Universal Health Services, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2011, filed November 7, 2011. UHS owned or operated 25 acute care hospitals, 202 behavioral health centers and six surgical hospitals and surgery or radiation oncology centers. Results include the behavioral health facilities acquired from Psychiatric Solutions, Inc. (PSI) in November 2010.
Key financial metrics
| ($ in thousands, except per-share data) | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net revenues | $1,848,662 | $1,323,264 | $5,661,424 | $4,008,732 |
| Income from operations | $195,528 | $104,684 | $688,178 | $374,981 |
| Operating margin | 10.6% | 7.9% | 12.2% | 9.4% |
| Income before taxes | $147,076 | $93,206 | $533,501 | $338,849 |
| Net income attributable to UHS | $85,054 | $55,610 | $302,896 | $193,001 |
| Net margin attributable to UHS | 4.6% | 4.2% | 5.4% | 4.8% |
| Diluted EPS | $0.86 | $0.57 | $3.06 | $1.96 |
| Interest expense, net | $48,452 | $11,478 | $154,677 | $36,132 |
- Revenue increased 40% in the quarter and 41% year to date. Q3 growth included $475 million from PSI facilities and $54 million, or 4%, from same-facility operations. Nine-month growth included $1.44 billion from PSI facilities and $223 million, or 6%, from same-facility operations.
- Operating expense as a percentage of revenue improved to 89.4% from 92.1% in Q3 and to 87.8% from 90.6% year to date. However, salaries, wages and benefits increased to 45.8% of revenue in Q3 and 44.9% year to date, compared with 43.3% and 42.8%, respectively.
- Net cash provided by operating activities was $562.5 million for the first nine months, compared with $412.8 million in 2010. Accounts receivable used $103.7 million of cash, and days sales outstanding increased to 46 days from 41 days.
- Net cash used in investing activities was $208.2 million, including $195.4 million of capital expenditures, $27.9 million for electronic health records implementation and $8.6 million for acquisitions, partly offset by $23.7 million of asset-sale proceeds.
- Net cash used in financing activities was $344.6 million, including $267.5 million of debt reduction, $44.5 million of share repurchases and $14.6 million of dividends.
- Cash and cash equivalents were $39.1 million at September 30, 2011, compared with $29.5 million at December 31, 2010. Total assets were $7.61 billion and UHS stockholders’ equity was $2.22 billion.
- Debt carrying value was $3.69 billion, or 62% of total capitalization, compared with 66% at December 31, 2010. Available borrowing capacity under the credit agreement and receivables securitization was $646 million, net of $64 million of letters of credit.
Material changes versus the prior comparable period
- The PSI acquisition materially changed the business mix: behavioral health represented 46% of Q3 net revenue and 45% of nine-month revenue, compared with 27% in both 2010 periods.
- Behavioral health income before taxes increased to $184.3 million from $78.0 million in Q3 and to $559.7 million from $241.9 million year to date. Same-facility behavioral health revenue increased 7% in both comparison periods.
- Acute care revenue increased 3% in Q3 and 5% year to date, but Q3 acute care income before taxes declined 13% to $57.0 million. Acute care inpatient admissions declined 2.6% in Q3 and 2.0% year to date; adjusted admissions declined 0.3% in both periods.
- Interest expense increased $37 million in Q3 and $119 million year to date, primarily because of acquisition-related borrowings, higher average debt and the 2010 senior notes issuance.
- The effective tax rate increased to 35.5% from 29.4% in Q3 and to 36.1% from 33.6% year to date, principally due to a favorable discrete tax item in 2010 and a higher blended state tax rate in 2011.
- UHS repurchased 1.14 million Class B shares for approximately $44.5 million during the first nine months, including 1.02 million shares for $38.4 million in Q3. Approximately 717,183 shares remained available under the program.
Guidance, outlook, risks and unusual items
- Management expected fourth-quarter 2011 capital expenditures of approximately $80 million to $105 million, funded through internally generated funds and available financing.
- Management estimated aggregate Medicaid reimbursement reductions of approximately 3% to 4%, or $45 million to $55 million annually, from rates in effect during the first half of 2011. Medicaid supplemental and provider-tax programs remain subject to legislative and regulatory changes.
- Management estimated approximately $15 million of state Medicaid electronic health record incentive payments could be received in Q4 2011, but noted that eligibility and timing were uncertain.
- Medicare reimbursement changes, possible Medicare reductions under the Budget Control Act, health-care reform implementation, managed-care pricing pressure, uninsured and self-pay volumes, labor costs, competition and economic conditions could adversely affect results.
- Professional and general liability reserves were $303 million at September 30, 2011. Letters of credit and surety bonds totaled $86 million, including $62 million for self-insurance programs.
- UHS had a $200 million senior-note maturity due November 15, 2011 and expected to refinance it with credit-agreement borrowings. The company was in compliance with debt covenants at September 30, 2011.
- Legal and regulatory matters included tentative settlements or reserves relating to Marion, Sierra Vista and other investigations; DOJ investigations involving ICDs, Friends Hospital and Riveredge Hospital; and Medicaid recoupment claims involving former PSI facilities. Management stated that established reserves were not material, but certain outcomes and potential exposures remained uncertain.
- Two Rivers Psychiatric Hospital remained eligible for Medicare and Medicaid reimbursement under a settlement with CMS, pending an expected 2012 survey. Southwest Healthcare System was subsequently restored to Medicare deemed status on November 4, 2011.
- Three former PSI facilities and one Puerto Rico facility remained held for sale pursuant to the FTC’s PSI acquisition clearance conditions. MeadowWood was divested in July 2011.
- The filing states that there were no material changes to previously disclosed risk factors, market-risk disclosures or internal controls.
Most important facts for investors to verify
- Whether PSI integration, behavioral health growth and related margins are sustainable and whether expected synergies offset the substantially higher debt burden.
- The refinancing of the $200 million senior notes due November 2011 and ongoing compliance with leverage and interest-coverage covenants.
- Collection trends for Medicaid, Veterans Administration and managed-care receivables, including the increase in DSO to 46 days.
- The magnitude and timing of anticipated Medicaid reimbursement reductions, Medicare policy changes and possible federal budget-related cuts.
- Acute care admission trends, uninsured volumes, charity-care costs and the provision for doubtful accounts.
- Status and ultimate financial exposure of DOJ investigations, false-claims matters, professional liability claims and CMS-related compliance proceedings.
- Completion and proceeds of required divestitures, as well as the potential impact of the $80 million to $105 million fourth-quarter capital program and electronic health record implementation.