UNIVERSAL HEALTH SERVICES INC quarterly report, Q3 FY2021

Universal Health Services, Inc. — Q3 2021 Form 10-Q Summary

Business context and reporting period

UHS operates acute care hospitals, outpatient facilities and behavioral health facilities in the United States, United Kingdom and Puerto Rico. As of September 30, 2021, it owned or operated 360 inpatient facilities and 40 outpatient and other facilities. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the same periods in 2020.

Key financial metrics

Metric	Q3 2021	Q3 2020	9M 2021	9M 2020
Net revenues	$3.156 billion	$2.913 billion	$9.367 billion	$8.472 billion
Income from operations	$315 million	$350 million	$1.049 billion	$944 million
Operating margin	10.0%	12.0%	11.2%	11.1%
Net income attributable to UHS	$218 million	$241 million	$752 million	$635 million
Diluted EPS	$2.60	$2.82	$8.83	$7.40
Net cash from operating activities	Not separately provided	Not separately provided	$562 million	$2.218 billion

Q3 net income attributable to UHS declined 9.5% year over year, while nine-month net income increased 18.4%. The Q3 net margin was approximately 6.9%, versus 8.3% in the prior-year quarter; the nine-month net margin was approximately 8.0%, versus 7.5%.

Acute care services generated Q3 revenue of $1.822 billion and income before taxes of $209 million, compared with $1.610 billion and $178 million, respectively, in Q3 2020.
Behavioral health services generated Q3 revenue of $1.328 billion and income before taxes of $198 million, compared with $1.300 billion and $253 million, respectively. The resulting margin declined to 14.9% from 19.4%.
Same-facility acute care admissions increased 9.9% and adjusted admissions increased 12.4% in Q3. Occupancy increased to 71% from 67%.
Same-facility behavioral health admissions declined 2.8%, adjusted admissions declined 2.7%, and occupancy declined to 70% from 73%.
Q3 salaries, wages and benefits were 49.3% of revenue, compared with 48.3% in the prior-year quarter. Nine-month salaries, wages and benefits were 48.5% of revenue, compared with 49.0%.
Capital expenditures were $666 million during the first nine months, and full-year 2021 capital expenditures were projected at approximately $850 million to $1.0 billion.

Balance sheet, debt and liquidity

Cash and cash equivalents were $190 million at September 30, 2021, compared with $1.224 billion at December 31, 2020. Total cash, cash equivalents and restricted cash were $244 million.
Total debt had a carrying value and fair value of approximately $3.75 billion. Total debt represented approximately 37% of total capitalization, compared with 38% at year-end 2020.
The company had no borrowings under its $1.2 billion revolving credit facility and approximately $1.196 billion of available capacity, net of letters of credit.
UHS refinanced debt during the quarter, issuing $700 million of 1.65% senior secured notes due 2026 and $500 million of 2.65% senior secured notes due 2032. It redeemed $400 million of 5.00% notes for $410 million and terminated the prior tranche B term loan.
Financing activities used $936 million of cash during the first nine months, including $771 million for share repurchases and $50 million for dividends.
Management stated that operating cash flow, cash, available credit and capital-market access should provide sufficient resources for the next 12 months, while noting that future financing may not be available on acceptable terms.

Material changes versus the prior comparable period

Q3 revenue increased 8.4%, driven primarily by an 8.2% same-facility increase in acute care and behavioral health revenue.
Q3 income before taxes decreased $36 million, primarily because behavioral health income declined $55 million, partially offset by a $31 million increase in acute care income.
Nine-month revenue increased 10.6% and income before taxes increased $137 million. The 2020 period included approximately $213 million of governmental stimulus revenue, while 2021 included no impact from the $189 million of CARES Act funds received and returned during 2021.
Operating cash flow declined by $1.656 billion, primarily because UHS repaid $695 million of Medicare accelerated payments in 2021, whereas 2020 operating cash flow benefited from those payments and deferred government grants.
UHS repurchased approximately 2.78 million shares for $419 million during Q3. The remaining stock-repurchase authorization was approximately $790.5 million at September 30, 2021.
Professional and general liability reserves increased by $41 million during the first nine months, compared with a $25 million increase in the comparable 2020 period.

Guidance, outlook, risks and unusual items

Management did not provide consolidated earnings guidance in the filing. It projected 2021 capital expenditures of approximately $850 million to $1.0 billion.
The Delta variant increased COVID-19 patient volumes during Q3. Management warned that future variants, staffing constraints, wage inflation, supply disruptions, elective-procedure changes and other pandemic effects could materially affect results through the remainder of 2021 and into 2022.
Behavioral health results were pressured by staffing shortages, temporary bed closures and higher labor costs. Hurricane Ida damaged three facilities and unfavorably affected Q3 pretax results by approximately $10 million.
The company recorded a $17 million pretax debt-extinguishment charge, consisting of approximately $7 million of deferred-charge write-offs and a $10 million make-whole premium.
UHS recognized approximately $3 million and $16 million of state and local governmental stimulus revenue in Q3 and the first nine months, respectively. It also recognized approximately $11 million and $42 million related to reimbursement for uninsured COVID-19 care.
State Medicaid supplemental payment programs generated a $75 million net benefit in Q3 and $312 million in the first nine months. Management estimated a 2021 full-year net benefit of approximately $389 million, subject to regulatory approvals, funding transfers and program terms.
Texas DSRIP funding is being eliminated for federal fiscal year 2022, while the Kentucky Hospital Rate Increase Program remains subject to annual CMS approval. UHS also expected approximately $25 million of Florida Medicaid directed-payment reimbursement during Q4 2021.
Key risks include reimbursement reductions, Medicaid supplemental-payment changes, Medicare sequestration, healthcare regulation, COVID-19 vaccination requirements and related staffing impacts, litigation and government investigations, cybersecurity, self-insurance claims, payer collectability and substantial indebtedness.
UHS had $450 million accrued for professional and general liability and workers’ compensation claims at September 30, 2021, and $169 million of off-balance-sheet standby letters of credit and surety bonds.

Important facts for investors to verify

Whether COVID-19 volumes, staffing costs and behavioral health occupancy improved after the Delta-related Q3 disruption.
The sustainability and approval status of Medicaid supplemental programs, including Texas, Kentucky, Florida, California and Nevada programs.
Whether professional liability reserve increases continue and produce additional material charges.
Actual fourth-quarter and full-year capital expenditures relative to the $850 million to $1.0 billion estimate.
Post-refinancing leverage, debt maturities, interest-rate exposure and compliance with credit-agreement covenants.
The effect of continued share repurchases and dividends on cash balances and liquidity.
Progress on pending litigation, the Pennsylvania DSH repayment appeals and other government investigations.
Whether the proposed acquisition of Riverside Medical Clinic Patient Services and related ambulatory surgery centers receives California approval and closes on expected terms.