Agiliti Inc. (AGTI) CEO Tom Leonard On Q4 2021 Results - Earnings Call Transcript

Mar. 08, 2022 10:29 PM ETAgiliti, Inc. (AGTI)
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Agiliti Inc. (NYSE:AGTI) Q4 2021 Earnings Conference Call March 8, 2022 5:00 PM ET

Company Participants

Kate Kaiser - Vice President of Corporate Communications & Investor Relations

Tom Leonard - Chief Executive Officer

Tom Boehning - President

Jim Pekarek - Executive Vice President & Chief Financial Officer

Conference Call Participants

Matthew Borsch - BMO Capital Markets

Kevin Fischbeck - Bank of America

Frank Pinal - Jefferies

Jason Cassorla - Citi

Matt Mishan - KeyBanc


Good afternoon and welcome to Agiliti's Fourth Quarter and Full Year 2021 Earnings Conference Call. Today's call is being recorded and we have allocated 1 hour for prepared remarks and Q&A.

At this time, I'd like to turn the conference over to Kate Kaiser, Senior Vice President of Corporate Communications and Investor Relations at Agiliti. Thank you. You may begin.

Kate Kaiser

Thanks, Shamali and hello, everyone. Thank you for joining us on today's call as we provide an overview of Agiliti's results for the quarter ending December 31, 2021.

Before we begin, I'll remind you that during today's call, we'll be making statements that are forward-looking and consequently are subject to risks and uncertainties. Certain factors may affect us in the future and could cause actual results to differ materially from those expressed in the forward-looking statements. Specific risk factors are detailed in our press release and our most recent SEC filings which can be found in the Investors section of our corporate website at We'll also be referring to certain measures that are not calculated and presented in accordance with generally accepted accounting principles during this call. You can find a reconciliation of these measures to the most directly comparable GAAP measures and a description of why we use these measures in our press release. To download a copy of the presentation that we'll use to facilitate today's discussion, please visit our website at select the Investors section at the top of the screen and then Events and Presentations. Finally, select presentation titled Agiliti Q4 and Full Year 2021 Earnings Slides.

With that, I'll turn the call over to our CEO, Tom Leonard.

Tom Leonard

Thanks, Kate and good afternoon. Thank you for taking the time to join us as we review our results from the fourth quarter of 2021 and reflect on our performance for the full year. Joining me today is our CFO, Jim Pekarek and our President, Tom Boehning, who leads our Commercial Operations.

Our results for 2021 finished ahead of our expectations and our previously increased guidance for the year and Agiliti crossed the $1 billion annual revenue milestone. Today, we'll walk through the factors that drove our performance throughout 2021, offer a perspective on current trends in the business and share our initial outlook for the year ahead. Jim will provide details on our results and our 2022 guidance later in the call. I'll begin with a few insights into our overall performance and direction.

First, we continue to deliver on our commercial goals as reflected in our results for both the quarter and the full year. With the rapid rise in spread of the COVID-19 Delta and Omicron variants late in the year, we saw increased customer demand on our medical device rental fleet which favorably impacted our Equipment Solutions results. Within Equipment Solutions, we also recognized the financial contribution from our recent Sizewise acquisition. We continue to see solid performance across the rest of our business as well. Clinical engineering performance in the quarter was largely driven by new customer contracts and our ongoing work supporting the strategic national stockpile. Revenue from on-site managed services held steady year-over-year. On March 1, Agiliti filed an 8-K announcing a new 1-year agreement with HHS to continue our important work, managing, maintaining and deploying the federal government's emergency medical device stockpile. Tom Boehning will provide additional details in his prepared remarks.

With our focus now squarely on 2022 and beyond, I'd like to offer a brief recap on our strategy and the overall direction of the company. We have established Agiliti as a key part of our national health care delivery infrastructure. Starting at a local level, we help hospitals, health systems and other provider organizations efficiently manage their medical device needs, ensuring the availability of patient-ready medical equipment whenever and wherever needed, including rights to the patient's bedside. The medical devices we manage, mobilize and maintain on behalf of our customers are paired with clinical expertise and technology-enabled service capabilities, helping to drive down cost and improve patient care outcomes for our customers. With more than 150 local medical device repair and logistics centers, our teams quite literally live and work in the same neighborhoods as the customers we serve.

We have previously shared that Agiliti's unique operations infrastructure puts us inside a 100-mile radius of more than 90% of all staff beds in the country. This provides us a meaningful structural advantage in how we access our customers and identify new opportunities as well as a cost advantage in how we serve them. At a national level, Agiliti delivers integrated medical device repair and logistics solutions targeted at improving device readiness and availability and delivered at scale. Our national operations footprint uniquely enables us to serve many of the nation's largest and most sophisticated health care systems and provides rapid coast-to-coast support during times of peak or emergent need. Throughout our long history, Agiliti has provided the supplemental medical device capacity required for health systems across the country to meet the patient surge during each flu season. We supported our health systems regional response to fires, floods and other natural and man-made disasters by mobilizing teams and medical equipment, on short notice to wherever needed.

And over the last 6 years, we've been supporting device management, maintenance and deployment needs on behalf of city, state and federal government and emergency response teams. Our work on behalf of these government agencies has been an important part of the national medical response throughout this period impacted by COVID-19. Agiliti has even become the partner of choice for many medical device manufacturers, serving as an extension of their own field repair capabilities to solve large-scale challenges, including nationwide medical device recalls. On top of our established history of consistent organic growth, Agiliti has demonstrated a record of successful tuck-in M&A. Our stated approach to evaluating opportunities is to overlap and extend, meaning we look to build on our existing capabilities to drive additional profitable volume through our national service infrastructure, continuing to grow our market size and share while staying close to what we do best.

In 2021, we completed 2 acquisitions that clearly illustrate this approach. First was Northfield Medical, nationwide provider of surgical equipment repair and maintenance services which we closed last March. Building on the 2020 acquisition of Mobile Instruments, we combine the second and third largest independent service providers to expand our capabilities in surgical instrument repair and to complete our nationwide service footprint. More recently, we acquired Sizewise in a transaction that closed on October 1, a manufacturer and distributor of standard and specialty bed frames, therapeutic support services and patient mobility equipment, the addition of Sizewise clearly illustrates our overlap and extend model. And beyond the direct and near-term synergies, we're excited about the future opportunities that the Sizewise acquisition opens up for Agiliti.

Obesity is a national challenge. Across the continuum of care, these patients require specialized medical equipment and handling protocols and they are at significantly higher risk for medical complications associated with prolonged bedrest. It despite the need, this patient population and the clinicians that care for them remain woefully underserved. Looking forward, we see a compelling opportunity to build on the Sizewise foundation and deliver new targeted solutions complete with a local clinical and operational support for which Agiliti is known. More broadly, Agility maintains an active pipeline of M&A opportunities and the financial flexibility to pursue them. We'll continue to seek targets that can drive profitable volume through our national operations infrastructure, extend the value that we provide for our customers and enhance our competitiveness.

A final point I'll make today regarding our strategy is around the extraordinary resilience and predictability that we've built into our business model. As you look across our business, you can observe our connection to every phase of our customers' medical device life cycle as well as the balance of our business between the medical and the procedural sides of a hospital's operations. Financially, this serves for us as a natural internal hedge, meaning regardless of macro trends facing our health system as a whole or specific situations or challenges affecting an individual customer, some part or parts of our solution set are always in demand. I've previously described this durable nature of the Agiliti business model which has been evidenced in our stable financial performance, starting well before COVID and throughout the highs and lows of the pandemic and now as we support our customers' transition back to normal operations, reflected in our results is the resilience of our model and the essential nature of our work.

We're proud of the performance of our teams and the important roles that Agiliti has long performed in support of our national health care delivery system. Looking forward, we're even more enthusiastic about our strong business momentum and the opportunities ahead of us. Let me now turn the call to Tom Boehning for his perspective on our performance.

Tom Boehning

Thanks, Tom. I'll begin with some additional color on our commercial performance and then share a few reflections on recent macro trends and their impact on our business. First, we continue to see heightened customer demand for our rental equipment during the fourth quarter, driven by both the Delta and Omicron variants of the COVID-19 virus. Our fearless national network of medical device service and logistics capabilities ensured that we remain responsive to the needs of our customers, they navigated the effects of the pandemic. We're now seeing a return to normal non-COVID device utilization levels as we approach the end of Q1 2022. We likewise expect to see a return to normal surgical case volumes across the country which will favorably offset some of the impact from normalization of equipment demand. More broadly, while the persistence of COVID-19 and its variants had an ongoing impact on customer mind share, our teams continued to enjoy access as we supported their short-term needs. Today, increasingly engaging with our customers on their longer-term strategic initiatives.

Turning to the topic of our new federal government agreement for emergency medical device stockpile management. On February 28 of this year, Agiliti entered into a new 1-year agreement with the U.S. Department of Health and Human Services, Assistant Secretary preparedness and response for the comprehensive maintenance and management services for medical ventilator equipment. This contract consolidates several prior agreements and it's comprised of an initial 6-month base term and a 6-month option term. On March 1, 2022, Agiliti publicly released details of this award.

In summary, the term of this new agreement is for up to 12 months. It's intended to provide sufficient time for HHS to run a competitive multiyear contract award process while minimizing the risk of interruption to the critical services that Agiliti provides in support of our nation's ongoing COVID-19 response. Agiliti, of course, fully intends to compete for any future contract award. As we've shared on previous calls, we operate under strict nondisclosure agreement with HHS regarding the details of this contract and the work that we perform at their direction. The information we can discuss today is limited to what the federal government discloses publicly and what we provided today in our prepared remarks.

I could take a moment to touch on the general subjects of labor availability, wage inflation and supply chain risk. We continue to closely monitor these important inputs to our business and we followed the broader discussion happening across all industries. As we shared last quarter, we are not seeing a significant impact from these macro issues. Regarding labor availability, we tend to view this subject across 3 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 recruitment process? And finally, can we retain the good talent once they've joined Agiliti?

With that context in mind, what we're seeing today is we're currently attracting somewhat fewer candidates at the top of our funnel and our time to fill positions has ticked up slightly. We've also seen increased wage pressure in certain local markets and that complicates our ability to successfully land candidates once we've engaged them in the process. As a result, today, we're seeing our open positions approaching 12% of total positions within the company. While positions normally hover in the high single digits based on historic turnover levels in our high growth rate, to date, we've not been able to manage through these additional open roles without meaningful customer impact or excess over time. We continue to monitor our teams and our customers closely to ensure we can continue our important work while trying to minimize the risk of employee burnout.

Our overall employee retention rates have held relatively steady over the last 3 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 teams financial and personal well-being. Bigger picture, Agiliti prides itself on 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 health care system. Further, we ensure our team members had the opportunity to share in the success of the company through our cash and stock-based incentive programs and more recently, the introduction of an employee stock purchase plan.

Overall, we believe Agiliti remains competitively positioned in a generally difficult labor environment. In terms of supply chain risks, our outlook is somewhat similar. Agiliti 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 for our own fleet and for those devices that we manage for our customers. Further, with the recent addition of manufacturing capabilities through our acquisition of Sizewise, we are maintaining 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, we have completed the integration of Northfield Medical. Today, we go to market as a single surgical equipment repair team. we serve our customers with a differentiated service offering supported by our integrated technology platform and a common operating infrastructure. We're also now well underway with our integration of Sizewise. We've aligned our commercial selling team and our operations leadership which is our highest integration priority. The combined team is collaborating in the field to bring our newly expanded solution directly to customers. We're now taking steps to combine our financial and operating systems as well as our corporate functions and we're just beginning to merge our facilities, vehicle fleet, equipment inventory and operations personnel, a project that will span roughly the next 2 years.

With that, let me turn things over to Jim to review our financial performance.

Jim Pekarek

Thank you, Tom. I'll start with an overview of our Q4 and full year 2021 financials and then end with some comments on our 2022 financial guidance.

For the fourth quarter, total company revenue totaled $290 million, representing a 36% increase over the prior year. Adjusted EBITDA totaled $85 million, an 18% increase over the prior year. We estimate that Sizewise contributed approximately $40 million in revenue and $10 million in adjusted EBITDA for the quarter which includes an estimated $2 million to $3 million of revenue contribution from COVID-driven demand. Adjusted EBITDA margins were 29% in Q4, down 440 basis points from last year. Adjusted EBITDA margins versus the prior year were impacted by the acquisition of Sizewise as well as the acquisition of Northfield Medical. You will recall that Agiliti generally enjoys a very strong margin profile. So the companies we have acquired all start with lower pre-synergy adjusted EBITDA margins.

Our strong operating performance drove an adjusted earnings per share of $0.25, up 25% or $0.05 a share over Q4 of last year. This growth was a direct result of our strong overall business performance, partially offset by an increase of 32 million weighted average fully diluted shares outstanding associated with our April 2021 IPO. For the full year, total company revenue totaled $1.04 billion, representing a 34% increase over the prior year. Adjusted EBITDA totaled $331 million, representing a 41% increase over the prior year. Adjusted EBITDA margins were 32% for 2021, up 150 basis points from last year.

Margins were favorably impacted by overall volume growth, most notably from record utilization of our medical device fleet and services performed under our HHS contract. Organic growth from new customers and COVID-driven medical device rental utilization were also significant drivers. Our strong operating performance drove an adjusted earnings per share of $0.99, up $0.48 and nearly double last year's results.

Taking a closer look at the fourth quarter across our service lines. We delivered strong revenue growth across both equipment solutions and clinical engineering and a slight decline in on-site managed services revenue. Equipment Solutions revenue totaled $120 million, up 54% year-over-year. Our October 1 acquisition of Sizewise contributed approximately $40 million in revenue in Q4. In addition, COVID demand continued in Q4. And while difficult to quantify, we estimate had a net favorable impact of between $12 million and $15 million versus pre-COVID levels. In the prior year period, we also experienced a favorable impact from COVID of approximately $11 million to $15 million.

Moving to Clinical Engineering. Q4 revenue was $96 million, representing year-over-year growth of 57% for the quarter. A significant driver of this performance was higher-than-anticipated revenue from work performed under our HHS agreement. In addition, we reported the revenue contribution from Northfield Medical within our Clinical Engineering solution during the quarter. Finally, our on-site managed services revenue totaled $74 million, representing a year-over-year decline of 1% for the quarter. As we have previously described, for nearly 2 years, customers have been focused on the near-term challenges related to COVID and Agiliti's Equipment Solutions service line has directly benefited. As we emerge from this COVID-dominated period, we are once again engaged with our customers on longer-term, more strategic initiatives. We are already seeing an increase in new on-site managed opportunities moving through our sales funnel.

Continuing down the P&L. Gross margin for Q4 totaled $121 million, an increase of $34 million or 40% year-over-year. Our gross margin rate was 42%, more than 100 basis points better than the prior year. This improvement in margin rate was driven by record levels of utilization of our medical device fleet and by general volume growth across our solutions. As all lines of business leverage a common operations infrastructure, volume has a favorable impact on our margins. SG&A costs for Q4 totaled $95 million, an increase of $26 million or 37%. SG&A expenses as a percentage of revenue increased by approximately 30 basis points over the prior year. The increase is primarily due to SG&A costs from our 2021 acquisitions, net of achieved synergies.

Moving to the balance sheet. We closed Q4 with net debt of $1.18 billion which includes $1.19 billion in debt, less $74 million of cash on hand on our balance sheet. Our cash flow from operations for the year was over $210 million, driven by strong operating results and lower interest costs resulting from the paydown of our second lien debt facility as part of our IPO. Strong cash flow generation and adjusted EBITDA growth resulted in a reduction versus the prior year of our reported leverage ratio to 3.4x at the end of the quarter. As we stated in our Q3 earnings call, we had estimated that the Sizewise acquisition would result in an increase in our leverage ratio by approximately half a turn which is consistent with our actual results.

A reminder that over the longer term, we expect to maintain our leverage in the low to mid-3x range as we anticipate using our strong balance sheet and cash flow generation to fund opportunistic M&A. Agiliti maintains a position of significant liquidity with $316 million available as of December 2021. This includes our $250 million revolving credit facility as well as cash on hand. On October 1, 2021, with the closing of the Sizewise acquisition, we successfully raised $150 million add-on term loan with terms and pricing consistent with the most cost-efficient portion of our term loan debt.

As we turn towards 2022, I'll spend a minute on planned near-term incremental capital investment. We are guiding full year CapEx in the range of $80 million to $90 million or approximately 7% to 8% of revenue. This is 1 to 2 percentage points higher than our normal level of annual investment to support our operations and IT infrastructure as well as the maintenance and growth requirements of our business. There are several drivers for the increased spend in 2022. First, we were unable to invest at the targeted level of maintenance CapEx for our equipment fleet last year as some device manufacturers experienced supply chain challenges and/or quality-related ship holds. This is simply a timing delay. It had no impact on our operations and we finished 2021 below our targeted spend level.

Next, we are modestly increasing our IT investment to accelerate the ongoing build-out of our internal systems infrastructure. These investments are focused on improving customer experience and upgrading capabilities to support the rapidly expanding scale of our business. Finally, with the acquisition of Sizewise, we are making several focused investments to modernize and expand our manufacturing infrastructure to align with our near-term growth projections.

Turning now to the rest of our 2022 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. We currently expect to deliver 2022 revenue in the range of $1.16 billion to $1.19 billion, representing top line growth of 12% to 15%. We anticipate adjusted EBITDA in the range of $305 million to $315 million, a decline of approximately 5% to 8% compared to the prior year. And as just stated, our net cash CapEx guidance reflects our expected investment in the range of $80 million to $90 million.

Finally, we are adding adjusted earnings per share to our full year guidance metrics as we approach the 1-year anniversary of our IPO and our capital structure has stabilized. For 2022, we expect adjusted earnings per share in the range of $0.89 to $0.94 per share. From a qualitative perspective and as we have shared in each of our earnings calls, throughout much of 2022, our financial results will comp against the $30 million to $40 million in high-margin COVID-driven revenue tailwinds from 2021. While we saw some COVID-driven demand early in Q1 of this year, our 2022 plan assumes a return to pre-COVID equipment utilization levels for the balance of the year.

Additionally and as Tom described earlier, our new HHS contract consolidates several prior agreements and its narrowed scope reflects the ongoing management and maintenance of the device stockpile without the incremental activities associated with its initial standup or deployment. While the financial details of the contract remain confidential, implicit in our guidance is that Agiliti will see an approximate $40 million to $50 million in revenue reduction in 2022. That difference will be accounted for within both clinical engineering and on-site managed services though the majority of the impact is expected within on-site managed services.

Consistent with our ordinary course of business, we expect to continue signing and implementing new contracts for our solutions throughout the year as customers turn the attention back to their long-term strategic and financial initiatives where our solutions play an important role. Net of the COVID impact in the rescoped HHS contract and adjusting for the annualized impact of acquisitions made in 2021, our guidance implies organic revenue growth in the mid- to high single-digit range, consistent with our historical pre-COVID growth rate.

Finally, our implied full year adjusted EBITDA margins which can be calculated from our 2022 guidance are expected to be in the range of 26% to 27%. Primary drivers that will impact margins for the balance of the year include the normalization of rental device utilization back to pre-COVID levels, our internal assumptions on the new HHS contract and the impact of our acquisitions in Northfield Medical and Sizewise, both of which start with lower pre-synergy EBITDA margins when compared to Agiliti's historical average.

I'll now turn the call over to our operator to provide instructions for our Q&A.

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Matthew Borsch with BMO Capital Markets.

Matthew Borsch

Yes. Maybe just talk a little bit more about the change in your experience with labor availability and wage inflation. I mean, I remember what you said on the third quarter. You weren't saying there was no impact but it was modest and it really accelerated. Is there anything you can say about regional variation or what you know about where the bid away might be coming from anything like that?

Tom Boehning

Matthew, it's Tom Boehning. Thank you for the question. It's -- we -- as we said in our prepared remarks, it's -- we usually run in about the high single-digit range in terms of our vacancy rate in the company. We're now hitting the low double-digit rates and we certainly are ramping up our recruiting efforts to be able to make sure that we get the right people in the right roles. We've had to make some modifications in certain markets to our incentive structures in order to make sure it was attractive to get people in those particular markets. But generally speaking, as we shared in our remarks and, of course, what we talked about last quarter, it's not having a material impact on the business.

Matthew Borsch

Are you just in terms of where the trend is then going for what you've seen over the last 2 months of 2022, is it getting -- has it gotten better, worse, just recently? I'm just trying to figure out how the trends running right now.

Tom Boehning

Yes, it's a good question. So retention has remained relatively steady. But with our growth, we have vacancies that we're trying to fill. And I would say it's been a little slower to fill the positions as we stated, than it has been in the past. But the retention rates, again, remain relatively steady which is encouraging that we have the right models in place. Our team members feel fulfilled in what they do. and that the incentive structures are aligned with what their desires are. So we're doing well in terms of retaining but recruiting certainly in certain markets, it's a little more difficult than it has been.


And our next question comes from the line of Kevin Fischbeck with Bank of America.

Kevin Fischbeck

I appreciate the comment about breaking out the organic revenue growth because it is kind of hard to tell what's underpinning everything given the deals and COVID everything. But maybe it makes sense to -- if you can give a little additional color by segment as you think about what's going to be growing maybe above that mid- to high single-digit range and what might be growing below that? How much kind of -- are you assuming kind of a return to normal as far as core volumes? Or is there pent-up demand anywhere in the assumptions.

Jim Pekarek

Yes. Thanks, Kevin. We don't break out the details within revenue but just sharing a couple of things that I had shared in the prepared remarks, First, from a COVID perspective, we do expect that we're going to get back to a pre-COVID level here very quickly. And recall that what I shared was that the 2021 impact for us overall was $30 million to $40 million. So that would be a good reference point as you're thinking 2021 to 2022 within Equipment Solutions. The other thing I called out which is an important one is in Q4 the estimate for the Sizewise revenue for the acquisition was about $40 million for the quarter. So that also will impact equipment solutions in 2022 so those are a couple of pieces to keep in mind. The other piece to keep in mind, Kevin and I pointed it out is within HHS, that contract that we just renewed, we estimate that the impact there is between $40 million and $50 million of lower revenue and that primarily will impact on site. It will impact both clinical engineering and on-site but primarily on-site. So that hopefully gives you a little bit more color as you think about 2022 within each solution.

Kevin Fischbeck

Okay. And I guess, as we think about the CapEx shift that you guys were discussing, it sounds like some of that was because of equipment delays and things like that. Are those things fully resolved now? Or is this still having an impact and you expect it to be resolved by year-end? And if there are future delays, would that potentially have an impact in your ability to serve clients.

Tom Leonard

So this is Tom.

Jim Pekarek

Leonard, maybe you can hit that one.

Tom Leonard

Yes. So are they fully resolved? No. Medical device manufacturers are both seeing still some impact to the supply chains and there are still recalls that impact availability of equipment. In terms of its impact to our business, though, risk. I would think about this as maintenance CapEx and our fleet. We maintain our fleet at a level where we're continuously refreshing the equipment that we own. So a delay simply means the average age of our equipment may age slightly over the course of the year but no impact to our ability to meet the requirements of our customers and we just make it up when we can to ensure that we're refreshing our fleet appropriately.


Our next question comes from the line of Frank Pinal with Jefferies.

Frank Pinal

Congrats on the quarter here. I guess 2 for me. On the contract, on the lower $40 million, $50 million lower revenues in the quarter, just wondering if you could maybe unpack that, provide a little clarity there. Is that -- is there some assumption there that there is sort of a 6-month contract that it could end at 6 months or it goes all the way to 12 months, they're sort of a midpoint. And what is that options that second 6-month option period just for clarity's sake?

Tom Leonard

Sure. This is Tom. Let me take that for you. So if you take a look at what has happened if rent contract extension ends by the way, will be from 2.5 years into a 1-year contract initial 1-year contract. Let me give some color to what's gone. There has been a medical device stockpile for a very long time. We've been part of that medical device stockpile actually and managing it for the half dozen or so years that I and this team has been here. As part of COVID and new use cases pandemic, it was significantly expanded and directly awarded to us. What you've seen us share over the last 6 months was a series of these 1-month and 2-month extensions and then now a 1-year direct award that consists of a 6-month base period to 6-month option period. Effectively, what's going on and they described it in the contract award over those first initial extensions, I think there was a hope that COVID would wane and there'll be time in the ability to run a competitive process without risk to the vital services that we provide with Delta and Omicron and I'm certain paths with regard to COVID, the strategy that they outlined was a new 1-year directly awarded contracts to Agiliti to give them time to do a -- to run a process when they feel that the world has stabilized that COVID has received it to the background, so they can run a full government procurement process without risk to the services that we're providing.

Sort of structured as an initial 6 months with a 6-month option term and we would generally expect that sometime between the first 6 months and the end of that option term that they'll go ahead and run this competitive process. As we've stated continuously, we've consolidated all of the predecessor parts of this stockpile under our management over the last 6 years. We've additionally consolidated other previously unrelated stockpiles under our management. We continue to feel very good about our position on this. whenever the government is finally in a position to be able to run a new longer-term contract award.

Frank Pinal

Great. And then just sort of taking a longer-term view there, is it prudent to assume, I guess, given the variable portion there that this sort of steps down or contribution wins over time into '23, '24, et cetera?

Tom Leonard

I'm sorry. So the $40 million to $50 million reflects what we have been generally pointing to as we've spoken about the contract. It reflects what is the ongoing maintenance, storage management of the stockpile. Imagine in this first year when we got the award, there was a substantial increase in the number of devices that needed to be managed, being made by a wide variety of manufacturers to provide us protection and taking on this greatly expanded and uncertain new stockpile. It was structured in a way to support all these stand-up activities, ensuring these devices are ready and then whatever deployment activities might occur over the course of that year. And so it was a very -- it was a larger contract. The current contract goes back to the stockpile management and maintenance without assumptions of future deployments. So it's the normalized level, this $40 million to $50 million that we've guided to here of reduced revenue is really that normalized level of revenue we'd expect to see in future 5-year renewals, just reflecting the management of the stockpile, again, not the deployment, not the standout.


And our next question comes from the line of Jason Cassorla with Citi.

Jason Cassorla

Great. I just wanted to quickly turn back to the labor supply commentary. You noted 12% open positions currently versus high single digits historically. And while that isn't a significant difference, could you maybe expand on if this labor supply dynamic is impacting your go-to-market strategy for new revenue opportunities in the near term? I guess just considerations around impacts to go forward as opposed to the ability to service current contracts which you said you haven't really noticed the impact yet. Just any color there would be great.

Tom Boehning

Thanks, Jason. It's Tom Boehning again. So we don't see the macro trends right now inhibiting growth. And I think it speaks to the strength of our model and our ability to retain talent. We obviously have been proactive in making sure we recruit and retain at an accelerated level. But also some of the acquisitions that we have done have created some really nice synergies that have allowed us to be able to meet the customer demands without having to fill these positions. So we've grown 20% year-over-year and the pressure of filling these positions and the headcount really hasn't impacted our customers, in part because of the fact that we've been able to manage the talent and balance that talent that we have, both through the acquisitions and the existing resources that we had well. So right now, again, no impact on our delivery to our customers and our ability to meet the growth targets that we set for ourselves.

Jason Cassorla

Got it. Great. And then maybe just as a follow-up. I want to -- you called out short-term COVID focus as an impact for on-site managed services. I think this is the first time you're calling this argument out specifically; I could be off here. But just hoping you delve deeper around your comments on the sales funnel there and how you're seeing the opportunity for that segment to develop amid that dynamic.

Tom Boehning

Yes. Thank you, Jason. So on the Equipment Solutions side which is our augmentation of both equipment and labor resource for clinical engineering, that was obviously in the highest demand during the critical periods for our customers as they were trying to meet the needs of their patients in various markets. Of course, it was dramatic. And so the strategic conversations around, for instance, coming in and managing their equipment, either across their facilities or across their IDN were postponed because their near-term needs on the transactional basis outweighed their demand to try to really manage the equipment across their enterprise. So it was much more tactical than strategic. And now that we're seeing the amount of hospitalizations begin to drop, we're seeing our customers reengaging on these on-site conversations which more strategic. And that's why we're seeing the growth on the onsite side. And as we mentioned earlier, a return of some of the equipment that's been deployed and distributed for some time because of the fact that the hospitalizations are beginning to drop. So that pivot to more strategic conversations around full management of their equipment across their enterprise is starting to become more relevant than it has been over the last year, 1.5 years because of the COVID demands.

Tom Leonard

Just an additional point of color I'd share with you, you said it wasn't clear if we had indicated where we're on-site with land for the year. What I'll remind you is that we guide only to full year revenue, not to individual solutions. But what we've pointed out consistent is some portion of our business no matter what's going on is always in demand, both our balance across life cycle needs of our customers when it comes to the devices as well as the balance across both the medical and the procedural side of the house. In this case, specifically I'd liken it to the example of when the house is on fire, somebody is looking for somebody to hand them a hose or a bucket of water, not help redesigning the kitchen. In the same way, when their houses were on fire during the course of COVID, our customers were looking for help, servicing the devices the teams hence the equipment necessary to meet the needs. Now that the fires out, they're once again, thinking about how do I increase the value of my home, how do I remodel the kitchen. This shift back to their longer-term initiatives as our conversations with them shifting once again back to a focus on what we do in our on-site programs.


Our next question comes from the line of Matt Mishan with KeyBanc.

Matt Mishan

Congratulations on a nice -- on a very nice quarter. Just a quick one. What percentage of your business is now tied to like the recovery in procedural volumes? I mean now that the fire is out, it seems as if that's going to be the area of the hospital that starts coming back a little bit faster. I just wanted to better understand how leveraged you are to that.

Tom Leonard

We are somewhat leveraged the procedural side in 2 places. Within Equipment Solutions, we have a business that provides lasers and technicians to support the surgical cases as well as the surgical repair business that we had acquired both North field as well as mobile instruments business. So we are leveraged well to procedure volumes. When we've spoken in the past about COVID impact, we've always described it as a net impact. So the excess of demand, some types of equipments on the medical side, net of the reduction in surgical case volumes that impact those parts of the business I've just described. So we would expect these things to reverse some lower utilization of things like pumps, events and beds and minor equipment but a corresponding pickup for things like our surgical laser business and our surgical instrument repair business.

Matt Mishan

Okay. Excellent. And then just on revenue synergies, you made a couple of really great acquisitions. But like when you think about the acquisitions you made, you made them during a very difficult time for the hospitals. As you kind of look to increase your share of wallet and grow market share, I mean, is there since you've had those conversations with those customers and we're now at a point in '22 where do you feel comfortable that they could start deploying those?

Tom Leonard

So yes. And the 1 acquisition, again, just to speak to the balance across the medical and the procedure. The Sizewise acquisition clearly benefits on the medical side. And as we described, they've been a beneficiary of some excess COVID demand, North field and mobile instruments, both in the surgical instrument repair side have been somewhat impacted by a reduction in surgical case volumes. And we've continued to sign business throughout this period and we do expect as surgical case volumes return, to be a beneficiary of that, both the increase in case volumes as well as you continue to sign new business. We shared -- we combined the number 2, number 3 independent service organizations through those acquisitions in surgical instrument repair. We're very excited about what our competitive position looks like and we do expect that to be an important driver of growth for us in the future.


And our next question comes from Amit Hazan with Goldman Sachs.

Unidentified Analyst

This is Phil [ph] on for Amit. A couple of clarifications, if I could. The first one, I appreciate that $40 million to $50 million headwind comment on the HHS contract. I'm wondering if you can characterize whether or not the reduction in scope that's expected on the go-forward occurred prior to this kind of full on renewal over the course of the last few months when the contracts were just being rolled forward or if this is a new phenomenon that the scope will be reduced moving forward?

Tom Leonard

The prior extensions were an extension of the existing original 1-year direct contracts that were awarded. And this new contract that we've just announced is where we expect to see this revenue reduction that impacts 2020. And it is much as we have been consistently guiding in terms of our expectation on what the scope of the longer-term agreement would be as well. Again, what comes out that causes the $40 million to $50 million reduction is reduced scope as we've now stood up and we don't expect to further deploy -- need to further deploy this equipment supported pandemic response. So those line items effectively come out and result in about a $40 million to $50 million reduction in scope and revenue for us but that's for the new contract that was just announced.

Unidentified Analyst

Okay. That's very clear. And then secondarily, on the year-over-year COVID impact, I saw the 30 to 40 and obviously, 12 to 15 comment on the quarter. I also heard the -- getting back to the normal environment for equipment solutions during the course of 2022 but it's fair to think about some level of impact occurring in 1Q persisting from Omicron, correct? Is the 12 to 15 experienced in 4Q, a reasonable starting point for the impact expected within '22 guidance and primarily within the 1Q quarter?

Jim Pekarek

Yes, Amit, I wouldn't think about it that way. As I shared in my script, we saw it early in the first quarter but what we've assumed for the balance of the plan is that it's not going to be material. So we'll be back to a pre-COVID level candidly starting in the middle of Q1.

Tom Leonard

So that range as you suggested would be much higher than what we would expect to see in the quarter. We would expect a nonmaterial impact in Q1.


We have reached the end of the question-and-answer session. I'll now turn the call back over to CEO, Tom Leonard, for closing remarks.

Tom Leonard

Thank you and thank you again, everyone, for joining our call today. I'll say it's absolutely a privilege to get to share the great work of our teams and what they're doing to support our nation's health care system. We're excited about our momentum as we enter 2022 and we look forward to sharing our continued progress with you. With that, we'll conclude today's call.


And this concludes today's conference call. And you may disconnect you lines at this time. Thank you for your participation.

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