Agiliti, Inc.

a presentation titled agility q3 2021 earnings slides with that i'll turn the call over to our ceo tom leonard thanks kate and good afternoon thanks for taking the time to join us as we review our results from the third quarter of 2021. joining me today to discuss our performance is our cfo jim pickerick and our president tom benning who leads our commercial operations Our results finished ahead of our expectations for Q3 after having previously increased our guidance for the full year 2021. Today, we'll walk through the factors that drove our performance in the third quarter and provide color on our updated guidance for the full year. Starting with the highlights, total revenue for the quarter was $262 million, representing a 35% increase from Q3 2020. Adjusted EBITDA was 82 million, a 46% increase compared to Q3 of last year. And our adjusted earnings per share for the third quarter was 23 cents, compared to an adjusted EPS of 13 cents for the prior year period, representing an increase of 76%. In line with our performance and adjusting for the October 1st close of the size-wise acquisition, We have raised our guidance for a full year 2021 to reflect expected revenue in the range of 1.01 to 1.02 billion and adjusted EBITDA in the range of 300 to 310 million. Jim's going to provide more detail on our financial outlook and the principal drivers behind our Q3 results later on in the call. I'd like to start today with a few insights into our overall performance and our direction. First, we once again delivered our commercial goals for the quarter. I previously described the stable and highly predictable nature of the agility business, which is clearly evident in our consistent performance, including our most recent results. Our results also reflect the increased customer demand for our medical device rental equipment during August and September. as providers continue to combat the impact of COVID-19 and its variants across the country. This late demand exceeded our initial expectations for the quarter. Additionally, while working at the direction of the federal government on our national stockpile management contract, we recognized higher than anticipated time and materials-based revenue in Q3. We previously expected a portion of this revenue to occur in Q4 of this year. So this reflects an acceleration in timing from our prior expectations. I'll note that this difference in timing does not increase our view on the total financial contribution of this contract and the balance of the year. Remaining on the topic of our government stockpile agreement for a moment, we offer a brief update on our contract status. Agility continues to operate under a series of short-term extensions to our existing contract while we await the federal government's reissue of an RFP for a contract renewal. We have no visibility into the timing of either the RFP or a contract award. Until such time the new contract is awarded, we expect that HHS will continue to ensure the continuity of our support for the maintenance, storage, and deployments of these critical resources by use of short-term extensions. I'll remind you that our financial guidance for 2021 continues to include the assumption that agility is successful in securing a renewal of this government contract. And as we've shared on previous calls, we operate under a strict non-disclosure agreement with HHS regarding the details of this contract and the work we perform at their direction. As such, the information we can discuss today is limited to what the federal government discloses publicly and what we've provided here in our prepared remarks. I'd like to spend some time today on another recent highlight, our acquisition of SizeWise. On September 14th, we announced that Agility had finalized an agreement to acquire SizeWise, a manufacturer and distributor of standard and specialty bed frames, therapeutic support services, and patient mobility equipment. In our announcement, we noted that during the 12 months into June 30, 2021, The size-wise business generated revenue of $155 million and adjusted EBITDA of $30 million, which was inclusive of an estimated benefit from COVID-19 of approximately $5 million in adjusted EBITDA. The acquisition was finalized on October 1st, and we will account for size-wise future revenue contribution within our equipment solutions service lines. We're early in our integration of SizeWise. However, we see a clear path to achieving meaningful cost synergies as we integrate, targeting 5 million in year one EBITDA and growing to 15 million by year three. But first and foremost, this acquisition is about long-term profitable growth. SizeWise builds on Agility's unique at-scale infrastructure. As we optimize our combined operations network, including facilities, vehicles, staff, products, and our business operating systems, we will further improve our local market presence and our customer reach. ViceWise strengthens Agility's capabilities in the supply chain, permitting greater input over R&D, manufacturing, and logistics, or vital product category, and enabling us to manufacture a differentiated product portfolio for our exclusive benefit. SizeWise expands Agility's value proposition with their exceptional market reputation and deep expertise to better address the clinical needs of bariatric patients and those at risk of skin and fall injury. And it aligns with Agility's proven end-to-end service model of investing class, high utilization medical equipment delivered within a comprehensive service framework. to provide some broad market context on this compelling opportunity. In 2020, it was estimated there were 9.2 million hospital stays in which obesity was a principal or secondary diagnosis, accounting for approximately a quarter of all hospital stays. Primary diagnosis was associated with bariatric surgical procedures, and a secondary diagnosis was associated with complicating medical conditions. the most common being orthopedic, cardiorespiratory, skin or wound related, or behavioral health conditions. An estimated 2 million or 22% of those discharges were for severely obese patients for treatment and patient handling. In the U.S., severely obese patients account for approximately 30% of all staff injuries related to patient handling. And 16.5% of all U.S. healthcare expenditures are spent to treat obesity and obesity-related diseases, representing approximately $168 billion in annual costs to our healthcare system. And once these patients are discharged, specialized bariatric and patient handling equipment is almost always needed for their continued care. The size-wise acquisition merges well with Agility's primary value proposition, ensuring providers have access to the critical medical equipment they require, delivered to the point of care and augmented by our differentiated services, and always with the confidence that they're maintained the highest standard in the industry. We're excited about the opportunity in front of us and plan to share more in the coming quarters as we begin to execute this combined company. With that, let me turn the call over to Tom Benning to offer his perspective on our performance in Q3.

Thanks, Tom. I'll begin with some additional color on our commercial performance and then share a few reflections on some recent macro trends and their effect on our business. First, we continue to see heightened customer demand for our rental equipment during the third quarter. Changes in COVID-related demand are obviously difficult to predict. but our peerless national network of medical device service and logistics capabilities ensures that we remain responsive to the needs of our customers as they navigate the effects of the pandemic. While supporting our customers' near-term needs, we've continued to engage with them on longer-term strategic initiatives and investments. Our ability to continue negotiating and signing longer-term agreements throughout this period of short-term disruption is evident in our consistent positive results and also provides us excellent forward visibility for the next several quarters. I'd like to take a moment to touch on subjects of labor availability, wage inflation, and supply chain interruptions. We continue to closely monitor these important inputs to our business as we follow the broader discussion happening across all industries. To date, we seem to be less impacted than most when it comes to these macro issues facing nearly all companies today. But that doesn't mean we're not managing through localized challenges across parts of our business. Regarding labor availability, we tend to be the subject across three broad categories. Are we attracting high-quality candidates to the top of the funnel? Are we able to land the right candidates once we've engaged them in the recruiting process? And finally, can we retain good talent once they've joined agility? With that context in mind, what we're seeing today is that we're currently attracting somewhat fewer candidates at the top of our funnel, and this is elongating our time to fill positions. We're also seeing wage pressures in some local markets, and that can challenge our ability to land candidates once we engage them in the process. Our overall employment retention rates, however, have stayed pretty steady. In fact, our turnover rates are flat to slightly down over the past three years. We credit this to a culture that prioritizes the needs of our team members, including throughout COVID when we extended new targeted benefits to ensure our team's financial and personal well-being. And while our position vacancies are currently taking slightly longer to fill, we have successfully grown our headcount by more than 20% year over year, with most of those roles supporting our field-based, customer-facing operations and contributing to our above-market growth. To remain proactive in the battle to attract and retain talent, We recently completed a comprehensive weight and position study to measure our competitiveness across all job categories, levels of seniority, and local labor markets. We have and will continue to proactively tune our compensation models as appropriate. Bigger picture, agility prides itself on our mission-driven work. We offer the opportunity to build a rewarding career doing work that makes a difference in the lives of patients and that supports our nation's healthcare system. Further, we ensure our team members have the opportunity to share in the success of the company through our financial incentive programs and, more recently, the introduction of employee stock purchase plan, letting them participate in the growth and the success of the company. It's for all these reasons that we believe Agility remains competitively positioned in a generally difficult labor environment. In terms of supply chain pressures, our outlook is somewhat similar. Agility generally operates under longer-term supply agreements with relatively fixed pricing. Our centralized purchasing and supply chain management processes ensures efficient acquisition and management of critical repair parts for the devices that we service, both for our own fleet and for the devices that we manage for our customers. Further, with the recent addition of manufacturing capabilities through our acquisition of SizeWise, We're building adequate safety stock to support the business through potential short-term disruptions. I'll conclude with an update on the integration of our recent acquisitions. First, the integration of Northfield Medical remains on track and nearly complete following our acquisition of the business in March of this year. Our teams have worked to seamlessly combine our operations and build out our offering of surgical equipment repair services. Immediately following the close of the transaction, we aligned our customer-facing sales and ops teams and we began collaborating on commercial opportunities. Today, we go to market as a single surgical equipment repair team with a differentiated service offering carried by a dedicated sales force backed up by our consolidated technology platforms and supported by a common back office infrastructure. As we approach the final phases of our Northfield integration, We've also begun the initial phase of our integration plan for size-wise. Our integration philosophy has always been we'll first do no harm, meaning that we take time upfront to learn and we work jointly toward a combination that elevates the best of both companies. We plan to utilize the remainder of 2021 to assess talent and perform our integration blueprinting. We plan to begin executing our formal integration plans in early 2022. With that, let me turn things over to Jim to offer more detail on the financial performance in Q3.

Thank you, Tom. I'll start with an overview of our Q3 2021 financials and then offer some reflections on the balance of the year. For the third quarter, total company revenue totaled $262 million, representing a 35% increase over the prior year. Adjusted EBITDA totaled $82 million, representing a 46% increase over Q3 of 2020. This performance resulted in adjusted EBITDA margins of 31% for Q3 of 2021, up 200 basis points from last year. Our strong operating performance drove an adjusted earnings per share of 23 cents, up from 13 cents in Q3 of last year. Taking a closer look at our revenue for the third quarter across our service lines, we delivered strong revenue growth across both clinical engineering and onsite managed services, and a slight improvement in equipment solutions revenue. Equipment solutions revenue totaled $78 million, up 1% year over year. We had previously estimated that in Q3 of last year, the favorable impact from COVID was in the range of $11 to $15 million, primarily occurring within equipment solutions. On our last earnings call, we shared our expectation that we would return to pre-COVID demand levels in Q3. However, this year's late Q3 surge in COVID-related hospitalizations resulted in a net favorable revenue impact that we estimate between $7 and $10 million. Additionally, during the quarter, we recorded $5 million in revenue related to a larger than normal liquidation of equipment from within our medical device fleet. Moving to clinical engineering, Q3 revenue was $112 million. representing year-over-year growth of 78% for the quarter. The growth in the quarter came from signing and onboarding new business over the last year. And, as you heard earlier from Tom, we also delivered higher than expected revenue from work performed during the quarter under the direction of the federal government under our stockpile management agreement. In addition, We reported revenue contributions from Northfield Medical within our clinical engineering solution during the quarter. Finally, our onsite managed services revenue totaled $73 million, representing year-over-year growth of 32% for the quarter. A majority of the growth in Q3 came from our expanded contract with the federal government for medical device stockpile management services. Gross margin for Q3 totaled 103 million, an increase of 29 million or 39% year-over-year. Our gross margin rate was 39%, up over 100 basis points from the year-ago period. This improvement in margin rate was driven primarily by strong total revenue growth across all three solutions. As all lines of business leverage a common operations infrastructure, volume growth generally has a favorable impact on our margins. SG&A costs for Q3 totaled $75 million, an increase of $3 million or 4.6 percent. The increase is primarily due to cost increases for the Northfield acquisition, offset by the decrease in the remeasurement of the tax receivable agreement of $9.4 million in 2020. SG&A expenses as a percentage of revenue declined by over 800 basis points, partially due to the decline in the expense related to the remeasurement of the tax receivable agreement, but also due to continued overall leverage of our fixed cost infrastructure. Adjusted EBITDA for Q3 totaled $82 million, representing an increase of $26 million versus the prior year. Our year-over-year revenue growth and improved gross margins in the quarter combine to deliver adjusted EBITDA margins of 31%. In the appendix to our slide deck, we provide a reconciliation of GAAP EBITDA to adjusted EBITDA consistent with our past reporting. Finally, our adjusted earnings per share for Q3 totaled 23 cents per share, an increase of 10 cents per share from the prior year, and representing 76% year-over-year growth. This growth was a direct result of our strong overall business performance, partially offset by the increase in the weighted average fully diluted shares of approximately 35 million shares associated with the shares issued during our April 2021 IPO. Moving to the balance sheet and our new capital structure, we closed Q3 with net debt of $921 million, which includes $1.04 billion in debt, less $124 million of cash on hand on our balance sheet. Our cash flow from operations for the first nine months of the year was over $130 million. driven by strong operating results and lower interest costs resulting from the pay down of our second lien debt facility as part of the IPO. Wrong cash flow generation and adjusted EBITDA growth resulted in a reduction of our leverage ratio to 2.9 times at the end of Q3. Looking forward, with the recently announced size-wise acquisition, our pro forma leverage will increase by approximately half a term. A reminder that over the longer term, we expect to target our leverage in the low to mid 3X range as we use our strong balance sheet and cash flow generation to fund opportunistic M&A. Agility maintains a position of significant liquidity with $366 million available as of September 2021. This includes our $250 million revolving credit facility, as well as cash on hand. Since completing the IPO and reducing our outstanding debt, we shared that our corporate rating increased from B to B+, with a positive outlook from S&P, and from B2 to B1 with a stable outlook from Moody's. Over time, we expect this should further reduce our cost to access to capital markets, as required, to augment our growth with targeted M&A. In this regard, on October 1st, 2021, with the closing of the SightWise acquisition, we successfully raised $150 million add-on term loan with terms and pricing consistent with our most cost-efficient portion of our term loan debt. Our pro forma liquidity, after giving effect to the size-wise acquisition and the recent debt raise, includes an undrawn $250 million of revolving credit facility, as well as over $40 million of cash on hand. Finally, I'll provide some additional color on our 2021 financial outlook. As a reminder, we provide guidance for key performance metrics on a full year basis. I'll start with a quantitative summary and share our significant assumptions. Based on current performance and fully considering the financial impact of the size-wise acquisition, we are raising our guidance for the full year 2021. Specifically, we are increasing our revenue guidance to a range of $1.01 to $1.02 billion, representing full-year revenue growth a 31 to 32 percent. We are also raising our adjusted EBITDA guidance to a new range of 300 million to 310 million, representing full-year growth of approximately 28 to 31 percent. Finally, we are slightly increasing our net cash CapEx guidance from the previous range of 65 to 70 million to a revised range of $67 to $72 million. CapEx as a percentage of revenue is expected to remain in the range of 6% to 7%. Reflecting on the balance of the year, we are planning under the assumption that COVID-19 continues into Q4 before starting to taper. This should favorably impact the utilization of our medical device fleet for the balance of the year. Recall that last year the favorable net COVID impact on our financial results was approximately 30 to 40 million for full year 2020 revenue, occurring primarily between Q2 and Q4. The favorable net COVID impact on our financial results has been approximately 19 to 24 million for the first nine months of 2021. The strong growth implied by our full-year guidance takes into consideration that the comps will become more challenging for the next several quarters until we have fully lapped the COVID tailwind. Additionally, and as Tom noted earlier, we recognize higher than anticipated time and materials-based revenue related to our medical device stockpile management contract with the federal government during Q3. We had previously expected a portion of this revenue to occur in Q4 of this year, so this reflects an acceleration in timing from our prior expectations. This does not increase our view on the total financial contribution from this agreement for the balance of the year. Continuing with our assumptions regarding the stockpile management contract, our 2021 financial guidance includes the assumption that we will successfully renew the agreement with the Department of Health and Human Services. We also expect to continue signing and implementing new contracts for a solution throughout the year in the ordinary course of our business as customers continue to turn their attention back to the strategic and financial initiatives where our solutions play an important role. These assumptions are embodied within our full-year guidance. As is evident in our consistent and positive 2020 and 2021 financial performance, changes in the outlook with respect to COVID-19 may slightly alter our mix of revenue for the balance of the year. but we would not expect it to significantly impact our consolidated results from our expectations for the balance of the year. Finally, our implied full-year EBITDA margins, which can be calculated from our revised 2021 guidance, are expected to be in the range of 28 to 30 percent. This guidance reflects our expectation that the business will return to our pre-COVID margin profile. Primary drivers that will impact margins for the balance of the year include the normalization of rental device volume as we exit 2021, our internal assumptions on a renewal of the HHS contract, and the impact of our recently completed acquisitions of Northfield Medical and Swat SizeWise, both of which have lower initial EBITDA margins when compared to Agility's historical average. I will end my prepared remarks today with a final comment on the recently completed size-wise transaction. For the next two quarters, we will plan to provide additional financial context for the revenue and adjusted EBITDA contribution coming from the acquired size-wise business. By the end of Q2 of next year, we expect that we will have sufficiently progressed with our integration such that it will not be practical to identify the size-wise specific contribution to our overall financial performance. Similar to our experience with the Northfield acquisition, Agility's rental business and operations infrastructure benefit from significant overlap with the acquired SizeWise business. As we integrate all aspects of the product portfolio, operations infrastructure, and related back office capabilities, we expect that the financial contribution associated with legacy SizeWise will quickly become indiscernible. With that, I'll now turn the call over to our operator. provide instructions for our Q&A.