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Agiliti, Inc. (NYSE:AGTI)
Q3 2021 Earnings Call
Nov 09, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Kate Kaiser

[Audio gap] select the presentation titled Agiliti Q3 2021 earnings slides. With that, I'll turn the call over to our CEO, Tom Leonard.

Tom Leonard -- Chief Executive Officer

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 Pekarek; and our president, Tom Boehning, 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 $0.23, compared to an adjusted EPS of $0.13 for the prior-year period, representing an increase of 76%.

In line with our performance and adjusting for the October 1st close of the Sizewise acquisition, we have raised our guidance for full year 2021 to reflect expected revenue in the range of $1.01 billion to $1.02 billion and adjusted EBITDA in the range of $300 million 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 Agiliti 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 continued to combat the impact of COVID-19 and its variants across the country. This late demand exceeded our initial expectations for the quarter. Additionally, we're 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 in the balance of the year.

Remaining on the topic of our government stockpile agreement for a moment, let me offer a brief update on our contract status. Agiliti 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 Agiliti is successful in securing a renewal of this government contract. And as we've shared on previous calls, we operate under a strict nondisclosure 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 will be provided here in our prepared remarks. I'd like to spend some time today on another recent highlight: our acquisition of Sizewise.

On September 14, we announced that Agiliti had finalized an agreement to acquire Sizewise, the 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 ended June 30, 2021, the Sizewise 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. Acquisition was finalized on October 1, and we will account for Sizewise future revenue contribution within our equipment solutions service line. 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 Agiliti'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.

Sizewise strengthens Agiliti's capabilities at supply chain, permitting greater input over R&D, manufacturing, and logistics, our vital product category, and enabling us to manufacture a differentiated product portfolio for our exclusive benefit. Sizewise expands Agiliti'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 Agiliti's proven end-to-end service model, providing best-in-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 which obesity was a principal or secondary diagnosis, accounting for approximately one-fourth of all hospital stays.

Primary diagnosis was associated with bariatric surgical procedures, and a secondary diagnosis was associated with complicating medical conditions with 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 cost 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 Sizewise acquisition merges well with Agiliti'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 are maintained the highest standard in the industry. We're excited about the opportunity in front of us, and we plan to share more in the coming quarters as we begin to execute this combined company.

With that, I'd like to turn the call over to Tom Boehning to offer his perspective on our performance in Q3. 

Tom Boehning -- President

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 continued 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 interactions. 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 view this 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 Agiliti? 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've engaged them in the process.

Our overall employment retention rates, however, had 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 wage 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, Agiliti 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 Agiliti remains competitively positioned in a generally difficult labor environment. In terms of supply chain pressures, 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 with 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've been collaborating on commercial opportunities. Today, we go to market with 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 Sizewise.

Our integration philosophy has always been 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. 

Jim Pekarek -- Chief Financial Officer

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 $0.23, up from $0.13 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 million 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 million 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%. The increase was 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 it was 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 combined 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 $0.23 per share, an increase of $0.10 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 9 months of the year was over $130 million, driven by strong operating results and lower interest costs resulting from the paydown of our second lien debt facility as part of the IPO. Strong cash flow generation and adjusted EBITDA growth resulted in a reduction of our leverage ratio to 2.9x at the end of Q3.

Looking forward, with the recently announced Sizewise acquisition, our pro forma leverage will increase by approximately half a turn. 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. Agiliti 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-plus with a positive outlook from S&P, and from B2 to B1 with a stable outlook for Moody's. Over time, we expect this should further reduce our cost to access the capital markets as required to augment our growth with targeted M&A. In this regard, 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 our most cost-efficient portion of our term loan debt. Our pro forma liquidity, after giving effect to the Sizewise acquisition and the recent debt raise, includes an undrawn $250 million 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 Sizewise acquisition, we are raising our guidance for the full year 2021.

Specifically, we are increasing our revenue guidance to a range of $1.01 billion to $1.02 billion, representing full year revenue growth of 31% to 32%. 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%. Finally, we are slightly increasing our net cash capex guidance from the previous range of $65 million to $70 million to a revised range of $67 million 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 million 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 million to $24 million for the first 9 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 recognized 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 our solutions 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%. 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 Sizewise, both of which have lower initial EBITDA margins when compared to Agiliti's historical average. I will end my prepared remarks today with a final comment on the recently completed Sizewise 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 Sizewise 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 Sizewise specific contribution to our overall financial performance. Similar to our experience with the Northfield acquisition, Agiliti'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 to provide instructions for our Q&A. 

Questions & Answers:


Operator

[Operator instructions] The first question comes from Amit Hazan with Goldman Sachs. Please go ahead.

Amit Hazan -- Goldman Sachs -- Analyst

Thank you, and good afternoon. I wanted to start with a guidance question. So Sizewise, it looks like just kind of, if we kind of look at the revenues that you gave for their LTM, could contribute about $40 million or so this year, which looked like it's about the size of your increase in guidance. Just give us some clarifications around that.

Maybe you're thinking about the synergies or something like that, but clearly the business in 3Q benefited even without some of the callouts from 3Q to 4Q on the government side. So just help us out to understand contribution of Sizewise as it relates to the increased guidance and just overall confidence in the business as it relates to the increased guidance.

Jim Pekarek -- Chief Financial Officer

Yes. No worries. Thanks for the question, Amit. What I would tell you in terms of the way to think about our updated guidance for the year, think about it in three elements.

One is we continue to onboard new business, as I've said. And that's helped in Q3, and it's certainly reflected in our updated guidance for the full year. Secondly, with respect to your specific question with Sizewise, as we've disclosed, that business historically has been about $155 million in revenue, and we've disclosed that there's been about $30 million of adjusted EBITDA. Keep in mind that within that $30 million was approximately $5 million of COVID benefit.

So that's the second element of the reason for our increase. And then the last one is COVID. Recall that when we had our previous guidance, we had estimated that we will return to a pre-COVID level in H2. What we saw happen was that did occur in July, but then as we moved into August with delta that began to ramp up.

And as we disclosed with respect to our Q3 benefit from COVID, we estimated that benefit from a top-line perspective in the range of $7 million to $10 million. Those are the three elements to think about in terms of the raise in the guidance, Amit.

Amit Hazan -- Goldman Sachs -- Analyst

OK. And just thinking forward a little bit, we're tasked with modeling 2022 despite uncertainties around COVID or the government contract piece. So I'm wondering what kind of help you can give us in terms of just puts and takes to think about for both sales and margins next year. And how you're thinking about modeling internally and what you can help us with to kind of just get our numbers as estimates as accurate as possible with the information we have.

Jim Pekarek -- Chief Financial Officer

Yes, Amit. We'll provide the specifics when we update our guidance for next year. But what I would say is that the elements that I shared just now around the rationale for our increase in guidance are really the three key elements to keep in mind as you update your modeling for 2021 and 2022. I don't know if TL has another perspective you want to share there or not.

Tom Leonard -- Chief Executive Officer

Yes, I guess nothing I would add. Just to amplify what you said, Jim, is obviously this is part of the pre-IPO process. We spent time with you and outlines our initial views and the key drivers for our initial views on what next year would look like. Obviously, that remains intact, plus the annualization of the two acquisitions we did in this year, Northfield, which was completed late Q1, and [Audio gap] On October 1.

I think those are the right building blocks, plus with what we've shared previously, to get you in the right place to start.

Amit Hazan -- Goldman Sachs -- Analyst

And just one last one for me, just high level. Obviously, we're kind of monitoring what's going on with customers of yours in terms of just labor shortages on their side. I wonder if you could just give us a sense of how that impacts your business positive or negative in the different divisions.

Tom Boehning -- President

Tom, I can take that one. As said in our prepared remarks, we've actually grown our headcount 20% year over year, and that's been in line with the steady growth of the business. However, we are keeping a close eye on what is happening in specific markets. So we're being proactive and prepared to pivot as needed if market conditions change or new challenges emerge.

So as it stands right now, we don't see any of these macro trends inhibiting our growth.

Tom Leonard -- Chief Executive Officer

And just to follow up with a little bit more on that in terms of how it impacts our business, Tom addressed that we don't see it at this point impacting the costs in our business in terms of the opportunity as we look forward. We've previously shared that we really operate for our highest count pool of resources in the company. We operate in a closed marketplace for that talent within healthcare. And many of those folks, like our medical technicians, will choose to work for a hospital or work for a company like Agiliti.

If they work for a hospital, they honestly work in the basements and they're a cost center. They're a cost to the hospital. If you work at Agiliti, you're at the pointy end of the spear of what we do. You have the benefit from our investments in training.

You have the ability to participate not just with your bonuses, as we do well, but the share in equity ownership. So in that battle for talent, we tend to be pretty well-positioned. What does that mean in terms of our business opportunity? Well, that's just one more pressure on customers that are already dealing with the management maybe of their devices, which is non-core, non-clinical requirement of their business. It's just one more pressure I think that lends to the answer to outsource that business to someone like Agiliti.

We can do it better with higher quality and at a lower overall cost than they can do it for themselves. So cost-wise, it's been neutral so far, and be able to manage it. In terms of opportunity-wise, I think it gives just more reason for our customers to outsource to some.

Operator

[Operator instructions] The next question comes from Matthew Borsch with BMO. Please go ahead. 

Matthew Borsch -- BMO Capital Markets -- Analyst

[Audio gap] that you're pointing into a range of 28% to 30% for the full year. Did I understand you correctly? Because I calculate that the numbers come out to like 29.5% and 30.5%. I'm wondering if I'm just making some obvious error.

Jim Pekarek -- Chief Financial Officer

No, Matt. The range is 28% to 30%. No obvious there. I'm sure I can take it offline with you just to make sure we're in line.

Matthew Borsch -- BMO Capital Markets -- Analyst

OK, OK. Let me just, if I could ask maybe a separate question here. Should we think about clinical engineering and onsite services as segments that would have done even better absent the COVID impact in 3Q? I'm just curious how you would characterize that.

Jim Pekarek -- Chief Financial Officer

Yes. No, I wouldn't characterize it that way. One thing that might be helpful for you, though, in terms of just understanding the clinical engineering revenue for the quarter, and I pointed this out in the script, but just embellish on it a little bit. The growth was really due to a few factors.

Obviously the onboarding of new business and then the acquisition that we made of Northfield Medical. Now we don't disclose the impact of Northfield Medical for this quarter. But what I will tell you is what we've disclosed for Q3 of 2020 is that Northfield medical was around $29 million of revenue. So if you took last year's clinical engineering revenue and added $29 million, it would be a good way to do the comp of Q3 of last year to Q3 of this year.

So hopefully that helps a bit, Matt.

Matthew Borsch -- BMO Capital Markets -- Analyst

It does. Thank you.

Operator

The next question is from Ralph Giacobbe with Citi. Please go ahead.

Ralph Giacobbe -- Citi -- Analyst

Great. Thanks. Is there any changes to the financials and the economics of the government contract under these short-term extensions? And for 3Q, just wanted to clarify. It was more, or was revenue driven by incrementally the variable component of the contract given the delta surge? Is that what you meant by sort of the pull-through? Just wanted to kind of clarify that.

Thanks.

Jim Pekarek -- Chief Financial Officer

Ralph, on the first question, what I would say is that the math has been factored in when we think about our full year guidance with respect to government. So I wouldn't say that there is a change there with respect to our thinking. And again, as I pointed out in my script, we've assumed that we're going to be successful in onboarding that renewal of that contract. In the second part of your question, I want to make sure I understood it right.

Could you ask that again, Ralph?

Ralph Giacobbe -- Citi -- Analyst

Sure. I'm just wondering if there was a revenue contribution, I guess, from the variable component. So the fixed component and the variable components of the government contract. So was the variable component sort of triggered because of the delta surge, or am I misunderstanding? Because you also had sort of the commentary around benefits from the expanded contract.

So I guess I was just a little unclear on some of those comments.

Jim Pekarek -- Chief Financial Officer

Yes. No worries. There was certainly some work with respect to the government's request for us to do some work given what was going on with respect to delta, for sure. And just to clarify that that work, that T&M work showed up within the clinical engineering revenue for the third quarter.

That's where we talked about the movement from previously we had anticipated that work being done in Q4, and it moved up to Q3. So yes, you're thinking about it right from the perspective of requests that the government made based upon what was going on with delta.

Ralph Giacobbe -- Citi -- Analyst

OK. Got it. That's helpful. And then just lastly, was hoping you can give just an update on conversations with hospitals at this point coming out of the pandemic, if there is greater appetite to expand relationships.

I think in your prepared remark, you did talk about sort of long-term strategic conversations or some like longer-term contracts. I was hoping you could flesh that out and give us some context around that as well.

Tom Boehning -- President

Yes, Ralph. So it's Tom. We are seeing the customers reengage at a different level around things that they want to do with us that perhaps had been paused during the period of COVID. We're excited by that, and what COVID has done is raise awareness to what Tom had mentioned earlier that what they're doing with their medical equipment is often not strategic.

But during the pandemic, they realized the strategic importance of it and the differentiated value that we can provide as a result of the unique outsourcing services that we can provide to them. And so we have seen an uptick over the course of certainly the last quarter where customers are wanting to reengage where they may have paused some of the broader conversations of various things that we could do together, and we're looking forward to continuing to see that to grow, and opportunities a consequence begin to come through as we emerge from the pandemic.

Ralph Giacobbe -- Citi -- Analyst

OK. That's helpful. Thank you.

Operator

The next question is from Kevin Fischbeck with Bank of America. Please go ahead. 

Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst

Great. Thanks. I wanted to try and get a better sense of how you felt the core business actually performed here in Q3, because obviously the guidance raise was -- the beat versus consensus was nice. But I guess when you think about the COVID contribution and then the shifting from Q4 to Q3 on the government contract, it's not really clear to me how much of that kind of outperformance is actually in that core business versus some of these other kind of timing unexpected issues.

Jim Pekarek -- Chief Financial Officer

Yes. TL, I don't know if you want to hit on it, but I would just say from my lens, our view in terms of the core businesses that continue to perform consistent with what the guidance is that we've shared previously.

Tom Leonard -- Chief Executive Officer

Yes. Jim, the way I would characterize it is I feel like the math is entirely consistent. Obviously, we only guide on a full year basis. We have a sense for what consensus looks like.

And I say effectively, if you walk the beat plus a quarter of Sizewise, less effectively that timing differential as we brought some Q4 into Q3, the government's section under the contract as we shared, it gets you very directly to what that revised expectation would look like for the full year. And in terms of where did that beat come from, as we described, it came both from the day-to-day operations of our business and to a degree from the work that we do from the federal government, again, including the timing-related portion of that.

Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst

OK. I guess maybe if we expand it to the guidance raise for the year, then, I'm just trying to think about the core versus some of the other things. It sounds like the government contract for the year didn't change. But you've got Sizewise which is, call it, $8 million a quarter for your $30 million number.

And then you said COVID was $7 million to $11 million in Q3 with some additional contribution in Q4. I don't think you really had much COVID in the back half of the year for your guidance. So it kind of feels to me like a lot of the guidance raise was COVID and Sizewise. Is that fair that the core business is largely in line, or is the core business outperforming more than that would imply?

Jim Pekarek -- Chief Financial Officer

Yes, there is the three elements is what I would tell you. The one is the piece with respect to Sizewise that you hit on that's now being reflected in Q4. With respect to COVID, like we said in the script, it's $7 million to $10 million is the math with respect to the revenue in Q3. And then the other piece would be the continuation of onboarding new business.

So there are elements of each. And like I said at the outset of your question, I feel like that our core business is doing exactly what we've expected it to do from our prior guidance that we had provided.

Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst

OK, great. Maybe just one quick question. Sizewise seasonality, anything to think of there? Should it look like equipment solutions seasonality, or is there anything different that we try to layer that into next year?

Jim Pekarek -- Chief Financial Officer

Yes. The one thing I would point out and have pointed out is when you think about the COVID benefit for them, we've estimated that that's about $5 million of a favorable impact in terms of the adjusted EBITDA number that we had shared of $30 million. So if you think about them like you think about us with respect to Q4, we expect COVID to come into Q4 and then to, over the course of the quarter, come down and more at a pre-COVID level. You should think about that as well consistently with Sizewise.

Nothing much else as you go into Q1. It's somewhat similar to our business in that typically, in a pre-COVID world, you have the benefits of the flu. But I would tell you that that's more on the fringes, that that's not a sizable impact, Kevin.

Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst

OK. Thanks.

Operator

The next question is from Matthew Mishan with KeyBanc. Please go ahead. 

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

Thank you, and good afternoon. Is there any way you guys could quantify your estimate for the fourth quarter for Sizewise? You're going to end up quantifying what the actual load is over the next couple of quarters. I think it would just be helpful for folks to understand the estimate for Sizewise implied in the fourth quarter.

Jim Pekarek -- Chief Financial Officer

Yes. I'm happy to help with that, Matt. What I would do is I would use the historical number that we provided, the $155 million as a base, and then you can just divide that number by four. It's a decent proxy is the way I would think about it.

In terms of the EBITDA, you could do the same, but I would provide a little bit further discounting given the $5 million COVID benefit that we previously outlined within the $30 million.

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

OK. I think that makes total sense then. And thank you for giving that color. My last question would be around the labor inflation you were talking about.

It sounds like you've been able to retain your employees, but you are having a more difficult time attracting the right candidate. I think you're not alone in that. I think we've heard that from mostly everybody. How do you think about the ability to attract the right candidate and your ability to kind of support growth into next year, especially with some of the onboarding that you're doing with the business?

Tom Leonard -- Chief Executive Officer

Yes.

Jim Pekarek -- Chief Financial Officer

Go ahead, Tom.

Tom Leonard -- Chief Executive Officer

Yes, I think we're in a good place. Tom Boehning mentioned in the script and I'll kind of reiterate here, we managed to grow our headcount some 20% this year in alignment with our growth. So while the -- we've had fewer folks piling in at the top of the funnel than we normally would see or expect, we have not had an issue of being able to meet our needs and needs of the business. As we look forward next year, remember as well as we come together with Sizewise, there's a synergy opportunity in there, and some of those headcount needs will likely be met with folks that are already currently employed by either Agiliti or Sizewise, providing a further relief or cushion for us and making sure that we have the talent on board that we need in the places that we need them as we execute on next year.

And I will note, we have not changed our outlook at all for next year based on anything we described with regard to either excess personnel costs, personnel, or any of the supply chain-related issues. We feel like we've got them at this point all pretty well in hand.

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

Thank you very much.

Operator

The next question is from John Ransom with Raymond James. Please go ahead. 

John Ransom -- Raymond James -- Analyst

Hi, good evening. Just to kind of telescope back for a minute and talking to your customers and thinking about the landscape post-COVID, what do you think has changed versus not changed? And how do you see yourself adjusting to the market now versus, say, two years ago?

Tom Leonard -- Chief Executive Officer

Tom, do you want to --

Tom Boehning -- President

Yes. It'd be my pleasure. So thank you for the question. The opportunities have continued to grow for us with the expansion in just surgical equipment repair over the course of the last 20 months, and then the additional opportunities on the bariatric space with the acquisition of Sizewise.

So access for us has continued to grow, not just simply because of the strategic importance of what we provide to customers, but the breadth of offerings that we have has allowed us to continue to raise the opportunities that we have with the right audiences looking at our customers. And because of that, we're, as mentioned in the prepared remarks, is we are having more strategic conversations than we've had certainly over the last 20 months. So it's been exciting to add those product lines and give us an opportunity to pull them all together into more complete offerings and really provide a much more impactful suite of cost savings and value lift, as well as improving clinical outcomes as a result of the adds of those products and businesses.

Tom Leonard -- Chief Executive Officer

And then a follow-on. If I could briefly follow on to that. One of the things we've talked about, is it that Agiliti's [Audio gap] that we provide to customers. By being fairly unique.

That's often meant there was an education component associated with our sale. Having to highlight for customers their inefficiencies, their waste. I would say that one of the things that has absolutely changed as a result of COVID is while customers, they have tolerated that inefficiency before, that waste before, they've clearly seen when they couldn't get access to the critical medical equipment they needed to provide care for their patients, they clearly saw that this has to be a higher priority than it was before. So rather than pushing our way and educating our way into the C-suite, we find ourselves getting pulled now more into the C-suite with the question being posed to us, how can you help us not just eliminate the waste, but better mobilize this equipment so we have what we need when we need it, patient ready? And I'd say that the nature of the conversations we're having with customers has really evolved throughout this period of COVID and the unique ways you've been able to serve the nation's healthcare system.

John Ransom -- Raymond James -- Analyst

And as a follow-on, you've clearly done a couple of acquisitions that helped the story. How many BD people do you have like scouring the landscape for deals like you've done versus, say, two years ago? And do you see more opportunities to add capabilities? Are you getting more inbound as you've gotten public and gotten more visible?

Tom Leonard -- Chief Executive Officer

So I'd say first off, it can't be strategic if it just shows you a doorstep in the form of a book. The BD process starts with me. It starts with our business team, and what do we need to do to continue to expand our solution to differentiate it, to offer more value to customers. Who's out there then that might be additive to our story? None of these things fall into our lap.

And obviously in the case of Sizewise, for example, we were in discussions with them for the better part of three years, getting to know them, assessing the fit, making sure they would be the right company for us. In a similar vein, I knew the CEO and I followed the Northfield team for the better part of the last 5-plus, maybe six years. So it isn't about a BD team getting books and processing them. It's about this executive team having a strategy for the business, looking for things that will continue to augment the value that we have.

Building those relationships, vetting them, and building a funnel because we'll easily look at more than 20 opportunities before we bring one as far along as it gets visible or gets closed. And we do have a good, healthy funnel as we sit here today. Again, that's part of my job to help ensure that that remains the case.

John Ransom -- Raymond James -- Analyst

Well, I feel kind of bad for somebody trying to sell something to you then. That sounds tough. Sorry, that was a lame attempt at humor. I'll go back into the queue.

Operator

The next question is from Anthony Petrone with Jefferies. Please go ahead. 

Anthony Petrone -- Jefferies -- Analyst

Hi. Good afternoon. A couple -- one question on contracting and then a follow-up on labor to a question asked earlier in the call. On the longer-term Department of Health contract, just wondering what the expectation there should be.

Is it something that slips into 2022? And if so, just why do you think even with delta sort of ongoing here that the Department of Health would sort of put that decision-making process for a longer-term contract on hold here for a bit? And then on labor shortages, we're hearing hospitals themselves again having pressure as staffing is shifting. Nurse practitioners in particular and physicians assistants are leaving the industry. And so when you think of that pressure on hospitals from a staffing level, it kind of strikes us that actually provides a greater opportunity to outsource a number of initiatives internally at the hospital as an offset to higher cost pressures that they may be facing next year. So do you actually think that actually staffing shortages could spark more conversations at the C-suite for Agiliti between hospitals?

Tom Leonard -- Chief Executive Officer

So thanks for that. We'll have to make this our last question because we are at the one-hour mark. In terms of the first question regarding the federal government contract, I wish the ways of the government could be fully known to me and that they would address their contract strategy with us, but they don't. So we stand by waiting an RFP and a formal contract award.

And in the meantime, we'll continue to keep these critical resources in a deployable state of readiness under the short-term contracts that they continue to extend to us. With regard to the second point you made about staffing difficulties for our customers who are hospitals, it absolutely does lend itself to a greater interest. Somebody says need to outsource, and we do expect that to be a modest tailwind to the business that we do, which is doing this work, when it comes to medical devices, better and at lower cost and a higher quality than our customers can do for themselves. And with that, we are at full time, so we'll go ahead and bring today's earnings call to a close.

Thank you, everyone, for your interest in Agiliti.

Operator

[Operator signoff]

Duration: 60 minutes

Call participants:

Kate Kaiser

Tom Leonard -- Chief Executive Officer

Tom Boehning -- President

Jim Pekarek -- Chief Financial Officer

Amit Hazan -- Goldman Sachs -- Analyst

Matthew Borsch -- BMO Capital Markets -- Analyst

Ralph Giacobbe -- Citi -- Analyst

Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

John Ransom -- Raymond James -- Analyst

Anthony Petrone -- Jefferies -- Analyst

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