staffs fully-trained and knowledgeable about the use and operation of medical equipment covered by the 360 solutions. As of December 31, 2014, we had 360 solutions implemented in 209 programs in our MES segment. Our 360 solutions primarily involve the management of the medical equipment we offer on a peak needs usage basis, including, but not limited to:
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Infusion pumps (Infusion 360 solutions);
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Specialty beds and therapy surfaces (Patient Handling 360 solutions);
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Negative pressure wound therapy pumps (NPWT 360 solutions);
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Fall management equipment (Fall Management 360 solutions).
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Specialty Medical Sales, Distribution and Disposal Solutions. We use our national infrastructure to provide sales and distribution solutions to manufacturers of specialty medical equipment on a limited basis. Our distribution solutions include providing demonstration services and product maintenance services. We act as a distributor for only a limited number of products which are particularly suited to our national distribution network or that fit with our ability to provide technical support. An example of this is our OnCare private label, where we brand differentiated specialty beds and therapy surfaces for wound management, fall management, early mobility and bariatrics. We also sell other original equipment manufacturer (“OEM”) equipment in selected product lines including, but not limited to, respiratory percussion vests, continuous passive motion machines, patient monitors, patient handling equipment and critical care 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. Additionally, we can assist customers in obtaining lease financing. 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, as well as diagnostic, ultrasound and x-ray equipment.
We offer our customers single use disposable items. Most of these items are used in connection with our peak needs usage equipment. We offer these products as a convenience to our customers and to complement our full health care technology management and service solutions.
MES Customers
Our primary customer relationships are with health care providers, including hospitals and alternate site providers. These organizations may belong to larger health systems or other 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:
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Urban and Teaching Hospitals. We provide our solutions to large urban and teaching hospitals on a supplemental and fully outsourced basis. Our solutions are requested by hospitals because of our extensive
availability of a wide range of medical equipment, service and management solutions. Our solutions allow hospitals to meet regulatory requirements, enhance caregiver and patient safety and decrease delays in therapy.
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Small Hospitals and Critical Access Hospitals. We offer comprehensive equipment management and service solutions to small hospitals (those with fewer than 150 beds) and Critical Access Hospitals. Critical Access Hospitals are rural community hospitals that receive cost-based Medicare reimbursement. These hospitals typically lack the scale and resources to effectively evaluate, acquire and manage medical equipment.
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Alternate Site Providers. We offer our medical equipment solutions to alternate site providers (such long-term acute care hospitals, surgery centers, skilled nursing facilities, specialty hospitals, nursing homes and home health care providers). Our national infrastructure and presence allow our national multi-site customers to eliminate a fragmented local approach for a systematic singular solution.
MES Competitors
We believe that the strongest competition to our medical equipment solutions lies in the direct purchase or lease of equipment by our customers or potential customers, who assume management of the equipment themselves. The vast majority of acute care hospitals and alternate site providers view outsourcing primarily as a means of meeting short-term or peak supplemental needs, rather than as a long-term alternative to purchasing or leasing equipment and managing the equipment through its full lifecycle. Although we believe that we can demonstrate the cost-effectiveness of outsourcing patient-ready medical equipment and its management in the health care setting, particularly through our 360 solutions, we believe that many health care providers will continue to purchase or lease and manage internally a substantial portion of their medical equipment.
While our competition varies depending on medical equipment modality, we compete nationally in our MES segment with Kinetic Concepts, Inc., ArjoHuntleigh and Hill-Rom Holdings, Inc. Our other competition consists of regional or local companies and some medical equipment manufacturers and dealers that provide equipment outsourcing or leasing to augment their medical equipment sales.
Clinical Engineering Solutions
Our CES segment accounted for $92.1 million, or 21.1%, of our revenues for the year ended December 31, 2014. This segment represented 20.3% and 19.8% of total revenue for the years ended December 31, 2013 and 2012, respectively. We offer a broad range of inspection, preventive maintenance, repair, logistic and consulting services through our team of over 340 technicians and professionals located throughout the United States in our nationwide network of service centers. We managed over 300,000 units of customer owned equipment as of December 31, 2014. In addition, as of December 31, 2014, we serviced approximately 400,000 units that we own or directly manage in our MES segment.
Our CES segment leverages our over 75 years of experience and our extensive equipment database in repairing and maintaining a broad range of health care technologies. Historically, we have been our own largest customer for CES services in order to repair and maintain approximately 400,000 units that we own or directly manage. However, we believe our CES segment has significant future growth potential by offering non-capital based comprehensive solutions as a stand-alone or complementary alternative for customers that own medical equipment but lack the infrastructure, expertise, or scale to perform routine maintenance, repair, record keeping, and lifecycle analysis and planning functions. We also believe hospital and other facility-based clients will face increasing challenges in managing sophisticated medical equipment that requires connectivity and interoperability with information technology systems, compliance with the 10th revision of the International Statistical Classification of Diseases and Related Health Problems (ICD-10), regulatory requirements, integration with EMR, maintenance and management of software databases and management of other medical equipment patient information and safety features.
Our clinical engineering technicians are trained and certified on a wide range of equipment on an ongoing basis directly by equipment manufacturers and through our internal training programs. Current certifications are maintained and technicians are cross-trained to create valuable resources for our customers. We also operate a quality assurance
department to develop and document our own quality standards for our medical equipment. We utilize proprietary recordkeeping software to record these services and the records we maintain meet the applicable standards of The Joint Commission, the National Fire Protection Association (“NFPA”) and the U.S. Food and Drug Administration (“FDA”). These maintenance records are available to our customers online and to regulatory agencies to verify the maintenance of the equipment.
We expect much of our future growth in this segment to be driven by our acute care hospital and alternate site facility customers outsourcing more of their clinical engineering needs. In addition, we believe that there is a significant opportunity to enhance the connectivity and interoperability of health care devices and IT systems, and lead the integration and convergence of patient data from medical equipment and their systems directly into the patient’s EMR.
We have three primary solutions in our CES segment:
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Supplemental Maintenance and Repair Solutions;
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360 On-site Managed Solutions; and
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Health Care Technology Advisory Solutions.
Our CES services and programs provide a range of solutions for our customers:
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Supplemental Maintenance and Repair Solutions. We provide maintenance and repair solutions on a scheduled and unscheduled basis to supplement the customer’s current maintenance management practices. As part of the supplemental maintenance and repair solutions, we provide service documentation that supports the customer’s regulatory reporting requirements. Our maintenance and repair solutions include fee-for-service arrangements, scheduled maintenance and inspection services, full service maintenance, inspection and repair services and vendor management services in which we manage the manufacturer and/or third-party vendors for service delivery, typically on laboratory and radiology equipment.
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360 On-site Managed Solutions (“360 solutions”). We also provide full and part-time, on-site, resident-based equipment maintenance solutions, pursuant to which our customers fully outsource and we assume responsibility for the creation, implementation and ongoing compliance with a customer’s medical equipment management plan. Virtually, all health care providers are required through their regulatory environment to maintain strict adherence to their facility wide medical equipment management plan and are subject to inspection of their compliance. Our 360 solutions provide coordinated management of customer-owned equipment utilizing UHS employees and proprietary information systems, third party vendors of services and parts and a broad range of services offered through our Health Care Advisory Services Solutions. As of December 31, 2014, we had 360 solutions implemented in 144 programs in our CES segment.
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Health Care Technology Advisory Solutions. We provide medical technology consulting and advisory solutions as part of our 360 solutions or as a stand-alone service. Some examples of our advisory services include technology baseline assessments, product comparison research, equipment utilization studies, procurement assistance, device contained patient information security and medical equipment and IT connectivity and interoperability.
CES Customers
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Urban and Teaching Hospitals. We provide our clinical engineering solutions to large urban and teaching hospitals on a supplemental and fully outsourced basis through our 360 solutions. Our services are requested by in-house hospital biomedical departments on a supplemental basis because of our extensive expertise with a wide range of medical equipment. Our service offerings allow hospital staffed biomedical departments to meet the technical requirements and workload demands on their in-house departments. One customer accounted for approximately 14% of total revenue in 2014 within our MES and CES segments.
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Small Hospitals and Critical Access Hospitals. We offer supplemental clinical engineering and full outsourced services through our 360 solutions to small hospitals (those with fewer than 150 beds) and Critical Access
Hospitals. Critical Access Hospitals are rural community hospitals that receive cost-based Medicare reimbursement. These hospitals typically lack the scale and resources to create comprehensive capital plans, or to evaluate, acquire, manage, maintain, repair and dispose of medical equipment. With our 360 solutions we assume complete responsibility for this process and consult with the hospital to create and implement this function.
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Alternate Site Providers. We offer our clinical engineering solutions to alternate site providers (such as long-term acute care hospitals, surgery centers, skilled nursing facilities, specialty hospitals, nursing homes and home health care providers). Our national infrastructure and presence allow our customers to eliminate a fragmented local approach to a systematic singular solution. Our nationwide service and repair network allows equipment to be efficiently repaired locally, on-site, or picked up and repaired in one of our local service centers.
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Manufacturers. We provide our logistical and clinical engineering solutions to medical equipment manufacturers. Manufacturers utilize UHS to augment and support the manufacturers’ current technical staffs that experience service supply issues during peak needs or FDA recall issues or as a complete outsourced technical provider. Our offerings include equipment logistics, parts and demonstration management programs. Work is performed on a depot or on-site basis. UHS offerings include warranty repair, non-warranty repair, product recall, field upgrades, routine maintenance, onsite installation and in-service education.
CES Competitors
The strongest competition to CES lies in customers obtaining these services through their in-house departments and personnel. Although we believe we can consistently demonstrate the economic and qualitative value of our offerings, the vast majority of our potential hospital customers choose to maintain and repair their equipment themselves.
In addition to in-house departments, we face significant and direct competition in the CES segment from a few large multi-national companies that manufacture diagnostic and imaging products including General Electric, Philips and Siemens, as well as other national independent service providers and a mix of regional and local service providers. We believe that through our nationwide network of highly trained technicians, strong customer relationships and extensive equipment database, we offer customers an attractive alternative for performing clinical engineering services on their equipment.
Surgical Services
Our SS segment accounted for $59.1 million, or 13.5%, of our revenues for the year ended December 31, 2014. This segment represented 13.1% and 12.1% of total revenue for the years ended December 31, 2013 and 2012, respectively. As of December 31, 2014, we owned or managed over 5,000 units of mobile surgical equipment in our SS segment, primarily used in the practice of general surgery, orthopedic surgery, otolaryngology, urology, obstetrics, gynecology, podiatry, dermatology and plastic/cosmetics.
SS provides high end, state-of-the-art surgical equipment and associated products along with trained and certified Surgical Equipment Technologists (“technologists”) to assist in the procedural operation of the equipment. We provide these services to over 1,000 acute care hospitals and surgery centers through our nationwide network of 83 district service centers and an additional five stand-alone SS service centers. Our technologists work in the operating room (“O.R.”) and support physicians and O.R personnel. The services are offered on a per-procedure basis. Our technologists deliver, set up, and create a safe environment for hospital and clinical personnel operating the equipment and provide all necessary disposable materials needed. Our technologists work closely with our customers to confirm that all certifications and credentials meet requirements to provide on-site services. Our technologists also assist customers in the operation of facility-owned assets and supplement the training and staffing of their personnel. As of December 31, 2014, SS provided solutions in 42 states.
SS solutions encompass mobilizing expensive, high-end, under-utilized equipment for our clients. SS has established working relationships with leading manufacturers and is sometimes an introducer of technology in its markets. SS
reviews developments in the surgical equipment field to stay abreast of new and emerging technologies and to obtain new surgical medical equipment. In this regard, SS has, in recent years, added equipment to provide for services in lithotripsy, cryosurgery, transmyocardial revascularization, advanced visualization technology, microwave therapy and prostate surgery. SS strives to develop and expand strategic relationships in order to enhance its product lines and improve its access to new medical devices.
We expect much of our future growth in this segment to be driven by our customers outsourcing more of their surgical equipment needs, as well as our continued investment in new surgical technologies that help O.R. staff reduce costs, increase productivity and get better patient outcomes. We expect to be on the leading edge of bringing future surgical technologies to market in the U.S. that will help solidify and grow our position as a leader in this field.
We have two primary solutions in our SS segment:
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On-Demand and Scheduled Usage Solutions; and
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360 On-site Managed Solutions.
Our SS services and programs provide a range of solutions for our customers:
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On-Demand and Scheduled Usage Solutions. Supplemental or peak needs mobile surgical equipment solutions are ordered from several hours to several months in advance of surgery, and re-confirmed with the customer the day before the medical procedure by SS’ scheduling department. Upon arrival at the customer site, the SS technologist sets up the equipment, posts required warning notices outside the O.R., issues safety equipment to the O.R. staff, provides any disposable materials needed and supplies equipment certifications and/or documentation required for hospital record keeping. Technologist-only services are also made available to hospitals and surgical centers that sometimes find that the outsourcing of technologists without renting equipment to be a cost-effective alternative to training and staffing their own personnel. SS also provides its customers with disposable products and/or ancillary equipment that are needed for a given medical procedure.
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360 On-site Managed Solutions (“360 solutions”). Our 360 solutions allow our customers to fully outsource the responsibilities and costs of effectively managing surgical equipment in their O.R.s, with the added benefit of enhancing equipment utilization. With our 360 solutions, equipment types and quantities are adjusted to meet changes in patient census and acuity. Our technologists work at the customers’ sites to integrate our equipment management process and proprietary management software technology tools into the customers’ day-to-day operations. We assume full responsibility for having surgical equipment and a technologist in the O.R. exactly when needed, removing equipment that is no longer in use and sanitizing, testing and repairing equipment as needed between each use. SS also provides its customers with disposable products and/or ancillary equipment that are needed for a given medical procedure.
SS Customers
Our primary customer relationships are with acute care hospitals and surgery centers. 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:
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Acute Care Hospitals. We provide our solutions to acute care hospitals on a supplemental and fully outsourced basis. Our solutions are requested by in-house hospital O.R. departments on a supplemental basis because of our extensive expertise with mobile surgical equipment. Our solutions allow O.R. staff and physicians to conduct their cases in a safe, efficient and cost effective manner.
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Surgery Centers. We offer our surgical solutions to surgery centers and other alternative site facilities. Our national infrastructure and presence allow our national customers to eliminate a fragmented local approach to a systematic singular solution. We provide surgery centers access to state-of-the-art surgical equipment that would otherwise be costly to acquire, manage and maintain.
SS Competitors
The market for mobile surgical services is highly fragmented and competitive. Companies, particularly in the mobile surgical equipment industry, often compete by price, thereby impacting profit margins. In addition, SS faces many existing and future competitors of various size and scale. The SS business could also be adversely affected if our customers elect to purchase surgical equipment directly from the manufacturers and hire their own technicians.
Competitors in our market include multiple privately held local and regional companies.
Products
The detail on the percentage of revenue for each group of similar products sold or services provided in the MES, CES and SS segments are described in Item 15, Note 18, Business Segments.
VALUE OF UHS SOLUTIONS
Our solutions enable health care providers to replace the fixed costs of owning and/or leasing medical equipment with variable costs that are more closely related to their patient census and patient acuity. They also eliminate significant capital costs associated with equipment acquisitions and liability associated with equipment ownership. The increased flexibility and solutions provided to our customers allows them to:
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access our extensive data and expertise on the cost, performance, features and functions of all major items of medical equipment;
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increase productivity of available equipment;
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reduce maintenance and management costs through the use of our technology and knowledgeable outsourcing staff;
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access new medical and surgical equipment and technology without the expense of acquisition on a pay-per-procedure basis;
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increase the productivity and satisfaction of their nursing staffs by allowing them to focus on primary patient care responsibilities, which we believe lead to lower attrition rates;
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reduce the risk of hospital-acquired conditions (infections, falls, wounds);
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mitigate the risks and costs associated with product recalls or modifications;
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reduce equipment obsolescence risk; and
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facilitate compliance with regulatory and recordkeeping requirements and manufacturers’ specifications on tracking and maintenance of medical equipment.
In addition to providing significant flexibility, we employ technical, clinical and financial specialists that directly interact with our customers to ensure we are optimizing our equipment outsourcing solutions. We believe that these experts enhance our ability to deliver on the above-specified benefits to our customers.
BUSINESS OPERATIONS
District Service Centers
As of December 31, 2014, we operated 83 market-based district service centers, five CES Centers of Excellence and an additional five stand-alone SS service centers, which allow us to provide our health care technology management and service solutions to customers in virtually all markets throughout the United States. Each district service center is responsible for servicing its local healthcare market. Each service center maintains an inventory of locally demanded equipment, parts, supplies and other items tailored to accommodate the needs of individual customers within its geographical area. Should additional or unusual equipment be required by one of our customers, a district service center can draw upon the resources of all of our other districts. With access to over 700,000 owned or managed units of medical equipment available for customer use as of December 31, 2014, we can most often obtain the necessary equipment within 24 hours.
Depending on the district service center size and demands, our district service centers are staffed by multi-disciplined teams of sales professionals, service representatives, customer service technicians, clinical engineering (biomedical) equipment technicians and surgical services technologists trained to provide the spectrum of solutions we offer our customers. Employees providing resident-based services through our 360 Solutions are supported by site based managers and/or the district service centers in the markets where their customers are located.
Centers of Excellence
Our district service center network is supported by five strategically located CES Centers of Excellence. These Centers focus on providing highly specialized clinical engineering service and support. The Centers of Excellence also provide overflow support, technical expertise, training programs and specialized depot service functions for our district service center. All specialized depot work required by our manufacturer customers resides within these Centers of Excellence. All five of our Centers of Excellence are certified as being in compliance with International Organization for Standardization (“ISO”) 9001:2008 and ISO 13485:2003 standards as a quality commitment to our customers.
Centralized Functions
Our corporate office is located in Minneapolis, Minnesota. We have centralized many of the key elements of our equipment and service offerings in order to create standardization, and to maximize our operating efficiencies and uniformity of service. Some of the critical aspects of our business that we have centralized include contract administration, marketing, purchasing, pricing, logistics, accounting and information technology.
Medical Equipment Fleet
We acquire or manage medical equipment to meet our customers’ needs in some of the following product areas: 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 and surgical equipment. We believe we maintain one of the most technologically advanced equipment fleets in the industry, routinely acquiring new and pre-owned equipment to enhance our fleet. Our specialized equipment portfolio managers evaluate new products each year to keep abreast of current market technology and to determine whether to add new products to our equipment fleet. In making equipment purchases, we consider a variety of factors, including manufacturer credibility, repair and maintenance costs, anticipated user demand, equipment mobility and anticipated obsolescence. Historically, we have purchased and owned directly the equipment used in our medical equipment outsourcing programs. During the year ended December 31, 2014, we owned or managed over 700,000 units of medical equipment available for use by our customers.
In 2014, our ten largest manufacturers of medical equipment supplied approximately 76% (measured in dollars spent) of our direct medical equipment purchases. In 2014, one of our largest medical equipment suppliers accounted for approximately 46% of our medical equipment purchases (measured in dollars spent).
We seek to ensure availability of equipment at favorable prices. We generally do not enter into long-term fixed price contracts with suppliers of our equipment. We may receive price discounts related to the volume and timing of our purchases. The purchase price we pay for equipment generally ranges from $1,000 to $30,000 per item for MES and up to $500,000 per item for SS.
COMPETITIVE STRENGTHS
We believe our business model presents an attractive value proposition to our customers and has resulted in growth in recent years. We provide our customers with a wide array of solutions across the full spectrum of equipment management. We believe our over 75 years of experience and reputation as the “go to” company in critical situations has earned us a leading position in our industry.
We attribute our historical success to, and believe that our potential for future growth comes from, the following strengths:
Unique position in the health care arena. We believe that we are unique in providing the largest breadth of comprehensive health care technology management and service solutions to the health care industry. While we have competitors that may offer products and services in various stages of the equipment lifecycle, none provide the comprehensive approach to customers that we do. Our extensive relationships with more than 7,000 hospitals and alternate site providers, over 200 medical device manufacturers and many of the nation’s largest GPOs and IDNs, of which many are long-standing, present a unique position and value proposition in the health care arena.
We are uniquely positioned in the health care industry as a result of our:
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investment in our large and modern fleet of medical equipment;
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diversified product offering and customized solutions;
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nationwide infrastructure for service and logistics;
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proprietary health care technology management software and tools;
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commitment to customer service that has earned us a reputation as a leader in quality, value, and service in our industry;
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extensive knowledge and experience in acquiring, managing, maintaining and remarketing medical equipment;
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team of technical, clinical, and financial experts; and
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performance and reliability in critical times of need by our customers.
Large, modern equipment fleet. We own or manage an extensive, modern fleet of medical equipment, which during the year ended December 31, 2014, consisted of over 700,000 units available for use to our customers. This modern equipment fleet, along with our quality assurance programs and tools, places us in a leadership position in the areas of quality and patient safety. It also places us in a unique position to service “high end” acute care hospitals, such as teaching, research or specialty institutions that demand the most current technology to satisfy the increasingly complex needs of their patients.
Nationwide infrastructure. We have a broad, nationwide staff, facility, and vehicle service network coupled with focused and customized operations at the local level. Our extensive network of district service centers and Centers of Excellence and our 24-hours-a-day, 365 days-a-year service capabilities enable us to compete effectively for large, national contracts as well as to drive growth regionally and locally.
Proprietary software and asset management tools. We have used our more than 75 years of experience and our extensive database of equipment management information to develop sophisticated software technology and management tools. These tools have allowed us to become a leader in meeting the demands of customers by delivering sophisticated 360 solutions that we use to drive cost efficiencies, equipment productivity, caregiver satisfaction, and better patient outcomes. We believe that our continued and significant investment in new tools and technology will help us to continue to distinguish our offerings to the health care industry.
Superior customer service. We believe we have a long-standing reputation among our customers for outstanding service and quality. This reputation is largely due to our strong customer service culture, which is continuously reinforced by management’s commitment to, and significant investment in, hiring and training resources. We strive to seamlessly integrate our employees and solutions into the operations of our customers. This aggressive focus on customer service has helped us achieve a high customer retention rate.
Proven management team. We have an industry leading management team with significant depth of experience. Our management team has successfully supervised the development of our competitive strategy, continually enhanced and expanded our service and product offerings, established our nationwide coverage and furthered our reputation as an industry leader for quality, value and service.
Industry with favorable fundamentals. Our business benefits from the overall favorable trends in health care in general and our segments in particular. There is a fundamental shift in the needs of hospitals and alternate site providers from supplemental and peak needs supply of medical equipment to full, on-site managed solutions. This move to full
outsourcing is not unlike trends in similar services at hospitals including food service, laundry, professional staffing and technology. The strong fundamentals in our business segments are being driven by the following trends:
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Focus on reducing costs and increasing operational efficiency. Hospitals and other health care facilities are going through substantial change in the health care market and consistently look for ways to save capital, reduce operating expenses and become more operationally efficient. We expect these pressures to continue in the future, and believe that UHS is on the right side of health care reform. Our comprehensive solutions offer our customers a way to realize costs savings and operational improvements, thereby improving their organizational efficiency and financial viability.
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Demand for better patient safety and outcomes. Hospitals across the United States are focused on improving patient safety and outcomes, which includes efforts to minimize the incidence of hospital-acquired infections, patient falls and pressure ulcers. Hospitals turn to us to assist them in managing their equipment to help them to minimize these incidents, thereby improving patient safety and outcomes while reducing the cost of these events.
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Caregiver retention and satisfaction. Hospitals continue to experience nursing and other caregiver retention and job satisfaction pressures. We expect that with these internal pressures, hospitals will increasingly turn to our programs to outsource health care technology management duties and related management challenges.
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Favorable demographic trends. According to the U.S. Census Bureau, individuals aged 65 and older in the United States comprise the fastest growing segment of the population. This segment is expected to grow to over 79 million individuals by 2035. This represents a 66% increase in the 65 and older segment of the population over the next 20 years. As a result, over time, the number of patients and the volume of hospital admissions are expected to grow. The aging population and increasing life expectancy are driving demand for health care services.
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Increase in obesity. The U.S. population is getting heavier. In 2013, all 50 states reported having obesity prevalence rates of 20% or more, as reported by the Center for Disease Control and Prevention.
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Increased capital and operating expense pressures and regulatory scrutiny. Hospitals continue to experience restricted capital and operating budgets, while the cost and complexity of medical equipment increases. Furthermore, the increasing complexity and sophistication of medical equipment brings with it more record keeping and regulatory scrutiny of the use and maintenance of medical equipment in the health care setting. We expect that hospitals will increasingly look to us to source these capital equipment needs and manage medical equipment to achieve capital and operating expense savings, operating efficiencies and regulatory compliance.
No direct third-party payor reimbursement risk. Many health care providers rely on payment from patients or reimbursement from third-party payors. Our fees are paid directly by our customers, rather than by third-party payors, such as Medicare, Medicaid, managed care organizations or indemnity insurers. Accordingly, our exposure to uncollectible patient or reimbursement receivables or Medicare or Medicaid reimbursement changes is reduced, as evidenced by our bad debt expense of approximately 0.2%, 0.3% and 0.3% of total revenues for the years ended December 31, 2014, 2013 and 2012, respectively.
Strong value proposition. With our focus and expertise in health care technology management and service solutions, we are able to create a strong value proposition for our customers. All of our comprehensive solutions focus on providing our customers with:
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lower capital and operating costs;
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enhanced operational productivity and staff satisfaction; and
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improved patient safety and outcomes.
Technical, clinical and financial specialists. We employ a number of technical, clinical and financial specialists that engage directly with our customers to drive better cost, efficiency and clinical outcomes. Our specialists employ:
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Gateway solutions which offer an entry point to the economic buyer and include peak needs usage, sales and remarketing, and clinical engineering services;
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Vertical solutions to provide clinical offerings tailored to specific patient needs in the areas of wound management, fall management, early mobility, bariatrics, respiratory therapy, maternal and infant care and surgical services; and
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Comprehensive solutions through our 360 solutions to drive efficiencies and allow customers to effectively manage costs.
Performance and reliability in time of critical need by our customers. We believe that many of our customers have come to rely on our ability to respond quickly and with significant resources in times of emergency, such as hurricanes, tornadoes, floods and epidemic outbreaks to bring in needed medical equipment in critical situations. We believe our ability to provide critical service in extreme situations distinguishes us from our competitors. It also requires us to maintain inventories and infrastructure that we do not believe our competitors currently maintain.
GROWTH STRATEGY
Historically, we have experienced significant and sustained organic and strategic growth. Our overall growth strategy is to continue to grow both organically and through strategic acquisitions.
Organic Growth
We believe that the following external and market factors will provide us significant growth opportunities:
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pressure to reduce costs and increase operational efficiency;
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the aging population;
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increasing life expectancy;
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increasing obesity and patient acuity;
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continued increase in the number, complexity and sophistication of medical technologies;
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increasing cost and staffing pressures in hospitals;
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continuing growth of outsourcing of non-core functions by hospitals, alternate site providers and manufacturers; and
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increasing demand by payors and providers for equipment based solutions.
Our organic growth will be driven internally by the following factors:
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growing our business segments through customer education and increasing the numbers and types of equipment and service we offer in our programs;
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converting peak needs usage and supplemental service customers to fully outsourced 360 solutions;
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growing our less capital intensive CES and SS business;
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increasing the number of hospitals, alternative care facilities, surgery centers, physicians and manufacturers to which we provide services; and
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expanding and deepening our relationships with customers and manufacturers to develop more effective and comprehensive offerings tailored to the unique needs of caregivers.
EMPLOYEES
We had 2,304 regular employees as of December 31, 2014, including 2,029 full-time and 275 part-time employees. Of such employees, 189 were sales representatives, 1,812 were operations personnel and 303 were employed in corporate support functions.
None of our employees are covered by a collective bargaining agreement, and we have experienced no work stoppages to date. We believe that our relations with our employees are good.
INTELLECTUAL PROPERTY
We have registrations with the United States Patent and Trademark Office for the following marks: Asset360® and BioMed360®; “Universal Hospital Services, Inc.,” ‘‘UHS®’’ and the UHS logo; “OnCare,” “Harmony,” “MedPrime Capital,” “Equipment Lifecycle Services” and the Equipment Lifecycle Services logo; and “CHAMP.” United States service mark registrations are generally for a term of 10 years, renewable every 10 years if the mark is used in the regular course of business.
We have a domain name registration for UHS.com, which serves as our main website, and my.UHS.com and myservice.UHS.com, which are web-based tools that provide 24 hour on-demand access to equipment reports for all equipment outsourced or maintained by us. In 2011, we registered the domain name OnCareMedical.com featuring our OnCare™ sub-brand for patient handling products. In 2012, we registered UHSSurgicalServices.com.
We have developed a number of proprietary software programs to directly service or support our customers including “inCare™” which is a medical equipment inventory management system that allows UHS to track the location and usage of equipment we are managing at the customers’ location in our MES 360 Solutions. “MyUHS™” is our online ordering and reporting site which accesses our proprietary programs specifically designed to help customers meet medical equipment documentation and reporting needs under applicable regulations and standards, such as those promulgated by the FDA and The Joint Commission. Additionally, this tool provides detail reporting on utilization, compliance, and analytics for management. “inService™” is our equipment maintenance and planning system which houses our work order system and assists in our customers regulatory compliance recordkeeping. “inSurgery™” is our web-based scheduling, tracking, reporting and physician preference system for SS solutions. “inCommand™” encompasses the proprietary software tools that allow our employees to manage and maintain our extensive equipment fleet and serve our customers more effectively and efficiently.
MARKETING
We market our programs primarily through our direct sales force, which consisted of 189 professional sales representatives as of December 31, 2014. Our direct sales force is organized into two regions and eleven sales divisions. We support our direct sales force with technical, clinical, surgical and financial specialists, who provide comprehensive solutions for our customers. Our national accounts team also supports our direct sales force through its focus on securing national and regional contracts.
We also market through our websites, www.uhs.com, www.uhssurgicalservices.com and www.oncaremedical.com, participate in numerous national and regional conventions and interact with industry groups and opinion leaders. Information presented on our website is not incorporated by reference and should not be considered a part of our Annual Report on Form 10-K.
In our marketing efforts, we primarily target key decision makers, such as administrators, chief executive officers, chief financial officers, chief medical officers, and chief nursing officers as well as physicians, directors and managers of functional departments, such as materials management, surgery, purchasing, pharmacy, biomedical services, and central supply. We also promote solutions to hospital, surgery centers, manufacturer and alternate site provider groups and associations.
SEASONALITY/BUSINESS INTERRUPTION
Quarterly operating results are typically affected by seasonal factors. Historically, our first and fourth quarters are the strongest, reflecting increased hospital census and patient acuity during the fall and winter months. Our business can also be impacted by natural disasters, such as hurricanes and earthquakes, which affect our ability to transfer equipment to and from our customers, and equipment recalls, which can cause equipment to be removed from market use. We also
see declines in our business in down economic cycles with high levels of unemployment. Our customers typically see weaker census and higher levels of indigent patients during these times, causing them to use fewer of our solutions.
REGULATORY MATTERS
Regulation of Medical Equipment
Our customers are subject to documentation and safety reporting regulations and standards with respect to the medical equipment they use, including those established by the FDA, The Joint Commission and the NFPA. Some states and municipalities also have similar regulations.
We monitor changes in regulations and standards to accommodate the needs of customers by providing specific product and manufacturer information upon request. Manufacturers of medical equipment are subject to regulation by agencies and organizations such as the FDA, Underwriters Laboratories and the NFPA. We believe that all medical equipment we outsource conforms to these regulations.
The Safe Medical Devices Act of 1990 (“SMDA”), which amended the Food, Drug and Cosmetic Act (“FDCA”), requires manufacturers, user facilities and importers of medical devices to report deaths and serious injuries which a device has or may have caused or to which a device has or may have contributed. In addition, the SMDA requires the establishment and maintenance of adverse event files and various other FDA reports. Manufacturers and importers are also required to report certain device malfunctions. We work with our customers to assist them in meeting their reporting obligations under the FDCA, including those requirements added by the SMDA.
As a distributor of medical devices, we are required by the FDCA to maintain device complaint records containing any incident information regarding the identity, quality, durability, reliability, safety, effectiveness or performance of a device. We are required to retain copies of these records for a period of two years from the date of inclusion of the record in the file or for a period of time equivalent to the expected life of the device, whichever is greater, even if we cease to distribute the device. Finally, we are required to provide authorized FDA employees access to copy and verify these records upon their request. We have current compliance records regarding maintenance, repairs, modification and user-error with respect to our equipment.
Besides the FDA, a number of states regulate medical device distributors and wholesalers either through pharmacy or device distributor licensure. Currently, we hold such licenses in 14 states. Some licensure regulations and statutes in additional states may apply to our activities. Although our failure to possess such licenses in these states for our existing operations may subject us to certain monetary fines, we do not believe the extent of such fines, in the aggregate, would be material to our liquidity, financial condition or results of operations.
In addition, we are required to provide information to the manufacturer regarding the permanent disposal or any change in ownership of certain categories of medical outsourcing equipment. We believe our medical equipment tracking systems are in compliance with these regulations.
The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) applies to certain covered entities, including health plans, health care clearinghouses and health care providers, as well as to business associates such as us. HIPAA regulations protect individually identifiable health information, including information in an electronic format, by, among other things, setting forth specific standards under which such information may be used and disclosed, providing patients rights to obtain and amend their health information, requiring notification to individuals, federal and state agencies and media outlets in the event of a breach of health information and establishing certain administrative requirements for covered entities. The Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”) created legal obligations for business associates and extended criminal and civil sanctions to business associates for violations of HIPAA requirements.
Because of our self-insured health plans, we are also a covered entity under the HIPAA regulations. Also, we may be obligated to comply with certain HIPAA requirements as a business associate of various health care providers. In addition, various state legislatures have enacted and may continue to enact additional privacy legislation that is not
preempted by the federal law, which may impose additional burdens on us. Moreover, other federal privacy legislation may be enacted. Accordingly, we have made and, as new standards go into effect, we expect to continue to make administrative, operational and information infrastructure changes in order to comply with these requirements.
The Patient Protection and Affordable Care Act and The Health Care and Education Responsibility Act of 2010 (together, the “Affordable Care Act”) have and will result in significant reforms to the U.S. health care system and the structure of the health care provider delivery system. The Affordable Care Act calls for additional transparency around payments made by the pharmaceutical and medical device industries to doctors and teaching hospitals, which may include gifts, food, travel and speaking or consultancy fees. All U.S. manufacturers of drugs, devices, biologics or medical supplies, including distributors who hold title to such drugs, devices, biologics, or medical supplies, for which payment is available under government-funded health insurance programs (i.e., Medicare, Medicaid and the State Children’s Health Insurance Program) must report annually to the U.S. Department of Health and Human Services any payment or gift, which represents a “transfer of value,” to a physician or teaching hospital, including detailed information about the nature and value of remuneration provided, and the identity of the receiving physician or teaching hospital. Additionally, states may require manufacturers to report information that is not required or is exempted under the federal reporting requirements. For example, a state may require manufacturers to report advertising expenditures, loans of medical devices, in-kind gifts to charities and payments to other recipients, group purchasing organizations and retailers. We identify applicable state reporting requirements as they become effective.
Although our business is not currently extensively regulated under healthcare laws, we are subject to certain regulatory requirements as discussed above and our customers are subject to direct regulation under the Federal False Claims Act, the Stark Law, the Anti-Kickback Law, rules and regulations of the Centers for Medicare and Medicaid Services (“CMS”), and other federal and state healthcare laws and regulations. Promulgation of new laws and regulations, or changes in or re-interpretations of existing laws and regulations, could affect our business, operating results or financial condition. Our operations might be negatively impacted if we had to comply with additional complex government regulations.
Third-Party Reimbursement
Our fees are paid directly by our customers rather than through direct reimbursement from third-party payors, such as Medicare or Medicaid. We do not bill the patient, the insurer or other third-party payors directly for services provided for hospital or alternate site provider inpatients or outpatients. Sometimes our customers are eligible to receive third-party reimbursement for our services. Consequently, the reimbursement policies of such third-party payors have a direct effect on the ability of health care providers to pay for our services and an indirect effect on our level of charges. Also, in certain circumstances, third-party payors may take regulatory or other action against service providers even though the service provider does not receive direct reimbursement from third-party payors.
Hospitals and alternate site providers face cost containment pressures from public and private insurers and other managed care providers, such as health maintenance organizations, preferred provider organizations and managed fee-for-service plans, as these organizations continue to place controls on the reimbursement and utilization of health care services. We believe that these payors have followed or will follow the government in limiting the services that are reimbursed and in exerting downward pressure on prices. In addition to promoting managed care plans, employers are increasingly self-funding their benefit programs and shifting costs to employees through increased deductibles, co-payments and employee contributions. Hospitals and health care facilities are also experiencing an increase in uncompensated care or “charity care,” which causes increased economic pressures on these organizations. We believe that these cost reduction efforts will place additional pressures on health care providers’ operating margins and will encourage efficient equipment management practices such as the use of our outsourcing and 360 Program solutions.
Liability and Insurance
Although we do not manufacture any medical equipment, our business entails the risk of claims related to the outsourcing, sale and service of medical equipment. In addition, our instruction of hospital and alternate site provider employees with respect to the use of equipment and our professional consulting services are sources of potential claims. We have not suffered a material loss due to a claim. However, any such claim, if made, could have a material adverse
effect on our business. While we do not currently provide any services that require us to work directly with patients, expansion of services in the future could involve such activities and subject us to claims from patients.
We maintain a number of insurance policies, including commercial general liability coverage (product and premises liability insurance), automobile liability insurance, worker’s compensation insurance and professional liability insurance. We also maintain excess liability coverage. Our policies are subject to annual renewal. We believe that our current insurance coverage is adequate. Claims exceeding such coverage may be made and we may not be able to continue to obtain liability insurance at acceptable levels of cost and coverage.
ITEM 1A:
ITEM 1A: Risk Factors
Our business is subject to various risks and uncertainties. Any of the risks discussed below, or elsewhere in this Annual Report on Form 10-K or our other filings with the Securities and Exchange Commission (“SEC”), could materially adversely affect our business, financial condition or results of operations.
Risks Related to Our Business and Industry
Our competitors may engage in significant competitive practices, which could cause us to lose market share, reduce prices or increase expenditures.
Our competition may engage in competitive practices that could cause us to lose market share, reduce our prices, or increase our expenditures. For example, competitors may sell significant amounts of surplus equipment or sell capital equipment at a lower gross margin to obtain the future repeat sales of disposables for a higher gross margin, thereby decreasing the demand for our equipment solutions. Additionally, the overall market for services is very competitive and our competitors often compete by lowering prices, thus impacting gross margin.
Our competitors may bundle products and services offered to customers, some of which we do not offer.
If competitors offer their products and services to customers on a combined basis with reduced prices, and we do not offer some of these products or cannot offer them on comparable terms, we may have a competitive disadvantage that will lower the demand for our solutions.
If our customers’ patient census or services decrease, the revenues generated by our business could decrease.
Our operating results are dependent in part on the amount and types of equipment necessary to service our customers’ needs, which are heavily influenced by the number of patients our customers serve at any time (which we refer to as “patient census”) and the services those patients receive. At times of lower patient census, our customers have a decreased need for our services on a supplemental or peak needs basis. During severe economic downturns like the one we recently experienced, the number of hospital admissions and inpatient surgeries declines as consumers reduce their use of non-essential health care services. Our operating results can also vary depending on the timing and severity of the cold and flu season, local, regional or national epidemics, and the impact of national catastrophes, as well as other factors affecting patient census and service demand.
Another global economic downturn could adversely affect our customers and suppliers or have new, additional adverse effects on them, which could have further adverse effects on our operating results and financial position.
We believe our customers could be adversely affected by another global economic downturn. The impact of another downturn on our customers may result in, among other things, decreased patient census, decreased number of non-essential patient services, increased uncompensated care and bad debt, increased difficulty obtaining financing on favorable terms and tighter capital and operating budgets. Many of our customers depend on investment income to supplement inadequate third-party payor reimbursement. Further disruption in the capital and credit markets could adversely affect the value of many investments, reducing our customers’ ability to access cash reserves to fund their operations. If economic conditions reoccur or worsen, our customers may seek to further reduce their costs and may be
unable to pay for our solutions, resulting in reduced orders, slower payment cycles, increased bad debt, and customer bankruptcies.
Our suppliers also may be negatively impacted by another economic downturn and tighter capital and credit markets. If our key suppliers experience financial difficulty and are unable to deliver to us the equipment we require, we could be forced to seek alternative sources of medical equipment or to purchase equipment on less favorable terms, or we could be unable to fulfill our requirements. A delay in procuring equipment or an increase in the cost to purchase equipment could limit our ability to provide equipment to customers on a timely and cost-effective basis.
All of these factors are related to a general economic downturn, which is out of our control, and could have a negative impact on our financial condition.
If we are unable to maintain existing contracts or contract terms with, or enter into new contracts with our customers, we may lose customers and/or the associated revenues.
Our revenue maintenance and growth depend, in part, on continuing contracts with customers, including through GPOs and IDNs, with which certain of our customers are affiliated. In the past, we have been able to maintain and renew the majority of such contracts and expand the solutions we offer under such contracts. If we are unable to maintain our contracts, or if the GPOs or IDNs seek additional discounts or other more beneficial terms on behalf of their members, we may lose a portion or all of existing business with, or revenues from, customers that are members of such GPOs and IDNs.
One customer accounted for approximately 14% of total revenue in 2014. The revenue is in our MES and CES segments. To the extent the contracts are not renewed or are terminated, our revenue and operating results would be significantly impacted.
Consolidation in the health care industry may lead to a reduction in the prices we charge, thereby decreasing our revenues.
Many hospitals and alternate site providers have combined to create health systems or IDNs. We believe this trend may continue. Any resulting IDN or health systems may have greater bargaining power over us, which could lead to a reduction in the prices we charge and a reduction in our revenues.
We have relationships with certain key suppliers, and adverse developments concerning these suppliers could delay our ability to procure equipment or provide certain services, or increase our cost of purchasing equipment.
We purchased medical equipment from approximately 149 manufacturers in 2014. Our ten largest manufacturers of medical equipment accounted for approximately 76% of our direct medical equipment purchases in 2014. Adverse developments concerning key suppliers or our relationships with them could force us to seek alternative sources for our medical equipment or to purchase such equipment on less unfavorable terms. A delay in procuring equipment or an increase in our cost to purchase equipment could limit our ability to provide equipment to our customers on a timely and cost-effective basis. In addition, if we do not have access to certain parts, or if manufacturers do not provide access to the appropriate equipment manuals or training, we may not be able to provide certain clinical engineering services.
If we are unable to change the manner in which health care providers traditionally procure medical equipment, we may not be able to achieve significant revenue growth.
We believe that the strongest competition to our outsourcing solutions is the direct purchase or capital lease of medical equipment, and self-management of that equipment. Many hospitals and alternate site providers view outsourcing primarily as a means of meeting short-term or peak supplemental needs, rather than as a long-term, effective and cost-efficient alternative to purchasing or leasing equipment. Many health care providers may continue to purchase or lease a substantial portion of their medical equipment and to manage and maintain it on their own.
A substantial portion of our revenues come from customers with which we do not have long-term commitments, and cancellations by or disputes with customers could decrease the amount of revenues we generate, thereby reducing our ability to operate and expand our business.
For the year ended December 31, 2014, approximately 53% of our total revenue was derived from customers that contracted with us or from hospitals and other providers that purchased equipment or services from us through a GPO that contracted with us on behalf of its members. The source of the remaining 47% of revenue was from customers that do not purchase equipment or services from us through a GPO contract. Our customers are generally not obligated to outsource our equipment under long-term commitments. In addition, many of our customers do not sign written contracts with us fixing the rights and obligations of the parties regarding matters such as billing, liability, warranty or use. Therefore, we face risks such as fluctuations in usage, inaccurate or false reporting of usage by customers and disputes over liabilities related to equipment use. The non-contracted services we provide could be terminated by the customer without notice or payment of any termination fee. A large number of such terminations may adversely affect our ability to generate revenue growth and sufficient cash flows to support our growth plans. In addition, those customers with long-term commitments may have contracts that do not permit us to raise our prices, yet our cost to serve may increase. Any of these risks could reduce our ability to operate and expand our business.
We depend on key personnel and our inability to attract and retain key personnel could harm our business.
Our financial performance is dependent in significant part on our ability to hire, develop and retain key personnel, including our senior executives, sales professionals, sales specialists, hospital management employees and other qualified workers. We have experienced and will continue to experience intense competition for these resources. The loss of the services of one or more of our senior executives or other key personnel could significantly undermine our management expertise, key relationships with customers and suppliers, and our ability to provide efficient, quality health care solutions.
Our growth strategy depends in part on our ability to successfully identify and manage our acquisitions and a failure to do so could impede our revenue growth, thereby weakening our industry position.
As part of our growth strategy, we intend to pursue acquisitions or other strategic relationships within the health care industry that we believe will enable us to generate revenue growth. Future acquisitions may involve significant cash expenditures that could impede our revenue growth. In addition, our efforts to execute our acquisition strategy may be affected by our ability to identify suitable candidates and successfully bid, finance, negotiate and close acquisitions. We regularly evaluate potential acquisitions. We may not be successful in acquiring other businesses, and the businesses we do acquire in the future may not ultimately produce returns that justify our related investment.
Acquisitions may involve numerous risks, including:
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difficulties assimilating personnel and integrating distinct business cultures;
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diversion of management’s time and resources from existing operations;
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potential loss of key employees or customers of acquired companies; and
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exposure to unforeseen liabilities of acquired companies.
If we are unable to continue to grow through acquisitions, our ability to generate revenue growth may be impaired.
We may incur increased expenses related to our pension plan, which could impact our financial position.
We have a defined benefit pension plan covering certain current and former employees. Although benefits under the pension plan were frozen in 2002, funding obligations under our pension plan continue to be impacted by the performance of the financial markets. If the financial markets do not provide the long-term returns we have assumed, the likelihood of our being required to make additional contributions will increase. The equity and debt markets can be, and recently have been, volatile, and therefore our estimate of future contribution requirements can change dramatically in relatively short periods of time.
Our cash flow fluctuates during the year because operating income as a percentage of revenue fluctuates with our quarterly operating results and we make semi-annual debt service payments.
Our results of operations have been and can be expected to be subject to quarterly fluctuations. We may experience increased revenues in the first and fourth quarters of the year, depending upon the timing and severity of the cold and flu season and the related increased hospital census and medical equipment usage during that season. Because a significant portion of our expenses are relatively fixed over these periods, our operating income as a percentage of revenue tends to increase during the first and fourth quarter of each year. If the cold and flu season is delayed by as little as one month, or is less severe than in prior periods, our quarterly operating results for a current period can vary significantly from prior periods. Our quarterly results can also fluctuate as a result of such other factors as the timing of acquisitions, new 360 solution agreements or new service center openings.
A portion of our revenues are derived from home care providers and nursing homes, and these health care providers may pose additional credit risks.
Our nursing home and home care customers may pose additional credit risks since they are generally less financially sound than hospitals. These customers continue to face cost pressures. We may incur losses in the future due to the credit risks, including potential bankruptcy filings, associated with any of these customers.
Although we do not manufacture any medical equipment, our business entails the risk of claims related to the medical equipment that we outsource and service. We may not have adequate insurance to cover a claim, and it may be more expensive or difficult for us to obtain adequate insurance in the future.
We may be liable for claims related to the use of our medical equipment or to our maintenance or repair of a customer’s medical equipment. Any such claims, if made and upheld, could make our business more expensive to operate and therefore less profitable. We may be subject to claims exceeding our insurance coverage or we may not be able to continue to obtain liability insurance at acceptable levels of cost and coverage. If we are found liable for any significant claims that are not covered by insurance, our liquidity and operating results could be materially adversely affected. In addition, litigation relating to a claim could adversely affect our existing and potential customer relationships, create adverse public relations and divert management’s time and resources from the operation of the business.
We may incur increased costs that we cannot pass through to our customers.
Our customer contracts may include limitations on our ability to increase prices over the term of the contract. On the other hand, we rely on third parties, including subcontractors, to provide some of our services and supplies and we do not always have fixed pricing contracts with these subcontractors. Therefore, we are at risk of incurring increased costs that we are unable to pass through to our customers.
Any failure of our management information systems could harm our business and operating results.
We depend on our management information systems to actively manage our medical equipment fleet, control capital spending, and provide fleet information, including equipment usage history, condition and availability of our medical equipment. These functions enhance our ability to optimize fleet utilization and redeployment. The inability of our management information systems to operate as we anticipate could damage our reputation with our customers, disrupt our business or result in, among other things, decreased revenues and increased overhead costs. Any such failure could harm our business and results of operations. Our results of operations could be adversely affected if these systems, or our customers' access to them, are interrupted, damaged by unforeseen events, cyber security incidents or other actions of third parties, or fail for any extended period of time. In addition, data security breaches could adversely impact our operations, results of operations or our ability to satisfy legal requirements, including those related to patient-identifiable health information.
There are inherent limitations in all internal control systems over financial reporting, and misstatements due to error or fraud may occur and not be detected.
While we have taken actions designed to address compliance with the internal control over financial reporting and disclosure controls and other requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated by the SEC implementing these requirements, there are inherent limitations in our ability to control all circumstances. We do not expect that our internal control over financial reporting and disclosure controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, in our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may be inadequate because of changes in conditions, such as growth of the Company or increased transaction volume, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Risks Related to Healthcare and Other Legal Regulation
Uncertainty surrounding health care reform initiatives remains. Depending on the scope, form, and implementation of final health care reform legislation, our business may be adversely affected.
The health care industry is undergoing significant change. In March 2010, the Congress adopted and President Obama signed into law the Affordable Care Act (the “ACA”). The ACA has increased the number of Americans with health insurance and employer mandates and subsidies offered to lower income individuals. While the increase in coverage could translate into increased utilization of our products and services, health care reform and political uncertainty have historically resulted in changes in how our customers purchase our services and have adversely affected our revenues. Provider revenue per service may decline with reductions in Medicare and Medicaid reimbursement. Furthermore, the implementation of the ACA may impose changes in health care delivery, reimbursement, operations or record keeping that are not compatible with our current offerings, which could force us to incur additional compliance costs. So far, starting in 2013, our business, along with some of our suppliers and customers that are manufacturers, came under direct regulation of the Open Payments Law, specifically the Physician Payments Sunshine Act. The Open Payments Law will require the annual reporting and publishing of all transfers of value to physicians and teaching hospitals to give greater transparency to financial relationships between manufacturers, physicians and teaching hospitals. Federal and state governments also continue to enact and consider various legislative and regulatory proposals that could materially impact certain aspects of the health care system. We cannot predict with certainty what healthcare initiatives, if any, will be implemented or what the ultimate effect of federal health care reform (including, but not limited to, the ACA) or any future legislation or regulation will have on our operating results or financial condition.
Recently enacted amendments to federal privacy laws make us subject to more stringent penalties in the event we improperly use or disclose protected health information regarding our customers’ patients.
HITECH Act expanded the scope of the privacy and security requirements under HIPAA and increased penalties for violations to “Business Associates,” which includes UHS. Business Associates such as UHS are required to comply with certain of the HIPAA privacy standards and are required to implement administrative, physical and technical security standards to protect the integrity, confidentiality and availability of certain electronic health information we receive, maintain or transmit. In addition, the HITECH Act enacted federal breach notification rules requiring notification to affected individuals and the Department of Health and Human Services (and in some cases, relevant media outlets) whenever a breach of personal health information occurs. In addition, the HIPAA rules now involve increased penalties, including mandatory penalties for “willful neglect” violations, starting at $100 per violation subject to a cap of $1.5
million for violations of the same standard in a single calendar year. State attorneys general are also authorized to enforce federal HIPAA privacy and security rules. Our operations could be negatively impacted by a violation of the HIPAA privacy or security rules and our reputation could suffer in the event of a data breach involving significant number of individuals.
Many states in which we operate also have state laws that protect the privacy and security of confidential, personal information that have similar to or even more protection than the federal provisions. Some state laws impose fines and penalties upon violators in addition to allowing a private right of action to sue for damages for those who believe their personal information has been misused.
Our relationships with healthcare facilities and marketing practices are subject to the federal Anti-Kickback Statute and similar state laws.
We are subject to the federal Anti-Kickback Law, which prohibits the knowing and willful offer, payment, solicitation or receipt of any form of “remuneration” in return for, or to induce, the referral of business or ordering of services paid for by Medicare or other federal programs. “Remuneration” has been broadly defined to include anything of value, including gifts, discounts, credit arrangements, and in-kind goods or services. Certain federal courts have held that the Anti-Kickback Law can be violated if “one purpose” of a payment is to induce referrals. The Anti-Kickback Law is broad and prohibits many arrangements and practices that are lawful in businesses outside the healthcare industry. Violations can result in imprisonment, civil or criminal fines or exclusion from Medicare and other governmental programs. The Office of Inspector General issued a series of safe harbors that if met will help assure healthcare providers and other parties will not be prosecuted under the Anti-Kickback Law. Contracts with healthcare facilities and other marketing practices or transactions may implicate the Anti-Kickback Law. We have attempted to structure our contracts and marketing practices to comply with the Anti-Kickback Law along with providing training to our employees. However, we cannot ensure that we will not have to defend against alleged violations from private entities or that OIG or other authorities will not find that our practices violate the Anti-Kickback Law.
Changes in third-party payor reimbursement for health care items and services, as well as economic hardships faced by other parties from which our customers obtain funding, may affect our customers’ ability to pay for our services, which could cause us to reduce our prices or adversely affect our ability to collect payments.
Although our customers are health care providers that pay us directly for the services we deliver, they rely on third-party payor reimbursement for a substantial portion of their operating revenue. Third-party payors include government payors like Medicare and Medicaid and private payors like insurance companies and managed care organizations. Third-party payors continue to engage in widespread efforts to control health care costs. Their cost containment initiatives include efforts to control utilization of services and limit reimbursement amounts. Reimbursement limitations can take many forms, including discounts, non-payment for certain care (for example, care associated with certain hospital-acquired conditions) and fixed payment rates for particular treatment modalities or plans, regardless of the provider’s actual costs in caring for a patient. Reimbursement policies have a direct effect on our customers’ ability to pay us for our services and an indirect effect on the prices we charge. Ongoing concerns about rising health care costs may cause more restrictive reimbursement policies to be implemented in the future. Restrictions on the amounts or manner of reimbursements or funding to health care providers may affect the financial strength of our customers and the amount our customers are able to pay for our solutions.
In addition, a portion of our customers derive funding from state and local government sources, some of which are facing financial hardships, including decreased funding. Any limitation or elimination of funding to our customers by these sources could also affect the financial strength of our customers and the amount they are able to pay for our services.
New healthcare laws or regulations could impact our business.
Although our business is not currently extensively regulated under health care laws, we are subject to certain regulatory requirements that continue to come under greater scrutiny and regulation. Our customers are subject to direct regulation under the Federal False Claims Act, the Stark Law, the Anti-Kickback Law, rules and regulations of the Centers for
Medicare and Medicaid Services (“CMS”) and other federal and state health care laws and regulations. Promulgation of new laws and regulations, or changes in or re-interpretations of existing laws or regulations as they relate to our customers and our business, could affect our business, operating results or financial condition. Our operations might be negatively impacted if we had to comply with additional complex government regulations.
Our customers operate in a highly regulated environment. Regulations affecting them could cause us to incur additional expenses associated with compliance and licensing. We could be assessed fines and face possible exclusion from participation in state and federal health care programs if we violate laws or regulations applicable to our business.
The health care industry is required to comply with extensive and complex laws and regulations at the federal, state and local government levels. While the majority of these regulations do not directly apply to us, there are some that do, including the FDCA and certain state pharmaceutical licensing requirements. Although we believe we are in compliance with the FDCA, if the FDA expands the reporting requirements under the FDCA, we may be required to comply with the expanded requirements and may incur substantial additional expenses in doing so. With respect to state requirements, we are currently licensed in 14 states and may be required to obtain additional licenses, permits and registrations as state requirements change. Our failure to possess such licenses for our existing operations may subject us to certain additional expenses.
In addition to the FDCA and state licensing requirements, we are impacted by federal and state laws and regulations aimed at protecting the privacy of individually identifiable health information, among other things, and detecting and preventing fraud, abuse and waste with respect to federal and state health care programs. Some of these laws and regulations apply directly to us. Additionally, many of our customers require us to abide by their policies relating to patient privacy, state and federal anti-kickback acts, and state and federal false claim acts and whistleblower protections. Since the ACA provides for further oversight over and detection of fraud and abuse activities, we expect many of our customers to continue to require us to abide by such policies.
Given that our industry is heavily regulated, we may be subject to additional regulatory requirements. If our operations are found to be in violation of any governmental regulations to which we, or our customers, are subject, we may be subject to the applicable penalty associated with the violation. Penalties, damages, fines, or curtailment of our operations could significantly increase our cost of doing business, leading to difficulty generating sufficient income to support our business. Also, if we are found to have violated certain federal or state laws or regulations regarding Medicare, Medicaid or other governmental funding sources, we could be subject to fines and possible exclusion from participation in federal and state health care programs.
Although we do not manufacture any medical equipment, we own a large fleet of medical equipment, which may be subject to equipment recalls or obsolescence.
We incur significant expenditures to maintain a large and modern equipment fleet. Our equipment may be subject to recalls that could be expensive to implement and could result in revenue loss while the associated equipment is removed from service. We may be required to incur additional costs to repair or replace the equipment at our own expense or we may choose to purchase incremental new equipment from a supplier not affected by the recall. Additionally, our relationship with our customers may be damaged if we cannot promptly replace the equipment that has been recalled. We depend on manufacturers and other third parties to properly obtain and maintain FDA clearance for their equipment and products and their failure to maintain FDA clearance could have a material adverse effect on the Company.
Our success depends, in part, on our ability to respond effectively to changes in technology. Because we maintain a large fleet of equipment, we are subject to the risk of equipment obsolescence. If advancements in technology render a substantial portion of our equipment fleet obsolete, or if a competing technology becomes available that our customers prefer, we may experience a decrease in demand for our products, which could adversely affect our operating results and cause us to invest in new technology to maintain our market share and operating margins.
Risks Related to Our Capital Structure and Our Debt
Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under our indebtedness.
We have a significant amount of indebtedness which could have important consequences.
For example, it could:
·
make it more difficult for us to satisfy our debt obligations;
·
increase our vulnerability to general adverse economic, industry and competitive conditions;
·
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes;
·
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
·
place us at a competitive disadvantage compared to our competitors that have less leverage;
·
limit our ability to borrow additional funds;
·
limit our ability to make investments in technology and infrastructure improvements; and
·
limit our ability to make significant acquisitions.
Our ability to satisfy our debt obligations will depend on our future operating performance. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Our business may not continue to generate sufficient cash flow from operations and future borrowings may not be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. If we are unable to make our interest payments or to repay our debt at maturity, we may have to obtain alternative financing, which may not be available to us.
If we are unable to fund our significant cash needs, including capital expenditures, we may be unable to expand our business as planned or to service our debt.
We require substantial cash to operate our health care technology solutions and service our debt. Our health care technology solutions require us to invest a significant amount of cash in medical equipment purchases. To the extent that such expenditures cannot be funded from our operating cash flow, borrowings under our senior secured credit facility or other financing sources, we may not be able to grow as currently planned. We currently expect that over the next 12 months, we will make net investments of approximately $45 to $55 million in new and pre-owned medical equipment and other capital expenditures. This estimate is subject to numerous assumptions, including revenue growth, the number of 360 solution signings, and any significant changes in customer contracts. In addition, a substantial portion of our cash flow from operations must be dedicated to servicing our debt and there are significant restrictions on our ability to incur additional indebtedness under the amended and restated credit agreement governing our senior secured credit facility.
Primarily because of our debt service obligations and debt refinancing charges and elevated depreciation and amortization charges we have incurred subsequent to the Transaction, we have had a history of net losses. If we consistently incur net losses, it could result in our inability to finance our business in the future. We had net losses of $66.5, $43.0 and $35.2 million during the years ended December 31, 2014, 2013 and 2012, respectively. Our ability to use our United States federal income tax net operating loss carryforwards to offset our future taxable income may be limited. If we are limited in our ability to use our net operating loss carryforwards in future years in which we have taxable income, we will pay more current taxes than if we were able to utilize our net operating loss carryforwards without limitation, which could harm our results of operations and liquidity.
We may not be able to obtain funding on acceptable terms or at all under our amended senior secured credit facility or otherwise because of the deterioration of the credit and capital markets. Thus, we may be unable to expand our business as planned or to service our debt.
Global financial markets and economic conditions continue to be disrupted and volatile due to a variety of factors, including significant write-offs in the financial services sector and the current weak economic conditions. As a result, the cost of raising money in the debt and equity capital markets has increased while the availability of funds from those markets has diminished. In particular, as a result of concerns about the stability of financial markets and the solvency of lending counterparties, the cost of obtaining money from the credit markets generally has increased as many lenders and institutional investors have increased interest rates, enacted tighter lending standards, refused to refinance existing debt on similar terms or at all and reduced, or in some cases ceased, to provide funding to borrowers. In addition, lending counterparties under our amended senior secured credit facility may be unwilling or unable to meet their funding obligations. If funding is not available when needed, or is available only on unfavorable terms, we may be unable to meet our obligations as they come due. Moreover, without adequate funding, we may be unable to execute our growth strategy, complete future acquisitions, or take advantage of other business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our revenues and results of operations.
The interests of our principal equity holder may not be aligned with the interests of our other security holders.
IPC beneficially owns securities representing approximately 96% of the voting equity interests of Parent, and therefore indirectly controls our affairs and policies. Circumstances may occur in which the interests of our principal equity holder could be in conflict with the interests of our other security holders. In addition, our principal equity holder may have an interest in pursuing dividends, acquisitions, divestitures, capital expenditures or other transactions that, in its judgment, could enhance its equity investment, even though these transactions might involve risks to our other security holders.
ITEM 1B:
ITEM 1B: Unresolved Staff Comments
None.
ITEM 2:
ITEM 2: Properties
As of December 31, 2014, we operated 83 full service district service centers nationwide, five CES Centers of Excellence and an additional five stand-alone SS service centers. We lease all of our district service centers as well as SS locations and Centers of Excellence. The average square footage of our non-corporate locations is approximately 8,400 square feet. Our full service district service centers support all of our business segments. Our corporate office is located at a 55,000 square foot leased facility in a suburb of Minneapolis, Minnesota.
ITEM 3:
ITEM 3: Legal Proceedings
The Company, in the ordinary course of business, could be subject to liability claims related to employees and the equipment that it rents and services. Asserted claims are subject to many uncertainties and the outcome of individual matters is not predictable. While the ultimate resolution of these actions may have an impact on the Company’s financial results for a particular reporting period, management believes that any such resolution would not have a material adverse effect on the financial position, results of operations or cash flows of the Company and the chance of a negative outcome on outstanding litigation is considered remote.
On January 13, 2015, the Company filed suit in the Western District of Texas against Hill-Rom Holdings, Inc., Hill-Rom Company, Inc. and Hill-Rom Services, Inc. (the "Defendants") alleging that the Defendants violated federal and state antitrust laws by willfully and unlawfully engaging in a pattern of exclusionary and predatory conduct in order to foreclose market competition and seeking actual damages, trebled damages and punitive damages. At this early stage in the litigation, the Company does not believe the expense of litigation will have a material impact on the Company's operating expenses or financial results.
ITEM 4:
ITEM 4: Mine Safety Disclosures
Not applicable.
PART II
ITEM 5:
ITEM 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
As of March 1, 2015, Parent owns, and at all times during 2014 Parent has owned, all 1,000 shares of our common stock, par value $.01 per share. There is no established public trading market for our common stock. During 2014, the Company did not declare or pay any cash dividends. Our debt instruments contain certain restrictions on our ability to pay cash dividends on our common stock (see the information regarding our Notes and senior secured credit facility contained under the caption “Liquidity and Capital Resources” in Item 7 of this Annual Report on Form 10-K).
We did not repurchase any of our equity securities during 2014.
ITEM 6:
ITEM 6: Selected Financial Data
The selected financial data is presented below under the captions “Consolidated Statements of Operations Data,” “Other Financial Data,” “Other Operating Data” and “Consolidated Balance Sheet Data” for and as of the periods presented below. The selected financial data presented below is qualified in its entirety by, and should be read in conjunction with, the financial statements and notes thereto and other financial and statistical information included elsewhere in this Annual Report on Form 10-K, including the information contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
We are a leading nationwide provider of health care technology management and service solutions to the United States health care industry. Our diverse medical equipment solutions customer base includes more than 7,000 acute care hospitals and alternate site providers. We also have relationships with more than 200 medical device manufacturers and many of the nation’s largest group purchasing organizations (“GPOs”) and many of the integrated delivery networks (“IDNs”). All of our solutions leverage our nationwide network of 83 district service centers, five Centers of Excellence and an additional five stand-alone Surgical Services service centers together with our more than 75 years of experience managing and servicing all aspects of medical equipment. During the year ended December 31, 2014, we owned or managed over 700,000 units of medical equipment consisting of approximately 400,000 owned or managed units in our Medical Equipment Solutions (“MES”) segment, over 300,000 units of customer-owned equipment we managed in our Clinical Engineering Solutions (“CES”) segment and over 5,000 units of owned or managed mobile surgical equipment in our Surgical Services (“SS”) segment. Our fees are paid directly by our customers rather than from direct reimbursement from third-party payors, such as private insurers, Medicare, or Medicaid. We commenced operations in 1939, originally incorporated in Minnesota in 1954 and reincorporated in Delaware in 2001. Historically, we have experienced significant and sustained growth. Our overall growth strategy is to continue to grow both organically and through strategic acquisitions.
As one of the nation’s leading providers of health care technology management and service solutions, we design and offer comprehensive solutions for our customers that help reduce capital and operating expenses while increasing medical equipment and staff productivity and support improved patient safety and outcomes.
In June 2014, Smith & Nephew announced that it had ceased commercial distribution of the RENASYS Negative Pressure Wound Therapy (“NPWT”) product line in the United States following a request from the FDA to obtain additional regulatory clearances through the premarket notification 510(k) process with respect to certain design modifications made to the RENASYS product line. Subsequently, the FDA authorized limited distribution by Smith & Nephew of these products under a Certificate of Medical Necessity (“CMN”) program. The Company is unable to predict when or whether Smith & Nephew will resume full commercial distribution of the RENASYS product line. The RENASYS product line generated approximately $24 million in annual revenue for the prior twelve month period from device rental ($14 million) and disposable sales ($10 million) which was included in our MES segment. As of December 31, 2014, the Company had a net asset exposure of approximately $1 million on the balance sheet, which includes approximately $4 million of equipment which it believes is recoverable, offset with $3 million of payable. In late July, the Company signed an agreement with a NPWT manufacturer to provide an alternative solution to our customers. However, many of our customers have met their NPWT needs directly with other manufacturers or service providers. The Company’s future financial results will be negatively impacted by the interruption of commercial distribution of the RENASYS product line and we anticipate losing the majority of the disposable portion of our revenue based on the new agreement with an alternative NPWT manufacturer. The gross margin on the disposable portion of the business is significantly lower than the overall MES segment gross margin. The potential impact will be highly dependent upon the outcome of the factors mentioned above. The net loss in revenue impact, specifically the loss in Smith & Nephew revenue offset with revenue generated by another provider, was approximately $8 million for 2014 and the additional impact in 2015 is estimated at approximately $8 to $10 million. The cash gross margin impact was approximately $3 million in 2014 and is estimated at approximately $3 to $4 million in 2015.
In July 2014, the Company was notified that a national group purchasing organization (“GPO”) awarded a sole source agreement to a competitor of the Company, for all peak need rental equipment, therapy surfaces (wound and pulmonary) and bariatric equipment. This GPO currently has agreements for the purchase or rental of this equipment with multiple vendors, including from the Company under agreements that expired on December 31, 2014. Under these agreements, the Company supplies equipment to its GPO member customers. The Company generated approximately $26 million of business (over the prior twelve month period) in the portions of the business covered under this new agreement which was included in our MES segment. In addition, the Company also maintains certain 360 solutions with customers that are members of this GPO. The Company is working with the national GPO and its members to develop an orderly transition and anticipates that this transition will occur over the next several months. The Company is assessing the financial impact to its business and the impact will be dependent upon several factors including the GPO members’ willingness to contract with the Company as a non-contracted vendor and the ability of the new service provider to service all of these GPO members. The Company’s future results will be negatively impacted by the loss of this agreement and, while highly sensitive to the factors mentioned above, the loss in revenue was $0.4 million for 2014 and is estimated at approximately $15 to $20 million for 2015. The cash gross margin impact, while difficult to estimate given the fixed nature of the expense base, is estimated at approximately $10 to $14 million in 2015. The Company anticipates either selling or redeploying approximately $4 to $6 million in excess equipment currently supporting the existing business, which will reduce the on-going maintenance capital expenditures.
Principles of Consolidation
The consolidated financial statements include the accounts of UHS and of Surgical Services, its 100%-owned subsidiary. In addition, in accordance with guidance issued by the Financial Accounting Standards Board (“FASB”), we have accounted for our equity investments in entities in which we are the primary beneficiary under the full consolidation method. All significant intercompany transactions and balances have been eliminated through consolidation. As the primary beneficiary, we consolidate the limited liability companies (“LLCs”) referred to in 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 reportable segments consist of medical equipment solutions, clinical engineering solutions and surgical services. We evaluate the performance of our reportable segments based on gross margin. The accounting policies of the individual reportable segments are the same as those of the entire company. Our revenue, profits, and assets for our reportable segments for each of the last five fiscal years ended December 31 are described in “Item 6 - Selected Financial Data.”
All of our outstanding capital stock is owned by UHS Holdco, Inc. (“Parent”), which acquired the Company in a recapitalization in May 2007. Parent is owned by affiliates of Irving 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 in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of 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:
·
recoverability and valuation of long-lived assets, goodwill and intangible assets;
·
potential litigation liabilities; and
·
income taxes.
For goodwill and indefinite-lived intangible assets, including 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.” Goodwill and indefinite-lived intangible assets are tested at least annually for impairment and more frequently if events or changes in circumstances indicate that the asset might be impaired. We review goodwill for impairment by first assessing 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. If we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, we conclude that goodwill is not impaired. If the carrying amount of a reporting unit is zero or negative, the second step of the impairment test is performed to measure the amount of impairment loss, if any, when it is more likely than not that a goodwill impairment exists. As of December 31, 2014, all of our reporting units had a negative carrying value. We review indefinite-lived intangible assets for impairment by first assessing qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, we conclude that it is not more likely than not that the indefinite-lived intangible asset is impaired, then we conclude that the indefinite-lived intangible asset is not impaired.
During the second quarter of 2014, the Company became aware of certain events that will have a negative impact on the future financial results of the Company. The Company applies a fair value based impairment test to the net book value of goodwill and intangible assets with indefinite lives on an annual basis and on an interim basis if events or circumstances indicate that an impairment loss may have occurred. The review of indefinite-life intangibles for impairment during the second quarter of 2014 indicated that the carrying value of trade names in the MES segment exceeded its estimated fair values. The Company performed an interim impairment test and recorded a non-cash impairment charge of $34.9 million in the second quarter of 2014. As a result of the trade names impairment, the Company’s equity went to a deficit causing the Company to undertake a step 2 goodwill impairment analysis. The preliminary step 2 analysis of the MES goodwill reflected no impairment. The finalization of the step 2 analysis and the result of the annual impairment review resulted in no changes to or additional impairment charges. No impairments were recognized in 2013 or 2012 related to indefinite-lived intangible assets or goodwill.
For property and equipment and amortizable intangible assets, impairment is evaluated when an event (such as those noted in ASC Topic 360, “Property, Plant, and Equipment”) is indicated. This evaluation is conducted at the lowest
level of identifiable cash flows. If there is an indication of impairment based on this evaluation of undiscounted cash flows versus carrying value, impairment is measured based on the estimated fair value of the long-lived or amortizable asset in comparison to its carrying value. Our amortizable intangible assets consist of the following discrete items: customer relationships, a supply agreement, technology databases, non-compete agreements and favorable lease agreements. For property and equipment, primarily movable medical equipment, we continuously monitor specific makes/models for events such as product recalls or obsolescence. We recorded asset impairment charges of $2.0 million in 2014. No impairments were recognized in 2013 or 2012 related to property and equipment and amortizable intangible assets.
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 consolidated 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 as incurred.
The Company’s current and deferred tax provision is based on estimates and assumptions that could materially differ from the actual results reflected in its income tax return(s) filed during the subsequent year and could materially affect the Company’s effective tax rate.
The Company has recorded a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized. We evaluate the recoverability of our deferred tax assets by scheduling the expected reversals of deferred tax assets and liabilities to determine whether net operating loss carry forwards are recoverable prior to expiration. The Company had a valuation allowance of $55.0 and $36.1 million as of December 31, 2014 and 2013, respectively.
In accounting for uncertainty in income taxes, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
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 2014 to 2013 and 2013 to 2012.
* Not meaningful
Results of Operations for the Year Ended December 31, 2014 compared to the Year Ended December 31, 2013
Total Revenue
Total revenue for the year ended December 31, 2014 was $436.7 million, compared with $428.4 million for the year ended December 31, 2013, an increase of $8.3 million or 1.9%. The increase was primarily due to additional revenue in our MES segment related to growth in our 360 On-site Managed Solutions (“360 solutions”) of $15.4 million, partially offset by the decline in NPWT device rental and disposable sales of $8.0 million due to the interruption of Smith & Nephew commercial distribution of the RENASYS product line and a decrease in supplemental revenue associated with peak need usage and patient handling of $6.1 million; additional revenue in our CES segment related to growth in our 360 solutions of $5.1 million and additional revenue in our SS segment related to growth in our surgical services business of $3.0 million primarily from organic growth.
Cost of Revenue
Total cost of revenue for the year ended December 31, 2014 was $309.9 million compared to $301.2 million for the year ended December 31, 2013, an increase of $8.7 million or 2.9%. The increase in our MES segment was primarily due to an increase in 360 solutions costs of $9.0 million corresponding with the 360 solutions revenue growth, partially offset by decreases in cost of disposable sales of $5.0 million and other rental costs of $2.0 million; an increase in our CES segment costs related to 360 solution costs of $5.8 million and the growth in our surgical services business resulted in additional costs of $1.2 million.
Gross Margin
Total gross margin for the year ended December 31, 2014 was $126.8 million, or 29.1% of total revenues compared to $127.2 million, or 29.7% of total revenues for the year ended December 31, 2013, a decrease of $0.4 million or 0.4%. The decrease in gross margin as a percent of revenue was primarily impacted by business mix related to increases in the 360 business relative to other portions of the MES segment coupled with growth in the CES and SS portions of the business.
Medical Equipment Solutions Segment
(in thousands)
Total revenue in the MES segment was $285.5 million for both the year ended December 31, 2014 and for the same period of 2013. The MES segment was favorably impacted by new 360 solutions program signings combined with organic growth which in aggregate totaled to approximately $15.4 million, which was partially offset by the decline in NPWT device rental and disposable sales of $8.0 million due to the interruption of Smith & Nephew commercial distribution of the RENASYS product line and a decrease in supplemental revenue associated with peak need usage and patient handling of $5.4 million. Many of our 360 Solution customers utilize more than one of our equipment management program offerings in areas such as infusion, patient handling, and negative pressure wound therapy. As of December 31, 2014, we had 209 such active programs, up from 181 as of December 31, 2013. The decline in peak need usage revenue was driven by the conversion of customers to 360 solutions, the loss of certain customers to alternative solutions and, to a lesser extent, soft patient census early in 2014.
Total cost of revenue in the segment for the year ended December 31, 2014 increased by $1.3 million, or 1.0%, to $130.1 million as compared to the same period of 2013. This increase is attributable to the increase in costs to support growth in our 360 solutions of $9.0 million largely due to an increase in employee related expense of $5.1 million and an increase in repairs and maintenance and service costs of $2.1 million for certain program offerings, partially offset by decreases in cost of disposable sales of $5.0 million and other rental costs of $2.0 million.
Medical equipment depreciation for the year ended December 31, 2014 increased by $0.1 million, or 0.2%, to $67.7 million as compared to the same period of 2013. The increase in medical equipment depreciation was primarily due to impairment charges of $2.0 million taken on excess infusion equipment sold in the second quarter of 2014 and under-utilized patient handling equipment charge, offset by reduced depreciation expense resulting from impairment and disposals of certain medical equipment.
Gross margin percentage for the MES segment was 30.7% and 31.2% for the years ended December 31, 2014 and 2013, respectively. Gross margin rate was impacted by the growth in our 360 solutions, which has a lower margin rate than other medical equipment solutions.
Future revenue will be negatively impacted by the loss of revenues resulting from the pending FDA 510(k) clearance on RENASYS NPWT product line and the loss of the agreement related to a national GPO. See Item 15 of Part IV, Note 9, Commitments and Contingencies.
Clinical Engineering Solutions Segment
(in thousands)
Total revenue in the CES segment for the year ended December 31, 2014 increased by $5.2 million, or 6.0%, to $92.1 million as compared to the same period of 2013. The increase was primarily due to growth in our 360 solutions. As of December 31, 2014, we had 360 solutions implemented in 144 programs in our CES segment, up from 131 programs as of December 31, 2013.
Total cost of revenue in the segment for the year ended December 31, 2014 increased by $5.8 million, or 8.6%, to $73.5 million as compared to the same period of 2013. The increase is primarily attributable to increases in employee related costs and vendor expenses to support the revenue growth.
Gross margin percentage for the CES segment was 20.1% and 22.0% for the years ended December 31, 2014 and 2013, respectively. The decrease was partially due to lower volume in our manufacturing services portion of the business resulting from additional services being performed in house, as well as a higher level of employee related costs and vendor expenses on supported equipment. Gross margin percentage will fluctuate materially based on the variability of third-party vendor expenses in our 360 solutions and supplemental service programs, as well as fluctuations of services being performed in house for manufacturing services.
Surgical Services Segment
(in thousands)
Total revenue in the SS segment for the year ended December 31, 2014 increased by $3.0 million, or 5.4%, to $59.1 million as compared to the same period of 2013. The increase was driven by organic growth in our surgical services business.
Total cost of revenue in the segment for the year ended December 31, 2014 increased by $1.2 million, or 3.7%, to $32.7 million as compared to the same period of 2013. The increase was primarily attributable to an increase in employee-related costs to support growth in our surgical services business of $0.9 million.
Medical equipment depreciation for the year ended December 31, 2014 increased by $0.4 million, or 7.0%, to $5.8 million as compared to the same period of 2013.
Gross margin percentage for the SS segment was 34.8% and 34.0% for the years ended December 31, 2014 and 2013, respectively. The increase in gross margin percentage was primarily attributable to leverage from volume growth and some shift to higher margin modalities.
Selling, General and Administrative, Restructuring, Acquisition and Integration Expenses, Intangible Asset Impairment Charge, Loss on Extinguishment of Debt and Interest Expense
(in thousands)
Selling, General and Administrative
Selling, general, and administrative expenses for the year ended December 31, 2014 increased by $1.9 million, or 1.7%, to $114.6 million as compared to the same period of 2013. Selling, general and administrative expense as a percentage of total revenue was 26.2% and 26.3% for the years ended December 31, 2014 and 2013, respectively.
Restructuring, Acquisition and Integration Expenses
Restructuring, acquisition and integration expenses for the year ended December 31, 2014 increased by $2.8 million to $3.1 million as compared to the same period of 2013. The increase was primarily due to additional charges related to the realignment of the management team.
Intangible Asset Impairment Charge
During the second quarter of 2014, the Company became aware that future financial results of the Company will be negatively impacted by the loss of revenues resulted from pending FDA 510(k) clearances on RENASYS NPWT product line and the loss of the agreement related to a national GPO. The Company applies a fair value based impairment test to the net book value of goodwill and intangible assets with indefinite lives on an annual basis and on an interim basis if events or circumstances indicate that an impairment loss may have occurred. The review of indefinite-life intangibles for impairment during the second quarter of 2014 indicated that the carrying value of trade names in the MES segment exceeded its estimated fair values. As a result, the Company performed an interim impairment test and recorded a preliminary non-cash impairment charge of $34.9 million during the second quarter of 2014. The calculation of the preliminary impairment charge contains significant judgments and estimates including weighted average cost of capital, future revenue, profitability, cash flows and fair values of assets and liabilities. The finalization of the step 2 analysis and the result of the annual impairment review resulted in no changes to or additional impairment charges.
Loss on Extinguishment of Debt
The loss of $1.9 million reflected the write-off of the unamortized deferred financing costs related to the redemption of our floating rate notes due 2015 (“Floating Rate Notes”) during 2013.
Interest Expense
Interest expense for the year ended December 31, 2014 decreased by $1.7 million, or 3.1%, to $53.3 million as compared to the same period of 2013. This decrease was mainly attributable to the decrease in amortization of deferred financing costs combined with an increase in amortization of bond premium. Interest expense includes amortization of deferred financing fees associated with our debt of $2.4 and $2.7 million for years ended December 31, 2014 and 2013, respectively.
Income Taxes
Income taxes were a benefit of $13.1 and $0.2 million for the years ended December 31, 2014 and 2013, respectively. The tax benefit for the year ended December 31, 2014 primarily relates to an intangible asset impairment charge, partially offset by state minimum fees. The tax benefit for the year ended December 31, 2013 primarily related to two items along with state minimum fees. The first item is to record a deferred tax liability for adjustments in connection with the tax amortization of indefinite-life goodwill. The second item is to reverse a long-term liability created as a reserve against operating losses from an acquisition in 2011. The Company will continue to incur deferred tax expense in the future as tax amortization occurs. The expected tax benefit from operating losses during the year ended December 31, 2014 was offset by the recording of an additional valuation allowance.
Consolidated Net Loss
Consolidated net loss was $66.0 and $42.3 million for the years ended December 31, 2014 and 2013, respectively. Net loss was impacted primarily by gross intangible asset impairment charge of $34.9 million, or $21.2 million net of taxes of $13.7 million.
EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) was $73.8 and $110.6 million for the years ended December 31, 2014 and 2013, respectively. EBITDA for the year ended December 31, 2014 was impacted by intangible asset impairment charge, increases in selling, general and administrative and restructuring expenses, offset by a decrease in loss on extinguishment of debt.
EBITDA is defined as earnings attributable to UHS 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. 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 net loss attributable to UHS to EBITDA, see note (2) under the caption “Selected Financial Data” in Item 6 of this Annual Report on Form 10-K.
Results of Operations for the Year Ended December 31, 2013 compared to the Year Ended December 31, 2012
Total Revenue
Total revenue for the year ended December 31, 2013 was $428.4 million, compared to $415.3 million for the year ended December 31, 2012, an increase of $13.1 million or 3.2%. The increase was primarily due to additional revenue in our MES segment related to growth in our 360 On-site Managed Solutions (“360 solutions”) of $12.2 million, partially offset by a decrease in peak need usage revenue of $4.0 million; additional revenue in our SS segment related to growth in our surgical services business of $5.9 million primarily from organic growth combined with a July 2012 acquisition and additional revenue in our CES segment related to growth in our 360 solutions of $3.1 million, partially offset by a decrease in used sales of $2.7 million.
Cost of Revenue
Total cost of revenue for the year ended December 31, 2013 was $301.2 million compared to $267.6 million for the year ended December 31, 2012, an increase of $33.6 million or 12.6%. The increase in our MES segment was primarily due
to 2012 included recall gains of $18.6 million without a comparable amount for 2013 and an increase in 360 solutions costs of $5.9 million corresponding with the 360 solutions revenue growth, the growth in our surgical services business resulted in additional costs of $3.7 million and an increase in our CES segment costs related to 360 solution costs of $2.9 million.
Gross Margin
Total gross margin for the year ended December 31, 2013 was $127.2 million, or 29.7% of total revenues compared to $147.7 million, or 35.6% of total revenues for the year ended December 31, 2012, a decrease of $20.5 million or 13.9%. The decrease in gross margin as a percent of revenue was primarily impacted by recall equipment gains recognized in the prior year.
Medical Equipment Solutions Segment
(in thousands)
Total revenue in the MES segment for the year ended December 31, 2013 increased by $2.6 million, or 0.9%, to $285.5 million as compared to the same period of 2012. The increase was primarily due to new signings of 360 solutions programs combined with organic growth of $12.2 million, partially offset by decreases in peak need usage revenue of $4.0 million, used sales of $2.7 million and other disposables sales of $2.3 million. Many of our 360 Solution customers utilize more than one of our equipment management program offerings in areas such as infusion, patient handling, and negative pressure wound therapy. As of December 31, 2013, we had 181 such active programs, up from 118 as of December 31, 2012. Peak need usage revenue was negatively impacted by converting customers to 360 solutions and sluggish patient census.
Total cost of revenue in the segment for the year ended December 31, 2013 increased by $22.3 million, or 20.9%, to $128.9 million as compared to the same period of 2012. This increase is attributable to the decrease in recalled equipment gains of $18.6 million due to the completion of the recall program in 2012 and an increase in costs to support growth in our 360 solutions of $5.9 million largely due to an increase in employee related expense of $4.5 million, partially offset by lower cost of disposable sales of $3.0 million.
Medical equipment depreciation for the year ended December 31, 2013 increased by $1.8 million, or 2.8%, to $67.6 million as compared to the same period of 2012. The increase in medical equipment depreciation was primarily due to the additional depreciation expense related to medical equipment purchased to support the growth in the 360 solutions programs.
Gross margin percentage for the MES segment was 31.2% and 39.1% for the years ended December 31, 2013 and 2012, respectively. The decrease in gross margin percentage was primarily attributable to the recall equipment gains recognized in 2012 of $18.6 million. Gross margin percentage for 2012 excluding recall equipment gains was 32.5%. Gross margin rate was impacted by the growth in our 360 solutions, which has a lower margin rate than other medical equipment solutions.
Clinical Engineering Solutions Segment
(in thousands)
Total revenue in the CES segment for the year ended December 31, 2013 increased by $4.6 million, or 5.6%, to $86.9 million as compared to the same period of 2012. The increase was primarily due to growth in our 360 solutions of $3.1 million. As of December 31, 2013, we had 360 solutions implemented in 131 programs in our CES segment.
Total cost of revenue in the segment for the year ended December 31, 2013 increased by $5.3 million, or 8.5%, to $67.7 million as compared to the same period of 2012. Cost of revenue consists primarily of employee-related expenses, vendor expenses and repair parts expenses. The increase is primarily attributable to an increase in vendor expenses to support the revenue growth.
Gross margin percentage for the CES segment was 22.0% and 24.1% for the years ended December 31, 2013 and 2012, respectively. Gross margin percentage will fluctuate based on the variability of third-party vendor expenses in our 360 solutions and supplemental service programs.
Surgical Services Segment
(in thousands)
Total revenue in the SS segment for the year ended December 31, 2013 increased by $5.9 million, or 11.7%, to $56.1 million as compared to the same period of 2012. The increase was driven by approximately $3.8 million organic growth in our surgical services business and $2.1 million growth related to our acquisitions.
Total cost of revenue in the segment for the year ended December 31, 2013 increased by $3.7 million, or 13.3%, to $31.6 million as compared to the same period of 2012. The increase was primarily attributable to an increase in employee-related costs to support growth in our surgical services business of $1.2 million and an increase in disposables of $1.1 million related to the revenue growth.
Medical equipment depreciation for the year ended December 31, 2013 increased by $0.4 million, or 8.7%, to $5.4 million as compared to the same period of 2012. The increase in medical equipment depreciation was primarily due to the additional depreciation expense related to acquisitions in our surgical services business during 2012.
Gross margin percentage for the SS segment was 34.0% and 34.6% for the years ended December 31, 2013 and 2012, respectively. The decrease in gross margin percentage was primarily attributable to expansion of equipment offerings to geographies which resulted in an increase in travel expense.
Selling, General and Administrative, Restructuring, Acquisition and Integration Expenses, Loss on Extinguishment of Debt and Interest Expense
(in thousands)
* Not meaningful
Selling, General and Administrative
Selling, general, and administrative expenses for the year ended December 31, 2013 increased by $3.4 million, or 3.1%, to $112.6 million as compared to the same period of 2012. The increase was primarily due to an increase in outside consulting services to support potential investments in acquisitions and other business opportunities totaling $3.8 million. The remaining increase was the employee-related salaries and benefits of $2.3 million primarily to support the growth in our 360 solutions business. The increase was partially offset by a decrease in stock option expense of $2.4 million due to an increase in forfeited shares and the majority of shares becoming fully vested by the end of 2012.
Selling, general and administrative expense as a percentage of total revenue was 26.3% for the years ended December 31, 2013 and 2012.
Restructuring, Acquisition and Integration Expenses
Restructuring, acquisition and integration expenses for the year ended December 31, 2013 decreased by $7.2 million, or 96.8%, to $0.2 million as compared to the same period of 2012. The decrease was primarily due to the completion of the management reorganization.
Loss on Extinguishment of Debt
For the year ended December 31, 2013, the loss of $1.9 million reflects the write-off of the unamortized deferred financing costs related to the redemption of our Floating Rate Notes during 2013. For the year ended December 31, 2012, we incurred $12.3 million of expense related to the repurchase of $230.0 million of our 8.50% / 9.25% PIK Toggle Notes due 2015 (“PIK Toggle Notes”) and $175.0 million of our PIK Toggle Notes issued on June 17, 2011, for total aggregate principal amount of $405.0 million. The expense consisted of a call premium of $9.8 million, a credit of $2.9 million related to the bond premium write-off from the $175.0 million of notes issued in 2011 and the write-off of unamortized deferred financing costs of $5.4 million.
Interest Expense
Interest expense for the year ended December 31, 2013 decreased by $0.7 million, or 1.2%, to $55.0 million as compared to the same period of 2012. This decrease was mainly attributable to the decrease in amortization of deferred financing costs. Interest expense includes amortization of deferred financing fees associated with our debt of $2.7 and $3.7 million for years ended December 31, 2013 and 2012, respectively.
Income Taxes
Income taxes were a benefit of $0.2 and $2.6 million for the years ended December 31, 2013 and 2012, respectively. The tax benefit for the year ended December 31, 2013 primarily relates to two items along with state minimum fees. The first item is to record a deferred tax liability for adjustments in connection with the tax amortization of indefinite-life goodwill. The second item is to reverse a long-term liability created as a reserve against operating losses from an
acquisition in 2011. The Company will continue to incur deferred tax expense in the future as tax amortization occurs. The expected tax benefit from operating loss during the year ended December 31, 2013 was offset by the recording of additional valuation allowance. 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 event had the one-time effect of reducing our valuation allowance by approximately $3.4 million on that date, though this amount was offset by approximately $2.5 million of additional valuation allowance resulting from year-to-date losses.
Consolidated Net Loss
Consolidated net loss was $42.3 and $34.4 million for the years ended December 31, 2013 and 2012, respectively. Net loss was impacted primarily by recalled equipment gains in 2012 of $18.6 million, higher selling, general and administrative expenses of $3.4 million partially offset by a decrease in restructuring, acquisition and integration expenses of $7.2 million and a decrease in loss on extinguishment of debt of $10.5 million.
EBITDA
EBITDA was $110.6 and $114.6 million for the years ended December 31, 2013 and 2012, respectively. EBITDA for the year ended December 31, 2013 was impacted by a decrease of $18.6 million in recalled equipment gains as a result of the completion of the recall program offset by a decrease in loss on extinguishment of debt of $10.5 million.
In addition to using EBITDA internally as a measure of operational performance, we disclose it externally to assist analysts, investors and lenders in their comparisons of operational performance, valuation and debt capacity across companies with differing capital, tax and legal structures. EBITDA, however, is not a measure of financial performance under 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 net loss attributable to UHS to EBITDA, 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. As of December 31, 2014, our major sources of funds were comprised of $425.0 million aggregate principal amount of our Original Notes (as defined below), $220.0 million aggregate principal amount of our Add-on Notes (as defined below), $235.0 million senior secured credit facility and $15.1 million of vehicle leases. Our $230.0 million of Floating Rate Notes and $405.0 million aggregate principal amount of PIK Toggle Notes were redeemed in March 2013 and August 2012, respectively.
Original Notes and Add-on Notes - 7.625%. On August 7, 2012, we issued $425.0 million in aggregate principal amount of 7.625% Second Lien Senior Secured Notes due 2020 (the “Original Notes”) under an indenture dated as of August 7, 2012 (the “2012 Indenture”). On February 12, 2013, we issued $220.0 million in aggregate principal amount of 7.625% Second Lien Senior Secured Notes due 2020 (the “Add-on Notes”, and along with the Original Notes, the “2012 Notes”) as “additional notes” pursuant to the 2012 Indenture. The 2012 Notes mature on August 15, 2020.
The 2012 Indenture provides that the 2012 Notes are our second lien senior secured obligations and are fully and unconditionally guaranteed on a second lien senior secured basis by our existing and certain of our future 100%-owned domestic subsidiaries.
Interest on the 2012 Notes is payable, entirely in cash, semiannually, in arrears, on February 15 and August 15 of each year. We may redeem some or all of the 2012 Notes at the redemption prices set forth in the 2012 Indenture. If we sell certain assets or undergo certain kinds of changes of control, we must offer to repurchase the 2012 Notes.
Our 2012 Notes are subject to certain debt covenants which are described below under the heading “2012 Indenture.”
Floating Rate Notes. On May 31, 2007, we issued $230.0 million aggregate principal amount of our Floating Rate Notes. Interest on the Floating Rate Notes was reset for each semi-annual interest period and was calculated at the current LIBOR rate plus 3.375%.
On March 14, 2013, we redeemed all of our outstanding Floating Rate Notes. The proceeds of the Add-on Notes were used to fund the redemption.
Senior Secured Credit Facility. 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 our then-existing senior secured credit facility originally dated as of May 31, 2007 and amended and restated as of May 6, 2010. We refer to the second 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 Second Amended Credit Agreement increased the aggregate amount we may obtain under revolving loans from $195.0 million to $235.0 million and extended the maturity date to July 31, 2017. Our obligations under the Second Amended Credit Agreement are secured by a first priority security interest in substantially all of our assets, excluding a pledge of our and Parent’s stock, any joint ventures and certain other exceptions. Our obligations under the Second Amended Credit Agreement are unconditionally guaranteed by Parent and our restricted subsidiaries.
As of December 31, 2014, we had $135.7 million of availability under the senior secured credit facility based on a borrowing base of $178.3 million less borrowings of $39.0 million and after giving effect to $3.6 million used for letters of credit.
The senior secured credit facility requires our compliance with various affirmative and negative covenants. Pursuant to the affirmative covenants, we and Parent agreed to, among other things, deliver financial and other information to the administrative agent, provide notice of certain events (including events of default), pay our obligations, maintain our properties, maintain the security interest in the collateral for the benefit of the administrative agent and the lenders and maintain insurance.
Among other restrictions, and subject to certain definitions and exceptions, the senior secured credit facility restricts our ability to:
·
incur indebtedness;
·
create or permit liens;
·
declare or pay dividends and certain other restricted payments;
·
consolidate, merge or recapitalize;
·
acquire or sell assets;
·
make certain investments, loans or other advances;
·
enter into transactions with affiliates;
·
change our line of business; and
·
enter into hedging transactions.
The senior secured credit facility also contains a financial covenant that is triggered if our available borrowing capacity is less than $20.0 million for a certain period, which consists of a minimum ratio of trailing four-quarter 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 1.00% - 1.50% above the rate equal to the greater of (i) the “federal funds rate” plus one-half of one percent (0.50%) per annum, (ii) the “prime rate” announced from time to time by the administrative agent for such day and (iii) the “Eurodollar rate” for a one month interest period as determined on such day, plus one percent (1.0%) payable quarterly in arrears; and
·
at a per annum rate equal to 2.00% - 2.50% above the adjusted British Bankers Association Interest Settlement Rate for deposits in Dollars rate used by the administrative agent with a term equivalent to the selected interest rate period, for the respective interest rate period determined at our option, payable in arrears upon cessation of the interest rate period elected, provided that for an interest rate period longer than three months, payable in arrears on the respective dates that fall every three months from the beginning of such interest rate period.
At December 31, 2014, we had $39.0 million of borrowings outstanding which was accruing interest at a rate of 2.6608%.
We were in compliance with all financial debt covenants for all years presented.
2012 Indenture. Our 2012 Notes are guaranteed, jointly and severally, on a second priority senior secured basis, by Surgical Services, and are also similarly guaranteed by certain of our future 100%-owned domestic subsidiaries. The 2012 Notes are our second priority senior secured obligations and rank (i) equal in right of payment with all of our existing and future unsubordinated indebtedness and effectively senior to any such unsecured indebtedness to the extent of the value of collateral; (ii) senior in right of payment to all of our and our guarantors’ existing and future subordinated indebtedness; (iii) effectively junior to our senior secured credit facility and certain other obligations secured by a lien on assets, in each case, to the extent of the value of such collateral or assets; and (iv) structurally subordinated to any indebtedness and other liabilities (including trade payables) of any of our future subsidiaries that are not guarantors.
The 2012 Indenture contains covenants that limit our and our guarantors’ ability, subject to certain definitions and exceptions, and certain of our future subsidiaries’ ability to:
·
incur additional indebtedness;
·
pay cash dividends or distributions on our capital stock or repurchase our capital stock or subordinated debt;
·
issue redeemable stock or preferred stock;
·
issue stock of subsidiaries;
·
make certain investments;
·
transfer or sell assets;
·
create liens on our assets to secure debt;
·
enter into transactions with affiliates; and
·
merge or consolidate with another company.
The 2012 Indenture specifies certain events of default, including among others, failure to pay principal, interest or premium, violation of covenants and agreements, cross-defaults to other material agreements, bankruptcy events, invalidity of guarantees, and a default in the performance by us of the security documents relating to the 2012 Indenture. Some events of default will be triggered only after certain grace or cure periods have expired, or provide for materiality thresholds. In the event certain bankruptcy-related defaults occur, the 2012 Notes will become due and payable immediately. If any other default occurs, the Trustee (and in some cases the noteholders) would be entitled to take various actions, including acceleration of amounts due under the 2012 Indenture.
We were in compliance with all financial debt covenants for all years presented.
Liquidity
Our principal sources of liquidity are expected to be cash flows from operating activities and borrowings under our senior secured credit facility, which provides loans in the amount of up to $235.0 million, subject to our borrowing base. 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 solutions 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 make net investments of approximately $45 to $55 million in new and pre-owned medical equipment and other capital expenditures. This estimate is subject to numerous assumptions, including revenue growth, the number of 360 solutions signings, and any significant changes in customer contracts.
If we are unable to generate sufficient cash flow from operations in order to service our debt, we will be forced to take actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing our debt, or seeking additional equity capital. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If we are unable to repay our debt at maturity, we may have to obtain alternative financing, which may not be available to us.
Future cash flows from operations will be negatively impacted by the loss of revenues resulting from the pending FDA 510(k) clearances on RENASYS NPWT product line and the loss of the agreement related to a national GPO. See Item 15 of Part IV, Note 9, Commitments and Contingencies.
The following table sets forth selected historical information regarding our cash flows:
Net cash provided by operating activities was $60.6, $57.6 and $72.5 million for the years ended December 31, 2014, 2013 and 2012, respectively. Net cash provided by operating activities increased in 2014 compared to 2013 primarily due to increase in collections of accounts receivable. Net cash provided by operating activities decreased in 2013 compared to 2012 primarily due to debt refinancing in August 2012 shifting the interest cycle from June and December to February and August, resulting in approximately eight months of cash interest payments in 2012 and twelve months of cash interest payments in 2013. In addition, the management reorganization costs were expensed in 2012 and primarily paid in 2013.
Net cash used in investing activities was $55.5, $56.4 and $73.6 million for the years ended December 31, 2014, 2013 and 2012, respectively. The decrease in net cash used in investing activities in 2014 compared to 2013 primarily due to higher proceeds from sale of medical equipment and lower purchases of property and office equipment. The decrease in net cash used in investing activities in 2013 was primarily the result of our January 3, 2012 and July 9, 2012 acquisitions in our surgical services business.
Net cash used in financing activities was $5.1, $1.1 and $0.1 million for the years ended December 31, 2014, 2013 and 2012, respectively. The increase in net cash used in financing activities in 2014 compared to 2013 was primarily due to the change in book overdrafts. The increase in net cash used in financing activities in 2013 compared to 2012 was primarily due to the change in book overdrafts.
Total debt at the end of 2014 was flat in comparison to 2013. The senior secured credit facility increased by $6.0 million was offset primarily by the decrease in capital lease obligations for the Company’s vehicle fleet.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2014, we do not have any unconsolidated SPEs.
Contractual Obligations
The following is a summary, as of December 31, 2014, of our future contractual obligations:
(1)
While our net pension liability at December 31, 2014 was approximately $8 million, we cannot reasonably estimate required payments beyond 2015 due to changing actuarial and market conditions.
(2)
We cannot reasonably determine the exact timing of payments related to our unrecognized tax positions.
Based on the level of operating performance expected in 2015, we believe our cash from operations and additional borrowings under our senior secured credit facility will meet our liquidity needs for the foreseeable future, exclusive of any borrowings that we may make to finance potential acquisitions. However, if during that period or thereafter we are not successful in generating sufficient cash flows from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to us, our business could be adversely affected. As of December 31, 2014, we had $135.7 million of availability under the senior secured credit facility based on a borrowing base of $178.3 million less borrowings of $39.0 million and after giving effect to $3.6 million used for letters of credit. As of December 31, 2013, we had $155.6 million of availability under the senior secured credit facility based on a borrowing base of $192.8 million less borrowings of $33.0 million and after giving effect to $4.2 million used for letters of credit.
Our levels of borrowing are further restricted by the financial covenants set forth in our senior secured credit facility agreement and the 2012 Indenture governing our 2012 Notes, which covenants are summarized above.
As of December 31, 2014, we were in compliance with all covenants for all years presented.
Our expansion and acquisition strategy may require substantial capital. Sufficient funding for future acquisitions may not be available under our existing senior secured 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.
RECENT ACCOUNTING PRONOUNCEMENTS
See Item 15, Note 2, Significant Accounting Policies.
FORWARD LOOKING STATEMENTS
Safe 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 competitors’ activities;
·
our customers’ patient census or service needs;
·
global economic conditions’ effect on our customers;
·
our ability to maintain existing contracts or contract terms and enter new contracts with customers;
·
consolidation in the health care industry and its effect on prices;
·
our relationships with key suppliers;
·
our ability to change the manner in which health care providers procure medical equipment;
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the absence of long-term commitments and cancellations by or disputes with customers;
·
our dependence on key personnel;
·
our ability to identify and manage acquisitions;
·
increases in expenses related to our pension plan;
·
our cash flow fluctuation;
·
the increased credit risks associated with doing business with home care providers and nursing homes;
·
the risk of claims associated with medical equipment we outsource and service;
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increases costs we cannot pass through;
·
the failure of any management information system;
·
the inherent limitations on internal controls of our financial reporting;
·
the uncertainty surrounding health care reform initiatives;
·
the federal Privacy law risks;
·
the federal Anti-Kickback law risks;
·
changes to third-party payor reimbursement for health care items and services;
·
potential other new healthcare laws or regulations;
·
our customers operate in a highly regulated environment;
·
our fleet’s risk of recalls or obsolescence;
·
our substantial debt service obligations;
·
our need for substantial cash to operate and expand our business as planned;
·
our history of net losses and substantial interest expense; 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.
ITEM 7A:
ITEM 7A: Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk arising from adverse changes in interest rates, fuel costs and pension valuation. We do not enter into derivatives or other financial instruments for speculative purposes.
Interest Rates
We use both fixed and variable rate debt as sources of financing. As of December 31, 2014, we had approximately $710.2 million of total debt outstanding, of which $39.0 million was bearing interest at variable rates. Based on variable debt levels at December 31, 2014, a 1.0 percentage point change in interest rates on variable rate debt would have resulted in annual interest expense fluctuating by approximately $0.4 million.
Fuel Costs
We are exposed to market risks related to changes in the price of gasoline used to fuel our fleet of delivery and sales vehicles. A hypothetical 10% increase or decrease in the average 2014 prices of unleaded gasoline, assuming gasoline usage levels for the year, would lead to an annual increase or decrease in fuel costs of approximately $0.6 million.
Pension
Our pension plan assets, which were approximately $20.6 million at December 31, 2014 are subject to volatility that can be caused by fluctuations in general economic conditions. Continued market volatility and disruption could cause further declines in asset values, and if this occurs, we may need to make additional pension plan contributions and our pension expense in future years may increase. A hypothetical 10% decrease in the fair value of plan assets at December 31, 2014 would lead to a decrease in the funded status of the plan of approximately $2.1 million.
Other Market Risk
As of December 31, 2014, we have no other material exposure to market risk.
ITEM 8:
ITEM 8: Consolidated Financial Statements and Supplementary Data
The following table sets forth certain unaudited quarterly financial data for 2014 and 2013. In our opinion, this unaudited information has been prepared on the same basis as the audited information and includes all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information set forth therein. The operating results for any one quarter are not necessarily indicative of results for any future period.
Selected Quarterly Financial Information
(Unaudited)
The Report of the Independent Registered Public Accounting Firm, Financial Statements, and Schedules are set forth in Part IV, Item 15 of this Annual Report of Form 10-K.
ITEM 9:
ITEM 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A:
ITEM 9A: Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). As of the end of the period covered by this report, we performed an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based upon, and as of the date of, that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that our Company files or submits to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of our principal executive and principal financial officer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP. Such internal control includes those policies and procedures that:
·
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets;
·
provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors; and
·
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making this assessment, it used the criteria set forth in Internal Control - Integrated Framework (2013 version) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that, as of December 31, 2014, our internal control over financial reporting is effective based on those criteria.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the rules of the SEC that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting.
There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B:
ITEM 9B: Other Information
None.
PART III
ITEM 10:
ITEM 10: Directors, Executive Officers and Corporate Governance
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the ages and the current positions of our executive officers and directors as of March 23, 2015.
John L. Workman joined us in November 2014 as a director and Chair of the Audit Committee. As of February 7, 2015, Mr. Workman became the Company’s Interim Executive Chairman of the Board. From 2012 to June 2014, Mr. Workman served as Chief Executive Officer and Director at OmniCare, Inc. Prior to that, Mr. Workman served as Chief Financial Officer of OmniCare, Inc. from 2009 to 2012, and President from 2011 to 2012. Prior to joining OmniCare, Mr. Workman served as Chief Financial Officer of HealthSouth Corporation from 2004 to 2009. Prior to that, he spent six years serving in executive officer roles at U.S. Can Corporation, including Chief Executive Officer and Chief Operating Officer. Mr. Workman also spent more than 14 years with Montgomery Ward & Company, Inc., serving in various financial leadership capacities, including Chief Financial Officer and Chief Restructuring Officer. Mr. Workman began his career with the public accounting firm KPMG LLP. Mr. Workman is also a Director of Federal Signal Corporation, a public company that specializes in environmental and safety solutions where he chairs the Audit Committee. Mr. Workman holds a Master of Business Administration degree from University of Chicago and a Bachelor of Science degree from Indiana University.
James Pekarek joined us in April 2013 as Executive Vice President and Chief Financial Officer. Prior to joining the Company, Mr. Pekarek was the Chief Financial Officer for Cornerstone Brands since 2005. Cornerstone Brands, which is a leading home and apparel lifestyle retailer, is a division of HSN, Inc., an interactive multichannel retailer. Before that, Mr. Pekarek held executive level finance positions with The Spiegel Group, Montgomery Wards, Inc. and Outboard
Marine Corporation. Mr. Pekarek has a Master of Business Administration degree from Northwestern University and a Bachelor of Science in Accounting from Indiana University.
Patrick Sinclair joined us in April 2013 as President of SS. In August 2014, Mr. Sinclair became Executive Vice President, Sales & Marketing. As Executive Vice President, Mr. Sinclair is responsible for all sales and marketing functions. Prior to joining the Company, Mr. Sinclair was a Senior Vice President with Accretive Health, a provider of revenue cycle services and solutions to the U.S. healthcare industry. Before that, Mr. Sinclair was the Vice President - Energy Management and Vice President - IT Strategy & Applications for Royal Caribbean Cruise Lines. Mr. Sinclair’s career began at Accenture where he worked his way up to Partner. Mr. Sinclair has a Bachelor of Commerce degree from University of Witwatersrand.
Brian Simons joined us in August 2014 as Senior Vice President, Operations. Prior to joining the Company, Mr. Simons was a Vice President with NCR Corporation, a provider of consumer transaction technologies. Before that, Mr. Simons held several supply chain leadership positions at Honeywell International, including his most recent position as Senior Director, Transportation, Logistics and Supply Chain Planning. Mr. Simons has a Master of Business Administration degree from Arizona State University and a Bachelor of Science degree in Global Business from Arizona State University.
Lee Pulju became our General Counsel in January 2011. In 2013, Ms. Pulju became Vice President and General Counsel. From 2009 to 2011, Ms. Pulju was our Associate General Counsel. Prior to joining us, Ms. Pulju was an attorney at Faegre Baker Daniels LLP, formerly Faegre & Benson LLP, from 2002 to 2009. Ms. Pulju holds a Juris Doctorate degree from Hamline University School of Law and a Bachelor of Arts degree in Biology from Gustavus Adolphus College.
Robert L. Creviston was named Chief Human Resources Officer effective February 2013. From 2007 until 2013, Mr. Creviston was the Vice President of Human Resources - Midwest Group at Waste Management, Inc., a leading North America provider of integrated environmental solutions. From 2000 to 2007 he held a variety human resources management roles at Pactiv Corporation, a packaging business focused in the food service and consumer products space. Mr. Creviston hold a B.S. in Industrial and Labor Relations from Cornell University.
Scott A. Christensen joined us in 2012 as Controller and Chief Accounting Officer. In 2013, Mr. Christensen was named Vice President. Prior to joining us, from 1992 to 2012 Mr. Christensen served in several executive capacities at Supervalu, Inc., one of the largest companies in the U.S grocery channel, including Vice President of Finance and Vice President of Accounting. From 1987 to 1992, Mr. Christensen served as a supervising accountant at KPMG Peat Marwick. Mr. Christensen is a graduate of St. Cloud State University and holds a Bachelor of Science degree in Accounting.
Barry P. Schochet has served as a director and as a member of our audit committee since 2008. Until 2013, Mr. Schochet was President and Chief Executive Officer of BPS Health Ventures, LLC, a health care consulting and equity investment firm, a position he has held since 2005. From 1979 until 2005, he served in several executive capacities at Tenet Healthcare Corporation, including Vice Chairman. Through its subsidiaries, Tenet owns and operates acute care hospitals and related health care services. Mr. Schochet currently serves on the Board of Directors of OmniCare, Inc. (NYSE: OCR). Mr. Schochet served as a director of Broadlane, Inc. from its founding in 2000 until its sale in 2010. Mr. Schochet serves as an advisor to TriCap Technology Group and the Redina Companies. Mr. Schochet holds a Master’s degree in hospital administration from George Washington University and a Bachelor of Arts degree in Zoology from the University of Maine. Mr. Schochet brings to our board sophisticated health care system management and purchasing expertise.
Bret D. Bowerman has been a director and a member of our audit committee since 2007. Mr. Bowerman is a co-founder and Managing Director of Harbour Point Capital and a Senior Advisor to Irving Place Capital. Prior to founding Harbour Point Capital in 2015, Mr. Bowerman was a Principal with Irving Place Capital, formerly known as Bear Stearns Merchant Banking (“BSMB”). When with BSMB, Mr. Bowerman held the position of Senior Associate. Prior to joining BSMB in 2007, Mr. Bowerman worked as a Research Analyst at investment manager GoldenTree Asset Management from 2006 to 2007. Mr. Bowerman currently serves on the Board of Directors of National Surgical
Healthcare. Mr. Bowerman holds a Master of Business Administration degree from the Wharton School of the University of Pennsylvania and a Bachelor of Arts degree in Economics from Washington & Lee University. Mr. Bowerman has a deep understanding of financial issues, which makes him a skilled advisor.
David Crane has been a director and a member of our compensation committee since 2008. Mr. Crane currently serves as Chairman and CEO of National Surgical Healthcare (“NSH”). NSH owns and manages orthopedically focused surgical hospitals and ASC’s. NSH is an IPC portfolio company. Mr. Crane also served as a senior advisor for health care for IPC from 2008 through 2014. From 1989 until 2004 Mr. Crane was a director, COO and then CEO of MedCath, Inc. (NASDAQ: MDTH) which owned and managed cardiac focused Heart Hospitals. Mr. Crane served as a director of Orion Healthcare, Inc. (NASDAQ: ORNH) from 2004 to 2008, as a director of Pediatric Services of America (NASDAQ: PSAI) from 2003 to 2007, and as a director of Alveolus Inc. from 2002 to 2008. Mr. Crane was on the Board of Trustees of the Charlotte Latin School from 2000 to 2008. Mr. Crane holds a Master of Business Administration from Harvard Business School and a Bachelor of Arts degree from Yale College. Mr. Crane contributes experience of a provider system striving to achieve superior patient outcomes and optimal financial performance.
Michael C. Feiner became a director in 2012 and a member of our compensation committee in March 2013. Mr. Feiner is currently a Senior Advisor-Human Capital at Irving Place Capital. He also serves on the board of directors of CTPartners Executive Search Inc. Mr. Feiner founded Michael C. Feiner Consulting, Inc. in 1996. In this position he has worked with small and large companies in a broad range of industries, consulting on business-driven human capital strategy, organization development, and leadership effectiveness. He has also served as a strategic advisor to Boards and C-suite executives. Mr. Feiner previously served as Senior Vice President & Chief People Officer for Pepsi-Cola’s beverage operations worldwide. Mr. Feiner is also the author of “The Feiner Points of Leadership: The 50 Basic Laws That Will Make People Want to Perform Better For You” and was Professor of Management at Columbia Business School. Mr. Feiner holds a Master of Business Administration degree from Columbia Business School and a Bachelor of Science degree from Boston University.
Robert Juneja has been a director and has served as chairman of our compensation committee since 2007. Mr. Juneja is a co-founder and Managing Director of Harbour Point Capital and a Senior Advisor to Irving Place Capital. Prior to founding Harbour Point Capital in 2015, Mr. Juneja was Senior Managing Director with Irving Place Capital, formerly BSMB. When with BSMB, Mr. Juneja was Senior Managing Director of Bear, Stearns & Co. Inc. Mr. Juneja joined BSMB in 2000 and focuses on investments in financial services and health care services. Mr. Juneja serves on the board of directors of Oak Street Health, National Surgical Healthcare, Manifold Capital Corp., Alter Moneta Holdings and Caribbean Financial Group. Mr. Juneja holds a Master of Business Administration degree from the Wharton School of the University of Pennsylvania and a Bachelor of Arts degree in Mathematics from the University of Michigan. Mr. Juneja has extensive knowledge of complex financial and operational issues facing health care organizations today.
John B. Grotting became a director in 2010. Mr. Grotting has served as an Operating Partner for Frazier Healthcare Ventures since 2010. Frazier Healthcare Ventures is one of the leading providers of venture and growth equity capital to emerging biopharma, medical device and healthcare service companies. In addition, Mr. Grotting has held a variety of senior executive positions in the healthcare field, including serving as CEO of medical device reprocessor Ascent Healthcare Solutions from 2004 to 2009. Prior to joining Ascent Healthcare Solutions in 2004, Mr. Grotting held senior executive positions at Legacy Health System, Allina Health System and Bridge Medical, Inc. Mr. Grotting serves as a director of VHA Inc., St. Olaf College, Vocera Communications, Inc., Scottsdale Healthcare, Essia Health, Prezio Healthcare and Life Nexus. Mr. Grotting holds a Master’s degree in Hospital and Healthcare Management from the University of Minnesota and a B.A. in Economics from St. Olaf College in Northfield, MN. Mr. Grotting has extensive experience in health system operations management along with growing and successfully selling two healthcare growth equity businesses.
David J. Illingworth became a director on March 14, 2012. In 2013, Mr. Illingworth became a director of Domtar Corporation. Mr. Illingworth has been a director of Varian Medical Systems, Inc., a world leader in the sales and service of oncology products and the sales of x-ray tubes and imaging subsystems, since 2011. From 2007 until his retirement in 2011, Mr. Illingworth served as CEO of Smith & Nephew, an orthopedic devices company. From 2002 to 2007, he served as Chief Operating Officer and division president at Smith & Nephew. Prior to joining Smith & Nephew, Mr.
Illingworth served in senior management roles for XL Vision, Inc., VidaMed, Inc., Nellcor Puritan Bennett LLC and GE Medical Systems. He holds a Bachelor of Science degree in Biomedical Engineering from Texas A&M University.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors
Each member of our board of directors is expected to devote sufficient time, energy and attention to ensure diligent performance of his or her duties. Our board met four times during 2014. The then-current directors attended 75 percent or more of the meetings of our board and various committees that occurred during their term of service during 2014. We believe that Barry Schochet, David Crane, John Grotting, and David Illingworth are independent as defined under the current rules of The NASDAQ Stock Market LLC (“NASDAQ”). Robert Juneja, Bret Bowerman and Michael Feiner are not considered to be independent due to their respective relationships with IPC and Parent, Mr. Workman is not considered to be independent as defined under current NASDAQ rules because he serves as principal executive officer, and Mr. Blackford was not considered to be independent because he served as chairman of the board and chief executive officer of Parent and as our chairman and chief executive officer.
Under a securityholders agreement among Parent, IPC/UHS, L.P. and IPC/UHS Co-Investment Partners, L.P., which are both affiliates of IPC (together, “IPC/UHS”), Gary D. Blackford, Kathy Blackford, and Blackford Trusts (together, “Blackford”) and certain other securityholders of Parent (referred to, with Blackford, as the “Parent Securityholders”), IPC/UHS, the Parent Securityholders and their respective permitted transferees have agreed to vote all of their Parent securities so that the following individuals are elected to and continue to serve on our board of directors:
·
three representatives (the “Irving Place Capital Directors”) designated by the holders of at least a majority of the common stock and common stock equivalents included in the Parent securities issued or issuable to IPC/UHS or any permitted transferees of IPC/UHS, and
·
the chief executive officer of the Company.
In addition, the Parent Securityholders have agreed to vote all of their Parent securities so that any committee of the Company will include at least two Irving Place Capital Directors, and, for so long as he is a director, our chief executive officer, unless he waives this right or unless our board of directors desires to exclude officers from such committee. Robert Juneja, Bret Bowerman and Michael Feiner are the current Irving Place Capital designates to serve on our board of directors. Mr. Bowerman also serves on our audit committee, and Mr. Juneja and Mr. Feiner serve on our compensation committee.
Committees of the Board of Directors
Audit Committee
Our audit committee members are John Workman, Bret Bowerman and Barry Schochet. David Dovenberg serves in an advisory capacity to the audit committee but is not a member of the committee and does not vote on matters before the committee. Mr. Workman is the chairman. The audit committee met four times during 2014 with all members present at 75% or more of the meetings. The audit committee, among other things:
·
reviews the results of the independent registered public accounting firm’s annual audit and its required communication on any significant adjustments, management judgments and estimates, new accounting policies and disagreements with management;
·
reviews and discusses with management and our independent registered public accounting firm our quarterly consolidated financial statements and our audited consolidated financial statements, and approves the filing of the audited annual consolidated financial statements included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission;
·
reviews and oversees the performance of our independent registered public accounting firm;
·
reviews written disclosures and the letter from the independent accountant required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s
communications with the audit committee concerning independence, and discusses with the independent accountant the independent accountant’s independence;
·
approves the fees and other significant compensation to be paid to the independent auditors, and pre-approves all permissible non-audit services to be performed by the independent auditors;
·
reviews the adequacy of our system of internal accounting controls;
·
reviews and periodically reassesses the audit committee charter;
·
discusses with the independent auditors the annual consolidated financial statements, the results of its audit and the matters required to be communicated to audit committees in accordance with the applicable auditing standards.
·
oversees the preparation of and approves the report of the audit committee for inclusion in the Company’s Annual Report on Form 10-K for filing with the SEC;
·
oversees the application of the Company’s related person transaction policy and its code of business conduct and ethics;
·
assesses whether management has a review system in place that is reasonably designed to satisfy legal requirement with respect to the Company’s consolidated financial statements, reports and other financial information disseminated to governmental organizations and the public;
·
reviews the types of issues reported to the Company Hotline, which is a reporting system used by employees to pose questions about, or report violation or suspected violations of the Company’s code of business conduct and ethics, and periodically review with Company’s Chief Compliance Officer reports made to the Company’s Hotline;
·
reviews the valuation of the Company in connection with Parent’s determination of the exercise price of stock option awards; and
·
conducts periodic self-evaluations of its performance.
Under current NASDAQ rules, our current audit committee would not be deemed to be comprised solely of independent directors since Mr. Bowerman is an Irving Place Capital Senior Advisor and is associated with IPC and Parent, and Mr. Workman is not independent as defined under current NASDAQ rules because he served as principal executive officer. We believe that Mr. Schochet is an independent director under current NASDAQ rules.
Our board has determined that Mr. Workman, who is chairman of the audit committee, qualifies as an “audit committee financial expert” as that term is defined under Item 407(d)(5) of Regulation S-K.
Compensation Committee
Our compensation committee consists of Robert Juneja, David Crane, John Grotting and Michael Feiner. The compensation committee met five times during 2014 with all members present at 100% or more of the meetings. The compensation committee, among other things:
·
assists the board in overseeing the Company’s management compensation policies and practices, including evaluating annually the performance of the Company’s executive officers and determining and approving the compensation of our executive officers (including our chief executive officer);
·
reviews and approves equity compensation programs for employees;
·
reviews the objectives of the Company’s management compensation programs, and reviews and authorizes any employment, compensation, benefit or severance arrangement with any executive officer (current or former);
·
prepares or oversees the preparation of and approves the Compensation Discussion and Analysis required by the rules of the Securities and Exchange Commission;
·
retains consultants or experts as it deems necessary in the performance of its responsibilities;
·
produces an annual compensation committee report for inclusion in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission;
·
determines the annual compensation to be paid to the named executive officers; and
·
makes regular reports to the board of directors concerning executive compensation.
Under current NASDAQ rules, our current compensation committee would not be deemed to be comprised solely of independent directors, because Mr. Juneja and Mr. Feiner are Irving Place Capital Senior Advisors associated with IPC. We believe that Mr. Grotting and Mr. Crane are independent under current NASDAQ rules.
CODE OF BUSINESS CONDUCT AND ETHICS
We have adopted a code of conduct and ethics for all employees, directors and officers, including our chief executive officer, chief financial officer and chief accounting officer. Our code of conduct and ethics can be found at our internet website, www.uhs.com. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of our code of conduct and ethics by posting such information on our website at the address specified above. The audit committee charter is also available in print upon request.
ITEM 11:
ITEM 11: Executive Compensation
COMPENSATION DISCUSSION AND ANALYSIS
Introduction
In this compensation discussion and analysis we discuss our compensation program, including our compensation philosophy and objectives and each component of compensation for our chief executive officer, chief financial officer, and the other individuals included in the Summary Compensation Table below (collectively, the “named executive officers”).
The base salary and annual performance-based incentive compensation paid to our named executive officers for fiscal 2014 was determined by the compensation committee in March 2014 and March 2015, respectively, and recommended to our board of directors for final approval, which occurred in March 2014 and March 2015, respectively.
Compensation Philosophy and Objectives
We strive to ensure that we are able to attract and retain talented employees and reward performance. We also believe that the most effective executive compensation program is one that is designed to reward the achievement of specific annual and long-term strategic goals of our Company. Accordingly, our compensation committee (and our board, in ratifying the compensation committee’s determination) evaluates both performance and compensation to ensure both that the compensation provided to key executives is fair and reasonable, and that it remains competitive relative to the compensation paid to similarly situated executives of a group of peer companies in the same or similar industries, adjusted for our size and ownership model. To these ends, our compensation committee and board of directors have determined that our executive compensation program for our named executive officers should include base salary, annual performance-based incentive and long-term equity (stock option) compensation that rewards performance as measured against established goals, and competitive health, dental and other benefits.
Overview of Compensation Program and Process
We have structured our compensation program to motivate the named executive officers to achieve the business goals set by us, and to reward them for achieving these goals. In furtherance of this, our compensation committee conducts an annual review of our total compensation program to achieve the following goals:
·
provide fair, reasonable and competitive compensation;
·
link compensation with our business plans;
·
reward achievement of both company and individual performance; and
·
attract and retain talented executives who are critical to the Company’s success.
We believe that these goals reflect the importance of pay for performance by providing our named executive officers with an opportunity to earn compensation for above average performance. The compensation for each named executive officer includes (1) a base salary that we believe is competitive with salary levels for similarly situated executives of our
peer companies, adjusted for our size and ownership model, and (2) incentive compensation that is contingent upon achievement of specific corporate and individual objectives.
In 2014, the compensation committee considered certain elements of total compensation against a group of publicly traded companies in the same or related industries (the “Peer Group”). In fiscal 2014, our compensation committee reviewed the compensation, including base salary and incentive compensation, paid to executives in the Peer Group, and considered the performance evaluations in determining the appropriate compensation for each named executive officer. In approving the compensation for our named executive officers, our board of directors considered the recommendations of our compensation committee, our company’s performance and the need to attract, retain, and motivate our executives.
It is challenging for us to identify a group of similarly situated peer companies, because the identity of competitors varies among our three business segments, and great variability exists in the size and scope of activities among health care industry businesses, including our competitors. For purposes of determining our 2014 compensation, our compensation committee determined that it was appropriate to select the following companies for inclusion in the Peer Group based on the sensitivity of each Peer Group member to similar marketplace trends and industry sector:
·
Stericycle, Inc., a company that outsources medical waste disposal services;
·
CareFusion Corporation, a supplier of certain of our products;
·
Healthcare Services Group, Inc., a company that outsources housekeeping and dietary services to medical facilities;
·
MedAssets, Inc., a provider of supply chain consulting and revenue cycle management services for health systems, hospitals and health care providers;
·
Cerner Corporation, a supplier of healthcare information technology solutions;
·
HealthSouth Corporation, a provider of inpatient rehabilitative services;
·
Accretive Health, Inc., a provider of revenue cycle management services for the U.S. healthcare industry.
·
Premier Healthcare Solutions, Inc., a national healthcare alliance delivering an integrated platform of solutions through its supply chain services and performance services segments;
·
Team Health Holdings Inc., a provider of hospital-based clinical outsourcing in multiple departments including anesthesia, hospital medicine and emergency medicine; and
·
Surgical Care Affiliates, Inc., a provider of surgical solutions through the development and operation of a network of multi-specialty ACS and surgical hospitals.
The Peer Group typically is re-evaluated each year, and consistent with that practice, on December 18, 2014, the compensation committee re-examined its selection of companies to comprise the Peer Group, taking into consideration data compiled from public sources, investment banks, compensation consultants and independent analysts about companies that are comparable to UHS, as well as information available about other companies that operate within the health care industry or that reflect the following attributes:
·
a business model of providing outsourced solutions consistent with UHS’ current focus;
·
an organic and acquisitive growth profile similar to UHS;
·
a technology solutions focus consistent with UHS’ approach; and
·
a lack of direct reimbursement risk from third-party payors such as Medicare and Medicaid.
The compensation committee determined that the current Peer Group is appropriate based on the Company’s business mix and revenue sources, business offerings, current and forecasted growth profile, and solutions-based focus. The compensation committee also decided to include Kinetic Concepts, Inc. and Hill-Rom Holdings, Inc. Accordingly, the compensation committee determined that for purposes of 2015 compensation the Peer Group will consist of the following companies:
·
Stericycle, Inc., a company that outsources medical waste disposal services;
·
CareFusion Corporation, a supplier of certain of our products;
·
Healthcare Services Group, Inc., a company that outsources housekeeping and dietary services to medical facilities;
·
MedAssets, Inc., a provider of supply chain consulting and revenue cycle management services for health systems, hospitals and health care providers;
·
Cerner Corporation, a supplier of healthcare information technology solutions;
·
HealthSouth Corporation, a provider of inpatient rehabilitative services;
·
Accretive Health, Inc., a provider of revenue cycle management services for the U.S. healthcare industry;
·
Premier Healthcare Solutions, Inc., a national healthcare alliance delivering an integrated platform of solutions through its supply chain services and performance services segments;
·
Team Health Holdings Inc., a provider of hospital-based clinical outsourcing in multiple departments including anesthesia, hospital medicine and emergency medicine;
·
Surgical Care Affiliates, Inc., a provider of surgical solutions through the development and operation of a network of multi-specialty ACS and surgical hospitals.
·
Kinetic Concepts, Inc., a provider of negative pressure wound therapy devices; and
·
Hill-Rom Holdings, Inc., a manufacturer and provider of medical technologies and related services for the health care industry, including patient support systems, safe mobility and handling solutions, non-invasive therapeutic products for a variety of acute and chronic medical conditions, medical equipment rentals, surgical products and information technology solutions.
2014 Executive Compensation Components
For fiscal 2014 the principal components of compensation for our named executive officers were base salary and annual performance-based incentive compensation, each of which is addressed in greater detail below. Each named executive officer also has severance and/or change of control benefits, and is eligible to participate in our long-term savings plan and the broad-based benefit and welfare plans that are available to our employees in general. In addition, the named executive officers are eligible to receive stock option awards from Parent under its stock option plan. Although these awards are determined solely by Parent’s board of directors, our compensation committee considers the option awards in assessing each named executive officer’s compensation package and whether such package is consistent with our compensation program philosophy and objectives.
We do not have an established formula or target for allocating between cash and non-cash compensation, or between short-term and long-term incentive compensation. Instead, our goal is to ensure that the compensation we pay is sufficient to attract and retain executive officers, and to reward them for performance that meets the goals set by our compensation committee.
Setting Executive Compensation
The compensation committee determines the total compensation for our named executive officers based on a consideration of the following factors:
·
the scope of responsibility of each named executive officer;
·
market data from Peer Group companies;
·
an assessment of the positions of similarly situated executives within the Peer Group and internal comparisons to the compensation received by those executives;
·
internal review of each named executive officer’s compensation, both individually and relative to other named executive officers;
·
individual performance of each named executive officer, which is assessed based on factors such as fulfillment of job responsibilities, the financial and operating performance of the activities directed by each named executive officer, experience and potential;
·
the total compensation paid to each named executive officer in past years (including long-term equity (stock option) compensation awarded by Parent under its stock option plan); and
·
performance evaluations for each named executive officer.
Base Salary
We provide our named executive officers with a base salary to compensate them for services rendered. Salary levels are typically considered in March of each year as part of our performance review process and upon a promotion or other change in job responsibility. Merit-based increases to salaries of the named executive officers are based on the compensation committee’s assessment of the individual’s performance.
Base salary ranges are determined for each named executive officer based on his or her position and responsibility and utilizing our compensation committee’s knowledge and expertise regarding the market, with reference to market data regarding Peer Group compensation compiled from public sources, compensation consultants and independent analysts. Base salary ranges are designed so that salary opportunities for a given position will be targeted at the midpoint of the base salary established for each range.
Goals and objectives for the overall senior management team at the Company include:
·
setting the appropriate tone at the top framework for ethics, policies and business practices across the Company;
·
driving growth of revenues and EBITDA;
·
being present in the field across our diverse geographical footprint with our localized employee base driving culture and best practices; and
·
supporting the roll out of our products to customers by helping to communicate the key customer benefits of reducing cost, improving efficiency and improving patient outcomes.
Each of the named executive officers is expected to participate in the above activities, with particular emphasis on their areas of expertise. Thus, Mr. Blackford (prior to his resignation) had emphasis areas in senior executive relations across the industry; Mr. Pekarek has emphasis areas in controls, reporting, budgeting and capital attraction; Mr. Sinclair has the emphasis areas of growth and revenues, marketing and expansion of the product portfolio; Mr. Simons has the emphasis areas in operational excellence, customer service and continuous improvement; Mr. Creviston has the emphasis areas in of development and retention of talent and design and administration of compensation programs.
Finding that the named executive officers achieved the objectives discussed above, on March 5, 2014, the compensation committee determined to increase the base salaries of Mr. Pekarek from $385,000 to $388,850, Mr. Sinclair from $375,000 to $400,000 and Mr. Creviston from $265,000 to $277,750. Mr. Simons joined the Company on August 6, 2014, and therefore he was not considered for annual merit increases. These increases reflected the increasing complexity of the Company’s business and the increased responsibilities these executives took on to meet growth objectives. These include increased strategic partnership activity, product development, expanded geographic markets and design and delivery of more complex customer-focused service solutions.
Annual Performance-Based Incentive Compensation
The annual performance-based incentive compensation component is offered through the Executive Incentive Program (the “EIP”), an annual cash incentive program that provides our executive officers with an opportunity to earn annual incentive awards based on the Company’s financial performance and the executive officers’ achievement of individual objectives. Under the EIP, our named executive officers can earn incentive awards that are based on a percentage of base salary, with the percentage for each officer (other than Mr. Blackford, whose percentage was specified in his employment agreement with us) set at a level the compensation committee has determined is consistent with his level of accountability and impact on our operations. In setting this percentage of base salary, the compensation committee also considers the incentive compensation paid to executives in the Peer Group. The percentage of base salary for our named executive officers (other than the chief executive officer) varies from 60% to 70% of base salary. The target award under the EIP for Mr. Blackford, our chief executive officer, was 100% of base salary, as specified in his employment agreement.
The corporate financial objective under the EIP relates to EBITDA, as adjusted for stock-based compensation, transaction and related expenses, intangible asset impairment charge, loss on extinguishment of debt, other, and board of director expenses (“Adjusted EBITDA”). The minimum, target and maximum levels for achievement of the corporate
financial objective are determined by the compensation committee. In March 2014 the minimum, target and maximum levels for achievement of the corporate financial objective for 2014 EIP awards were finally determined by our compensation committee consistent with the levels proposed by our chief executive officer. Awards are based in part on the Company’s achievement of the corporate financial objective for the current year, calculated by comparing actual and target Adjusted EBITDA for that fiscal year.
For the 2014 EIP awards to each named executive officer, the compensation committee set a minimum threshold for receiving an incentive payment equal to the actual Adjusted EBITDA for the prior fiscal year. Assuming the Company achieved an actual Adjusted EBITDA equal to the prior fiscal year’s actual Adjusted EBITDA, the incentive payment would be 65% of the target award opportunity. If the Company achieved an actual Adjusted EBITDA equal to 100% of target performance, the incentive payment would be 100% of the target award opportunity. Finally, the incentive payment would range from 100% up to 150% of the target award opportunity if the Company achieves a performance level ranging from 100% to 110% of target. Although our chief executive officer’s potential EIP award is governed by his employment agreement, which provides bookends for his potential EIP award at 110% and 90% of target (rather than 110% and 93%) and with a potential payment range from 0% to 170% (rather than 0% to 150%), the compensation committee determined it appropriate to align the chief executive officer’s 2014 EIP Program with the other named executive officers, and the chief executive officer agreed to such alignment for fiscal 2014. As such, the 2014 Executive Incentive Plan targets for the named executive officers were as follows:
*The target is set by the compensation committee
Methodology
In addition to using EBITDA and Adjusted EBITDA internally as a measure of operational performance, we disclose it externally to assist analysts, investors and lenders in their comparisons of operational performance, valuation and debt capacity across companies with differing capital, tax and legal structures. EBITDA, however, is not a measure of financial performance under 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 as a measure of liquidity. Because EBITDA is not a measure of 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. Adjusted EBITDA is included because certain compensation plans are based upon this measure. For fiscal 2014, the compensation committee established the Adjusted EBITDA target at $121.5 million. As such, the minimum target achievement was $119.5 million (the actual Adjusted EBITDA achievement for fiscal 2013) and the maximum target achievement was $133.7 million.
The named executive officers earn 50% of the actual EIP award based on actual Adjusted EBITDA results versus target. The remaining 50% of the actual Adjusted EBITDA results versus target is earned based on attainment of each named executive officer’s specific annual and quarterly objectives noted above.
For fiscal 2014 the compensation committee reviewed the Company’s performance against the corporate financial objective, and reviewed the achievement of each named executive officer’s individual objectives on the basis of the performance evaluation conducted by the compensation committee. Awards were determined by the compensation committee based on these results. The compensation committee determined that the minimum 2014 corporate target was achieved, such that by formula a 65% payout of target is funded. The compensation committee determined that Mr. Blackford should receive 66% of his target amount, which reflects Mr. Blackford’s performance versus the Company’s long-term shareholder return objectives; Mr. Pekarek should receive 100% of his target amount based on his performance versus his personal objectives and the Company’s need to retain executive management talent; Mr. Sinclair should receive 100% of his target amount based on his performance versus his personal objectives and the Company’s need to retain executive management talent; Mr. Simons should receive 100% of his target amount consistent with his arrangement with the Company; and that Mr. Creviston should receive 100% of his target amount based on his performance versus his personal objectives and the Company’s need to retain executive management talent. Award amounts for 2014 performance under the EIP were determined and approved for the named executive officers by the compensation committee in March 2015 and will be paid by the Company in April 2015. The 2014 EIP award amounts are reflected in the “Non-equity Incentive Plan Compensation” column of the Summary Compensation Table.
During the past five years, the Company achieved performance of the target three times, but did not achieve the maximum performance level. The payout percentage in the past five years ranged between approximately 0% and 100% of the participant’s target award opportunity. Generally, the minimum, target and maximum levels for achievement of the corporate financial objective are set, so that the relative difficulty of achieving the target is consistent from year to year.
Severance and/or Change of Control Benefits
The Company has adopted an Executive Severance Pay Plan that provides for severance benefits for certain of our senior executive officers, including Mr. Sinclair, Mr. Simons and Mr. Creviston, who are named executive officers. In addition, we have entered into employment agreements with Mr. Blackford, our chief executive officer, who resigned from the Company effective February 6, 2015 and Mr. Pekarek, our chief financial officer. These employment agreements provide for severance and/or change of control benefits for Mr. Blackford and Mr. Pekarek. Severance and/or change in control benefits serve several purposes and are designed to:
·
aid in the attraction and retention of the executives as a competitive practice;
·
keep the executives focused on running the business, impartial and objective when confronted with transactions that could result in a change of control; and
·
encourage our executives to act in the best interest of our stockholder in evaluating transactions.
For a detailed discussion of the foregoing, please refer to the caption “Potential Payments Upon Termination or Change in Control” below.
Long-Term Savings Plan and Other Benefits
The Company has adopted a Long-Term Savings Plan, which is a tax-qualified retirement savings plan pursuant to which all employees, including the named executive officers, are able to contribute to the plan the lesser of up to 60% of their annual salary or the limit prescribed by the Internal Revenue Service (“IRS”) on a pre-tax basis. The Company will match 50% of up to 6% of base pay that is contributed to the Long-Term Savings Plan, subject to the limits prescribed
by the IRS, excluding any catch-up contributions. Matching contributions and any earnings on the matching contributions are vested in accordance with the following schedule:
Long-Term Equity Incentive (Stock Option) Compensation
The 2007 Stock Option Plan of Parent (“2007 Stock Option Plan”) provides for the award of stock options to our named executive officers and is designed to:
·
enhance the link between the creation of stockholder value and long-term executive incentive compensation;
·
provide an opportunity for increased equity ownership of Parent by executives; and
·
maintain competitive levels of total compensation.
Stock option award levels vary among participants based on their positions within the Company. Consistent with past practice, broad-based stock option awards were granted in June of 2007, following a change of control of the Company, which occurred in connection with the Transaction. Thereafter, options are generally expected to be granted at approximately the same time each year during the first quarter and are granted to individuals who were newly hired or who were promoted or who increased their job responsibilities during the preceding 12-month period. Mr. Sinclair received grants of options in 2014. The exercise price of stock option awards under the 2007 Stock Option Plan is equal to the fair market value of Parent’s common stock on the grant date as determined by the board of directors of Parent. The ultimate value of an award depends on Parent’s stock price. For a detailed discussion of the 2007 Stock Option Plan, including the August 2010 amendment to the vesting provisions of option agreements, see discussion under the heading “2007 Stock Option Plan” below.
Effective November 4, 2014, the compensation committee recommended, and the board of directors (the “Parent Board”) of Parent, approved, an amendment (the “Amendment”) to the 2007 Stock Option Plan to remove the 2007 Stock Option Plan’s mandatory ten year limit on the duration of stock options. In addition, the compensation committee recommended, and the Parent Board approved, unilateral amendments to certain outstanding stock option agreements. These amendments extend the expiration date of such options to November 4, 2024 and reset the option exercise price at $0.71 per share, which was the fair market value of Parent’s common stock on the amendment date as determined by a third party valuation obtained by the Parent Board. The original options were granted from June 18, 2007 to May 21, 2013 with exercise prices ranging from $1.00 to $1.83. The Amendment to the 2007 Stock Option Plan and the amendments to the individual options do not change the number of options granted, the vesting commencement date, the vesting schedules or any continued service requirements.
Distributions With Respect to Vested Stock Options
On June 8, 2011, the Company and Parent’s Boards of Directors declared a dividend of $0.12 per share to the Parent’s shareholders of record on June 10, 2011 and a $0.12 per share distribution to be paid to the holders of vested options on the Parent’s stock as of June 10, 2011, subject to the consummation of the note offering which occurred on June 17, 2011. The dividends were payable on July 1, 2011.
Also on June 8, 2011, the Boards of Directors declared a distribution of $0.12 per option to holders of outstanding options on the Parent’s stock on June 10, 2011 that vested on December 31, 2011, 2012, 2013 and 2014 and are scheduled to vest on December 31, 2015.
Other Benefits
Our named executive officers are eligible to participate in the same broad-based benefit and welfare plans that are made available to our employees in general. In addition, if Mr. Blackford had elected not to participate in our group health plan, but rather obtained health coverage directly through an insurer approved by our board of directors, we would have reimbursed Mr. Blackford for the reasonable cost of such coverage in accordance with the terms of his employment agreement with us.
TAX AND ACCOUNTING IMPLICATIONS
Deductibility of Executive Compensation
The compensation committee reviews and considers the Company’s deductibility of executive compensation. We believe that compensation paid under our EIP is generally 100% deductible for federal income tax purposes, except that potential “excess parachute payments” exist with respect to our named executive officers. Section 280G of the IRS Code provides that the Company may not deduct compensation paid in connection with a change of control that is treated as an excess parachute payment. In certain circumstances, the compensation committee may elect to approve compensation that is not fully deductible to ensure competitive levels of compensation for our executive officers.
Accounting for Stock-Based Compensation
Beginning January 1, 2006, we began accounting for our stock-based compensation, namely, stock options issued under the 2007 Stock Option Plan, as required by ASC Topic 718, “Compensation-Stock Compensation.”
While Parent established the 2007 Stock Option Plan, compensation expense related to service provided by the Company’s employees, including the named executive officers, is recognized in the Company’s Statements of Operations with an offsetting Payable to Parent liability.
COMPENSATION COMMITTEE REPORT
The compensation committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on this review and discussion, recommended to the board of directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.
THE COMPENSATION COMMITTEE
Robert Juneja
David Crane
John Grotting
Michael Feiner
EXECUTIVE COMPENSATION
The following tables and accompanying narrative disclosure should be read in conjunction with the Compensation Discussion and Analysis.
SUMMARY COMPENSATION TABLE
The table below sets forth the total compensation awarded to, earned by or paid to the named executive officers for our 2014, 2013, and 2012 fiscal years.
Mr. Sinclair and Mr. Pekarek received signing bonuses which were characterized as “Bonus” payments for the year ended December 31, 2013. The named executive officers were not entitled to receive payments which would be characterized as “Bonus” payments for the years ended December 31, 2014, or 2012. Amounts listed under the “Non-
Equity Incentive Plan Compensation” column were determined in accordance with the “2014 Executive Incentive Plan Targets”, as approved by the compensation committee of our board of directors. The non-equity incentive plan compensation will be paid in April 2015.
(1)
The amount in the “Bonus” column includes signing bonus paid to Mr. Sinclair and Mr. Pekarek.
(2)
The amounts in the “Option Awards” column reflect that Mr. Sinclair and Mr. Simons received grants of options in the year ended December 31, 2014 and Mr. Pekarek, Mr. Sinclair and Mr. Creviston received grants of options in the year ended December 31, 2013. The amounts in the “Option Awards” column for the year ended December 31, 2014 also reflect Mr. Pekarek, Mr. Sinclair and Mr. Creviston’s incremental fair value of awards resulting from the November 4, 2014 amendment to stock option agreement which extend the expiration date and reset the exercise price of the options. The amounts in the “Option Awards” column reflect the grant date fair value or incremental fair value, determined in accordance with ASC Topic 718, of awards granted pursuant to the 2007 Stock Option Plan. Assumptions used in the calculation of these amounts are included in Item 15, Note 11, Share-Based Compensation to our audited consolidated financial statements for the fiscal year ended December 31, 2014 included elsewhere in this Annual Report on Form 10-K.
(3)
The amounts in the “Non-Equity Incentive Plan Compensation” column reflect the cash awards to the named executive officers under the EIP, which is discussed in detail under the caption “Annual Performance-Based Incentive Compensation.”
(4)
The amounts in the “All Other Compensation” column reflect our contributions for all of the named executive officers to the Long-Term Savings Plan, discussed in detail under the caption “Long-Term Savings Plan and Other Benefits” as well as $32,841 relocation expense paid to Mr. Simons.
(5)
Mr. Blackford resigned from the Company effective February 6, 2015.
(6)
Because Mr. Pekarek, Mr. Sinclair and Mr. Creviston were not named executive officers in 2012, their information is only provided for 2014 and 2013.
(7)
Because Mr. Simons was not a named executive officer in 2013 and 2012, his information is only provided for 2014.
2014 GRANTS OF PLAN-BASED AWARDS
(1)
The amounts shown under “Estimated Future Payouts Under Non-Equity Incentive Plan Awards” reflect the minimum, target and maximum payment levels, respectively, under the Company’s EIP. These amounts are based on the named executive officer’s base salary and position for the year ending and as of December 31, 2014. The 2014 EIP payout is included in the “Non-Equity Incentive Plan Compensation” column in the Summary Compensation Table.
(2)
The amounts in the “Grant Date Fair Value of Option Awards” column reflect the grant date fair value and incremental fair value resulting from the November 4, 2014 amendment to stock option agreement which extend the expiration date and reset the exercise price of the options, determined in accordance with ASC Topic 718, of awards pursuant to the 2007 Stock Option Plan. Assumptions used in the calculation of these amounts are included in Item 15, Note 11, Share-Based Compensation to our audited consolidated financial statements for the fiscal year ended December 31, 2014 included elsewhere in this Annual Report on Form 10-K.
OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2014 (1)
(1)
All outstanding equity awards are option awards granted under Parent’s 2007 Stock Option Plan, discussed in detail under the caption “Long-Term Equity Incentive (Stock Option) Compensation.”
(2)
Options granted under the 2007 Stock Option Plan for our named executive officers vest over a six-year period of service with one-sixth vesting on December 31 of each year of the six-year period, with such unvested options included in the “Number of Securities Underlying Unexercised Options Unexercisable” column.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
POTENTIAL PAYMENTS UNDER EMPLOYMENT AGREEMENTS
In connection with the Transaction, IPC negotiated a new employment agreement between the Company and Mr. Blackford. The employment agreement was amended and restated on December 31, 2008, to comply with Section 409A of the Code. Mr. Blackford’s rights to receive payments upon termination or change of control were terminated upon his resignation effective February 6, 2015, and no termination payments were made to Mr. Blackford in connection with his resignation.
On April 11, 2013, the Company entered into an employment agreement with Mr. Pekarek, the terms of which, as they relate to the possible payment upon termination of Mr. Pekarek, are summarized below. The amounts shown below assume that termination of employment was effective as of December 31, 2014, include amounts earned through that date, and are estimates of the amounts which would be paid out to the named executive officers upon their termination. The actual amounts paid can only be determined at the time of each named executive officer’s separation from us.
James B. Pekarek - Employment Agreement
The following termination and Change of Control payments are payable under Mr. Pekarek’s employment agreement, contingent upon Mr. Pekarek or his representative executing and delivering a release of all claims against the Company and all present and former directors, officers, agents, representatives, executives, successors and assignees of the Company and its direct or indirect owners within 45 days of the date of termination, provided 15 days have elapsed since such execution without any revocation thereof by Mr. Pekarek or his representative.
Payments Made Upon Death or Disability
In the event of death or disability, Mr. Pekarek or his legal representative will receive, on the 61st day following termination, a lump sum payment consisting of the following:
·
100% of his current base salary;
·
$11,350 intended for health and welfare benefits; and
·
earned and unpaid bonus for the calendar year ending prior to the date of termination, if any.
Additionally, Mr. Pekarek will receive accrued vested benefits through any benefit plan, program or arrangement of the Company at the times specified therein. “Disability” means the named executive officer becomes physically or mentally disabled, whether totally or partially, either permanently or so that the named executive officer is unable substantially and competently to perform his duties for 180 days during any 12-month period during the term of his employment agreement.
Payments Made Upon Termination Without Cause or Resignation For Good Reason
If we terminate Mr. Pekarek’s employment without Cause or he resigns for Good Reason, Mr. Pekarek will receive, on the 61st day following termination, a lump sum payment consisting of the following:
·
175% of his current base salary;
·
$11,350 intended for health and welfare benefits; and
·
earned and unpaid bonus for the calendar year ending prior to the date of termination, if any.
The Company also will pay Mr. Pekarek his pro rata EIP award for the calendar year in which his employment terminates, at the time the Company pays EIP awards to other senior executives for that same calendar year. Additionally, Mr. Pekarek will receive accrued vested benefits through any benefit plan, program or arrangement of the Company at the times specified therein.
“Cause” means:
·
the commission by the named executive officer of a felony for which he is convicted; or
·
the material breach by the named executive officer of his agreements or obligations under his employment agreement described in a written notice to the named executive officer that is not capable of being cured or has not been cured within 30 days after receipt.
Mr. Pekarek will have “Good Reason” for termination if, other than for Cause, any of the following has occurred:
·
Mr. Pekarek’s base salary or EIP target percentage has been reduced, other than in connection with an across-the-board reduction, not to exceed 5% of the then current base salary, of approximately the same percentage in executive compensation to executive employees imposed by our board of directors in response to negative financial results or other adverse circumstances affecting us;
·
our board of directors establishes an unachievable and commercially unreasonable adjusted EBITDA target that we must achieve for the named executive officer to receive an EIP under his employment agreement and Mr. Pekarek provides written notice of his objection to the board of directors within ten business days;
·
we have reduced or reassigned a material portion of Mr. Pekarek’s duties, have diminished his title, have required Mr. Pekarek to relocate outside the greater Minneapolis, Minnesota area, have relocated our corporate headquarters outside the greater Minneapolis area or have removed or relocated outside the greater Minneapolis area a material number of our employees or senior management, in each case without Mr. Pekarek’s written consent; or
·
we have breached, in any material respect, the employment agreement of Mr. Pekarek.
Payments Made Upon Termination for Cause or Resignation Without Good Reason
If we terminated Mr. Pekarek’s employment under his employment agreement for Cause or he resigns without Good Reason, all of Mr. Pekarek’s rights to payments, other than payment for services already rendered and any other benefits otherwise due, cease upon the date of termination.
Payments Made Upon a Change of Control
If we terminate Mr. Pekarek’s employment without Cause or Mr. Pekarek resigns for Good Reason at any time within six months before, or 24 months following, a Change of Control and notwithstanding and in lieu of amounts provided for resignation without Cause or for resignation for Good Reason, Mr. Pekarek is entitled to receive, on the 61st day following termination, a lump sum payment consisting of the following:
·
262.5% of his current base salary;
·
$11,350 intended for health and welfare benefits; and
·
earned and unpaid bonus for the calendar year ending prior to the date of termination, if any.
The Company also will pay Mr. Pekarek his pro rata EIP award for the calendar year in which his employment terminates, at the time the Company pays EIP awards to other senior executives for that same calendar year. Additionally, Mr. Pekarek will receive accrued vested benefits through any benefit plan, program or arrangement of the Company at the times specified therein.
However, if Mr. Pekarek’s employment terminates within six months prior to a Change in Control due to termination by the Company without Cause or due to termination for Good Reason, then Mr. Pekarek will receive payments in accordance with the provisions noted under the heading “Payments Made Upon Termination Without Cause or Resignation For Good Reason,” and within 30 days following the Change in Control, Mr. Pekarek will receive an additional lump sum payment equal to the difference between the payment already received and the amount required under the Change in Control provisions noted above.
“Change of Control” means (i) when any “person” (as defined in Section 13(d) and 14(d) of the Exchange Act) (other than the Company, IPC Manager III, L.P. or its affiliates, any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary, or any corporation owned, directly or indirectly, by the stockholder or stockholders, as the use may be, of the Company, in substantially the same proportions as their ownership of stock of the Company), acquires, in a single transaction or a series of transactions (whether by merger, consolidation, reorganization or otherwise), (A) “beneficial ownership” (as defined in Rule 13d-3 under the Exchange Act) of securities representing more than 50% of the combined voting power of the Company (or, prior to a public offering, more than 50% of the Company’s outstanding shares of common stock), or (B) substantially all or all of the assets of the Company and its Subsidiaries on a consolidated basis or (ii) a merger, consolidation, reorganization or similar transaction of the Company with a “person” (as defined above) if, following such transaction, the holders of a majority of the Company’s outstanding voting securities in the aggregate immediately prior to such transaction do not own at least a majority of the outstanding voting securities in the aggregate of the surviving corporation immediately after such transaction. “Subsidiary” means any corporation in an unbroken chain of corporations beginning with the Company if, at the time of a Change of Control, each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain.
The following table shows the potential payments upon a termination or Change of Control of us under Mr. Pekarek’s employment agreement.
(1)
The above table excludes the intrinsic value of vested stock options.
POTENTIAL PAYMENTS UNDER OUR EXECUTIVE SEVERANCE PAY PLAN
On June 1, 2007 we adopted an Executive Severance Pay Plan, which the compensation committee amended on December 31, 2008 to comply with Section 409A of the Code. The amended Executive Severance Pay Plan provides benefits that are economically equivalent to the benefits the covered senior executives were entitled to under the June 1, 2007 plan, with the timing of payment and certain other provisions modified to comply with Section 409A. Additionally, references to the controller were removed.
In February 2011, the Executive Severance Pay Plan was amended to:
·
exclude benefits from being paid if a change of control occurs as a result of the sale or transfer of substantially all of the assets of UHS to a private equity firm who invests in companies (a “Private Equity Firm”), or a company owned or controlled by a Private Equity Firm;
·
prohibit the Executive Severance Pay Plan from being modified, amended or terminated 30 days prior to or six months after a change in control in a way that adversely impacts a participants benefits; and
·
add the controller and general counsel as participants.
In October 2011, the Executive Severance Pay Plan was amended to change the definition of a covered “executive” to cover any employee who is designated in writing as covered by the Executive Severance Pay Plan by our chief executive officer.
In March 2015, the Executive Severance Pay Plan was amended to change the definition of a covered “executive” to cover any employee possessing a title of Vice President or above, or any employee who is designated in writing as covered by the Executive Severance Pay Plan by our chief executive officer; to specify that the first six months of severance pay will be made regardless of other employment while the next six months will be reduced by the value of compensation the employee receives from any alternate employment; and to provide that the Company will pay the employer’s portion of any COBRA premiums rather than an upfront lump sum payment of COBRA premium equivalents.
Executives covered by the Executive Severance Pay Plan include the following named executive officers: Patrick Sinclair, Brian Simons and Robert Creviston. The terms of the Executive Severance Pay Plan, as they related to the
possible payments upon the terminations of the aforementioned named executive officers, are summarized below. The amounts shown assume that termination was effective as of December 31, 2014, include amounts earned through that date and are estimates of the amounts which would be paid out to the named executive officer upon his termination. The actual amounts paid can only be determined at the time of the named executive officer’s separation from us.
Payments Made Upon Termination for Cause, Resignation Except for Good Reason, upon a Change in Control, Death or Disability
In the event of termination of employment for Cause, voluntary resignation except for Good Reason, upon a Change in Control or upon the death or disability of a named executive officer, no severance benefits are payable.
“Cause” means:
·
the executive’s continued failure, whether willful, intentional, or grossly negligent, after written notice, to perform substantially the executive’s duties (the “duties”) as determined by the executive’s immediate supervisor, or the chief executive officer, or a senior vice president of the Company (other than as a result of a disability);
·
dishonesty or fraud in the performance of the executive’s duties or a material breach of the executive’s duty of loyalty to the Company or its subsidiaries;
·
conviction or confession of an act or acts on the executive’s part constituting a felony under the laws of the United States or any state thereof or any misdemeanor which materially impairs such executive’s ability to perform the duties;
·
any willful act or omission on the executive’s part which is materially injurious to the financial condition or business reputation of the Company or any of its subsidiaries; or
·
any breach by the executive of any non-competition, non-solicitation, non-disclosure or confidentiality agreement applicable to the executive.
“Change of Control” means any event as a result of which Irving Place Capital and its affiliates collectively cease to own and control all of the economic and voting rights associated with ownership of at least 50.1% of the outstanding capital stock of Company or any sale or transfer of all or substantially all of the assets of the Company.
Notwithstanding the foregoing, a Change of Control will not include the sale or transfer of all or substantially all of the assets of the Company to a Private Equity Firm, or a company owned or controlled by a Private Equity Firm.
“Good Reason” means that, other than for Cause, any of the events set forth in paragraphs (i)-(iii) below has occurred; within 30 days of such event, the named executive notifies the Company in writing of such event, and the Company fails to cure the event within 60 days of receiving such notice; and the named executive terminates employment no later than 90 days after providing such notice:
·
the Company has demoted Executive, as evidenced by a material reduction or reassignment of Executive duties (per Executive job description), provided, however, that any change in Executive’s position constituting a lateral move or promotion will not be deemed to give rise to Good Reason unless Executive is required to relocate pursuant to section (iii) below;
·
the executive’s base salary has been materially reduced other than in connection with an across-the-board reduction of approximately the same percentage in executive compensation to employees imposed by our board of directors in response to negative financial results or other adverse circumstances affecting us; or
·
we have required the executive to relocate in excess of 50 miles from the location where the executive is currently employed.
Payments Made Upon Termination Without Cause or Resignation for Good Reason
If we terminate the named executive officer’s employment without Cause (other than death or disability) or the named executive officer resigns for Good Reason and the named executive officer signs a General Release within 45 days of the date of termination, the named executive officer will receive his or her then current salary on a bi-weekly payment schedule and COBRA benefits, if so elected by the named executive officer, for the 12-month period following termination (“Severance Period”), provided the time period allowed by the Company for rescission of the General Release has elapsed. The first payments will be made as soon as practicable following the effectiveness of the General Release and will include any such payment(s) that would otherwise have been made prior to the time the General Release was effective. “General Release” means a written release of all claims against us and our affiliates in the form presented by us, which includes confidentiality, non-competition, non-solicitation and no-hire provisions.
A failure to execute a General Release within 45 days of the named executive officer’s date of termination or a subsequent rescission of such General Release within the time allowed will result in the loss of any rights to receive payments or benefits under the Executive Severance Pay Plan.
The named executive officer will receive the salary for the first 6 months following the date of termination regardless of any other employment the named executive officer may accept. If the named executive officer finds other employment during the next 6 months after the date of termination, the amount of salary payable and COBRA benefits to the named executive officer will be reduced by the value of the compensation and benefits that the named executive officer receives in the named executive officer’s new employment.
If the named executive officer resigns for Good Reason, the named executive officer will receive a pro rata payment under our EIP, based on days employed, for the then current calendar year in which the termination occurs, payable at the time the EIP award is paid to our other senior executives.
The following tables show the potential payments to each of the named executive officers covered by our Executive Severance Pay Plan upon a termination or Change of Control.
(1)
The above tables exclude the intrinsic value of vested stock options.
2007 STOCK OPTION PLAN
On May 31, 2007, our Parent’s board of directors adopted the 2007 Stock Option Plan in connection with the Transaction. The 2007 Stock Option Plan provides for the issuance of approximately 43.9 million nonqualified stock options of our Parent to any of our and Parent’s executives, including the named executive officers, other key employees and to consultants and certain directors. The options allow for the purchase of shares of common stock of our Parent at prices no lower than the stock’s fair market value at the date of grant. The exercise price of the stock option awards granted during the years ended December 31, 2014, 2013, 2012, 2010, 2009 and 2008 was set reasonably and in good faith by Parent’s board of directors and compensation committee and is equal to the market value of Parent’s common stock on the grant date. The exercise price of options issued during the years ended December 31, 2014, 2013, 2012, 2010 and 2009, was determined through a variety of factors including peer group multiples, merger and acquisition multiples, and discounted cash flow analyses. The exercise prices of options issued during the year ended December 31, 2008 was determined by reference to the then recent per share valuation of Parent resulting from the 2007 Transaction as detailed below.
The 2007 Stock Option Plan is administered by Parent’s board of directors and compensation committee, which has the authority to select the persons to whom awards are granted, to determine the exercise price, if any, and the number of
shares of common stock covered by such awards, and to set other terms and conditions of awards, including any vesting schedule. Parent’s board of directors is permitted to amend, alter, suspend, discontinue or terminate the plan at any time, and either the Parent’s compensation committee or Parent’s board of directors is permitted to amend or terminate any outstanding award, except that an outstanding award may not be amended or terminated without the holder’s consent if such amendment or termination would adversely affect the rights of the holder.
While the terms of the options to be granted under the 2007 Stock Option Plan will be determined at the time of grant, our employee stock options issued in fiscal 2014 will expire on November 4, 2024 and stock options issued in 2013, 2012, 2010, 2009 and 2008 which originally were to expire 10 years from the date of grant were extended to November 4, 2024 with the November 4, 2014 Amendment as described below. Option grants to directors are 100% fixed vesting options, with one-sixth vesting on each December 31 over a six-year period. Option grants to employees are comprised of 50% fixed vesting and 50% performance vesting options. Fixed vesting options vest over a six-year service period with one-sixth vesting on December 31 of each year of the six-year period, subject to the option holder not ceasing employment with Parent or the Company. Upon a sale of Parent or the Company, all of the unvested options with fixed vesting schedules will vest and become exercisable. Performance vesting options vest over a six-year period with one-sixth vesting on December 31 of each year of the six-year period, subject to the option holder not ceasing employment with Parent or the Company. Prior to the Amendment described below, the vesting of performance vesting options was also subject to the Company’s attainment of either an adjusted EBITDA target for the then current year or an aggregate adjusted EBITDA target, as set forth in the respective form of option agreement. Also prior to the Amendment, upon a sale of Parent or the Company, all of the unvested options that vest upon the achievement of established performance targets would have vested and become exercisable upon IPC’s achievement of a certain internal rate of return on its investment in Parent, subject to certain conditions. With respect to both fixed vesting and performance vesting options, an employee’s unvested options are forfeited when employment is terminated, and vested options must be exercised within a prescribed time period on or following termination to avoid forfeiture. Before the exercise of an option, the holder has no rights as a stockholder regarding the shares subject to the option, including voting rights.
On August 11, 2010, the compensation committee of our board of directors recommended, and the board of directors of Parent (the “Parent Board”) approved, an amendment (the “Amendment”) to the vesting provisions contained in all outstanding option agreements of participants in the 2007 Stock Option Plan who were employed by Parent or us as of the effective date of the Amendment, or served on our board of directors through that date. The Amendment, among other things, did away with the requirement that the EBITDA-based performance objectives be achieved in order for performance vesting options to vest, in effect providing for time-based vesting of these options rather than performance vesting. The Amendment did not change the number of options granted, the strike price, or any continued service requirements. The Amendment also provided for the acceleration of vesting, for 2007 Stock Option Plan participants who were employed by Parent or us as of the effective date of the Amendment and who were granted options prior to December 31, 2009, of options (the “Accelerated Options”) to purchase approximately 2,996,000 shares of common stock of Parent that were eligible for vesting on December 31, 2009, but did not vest because we did not achieve the applicable Adjusted EBITDA target for the fiscal year ended December 31, 2009. At the time vesting was accelerated, the Accelerated Options remained eligible for vesting in future years based on our achievement of an aggregate Adjusted EBITDA target. Except as described above, all other terms and conditions applicable to the Accelerated Options remain in effect. The Amendment also amended the provisions relating to time vesting options granted under the 2007 Stock Option Plan to achieve greater consistency between the treatment of these options and the treatment of performance vesting options in the event of a sale of substantially all of the assets of Parent or us.
The Parent Board recognized the increased level of difficulty in achieving the original performance targets relating to performance vesting options (which were established in 2007), taking into consideration continued economic challenges, and authorized the Amendment in an effort to ensure that Parent continues to provide long-term incentives that drive core operating performance, while creating a meaningful retention benefit.
On November 4, 2014, the compensation committee of our board of directors recommended, and the board of directors of Parent (the “Parent Board”), approved, an amendment (the “Amendment”) to the 2007 Stock Option Plan to remove the 2007 Stock Option Plan’s mandatory ten year limit on the duration of stock options. In addition, the Compensation Committee recommended, and the Parent Board approved, unilateral amendments to the outstanding stock option agreements. These amendments extend the expiration date of such options to November 4, 2024 and reset the option
exercise price at $0.71 per share, which was the fair market value of Parent’s common stock on the amendment date as determined by a third party valuation obtained by the Parent Board.
DIRECTOR COMPENSATION
Through December 31, 2014, we paid each of our independent directors cash compensation of $70,000 per year for their service as independent directors. Members of our audit committee who were independent also received an annual fee of $5,000 ($20,000 for the chair), and members of our compensation committee who our board determined were independent received an annual fee of $3,000. These amounts are reviewed by the board from time to time, and all amounts are pro-rated for partial year directorship or membership, as appropriate. Directors who are not independent do not receive compensation for services on the board of directors. Although David Crane serves as a Senior Advisor to IPC, we consider him to be independent for compensation purposes.
Independent directors are eligible to receive grants of stock options under the 2007 Stock Option Plan, subject to the approval of Parent’s board of directors. In addition, we reimburse our independent directors for all out-of-pocket expenses incurred in connection with their activities as members of the board, provided that they are expected to follow travel and expense guidelines established for all of our officers and directors.
2014 Cash Compensation
In 2014, each of our independent directors (Mr. Schochet, Mr. Crane, Mr. Roberg, Mr. Grotting and Mr. Illingworth) received cash compensation of $70,000 for his service as an independent director. Mr. Workman, who was elected to serve as a director and chair of the audit committee effective November 5, 2014, received pro-rated cash compensation of $13,846 for his service as an independent director and chair of the audit committee. In addition, annual fees based on committee memberships were paid as described below. Finally, Mr. Schochet, Mr. Crane and Mr. Roberg received a distribution with respect to vested stock options, as described below.
·
Mr. Schochet received cash compensation of $5,000 for his service as a member of our audit committee. Mr. Schochet received a benefit of $24,840 with respect to the November 4, 2014 amendment to stock option agreement which extend the expiration date and reset the exercise price of the options. Mr. Schochet received a distribution with respect to vested stock options in the amount of $5,997. Mr. Schochet received an aggregate amount of $105,837 during 2014.
·
Mr. Crane received cash compensation of $3,000 for his service as a member of our compensation committee. Mr. Crane received a benefit of $24,840 with respect to the November 4, 2014 amendment to stock option agreement which extend the expiration date and reset the exercise price of the options. Mr. Crane received a distribution with respect to vested stock options in the amount of $5,997. Mr. Crane received an aggregate amount of $103,837 during 2014.
·
Mr. Roberg received cash compensation of $20,000 for his service as chairman of our audit committee before his resignation effective November 5, 2014. Mr. Roberg received a benefit of $24,840 with respect to the November 4, 2014 amendment to stock option agreement which extend the expiration date and reset the exercise price of the options. Mr. Roberg received a distribution with respect to vested stock options in the amount of $5,997. Mr. Roberg received an aggregate amount of $120,837 during 2014.
·
Mr. Grotting received cash compensation of $3,000 for his service as a member of our compensation committee. Mr. Grotting received a benefit of $46,140 with respect to the November 4, 2014 amendment to stock option agreement which extend the expiration date and reset the exercise price of the options. Mr. Grotting received an aggregate amount of $119,140 during 2014.
·
Mr. Illingworth received a benefit of $39,960 with respect to the November 4, 2014 amendment to stock option agreement which extend the expiration date and reset the exercise price of the options. Mr. Illingworth received an aggregate amount of $109,960 during 2014.
·
Mr. Workman received an aggregate amount of $13,846 during 2014.
Stock Option Compensation
No stock options were granted to any of our independent directors during 2014.
Until a stock option vests and is exercised, the underlying shares cannot be voted. These stock options vest over a six-year period of service with one-sixth of the grant vesting each year. The 2007 Stock Option Plan is discussed in detail under the caption “2007 Stock Option Plan” above.
2014 Director Compensation Table
The table below summarized the compensation paid by the Company to directors for the fiscal year ended December 31, 2014:
(1)
Only the members of our board who are independent for compensation purposes receive compensation for their service as directors.
(2)
The amount in the “Fees Earned or Paid in Cash” column for Mr. Schochet, Mr. Crane, Mr. Roberg, Mr. Grotting, Mr. Illingworth and Mr. Workman represents retainer and committee fees as discussed in detail under the caption “2014 Cash Compensation.”
(3)
The amounts in the “Option Awards” column reflect incremental fair value of awards resulting from the November 4, 2014 amendment to stock option agreement which extend the expiration date and reset the exercise price of the options, determined in accordance with ASC Topic 718, of awards granted pursuant to the 2007 Stock Option Plan. Assumptions used in the calculation of these amounts are included in Item 15, Note 11, Share-Based Compensation to our audited consolidated financial statements for the fiscal year ended December 31, 2014 included elsewhere in this Annual Report on Form 10-K. As of December 31, 2014, Mr. Schochet, Mr. Crane and Mr. Roberg, each had 300,000 options outstanding and exercisable under the 2007 Stock Option Plan. As of December 31, 2014, Mr. Grotting had 300,000 options outstanding and 250,000 options exercisable under the 2007 Stock Option Plan. As of December 31, 2014, Mr. Illingworth had 300,000 options outstanding and 150,000 options exercisable under the 2007 Stock Option Plan.
(4)
The amount in the “All Other Compensation” column reflect the cash paid to directors as equity distributions as a result of the dividend declared to Parent in June 2011, see Note 7 to our audited consolidated financial statements for the fiscal year ended December 31, 2014 included elsewhere in this Annual Report on Form 10-K.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 2014, the directors serving on the compensation committee of our board of directors were Mr. Juneja, Mr. Crane, Mr. Grotting and Mr. Feiner, none of whom has served as an officer or employee of UHS.
For a discussion of the related person transactions between or among the foregoing compensation committee members, their affiliates and us, see Item 13: Certain Relationships and Related Transactions, and Director Independence in this Annual Report on Form 10-K.
Our board of directors has considered the compensation policies and practices that are generally applicable to all employees, including our non-executive officers, and has concluded that such policies and practices do not create risks that are reasonably likely to have a material adverse effect on us.
ITEM 12:
ITEM 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of our capital stock is owned by Parent. IPC and certain members of our management team own all of the capital stock of Parent. The following table sets forth certain information known to us, based on information provided by Parent, regarding the beneficial ownership of the common stock of Parent as of March 1, 2015 by:
·
each person who is the beneficial owner of more than 5% of its outstanding voting stock;
·
each member of the board of directors of Parent and our named executive officers; and
·
all of our directors and executive officers as a group.
To our knowledge, each such stockholder has sole voting and investment power as to the common stock shown unless otherwise noted. Beneficial ownership of the common stock listed in the table has been determined in accordance with the applicable rules and regulations promulgated under the Exchange Act.
*Denotes less than one percent.
(1)
Unless otherwise specified, the address of each of the named individuals is c/o Universal Hospital Services, Inc., 6625 West 78th Street, Suite 300, Minneapolis, Minnesota 55439.
(2)
Percentage of beneficial ownership is based on the aggregate of 249,012,549 shares of Parent’s common stock outstanding as of March 1, 2015 and 20,675,053 options exercisable or becoming exercisable for our directors and executive officers within 60 days of March 1, 2015. The percentage of beneficial ownership for all holders has been rounded to the nearest 1/10th of a percentage.
(3)
IPC III GP, LLC may be deemed a beneficial owner of shares of Parent due to its status as a general partner of IPC/UHS, L.P. and IPC/UHS Co-Investment Partners, L.P. IPC III GP, LLC disclaims beneficial ownership of any such shares of which it is not the holder of record.
(4)
Includes 81,275 shares of common stock held by Mr. Blackford’s wife and 3,843,112 shares of common stock held in trust for Mr. Blackford’s children, wherein Mr. Blackford and his wife, as trustees, have equal voting and dispositive power and may collectively be deemed to be beneficially owned by Mr. Blackford, and options to purchase 14,500,000 shares of common stock that are exercisable or become exercisable within 60 days of March 1, 2015.
(5)
Includes options to purchase 916,657 shares of common stock that are exercisable or become exercisable within 60 days of March 1, 2015.
(6)
Includes options to purchase 716,669 shares of common stock that are exercisable or become exercisable within 60 days of March 1, 2015.
(7)
Includes options to purchase 333,400 shares of common stock that are exercisable or become exercisable within 60 days of March 1, 2015.
(8)
Includes options to purchase 416,662 shares of common stock that are exercisable or become exercisable within 60 days of March 1, 2015.
(9)
Includes options to purchase 300,000 shares of common stock that are exercisable or become exercisable within 60 days of March 1, 2015, for each of Mr. Schochet and Mr. Crane.
(10)
Mr. Bowerman is a Senior Advisor of Irving Place Capital. His address is c/o Irving Place Capital, 745 Fifth Avenue, New York, New York 10151.
(11)
Mr. Feiner is a Senior Advisor of Irving Place Capital. His address is c/o Irving Place Capital, 745 Fifth Avenue, New York, New York 10151.
(12)
Mr. Juneja is a Senior Advisor of Irving Place Capital. Mr. Juneja disclaims beneficial ownership of any of the shares of common stock owned by IPC/UHS, L.P. and IPC/UHS Co-Investment Partners, L.P., except to the extent of his pecuniary interest therein, if any. His address is c/o Irving Place Capital, 745 Fifth Avenue, New York, New York 10151.
(13)
Includes options to purchase 250,000 shares of common stock that are exercisable or become exercisable within 60 days of March 1, 2015
(14)
Includes options to purchase 150,000 shares of common stock that are exercisable or become exercisable within 60 days of March 1, 2015.
EQUITY COMPENSATION PLAN
The following table summarizes, as of December 31, 2014, the shares of Parent’s common stock subject to outstanding awards or available for future awards under Parent’s 2007 Stock Option Plan.
						
						
						
						
						
						
						
(1)
The exercise price of the stock option award is equal to the market value of Parent’s common stock on the grant date as determined reasonably and in good faith by the Parent’s board of directors and compensation committee. The exercise price of options issued during the years ended December 31, 2014, 2013, 2012, 2010 and 2009, was determined through a variety of factors including peer group multiples, merger and acquisition multiples, and discounted cash flow analyses. The exercise prices of options issued during the year ended December 31, 2008 was determined by reference to the then recent per share valuation of Parent resulting from the Transaction as detailed below.
(2)
Represents shares remaining available under Parent’s 2007 Stock Option Plan.
ITEM 13:
ITEM 13: Certain Relationships and Related Transactions, and Director Independence
TRANSACTIONS WITH RELATED PERSONS
The board of directors has adopted a written policy and written procedures regarding transactions with related persons. On an annual basis, each director and executive officer is obligated to complete a director and officer questionnaire, which requires disclosure of any transactions in which we are a participant and the director, executive officer or any member of his immediate family (each a “related person”), have a direct or indirect material interest. The policy and procedures charge the audit committee with the review, approval and/or ratification of any material transactions with a related person. In determining whether to authorize, approve and/or ratify a transaction, the audit committee will use any process and review any information that it determines is reasonable in light of the circumstances in order to determine if the transaction is fair and reasonable and on terms no less favorable to the Company than could be obtained in a comparable arm’s length transaction with an unrelated third party to the Company. The audit committee may, but is not required to, seek bids, quotes or independent valuations from unaffiliated third parties sufficient to enable the audit committee to assess the fairness of the transaction to the Company.
PROFESSIONAL SERVICES AGREEMENT
Payments under the professional services agreement described below may be made only to the extent permitted by our senior secured credit facility and 2012 Indenture governing our 2012 Notes.
On May 31, 2007, in connection with the Transaction, we and IPC entered into a professional services agreement pursuant to which general advisory and management services are provided to us with respect to financial and operating matters. IPC is an owner of Parent, and the following members of our Board of Directors are associated with IPC: Michael Feiner, Robert Juneja and Bret Bowerman. In addition, David Crane, a director, is the CEO of an IPC portfolio company. The professional services agreement requires us to pay an annual fee for ongoing advisory and management
services equal to the greater of $0.5 million or 0.75% of our Adjusted EBITDA (as defined in the professional services agreement) for the immediately preceding fiscal year, payable in quarterly installments. We incurred fees to IPC of approximately $1.0, $1.1 and $1.1 million for the years ended December 31, 2014, 2013 and 2012, respectively, for advisory and management services.
The professional services agreement was amended and restated as of February 1, 2008, to state that IPC may provide to us certain strategic services in exchange for a portion of the fees that would have been payable by us to IPC as advisory fees under the original professional services agreement, provided that the aggregate of the advisory and strategic services fees do not exceed the greater of $0.5 million or 0.75% of our Adjusted EBITDA (as defined in the professional services agreement) for the immediately preceding fiscal year.
In the ordinary course of business, we entered into an operating lease for our Minneapolis, Minnesota district service center with Ryan Fund V, LLC (“Ryan”), which began on May 1, 2007. One member of our board of directors is also a limited partner in Ryan which has ownership interest in an LLC that owns the property. During the years ended December 31, 2014, 2013 and 2012, we made rent payments to a Ryan affiliate totaling $0.4, $0.4 and $0.3 million, respectively.
In the ordinary course of business, we entered into engagement letters with CTPartners, LLC (“CTPartners”) to conduct searches for certain executive positions. One member of our board of directors, Michael Feiner, is also a director of CTPartners. Pursuant to these engagement letters, we made payments to CTPartners totalling approximately $0.5, $0.2 and $0.3 million for the years ended December 31, 2014, 2013 and 2012, respectively.
The professional services agreement was reviewed and approved in accordance with our policy and procedures regarding transactions with related persons.
DIRECTOR INDEPENDENCE
Information regarding the independence of our directors is incorporated by reference to the appropriate information in Item 10 above, under “MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS - The Board of Directors.”
ITEM 14:
ITEM 14: Principal Accounting Fees and Services
KPMG LLP (“KPMG”) has served as our independent registered public accounting firm since June 3, 2013. The following table presents fees for professional services rendered by KPMG during the years ended December 31, 2014 and 2013.
Deloitte and Touche LLP (“D&T”) served as our independent registered public accounting firm from June 20, 2007 to May 28, 2013. The following table presents fees for professional services rendered by D&T during the years ended December 31, 2014 and 2013.
(1)
Audit fees consist of services rendered for the audit of the annual consolidated financial statements, including required quarterly reviews, statutory and regulatory filings or engagements and services that generally only the auditor can reasonably be expected to provide.
(2)
Consists of fees for accounting consultations, other attestation services and registration statement filing.
(3)
Tax fees are for professional services rendered for tax compliance, tax advice and tax planning.
(4)
All other fees are for services other than those in the previous categories, including due diligence services.
All decisions regarding selection of independent registered public accounting firms and approval of accounting services and fees are made by our audit committee in accordance with the provisions of the Sarbanes-Oxley Act of 2002 and related SEC rules. There are no exceptions to the policy of securing prior approval by our audit committee for any service provided by our independent registered public accounting firm.
PART IV
ITEM 15:
ITEM 15: Exhibits and Financial Statement Schedules
(a)
The following documents are filed as part of this Report:
						
						
						
						
4.7
Registration Rights Agreement, dated February 12, 2013, by and among Universal Hospital Services, Inc., Barclays Capital Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets, LLC, Wells Fargo Securities, LLC and PNC Capital Markets LLC and the guarantor party thereto (incorporated by reference to Exhibit 4.1 to Form 8-K filed with the SEC on February 12, 2013).
10.1
Form of 8.50% / 9.25% Second Lien Senior Secured PIK Toggle Note due 2015 (included in Exhibit 4.1).
10.2
Second Amended and Restated Credit Agreement, dated as of July 31, 2012, among Universal Hospital Services, Inc., UHS Holdco, Inc., the lenders party thereto, Bank of America, N.A. as administrative agent, Barclays Bank PLC and Royal Bank of Canada as co-syndication agents and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Bank PLC and RBC Capital Markets as joint lead arrangers and joint book managers (incorporated by reference to Exhibit 10.1 to Form 8-K filed with the SEC on August 3, 2012).
10.3
Amended and Restated Guaranty, dated as of May 6, 2010, among UHS Holdco, Inc. and the secured parties named therein (incorporated by reference to Exhibit 10.2 to Form 10-Q filed with the SEC on May 10, 2010).
10.4
First Lien Security Agreement, dated May 6, 2010, among UHS Holdco, Inc., Universal Hospital Services, Inc. and GE Business Financial Services, Inc., as collateral agent (incorporated by reference to Exhibit 10.3 to Form 10-Q filed with the SEC on May 10, 2010).
10.5
Trademark Security Agreement, dated May 31, 2007, among UHS Merger Sub, Inc., Universal Hospital Services, Inc., UHS Holdco, Inc. and ML Capital, as collateral agent (incorporated by reference to Exhibit 10.4 to Form 10-Q filed with the SEC on August 14, 2007, File No. 000-20086).
10.6
Second Lien Security Agreement, dated May 31, 2007, among UHS Merger Sub, Inc., Universal Hospital Services, Inc. and Wells Fargo Bank, National Association, as collateral agent (incorporated by reference to Exhibit 10.5 to Form 10-Q filed with the SEC on August 14, 2007, File No. 000-20086).
10.7
Second Lien Trademark Security Agreement, dated May 31, 2007, among UHS Merger Sub, Inc., Universal Hospital Services, Inc., UHS Holdco, Inc. and Wells Fargo Bank, National Association, as collateral agent (incorporated by reference to Exhibit 10.6 to Form 10-Q filed with the SEC on August 14, 2007, File No. 000-20086).
10.8
Amended and Restated Second Lien Trademark Security Agreement, dated as of August 7, 2012, among Universal Hospital Services, Inc., UHS Surgical Services, Inc. and Wells Fargo Bank, National Association, as collateral agent (incorporated by reference to Exhibit 10.1 to Form 10-Q filed with the SEC on August 13, 2013).
10.9
Amended and Restated Second Lien Security Agreement, dated as of August 7, 2012, among Universal Hospital Services, Inc., UHS Surgical Services, Inc. and Wells Fargo Bank, National Association, as collateral agent (incorporated by reference to Exhibit 10.2 to Form 10-Q filed with the SEC on August 13, 2013).
10.10
Second Lien Copyright Security Agreement, dated May 31, 2007, among UHS Merger Sub, Inc., Universal Hospital Services, Inc., UHS Holdco, Inc. and Wells Fargo Bank, National Association, as collateral agent (incorporated by reference to Exhibit 10.7 to Form 10-Q filed with the SEC on August 14, 2007, File No. 000-20086).
10.11
Second Lien Patent Security Agreement, dated May 31, 2007, among UHS Merger Sub, Inc., Universal Hospital Services, Inc., UHS Holdco, Inc. and Wells Fargo Bank, National Association, as collateral agent (incorporated by reference to Exhibit 10.8 to Form 10-Q filed with the SEC on August 14, 2007, File No. 000-20086).
10.12
Securityholders Agreement, dated as of May 31, 2007, by and among UHS Holdco, Inc., IPC/UHS L.P. (formerly known as BSMB/UHS L.P.) and IPC/UHS Co-Investment Partners, L.P. (formerly known as BSMB/UHS Co-Investment Partners, L.P.), Gary D. Blackford and Kathy Blackford, and each of the other persons listed therein (incorporated by reference to Exhibit 10.9 to Form 10-Q filed with the SEC on August 14, 2007, File No. 000-20086).
10.13
First Amendment to the Intercreditor Agreement, dated as of the August 7, 2012, among the Company, Bank of America, N.A., collateral agent for the First Lien Secured Parties and Wells Fargo Bank, National Association, collateral agent for the Junior Lien Secured Parties (incorporated by reference to Exhibit 10.3 to Form 10-Q filed with the SEC on August 13, 2013).
10.14
Stock Option Plan of UHS Holdco, Inc. (incorporated by reference to Exhibit 10.17 to Form 10-Q filed with the SEC on August 14, 2007, File No. 000-20086). **
10.15
Amendment to Option Agreements, dated as of August 11, 2010, executed by UHS Holdco, Inc. (incorporated by reference to Exhibit 10.4 for Form 10-Q filed with the SEC on August 11, 2010). **
10.16
Form of Option Agreement Evidencing a Grant of an Option Under the 2007 Stock Option Plan (incorporated by reference to Exhibit 10.5 for Form 10-Q filed with the SEC on August 11, 2010). **
10.17
Amended and Restated Professional Services Agreement, dated as of February 1, 2008, by and between Universal Hospital Services, Inc. and Irving Place Capital Merchant Manager III, L.P. (formerly known as Bear Stearns Merchant Manager III, L.P.) (incorporated by reference to Exhibit 10.23 to Form 10-K/A filed with the SEC on March 12, 2008, File No. 000-20086).
10.18
Amended and Restated Employment Agreement, dated as of December 31, 2008, between Universal Hospital Services, Inc. and Gary D. Blackford. (incorporated by reference to Exhibit 10.17 to Form 10-K filed with the SEC on March 12, 2009, File No. 000-20086). **
10.19
Employment Agreement, dated as of February 7, 2012, between Universal Hospital Services, Inc. and William C. Mixon. (incorporated by reference to Exhibit 10.18 to Form 10-K/A filed with the SEC on November 7, 2012). **
10.20
Mutual Termination Agreement between William C. Mixon and Universal Hospital Services, Inc. (incorporated by reference to Exhibit 10.1 to Form 8-K filed with the SEC on April 18, 2014).
10.21
Mutual Termination Agreement between Timothy W. Kuck and Universal Hospital Services, Inc. (incorporated by reference to Exhibit 10.1 to Form 10-Q filed with the SEC on November 6, 2014).
10.22
Amended and Restated 2007 Stock Option Plan, dated as of November 4, 2014, executed by UHS Holdco, Inc. (incorporated by reference to Exhibit 10.2 to Form 10-Q filed with the SEC on November 6, 2014). **
10.23
Form of notice to option holders regarding amendments to outstanding options (incorporated by reference to Exhibit 10.3 to Form 10-Q filed with the SEC on November 6, 2014). **
10.24
Consulting Service Agreement, dated as of December 12, 2014, between Gary L. Blackford and Universal Hospital Services, Inc. (incorporated by reference to Exhibit 10.1 to Form 8-K filed with the SEC on December 12, 2014). **
10.25
Service Agreement, dated as of December 12, 2014, between John L. Workman and Universal Hospital Services, Inc. (incorporated by reference to Exhibit 10.2 to Form 8-K filed with the SEC on December 12, 2014). **
10.26*
Executive Severance Pay Plan, dated March 17, 2015. (incorporated by reference to Exhibit 10.26 to Form 10-K filed with the SEC on March 23, 2015). **
12.1*
Statement regarding the computation of ratio of earnings to fixed charges
21.1*
Subsidiaries of the Registrant
31.1*
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
31.2*
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
32.1*
Certification of John L. Workman Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification of James B. Pekarek Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*
The following financial information from Universal Hospital Services, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 23, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets as of December 31, 2014 and 2013, (ii) the Consolidated Statements of Operations for the years ended December 31, 2014, 2013 and 2012, (iii) the Consolidated Statements of Comprehensive Loss for the years ended December 31, 2014, 2013 and 2012, (iv) the Consolidated Statements of Equity for the years ended December 31, 2014, 2013 and 2012, (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012, and Notes to Consolidated Financial Statements
*Filed herewith
**Indicates management contracts, compensatory plans or arrangements required to be filed pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on March 23, 2015.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on March 23, 2015.
						
						
/s/ John L. Workman
						
Interim Executive Chairman of the Board
John L. Workman
						
of Directors (Principal Executive Officer)
						
						
/s/ James B. Pekarek
						
Executive Vice President and
James B. Pekarek
						
Chief Financial Officer (Principal Financial Officer)
						
						
/s/ Scott A. Christensen
						
Vice President, Controller, and
Scott A. Christensen
						
Chief Accounting Officer (Principal Accounting Officer)
						
						
/s/ Barry P. Schochet
						
Director
Barry P. Schochet
						
						
						
						
/s/ Bret D. Bowerman
						
Director
Bret D. Bowerman
						
						
						
						
/s/ David Crane
						
Director
David Crane
						
						
						
						
/s/ Michael C. Feiner
						
Director
Michael C. Feiner
						
						
						
						
/s/ Robert Juneja
						
Director
Robert Juneja
						
						
						
						
/s/ John B. Grotting
						
Director
John B. Grotting
						
						
						
						
/s/ David J. Illingworth
						
Director
David J. Illingworth
						
						
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
No annual report relating to the fiscal year ended December 31, 2014 or proxy statement with respect to any annual or other meeting of security holders has been sent to security holders, nor will such information be sent to security holders.
Universal Hospital Services, Inc.
Schedule II - Valuation and Qualifying Accounts
(in thousands)
Universal Hospital Services, Inc.
As of December 31, 2014 and 2013 and
For the years ended December 31, 2014, 2013 and 2012
						
						
						
Page
Report of Independent Registered Public Accounting Firms
						
						
Financial Statements
						
						
						
Consolidated Balance Sheets
						
						
Consolidated Statements of Operations
						
						
Consolidated Statements of Comprehensive Loss
						
						
Consolidated Statements of Equity (Deficit)
						
						
Consolidated Statements of Cash Flows
						
						
Notes to Consolidated Financial Statements
						
93 to 125
						
			 		
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Universal Hospital Services, Inc.:
We have audited the accompanying consolidated balance sheets of Universal Hospital Services, Inc. and subsidiary (the “Company”)
as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive loss, equity (deficit), and cash flows for the years then ended. In connection with our audits of the consolidated financial statements, we have also audited the amounts for the years ended December 31, 2014 and 2013 in the financial statement schedule II listed in the Index at Item 15. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. The accompanying consolidated financial statements of Universal Hospital Services, Inc. and subsidiary as of December 31, 2012, were audited by other auditors whose report thereon dated March 15, 2013, expressed an unqualified opinion on those statements, before the restatement described in Note 18 to the consolidated financial statements.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 2014 and 2013 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Universal Hospital Services, Inc. and subsidiary as of December 31, 2014 and 2013, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited the adjustments described in Note 18 that were applied to restate the 2012 consolidated financial statements to change the composition of the reportable segments to conform to the current presentation. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the
2012 consolidated financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2012 consolidated financial statements taken as a whole.
/s/ KPMG LLP
Minneapolis, Minnesota
March 23, 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Universal Hospital Services, Inc.
We have audited, before the effects of the retrospective adjustments to the disclosures for a change in the composition of reportable segments discussed in Note 18 to the consolidated financial statements, the consolidated statements of operations, comprehensive loss, equity, and cash flows for the year ended December 31, 2012 of Universal Hospital Services, Inc. and subsidiary (the "Company") (the 2012 consolidated financial statements before the effects of the adjustments discussed in Note 18 to the consolidated financial statements are not presented herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 2012 consolidated financial statements, before the effects of the retrospective adjustments to the disclosures for a change in the composition of reportable segments discussed in Note 18 to the consolidated financial statements, present fairly, in all material respects, the results of the Company’s operations and cash flows for the year ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
We were not engaged to audit, review, or apply any procedures to the retrospective adjustments to the disclosures for a change in the composition of reportable segments discussed in Note 18 to the consolidated financial statements and, accordingly, we do not express an opinion or any other form of assurance about whether such retrospective adjustments are appropriate and have been properly applied. Those retrospective adjustments were audited by other auditors.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
March 15, 2013
			 		
Universal Hospital Services, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share information)
The accompanying notes are an integral part of these consolidated financial statements.
Universal Hospital Services, Inc.
Consolidated Statements of Operations
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
Universal Hospital Services, Inc.
Consolidated Statements of Comprehensive Loss
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
Universal Hospital Services, Inc.
Consolidated Statements of Equity (Deficit)
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
			 		
Universal Hospital Services, Inc.
Consolidated Statements of Cash Flows
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
			 		
Universal Hospital Services, Inc.
Notes to Consolidated Financial Statements
As of December 31, 2014 and 2013 and
For the years ended December 31, 2014, 2013 and 2012
1.Basis of Presentation
Universal Hospital Services, Inc. (“we”, “our”, “us”, the “Company” or “UHS”) is a nationwide provider of health care technology management and service solutions to the United States health care industry. The Company’s services fall into three reporting segments: Medical Equipment Solutions (“MES”), Clinical Engineering Solutions (“CES”) and Surgical Services (“SS”).
All of our outstanding capital stock is owned by UHS Holdco, Inc. (“Parent”), which acquired the Company in a recapitalization in May 2007. Parent is owned by affiliates of Irving Place Capital Merchant Manager III, L.P. (“IPC”) and certain members of our management.
On January 3, 2012, we completed the acquisition, effective January 1, 2012, of all of the outstanding stock of a surgical laser equipment service provider for approximately $16.1 million in cash consideration. The financial results of this acquisition are included in our SS segment.
On March 31, 2012, we completed the acquisition of certain assets of the southern California equipment rental division of a medical equipment manufacturer. The total purchase price was approximately $0.8 million, including approximately $0.4 million in contingent consideration to be paid over four years based on future revenues. The financial results of this acquisition are included in our MES segment.
On July 9, 2012, we completed the acquisition of certain assets of a surgical laser equipment service provider for a total consideration of approximately $5.3 million. The financial results of this acquisition are included in our SS segment.
All acquisitions were funded primarily from our existing senior secured credit facility.
Principles of Consolidation
The consolidated financial statements include the accounts of UHS and of Surgical Services, its 100%-owned subsidiary, since its acquisition on April 1, 2011. In addition, in accordance with guidance issued by the Financial Accounting Standards Board (“FASB”), we have accounted for our equity investments in entities in which we are the primary beneficiary under the full consolidation method. All significant intercompany transactions and balances have been eliminated through consolidation. As the primary beneficiary, we consolidate the limited liability companies (“LLCs”) referred to in Note 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.
2.Significant Accounting Policies
Cash and Cash Equivalents
The Company considers money market accounts and other highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount. Concentrations of credit risk with respect to trade accounts receivable are limited due to the number of customers and their geographical distribution. The Company performs initial and ongoing credit evaluations of its customers and maintains allowances for potential credit losses. The allowance for doubtful accounts is based on historical loss experience and estimated exposure on specific trade receivables.
Inventories
Inventories consist of supplies and equipment held for resale and are valued at the lower of cost or market. Cost is determined by the average cost method, which approximates the first-in, first-out (“FIFO”) method.
Medical Equipment
Depreciation of medical equipment is provided on the straight-line method over the equipment’s estimated useful life, generally four to seven years. The cost and accumulated depreciation of medical equipment retired or sold is eliminated from their respective accounts and the resulting gain or loss is recorded as gain or loss on sales and disposals of equipment in the period the asset is retired or sold.
Property and Office Equipment
Property and office equipment includes property, leasehold improvements and office equipment.
Depreciation and amortization of property and office equipment is provided on the straight-line method over the lesser of the remaining useful life or lease term for leasehold improvements and 3 to 10 years for office equipment. The cost and accumulated depreciation or amortization of property and equipment retired or sold is eliminated from their respective accounts and the resulting gain or loss is recorded in selling, general and administrative expense in the period the asset is retired or sold.
Goodwill
Goodwill represents the excess of the cost of acquired businesses over the fair value of identifiable tangible net assets and identifiable intangible assets purchased.
Goodwill is tested at least annually for impairment and more frequently if events or changes in circumstances indicate that the asset might be impaired. We review goodwill for impairment by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the 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. If it is determined that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, we conclude that goodwill is not impaired. If the carrying amount of a reporting unit is zero or negative, the second step of the impairment test is performed to measure the amount of impairment loss, if any, when it is more likely than not that a goodwill impairment exists. As of December 31, 2014, all of our reporting units had a negative carrying value.
No goodwill impairments have been recognized in 2014, 2013, or 2012.
Other Intangible Assets
Other intangible assets primarily include customer relationships, a supply agreement, trade names, technology databases, non-compete agreements and favorable lease agreements. Our trade name intangibles have indefinite lives. Our remaining other intangible assets are amortized over their estimated economic lives of three to thirteen years. The straight-line method of amortization generally reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained by the Company in each reporting period. However, for certain of our customer relationships, we use the sum-of-the-years-digits amortization method to more appropriately allocate the cost to earnings in proportion to the estimated amount of economic benefit obtained.
Intangible assets with indefinite lives are tested for impairment on an annual basis and more frequently if events or changes in circumstances indicate that the asset might be impaired. We review indefinite-lived intangible assets for impairment by first assessing qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, we conclude that it is not more likely than not that the indefinite-lived intangible asset is impaired, then we take no further action.
Amortizable intangibles are measured for impairment consistent with the process utilized for long-lived assets as described below. Our amortizable intangible assets consist of the following discrete items: customer relationships, a supply agreement, technology databases, non-compete agreements and favorable lease agreements.
Long-Lived Assets
The Company periodically reviews its long-lived assets for impairment and assesses whenever significant events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. An impairment loss is recognized when the carrying amount of an asset exceeds the anticipated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. For other long-lived assets, primarily movable medical equipment, we continuously monitor specific
makes/models for events such as product recalls or obsolescence. The amount of the impairment loss to be recorded, if any, is calculated by the excess of the asset’s carrying value over its fair value.
Deferred Financing Costs
Financing costs associated with issuing debt are deferred and amortized over the related terms using the straight-line method, which approximates the effective interest rate method.
Purchase Accounting
We account for acquisitions by allocating the purchase price paid to effect the acquisition to the acquired assets and liabilities at fair value with excess purchase price being recorded as goodwill.
Revenue Recognition
Medical equipment is outsourced on both short-term and long-term arrangements and outsourced revenue is recorded in income as equipment is utilized based on an agreed rate per use or time period. Any changes to the rate are billed on a prospective basis.
Medical equipment sales revenues consist of (1) sales of medical equipment and related parts and single-use disposable items to customers and (2) sales of medical equipment that include installation services. Sales of medical equipment as well as related parts and single-use disposable items are recognized at the point of delivery, if performed by us, or at the point of shipment, when risk of loss has passed to the customer. Because of the short-term nature of equipment installation projects, sales that include installation services are recognized when the earnings cycle is complete-installation has been completed, the equipment becomes operational and the customer has accepted it. All revenues are recognized net of any sales taxes.
CES revenue is recognized as services are provided.
Surgical Services equipment is outsourced on a per case basis, inclusive of equipment, technologist and related disposables, if any. Revenue is recorded in income upon completion of the case based on agreed rate per use or time period.
The Company follows the provisions of Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition,” in recognizing all of these revenue streams - specifically, revenue recognition requires proof that (i) an arrangement exists, (ii) delivery has occurred and/or services have been rendered, (iii) the price is fixed; and (iv) collectability is reasonably assured.
The Company reports only its portion of revenues earned under certain revenue share arrangements in accordance with ASC Topic 605-45 “Principal Agent Considerations,” because, among other factors, the equipment manufacturer retains title to the equipment, maintains general inventory and physical loss risk of equipment on rental and because we earn a fixed percentage of the billings to customers.
From time to time the Company receives both non-monetary and cash refunds on equipment recalled by manufacturers. It is the Company’s practice to record such recall gains as a reduction in cost of sales.
Operating Leases
The Company leases all of its district, corporate and other operating locations under operating leases and recognizes rent expense on a straight-line basis over the lease terms. Rent holidays and rent escalation clauses, which provide for scheduled rent increases during the lease term, are taken into account in computing straight-line rent expense included in our consolidated statements of operations. The difference between the rent due under the stated periods of the leases compared to that of the straight-line basis is recorded as a component of other long-term liabilities in the consolidated balance sheets. Landlord funded lease incentives, including tenant improvement allowances provided for our benefit, are recorded as leasehold improvement assets and as deferred rent in the consolidated balance sheets and are amortized to depreciation expense and as rent expense credits, respectively.
Income Taxes
The Company accounts for deferred income taxes utilizing ASC Topic 740, “Income Taxes.” ASC Topic 740 requires the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the tax effects of temporary differences between the financial statement and the tax bases of assets and liabilities, as measured at current enacted tax rates. 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 initially established a valuation allowance in 2010 to recognize this uncertainty and since that time, have continued to recognize this uncertainty. In future reporting periods, we will continue to assess the likelihood that deferred tax assets will be realizable.
Interest and penalties associated with uncertain income tax positions is classified as income tax expense. The Company has not recorded any material income tax related interest or penalties during any of the periods presented.
Derivative Financial Instrument
We had an interest rate swap agreement which we used as a derivative financial instrument to manage our interest rate exposure that expired in June 2012. We do not use financial instruments for trading or other speculative purposes.
ASC Topic 815, “Derivatives and Hedging,” establishes accounting and reporting standards requiring that derivative instruments be recorded on the consolidated balance sheets as either an asset or liability measured at fair value. The statement requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. If hedge accounting criteria are met, the changes in a derivative’s fair value (for a cash flow hedge) are deferred in equity as a component of accumulated other comprehensive loss. These deferred gains and losses are recognized as income in the period in which hedged cash flows occur. The ineffective portions of hedge returns are recognized as earnings. Our hedging activity has been limited to an interest rate swap arrangement that is further described in Note 8, Long-Term Debt.
Fair Value of Other Financial Instruments
The Company considers that the carrying amount of financial instruments, including accounts receivable, accounts payable, accrued liabilities and senior secured credit facility, approximate fair value due to their short maturities. The fair value of our outstanding Original Notes and Add-on Notes (each as defined in Note 8, Long-Term Debt), based on the quoted market price for the same or similar issues of debt, which represents a Level 2 fair value measurement, is approximately:
(1)
The carrying value of the Add-on notes - 7.625% includes unamortized bond premium of $11.1 and $12.7 million as of December 31, 2014 and 2013, respectively.
Segment Information
Our segments are organized based on the different products and services that we offer. We report our financial results in three operating segments: MES, CES and SS, each of which is also a reportable segment. Note 18, Business Segments, contains additional segment information.
Stock-Based Compensation
We record compensation expense associated with stock options in accordance with ASC Topic 718, “Compensation - Stock Compensation.” Note 11, Stock-Based Compensation, contains the significant assumptions used in determining the underlying fair value of options and disclosures as required under ASC Topic 718.
Comprehensive Loss
Comprehensive loss is comprised of net loss and other comprehensive loss. Other comprehensive loss includes minimum pension liability adjustments. These amounts are presented in the consolidated statements of comprehensive loss net of reclassification adjustments to earnings.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make 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. Actual results could differ from those estimates.
Recent Accounting Pronouncements
Standard Adopted
In July 2013, the FASB issued Accounting Standards Update (“ASU”) No. 2013-11 Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exist (“ASU 2013-11”). ASU 2013-11 requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss (“NOL”) carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. The ASU does not require new recurring disclosures. ASU 2013-11 is effective prospectively for fiscal years beginning after December 15, 2013 and interim periods within those years. The adoption of ASU 2013-11 did not have a material effect on our consolidated financial statements.
Standards Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in the U.S. GAAP when it becomes effective. The new standard is effective beginning after December 15, 2016 and interim periods within those years. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.
In August 2014, the FASB issued ASU 2014-13 Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity (“ASU 2014-13”), which will allow an alternative fair value measurement approach for consolidated collateralized financing entities (CFEs) to eliminate a practice issue that results from differences in the fair value of a CFE’s financial assets and the fair value of its financial liabilities even when the financial liabilities have recourse to only the financial assets. The approach would permit the parent company of a consolidated CFE to measure the CFE’s financial assets and financial liabilities based on the more observable of the fair value of the financial assets and the fair value of the financial liabilities. The new standard is effective beginning after December 15, 2015 and interim periods within those years. The standard permits either a retrospective or a modified retrospective transition method, and early adoption is permitted as of the beginning of an annual period. We are evaluating the effect that ASU 2014-13 will have on our consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15 Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which requires management to evaluate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern and whether or not it is probable that the entity will be unable to meet its obligations as they become due within one year after the date the financial statements are issued. The new standard is effective beginning after December 15, 2016 and interim periods within those years. Early adoption is permitted. We are evaluating the effect that ASU 2014-15 will have on our consolidated financial statements and related disclosures.
3.Acquisitions
On July 9, 2012, we completed the acquisition of certain assets of a surgical laser equipment service provider for total consideration of approximately $5.3 million. The consideration consists of $2.6 million of cash paid at closing, $1.0 million of debt assumed that was paid off upon closing and approximately $1.7 million in contingent earn-out payment which was paid in October 2013.
On March 31, 2012, we completed the acquisition of certain assets of the southern California equipment rental division of a medical equipment manufacturer. The total purchase price was approximately $0.8 million, including approximately $0.4 million in contingent consideration which may be paid over four years based on future revenues. Assets acquired consisted of medical equipment of $0.4 million and customer relationship intangibles of $0.3 million.
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. The total consideration consists of $11.0 million of cash paid at
closing, $3.2 million of debt assumed that was paid off upon closing, and $1.9 million of holdback amounts, of which $0.3 million was paid in 2012 and $1.6 million was paid in January 2013.
Acquisitions completed during the year ended 2012 are not material individually or in the aggregate.
All acquisitions were funded primarily from our existing senior secured credit facility.
4.Fair Value Measurements
Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2014 and 2013 are summarized in the following table by type of inputs applicable to the fair value measurements:
A description of the inputs used in the valuation of assets and liabilities is summarized as follows:
Level 1 - Inputs represent unadjusted quoted prices for identical assets or liabilities exchanged in active markets.
Level 2 - Inputs include directly or indirectly observable inputs other than Level 1 inputs such as quoted prices for similar assets or liabilities exchanged in active or inactive markets; quoted prices for identical assets or liabilities exchanged in inactive markets; other inputs that are considered in fair value determinations of the assets or liabilities, such as interest rates and yield curves that are observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks and default rates; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 - Inputs include unobservable inputs used in the measurement of assets and liabilities. Management is required to use its own assumptions regarding unobservable inputs because there is little, if any, market activity in the assets or liabilities or related observable inputs that can be corroborated at the measurement date. Measurements of non-exchange traded derivative contract assets and liabilities are primarily based on valuation models, discounted cash flow models or other valuation techniques that are believed to be used by market participants. Unobservable inputs require management to make certain projections and assumptions about the information that would be used by market participants in pricing assets or liabilities.
During 2012, we recorded a contingent consideration liability, in the form of earn-out payments, related to our acquisitions in the total amount of $2.1 million. The contingent consideration payments are based on achieving certain revenue results. The fair value of the liability was estimated using a discounted cash flow approach with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement. The significant inputs in the Level 3 measurement not supported by market activity included our assessments of expected future cash flows during the earn-out period related to the assets acquired, appropriately discounted considering the uncertainties associated with the obligation, and calculated based on estimated revenues in accordance with the terms of the agreement. For the years ended December 31, 2014 and 2013, $0.07 million and $1.9 million, respectively, in earn-out were paid.
The assumptions used in preparing the discounted cash flow analyses included estimates of interest rates and the timing and amount of incremental cash flows.
A reconciliation of the beginning and ending balance for the Level 3 measurement are as follows:
During the year ended December 31, 2014, we recorded $2.0 million of impairment charges on certain long-lived assets for which the carrying value of those assets may not be recoverable based upon our estimated cash flows. The fair value of the assets was estimated using a discounted cash flow approach with significant inputs that are not observable in the market and thus represents a Level 3 fair
value measurement. The significant inputs in the Level 3 measurement not supported by market activity included our assessments of assets utilization level and estimated proceeds from sale of the assets.
During the year ended December 31, 2014, we recorded $34.9 million of an intangible asset impairment charge. The fair value of the intangible asset was estimated using an income approach with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement. Intangible asset impairment charge recorded during 2014 is discussed in Note 6, Selected Financial Statement Information. The significant inputs in the Level 3 measurement not supported by market activity included our assessments of projected revenue growth, estimated royalty rate and discount rate used to derive the present value factors.
5.Book Overdrafts
The Company typically does not maintain cash balances at its principal bank under a policy whereby the net amount of collected balances and cleared checks is, at the Company’s option, applied to or drawn from our credit facility on a daily basis. Surgical Services will, at times, carry modest levels of cash. Changes in book overdrafts are considered financing activities.
6.Selected Financial Statement Information
Property and Equipment
Our property and equipment at December 31, 2014 and 2013 consists of the following:
During 2014, we recorded asset impairment charges of $2.0 million on excess infusion equipment sold in the second quarter of 2014 and under-utilized patient handling equipment. There were no impairment charges on property and equipment during 2013 or 2012.
Goodwill and Other Intangible Assets
Our goodwill as of December 31, 2014 and 2013, by reportable segment, consists of the following:
Our other intangible assets as of December 31, 2014 and 2013 consist of the following:
Total amortization expense related to intangible assets was approximately $12.8, $13.8 and $15.1 million for the years ended December 31, 2014, 2013 and 2012, respectively.
During the second quarter of 2014, the Company became aware of certain events that will have a negative impact on the future financial results of the Company. The Company applies a fair value based impairment test to the net book value of goodwill and intangible assets with indefinite lives on an annual basis and on an interim basis if events or circumstances indicate that an impairment loss may have occurred. The review of indefinite-life intangibles for impairment during the second quarter of 2014 indicated that the carrying value of trade names in the MES segment exceeded its estimated fair values. The Company performed an interim impairment test and recorded a non-cash impairment charge of $34.9 million in the second quarter of 2014. As a result of the trade names impairment, the Company’s equity went to a deficit causing the Company to undertake a step 2 goodwill impairment analysis. The preliminary step 2 analysis of the MES goodwill reflected no impairment. The finalization of the step 2 analysis and the result of the annual impairment review resulted in no changes to or additional impairment charges.
There were no impairment charges during 2013 or 2012 with respect to other intangible assets.
At December 31, 2014, future estimated amortization expense related to intangible assets for each of the years ended December 31, 2015 to 2019 is estimated as follows:
Future amortization expense is an estimate. Actual amounts may change due to additional intangible asset acquisitions, impairment, accelerated amortization or other events.
7.Dividend and Equity Distribution
On June 8, 2011, the Boards of Directors declared an equity distribution of $0.12 per option to holders of outstanding options on the Parent’s stock on June 10, 2011 that vested on December 31, 2011, 2012, 2013, and 2014 and are scheduled to vest on December 31, 2015.
Our consolidated balance sheet as of December 31, 2014 and 2013 reflects the decrease in equity for dividends paid to Parent shareholders and distributions to vested option holders on July 1, 2011, December 31, 2011, December 31, 2012, December 31, 2013 and December 31, 2014, as well as estimated amounts to be paid to holders of options expected to vest on December 31, 2015 based on an estimated option forfeiture rate of 2% annually. Our consolidated balance sheet also reflects the related current dividend payable and long-term dividend payable included in Payable to Parent.
During 2014 and 2013, $0.02 million of dividends was forfeited and were recorded as a reduction to Payable to Parent and an increase to additional paid-in capital.
8.Long-Term Debt
Long-term debt at December 31, 2014 and 2013 consists of the following:
Original Notes and Add-on Notes - 7.625%. On August 7, 2012, we issued $425.0 million in aggregate principal amount of 7.625% Second Lien Senior Secured Notes due 2020 (the “Original Notes”) under an indenture dated as of August 7, 2012 (the “2012 Indenture”). On February 12, 2013, we issued $220.0 million in aggregate principal amount of 7.625% Second Lien Senior Secured Notes due 2020 (the “Add-on Notes”, and along with the Original Notes, the “2012 Notes”) as “additional notes” pursuant to the 2012 Indenture. The 2012 Notes mature on August 15, 2020.
The 2012 Indenture provides that the 2012 Notes are our second lien senior secured obligations and are fully and unconditionally guaranteed on a second lien senior secured basis by our existing and certain of our future 100%-owned domestic subsidiaries.
Interest on the 2012 Notes is payable, entirely in cash, semiannually, in arrears, on February 15 and August 15 of each year. We may redeem some or all of the 2012 Notes at the redemption prices set forth in the 2012 Indenture. If we sell certain assets or undergo certain kinds of changes of control, we must offer to repurchase the 2012 Notes.
Our 2012 Notes are subject to certain debt covenants which are described below under the heading “2012 Indenture.”
Floating Rate Notes. On May 31, 2007, we issued $230.0 million aggregate principal amount of our Floating Rate Notes. Interest on the Floating Rate Notes was reset for each semi-annual interest period and was calculated at the current LIBOR rate plus 3.375%.
On March 14, 2013, we redeemed all of our outstanding Floating Rate Notes. The proceeds of the Add-on Notes were used to fund the redemption.
Senior Secured Credit Facility. 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 our then-existing senior secured credit facility originally dated as of May 31, 2007 and amended and restated as of May 6, 2010. We refer to the second 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 Second Amended Credit Agreement increased the aggregate amount we may obtain under revolving loans from $195.0 million to $235.0 million and extended the maturity date to July 31, 2017. Our obligations under the Second Amended Credit Agreement are secured by a first priority security interest in substantially all of our assets, excluding a pledge of our and Parent’s stock, any joint ventures and certain other exceptions. Our obligations under the Second Amended Credit Agreement are unconditionally guaranteed by Parent and our restricted subsidiaries.
As of December 31, 2014, we had $135.7 million of availability under the senior secured credit facility based on a borrowing base of $178.3 million less borrowings of $39.0 million and after giving effect to $3.6 million used for letters of credit.
The senior secured credit facility requires our compliance with various affirmative and negative covenants. Pursuant to the affirmative covenants, we and Parent agreed to, among other things, deliver financial and other information to the administrative agent, provide
notice of certain events (including events of default), pay our obligations, maintain our properties, maintain the security interest in the collateral for the benefit of the administrative agent and the lenders and maintain insurance.
Among other restrictions, and subject to certain definitions and exceptions, the senior secured credit facility restricts our ability to:
·
incur indebtedness;
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create or permit liens;
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declare or pay dividends and certain other restricted payments;
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consolidate, merge or recapitalize;
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acquire or sell assets;
·
make certain investments, loans or other advances;
·
enter into transactions with affiliates;
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change our line of business; and
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enter into hedging transactions.
The senior secured credit facility also contains a financial covenant that is triggered if our available borrowing capacity is less than $20.0 million for a certain period, which consists of a minimum ratio of trailing four-quarter Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) to cash interest expense, as such terms are defined in the senior secured credit facility.
The senior secured credit facility specifies certain events of default, including, among others, failure to pay principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, bankruptcy events, certain ERISA-related events, cross-defaults to other material agreements, change of control events and invalidity of guarantees or security documents. Some events of default will be triggered only after certain cure periods have expired, or will provide for materiality thresholds. If such a default occurs, the lenders under the senior secured credit facility would be entitled to take various actions, including all actions permitted to be taken by a secured creditor and the acceleration of amounts due under the senior secured credit facility.
Borrowings under the senior secured credit facility accrue interest (including a credit spread varying with facility usage):
·
at a per annum rate equal to 1.00% - 1.50% above the rate equal to the greater of (i) the “federal funds rate” plus one-half of one percent (0.50%) per annum, (ii) the “prime rate” announced from time to time by the administrative agent for such day and (iii) the “Eurodollar rate” for a one month interest period as determined on such day, plus one percent (1.0%) payable quarterly in arrears; and
·
at a per annum rate equal to 2.00% - 2.50% above the adjusted British Bankers Association Interest Settlement Rate for deposits in Dollars rate used by the administrative agent with a term equivalent to the selected interest rate period, for the respective interest rate period determined at our option, payable in arrears upon cessation of the interest rate period elected, provided that for an interest rate period longer than three months, payable in arrears on the respective dates that fall every three months from the beginning of such interest rate period.
At December 31, 2014, we had $39.0 million of borrowings outstanding which was accruing interest at a rate of 2.6608%.
We were in compliance with all financial debt covenants for all years presented.
2012 Indenture. Our 2012 Notes are guaranteed, jointly and severally, on a second priority senior secured basis, by Surgical Services, and are also similarly guaranteed by certain of our future 100%-owned domestic subsidiaries. The 2012 Notes are our second priority senior secured obligations and rank (i) equal in right of payment with all of our existing and future unsubordinated indebtedness and effectively senior to any such unsecured indebtedness to the extent of the value of collateral; (ii) senior in right of payment to all of our and our guarantors’ existing and future subordinated indebtedness; (iii) effectively junior to our senior secured credit facility and certain other obligations secured by a lien on assets, in each case, to the extent of the value of such collateral or assets; and (iv) structurally subordinated to any indebtedness and other liabilities (including trade payables) of any of our future subsidiaries that are not guarantors.
The 2012 Indenture contains covenants that limit our and our guarantors’ ability, subject to certain definitions and exceptions, and certain of our future subsidiaries’ ability to:
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incur additional indebtedness;
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pay cash dividends or distributions on our capital stock or repurchase our capital stock or subordinated debt;
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issue redeemable stock or preferred stock;
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issue stock of subsidiaries;
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make certain investments;
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transfer or sell assets;
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create liens on our assets to secure debt;
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enter into transactions with affiliates; and
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merge or consolidate with another company.
The 2012 Indenture specifies certain events of default, including among others, failure to pay principal, interest or premium, violation of covenants and agreements, cross-defaults to other material agreements, bankruptcy events, invalidity of guarantees, and a default in the performance by us of the security documents relating to the 2012 Indenture. Some events of default will be triggered only after certain grace or cure periods have expired, or provide for materiality thresholds. In the event certain bankruptcy-related defaults occur, the 2012 Notes will become due and payable immediately. If any other default occurs, the Trustee (and in some cases the noteholders) would be entitled to take various actions, including acceleration of amounts due under the 2012 Indenture.
We were in compliance with all financial debt covenants for all years presented.
PIK Toggle Notes. Our 8.50% / 9.25% PIK Toggle Notes due 2015 (the “PIK Toggle Notes”) consisted 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. Interest on the PIK Toggle Notes was payable semiannually in arrears on each June 1 and December 1.
On July 24, 2012, we conducted a tender offer to purchase all $405.0 million of our outstanding PIK Toggle Notes. On August 7, 2012 and August 21, 2012, we accepted for payment approximately $317.9 million, or 78.48%, and $25,000, or 0.01%, respectively, of our outstanding PIK Toggle Notes. On September 5, 2012, we redeemed our remaining outstanding PIK Toggle Notes of $87.1 million. In connection with the redemption of our PIK Toggle Notes, we incurred $12.3 million of debt extinguishment expense which consisted of a call premium of $9.8 million and a credit of $2.9 million from the bond premium write-off and the write-off of unamortized deferred financing costs of $5.4 million.
Interest Rate Swap. In June 2007, we entered into an interest rate swap agreement for $230.0 million, which had 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 was December 2007 and the agreement expired on June 1, 2012.
The interest rate swap agreement qualified for cash flow hedge accounting under ASC Topic 815, “Derivatives and Hedging”. Before its expiration on June 1, 2012, the fair value of the interest rate swap agreement was included as a cash flow hedge on our consolidated balance sheet in accordance with ASC Topic 815. 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.
As a result of our interest rate swap agreement, the effective interest rate on our $230.0 million floating rate notes was 9.065% through June 1, 2012.
Maturities of Long-Term Debt. At December 31, 2014, maturities of long-term debt for each of our fiscal years ending December 31, 2015 to 2019 and thereafter, are estimated as follows:
9.Commitments and Contingencies
Rental expenses were approximately $11.9, $11.4 and $10.6 million for the years ended December 31, 2014, 2013 and 2012, respectively. At December 31, 2014, the Company was committed under various non-cancellable operating leases for its district, corporate and other operating locations with annual rental commitments for each of the years ending December 31, 2015 to 2019 and thereafter of the following:
The Company, in the ordinary course of business, could be subject to liability claims related to employees and the equipment that it rents and services. Asserted claims are subject to many uncertainties and the outcome of individual matters is not predictable. While the ultimate resolution of these actions may have an impact on the Company’s financial results for a particular reporting period, management believes that any such resolution would not have a material adverse effect on the financial position, results of operations or cash flows of the Company and the chance of a negative outcome on outstanding litigation is considered remote.
In June 2014, Smith & Nephew announced that it had ceased commercial distribution of the RENASYS Negative Pressure Wound Therapy (“NPWT”) product line in the United States following a request from the FDA to obtain additional regulatory clearances through the premarket notification 510(k) process with respect to certain design modifications made to the RENASYS product line. Subsequently, the FDA authorized limited distribution by Smith & Nephew of these products under a Certificate of Medical Necessity (“CMN”) program. The Company is unable to predict when or whether Smith & Nephew will resume full commercial distribution of the RENASYS product line. The RENASYS product line generated approximately $24 million in annual revenue for the prior twelve month period from device rental ($14 million) and disposable sales ($10 million) which was included in our MES segment. As of December 31, 2014, the Company had a net asset exposure of approximately $1 million on the balance sheet, which includes approximately $4 million of equipment which it believes is recoverable, offset with $3 million payable. In late July, the Company signed an agreement with a NPWT manufacturer to provide an alternative solution to our customers. However, many of our customers have met their NPWT needs directly with other manufacturers or service providers. The Company’s future financial results will be negatively impacted by the interruption of commercial distribution of the RENASYS product line and we anticipate losing the majority of the disposable portion of our revenue based on the new agreement with an alternative NPWT manufacturer. The gross margin on the disposable portion of the business is significantly lower than the overall MES segment gross margin. The potential impact will be highly dependent upon the outcome of the factors mentioned above.
In July 2014, the Company was notified that a national group purchasing organization (“GPO”) awarded a sole source agreement to a competitor of the Company, for all peak need rental equipment, therapy surfaces (wound and pulmonary) and bariatric equipment. This GPO currently has agreements for the purchase or rental of this equipment with multiple vendors, including from the Company under agreements that expired on December 31, 2014. Under these agreements, the Company supplies equipment to its GPO member customers. The Company generated approximately $26 million of business (over the prior twelve month period) in the portions of the business covered under this new agreement which was included in our MES segment. In addition, the Company also maintains certain 360 solutions with customers that are members of this GPO. The Company is working with the national GPO and its members to develop an orderly transition and anticipates that this transition will occur over the next several months. The Company is assessing the financial impact to its business and the impact will be dependent upon several factors including the GPO members’ willingness to contract with the Company as a non-contracted vendor and the ability of the new service provider to service all of these GPO members.
On January 13, 2015, the Company filed suit in the Western District of Texas against Hill-Rom Holdings, Inc., Hill-Rom Company, Inc. and Hill-Rom Services, Inc. (the "Defendants") alleging that the Defendants violated federal and state antitrust laws by willfully and unlawfully engaging in a pattern of exclusionary and predatory conduct in order to foreclose market competition and seeking actual damages, trebled damages and punitive damages. At this early stage in the litigation, the Company does not believe the expense of litigation will have a material impact on the Company's operating expenses or financial results.
10.Shareholder’s Equity (Deficit)
Common Stock
The Company has authorized and issued 1,000 shares of common stock with a par value of $0.01 per share.
Accumulated Other Comprehensive Loss
Changes in Accumulated Other Comprehensive Income for the year ended December 31, 2014 are as follows:
Amount reclassified from accumulated other comprehensive income is included in the Selling, general and administrative expense in the Consolidated Statements of Operations.
11.Share-Based Compensation
The 2007 Stock Option Plan provides for the issuance of 43.9 million nonqualified stock options of Parent to any of its and Parent’s executives, other key employees and to consultants and certain non-employee directors. The options allow for the purchase of shares of common stock of Parent at prices equal to the stock’s fair market value at the date of grant.
Options granted had a ten-year contractual term and vest over approximately six years. For option grants to its employees, half of the options have fixed vesting schedules and the other half of the options vest upon the achievement of established performance targets, though options subject to performance targets were amended on August 11, 2010. The amendment, among other things, did away with the requirement that the EBITDA-based performance objectives be achieved in order for performance vesting options to vest, in effect providing for time-based vesting of these options rather than performance vesting. For option grants to its directors, all of the options vest on a fixed schedule. The shares issued to a grantee upon the exercise of such grantee’s options will be subject to certain restrictions on transferability as provided in the 2007 Stock Option Plan. Grantees are subject to non-competition, non-solicitation and confidentiality requirements as set forth in their respective stock option grant agreements. Forfeited options are available for future issue.
Effective November 4, 2014, the Compensation Committee of our Board of Directors recommended, and the board of directors of Parent (the “Parent Board”), approved, an amendment (the “Amendment”) to the 2007 Stock Option Plan to remove the 2007 Stock Option Plan’s mandatory ten year limit on the duration of stock options. In addition, the Compensation Committee recommended, and the Parent Board approved, unilateral amendments to the outstanding stock option agreements. These amendments extend the expiration date of such options to November 4, 2024 and reset the option exercise price at $0.71 per share, which was the fair market value of Parent’s common stock on the amendment date as determined by a third party valuation obtained by the Parent Board. The original options were granted from June 18, 2007 to May 21, 2013 with exercise prices ranging from $1.00 to $1.83. The Amendment to the 2007 Stock Option Plan and the amendments to the individual options do not change the number of options granted, the vesting commencement date, the vesting schedules or any continued service requirements. The amendment resulted in additional share-based compensation expense of approximately $1.9 million, of which $1.2 million was recognized in 2014.
A summary of the status of Parent’s 2007 Stock Option Plan as of and for the years ended December 31, 2014, 2013 and 2012 is detailed below:
The exercise price of the stock option award is equal to the market value of Parent’s common stock on the grant date as determined reasonably and in good faith by the Parent’s Board of Directors and compensation committee and based on an analysis of a variety of factors including peer group multiples, merger and acquisition multiples, and discounted cash flow analyses.
The intrinsic value of a stock award is the amount by which the market value of the underlying stock exceeds the exercise price of the award.
We determine the fair value of options using the Black-Scholes option pricing model. The estimated fair value of options, including the effect of estimated forfeitures, is recognized as expense on a straight-line basis over the options’ vesting periods. The assumptions in the table below was used to determine the Black-Scholes fair value of stock options granted during the years ended December 31, 2014, 2013, and 2012.
Expected volatility is based on an independent valuation of the stock of companies within our peer group. Given the lack of a true comparable company, the peer group consists of selected public health care companies representing our suppliers, customers and competitors within certain product lines. The risk free-interest rate is based on the U.S. Treasury yield curve in effect at the grant date based on the expected option life. The expected option life for 2014 is estimated based on foreseeable trends. The expected option life for 2013 and 2012 represented the result of the “simplified” method applied to “plain vanilla” options granted during the period, as provided within ASC Topic 718, “Compensation - Stock Compensation”. Parent used the simplified method as Parent does not have sufficient historical exercise experience to provide a basis upon which to estimate the expected term.
Although Parent grants the stock options, the Company recognizes compensation expense related to these options since the services are performed for its benefit. For the years ended December 31, 2014, 2013 and 2012, we recognized non-cash share-based compensation expense of $2.3, $1.5 and $4.0 million, respectively, which is primarily included in selling, general and administrative expenses.
At December 31, 2014, unearned non-cash share-based compensation related to our options, that we expect to recognize as expense over a weighted average period of 2.4 years, totals approximately $4.2 million, net of our estimated forfeiture rate of 2.0%. The expense could be accelerated upon the sale of Parent or the Company.
12.Related Party Transactions
Management Agreement
On May 31, 2007, we and IPC entered into a professional services agreement pursuant to which general advisory and management services are provided to us with respect to financial and operating matters. IPC is an owner of Parent, and the following members of our Board of Directors are associated with IPC: Michael Feiner, Robert Juneja and Bret Bowerman. In addition, David Crane, a director, is the CEO of an IPC portfolio company. The professional services agreement requires us to pay an annual fee for ongoing advisory and management services equal to the greater of $0.5 million or 0.75% of our Adjusted EBITDA (as defined in the professional services agreement) for the immediately preceding fiscal year, payable in quarterly installments. The professional services agreement provides that IPC will be reimbursed for its reasonable out-of-pocket expenses in connection with certain activities undertaken pursuant to the professional services agreement and will be indemnified for liabilities incurred in connection with its role under the professional services agreement, other than for liabilities resulting from its gross negligence or willful misconduct. The term of the professional services agreement commenced on May 31, 2007 and will remain in effect unless and until either party notifies the other of its desire to terminate, we are sold to a third-party purchaser or we consummate a qualified initial public offering, as defined in the professional services agreement. Total professional services agreement fees incurred to IPC were $1.0, $1.1 and $1.1 million for the years ended December 31, 2014, 2013 and 2012, respectively.
2007 Stock Option Plan
Parent established the 2007 Stock Option Plan. Compensation expense related to service provided by the Company’s employees is recognized in the accompanying consolidated statements of operations with an offsetting Payable to Parent liability, which is not expected to be settled within the next twelve months.
Business Relationship
In the ordinary course of business, we entered into an operating lease for our Minneapolis, Minnesota district service center with Ryan Fund V, LLC (“Ryan”), which began on May 1, 2007. One member of our board of directors is also a limited partner in Ryan which has ownership interest in an LLC that owns the property. During the years ended December 31, 2014, 2013 and 2012, we made rent payments to a Ryan affiliate totaling $0.4, $0.4 and $0.3 million, respectively.
In the ordinary course of business, we entered into engagement letters with CTPartners, LLC (“CTPartners”) to conduct searches for certain executive positions. One member of our board of directors, Michael Feiner, is also a director of CTPartners. Pursuant to these engagement letters, we made payments to CTPartners totalling approximately $0.5, $0.2 and $0.3 million for the years ended December 31, 2014, 2013 and 2012, respectively.
The Company believes that the aforementioned arrangements and relationships were provided in the ordinary course of business.
13.Limited Liability Companies
We participate with others in the formation of LLCs in which Surgical Services becomes a partner and shares the financial interest with the other investors. Surgical Services is the primary beneficiary of these LLCs. These LLCs acquire certain medical equipment for use in their respective business activities, which generally focus on surgical procedures. The LLCs will acquire medical equipment for rental purposes under equipment financing leases. At December 31, 2014, the LLCs had approximately $0.5 million of total assets. The third party investors in each respective LLC generally provide the lease financing company with individual proportionate lease guarantees based on their respective ownership percentages in the LLCs. In addition, Surgical Services will provide such financing companies with its corporate guarantee based on its respective ownership interest in each LLC. In certain instances, Surgical Services has provided such financing companies with an overall corporate guarantee in connection with equipment financing transactions. In such instances, the individual investors in each respective LLC will generally indemnify us against losses, if any, incurred in connection with its corporate guarantee. Additionally, we provide operational and administrative support to the LLCs in which it is a partner. As of December 31, 2014, we held interests in six active LLCs.
In accordance with guidance issued by the FASB, we accounted for equity investments in LLCs (in which we are the primary beneficiary) under the full consolidation method whereby transactions between Surgical Services and the LLCs have been eliminated through consolidation.
14.Employee Benefit Plans
ASC Topic 715, “Compensation - Retirement Benefits” requires employers to recognize the under- funded or over funded status of a defined benefit post retirement plan as an asset or liability in its statements of financial position and to recognize changes in the funded status in the year in which the changes occur through accumulated other comprehensive income. Additionally, ASC Topic 715 requires employers to measure the funded status of a plan as of the date of its year-end statement of financial position.
Pension plan benefits are to be paid to eligible employees after retirement based primarily on years of credited service and participants’ compensation. The Company uses a December 31 measurement date. Effective December 31, 2002, the Company froze the benefits under the pension plan.
The change in benefit obligation, pension plan assets and funded status as of and for the years ended December 31, 2014 and 2013 are as follows:
Change in Benefit Obligation
Change in Plan Assets
Funded Status
A summary of our pension plan projected benefit obligation, accumulated obligation and fair value of pension plan assets at December 31, are as follows:
Amounts recognized in the consolidated balance sheets at December 31, are as follows:
Net Periodic Benefit Cost
The components of net periodic benefit cost are as follows:
Change in Accumulated Other Comprehensive Loss
Pension Plan Assets
Our target pension plan asset allocation and actual pension plan allocation of assets at December 31, are as follows:
The pension plan assets are invested with the objective of maximizing long-term returns while minimizing material losses in order to meet future benefit obligations when they come due.
The Company utilizes an investment approach with a mix of equity and debt securities used to maximize the long-term return on assets. Risk tolerance is established through consideration of pension plan liabilities, funded status and corporate financial condition. The investment portfolio consists of a diversified blend of mutual funds and fixed-income investments. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews and annual asset and liability reviews.
Fair Value Measurement
The following table presents our plan assets, using the fair value hierarchy as disclosed in Note 4, Fair Value Measurements, as of December 31, 2014 and 2013.
Investments in Equity and Debt Securities are valued at the net asset value of units held at the end of the period based upon the value of the underlying investments as determined by quoted market prices. These investments are classified as Level 1.
Contributions
The Company contributed $1.3, $0.7 and $1.6 million to the pension plan during the years ended December 31, 2014, 2013 and 2012, respectively. The Company expects to make contributions of approximately $0.3 million in 2015.
Estimated Future Benefit Payments
The following benefit payments are expected to be paid:
Pension Plan Assumptions
The following weighted-average assumptions were used as of each of the years ended December 31, as follows:
These assumptions are reviewed on an annual basis. The discount rate reflects the current rate at which the pension obligation could be effectively settled at the end of the year. The Company sets its rate to reflect the yield of a portfolio of high quality, fixed-income debt instruments that would produce cash flow sufficient in timing and amount to settle projected future benefits. In determining the expected return on asset assumption, the Company evaluates the long-term returns earned by the pension plan, the mix of investments that comprise pension plan assets and forecasts of future long-term investment returns.
The Company reassessed the mortality assumptions to measure the pension benefit plan obligation at year end 2014, adopting the most applicable mortality tables based on the tables released in 2014 by The Society of Actuaries’ Retirement Plan Experience Committee. As a result of this assumption change, net actuarial loss increased by $2.3 million. In addition, net actuarial loss was also increased by $2.8 million as the impact of lowering the discount rate.
Other Employee Benefits
The Company also sponsors a defined contribution plan, which qualifies under Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”) and covers substantially all of the Company’s employees. Employees may contribute annually up to 60% of their base compensation on a pre-tax basis (subject to Internal Revenue Service limitation). The company matching contribution is 50% of the first 6% of base compensation that an employee contributes. We made matching contributions to the plan of approximately $2.1, $2.0 and $1.8 million for the years ended December 31, 2014, 2013 and 2012, respectively.
The Company is self-insured for employee health care up to $200,000 per member per plan year and aggregate claims up to 125% of expected claims per plan year. Also, the Company purchases workers’ compensation and automobile liability coverage with related deductibles. The Company is liable for up to $250,000 per individual workers’ compensation claim and up to $250,000 per accident for automobile liability claims. Self-insurance and deductible costs are included in other accrued expenses in the consolidated balance sheets and are accrued based upon the aggregate of the liability for reported claims and an actuarially determined estimated liability for claims development and incurred but not reported.
15.Income Taxes
The benefit for income taxes consists of the following:
Reconciliations between the Company’s effective income tax rate and the U.S. statutory rate are as follow:
The components of the Company’s overall deferred tax assets and liabilities at December 31 are as follows:
At December 31, 2014, the Company had available unused federal net operating loss carryforwards of approximately $220.8 million. The net operating loss carryforwards will expire at various dates from 2017 through 2035.
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 during 2010 to recognize this uncertainty. In future reporting periods, we will continue to assess the likelihood that deferred tax assets will be realizable.
Under the Code, certain corporate stock transactions into which the Company has entered or may enter in the future could limit the amount of net operating loss carryforwards which may be utilized on an annual basis to offset taxable income in future periods.
ASC Topic 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Our evaluation was performed for the tax years ended December 31, 2014, 2013 and 2012, which are the tax years that remain subject to examination by major tax jurisdictions as of December 31, 2014.
A reconciliation of the beginning and ending amount of unrecognized tax benefit for the years ended December 31, 2014, 2013 and 2012
Included in the unrecognized tax benefits as of December 31, 2014 are $2.1 million of tax benefits that, if recognized, would decrease the effective tax rate. The decrease in 2013 was related to the expiration of applicable statute of limitations which was offset by an increase to the valuation allowance.
16.Consolidating Financial Statements
In accordance with the provisions of the 2012 Indenture, as a 100%-owned subsidiary of UHS, Surgical Services has jointly and severally guaranteed all the Company’s Obligations (as defined in the 2012 Indenture) on a full and unconditional basis. Consolidating financial information of UHS and the guarantors is presented on the following pages.
Universal Hospital Services, Inc.
Consolidating Balance Sheets
(in thousands, except share and per share information)
Universal Hospital Services, Inc.
Consolidating Balance Sheets
(in thousands, except share and per share information)
Universal Hospital Services, Inc.
Consolidating Statements of Operations
(in thousands)
Universal Hospital Services, Inc.
Consolidating Statements of Operations
(in thousands)
Universal Hospital Services, Inc.
Consolidating Statements of Operations
(in thousands)
Universal Hospital Services, Inc.
Consolidating Statements of Comprehensive Loss
(in thousands)
Universal Hospital Services, Inc.
Consolidating Statements of Comprehensive Income (Loss)
(in thousands)
Universal Hospital Services, Inc.
Consolidating Statements of Comprehensive Income (Loss)
(in thousands)
Universal Hospital Services, Inc.
Consolidating Statements of Cash Flows
(in thousands)
Universal Hospital Services, Inc.
Consolidating Statements of Cash Flows
(in thousands)
Universal Hospital Services, Inc.
Consolidating Statements of Cash Flows
(in thousands)
			 		
17.Securityholders Agreement
IPC and certain members of our management that acquired securities of Parent in 2007, at that time, entered into a securityholders agreement that governs certain relationships among, and contain certain rights and obligations of, such shareholders. The securityholders agreement, among other things:
·
limits the ability of the shareholders to transfer their securities in Parent, except in certain permitted transfers as defined therein;
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provides for certain co-sale rights; and
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provides for certain rights of first refusal with respect to transfers by shareholders other than to certain permitted transferees.
18.Business Segments
The Company operates in three reportable segments:
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MES is the segment through which the Company provides medical equipment outsourcing services to its customers, including more than 7,000 acute care hospitals and alternate site providers in the United States, including some of the nation’s premier health care institutions. The Company also buys, sources, remarkets and disposes of pre-owned medical equipment for its customers through the Company’s Asset Recovery Program; provides sales and distribution of specialty medical equipment; and offers its customers disposable items that are used on a single use basis.
·
CES offers a broad range of inspection, preventative maintenance, repair, logistic and consulting services through the Company’s team of over 340 technicians and professionals located in its nationwide network of service centers.
·
SS is the segment through which the Company provides high end, state-of-the-art surgical equipment along with trained and certified surgical equipment technologists to assist in the operation of the equipment.
Effective December 31, 2013, we reorganized our internal organizational structure and management. This resulted in a change in our reportable segments. Historical segment results have been restated to apply these changes.
Gross margin represents net revenues less total direct costs.
The following table provides additional detail on the percentage of revenue for each group of similar products sold or services provided in the MES, CES and SS segments:
19.Recall Gains
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.
For the years ended December 31, 2014, 2013 and 2012, we recognized recalled equipment net gains of approximately $0, $0 and $18.6 million, respectively, of which approximately $0, $0 and $15.9 million were non-cash gains. Non-cash gains resulted 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 revenue in our consolidated statements of operations.
20.Restructuring
The Company has completed a management reorganization in order to streamline our management ranks and refocus our approach to delivering solutions to customers. This results in severances, relocations, retirements and changed responsibilities across our management ranks resulting in approximately $10.5 million of one-time charges which was recorded under the Restructuring, acquisition and integration expenses in the Consolidated Statements of Operations during 2014, 2013 and 2012.
We incurred restructuring expense of $3.1, $0.3 and $7.2 million during 2014, 2013 and 2012, respectively, the majority of which related to severances and other related expenses. In addition, we recorded $0, $0.4 and $0.6 million during 2014, 2013 and 2012, respectively, for cancellation of outstanding stock options for certain terminated employees which was recorded as reduction to Payable to Parent in the Consolidated Balance Sheets. The restructuring expense impact was recorded under the Corporate and Unallocated segment. As of December 31, 2013, we had $0.3 million of restructuring liability. For the year ended December 31, 2014, $1.8 million in restructuring charges was paid. An additional provision of $3.1 million was recorded in 2014 for new severance arrangements and the remaining liability of $1.6 million as of December 31, 2014 is expected to be paid out by the end of the third quarter of 2015 and is included in the Other accrued expenses in the Consolidated Balance Sheets. As of December 31, 2012, we had $4.8 million of restructuring liability. For the year ended December 31, 2013, we incurred restructuring expense of $0.3 million and $4.8 million in restructuring charges was paid and the remaining $0.3 million was a liability as of December 31, 2013.
21.Concentration
One customer accounted for approximately 14%, 14% and 13% of total revenue in 2014, 2013 and 2012, respectively, within our MES and CES segments.
22.Subsequent Event
On March 23, 2015, Thomas J. Leonard was appointed to serve as Chief Executive Officer of the Company and a member of its Board of Directors, effective April 13, 2015.
In connection with preparing the audited consolidated financial statements for the year ended December 31, 2014, we have evaluated subsequent events for potential recognition and disclosure through the date of this filing.