Universal Health Services, Inc. — Q2 2010 Form 10-Q Summary
Business context and reporting period
UHS filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2010. The company operates acute-care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers and radiation oncology centers. At June 30, 2010, UHS owned, operated or had under construction 25 acute-care hospitals and 102 behavioral health centers, plus seven surgical hospitals and surgery or radiation oncology centers.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net revenues | $1.338 billion | $1.304 billion | $2.685 billion | $2.616 billion |
| Income from operations | $129.7 million | $163.0 million | $270.3 million | $299.8 million |
| Operating margin | 9.7% | 12.5% | 10.1% | 11.5% |
| Net income attributable to UHS | $65.6 million | $80.9 million | $137.4 million | $148.4 million |
| Diluted EPS | $0.67 | $0.82 | $1.40 | $1.50 |
| Net cash from operations | Not separately provided | Not separately provided | $219.4 million | $300.8 million |
Revenue increased 3% in both the quarter and year-to-date period, primarily from same-facility growth. Profitability declined because operating expenses grew faster than revenue, particularly salaries, other operating expenses and doubtful-account provisions. The provision for doubtful accounts was $143.8 million in Q2 and $269.2 million year to date, compared with $120.7 million and $239.6 million, respectively, in the prior comparable periods.
Acute-care income before taxes declined to $80.1 million in Q2 from $105.5 million and to $182.0 million year to date from $219.2 million. Behavioral health income before taxes increased to $86.0 million in Q2 from $73.9 million and to $164.0 million year to date from $141.2 million. Behavioral health benefited from higher admissions and operating leverage.
At June 30, 2010, cash and cash equivalents were $12.3 million, accounts receivable were $618.9 million, total assets were $4.0 billion and UHS common stockholders’ equity was $1.887 billion. Long-term debt was $881.3 million, with $2.0 million of current maturities. Total debt carrying value was $881 million and estimated fair value was $901 million.
Liquidity, cash flow and capital allocation
- Year-to-date operating cash flow was $219.4 million, down $81.5 million from 2009, largely because of the absence of prior-year construction-management receivable collections and unfavorable working-capital changes.
- Investing cash use was $116.6 million, including $121.6 million of capital expenditures net of disposals and $5.0 million of asset-sale proceeds.
- Financing cash use was $99.6 million, including $78.0 million of debt repayments, $9.7 million of dividends, $3.7 million of share repurchases and $12.3 million of distributions to noncontrolling interests.
- The $800 million revolving credit facility had $166 million outstanding and $571 million of available capacity, net of letters of credit, at June 30, 2010. The facility was scheduled to mature in July 2011.
- The accounts-receivable securitization facility had $100 million outstanding and $100 million available, and was scheduled to mature in August 2010. UHS planned to replace it with a new $250 million facility.
- UHS expected to spend approximately $130 million to $150 million on capital expenditures during the remaining six months of 2010.
Material changes versus the prior comparable period
- Revenue rose, but income from operations fell 20% in Q2 and 10% year to date; diluted EPS declined from $0.82 to $0.67 in Q2 and from $1.50 to $1.40 year to date.
- Acute-care results were pressured by declining commercial-payor utilization, more uninsured and underinsured patients, reduced Texas Medicaid revenue, and expense growth. Acute-care occupancy declined to 55% from 58% in Q2 and to 58% from 60% year to date.
- Behavioral health same-facility admissions increased 4.4% in Q2 and 4.2% year to date, while same-facility pretax margins improved to 24.5% from 22.2% in Q2 and to 23.6% from 21.6% year to date.
- Q2 2010 included approximately $18 million of transaction costs related to the proposed Psychiatric Solutions acquisition.
- UHS recorded a $16 million favorable reduction in professional and general liability reserves in Q2 2010, versus $23 million in Q2 2009. The lower benefit in 2010 reduced the year-over-year comparison.
- The company revised prior balance-sheet classifications to present approximately $197 million of redeemable noncontrolling interests outside permanent equity at December 31, 2009. The revision did not affect UHS stockholders’ equity, previously reported earnings or stated equity-based ratios.
Guidance, outlook, risks and unusual items
UHS announced a definitive agreement to acquire Psychiatric Solutions, Inc. for approximately $2.0 billion in cash, or approximately $3.1 billion including assumed net debt. Closing was expected in the fourth quarter of 2010, subject to shareholder, regulatory and other customary approvals. Financing commitments totaled $3.45 billion, consisting of an $800 million revolving facility, a $1.05 billion term loan A and a $1.6 billion term loan B. Completion would materially increase leverage and require successful integration.
Southwest Healthcare System remained subject to a CMS agreement requiring corrective actions and a subsequent certification survey. CMS had abated a proposed Medicare provider-agreement termination, while the California Department of Public Health had initiated a hospital-license revocation process. The facilities remained eligible for Medicare reimbursement during the agreement, but failure to resolve the matters could materially affect UHS. SWHCS represented approximately 3% of UHS income from operations after noncontrolling interests for the first six months of 2010.
Other significant risks include reimbursement reductions, Medicaid budget pressures, increasing uninsured and self-pay volumes, doubtful-account and charity-care trends, professional liability exposure, litigation and regulatory investigations, labor costs, competition, and concentration in Nevada, Texas and California. UHS reported $256 million of professional and general liability claims accruals and $80 million of standby letters of credit and surety bonds at June 30, 2010.
Management reported compliance with debt covenants and stated that it expected to fund capital expenditures and acquisitions through internally generated funds and additional financing. The filing does not provide formal earnings guidance.
Important facts for investors to verify
- Whether the Psychiatric Solutions transaction closed, on what terms, and the resulting debt, interest expense and leverage.
- Whether the planned $250 million accounts-receivable securitization replaced the maturing facility and on what pricing and covenant terms.
- The outcome of CMS and California licensing actions involving Southwest Healthcare System.
- Trends in acute-care occupancy, commercial-payor utilization, Texas Medicaid reimbursement, uninsured volumes, charity care and doubtful-account provisions.
- Whether the proposed $130 million to $150 million second-half capital-expenditure program was achieved and how it was financed.
- Resolution and financial exposure from the Virginia False Claims Act litigation, professional liability claims and other regulatory matters.