Business Context and Reporting Period
Company: Universal Health Services, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2008
Business Overview: The Company owns and operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers, and radiation oncology centers. As of March 31, 2008, the portfolio included 27 acute care hospitals and 112 behavioral health centers across 32 states, Washington D.C., and Puerto Rico.
Key Financial Metrics
| Metric (in thousands) | Q1 2008 | Q1 2007 |
|---|---|---|
| Net Revenues | $1,297,715 | $1,197,601 |
| Net Income | $61,663 | $49,508 |
| Diluted EPS | $1.20 | $0.92 |
| Operating Cash Flow | $131,676 | $98,976 |
| Long-Term Debt | $1,041,308 | $1,008,786 |
| Cash and Equivalents | $8,916 | $16,354 |
| Days Sales Outstanding (DSO) | 48 days | 50 days |
Margins: Net income margin improved to 4.8% in Q1 2008 from 4.1% in Q1 2007. Income before taxes margin increased to 7.7% from 6.7%.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 8.4% ($100 million) year-over-year. This was driven by a 7% increase in same-facility revenues and $13 million from new facilities (including Centennial Hills Hospital in Las Vegas).
- Profitability: Net income rose 24.5% ($12 million). Income before taxes increased $19.6 million, primarily due to higher volumes in acute care and behavioral health, improved operating efficiencies, and favorable pricing from private payors.
- Expense Trends: The provision for doubtful accounts increased to $120.9 million (9.3% of revenue) from $99.1 million (8.3% of revenue), reflecting a rise in uninsured patients. Salaries and wages increased to 42.4% of revenue from 42.7%.
- Capital Allocation: The Company repurchased 1.8 million shares of Class B Common Stock for $89.8 million. Capital expenditures were $81.8 million, focused on new hospital construction and expansions.
Outlook, Risks, and Contingencies
- Guidance: The Company expects to spend $320 million to $345 million on capital expenditures for the remainder of 2008. Financing is expected to come from internally generated funds and existing credit facilities.
- Legal Proceedings: The Company is under ongoing civil and criminal investigation by the U.S. Department of Health and Human Services (OIG) and the U.S. Attorney's Office regarding its South Texas Health System affiliates. The investigation concerns potential violations of Medicare/Medicaid rules regarding physician employment and patient referrals. The Company states it cannot currently evaluate the potential financial exposure.
- Regulatory Risks: Significant revenue concentration exists in Medicare (25%) and Managed Care (45%). The Company faces risks related to potential reductions in Medicaid funding, particularly in Texas, and changes in Medicare reimbursement rates (DRG updates).
- Insurance: Effective January 1, 2008, subsidiaries became self-insured for malpractice up to $10 million per occurrence. Total accrual for professional and general liability claims was $263 million.
Investor Verification Checklist
- Government Investigation Status: Monitor updates on the South Texas Health System investigation regarding potential False Claims Act violations and financial exposure.
- Uninsured Patient Trends: Verify the trajectory of the provision for doubtful accounts and charity care, which increased significantly to $151 million in Q1 2008.
- Medicaid Reimbursement: Assess the impact of the Texas Medicaid supplemental payment deferral resolution and the potential effects of the proposed Healthcare Opportunity Pool Waiver.
- Debt Covenants: Confirm continued compliance with debt covenants, specifically the minimum net worth and fixed charge coverage ratios, given the $416 million outstanding on the revolving credit facility.
- Capital Expenditure Execution: Track the completion and financial performance of the new Centennial Hills Hospital and the Palmdale, California facility.