AGILITI, INC. \DE - Quarter Report: 2021 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2021 |
or
☐ | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to |
Commission File Number: 001-40361
(Exact name of registrant as specified in its charter)
Delaware | 83-1608463 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
6625 West 78th Street, Suite 300
Minneapolis, Minnesota 55439-2604
(Address of principal executive offices, including zip code)
(952) 893-3200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, par value $0.0001 | AGTI | The New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☐ |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Number of shares of common stock outstanding as of November 5, 2021: 130,652,745
Agiliti, Inc. and Subsidiaries
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements — Unaudited
Agiliti, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share and per share information)
(unaudited)
| September 30, |
| December 31, | |||
2021 | 2020 | |||||
Assets | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | 123,713 | $ | 206,505 | ||
Accounts receivable, less allowance for doubtful accounts of $2,500 at September 30, 2021 and $1,993 at December 31, 2020 | 200,779 | 154,625 | ||||
Inventories |
| 29,092 |
| 27,062 | ||
Other current assets |
| 14,847 |
| 14,175 | ||
Total current assets |
| 368,431 |
| 402,367 | ||
Property and equipment: | ||||||
Medical equipment |
| 301,189 |
| 285,723 | ||
Property and office equipment |
| 140,138 |
| 112,646 | ||
Accumulated depreciation |
| (251,530) |
| (183,953) | ||
Total property and equipment, net |
| 189,797 |
| 214,416 | ||
Other long-term assets: | ||||||
Goodwill |
| 1,122,530 |
| 817,113 | ||
Operating lease right-of-use assets | 56,692 | 51,214 | ||||
Other intangibles, net |
| 528,119 |
| 402,095 | ||
Other |
| 18,884 |
| 16,151 | ||
Total assets | $ | 2,284,453 | $ | 1,903,356 | ||
Liabilities and Equity | ||||||
Current liabilities: | ||||||
Current portion of long-term debt | $ | 15,849 | $ | 16,044 | ||
Current portion of operating lease liability | 15,607 | 14,155 | ||||
Current portion of obligation under tax receivable agreement | 15,691 | 15,572 | ||||
Accounts payable |
| 48,712 |
| 37,215 | ||
Accrued compensation |
| 37,658 |
| 38,671 | ||
Accrued interest |
| 2,784 |
| 6,347 | ||
Deferred revenue | 6,858 | 8,800 | ||||
Other accrued expenses |
| 24,111 |
| 22,727 | ||
Total current liabilities |
| 167,270 |
| 159,531 | ||
Long-term debt, less current portion |
| 1,028,626 |
| 1,145,055 | ||
Obligation under tax receivable agreement, pension and other long-term liabilities |
| 57,216 |
| 53,794 | ||
Operating lease liability, less current portion | 45,919 | 40,283 | ||||
Deferred income taxes, net |
| 109,469 |
| 62,748 | ||
Commitments and contingencies (Note 11) | ||||||
Equity | ||||||
Common stock, $0.0001 par value; 350,000,000 shares authorized; 130,389,758 and 98,983,296 shares and at September 30, 2021 and December 31, 2020 |
| 13 |
| 10 | ||
Additional paid-in capital |
| 932,867 |
| 513,902 | ||
Accumulated deficit |
| (54,469) |
| (68,492) | ||
Accumulated other comprehensive loss |
| (2,581) |
| (3,619) | ||
Total Agiliti, Inc. and Subsidiaries equity |
| 875,830 |
| 441,801 | ||
Noncontrolling interest |
| 123 |
| 144 | ||
Total equity |
| 875,953 |
| 441,945 | ||
Total liabilities and equity | $ | 2,284,453 | $ | 1,903,356 | ||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
1
Agiliti, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except share and per share information)
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||
September 30, | September 30, | |||||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
| |||||
Revenue | $ | 262,424 | $ | 194,721 | $ | 748,212 | $ | 559,121 | ||||||
Cost of revenue |
| 158,990 |
| 120,115 |
| 444,346 |
| 359,239 | ||||||
Gross margin |
| 103,434 |
| 74,606 |
| 303,866 |
| 199,882 | ||||||
Selling, general and administrative |
| 75,052 |
| 71,732 |
| 225,334 |
| 180,838 | ||||||
Operating income |
| 28,382 |
| 2,874 |
| 78,532 |
| 19,044 | ||||||
Loss on extinguishment of debt | — | — | 10,116 | — | ||||||||||
Interest expense |
| 10,711 |
| 13,560 |
| 40,444 |
| 46,532 | ||||||
Income (loss) before income taxes and noncontrolling interest |
| 17,671 |
| (10,686) |
| 27,972 |
| (27,488) | ||||||
Income tax expense (benefit) |
| 7,943 |
| (573) |
| 13,832 |
| (5,678) | ||||||
Consolidated net income (loss) |
| 9,728 |
| (10,113) |
| 14,140 |
| (21,810) | ||||||
Net income attributable to noncontrolling interest |
| 60 |
| 95 |
| 117 |
| 198 | ||||||
Net income (loss) attributable to Agiliti, Inc. and Subsidiaries | $ | 9,668 | $ | (10,208) | $ | 14,023 | $ | (22,008) | ||||||
Basic income (loss) per share | $ | 0.07 | $ | (0.10) | $ | 0.12 | $ | (0.22) | ||||||
Diluted income (loss) per share | $ | 0.07 | $ | (0.10) | $ | 0.11 | $ | (0.22) | ||||||
Weighted-average common shares outstanding: | ||||||||||||||
Basic | 130,380,551 | 98,983,296 | 117,578,750 | 98,973,853 | ||||||||||
Diluted | 138,490,526 | 98,983,296 | 125,515,000 | 98,973,853 | ||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
2
Agiliti, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| |||||
Consolidated net income (loss) | $ | 9,728 | $ | (10,113) | $ | 14,140 | $ | (21,810) | |||||
Other comprehensive income (loss): | |||||||||||||
Gain on minimum pension liability, net of tax of $19, $0, $56 and $0 | 54 | 13 | 163 | 37 | |||||||||
(Loss) gain on cash flow hedge, net of (benefit) tax of ($6), $0, $297 and $0 | (17) | (446) | 875 | (2,028) | |||||||||
Total other comprehensive income (loss) |
| 37 |
| (433) |
| 1,038 |
| (1,991) | |||||
Comprehensive income (loss) |
| 9,765 |
| (10,546) |
| 15,178 |
| (23,801) | |||||
Comprehensive income attributable to noncontrolling interest |
| 60 |
| 95 |
| 117 |
| 198 | |||||
Comprehensive income (loss) attributable to Agiliti, Inc. and Subsidiaries | $ | 9,705 | $ | (10,641) | $ | 15,061 | $ | (23,999) | |||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
3
Agiliti, Inc. and Subsidiaries
Condensed Consolidated Statements of Equity
(in thousands)
(unaudited)
|
|
|
|
|
|
| Accumulated |
|
|
|
| |||||||
Additional | Other | |||||||||||||||||
Common | Paid-in | Accumulated | Comprehensive | Noncontrolling | Total | |||||||||||||
(in thousands) | Stock | Capital | Deficit | Loss | Interests | Equity | ||||||||||||
Balance at June 30, 2021 | $ | 13 | $ | 928,623 | $ | (64,137) | $ | (2,618) | $ | 118 | $ | 861,999 | ||||||
Net income |
| — |
| — |
| 9,668 |
| — |
| 60 |
| 9,728 | ||||||
Other comprehensive income | — | — |
| — |
| 37 |
| — |
| 37 | ||||||||
Share-based compensation | — | 4,235 | — | — | — | 4,235 | ||||||||||||
Stock options exercised | — | 7 | — | — | — | 7 | ||||||||||||
Dividend forfeited | — | 2 | — | — | — | 2 | ||||||||||||
Cash distributions to noncontrolling interests | — | — | — | — | (55) | (55) | ||||||||||||
Balance at September 30, 2021 | $ | 13 | $ | 932,867 | $ | (54,469) | $ | (2,581) | $ | 123 | $ | 875,953 | ||||||
|
|
|
|
|
| Accumulated |
|
|
|
| ||||||||
Additional | Other | |||||||||||||||||
Common | Paid-in | Accumulated | Comprehensive | Noncontrolling | Total | |||||||||||||
(in thousands) | Stock | Capital | Deficit | Loss | Interests | Equity | ||||||||||||
Balance at June 30, 2020 | $ | 10 | $ | 508,176 | $ | (57,814) | $ | (2,498) | $ | 173 | $ | 448,047 | ||||||
Net (loss) income |
| — |
| — |
| (10,208) |
| — |
| 95 | (10,113) | |||||||
Other comprehensive loss | — | — | — | (433) | — | (433) | ||||||||||||
Share-based compensation | — | 3,206 | — | — | — | 3,206 | ||||||||||||
Dividend forfeited | — | 5 | — | — | — | 5 | ||||||||||||
Cash distributions to noncontrolling interests | — | — | — | — | (116) | (116) | ||||||||||||
Balance at September 30, 2020 | $ | 10 | $ | 511,387 | $ | (68,022) | $ | (2,931) | $ | 152 | $ | 440,596 | ||||||
|
|
|
|
|
|
| Accumulated |
|
|
|
| |||||||
Additional | Other | |||||||||||||||||
Common | Paid-in | Accumulated | Comprehensive | Noncontrolling | Total | |||||||||||||
(in thousands) | Stock | Capital | Deficit | Loss | Interests | Equity | ||||||||||||
Balance at December 31, 2020 | $ | 10 | $ | 513,902 | $ | (68,492) | $ | (3,619) | $ | 144 | $ | 441,945 | ||||||
Net income |
| — |
| — |
| 14,023 |
| — |
| 117 |
| 14,140 | ||||||
Other comprehensive income | — | — |
| — |
| 1,038 |
| — |
| 1,038 | ||||||||
Share-based compensation | — | 9,917 | — | — | — | 9,917 | ||||||||||||
Stock options exercised | — | 380 | — | — | — | 380 | ||||||||||||
Issuance of common stock | 3 | 412,738 | — | — | — | 412,741 | ||||||||||||
Stock issuance costs | — | (4,084) | — | — | — | (4,084) | ||||||||||||
Dividend forfeited | — | 14 | — | — | — | 14 | ||||||||||||
Cash distributions to noncontrolling interests |
| — |
| — |
| — |
| — |
| (138) |
| (138) | ||||||
Balance at September 30, 2021 | $ | 13 | $ | 932,867 | $ | (54,469) | $ | (2,581) | $ | 123 | $ | 875,953 | ||||||
|
|
|
|
|
|
| Accumulated |
|
|
|
| |||||||
Additional | Other | |||||||||||||||||
Common | Paid-in | Accumulated | Comprehensive | Noncontrolling | Total | |||||||||||||
(in thousands) | Stock | Capital | Deficit | Loss | Interests | Equity | ||||||||||||
Balance at December 31, 2019 | $ | 10 | $ | 503,637 | $ | (46,014) | $ | (940) | $ | 276 | $ | 456,969 | ||||||
Net (loss) income |
| — |
| — |
| (22,008) |
| — |
| 198 |
| (21,810) | ||||||
Other comprehensive loss | — | — |
| — |
| (1,991) |
| — |
| (1,991) | ||||||||
Share-based compensation | — | 7,657 | — | — | — | 7,657 | ||||||||||||
Shares forfeited for taxes | — | (145) | — | — | — | (145) | ||||||||||||
Dividend forfeited | — | 238 | — | — | — | 238 | ||||||||||||
Cash distributions to noncontrolling interests |
| — |
| — |
| — |
| — |
| (322) |
| (322) | ||||||
Balance at September 30, 2020 | $ | 10 | $ | 511,387 | $ | (68,022) | $ | (2,931) | $ | 152 | $ | 440,596 | ||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
4
Agiliti, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
| 2021 |
| 2020 |
| ||||
Cash flows from operating activities: | ||||||||
Consolidated net income (loss) | $ | 14,140 | $ | (21,810) | ||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation |
| 78,249 |
| 72,955 | ||||
Amortization |
| 63,482 |
| 54,536 | ||||
Remeasurement of tax receivable agreement and contingent consideration | 4,542 |
| 8,231 | |||||
Loss on extinguishment of debt | 7,716 | — | ||||||
Provision for doubtful accounts |
| 1,121 |
| 1,336 | ||||
Provision for inventory obsolescence |
| 2,539 |
| 458 | ||||
Non-cash share-based compensation expense |
| 10,127 |
| 7,657 | ||||
Gain on sales and disposals of equipment |
| (3,939) |
| (852) | ||||
Deferred income taxes |
| 12,040 |
| (5,967) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable |
| (30,305) |
| (37,618) | ||||
Inventories |
| 1,241 |
| (5,534) | ||||
Other operating assets |
| (5,392) |
| (6,431) | ||||
Accounts payable |
| 4,701 |
| (1,138) | ||||
Other operating liabilities |
| (21,849) |
| 33,903 | ||||
Net cash provided by operating activities |
| 138,413 |
| 99,726 | ||||
Cash flows from investing activities: | ||||||||
Medical equipment purchases |
| (23,912) |
| (22,806) | ||||
Property and office equipment purchases |
| (15,539) |
| (15,465) | ||||
Proceeds from disposition of property and equipment |
| 8,187 |
| 2,157 | ||||
Acquisitions, net of cash acquired | (450,198) | (89,706) | ||||||
Net cash used in investing activities |
| (481,462) |
| (125,820) | ||||
Cash flows from financing activities: | ||||||||
Proceeds under revolver | 35,000 | 249,500 | ||||||
Payments under revolver | (35,000) | (283,000) | ||||||
Proceeds under term loan | 198,052 | 124,844 | ||||||
Payments under term loan | (326,770) | (5,895) | ||||||
Payments of principal under finance lease liability |
| (6,721) |
| (6,312) | ||||
Payments of deferred financing costs | (229) | (199) | ||||||
Payments under tax receivable agreement | (748) | — | ||||||
Distributions to noncontrolling interests |
| (138) |
| (322) | ||||
Proceeds from exercise of stock options | 380 | — | ||||||
Dividend and equity distribution payment | (926) | (1,138) | ||||||
Proceeds from issuance of common stock | 401,441 | — | ||||||
Stock issuance costs | (4,084) | — | ||||||
Shares forfeited for taxes | — | (145) | ||||||
Change in book overdrafts |
| — |
| (1,771) | ||||
Net cash provided by financing activities |
| 260,257 |
| 75,562 | ||||
Net change in cash and cash equivalents |
| (82,792) |
| 49,468 | ||||
Cash and cash equivalents at the beginning of period |
| 206,505 |
| — | ||||
Cash and cash equivalents at the end of period | $ | 123,713 | $ | 49,468 | ||||
Supplemental cash flow information: | ||||||||
Interest paid | $ | 40,991 | $ | 41,279 | ||||
Income taxes paid |
| 2,647 |
| 1,007 | ||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
5
Agiliti, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.Basis of Presentation
Description of Business
Agiliti, Inc. (individually and together with its consolidated subsidiaries (Federal Street Acquisition Corp (“FSAC”), Agiliti Holdco, Inc. and Agiliti Health, Inc. and subsidiaries), “we”, “our”, “us”, the “Company” or “Agiliti”) is a nationwide provider of healthcare technology management and service solutions to the United States healthcare industry. Agiliti, Inc. owns 100% of FSAC. FSAC owns 100% of Agiliti Holdco, Inc. Agiliti Holdco, Inc. owns 100% of Agiliti Health, Inc. Agiliti Health, Inc. owns 100% of Agiliti Surgical, Inc., Agiliti Imaging, Inc. and Surgical Equipment Repair, Inc. (formerly known as Northfield Medical, Inc. effective March 19, 2021). Agiliti Health, Inc. and subsidiaries is the only company with operations. All other entities have no material assets, liabilities, cash flows or operations other than their investment and ownership of Agiliti Health, Inc. and subsidiaries.
Initial Public Offering
On April 27, 2021, the Company closed its initial public offering (“IPO”), in which it issued and sold 30,263,157 shares of its common stock. The price was $14.00 per share. The Company received net proceeds of approximately $397.4 million from the IPO after deducting underwriting discounts and commissions of $22.2 million and offering expenses. Immediately after our IPO, funds controlled by our principal stockholder, Thomas H. Lee Partners, L.P., own approximately 76.0% of our outstanding common stock. As a result, we are a “controlled company” within the meaning of the corporate governance standards of the New York Stock Exchange (“NYSE”).
Basis of Presentation
The interim condensed consolidated financial statements have been prepared by the Company without audit. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. As such, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2020, included in the Company’s final prospectus filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”), on April 26, 2021 (“the Prospectus”).
The interim condensed consolidated financial statements presented herein as of September 30, 2021, reflect, in the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations, comprehensive income (loss), equity and cash flows for the periods presented. These adjustments are all of a normal, recurring nature. The results of operations for any interim period are not necessarily indicative of results for the full year.
We are required to make estimates and assumptions about future events in preparing condensed consolidated financial statements in conformity with GAAP. These estimates and assumptions affect the amounts of assets, liabilities, revenue and expenses at the date of the unaudited condensed consolidated financial statements. While we believe that our past estimates and assumptions have been materially accurate, our current estimates are subject to change if different assumptions as to the outcome of future events are made. We evaluate our estimates and judgments on an ongoing basis and predicate those estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. We make adjustments to our assumptions and judgments when facts and circumstances dictate. Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates used in preparing the accompanying unaudited condensed consolidated financial statements.
A description of our significant accounting policies is included in the Prospectus. There have been no material changes to these policies for the quarter ended September 30, 2021.
6
2.Recent Accounting Pronouncements
Standards Adopted
In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and recognition of deferred tax liabilities. This standard also simplifies the accounting for franchise taxes and enacted change in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the basis of goodwill. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2020. Early adoption is permitted. We adopted this standard on January 1, 2021. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.
Standards Not Yet Adopted
In March 2020, the FASB issued ASU No. 2020-04 Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The ASU may be applied through December 31, 2022. We will continue to evaluate the phase out of LIBOR but do not expect the adoption will have a material impact on our consolidated financial statements.
3.Revenue Recognition
In the following table, revenue is disaggregated by service solution.
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
(in thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||
Equipment Solutions | $ | 77,707 | $ | 76,629 | $ | 232,319 | $ | 218,744 | |||||
Clinical Engineering | 111,614 | 62,739 | 287,860 | 195,779 | |||||||||
Onsite Managed Services | 73,103 | 55,353 | 228,033 | 144,598 | |||||||||
$ | 262,424 | $ | 194,721 | $ | 748,212 | $ | 559,121 | ||||||
The Company capitalizes contract costs incurred in obtaining new contracts. The contract asset included in other long-term assets in the Condensed Consolidated Balance Sheet at September 30, 2021 and December 31, 2020 was $15.0 and $13.4 million, respectively. Capitalized costs are amortized over the expected life of the related contracts, which is estimated to be five years. Amortization is computed on a straight-line basis, which coincides with the predominant expected life of the underlying contracts. Amortization costs are reflected in cost of revenue and selling, general and administrative expenses. The amount of amortization included in cost of revenue was $0.2 and $0.1 million for the three months ended September 30, 2021 and 2020, respectively and $0.5 and $0.3 million for the nine months ended September 30, 2021 and 2020, respectively. The amount of amortization included in selling, general and administrative expense was $0.8 and $0.5 million for the three months ended September 30, 2021 and 2020, respectively, and $2.3 and $1.3 million for the nine months ended September 30, 2021 and 2020, respectively. There was no impairment loss in relation to the costs capitalized during the three and nine months ended 2021 and 2020.
During the three and nine months ended September 30, 2021, $2.8 and $8.9 million of revenue was recognized that was included in deferred revenue at the beginning of the period.
4.Acquisitions
On March 19, 2021, we completed a stock purchase agreement to purchase all of the outstanding capital stock of Northfield Medical, Inc. (“Northfield”), a company specializing in the service and repair of medical equipment and instruments for a total consideration of approximately $475 million (“Northfield Acquisition”). The consideration consisted of $461.0 million of cash paid at closing, $11.3 million in issuance of 752,328 shares of common stock and $2.7 million net working capital adjustment. The results of Northfield’s operations have been included in the condensed consolidated financial statements since March 19, 2021.
7
The following summarizes the preliminary fair values of assets acquired and liabilities assumed at the date of the Northfield Acquisition within our condensed consolidated balance sheet:
(in thousands) |
|
| |
Cash | $ | 10,767 | |
Accounts receivable | 16,970 | ||
Inventories | 5,810 | ||
Other current assets | 502 | ||
Property and equipment | 11,713 | ||
Goodwill | 305,417 | ||
Operating lease right-of-use assets | 4,815 | ||
Other intangibles | 183,700 | ||
Accounts payable | (7,331) | ||
Accrued compensation | (7,948) | ||
Other accrued expenses | (9,620) | ||
Finance lease liability | (2,340) | ||
Operating lease liability | (5,025) | ||
Other long-term liabilities | (837) | ||
Deferred income taxes | (34,328) | ||
Total purchase price | $ | 472,265 |
The Other intangibles represent acquired finite-life customer relationships, which is amortized over 15 years using the sum of the years’ digits method. The total amount of goodwill that is deductible for tax purposes is $68.2 million.
Due to the recent closing of the transaction, the purchase price allocation was preliminary and will be finalized when final assessments of the fair value of acquired assets and assumed liabilities are completed. The area of the purchase price allocation that is not yet finalized includes income tax related matters. The Company will make appropriate adjustments to the purchase price allocation prior to completion of the measurement period, as required.
The Northfield Acquisition was funded with additional borrowings under our first lien term loan, revolving loan and cash.
The following unaudited pro forma condensed consolidated results of operations assume the Northfield Acquisition had occurred on January 1, 2020. The unaudited pro forma condensed consolidated financial information should not be relied upon as necessarily being indicative of the historical results that would have been obtained if the acquisition had actually closed on that date, nor the results that may be obtained in the future.
(Unaudited) | (Unaudited) | |||||||||||
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
(in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Revenue | $ | 262,424 | $ | 223,659 | $ | 773,159 | $ | 639,984 | ||||
Net income (loss) attributable to Agiliti, Inc. and Subsidiaries |
| 9,688 | (12,641) | 13,411 | (31,080) | |||||||
Included in the determination of pro forma net income (loss) for the three and nine months ended September 30, 2021 and 2020 are pro forma charges for various purchase accounting adjustments. These pro forma adjustments included depreciation and amortization of assets acquired and interest expense on additional debt to finance the acquisition. Income taxes are provided at the estimated statutory rate.
On December 11, 2020, we completed the acquisition of certain assets of a surgical laser equipment solutions provider for total consideration of approximately $8.9 million. The result of the acquired company’s operations have been included in the condensed consolidated financial statements since that date.
On January 31, 2020, we completed the acquisition of certain assets of a surgical equipment repair and maintenance service provider for total consideration of approximately $88.3 million. The result of the acquired company’s operations have been included in the condensed consolidated financial statements since that date.
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The following summarizes the fair values of assets acquired and liabilities assumed of the January 31, 2020 acquisition within our condensed consolidated balance sheet:
(in thousands) |
|
| |
Cash | $ | 51 | |
Accounts receivable | 10,447 | ||
Inventories | 4,591 | ||
Other current assets | 208 | ||
Property and equipment | 3,534 | ||
Goodwill | 35,554 | ||
Operating lease right-of-use assets | 2,422 | ||
Other intangibles | 34,714 | ||
Accounts payable | (1,333) | ||
Accrued compensation | (494) | ||
Other accrued expenses | (275) | ||
Operating lease liability | (1,142) | ||
Total purchase price | $ | 88,277 |
The acquired intangible assets, all of which are finite-life, are comprised of trade name and customer relationships and have a weighted average useful life of approximately 14.5 years. The total amount of goodwill that is deductible for tax purposes is $35.4 million.
This acquisition was funded from the revolving loan.
5.Fair Value Measurements
Financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020 are summarized in the following table by type of inputs applicable to the fair value measurements:
Fair Value at September 30, 2021 | Fair Value at December 31, 2020 | |||||||||||||||||||||||
(in thousands) |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||||||
Assets: | ||||||||||||||||||||||||
Deferred compensation assets | $ | 2,223 | $ | — | $ | — | $ | 2,223 | $ | 1,104 | $ | — | $ | — | $ | 1,104 | ||||||||
Interest rate swap | — | 262 | — | 262 | — | — | — | — | ||||||||||||||||
Liabilities: | ||||||||||||||||||||||||
Contingent consideration | $ | — | $ | — | $ | 500 | $ | 500 | $ | — | $ | — | $ | 321 | $ | 321 | ||||||||
Obligation under tax receivable agreement | — | — | 54,628 | 54,628 | — | — | 50,600 | 50,600 | ||||||||||||||||
Interest rate swap | — | 972 | — | 972 | — | 1,883 | — | 1,883 | ||||||||||||||||
Deferred compensation liabilities | 2,223 | — | — | 2,223 | 1,104 | — | — | 1,104 | ||||||||||||||||
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
9
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.
The deferred compensation assets are held in mutual funds. The fair value of the deferred compensation assets and liabilities is based on the quoted market prices for the mutual funds and thus represents a Level 1 fair value measurement.
On January 4, 2019, we entered into a tax receivable agreement (“TRA”) with our former owners. The fair value of the obligation under the TRA was estimated using company specific assumptions that are not observable in the market and thus represents a Level 3 fair value measurement. Management’s estimate of the valuation of the obligation under the TRA is based on a Monte Carlo model which involves the use of projected cash flows of the Company, a discount rate, and historical deferred tax assets subject to the agreement. We made a remeasurement adjustment to increase the liability by $0.2 and $9.6 million during the three months ended September 30, 2021 and 2020, respectively. We made a remeasurement adjustment to increase the liability by $4.5 and $9.6 million during the nine months ended September 30, 2021 and 2020, respectively. We made no payments under the TRA during the three months ended September 30, 2021 and 2020. We made $0.7 million in payments under the TRA during the nine months ended September 30, 2021 and no payment for the nine months ended September 30, 2020.
In May 2020, we entered into an interest rate swap agreement to manage our interest rate exposure, see Note 8, Long-Term Debt. The carrying value of interest rate swap contracts is at fair value, which is determined based on current interest rate and forward interest rates as of the balance sheet date and is classified within Level 2.
Fair Value of Other Financial Instruments
The Company considers that the carrying amount of financial instruments, including accounts receivable, accounts payable and accrued liabilities approximates fair value due to their short maturities. The fair value of our outstanding First Lien Term Loan and Second Lien Term Loan (each as defined in Note 8, Long-Term Debt) as of September 30, 2021 and December 31, 2020, based on the quoted market price for the same or similar issues of debt, which represents a Level 2 fair value measurement, is approximately:
September 30, 2021 | December 31, 2020 | |||||||||||
| Carrying |
| Fair |
| Carrying |
| Fair | |||||
(in thousands) | Value | Value | Value | Value | ||||||||
First Lien Term Loan (1) | $ | 1,020,222 | $ | 1,044,390 | $ | 906,624 | $ | 911,788 | ||||
Second Lien Term Loan (2) | — | — | 232,361 | 240,000 | ||||||||
| (1) | The carrying value of the First Lien Term Loan is net of unamortized deferred financing costs of $11.0 and $12.8 million and unamortized debt discount of $4.2 and $2.8 million as of September 30, 2021 and December 31, 2020, respectively. |
| (2) | The carrying value of the Second Lien Term Loan was net of unamortized deferred financing costs of $0.8 million and unamortized debt discount of $6.8 million as of December 31, 2020. The Second Lien Term Loan was paid off on April 27, 2021. |
6.Selected Financial Statement Information
Goodwill and Other Intangible Assets
Our goodwill as of September 30, 2021 and December 31, 2020 consists of the following:
(in thousands) | |||
Balance at December 31, 2020 | $ | 817,113 | |
Acquisition | 305,417 | ||
Balance at September 30, 2021 | $ | 1,122,530 |
There were no impairment losses recorded on goodwill through September 30, 2021.
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Our other intangible assets as of September 30, 2021 and December 31, 2020 consist of the following:
September 30, 2021 | December 31, 2020 | |||||||||||||||||||||||
|
|
| Accumulated |
|
|
|
|
|
| Accumulated |
|
|
| |||||||||||
(in thousands) | Cost | Amortization | Impairment | Net | Cost | Amortization | Impairment | Net | ||||||||||||||||
Finite-life intangibles | ||||||||||||||||||||||||
Customer relationship | $ | 696,889 | $ | (172,660) | $ | — | $ | 524,229 | $ | 513,189 | $ | (118,172) | $ | — | $ | 395,017 | ||||||||
Non-compete agreements | 14,613 | (12,468) | — | 2,145 | 14,613 | (9,647) | — | 4,966 | ||||||||||||||||
Trade names | 3,779 | (2,034) | — | 1,745 | 3,779 | (1,667) | — | 2,112 | ||||||||||||||||
Total intangible assets | $ | 715,281 | $ | (187,162) | $ | — | $ | 528,119 | $ | 531,581 | $ | (129,486) | $ | — | $ | 402,095 | ||||||||
Total amortization expense related to intangible assets was $20.6 and $16.9 million for the three months ended September 30, 2021 and 2020, respectively, and $57.7 and $49.9 million for the nine months ended September 30, 2021 and 2020, respectively.
There were no impairment charges during three and nine months ended 2021 and 2020 with respect to other intangible assets.
The estimated future amortization expense for identifiable intangible assets during the remainder of 2021 and the next five years is as follows:
(in thousands) |
|
| |
Remainder of 2021 | $ | 20,592 | |
2022 | 75,225 | ||
2023 |
| 68,090 | |
2024 |
| 62,229 | |
2025 |
| 56,367 | |
2026 |
| 50,495 |
Supplementary Cash Flow Information
Supplementary cash flow information is as follows (in thousands):
September 30, | ||||||
| 2021 |
| 2020 | |||
Non-cash activities: | ||||||
Property and equipment purchases included in accounts payable (at end of period) | $ | 1,927 | $ | 3,132 | ||
Finance lease assets and liability additions |
| 6,795 |
| 7,015 | ||
Operating lease right-of-use assets and operating lease liability additions | 9,731 | 16,337 | ||||
Issuance of common stock related to acquisition | 11,300 | — | ||||
7.Share-Based Compensation
The 2018 Omnibus Incentive Plan (“2018 Plan”) provides for the issuance of 16.7 million nonqualified stock options, restricted stock units and performance restricted stock units to any of the Company’s executives, other key employees and certain non-employee directors. The stock options allow for the purchase of shares of common stock of the Company 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 to four years. The restricted stock units vest over to four years. The performance restricted stock units vest over three years upon achievement of established performance targets as defined in the respective award agreements.
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 2018 Plan. Grantees are subject to non-competition, non-solicitation and confidentiality requirements as set forth in their respective stock option grant agreements. Forfeited options, restricted stock units and performance restricted stock units are available for future issue.
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We determine the fair value of stock options using the Black-Scholes option pricing model. The estimated fair value of options, including the effect of estimated forfeitures, is recognized as an expense on a straight-line basis over the options’ expected vesting periods.
In connection with our IPO, we granted certain of our employees, including our named executive officers, restricted stock units, performance restricted stock units, and stock options under the 2018 Plan with respect to approximately 1.6 million shares of the Company’s common stock.
In connection with the IPO, we adopted an Employee Stock Purchase Plan (“ESPP”). A total of two million shares of our common stock are reserved for issuance under the ESPP. Employees are permitted to purchase the Company’s common stock at 85% of market value at the end of the six-month offering period ending on April 30 and October 31 each year. The Company recognizes share-based compensation expense for the discount received by participating employees. No shares were issued under the ESPP as of September 30, 2021.
Remaining authorized options, restricted stock units and performance restricted stock units available for future issuance were 8.4 million shares at September 30, 2021.
8.Long-Term Debt
Long-term debt consists of the following:
| September 30, |
| December 31, | |||
(in thousands) | 2021 | 2020 | ||||
First Lien Term Loan | $ | 1,035,421 | $ | 922,191 | ||
Second Lien Term Loan | — | 240,000 | ||||
Finance lease liability |
| 26,147 |
| 24,595 | ||
| 1,061,568 |
| 1,186,786 | |||
Less: unamortized deferred financing costs and debt discount | (17,093) | (25,687) | ||||
1,044,475 | 1,161,099 | |||||
Less: Current portion of long-term debt |
| (15,849) |
| (16,044) | ||
Total long-term debt | $ | 1,028,626 | $ | 1,145,055 | ||
First Lien Credit Facilities. On January 4, 2019, in connection with and substantially concurrent with the closing of the business combination, Agiliti Health, Inc. entered into a credit agreement (the “First Lien Credit Facilities”) with JPMorgan Chase Bank, N.A. as administrative agent, collateral agent, and letter of credit issuer, Agiliti Holdco, Inc., certain subsidiaries of Agiliti Health, Inc. acting as guarantors (the “Guarantors”), and the lenders from time to time party thereto.
The First Lien Credit Facilities originally provided for a seven-year senior secured delayed draw term loan facility in an aggregate principal amount of $660 million (the “First Lien Term Loan”) and a five-year senior secured revolving credit facility in an aggregate principal amount of $150 million (the “Revolving Loan”). In February 2020, we increased our principal First Lien Term Loan facility by $125 million and the revolving loan facility by $40 million. In October 2020 and March 2021, we further increased our principal First Lien Term Loan facility by $150 million and $200 million, respectively. All terms to the First Lien Term Loan remained the same, except these additional loans are subject to an interest rate floor of 0.75%.
The First Lien Term Loan amortizes in equal quarterly installments, commencing on June 30, 2019, in an aggregate annual amount equal to 1.00% of the original principal amount of such term loan, with the balance due and payable at maturity unless prepaid prior thereto.
Borrowings under the First Lien Credit Facilities bear interest, at Agiliti Health, Inc.’s option, at a rate per annum equal to an applicable margin (the “Applicable Margin”) over either (a) a base rate determined by reference to the highest of (1) the prime lending rate published in the Wall Street Journal, (2) the federal funds effective rate plus of 1% and (3) the LIBOR rate for a one-month interest period, plus 1.00%, or (b) a LIBOR rate determined by reference to the LIBOR rate as set forth by the ICE Benchmark Administration for the interest period relevant to such borrowing, in each case, subject to interest rate floors.
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The First Lien Credit Facilities contain a number of negative covenants that, among other things, restrict, subject to certain exceptions, the ability of Agiliti Health, Inc. and the guarantors thereunder to incur additional indebtedness and guarantee indebtedness; create or incur liens; engage in mergers or consolidations; sell, transfer or otherwise dispose of assets; pay dividends and distributions or repurchase capital stock; prepay, redeem or repurchase certain indebtedness; make investments, loans and advances; enter into agreements which limit the ability of Agiliti Health, Inc. and the guarantors thereunder to incur liens on assets; and enter into amendments to certain junior lien and subordinated indebtedness in a manner materially adverse to the lenders.
Solely with respect to the Revolving Loan, commencing with the fiscal quarter ending June 30, 2019, the Company is required to maintain a leverage ratio not to exceed 7:1 when the aggregate principal amount of outstanding Revolving Loans and drawn Letters of Credit, on the last day of the most recent fiscal quarter, exceeds 35% of the total revolving credit commitments.
On April 27, 2021, the Company entered into Amendment No. 4 (the “Amendment”) to the First Lien Credit Agreement. Pursuant to the Amendment, (i) the existing Revolving Loan was terminated and a new revolving credit facility was incurred under the First Lien Credit Agreement in an aggregate principle amount of $250.0 million (the “New Revolving Credit Facility”); (ii) the interest rate margin for borrowings under the New Revolving Credit Facility was set at LIBOR plus 2.75%, with stepdowns to (A) LIBOR plus 2.50% if the first lien leverage ratio (as calculated thereunder) is less than or equal to 3.75:1.00 and (B) LIBOR plus 2.25% if the first lien leverage ratio is less than or equal to 3.25:1.00; (iii) the commitment fee on the average daily undrawn portion of the New Revolving Credit Facility was reduced to 0.3750% per annum if the first lien leverage ratio is greater than 3.25:1.00 and 0.250% if the first lien leverage ratio is less than or equal to 3.25:1.00 and (iv) borrowings under the New Revolving Credit Facility mature the earlier of (x) six months prior to the then-existing final maturity date of the related term loans and (y) January 4, 2026.
In connection with the Amendment above, the Company incurred loss on extinguishment of debt of $0.3 million related to the write-off of unamortized deferred financing cost on the revolving credit facility.
Except as described above, the Amendment has substantially the same terms as the First Lien Credit Agreement, and amendments thereto, including customary covenants and events of default.
On October 1, 2021, in connection with the closing of Sizewise Rentals, LLC (“Sizewise”), we entered into Amendment No. 5 to the First Lien Credit Agreement. This amendment provides for a $150.0 million incremental term loan facility, the proceeds of which were used, together with cash on hand, to finance the Sizewise acquisition. This incremental term loan facility has terms identical to those applicable to the Initial Term Loans and the February 2020 Amendment (each as defined in the First Lien Credit Agreement), including as to pricing and interest, tenor, rights of payment and prepayment and right of security.
Second Lien Term Loan. The Second Lien Term Loan provided for an eight-year term loan facility in an aggregate principal amount of $240 million (the “Second Lien Term Loan”). The proceeds of the Second Lien Term Loan were drawn on November 15, 2019 and used to return capital to shareholders.
Borrowings under the Second Lien Term Loan bore interest, at Agiliti Health, Inc.’s option, at a rate per annum equal to an applicable margin over either (a) a base rate determined by reference to the highest of (1) the prime lending rate published in the Wall Street Journal, (2) the federal funds effective rate plus of 1% and (3) the LIBOR rate for a one-month interest period, plus 1.00%, or (b) a LIBOR rate determined by reference to the LIBOR rate as set forth by the ICE Benchmark Administration for the interest period relevant to such borrowing, in each case, subject to interest rate floors. The interest rate on the Second Lien Term Loan was LIBOR rate plus 7.75% at the end of the first quarter.
We used the proceeds from the IPO to repay $240.0 million in aggregate principal amount of our Second Lien Term Loan, $80.0 million of our First Lien Term Loan and $10.0 million of our Revolving Loan facility.
In connection with the repayment of our Second Lien Term Loan in April 2021, we incurred loss on extinguishment of debt of $9.8 million which consisted of the write-off of unamortized deferred financing costs and debt discount of $7.4 million and an additional 1% redemption price or $2.4 million.
Interest Rate Swap. In May 2020, we entered into an interest rate swap agreement for a total notional amount of $500.0 million, which has the effect of converting a portion of our First Lien Term Loan to fixed interest rates. The effective date for the interest rate swap agreement was June 2020 and the expiration date is June 2023.
13
The interest rate swap agreement qualifies for cash flow hedge accounting under ASC Topic 815, “Derivatives and Hedging.” Both at inception and on an on-going basis, we must perform an effectiveness test. The fair value of the interest rate swap agreement at September 30, 2021 was $0.7 million, of which $1.0 million is included in other accrued expenses and $0.3 million is included in other long-term assets on our condensed consolidated balance sheet. The change in fair value was recorded as a component of accumulated other comprehensive loss on our condensed consolidated balance sheet, net of tax, since the instrument was determined to be an effective hedge at September 30, 2021. We have not recorded any amounts due to ineffectiveness for any periods presented.
As a result of our interest rate swap agreement, we expect the effective interest rate on $350.0 million and $150.0 million of our First Lien Term Loan to be 0.3396% and 0.3290%, respectively, plus the Applicable Margin through June 2023.
We were in compliance with all financial debt covenants for all periods presented.
9.Leases
We lease facilities under operating lease agreements, which include both monthly and longer-term arrangements. Our finance leases consist primarily of leased vehicles.
The lease assets and liabilities are as follows:
September 30, | December 31, | |||||||
(in thousands) | Classification | 2021 | 2020 | |||||
Lease Assets | ||||||||
Operating lease assets | Operating lease right-of-use assets | $ | 56,692 | $ | 51,214 | |||
Finance lease assets | Property and equipment(a) | 26,132 | 23,513 | |||||
Total leased assets | $ | 82,824 | $ | 74,727 | ||||
Lease Liabilities | ||||||||
Current | ||||||||
Operating | Current portion of operating lease liability | $ | 15,607 | $ | 14,155 | |||
Finance | Current portion of long-term debt | 7,990 | 6,694 | |||||
Noncurrent | ||||||||
Operating | Operating lease liability, less current portion | 45,919 | 40,283 | |||||
Finance | Long-term debt, less current portion | 18,157 | 17,901 | |||||
Total lease liabilities | $ | 87,673 | $ | 79,033 | ||||
| (a) | Finance lease assets are recorded net of accumulated depreciation of $18.6 and $13.1 million as of September 30, 2021 and December 31, 2020, respectively. |
The lease cost for the three and nine months ended September 30, 2021 and 2020 was as follows:
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
(in thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||
Lease Cost | |||||||||||||
Finance lease cost | |||||||||||||
Amortization of right-of-use assets | $ | 2,115 | $ | 2,145 | $ | 6,493 | $ | 6,267 | |||||
Interest on lease liabilities | 179 | 175 | 557 | 539 | |||||||||
Operating lease cost | 5,074 | 3,182 | 14,150 | 8,885 | |||||||||
Short-term lease cost | 239 | 184 | 575 | 307 | |||||||||
Variable lease cost | 1,472 | 1,054 | 4,247 | 2,977 | |||||||||
Total lease cost | $ | 9,079 | $ | 6,740 | $ | 26,022 | $ | 18,975 | |||||
14
The maturity of lease liabilities at September 30, 2021 was as follows:
Operating | Finance | ||||||||
(in thousands) | Leases | Leases | Total | ||||||
Remaining of 2021 | $ | 4,498 | $ | 2,192 | $ | 6,690 | |||
2022 | 16,290 | 8,000 | 24,290 | ||||||
2023 | 14,229 | 5,568 | 19,797 | ||||||
2024 | 12,272 | 3,910 | 16,182 | ||||||
2025 | 9,379 | 2,724 | 12,103 | ||||||
Thereafter | 7,886 | 5,989 | 13,875 | ||||||
Total lease payments | $ | 64,554 | $ | 28,383 | $ | 92,937 | |||
Less: Interest | 3,028 | 2,236 | 5,264 | ||||||
Present value of lease liabilities | $ | 61,526 | $ | 26,147 | $ | 87,673 |
The lease term and discount rate at September 30, 2021 were as follows:
September 30, | |||
Lease Term and Discount Rate | 2021 | ||
Weighted-average remaining lease term (years) | |||
Operating leases | 4.4 | ||
Finance leases | 2.8 | ||
Weighted-average discount rate | |||
Operating leases | 2.4 | ||
Finance leases | 2.4 |
Other information related to cash paid related to lease liabilities and lease assets obtained for the nine months ended September 30, 2021 and 2020 was as follows:
Nine Months Ended | ||||||
September 30, | ||||||
(in thousands) | 2021 | 2020 | ||||
Cash paid for amounts included in the measurement of lease liabilities | ||||||
Operating cash flows for finance leases | $ | 557 | $ | 539 | ||
Operating cash flows for operating leases | 13,362 | 8,757 | ||||
Financing cash flows for finance leases | 6,721 | 6,312 | ||||
Lease asset obtained in exchange for new finance lease liabilities | 6,795 | 7,015 | ||||
Lease asset obtained in exchange for new operating lease liabilities | 9,731 | 16,337 | ||||
10.Dividend
In November 2019, the Company declared a $2.23 dividend per share that was paid to holders of common stock and is paid upon vesting to holders of restricted stock units and performance restricted stock units. Dividends paid during the three months ended September 30, 2021 and 2020 were $0.005 and $0.005 million, respectively. Dividends paid during the nine months ended September 30, 2021 and 2020 were $0.9 and $1.1 million, respectively.
Dividend payable was $1.2 and $2.2 million as of September 30, 2021 and December 31, 2020, respectively, of which $0.9 and $0.9 million was included in accounts payable and $0.3 and $1.3 million was included in other long-term liabilities.
11.Commitments and Contingencies
The Company, in the ordinary course of business, is subject to liability claims related to employees and the equipment that it rents and services. Asserted claims are subject to many uncertainties and the outcome of individual matters is not predictable. For certain claims where the loss is probable, a provision is recorded based on the Company’s best estimate. 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
15
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 July 29, 2019, the Company entered into a memorandum of understanding to settle all claims in an employee related class action litigation brought in California. The Company received a release in exchange for a payment of $3.5 million. Payment of the settlement amount was made in February 2020.
12.Related Party Transaction
On January 4, 2019, the Company entered into an advisory services agreement (the “Advisory Services Agreement”) with Agiliti Holdco, Inc., Agiliti Health, Inc. and THL Managers VIII, LLC (the “Advisor”). Pursuant to the Advisory Services Agreement, the Advisor provided management, consulting and other advisory services to the Company. In consideration for these services, the Company paid to the Advisor (i) a non-refundable periodic retainer fee in an aggregate amount per fiscal quarter equal to the greater of (a) $375,000 or (b) 1% of the consolidated Adjusted EBITDA (as defined in the Advisory Services Agreement) for the immediately preceding fiscal quarter or such other amount as may be mutually agreed, with the first such payment to be made on April 15, 2019, (ii) fees in amounts to be mutually agreed upon in connection with any financing or refinancing, dividend, recapitalization, acquisition, disposition and spin-off or split-off transaction, (iii) in the case of an initial public offering (“IPO”), in addition to the fees under clauses (i) and (ii), an amount equal to the net present value of the higher periodic fee that would have been payable from the date of such IPO until the scheduled termination date of the Advisory Services Agreement, and (iv) fees for other management, consulting and other advisory services to be discussed in good faith among the parties. The companies also paid expenses incurred by the Advisor, its consultants and certain other parties affiliated with Advisor. Total professional services fees incurred to the Advisor were $0 and $0.5 million for the three months ended September 30, 2021 and 2020, respectively, and $0.6 and $1.6 million for the nine months ended September 30, 2021 and 2020, respectively.
The Advisory Services Agreement was terminated upon the completion of the IPO. In connection with the termination of the Advisory Services Agreement, we were required to pay to the Advisor a buyout fee of approximately $7.0 million, which was expensed in the second quarter.
13.Limited Liability Companies
We participate with others in the formation of LLCs in which the Company becomes a partner and shares the financial interest with the other investors. The Company 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 September 30, 2021, the LLCs had approximately $0.4 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, the Company will provide such financing companies with its corporate guarantee based on its respective ownership interest in each LLC. In certain instances, the Company 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 the Company’s corporate guarantee. Additionally, we provide operational and administrative support to the LLCs in which it is a partner. As of September 30, 2021, we held interests in two active LLCs.
In accordance with guidance issued by the FASB, we account for equity investments in LLCs (in which we are the primary beneficiary) under the full consolidation method whereby transactions between the Company and the LLCs have been eliminated through consolidation.
14.Employee Benefit Plans
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.
16
The components of net periodic benefit cost are as follows:
Three Months Ended | Nine Months Ended | |||||||||||
|
| September 30, | September 30, | |||||||||
(in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||
Interest cost | $ | 196 | $ | 239 | $ | 589 | $ | 716 | ||||
Expected return on plan assets | (276) | (277) | (830) | (832) | ||||||||
Recognized net actuarial loss | 73 | 12 | 219 | 37 | ||||||||
Net periodic benefit cost | $ | (7) | $ | (26) | $ | (22) | $ | (79) | ||||
The Company made $0.3 and $0.5 million contributions to the pension plan during the three and nine months ended September 30, 2021. The Company expects to make additional contributions of approximately $0.2 million for the remaining of 2021.
15.Income Taxes
For the three and nine months ended September 30, 2021, the Company recorded income tax expense of $7.9 million and $13.8 million, respectively. For the three and nine months ended September 30, 2020, the Company recorded income tax benefit of $0.6 million and $5.7 million, respectively. The income tax expense for the three and nine months ended September 30, 2021 is primarily due to the tax-effect of pre-tax income from operations plus addbacks for non-deductible transaction costs, non-deductible expenses related to executive compensation disallowed under Internal Revenue Code Section 162(m) and the remeasurement of the tax receivable agreement. The income tax benefit for the three and nine months ended September 30, 2020 was due to the tax-effect of pre-tax loss from operations for the period, amended state income tax filings and the remeasurement of the tax receivable agreement.
16.Concentration
For the nine months ended September 30, 2021, approximately 19% of total revenue related to various contracts with the U.S. Department of Health and Human Services (“HHS”) and the Assistant Secretary of Preparedness and Response (“ASPR”).
On July 21, 2020, we entered into a one-year agreement with HHS and ASPR for the comprehensive maintenance and management services of medical ventilator equipment in exchange for up to $193 million in consideration throughout the duration of the agreement (“HHS Agreement”). Subsequent to its initial term, the Company has continued to operate under a series of short-term extensions to the HHS Agreement while the federal government prepares to re-issue a public request for proposal for a formal contract renewal. The Company has no visibility into the timing of either the request for proposal or a formal contract award. Until such time that a formal contract renewal is executed with HHS and ASPR, the Company will continue to provide support for the maintenance, storage and deployment of these critical resources by use of short-term extensions.
17.Earnings (Loss) Per Share
The following is a reconciliation of the basic and diluted number of shares used in computing earnings (loss) per share:
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Basic weighted average shares outstanding | 130,380,551 | 98,983,296 | 117,578,750 | 98,973,853 | ||||||||
Net effect of dilutive stock awards based upon the treasury stock method | 8,109,975 | - | 7,936,250 | - | ||||||||
Dilutive weighted average shares outstanding | 138,490,526 | 98,983,296 | 125,515,000 | 98,973,853 | ||||||||
Basic earnings (loss) per share | $ | 0.07 | $ | (0.10) | $ | 0.12 | $ | (0.22) | ||||
Diluted earnings (loss) per share | $ | 0.07 | $ | (0.10) | $ | 0.11 | $ | (0.22) | ||||
Anti-dilutive share-based awards excluded from the calculation of | ||||||||||||
dilutive earnings per share | — | 4,722,756 | — | 4,722,756 | ||||||||
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18.Subsequent Events
On October 1, 2021, in connection with the closing of Sizewise, we entered into Amendment No. 5 to the First Lien Credit Agreement. This amendment provides for a $150.0 million incremental term loan facility, the proceeds of which were used, together with cash on hand, to finance the Sizewise acquisition. This incremental term loan facility has terms identical to those applicable to the Initial Term Loans and the February 2020 Amendment (each as defined in the First Lien Credit Agreement), including as to pricing and interest, tenor, rights of payment and prepayment and right of security.
Previously, on September 14, 2021, we entered into a definitive agreement to acquire Sizewise, a privately held manufacturer and distributor of specialty patient handling equipment, in a stock purchase transaction valued at $230 million. The Company completed the transaction on October 1, 2021.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our final prospectus filed with the Securities and Exchange Commission (the “SEC”) pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on April 26, 2021 (“the Prospectus”). In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. You should review the sections titled “Note Regarding Forward-Looking Statements” for a discussion of forward-looking statements as well as in Part II, Item 1A, “Risk Factors” and the section entitled “Risk Factors” in the Prospectus for a discussion of factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis and elsewhere in this Quarterly Report on Form 10-Q and in our Prospectus.
BUSINESS OVERVIEW
Our Company
Unless otherwise specified, the terms “we”, “our”, “us” and the “Company” refer to Agiliti, Inc. and, where appropriate, its consolidated subsidiaries. The term “THL” refers to Thomas H. Lee Partners, L.P., our principal stockholder, and the term “THL Stockholder” refers to THL Agiliti LLC, an affiliate of Thomas H. Lee Partners, L.P.
We believe we are one of the leading experts in the management, maintenance and mobilization of mission-critical, regulated, reusable medical devices. We offer healthcare providers a comprehensive suite of medical equipment management and service solutions that help reduce capital and operating expenses, optimize medical equipment utilization, reduce waste, enhance staff productivity and bolster patient safety.
We commenced operations in 1939, originally incorporated in Minnesota in 1954 and reincorporated in Delaware in 2001. Since January 2019, we have been controlled by the THL Stockholder.
In our more than 80 years serving healthcare providers, we have built an at-scale, strong nationwide operating footprint allowing us to reach customers across the entire healthcare continuum—from individual facilities to the largest and most complex healthcare systems. Our ability to rapidly mobilize, track, repair and redeploy equipment during times of peak need or emergent events has made us a service provider of choice for city, state and federal governments to manage emergency equipment stockpiles.
Our diverse customer base includes over 9,000 active national, regional and local acute care hospitals, health system integrated delivery networks and alternate site providers (such as surgery centers, specialty hospitals, home care providers, long-term acute care hospitals and skilled nursing facilities). We serve the federal government as well as a number of city and state governments providing management and maintenance of emergency equipment stockpiles, and we are an outsourced service provider to medical device manufacturers supporting critical device remediation and repair services. We deliver our solutions through our nationwide network of over 100 service centers and 7 Centers of Excellence, among which we employ a team of more than 700 specialized biomed repair technicians, more than 3,000 field-based service operators who work onsite within customer facilities or in our local service centers, and over 200 field sales and account managers. Our fees are paid directly by our customers rather than by direct reimbursement from third-party payors, such as private insurers, Medicare or Medicaid.
We deploy our solution offering across three primary service lines:
Equipment Solutions: Supplemental, peak need and per-case rental of general biomedical, specialty, and surgical equipment, contracted directly with customers at approximately 7,000 U.S. acute care hospitals and alternate site facilities. We consistently achieve high customer satisfaction ratings by delivering patient-ready equipment within our contracted equipment delivery times and in response to our technical support and educational in-servicing for equipment within clinical departments, including the emergency room, operating room, intensive care, rehabilitation and general patient care areas. We are committed to providing the highest quality of equipment to our customers, supported by our comprehensive Quality Management System which is based on the quality standards recognized worldwide for medical devices: 21 CFR 820 and ISO 13485:2016. Revenue attributable to Equipment Solutions represented 30% and 39% of our total revenue for the three months ended September 30, 2021 and 2020, respectively, and 31% and 39% of our total revenue for the nine months ended September 30, 2021 and 2020, respectively.
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Clinical Engineering Services: Maintenance, repair and remediation solutions for all types of medical equipment, including general biomedical equipment and diagnostic imaging technology, through supplemental and fully outsourced offerings. Our supplemental offering helps customers manage their equipment repair and maintenance backlog, assist with remediation and regulatory reporting and temporarily fill open biotechnical positions. Our more than 700 technical repair staff flex in and out of customer facilities on an as-needed basis. We contract our Clinical Engineering Services with acute care and alternate site facilities across the U.S., as well as with the federal government and any medical device manufacturers that require a broad logistical footprint to support their large-scale service needs. Revenue attributable to Clinical Engineering Services represented 43% and 32% of our total revenue for the three months ended September 30, 2021 and 2020, respectively, and 38% and 35% of our total revenue for the nine months ended September 30, 2021 and 2020, respectively.
Onsite Managed Services: Comprehensive programs that assume full responsibility for the management, reprocessing and logistics of medical equipment at individual facilities and Integrated Delivery Networks (“IDNs”). Our more than 1,600 onsite employees work 24/7 in customer facilities, augmenting clinical support by integrating proven equipment management processes, utilizing our proprietary management software and conducting daily rounds and unit based training to ensure equipment is used and managed properly, overall optimizing day-to-day operations, adjusting for fluctuations in patient census and acuity and supporting better care outcomes. Revenue attributable to Onsite Managed Services represented 28% and 28% of our total revenue for the three months ended September 30, 2021 and 2020, respectively, and 30% and 26% of our total revenue for the nine months ended September 30, 2021 and 2020, respectively.
Many of our customers have multiple contracts and have revenue reported in multiple service lines. Our contracts vary based upon service offering, including with respect to term (with most being multi-year contracts), pricing (daily, monthly and fixed fee arrangements) and termination (termination for convenience to termination for cause only). Many of our contracts contain customer commitment guarantees and annual price increases tied to the consumer price index. Standard contract terms include payment terms, limitation of liability, force majeure provisions and choice of law/venue.
Impact of COVID-19 on our Business
We have taken proactive action to protect the health and safety of our employees, customers, partners and suppliers. There continues to be uncertainty related to the full extent of the impact of the COVID-19 outbreak on our future results, but we believe our business model and our available borrowings under our Revolving Credit Facility position us well to continue to manage our business through this crisis.
We continue to monitor the evolving situation and guidance from federal, state and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, given the nature of this situation, we cannot reasonably estimate the future impacts of COVID-19 on our financial condition, results of operations or cash flows.
Although difficult to determine, we have estimated for the nine-month period ended September 30, 2021, that the overall favorable impact on revenue from COVID-19 was $19 million to $24 million.
Initial Public Offering
On April 22, 2021, our registration statement on Form S-1 (File No. 333-253947) related to our initial public offering (“IPO”) was declared effective by the SEC, and our common stock began trading on the New York Stock Exchange (“NYSE”) on April 23, 2021. Our IPO closed on April 27, 2021.
RESULTS OF OPERATIONS
The following discussion addresses:
| ● | our financial condition as of September 30, 2021; and |
| ● | the results of operations for the three and nine-month periods ended September 30, 2021 and 2020. |
This discussion should be read in conjunction with the consolidated condensed financial statements included elsewhere in this Quarterly Report on Form 10-Q and the Management’s Discussion and Analysis of Financial Condition and Results of Operations section included in the Prospectus.
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The following table provides information on the percentages of certain items of selected financial data compared to total revenue for the three and nine-month periods ended September 30, 2021 and 2020.
Percent to Total Revenue | Percent to Total Revenue | |||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||
| 2021 |
| 2020 |
|
| 2021 | 2020 |
| ||
Revenue |
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |
Cost of revenue |
| 60.6 |
| 61.7 |
| 59.4 |
| 64.3 |
| |
Gross margin |
| 39.4 |
| 38.3 |
| 40.6 |
| 35.7 |
| |
Selling, general and administrative |
| 28.6 |
| 36.8 |
| 30.1 |
| 32.3 |
| |
Operating income |
| 10.8 |
| 1.5 | 10.5 |
| 3.4 |
| ||
Loss on extinguishment of debt | — | — | 1.4 | — | ||||||
Interest expense |
| 4.1 |
| 7.0 |
| 5.4 |
| 8.3 |
| |
Income (loss) before income taxes and noncontrolling interest |
| 6.7 |
| (5.5) | 3.7 |
| (4.9) |
| ||
Income tax expense (benefit) |
| 3.0 |
| (0.3) | 1.8 |
| (1.0) |
| ||
Consolidated net income (loss) |
| 3.7 | % | (5.2) | % | 1.9 | % | (3.9) | % | |
Consolidated Results of Operations for the three months ended September 30, 2021 compared to the three months ended September 30, 2020
Total Revenue
The following table presents revenue by service solution for the three months ended September 30, 2021 and 2020 (in thousands).
Three Months Ended | ||||||||||
September 30, | ||||||||||
| 2021 |
| 2020 |
| % Change |
| ||||
Equipment Solutions | $ | 77,707 | $ | 76,629 | 1.4 | % | ||||
Clinical Engineering |
| 111,614 |
| 62,739 | 77.9 |
| ||||
Onsite Managed Services |
| 73,103 |
| 55,353 | 32.1 |
| ||||
Total Revenue | $ | 262,424 | $ | 194,721 | 34.8 | % | ||||
Total revenue for the three months ended September 30, 2021 was $262.4 million, compared to $194.7 million for the three months ended September 30, 2020, an increase of $67.7 million or 34.8%. Equipment Solutions revenue increased 1.4% primarily driven by a one time equipment sale totaling approximately $5 million. Although difficult to determine, we have estimated that in the third quarter of 2020, the overall favorable impact from COVID-19 was approximately $11 million to $15 million. In the third quarter of 2021, we estimate that the overall favorable impact from COVID-19 was approximately $7 million to $10 million. Clinical Engineering revenue increased 77.9% due to continued strong growth as a result of our success in signing and implementing new business contracts over the last several quarters, the Northfield acquisition completed on March 19, 2021 and supplemental clinical engineering work related to the government contract entered into in the third quarter of 2020. Finally, our Onsite Managed Services revenue increased 32.1% with the majority of growth coming from a new contract signed in the third quarter of 2020 for the comprehensive maintenance and management services of medical ventilator equipment.
Cost of Revenue
Total cost of revenue for the three months ended September 30, 2021 was $159.0 million compared to $120.1 million for the three months ended September 30, 2020, an increase of $38.9 million or 32.4%. On a percentage of revenue basis, cost of revenue decreased from 61.7% of revenue in 2020 to 60.6% in 2021. The decline as a percentage of revenue was driven primarily from revenue growth as we were able to leverage our fixed cost infrastructure resulting in our expenses growing at a lower rate than revenue growth.
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Gross Margin
Total gross margin for the three months ended September 30, 2021 was $103.4 million, or 39.4% of total revenue, compared to $74.6 million, or 38.3% of total revenue, for the three months ended September 30, 2020, an increase of $28.8 million or 38.6%. The increase in gross margin as a percentage of revenue was primarily impacted by favorable leverage from volume growth.
Selling, General and Administrative, Loss on Extinguishment of Debt and Interest Expense
(in thousands)
Three Months Ended |
| |||||||||||
September 30, |
| |||||||||||
| 2021 |
| 2020 |
| Change |
| % Change |
| ||||
Selling, general and administrative | $ | 75,052 | $ | 71,732 | $ | 3,320 |
| 4.6 | % | |||
Interest expense |
| 10,711 |
| 13,560 |
| (2,849) |
| (21.0) | ||||
Selling, General and Administrative
Selling, general and administrative expense increased $3.3 million, or 4.6%, to $75.1 million for the quarter ended September 30, 2021 as compared to the same period of 2020. Selling, general and administrative expense as a percentage of total revenue was 28.6% and 36.8% for the quarter ended September 30, 2021 and 2020, respectively. The increase of $3.3 million was primarily due to the increases in costs and amortization expense related to the Northfield acquisition, offset by the decrease in the remeasurement of the tax receivable agreement of $9.6 million in 2020.
Interest Expense
Interest expense decreased $2.8 million to $10.7 million for the third quarter of 2021 as compared to the same period of 2020 primarily due to the repayment of our Second Lien Term Loan from the proceeds of the IPO.
Income Taxes
Income taxes were an expense of $7.9 million and a benefit of $0.6 million for the three months ended September 30, 2021 and 2020, respectively. The income tax expense for the three months ended September 30, 2021 was primarily related to the tax-effect of pre-tax income from operations plus addbacks for non-deductible transaction costs, non-deductible expenses related to executive compensation disallowed under Internal Revenue Code Section 162(m) and the remeasurement of the tax receivable agreement. The income tax benefit for the three months ended September 30, 2020 was due to the tax-effect of pre-tax loss from operations for the period and the remeasurement of the tax receivable agreement.
Consolidated Net Income (Loss)
Consolidated net income increased $19.8 million to $9.7 million in the third quarter of 2021 as compared to the same period of 2020. The increase in net income was impacted primarily by the increase in revenue.
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Consolidated Results of Operations for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020
Total Revenue
The following table presents revenue by service solution for the nine months ended September 30, 2021 and 2020 (in thousands).
Nine Months Ended | ||||||||||
September 30, | ||||||||||
| 2021 |
| 2020 |
| % Change |
| ||||
Equipment Solutions | $ | 232,319 | $ | 218,744 | 6.2 | % | ||||
Clinical Engineering |
| 287,860 |
| 195,779 | 47.0 |
| ||||
Onsite Managed Services |
| 228,033 |
| 144,598 | 57.7 |
| ||||
Total Revenue | $ | 748,212 | $ | 559,121 | 33.8 | % | ||||
Total revenue for the nine months ended September 30, 2021 was $748.2 million, compared to $559.1 million for the nine months ended September 30, 2020, an increase of $189.1 million or 33.8%. Equipment Solutions revenue increased 6.2% primarily driven by increased demand for surgical equipment procedures and to a lesser extent a one time equipment sale totaling approximately $5 million. Although difficult to determine, we have estimated that for the first nine months of 2020, the overall favorable impact from COVID-19 was approximately $18 million to $25 million. In the first nine months of 2021, we estimate that the overall favorable impact from COVID-19 was $19 million to $24 million. Clinical Engineering revenue increased 47.0% due to continued strong growth as a result of our success in signing and implementing new business contracts over the last several quarters, the Northfield acquisition completed on March 19, 2021 and supplemental clinical engineering work related to the government contract entered into in the third quarter of 2020. Finally, our Onsite Managed Services revenue increased 57.7% with the majority of growth coming from a new contract signed in the third quarter of 2020 for the comprehensive maintenance and management services of medical ventilator equipment.
Cost of Revenue
Total cost of revenue for the nine months ended September 30, 2021 was $444.3 million compared to $359.2 million for the nine months ended September 30, 2020, an increase of $85.1 million or 23.7%. On a percentage of revenue basis, cost of revenue decreased from 64.3% of revenue in 2020 to 59.4% in 2021. The decline as a percentage of revenue was driven primarily from revenue growth as we were able to leverage our fixed cost infrastructure resulting in our expenses growing at a lower rate than revenue growth.
Gross Margin
Total gross margin for the nine months ended September 30, 2021 was $303.9 million, or 40.6% of total revenue, compared to $199.9 million, or 35.7% of total revenue, for the nine months ended September 30, 2020, an increase of $104.0 million or 52.0%. The increase in gross margin as a percentage of revenue was primarily impacted by favorable leverage from volume growth.
Selling, General and Administrative, Loss on Extinguishment of Debt and Interest Expense
(in thousands)
Nine Months Ended |
| |||||||||||
September 30, |
| |||||||||||
| 2021 |
| 2020 |
| Change |
| % Change |
| ||||
Selling, general and administrative | $ | 225,334 | $ | 180,838 | $ | 44,496 |
| 24.6 | % | |||
Loss on extinguishment of debt | 10,116 | — | 10,116 | * | ||||||||
Interest expense |
| 40,444 |
| 46,532 |
| (6,088) |
| (13.1) | ||||
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Selling, General and Administrative
Selling, general and administrative expense increased $44.5 million, or 24.6%, to $225.3 million for the nine months ended September 30, 2021 as compared to the same period of 2020. Selling, general and administrative expense as a percentage of total revenue was 30.1% and 32.3% for the nine months ended September 30, 2021 and 2020, respectively. The increase of $44.5 million was primarily due to the increases in costs and amortization expense related to the Northfield acquisition, the buyout fee related to the termination of the Advisory Service Agreement of $7.0 million and an increase in payroll related costs associated with the growth of our business.
Loss on Extinguishment of Debt
Loss on extinguishment of debt for the nine months ended September 30, 2021 consisted of the write-off of the unamortized deferred financing cost and debt discount of $7.4 million and an additional 1% redemption price or $2.4 million related to the repayment of our Second Lien Term Loan in April 2021 with proceeds from the IPO and the write-off of the unamortized deferred financing cost of $0.3 million related to the amendment of our Revolving Credit Facility.
Interest Expense
Interest expense decreased $6.1 million to $40.4 million for the nine months ended 2021 as compared to the same period of 2020 primarily due to the repayment of our Second Lien Term Loan with proceeds from the IPO.
Income Taxes
Income taxes were an expense of $13.8 million and a benefit of $5.7 million for the nine months ended September 30, 2021 and 2020, respectively. The income tax expense for the nine months ended September 30, 2021 is primarily due to the tax-effect of pre-tax income from operations plus addbacks for stock compensation, non-deductible transaction costs, nondeductible expenses related to executive compensation disallowed under Internal Revenue Code Section 162(m) and the remeasurement of the tax receivable agreement. The income tax benefit for the nine months ended September 30, 2020 was due to the tax-effect of pre-tax loss from operations for the period, amended state income tax filings and the remeasurement of the tax receivable agreement.
Consolidated Net Income
Consolidated net income increased $36.0 million to $14.1 million for the nine months ended September 30, 2021 as compared to the same period of 2020. The increase in net income was impacted primarily by the increase in revenue.
Adjusted EBITDA
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) was $245.8 million and $162.2 million for the nine months ended September 30, 2021 and 2020, respectively. Adjusted EBITDA for the nine months ended September 30, 2021 was higher than in 2020 primarily due to the increase in revenue.
EBITDA is defined as earnings attributable to Agiliti, Inc. before interest expense, income taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA excluding non-cash share-based compensation expense, management fees and other non-recurring gains, expenses or losses, transaction costs, remeasurement of tax receivable agreement and loss on extinguishment of debt. In addition to using EBITDA and Adjusted EBITDA internally as measures of operational performance, we disclose them 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. We believe the investment community frequently uses EBITDA and Adjusted EBITDA in the evaluation of similarly situated companies. Adjusted EBITDA is also used by the Company as a factor to determine the total amount of incentive compensation to be awarded to executive officers and other employees. EBITDA and Adjusted EBITDA, however, are not measures of financial performance under GAAP and should not be considered as alternatives to, or more meaningful than, net income as measures of operating performance or to cash flows from operating, investing or financing activities or as measures of liquidity. Since EBITDA and Adjusted EBITDA are not measures determined in accordance with GAAP and are thus susceptible to varying interpretations and calculations, EBITDA and Adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. EBITDA and Adjusted EBITDA do not represent amounts of funds that are available for management’s discretionary use. EBITDA and Adjusted EBITDA presented below may not be the same as EBITDA and Adjusted
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EBITDA calculations as defined in the First Lien Credit Facilities. A reconciliation of net income (loss) attributable to Agiliti, Inc. to Adjusted EBITDA is included below:
Nine Months Ended | ||||||
September 30, | ||||||
(in thousands) |
| 2021 | 2020 | |||
Net income (loss) attributable to Agiliti, Inc. and Subsidiaries | $ | 14,023 | $ | (22,008) | ||
Interest expense |
| 40,444 |
| 46,532 | ||
Income tax expense (benefit) |
| 13,832 |
| (5,678) | ||
Depreciation and amortization |
| 138,676 |
| 124,659 | ||
EBITDA | 206,975 | 143,505 | ||||
Non-cash share-based compensation expense | 10,127 | 7,657 | ||||
Management and other expenses (1) | 7,626 | (256) | ||||
Transaction costs (2) | 6,440 | 1,699 | ||||
Tax receivable agreement remeasurement | 4,542 | 9,600 | ||||
Loss on extinguishment of debt (3) | 10,116 | — | ||||
Adjusted EBITDA | $ | 245,826 | $ | 162,205 | ||
Other Financial Data: | ||||||
Net cash provided by operating activities | $ | 138,413 | $ | 99,726 | ||
Net cash used in investing activities |
| (481,462) |
| (125,820) | ||
Net cash provided by financing activities |
| 260,257 |
| 75,562 | ||
| (1) | Management and other expenses represent (a) management fees and buyout termination fee under the Advisory Services Agreement, which was terminated in connection with the initial public offering and (b) employee related non-recurring expenses. |
| (2) | Transaction costs represent costs associated with potential and completed mergers and acquisitions and are primarily related to the Northfield Acquisition for the nine months ended September 30, 2021. |
| (3) | Loss on extinguishment of debt consists of the write-off of the unamortized deferred financing costs and debt discount and an additional 1% redemption price related to the repayment of our Second Lien Term Loan and the write-off of the unamortized deferred financing cost related to the amendment of our Revolving Credit Facility. |
SEASONALITY
Quarterly operating results are typically affected by seasonal factors. Historically, our first and fourth quarters are the strongest, reflecting increased customer utilization during the fall and winter months. However, COVID-19 has impacted the seasonality of our business.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash flows from operating activities and borrowings under our Revolving Credit Facility, which provides for loans in an amount of up to $250 million. Our principal uses of liquidity are to fund capital expenditures related to purchases of medical equipment, provide working capital, meet debt service requirements and finance our strategic plans.
We believe our existing balances of cash and cash equivalents, our currently anticipated operating cash flows and availability under our Revolving Credit Facility will be sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months. If new financing is necessary, there can be no assurance that any such financing would be available on commercially acceptable terms, or at all. To date, we have not experienced difficulty accessing the credit market; however, future volatility in the credit market may increase costs associated with issuing debt instruments or affect our ability to access those markets. In addition, it is possible that our ability to access the credit market could be limited at a time when we would like, or need to do so, which could have an adverse impact on our ability to refinance debt and/or react to changing economic and business conditions.
Net cash provided by operating activities was $138.4 and $99.7 million for the nine months ended September 30, 2021 and 2020, respectively. Net cash provided by operating activities during 2021 was favorably impacted by our improved financial performance.
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Partially offsetting the increase in net cash provided by operating activities were the use of cash to pay accrued compensation related to our strong 2020 operating results and a reduction in accrued interest related to our lower debt and interest rates.
Net cash used in investing activities was $481.5 and $125.8 million for the nine months ended September 30, 2021 and 2020, respectively. The increase in net cash used in investing activities was primarily due to the Northfield Acquisition completed in March 2021.
Net cash provided by financing activities was $260.3 and $75.6 million for the nine months ended September 30, 2021 and 2020, respectively. The increase in net cash provided by financing activities during 2021 was primarily due to proceeds from issuance of common stock from the IPO, partially offset by repayment of the Second Lien Term Loan.
RECENT ACCOUNTING PRONOUNCEMENT
See Note 2, Recent Accounting Pronouncements, to the condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q.
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 September 30, 2021, we did not have any unconsolidated SPEs.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this Form 10-Q are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate”, “estimate”, “expect”, “project”, “plan”, “intend”, “believe”, “may”, “will”, “should”, “can have”, “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:
| ● | effects from political and policy changes that could limit our growth opportunities; |
| ● | effects from the continued COVID-19 pandemic on our business and the economy; |
| ● | our potential inability to maintain existing contracts or contract terms with, or enter into new contracts with, our customers; |
| ● | cancellations by or disputes with customers; |
| ● | our potential failure to maintain our reputation, including by protecting intellectual property; |
| ● | effects of a global economic downturn on our customers and suppliers; |
| ● | a decrease in our customers’ patient census or services; |
| ● | competitive practices by our competitors that could cause us to lose market share, reduce our prices or increase our expenditures; |
| ● | the bundling of products and services by our competitors, some of which we do not offer; |
| ● | consolidation in the healthcare industry, which may lead to a reduction in the prices we charge; |
| ● | adverse developments with supplier relationships; |
| ● | the potential inability to change the manner in which healthcare providers traditionally procure medical equipment; |
| ● | our potential inability to attract and retain key personnel; |
| ● | our potential inability to make attractive acquisitions or successfully integrate acquire businesses; |
| ● | an increase in expenses related to our pension plan; |
| ● | the fluctuation of our cash flow; |
| ● | credit risks relating to home care providers and nursing homes; |
| ● | potential claims related to the medical equipment that we outsource and service; |
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| ● | the incurrence of costs that we cannot pass through to our customers; |
| ● | a failure of our management information systems; |
| ● | limitations inherent in all internal controls systems over financial reporting; |
| ● | social unrest; |
| ● | our failure to keep up with technological changes; |
| ● | our failure to coordinate the management of our equipment; |
| ● | challenges to our tax positions or changes in taxation laws; |
| ● | litigation that may be costly to defend; |
| ● | uncertainty surrounding healthcare reform initiatives; |
| ● | federal privacy laws that may subject us to more stringent penalties; |
| ● | our relationship with healthcare facilities and marketing practices that are subject to federal Anti-Kickback Statute and similar state laws; |
| ● | our contracts with the federal government that subject us to additional oversight; |
| ● | the impact of changes in third-party payor reimbursement for healthcare items and services on our customers’ ability to pay for our services; |
| ● | the highly regulated environment our customers operate in; |
| ● | potential recall or obsolescence of our large fleet of medical equipment; and |
| ● | other factors disclosed in the section entitled “Risk Factors” in this Form 10-Q, in our Prospectus, and elsewhere in our filings with the SEC. |
We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q, in our Prospectus and elsewhere in our filings with the SEC. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this Form 10-Q in the context of these risks and uncertainties.
We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this Form 10-Q are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
Item 3. 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 September 30, 2021, we had approximately $1061.6 million of total debt outstanding before netting with deferred financing costs and unamortized debt discount, of which $535.4 million was bearing interest at variable rates. Based on variable debt levels at September 30, 2021, a 1.0 percentage point change in interest rates on variable rate debt would have resulted in annual interest expense fluctuating by approximately $5.4 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 in the first nine months of 2021 average price of unleaded gasoline, assuming gasoline usage levels for the nine months ended September 30, 2021, would lead to an annual increase in fuel costs of approximately $0.5 million.
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Pension
Our pension plan assets, which were approximately $24.6 million at December 31, 2020, are subject to volatility that can be caused by fluctuations in general economic conditions. Continued market volatility and disruption could cause 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, 2020 would lead to a decrease in the funded status of the plan of approximately $2.5 million.
Other Market Risk
As of September 30, 2021, we have no other material exposure to market risk.
Item 4. Controls and Procedures
| (a) | Evaluation of disclosure controls and procedures |
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2021.
| (b) | Changes in internal control over financial reporting |
There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1.Legal Proceedings
The Company, in the ordinary course of business, is subject to liability claims related to employees and the equipment that it rents and services. Asserted claims are subject to many uncertainties and the outcome of individual matters is not predictable. While the ultimate resolution of these actions may have an impact on the Company’s financial results for a particular reporting period, management believes that any such resolution would not have a material adverse effect on the financial position, results of operations or cash flows of the Company and the chance of a negative outcome on outstanding litigation is considered remote. See the additional information in Note 11, Commitments and Contingencies, to the condensed consolidated financial statements included in Part I, Item 1 of the Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed under the heading “Risk Factors” in our Prospectus and under Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, other than:
We may be unable to maintain existing contracts or contract terms or enter into new contracts with our customers.
Our revenue maintenance and growth depend, in part, on continuing contracts with customers, including through Group Purchasing Organizations (“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. In addition, certain of our customers account for large portions of our revenue. From time to time, a single customer, depending on the current status and volumes of a number of separate contracts, may account for 10% or more of our total revenue. As a result, the actions of even a single customer can expose our business and operating results to greater volatility.
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On July 21, 2020, we entered into a one-year agreement with the U.S. Department of Health and Human Services (“HHS”) and the Assistant Secretary for Preparedness and Response (“ASPR”) for the comprehensive maintenance and management services of medical ventilator equipment in exchange for up to $193.0 million in consideration throughout the duration of the agreement (the “HHS Agreement”). Subsequent to its initial term, the Company has continued to operate under a series of short-term extensions to the HHS Agreement while the federal government prepares to re-issue a public request for proposal for a formal contract renewal. The Company has no visibility into the timing of either the request for proposal or a formal contract award. Until such time that a formal contract renewal is executed with HHS and ASPR, the Company will continue to provide support for the maintenance, storage and deployment of these critical resources by use of short-term extensions. As a result, we expect that HHS and ASPR will continue to be our largest customer throughout the duration of any extensions to the HHS Agreement. Although we expect to have the opportunity to complete a request for proposal for continuing contracts with HHS following the expiration of any extensions to the HHS Agreement, to the extent the HHS Agreement or other contracts with significant customers are not renewed or are terminated, our revenue and operating results would be significantly impacted.
For the nine months ended September 30, 2021, approximately 19% of total revenue related to various contracts with HHS and ASPR.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
Set forth below is information regarding securities issued by us during the period covered by this Quarterly Report on Form 10-Q that were not registered under the Securities Act. Also included is the consideration, if any, received by us for such securities and information relating to the section of the Securities Act, or rule of the SEC, under which exemption from registration was claimed.
Since June 30, 2021, we have issued the following unregistered securities:
| ● | In July 2021, we issued 28,152 shares of common stock in connection with the exercise of warrants. The issuance of these securities were exempt from registration in reliance upon Section 3(a)(9) of the Securities Act of 1933. |
Item 6.Exhibits
Exhibit |
| Description |
3.1 | ||
3.2 | ||
10.1 | ||
31.1 | ||
31.2 | ||
32.1* | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2* | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
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101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document. | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
104 | The cover page for the Company’s Quarterly Report on Form 10-Q has been formatted in Inline XBRL and contained in Exhibit 101. |
* | Furnished, not filed. |
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SIGNATURES
Pursuant to the requirements 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.
Date: November 9, 2021
Agiliti, Inc. | ||
By | /s/ Thomas J. Leonard | |
Thomas J. Leonard | ||
Chief Executive Officer | ||
(Principal Executive Officer and Duly Authorized Officer) | ||
By | /s/ James B. Pekarek | |
James B. Pekarek | ||
Executive Vice President and Chief Financial Officer | ||
(Principal Financial Officer) | ||
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