Business Context and Reporting Period
Company: Universal Health Services, Inc. (UHS)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2009
Business Overview: UHS owns and operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers, and radiation oncology centers. As of September 30, 2009, the company operated 25 acute care hospitals and 104 behavioral health centers across 32 states, Washington D.C., and Puerto Rico.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sept 30, 2009 |
3 Months Ended Sept 30, 2008 |
9 Months Ended Sept 30, 2009 |
9 Months Ended Sept 30, 2008 |
|---|---|---|---|---|
| Net Revenues | $1,295,109 | $1,244,462 | $3,911,168 | $3,785,015 |
| Net Income Attributable to UHS | $51,074 | $36,997 | $199,508 | $152,900 |
| Diluted EPS | $1.03 | $0.73 | $4.04 | $2.99 |
| Operating Cash Flow (9mo) | $484,275 | $414,763 | ||
| Long-Term Debt | $852,270 | $990,661 | ||
| Cash and Equivalents | $13,630 | $5,460 | ||
| Debt to Capitalization | 33% | 39% |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 4% ($51 million) for the quarter and 3% ($126 million) for the nine-month period compared to the prior year. Growth was driven by a 5% increase in same-facility revenues for acute care and behavioral health, partially offset by a decrease in construction management contract revenues.
- Profitability: Net income attributable to UHS increased 38% ($14 million) for the quarter and 31% ($47 million) for the nine-month period. Operating margins improved due to cost containment in salaries, supplies, and other operating expenses.
- Insurance Reserve Adjustment: A significant non-cash favorable adjustment of $23 million was recorded in Q2 2009 related to a reduction in professional and general liability self-insurance reserves for prior years. Approximately $20 million of this benefit applied to acute care facilities.
- Debt Reduction: Long-term debt decreased by approximately $138 million year-over-year due to repayments under the revolving credit facility and accounts receivable securitization program.
- Segment Performance:
- Acute Care: Pre-tax income increased 32% for the quarter and 20% (excluding the insurance reserve benefit) for the nine-month period.
- Behavioral Health: Pre-tax income increased 14% for the quarter and 11% for the nine-month period on a same-facility basis.
Guidance, Outlook, Risks, and Contingencies
- Capital Expenditures: Management expects to spend approximately $95 million to $115 million on capital expenditures for the remainder of 2009, primarily for new hospital construction (Palmdale, CA; Denison, TX) and facility expansions.
- Liquidity: The company maintains an $800 million revolving credit facility with $507 million available and a $200 million accounts receivable securitization program with $190 million available. Management believes internally generated funds and existing credit facilities are sufficient to fund operations and growth.
- Legal Proceedings:
- South Texas Health System: Reached a settlement agreement involving a $27.5 million payment (paid October 2009) to resolve a False Claims Act investigation regarding physician payments and referrals. A $4.3 million unfavorable discrete tax item was recorded in 2009.
- Virginia Behavioral Health: DOJ and Virginia Attorney General intervened in a qui tam case regarding Medicaid documentation at Marion Youth Center. A reserve has been established, but the ultimate settlement amount is undetermined.
- Regulatory Risks: Significant exposure to changes in Medicare and Medicaid reimbursement rates. The company notes potential adverse impacts from state budget deficits reducing Medicaid funding and ongoing healthcare reform proposals.
- Insurance: The company is self-insured for malpractice up to $10 million per occurrence. A sharp increase in claims could materially affect future results.
Investor Verification Checklist
- Insurance Reserve Sustainability: Verify the assumptions behind the $23 million reduction in self-insurance reserves and the potential for future volatility in these estimates.
- Medicaid Reimbursement Trends: Monitor state budget deficits, particularly in Texas, Nevada, and Florida, and their impact on Medicaid funding and the company's revenue mix.
- Construction Project Timelines: Track the completion and opening dates of major capital projects (Palmdale, Denison) to ensure they align with revenue projections.
- Legal Settlement Finality: Confirm the finality of the South Texas settlement and monitor the status of the Virginia qui tam case for potential additional liabilities.
- Uninsured Patient Rates: Assess the trend of uninsured patients and the adequacy of the provision for doubtful accounts ($216 million allowance) given economic conditions.