Business Context and Reporting Period
Company: Universal Health Services, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1999
Business Overview: The Company operates acute care and behavioral health care services. As of September 30, 1999, it operated 6,860 licensed beds across its facilities, with acute care services accounting for approximately 85% of consolidated net revenues.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended 9/30/99 | 3 Months Ended 9/30/98 | 9 Months Ended 9/30/99 | 9 Months Ended 9/30/98 |
|---|---|---|---|---|
| Net Revenues | $489,828 | $456,090 | $1,522,990 | $1,393,765 |
| Net Income | $10,794 | $13,393 | $63,846 | $59,504 |
| Earnings Per Share (Diluted) | $0.34 | $0.40 | $1.97 | $1.78 |
| EBITDAR | $61,519 | $67,372 | $244,619 | $231,869 |
| Operating Margin | 12.6% | 14.8% | 16.1% | 16.6% |
| Cash from Operations (9mo) | $156,903 | $126,808 | ||
| Total Debt (Long-term + Current) | $404,251 (as of 9/30/99) | |||
| Cash and Equivalents | $7,088 (as of 9/30/99) |
Note: EBITDAR is defined as Earnings before interest, income taxes, depreciation, amortization, lease & rental, and minority interest expense.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 7.4% ($34 million) for the quarter and 9.3% ($129 million) for the nine-month period compared to the prior year. Growth was driven by acquisitions (behavioral health facilities in IL, IN, NJ and an acute care facility in TX) and organic volume increases (admissions and patient days).
- Profitability Decline: Despite revenue growth, Net Income decreased 19.4% for the quarter and EBITDAR decreased 8.7% for the quarter. Operating margins contracted from 14.8% to 12.6% (quarterly) and 16.6% to 16.1% (nine-month).
- Acute Care Pressure: Acute care EBITDAR dropped from $71 million to $60 million for the quarter. This was primarily due to increased bad debt provisions (rising from 7.1% to 10.1% of acute care revenues), reduced Medicare/Medicaid reimbursements under the Balanced Budget Act of 1997, and operational issues in Las Vegas and Amarillo, Texas.
- Behavioral Health Stability: Behavioral health revenues remained relatively flat for the quarter but grew 2.2% for the nine-month period. EBITDAR increased slightly to $11 million for the quarter.
- Capital Allocation: The Company repurchased 1.53 million shares of Class B Common Stock for $56.5 million during the nine-month period. Capital expenditures decreased to $48.5 million (nine months) from $71.1 million in the prior year.
Guidance, Outlook, and Risks
- Reimbursement Risks: The Company faces continued pressure from the Balanced Budget Act of 1997, including reductions in Medicare bad debt reimbursement and Medicaid disproportionate share payments (estimated at $11 million annually reduction starting Q3 1999). Outpatient Medicare reimbursement is scheduled to convert to a Prospective Payment System (PPS) in Q2 2000, with impact currently unquantifiable.
- Operational Challenges: Management is allocating resources to address operational issues at facilities in Las Vegas and Amarillo. Competition for patients remains high due to significant unused industry capacity.
- Year 2000 Compliance: The Company believes its major software and biomedical equipment are substantially Year 2000 compliant. Remediation costs have not materially impacted operations, though reliance on third-party vendors (payors, utilities) introduces residual risk.
- Liquidity: The Company maintains $210 million of unused capacity under its $400 million revolving credit facility and $5 million under its commercial paper program. Total debt represents 39% of total capitalization.
- Contingencies: The Company has committed or guaranteed approximately $54 million related to self-insurance programs and debt support, including a $40 million letter of credit.
Investor Verification Checklist
- Bad Debt Trends: Verify the sustainability of the 10.1% bad debt provision rate in acute care and the specific impact of the Balanced Budget Act on future collections.
- Facility Performance: Monitor the turnaround progress of the Las Vegas and Amarillo facilities, which are cited as key drivers of recent margin compression.
- Medicaid Funding: Confirm the status of the Texas and South Carolina disproportionate share reimbursement programs, which are scheduled to terminate in Q3 2000.
- Outpatient PPS Impact: Assess the financial modeling for the Q2 2000 conversion of outpatient Medicare reimbursement to PPS.
- Debt Covenants: Review the terms of the $400 million revolving credit facility maturing in July 2002 to ensure compliance with leverage ratios given the current debt-to-capitalization of 39%.