AGILITI, INC. \DE - Quarter Report: 2021 March (Form 10-Q)

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a 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 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in of the Exchange Act).    Yes  ☐    No  ☒

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 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”).

In December 2019, the FASB issued ASU (“ASU ASU 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 in the basis of goodwill. The ASU is effective for annual and interim periods in fiscal years ending 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.

In March 2020, the FASB issued ASU (“ASU ASU provides optional expedients and exceptions for applying generally accepted accounting principles (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 are beginning to evaluate the impact of on our consolidated financial statements.

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 traded derivative contract assets and liabilities are primarily based on valuation models, discounted cash flow models or other valuation techniques that are believed to be used by market participants. Unobservable inputs require management to make certain projections and assumptions about the information that would be used by market participants in pricing assets or liabilities.

The 2018 Omnibus Incentive Plan (“2018 Plan”) provides for issuance of 10.4 million nonqualified stock options, restricted stock units and performance restricted stock units to any of its executives, other key employees and certain 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 contractual term and vest over one to four years. The restricted stock units vest over three to four years. The performance restricted stock units vest over three years upon achievement of established performance targets as defined in the agreement.

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 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.

On January 4, 2019, in connection with and substantially concurrent with the closing of the Business Combination, Agiliti 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, certain subsidiaries of Agiliti Health acting as guarantors (the “Guarantors”), and the lenders from time to time party thereto.

Borrowings under the First Lien Credit Facilities bear interest, at Agiliti’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 1/2 of 1% and (3) the LIBOR rate for a 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 Second Lien Term Loan provides 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 bear interest, at Agiliti’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 1/2 of 1% and (3) the LIBOR rate for a 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.

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.

The interest rate swap agreement qualifies for cash flow hedge accounting under ASC Topic 815, “Derivatives and Hedging.” Both at inception and on an basis, we must perform an effectiveness test. The fair value of the interest rate swap agreement at March 31, 2021 was $0.8 million, of which $0.9 million is included in other accrued expenses and $0.1 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 March 31, 2021. We have not recorded any amounts due to ineffectiveness for any periods presented.

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On January 4, 2019, Agiliti entered into an advisory services agreement (the “Advisory Services Agreement”) with Agiliti Holdco, Agiliti Health and THL Managers VIII, LLC (the “Advisor”). Pursuant to the Advisory Services Agreement, the Advisor will provide management, consulting and other advisory services to the Company. In consideration for these services, the Company will pay to the Advisor (i) a 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 in connection with any financing or refinancing, dividend, recapitalization, acquisition, disposition and or 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 will also pay expenses incurred by the Advisor, its consultants and certain other parties affiliated with Advisor. The initial term of the Advisory Agreement ends on January 4, 2027 and is automatically extended for successive periods of one year. The Advisory Services Agreement may be terminated by the Advisor at any time. The Advisory Services Agreement also terminates automatically immediately prior to an IPO or a transaction involving a change of control (as defined in the Advisory Services Agreement). Total professional services fees incurred to the Advisor were $0.6 and $0.5 for the three months ended March 31, 2021 and 2020, respectively.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax expense for the three months ended March 31, 2021 primarily related to operating income, addbacks for transaction costs and the remeasurement of the tax receivable agreement. The tax benefit for the three months ended March 31, 2020 primarily related to operating losses.

On July 21, 2020, we entered into a agreement with the U.S. Department of Health and Human Services and the Assistant Secretary for Preparedness and Response 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. For the three months ended March 31, 2021, approximately 20% of total revenue related to contracts with the U.S. Department of Health and Human Services and the Assistant Secretary of Preparedness and Response.

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 Credit Facility 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 2.75%, with stepdowns to (A) LIBOR 2.50% if the first lien leverage ratio (as calculated thereunder) is less than or equal to 3.75:1.00 and (B) LIBOR 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 our more than 80 years serving healthcare providers, we have built an 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.

Supplemental, peak need and 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 for equipment within clinical departments, including the emergency room, operating room, intensive care, rehabilitation

 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 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 such customers for the three months ended March 31, 2021 and 2020 represented 32% and 37% of our total revenue, respectively.

 Comprehensive programs that assume full responsibility for the management, reprocessing and logistics of medical equipment at individual facilities and IDNs. Our more than 1,700 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 helping to optimize operations, adjust for fluctuations in patient census and acuity and support better care outcomes. Revenue attributable to such customers for the three months ended March 31, 2021 and 2020 represented 33% and 25% of our total revenue, respectively.

We have taken proactive action to protect the health and safety of our employees, customers, partners and suppliers. There is uncertainty related to the anticipated impact of the outbreak on our future results, but we believe our business model and our available borrowings under our Revolving Loan leave us well-positioned 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 impacts of on our financial condition, results of operations or cash flows in the future.

On April 22, 2021, our registration statement on Form (File 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. As a result, our condensed consolidated financial statements as of March 31, 2021 do not reflect the impact of our IPO. For additional information, see Note 18 - Subsequent Events to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form

This discussion should be read in conjunction with the consolidated condensed financial statements included elsewhere in this Quarterly Report on and the Management’s Discussion and Analysis of Financial Condition and Results of Operations section included in the Prospectus.

Total revenue for the three months ended March 31, 2021 was $235.2 million, compared to $179.2 million for the three months ended March 31, 2020, an increase of $56.0 million or 31.2%. Equipment Solutions revenue increased 20.6% primarily driven by increased demand for equipment needed to fight the pandemic. Although difficult to determine, we have estimated the positive impact from within Equipment Solutions to be in the $10 million to $12 million range. Clinical Engineering revenue increased 13.8% due to continued strong growth as a result of our success in signing and implementing new business contracts over the last several quarters as well as acquisitions on January 31, 2020 and March 19, 2021. Finally, our Onsite Managed Services revenue increased 73.3% 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 and from our managed only solution where we manage equipment owned by the customer.

EBITDA is defined as earnings attributable to Agiliti before interest expense, income taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA excluding, share-based compensation expense, management fees and other gains, expenses or losses, transaction costs and remeasurement of tax receivable agreement. 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 accounting principles generally accepted in the United States of America (“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 EBITDA calculations as defined in the First Lien Credit Facilities. A reconciliation of net income (loss) attributable to Agiliti to Adjusted EBITDA is included below:

See Note 18, Subsequent events, to the condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form for transactions after March 31, 2021.

See Note 2, Recent Accounting Pronouncements, to the condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form

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 sheet arrangements or other contractually narrow or limited purposes. As of March 31, 2021, we did not have any unconsolidated SPEs.

This Quarterly Report on Form 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 are forward-looking statements. Forward-looking statements give our current expectations and