UNIVERSAL HEALTH SERVICES INC annual report, FY2022

Universal Health Services, Inc. — FY2022 Form 10-K Summary

Business context and reporting period

UHS filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The company owns and operates acute care hospitals, outpatient facilities and behavioral health facilities across 39 states, Washington, D.C., the United Kingdom and Puerto Rico. As of February 27, 2023, UHS operated 359 inpatient facilities and 39 outpatient and other facilities. Acute care and related operations generated 57% of 2022 consolidated net revenue, while behavioral health operations generated 43%.

Financial performance and key metrics

Metric	2022	2021	Change
Net revenues	$13.399 billion	$12.642 billion	+6.0%
Income from operations	$1.004 billion	$1.363 billion	-26.4%
Operating margin	7.5%	10.8%	-330 bps
Income before taxes	$866.3 million	$1.293 billion	-33.0%
Net income attributable to UHS	$675.6 million	$991.6 million	-31.9%
Diluted EPS	$9.14	$11.82	-22.7%
Net cash from operating activities	$996.0 million	$883.7 million	+12.7%
Capital expenditures	$734.0 million	$855.7 million	-14.2%

Net revenue growth reflected a $507 million increase from same-facility operations and approximately $250 million from acquired or newly opened facilities, including Northern Nevada Sierra Medical Center, and higher provider-tax assessment programs. Revenue growth did not translate into higher earnings because of labor, inflation, operating-cost and impairment pressures.

Acute care same-facility revenue increased 4.1%, but income before taxes declined 28% to $534.7 million; the margin fell to 7.3% from 10.6%.
Acute care admissions increased 0.7% and adjusted admissions increased 3.1%, while available-bed occupancy declined to 64% from 67%.
Behavioral health same-facility revenue increased 4.2%, while income before taxes declined 2% to $1.017 billion; the margin declined to 18.2% from 19.4%.
Companywide salaries, wages and benefits increased to $6.762 billion, or 50.5% of revenue, from 48.8% in 2021.
Interest expense increased to $126.9 million from $83.7 million, driven by higher average borrowings and higher borrowing costs.
Net accounts receivable increased to $2.018 billion from $1.747 billion, and days sales outstanding increased to 55 days from 50 days.
Cash and cash equivalents were $102.8 million at year-end; cash, cash equivalents and restricted cash totaled $200.8 million.

Liquidity, debt and capital allocation

Total debt, net of financing costs, was $4.808 billion at December 31, 2022, compared with $4.190 billion at December 31, 2021. Debt represented approximately 45% of total capitalization, compared with 41% in 2021.
Debt included $2.338 billion outstanding under the tranche A term loan, $310.4 million under the revolving credit facility and $2.0 billion of senior secured notes due in 2026, 2030 and 2032.
The revolving credit facility had $886 million of available capacity, net of letters of credit, at year-end. UHS was in compliance with its debt covenants.
The accounts receivable securitization program expired on December 20, 2022 and was not renewed or replaced.
UHS repurchased 6.67 million shares for approximately $810.9 million during 2022, paid $58.4 million of dividends, and had approximately $947.4 million of remaining repurchase authorization at year-end.
Management expects 2023 capital expenditures of approximately $725 million to $875 million and expects to fund capital expenditures and acquisitions with internally generated funds and additional financing as needed.
Management stated that operating cash flow, cash, available credit commitments and capital-market access should provide sufficient resources for operating, investing and financing requirements for the next 12 months.

Material changes versus the prior comparable period

Revenue increased 6.0%, but income from operations declined 26.4% and net income attributable to UHS declined 31.9%.
Labor costs were materially higher because of the nationwide shortage of nurses and clinical staff, premium compensation and increased use of temporary labor. Management stated that these effects materially unfavorably affected 2022 results.
Interest expense rose 51.7%, while the average cost of borrowings increased to approximately 2.8% from 2.1%.
UHS recorded a $57.6 million pre-tax impairment charge related to Desert Springs Hospital Medical Center in Las Vegas. The company announced plans to discontinue inpatient operations at the facility by March 2023 while continuing emergency department services and developing a freestanding emergency department.
Operating cash flow improved despite lower earnings, but accounts receivable and working-capital movements were significant uses of cash.
UHS purchased the 20% minority interest in The George Washington University Hospital for approximately $51 million and thereafter owned the hospital entirely.

Guidance, outlook, commentary and risks

UHS did not provide consolidated revenue or earnings guidance in the filing. It expects 2023 capital expenditures of $725 million to $875 million and estimates a 2023 net benefit of approximately $469 million from various Medicaid supplemental payment programs, subject to governmental approvals, funding transfers and other conditions outside the company’s control.

Management expects staffing shortages, wage pressure, temporary labor expense, inflation and supply-chain costs to continue adversely affecting results for the foreseeable future, although some labor pressures moderated after the first quarter of 2022.
UHS remains exposed to changes in Medicare, Medicaid and commercial reimbursement, including scheduled Medicaid disproportionate-share hospital reductions beginning in federal fiscal year 2024. The filing estimates that 2022 DSH payment levels in South Carolina and Texas could ultimately decline by approximately 65% and 41%, respectively.
Medicaid redeterminations and the phaseout of enhanced federal Medicaid matching funds during 2023 could reduce coverage and reimbursement.
Provider-tax and supplemental Medicaid programs contributed a $497 million net benefit in 2022. These programs require recurring state and federal approvals and could be materially reduced or discontinued.
UHS has substantial exposure to professional and general liability claims. The related accrual was $371.9 million at year-end, and workers’ compensation reserves were $124.5 million. Management stated that future adjustments could be material.
The company remains subject to litigation, government investigations, False Claims Act and Medicaid DSH matters. The filing states that potential losses beyond recorded amounts generally cannot be estimated and could materially affect future results, cash flows or liquidity.
Cybersecurity, privacy, regulatory compliance, physician and employee retention, competition, payer denials, uninsured patient collections, foreign currency exposure and severe weather are identified as significant risks.
UHS expects the COVID-19 public health emergency to expire on May 11, 2023 and cannot predict the financial impact of losing related reimbursement policies and regulatory flexibilities.
A 1% change in interest rates on variable-rate debt would affect pre-tax income by approximately $26 million, based on debt outstanding at December 31, 2022.

Most important facts for an investor to verify

Whether labor costs, temporary staffing usage and occupancy trends improve sufficiently to restore acute care and behavioral health margins.
The collectability and timing of the $2.018 billion accounts receivable balance, particularly Medicaid supplemental-program receivables, and whether DSO declines from 55 days.
The renewal, funding and audit status of Medicaid supplemental, DSH, provider-tax and other state payment programs.
The effect of Medicaid eligibility redeterminations, enhanced FMAP phaseout and scheduled DSH reductions beginning in 2024.
The timing, cost and operating impact of discontinuing Desert Springs inpatient operations and constructing a replacement freestanding emergency department.
Debt maturities and refinancing needs, especially approximately $3.04 billion of scheduled debt maturities in 2026, along with exposure to SOFR and other floating-rate costs.
Potential adjustments to the $371.9 million professional and general liability reserve, workers’ compensation reserves and other legal contingencies.
Final court approval and financial exposure associated with disclosed derivative and ERISA settlements, as well as the outcome of Pennsylvania Medicaid DSH repayment appeals.