UNIVERSAL HEALTH SERVICES INC quarterly report, Q3 FY2020

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

Business context and reporting period

UHS owns and operates acute-care hospitals, outpatient facilities and behavioral-health facilities in the United States, United Kingdom, Puerto Rico and Washington, D.C. As of September 30, 2020, the company operated 356 inpatient and 41 outpatient and other facilities. The filing covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. The interim financial statements are unaudited.

COVID-19 materially affected operations beginning in March 2020. Patient volumes declined sharply in March and April, then improved as restrictions eased and elective procedures resumed. The company reported intermittent COVID-19 increases during the third quarter but stated that non-COVID-19 volumes were less affected than during the initial outbreak.

Key financial metrics

Metric	Q3 2020	Q3 2019	9M 2020	9M 2019
Net revenues	$2.913 billion	$2.822 billion	$8.472 billion	$8.482 billion
Income from operations	$350 million	$189 million	$944 million	$875 million
Operating margin	12.0%	6.7%	11.1%	10.3%
Income before taxes	$323 million	$138 million	$850 million	$745 million
Net income attributable to UHS	$241 million	$97 million	$635 million	$570 million
Diluted EPS	$2.82	$1.10	$7.40	$6.35
Effective tax rate	24.5%	26.9%	24.1%	22.2%

Q3 revenue increased 3.2%, while nine-month revenue decreased 0.1%. Q3 net income attributable to UHS increased approximately 148%, and nine-month net income increased approximately 12%. Results benefited from lower interest expense, the absence of a $98 million 2019 behavioral-health impairment charge, favorable Medicaid supplemental payments and other items. Nine-month results included approximately $213 million of CARES Act and other governmental grant revenue.

Acute-care same-facility revenue increased 5.5% in Q3 but increased only 0.8% for the nine months. Excluding governmental stimulus revenue, nine-month acute-care same-facility revenue decreased 2.8%. Acute-care inpatient admissions decreased 9.6% in Q3 and 10.5% for the nine months; adjusted admissions decreased 17.3% and 15.4%, respectively. Behavioral-health same-facility revenue increased 1.2% in Q3 and decreased 0.2% for the nine months. Behavioral-health admissions decreased 5.3% in Q3 and 7.2% for the nine months.

Cash flow, liquidity and debt

Net cash provided by operating activities was $2.218 billion for the first nine months of 2020, compared with $1.105 billion in 2019. The increase primarily reflected $878 million of Medicare accelerated payments and deferred governmental grants, plus a $111 million payroll-tax deferral benefit.
Cash, cash equivalents and restricted cash totaled $1.146 billion at September 30, 2020, including $1.101 billion of cash and cash equivalents, compared with $106 million at December 31, 2019.
Capital expenditures were $547 million during the first nine months. Full-year 2020 capital expenditures were estimated at $725 million to $750 million.
Net cash used in investing activities was $575 million, including $52 million for acquisitions and property. Net cash used in financing activities was $603 million.
Debt carrying value and fair value were approximately $3.6 billion at September 30, 2020, compared with approximately $4.0 billion at December 31, 2019. Debt represented approximately 38% of total capitalization, versus 42% at year-end 2019.
UHS issued $800 million of 2.65% senior secured notes due 2030 and used proceeds primarily to redeem its $700 million of 4.75% senior secured notes due 2022. The redemption resulted in an approximately $1 million loss on extinguishment of debt.
The company had no borrowings under its $1 billion revolving credit facility and approximately $997 million of available capacity, net of letters of credit. It also had $450 million of available capacity under its accounts receivable securitization program.
UHS stated that it was in compliance with its debt covenants and believed existing cash, operating cash flow and financing access were sufficient for the next twelve months.

Material changes versus the prior comparable period

Operating performance improved sharply in Q3, partly because 2019 included a $98 million impairment charge related to Foundations Recovery Network.
Interest expense declined by $17 million in Q3 and $37 million for the nine months, driven by lower average borrowings and lower borrowing costs.
Q3 operating margin increased to 12.0% from 6.7%; nine-month operating margin increased to 11.1% from 10.3%.
Cash increased substantially because of governmental support and Medicare accelerated payments. Of the $1.091 billion received under COVID-related programs, approximately $695 million represented Medicare accelerated payments and approximately $396 million represented governmental stimulus funds.
At September 30, $878 million of Medicare accelerated payments and deferred CARES Act and other grants were recorded as a liability. Approximately $183 million of the governmental stimulus funds remained in the liability account.
UHS repurchased $200 million of common stock in the first nine months, primarily before suspending its repurchase program in response to COVID-19. Quarterly dividends were also suspended after a $0.20-per-share dividend paid in the first quarter.
Professional and general liability reserves increased by $25 million during the first nine months due to unfavorable claims trends. Total professional and general liability and workers’ compensation reserves were $352 million at September 30, 2020, versus $323 million at December 31, 2019.

Guidance, outlook, management commentary and risks

Management projected 2020 capital expenditures of $725 million to $750 million, with $178 million to $203 million expected during the fourth quarter.
Management estimated a 2020 net benefit of approximately $288 million from Texas and other state Medicaid supplemental payment programs, net of estimated provider taxes. These amounts depend on continued governmental approvals, funding transfers and regulatory conditions.
The company estimated that the 2021 Medicare IPPS final rule would increase its overall IPPS payments by approximately 2.3%, and that the 2021 psychiatric PPS rule would increase payments by approximately 2.2%. These are estimates and exclude or depend on various statutory adjustments.
COVID-19 remains the principal operating uncertainty. Future effects may include lower patient volumes, suspension of elective procedures, higher personal protective equipment and labor costs, unfavorable payer mix, increased uninsured patients and additional professional liability exposure.
CARES Act funds may require retrospective adjustment or repayment because HHS issued revised reporting requirements and interpretations after the balance-sheet date. The company stated that it could not predict whether any funds would ultimately need to be returned.
Medicare accelerated payments must be repaid through future Medicare revenue withholdings beginning in 2021. Amounts outstanding after 29 months may bear interest at 4%.
On September 27, 2020, UHS experienced a cybersecurity incident that temporarily disrupted access to U.S. information systems. Systems were restored and no evidence of unauthorized access, copying or misuse of patient or employee data had been identified as of the filing, but the ultimate financial impact remained unquantified.
UHS faces litigation and regulatory risks, including shareholder class and derivative actions, the George Washington University dispute, Pennsylvania Medicaid DSH repayment claims, government investigations and False Claims Act exposure. The company cannot estimate potential losses beyond recorded accruals for these matters.
Other significant risks include reductions in Medicare and Medicaid reimbursement, possible Medicaid DSH reductions, dependence on state supplemental payment programs, payer collection risk, labor shortages, healthcare reform uncertainty, managed-care contract changes and potential adverse outcomes from regulatory audits.

Most important facts for investors to verify

Whether COVID-19 patient volumes, elective procedures and behavioral-health admissions continue to recover without a renewed material decline.
Whether CARES Act grant revenue is retained under the revised HHS reporting rules or requires future reversal or repayment.
The timing and cash-flow effect of repaying $695 million of Medicare accelerated payments.
The sustainability of Medicaid supplemental payments, including the estimated $288 million 2020 net benefit and future DSH reductions.
Changes in professional liability reserves and the ultimate severity of related claims.
The financial and operational consequences of the September 2020 cybersecurity incident.
Progress on refinancing or repaying the term loan A maturity due in October 2023 and continued compliance with debt covenants.
Developments in pending litigation, government investigations and Pennsylvania DSH repayment appeals.