Universal Health Services, Inc. — 2014 First-Quarter Form 10-Q
Business context and reporting period
UHS owns and operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers and radiation oncology centers. As of March 31, 2014, it owned or operated 24 acute care hospitals and 194 behavioral health centers across 37 states, Washington, D.C., Puerto Rico and the U.S. Virgin Islands. The filing covers the unaudited three months ended March 31, 2014, compared with the three months ended March 31, 2013.
Financial performance and key metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net revenues | $1.920 billion | $1.832 billion | Up 5% |
| Provision for doubtful accounts | $208.2 million | $246.7 million | Down $38.5 million |
| Income from operations | $271.0 million | $243.9 million | Up 11% |
| Operating margin | 14.1% | 13.3% | Up 80 basis points |
| Income before income taxes | $235.8 million | $204.0 million | Up 16% |
| Net income attributable to UHS | $138.1 million | $119.8 million | Up 15% |
| Diluted EPS | $1.38 | $1.21 | Up 14% |
| Net cash provided by operating activities | $194.6 million | $178.5 million | Up $16.1 million |
The net margin attributable to UHS increased to 7.2% from 6.5%. The effective tax rate was 35.6%, compared with 36.3% in the prior-year quarter. Interest expense declined to $35.2 million from $39.9 million, primarily due to lower average borrowings and borrowing costs.
At March 31, 2014, cash and cash equivalents were $16.3 million, accounts receivable were $1.213 billion, and total assets were $8.431 billion. Net accounts receivable included a $286 million allowance for doubtful accounts, compared with $395 million at December 31, 2013. Days sales outstanding were 57 days, compared with 56 days at March 31, 2013.
Capital expenditures were $92.4 million, and net cash used in investing activities was $90.7 million. Financing activities used $104.9 million, including $109.1 million of debt repayments, $14.0 million of share repurchases related to employee tax-withholding obligations, and $4.9 million of dividends. Cash decreased by $1.0 million during the quarter.
Segments and material changes versus the prior period
- Acute care: Same-facility net revenue increased 5.8% to $961.2 million. Same-facility income before taxes increased 55% to $127.8 million, with margin increasing to 13.3% from 9.1%. Inpatient admissions decreased 2.7%, but adjusted admissions decreased only 0.5%; net revenue per adjusted admission increased 6.3%.
- Behavioral health: Same-facility net revenue increased 4% to $939.7 million. Same-facility income before taxes decreased 1% to $222.3 million, and margin declined to 23.7% from 24.7%. Inpatient admissions increased 2.6%, while adjusted patient days increased 0.1%.
- Consolidated revenue growth was primarily attributable to an $86 million increase from facilities owned in both periods. The lower doubtful-account provision was a significant contributor to improved profitability.
- A $10 million pretax gain from the divestiture of a non-operating investment benefited Q1 2014 results.
- EHR-related items had an approximately $8 million unfavorable pretax impact in Q1 2014, compared with less than $1 million unfavorable impact in Q1 2013, reflecting higher depreciation and lower incentive income.
- Total uncompensated care at acute care hospitals increased to $320 million from $230 million, primarily because uninsured discounts increased to $186 million from $88 million. The increase was offset in reported results by the lower doubtful-account provision.
Debt, liquidity and outlook
Total debt had a carrying value of approximately $3.2 billion and a fair value of approximately $3.3 billion at March 31, 2014. Debt represented 49% of total capitalization, compared with 51% at December 31, 2013. The company had $743 million of available capacity under its $800 million revolving credit facility, net of certain borrowings and letters of credit, and $115 million of additional capacity under its accounts receivable securitization program. UHS was in compliance with its debt covenants.
Scheduled installment payments on Term Loan A and Term Loan A2 were approximately $54 million for the remainder of 2014, $77 million in 2015 and $46 million in 2016. Management stated that operating cash flow, cash, available borrowing capacity and capital-market access were expected to provide sufficient resources for the next twelve months. UHS expected to spend approximately $270 million to $290 million on capital expenditures during the remaining nine months of 2014.
The filing does not provide a formal earnings or revenue guidance range. Management expected to finance capital expenditures and acquisitions with internally generated funds and, if necessary, additional borrowing or other capital-market resources.
Risks, contingencies and unusual items
- CMS and Florida Medicaid payment suspensions remained in effect at River Point Behavioral Health in connection with government investigations. A prolonged suspension could materially adversely affect that facility’s future results and financial condition, although its Q1 consolidated impact was not material.
- UHS faced multiple DOJ, OIG and state investigations involving behavioral health facilities and alleged healthcare billing or False Claims Act issues. The company stated that the scope, liability and potential financial exposure could not be predicted.
- Illinois receivables were approximately $39 million, including $14 million outstanding for more than 60 days. Texas Medicaid supplemental-payment receivables were approximately $40 million. No related reserves were recorded, but failure to collect could adversely affect cash flow and results.
- Professional and general liability reserves were $206 million, and workers’ compensation reserves were $65 million. UHS remains substantially self-insured and noted that claim severity or frequency could materially change future results.
- Key reimbursement risks include Medicare sequestration, proposed Medicare payment changes, Medicaid and DSH reductions, provider-tax programs, managed-care pricing, the Medicare Two Midnight rule, value-based purchasing, readmission penalties and Affordable Care Act implementation.
- UHS reported $90 million of standby letters of credit and surety bonds, primarily related to self-insurance programs.
- UHS acquired the operations of a 48-bed behavioral health facility in Tucson for approximately $3 million during the quarter. Subsequent to quarter-end, it acquired the Psychiatric Institute of Washington and related management contracts.
Important facts for investors to verify
- Whether the lower doubtful-account provision is sustainable given the increase in uncompensated care and uninsured discounts.
- Collection timing and ultimate recoverability of Illinois and Texas receivables without reserves.
- The duration and financial effect of the River Point payment suspensions and the broader behavioral health investigations.
- Acute care volume trends, including declining inpatient admissions, and whether pricing and case mix can offset volume pressure.
- Future Medicare, Medicaid, DSH and provider-tax reimbursement changes, including the proposed FFY 2015 Medicare rule.
- Required debt repayments, refinancing needs and the company’s ability to fund the projected $270 million to $290 million of remaining-2014 capital expenditures.
- The impact of the $10 million divestiture gain and the unfavorable EHR-related expense on recurring earnings.