Universal Health Services, Inc. — Form 10-Q Summary
Business Context and Reporting Period
UHS operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers and radiation oncology centers. As of June 30, 2015, it operated 24 acute care hospitals and 215 behavioral health centers across 37 states, Washington, D.C., the United Kingdom, Puerto Rico and the U.S. Virgin Islands. The filing covers the three and six months ended June 30, 2015, compared with the same periods in 2014. The financial statements are unaudited.
Acute care and behavioral health services each represented approximately 51% and 49%, respectively, of consolidated net revenues. The 2014 income statement was reclassified to present provider taxes in other operating expenses rather than as a reduction of revenue; management concluded the classification change was not material.
Key Financial Metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net revenues | $2.275 billion | $2.052 billion | $4.501 billion | $3.990 billion |
| Income from operations | $335 million | $293 million | $662 million | $564 million |
| Operating margin | 14.7% | 14.3% | 14.7% | 14.1% |
| Net income | $201 million | $167 million | $396 million | $318 million |
| Net income attributable to UHS | $182 million | $152 million | $356 million | $290 million |
| Net margin attributable to UHS | 8.0% | 7.4% | 7.9% | 7.3% |
| Diluted EPS | $1.80 | $1.51 | $3.54 | $2.89 |
| Interest expense, net | $28 million | $35 million | $58 million | $70 million |
Net cash provided by operating activities was $532 million for the first six months of 2015, compared with $458 million in 2014. Capital expenditures were $171 million, acquisitions and property purchases were $35 million, and net cash used in investing activities was $205 million. Net cash used in financing activities was $316 million, including $256 million of debt repayments, $68 million of share repurchases and $20 million of dividends. Cash increased to $42 million at June 30, 2015 from $32 million at December 31, 2014.
Accounts receivable were $1.361 billion, with reported days sales outstanding of 55 days versus 54 days at June 30, 2014. The allowance for doubtful accounts was $363 million. Total debt had a carrying value of approximately $3.0 billion and fair value of approximately $3.1 billion. Total debt represented 43% of total capitalization, compared with 47% at December 31, 2014.
Liquidity included $755 million of available borrowing capacity under the $800 million revolving credit facility, after outstanding short-term borrowings and letters of credit, plus $120 million of unused capacity under the accounts receivable securitization program. Management stated that operating cash flow, cash, borrowing capacity and capital-market access should be sufficient for operating, investing and financing needs over the next twelve months.
Material Changes Versus the Prior Comparable Period
- Second-quarter net revenue increased 11%, or $223 million; six-month net revenue increased 13%, or $510 million.
- Same-facility revenue increased 7% in the quarter and 8% for the six-month period. Acute care same-facility revenue increased 8.4% in the quarter and 10.2% year to date; behavioral health same-facility revenue increased 5% and 6%, respectively.
- Income before taxes increased 19% in the quarter and 22% for the six-month period. Management attributed the year-to-date increase primarily to $66 million of improvement in acute care and $57 million of improvement in behavioral health, partly offset by the absence of a $10 million gain recorded in 2014.
- Acute care admissions increased 5.0% in the quarter and 4.6% year to date; adjusted admissions increased 5.7% in both periods. Acute care occupancy rose to 59% in the quarter and 61% year to date, from 57% and 59%.
- Behavioral health admissions increased 4.4% in the quarter and 5.1% year to date. Occupancy was 77% in both the quarter and year-to-date period, compared with 76% year to date in 2014.
- Interest expense declined $7 million in the quarter and $13 million year to date, reflecting lower average borrowings and borrowing costs, reduced swap expense and lower financing-fee amortization.
- The provision for doubtful accounts declined to $332 million year to date from $384 million, while uncompensated care declined to $550 million from $586 million based on established charges.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expects approximately $200 million to $230 million of capital expenditures during the remaining six months of 2015 and expects to fund capital expenditures and acquisitions with internally generated funds and/or additional financing.
- Management estimated approximately $20 million of aggregate Texas and South Carolina Medicaid disproportionate-share reimbursements, approximately $29 million of Texas uncompensated-care and affiliated-hospital revenues, approximately $18 million of Texas DSRIP net revenue, approximately $3 million from the Nevada supplemental-payment program and approximately $32 million from other provider-tax programs during the remaining six months of 2015. These amounts are subject to program renewals, approvals, qualifying conditions and governmental transfers.
- CMS’s 2016 IPPS final rule was estimated to produce an overall decrease of approximately 0.1% for UHS after DSH changes, excluding sequestration. The 2016 psychiatric prospective payment rule was estimated to increase payments by 1.7%. These are management estimates and not company earnings guidance.
- During the second quarter, UHS finalized a government settlement concerning an investigation of implantable cardioverter defibrillator billing; the settlement approximated the previously established reserve.
- The DOJ expanded a False Claims Act investigation to include UHS as a corporate entity and various behavioral health facilities. The company stated that potential liability and financial exposure are uncertain and that no estimate of additional loss could be made.
- River Point Behavioral Health remained subject to Medicare and Medicaid payment suspensions, materially affecting that facility although not materially affecting consolidated results. Timberlawn faced a CMS termination action involving its Medicare provider agreement, and UHS pursued administrative and judicial relief. Texoma Medical Center entered a CMS Systems Improvement Agreement through October 2016 unless completed earlier.
- Professional and general liability reserves were $201 million and workers’ compensation reserves were $68 million at June 30, 2015. UHS had $118 million of standby letters of credit and surety bonds, primarily related to self-insurance.
- Illinois receivables totaled approximately $24 million, including $8 million outstanding more than 60 days; Texas Medicaid supplemental-program receivables totaled approximately $97 million. No reserves were recorded for these balances, and failure to collect them could adversely affect cash flow and results.
- Seven interest-rate swaps with aggregate notional value of $825 million matured in May 2015. UHS entered into forward-starting swaps with aggregate notional value of $500 million during the quarter and additional $200 million of swaps in July 2015.
- Principal risks include changes in Medicare and Medicaid reimbursement, state supplemental-payment programs, regulatory investigations, payment suspensions, litigation, self-insured claims, labor costs, payer collection risk, competition, acquisition integration and access to financing.
Most Important Facts for Investors to Verify
- Whether acute care volume and occupancy gains continue and offset reimbursement pressure and rising operating expenses.
- The sustainability and renewal status of Texas, South Carolina, Nevada and other Medicaid supplemental-payment programs.
- The ultimate outcome and potential financial exposure from the DOJ behavioral health investigation and related regulatory matters.
- Whether Timberlawn retains Medicare and Medicaid certification and whether River Point’s payment suspension is lifted.
- Collection timing and recoverability of Illinois and Texas receivables, including the absence of reserves.
- Debt repayment requirements, the October 2016 securitization maturity, the June 2016 maturity of the 7.125% notes and compliance with credit covenants.
- Actual 2015 capital expenditures, acquisitions, share repurchases and dividends relative to internally generated cash flow.