Universal Health Services, Inc. 2012 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
UHS filed its unaudited Form 10-Q for the three and six months ended June 30, 2012. The company operated 25 acute care hospitals, 194 behavioral health centers and six surgical hospitals and surgery/radiation oncology centers across 36 states, Washington, D.C., Puerto Rico and the U.S. Virgin Islands.
Key Financial Metrics
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|---|---|---|---|
| Net revenues | $1.730 billion | $1.714 billion | $3.527 billion | $3.441 billion |
| Income from operations | $230 million | $232 million | $499 million | $493 million |
| Income before taxes | $184 million | $182 million | $407 million | $386 million |
| Net income attributable to UHS | $108 million | $104 million | $236 million | $218 million |
| Diluted EPS | $1.10 | $1.04 | $2.41 | $2.20 |
| Operating margin | 13.3% | 13.5% | 14.2% | 14.3% |
- Net revenues increased 1% in the quarter and 3% year to date. The provision for doubtful accounts was $185 million in the quarter and $333 million year to date, compared with $155 million and $304 million, respectively, in the prior-year periods.
- Net income attributable to UHS increased 4% in the quarter and 8% year to date. The effective tax rate was 36.3% for the quarter and 36.1% year to date.
- Operating cash flow was $373 million for the first six months, compared with $356 million in 2011. Capital expenditures were $182 million, and electronic health record implementation costs were $28 million.
- Cash and cash equivalents were $33 million at June 30, 2012, versus $41 million at December 31, 2011. Accounts receivable increased to $1.020 billion from $970 million.
- Total debt was approximately $3.46 billion at June 30, 2012, with a reported fair value of $3.53 billion. Debt represented 58% of total capitalization, compared with 61% at December 31, 2011.
- Available borrowing capacity under the senior secured credit agreement was $623 million, and the accounts receivable securitization facility had $45 million of remaining capacity. The company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Acute care same-facility net revenue declined 2% in the quarter and 1% year to date. Acute care pre-tax income declined 19% in the quarter and 15% year to date, reflecting lower admissions, weaker payor mix and higher labor costs as a percentage of revenue.
- Acute care inpatient admissions decreased 4.3% in the quarter and 3.0% year to date; adjusted admissions increased 0.4% year to date. Occupancy declined to 53% in the quarter and 55% year to date.
- Behavioral health same-facility net revenue increased 4% in the quarter and 5% year to date. Same-facility pre-tax income increased 12% in the quarter and 9% year to date, with improved admissions and operating margins.
- Interest expense declined $4 million in the quarter and $14 million year to date, primarily because of lower average borrowings and lower effective interest rates.
- Results benefited from approximately $33 million of net pre-tax income year to date from an industry-wide Medicare underpayment settlement, approximately $14 million from Oklahoma supplemental Medicaid reimbursements and approximately $9 million from new Indiana and Ohio supplemental Medicaid programs.
- Results were reduced by approximately $8 million year to date from revised Medicare disproportionate-share calculations and Florida county reimbursement receivable write-offs, and by approximately $8 million after noncontrolling interests from EHR implementation costs.
Guidance, Outlook, Risks and Unusual Items
- Management expected to spend approximately $175 million to $190 million on capital expenditures during the remaining six months of 2012.
- UHS signed an agreement to acquire Ascend Health Corporation for $500 million in cash, plus assumed net debt of approximately $17 million. Closing was expected in the fourth quarter of 2012, subject to regulatory approvals.
- UHS agreed to sell Auburn Regional Medical Center for approximately $98 million, including estimated working capital, with closing expected in the fourth quarter of 2012. Management expected a substantial gain upon closing.
- Medicaid rate reductions in the company’s operating states were estimated at approximately $45 million to $55 million annually relative to the prior fiscal-year rates. Additional 2013 fiscal-year reductions were estimated at $8 million to $15 million annually.
- A proposed change to Texas Medicaid disproportionate-share reimbursement could reduce future reimbursements by approximately $16 million annually if implemented as drafted.
- UHS had $72 million of receivables due from Illinois, including $52 million outstanding more than 60 days. No specific reserve was recorded, but management stated that collection was uncertain.
- Key risks include reimbursement reductions, Medicare and Medicaid policy changes, uninsured and self-pay collection trends, declining acute care admissions, labor shortages, leverage and acquisition integration, regulatory investigations, litigation and self-insured professional liability exposure.
- Nine acute care hospitals had implemented EHR applications by June 30, 2012. One hospital had met meaningful-use criteria; eight additional hospitals were expected to qualify by year-end 2012. Failure to qualify could result in future Medicare payment penalties.
- Two Rivers Psychiatric Hospital passed an initial CMS survey in April 2012 but remained subject to a second survey expected in late 2012 or early 2013. Peachford Behavioral Health System received an HHS Office of Inspector General subpoena in July 2012; the scope and potential exposure were unclear.
Most Important Facts for Investors to Verify
- Whether the Ascend acquisition and Auburn Regional Medical Center divestiture closed on the expected terms and how they affected leverage, earnings and cash flow.
- Acute care volume, occupancy, payor mix, labor-cost trends and the sustainability of the weaker acute care margins.
- Collection of Illinois receivables and the adequacy of the company’s doubtful-account allowance.
- Final Texas Medicaid DSH methodology and the continuation of Medicaid supplemental, DSH and provider-tax programs.
- Progress toward EHR meaningful-use requirements, receipt and timing of incentive payments and potential Medicare penalties.
- Available liquidity after the Ascend transaction, planned capital spending and debt repayments, together with compliance with credit-agreement covenants.
- Developments in the Peachford, DOJ, CMS, False Claims Act and other regulatory or litigation matters, including any exposure beyond recorded reserves.