UNIVERSAL HEALTH SERVICES INC annual report, FY2019

Universal Health Services, Inc. — FY2019 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone fourth-quarter filing; quarterly data is included. UHS owns and operates acute care hospitals, outpatient facilities and behavioral health facilities in the United States, United Kingdom and Puerto Rico. As of February 26, 2020, the company operated 354 inpatient and 42 outpatient or other facilities.

Financial performance and operating metrics

Metric	2019	2018	Change
Net revenues	$11.378 billion	$10.772 billion	+5.6%
Income from operations	$1.216 billion	$1.175 billion	+3.5%
Income before income taxes	$1.066 billion	$1.035 billion	+3.1%
Net income attributable to UHS	$815 million	$780 million	+4.5%
Diluted EPS	$9.13	$8.31	+9.9%
Net margin	7.2%	7.2%	Flat
Cash provided by operating activities	$1.438 billion	$1.275 billion	+$164 million
Capital expenditures, net	$634 million	$665 million	-$31 million
Total debt after financing costs	$3.984 billion	$3.999 billion	-$15 million

Acute care represented approximately 54% of consolidated revenue and behavioral health approximately 46%.
Same-facility acute care revenue increased 7.7%; acute care admissions increased 4.6%, adjusted admissions 4.8%, and available-bed occupancy increased to 64% from 62%.
Same-facility behavioral health revenue increased 3.1%; admissions increased 1.1%, patient days increased 0.5%, and available-bed occupancy remained 76%.
Acute care income before taxes was $713 million, or 11.6% of revenue, compared with $709 million, or 12.4%, in 2018. Behavioral health income before taxes was $901 million, or 17.3% of revenue, compared with $916 million, or 18.2%, in 2018.
Accounts receivable were $1.561 billion, with days sales outstanding improving to 50 days from 51 days. Cash and cash equivalents were $61 million; cash, cash equivalents and restricted cash totaled $106 million.
Total assets were $11.668 billion and UHS common stockholders’ equity was $5.504 billion. Debt represented approximately 42% of total capitalization.
Interest expense increased to $163 million from $155 million. The average effective borrowing cost increased to approximately 4.0% from 3.8%.

Material changes versus the prior comparable period

Revenue growth was driven primarily by a $583 million, or 5.5%, increase from same-facility operations, with additional contribution from the 25 U.K. behavioral health facilities acquired in 2018.
Net income benefited from a substantially smaller increase in the DOJ behavioral health reserve: $11 million in 2019 versus $102 million in 2018.
UHS recorded $98 million of pre-tax impairment charges related to Foundations Recovery Network, compared with $49 million in 2018. The 2019 charge included a $75 million tradename write-off and $23 million of real-property impairments.
Behavioral health reported lower total segment earnings despite higher revenue because of the Foundations impairments and continuing labor, reimbursement and competitive pressures. Excluding impairment charges, same-facility behavioral health earnings increased $27 million.
UHS repurchased approximately $706 million of shares under its repurchase program during 2019 and paid $53 million of dividends. The board increased total repurchase authorization to $2.7 billion; $756 million remained available at year-end.
The quarterly dividend increased from $0.10 to $0.20 per share beginning with the third-quarter 2019 dividend, resulting in $0.60 of dividends per share for the year.
The company adopted the new lease standard in 2019, recording $327 million of operating lease right-of-use assets and corresponding operating lease liabilities.

Liquidity, debt and capital allocation

Operating cash flow of $1.438 billion exceeded net capital expenditures of $634 million.
Cash used in financing activities was $845 million, primarily reflecting $771 million of share repurchases and dividends, partly offset by modest net debt repayment.
The $1.0 billion revolving credit facility had no borrowings outstanding at year-end, with approximately $967 million of available capacity after letters of credit and short-term borrowings.
Term Loan A borrowings were $1.950 billion, Term Loan B borrowings were $495 million, and accounts receivable securitization borrowings were $400 million against $450 million of capacity.
Senior secured notes totaled $1.1 billion: $700 million due in 2022 and $400 million due in 2026. Total debt maturities before financing costs were approximately $4.001 billion, including $88 million due in 2020 and approximately $1.757 billion due in 2023.
Management expected 2020 capital expenditures of approximately $775 million to $825 million, including about $250 million for projects already in progress.
Management stated that operating cash flow, cash and access to capital markets were expected to fund operating, investing and financing needs for the next twelve months. The company was in compliance with its debt covenants at year-end.

Guidance, outlook, commentary and unusual items

Management expects growth from existing facilities, outpatient expansion, selective acquisitions and operational efficiency initiatives, but did not provide consolidated earnings or revenue guidance.
Management estimated 2020 net benefits from state Medicaid supplemental payment programs of approximately $214 million, subject to continued approvals, funding transfers and other conditions.
UHS estimated that the 2020 Medicare IPPS final rule would increase its overall IPPS payments by approximately 2.1%; psychiatric prospective payment system payments were expected to increase approximately 1.7%.
In Las Vegas, a competing health system entered the United/Sierra Healthcare network beginning in January 2020. UHS expected lower patient volumes at six hospitals, substantially offset by negotiated rate increases, but could not assure that the net effect would be immaterial.
Management cited labor shortages, particularly among nurses and behavioral health personnel, as limiting admissions in certain markets and increasing salary, wage and benefit costs.
UHS reached an agreement in principle for a $127 million civil settlement with the DOJ and various state attorneys general regarding behavioral health investigations. The company had a $134 million pre-tax reserve at December 31, 2019, including an $11 million increase recorded in 2019, and was negotiating a related corporate integrity agreement. Definitive agreements had not been finalized.
The River Point Behavioral Health Medicare payment suspension remained in effect; approximately $8.6 million had been withheld through year-end 2019. Resolution was expected to be part of the broader settlement process.
Other unresolved matters included a potential settlement involving Turning Point Hospital, Pennsylvania Medicaid DSH repayment demands, the George Washington University lawsuit, and shareholder litigation. The filing states that potential losses beyond recorded reserves could not be reasonably estimated.
Key external risks include Medicare and Medicaid reimbursement reductions, Medicaid DSH cuts, changes to supplemental payment programs, payer denials, uninsured and underinsured patients, healthcare reform uncertainty, regulatory enforcement, malpractice claims, cybersecurity incidents, Brexit and foreign exchange exposure, interest-rate and LIBOR transition risk, and possible goodwill impairment. Goodwill was approximately $3.870 billion at year-end.

Most important facts for investors to verify

Reconcile reported 2019 revenue growth and margins with payer mix, same-facility volume, reimbursement rates and the increasing cost of labor.
Monitor completion and cash cost of the DOJ settlement, corporate integrity agreement and related behavioral health investigations.
Assess the sustainability and regulatory approval of Medicaid supplemental, DSH, UC/UPL and DSRIP payments, including the potential effect of proposed Medicaid financing changes.
Evaluate 2020 Las Vegas volume and rate impacts following the United/Sierra network change.
Review debt maturities, floating-rate exposure, refinancing requirements and the sensitivity that a 1% interest-rate increase would reduce pre-tax income by approximately $29 million.
Track Foundations Recovery Network performance and the risk of further impairment, as well as the recoverability of approximately $3.9 billion of goodwill.
Assess whether the company’s substantial share repurchases and dividend increase remain appropriate relative to debt obligations, capital expenditures and litigation or regulatory cash requirements.
Verify the collectability of accounts receivable, including approximately $36 million due from Illinois and the company’s estimates for Medicare and Medicaid settlements.