UNIVERSAL HEALTH SERVICES INC quarterly report, Q1 FY2015

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

Reporting period: Three months ended March 31, 2015; comparative period is the three months ended March 31, 2014. The interim financial statements are unaudited and include normal recurring adjustments.

Business context

UHS operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers and radiation oncology centers through subsidiaries. At March 31, 2015, it owned or operated 24 acute care hospitals and 217 behavioral health centers across 37 states, the United Kingdom, Puerto Rico, Washington, D.C. and the U.S. Virgin Islands. Acute care represented 52% of consolidated net revenue and behavioral health 48%.

Financial results and key metrics

Metric	Q1 2015	Q1 2014	Change
Net revenues	$2.225 billion	$1.938 billion	15%
Income from operations	$327.1 million	$271.0 million	21%
Operating margin	14.7%	14.0%	Up 70 bps
Income before taxes	$297.0 million	$235.8 million	26%
Net income	$194.3 million	$151.9 million	28%
Net income attributable to UHS	$174.3 million	$138.1 million	26%
Diluted EPS	$1.73	$1.38	25%
Net cash from operating activities	$271.3 million	$194.6 million	39%

The effective tax rate was 34.6%, compared with 35.6% in the prior-year quarter. Interest expense declined to $30.0 million from $35.2 million. Net revenue growth included a $178 million, or 9%, increase from same-facility operations. The provision for doubtful accounts declined to $154.7 million from $208.2 million.

At March 31, 2015, cash and cash equivalents were $35.1 million, accounts receivable were $1.384 billion, and total assets were $9.084 billion. Total debt was approximately $3.1 billion, representing 45% of total capitalization, compared with 47% at December 31, 2014. Debt fair value was approximately $3.2 billion.

Segment and operating trends

Acute care: Same-facility net revenue increased 12.2% to $1.090 billion, while income before taxes increased 37% to $165.6 million. Inpatient admissions increased 4.3%, adjusted admissions increased 5.7%, occupancy increased to 63% from 60%, and net revenue per adjusted admission increased 6.1%.
Behavioral health: Same-facility net revenue increased 6% to $1.004 billion, while income before taxes increased 13% to $250.1 million. Same-facility inpatient admissions increased 5.7%, adjusted admissions increased 6.0%, and occupancy increased to 77% from 76%.
Management attributed improved acute-care performance partly to stronger economic conditions, Affordable Care Act-related insurance coverage and fewer uninsured patients.
Medicare and Medicaid represented 36% of net patient revenue, while managed care represented 50% in both periods.

Cash flow, capital allocation and liquidity

Operating cash flow was $271.3 million. Investing cash usage was $123.8 million, including $89.3 million of capital expenditures and $34.5 million for acquisitions and property.
Financing cash usage was $144.0 million, including $158.9 million of debt repayments, $28.8 million of share repurchases, $9.9 million of dividends and $12.6 million of sale-leaseback proceeds.
Management expects approximately $285 million to $310 million of capital expenditures during the remaining nine months of 2015.
The $800 million revolving credit facility had no borrowings outstanding and approximately $739 million of available capacity, net of short-term borrowings and letters of credit. The accounts receivable securitization had $325 million outstanding and $35 million of additional capacity.
Management believes operating cash flow, cash, available borrowing capacity and capital-market access will be sufficient for operating, investing and financing needs during the next twelve months.

Material changes and unusual items

During the first quarter, UHS acquired a 46-bed behavioral health facility in the United Kingdom, a 24-bed critical access hospital-related business and other assets for approximately $35 million.
Two free-standing emergency departments were sold to and leased back from Universal Health Realty Income Trust for approximately $13 million of proceeds; annual rent is expected to be approximately $0.9 million.
The first quarter of 2014 included an approximately $10 million pretax gain on the sale of a non-operating investment; no comparable gain occurred in 2015.
Provider-tax accounting was reclassified beginning in 2015. The 2014 comparative income statement was revised to increase both net revenue and other operating expenses by $18 million, with no impact on pretax income.
UHS declared and paid a quarterly dividend of $0.10 per share, compared with $0.05 per share in Q1 2014. The company repurchased $5.6 million of shares under its authorized repurchase program and had $336.4 million remaining under that program.

Guidance, outlook and risks

Management estimates approximately $36 million of remaining 2015 reimbursements from Texas and South Carolina disproportionate-share-hospital programs, assuming renewal at similar levels.
Management estimates approximately $25 million of additional 2015 Texas DSRIP net revenue benefit, net of provider taxes, subject to required approvals and conditions; no DSRIP revenue was recognized in Q1 2015.
An April 2015 Texas rule could shift $136 million of funding from private-hospital to public-hospital uncompensated-care pools. The filing does not provide a clear estimate of UHS’s potential impact.
UHS faces significant reimbursement and regulatory exposure, including Medicare and Medicaid rate changes, Medicaid supplemental-program renewals, Medicare DSH reductions, managed-care pricing, health-care reform and value-based purchasing requirements.
Illinois receivables totaled approximately $42 million, including $22 million aged more than 60 days. Texas Medicaid supplemental-program receivables totaled approximately $105 million. No reserves were recorded for these balances, although collection timing and ultimate collectability remain uncertain.
UHS has substantial self-insurance exposure. Accrued professional and general liability claims were approximately $190 million in the financial statements, and workers’ compensation liabilities were approximately $66 million. The filing also reports $114 million of standby letters of credit and surety bonds.
A DOJ/OIG coordinated investigation into behavioral health facilities was expanded in March 2015 to include UHS as a corporate entity and focuses on alleged False Claims Act issues involving government-payer billings. Potential liability and financial exposure are uncertain.
CMS continued a 180-day Medicare payment suspension at River Point Behavioral Health. A prolonged suspension could materially affect that facility, although it did not materially affect consolidated Q1 results.
The company states that it was in compliance with debt covenants at March 31, 2015. It also reports that all acute care hospitals had met applicable EHR meaningful-use requirements for fiscal 2015, but continued compliance is required.

Most important facts to verify

Whether Texas uncompensated-care, DSH and DSRIP programs are renewed and the ultimate effect of the April 2015 funding rule.
Collection timing and reserves for Illinois and Texas Medicaid-related receivables.
Developments, reserves and potential financial exposure from the DOJ/OIG investigations and River Point payment suspension.
Progress against the remaining $285 million to $310 million 2015 capital-expenditure plan and related financing needs.
Debt maturities, interest-rate exposure, covenant compliance and availability under the revolving credit and receivables-securitization facilities.
Whether acute-care volume, occupancy, payer mix and reduced uninsured utilization trends continue.