Business Context and Reporting Period
Company: Universal Health Services, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1998
Business Overview: The Company operates acute care hospitals, ambulatory treatment centers, specialized women's health centers, and behavioral health facilities. Significant activity during the period included the acquisition of facilities in Puerto Rico and Las Vegas, the opening of new facilities in Texas and Nevada, and the impact of Hurricane Georges on operations in Puerto Rico and Louisiana.
Key Financial Metrics
| Metric (in thousands, except per share) | 3 Months Ended Sep 30, 1998 | 3 Months Ended Sep 30, 1997 | 9 Months Ended Sep 30, 1998 | 9 Months Ended Sep 30, 1997 |
|---|---|---|---|---|
| Net Revenues | $456,090 | $362,377 | $1,393,765 | $1,046,373 |
| Net Income | $13,393 | $13,819 | $59,504 | $52,256 |
| Earnings Per Share (Diluted) | $0.40 | $0.42 | $1.78 | $1.58 |
| EBITDAR (Including Hurricane Impact) | $67,000 | $56,000 | $232,000 | $183,000 |
| Operating Cash Flow (9 Months) | $126,572 | $154,183 | ||
| Capital Expenditures (9 Months) | ($71,055) | ($103,703) | ||
| Total Debt (Long-term + Current) | $410,497 | $278,121 | ||
| Cash and Equivalents | $3,340 | $332 |
Note: EBITDAR figures are derived from Management's Discussion and Analysis text. Debt figures are the sum of current maturities and long-term debt from the Balance Sheet.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 26% ($94 million) for the quarter and 33% ($347 million) for the nine-month period compared to 1997. Growth was driven primarily by acquisitions (Puerto Rico, Las Vegas) and new facility openings.
- Profitability: Net income for the quarter decreased slightly to $13.4 million from $13.8 million, while nine-month net income increased to $59.5 million from $52.3 million.
- Operating Margins: Overall operating margins were 14.8% (Q3) and 16.6% (9M) in 1998, compared to 15.4% (Q3) and 17.5% (9M) in 1997. The decline is attributed to Hurricane Georges and lower margins at recently acquired facilities.
- Expense Increases: Interest expense rose 56% for the quarter and 38% for the nine months due to borrowings financing acquisitions. Depreciation and amortization increased 35% and 32% respectively.
- Acquisition Activity: The Company acquired three acute care hospitals in Puerto Rico for $186 million and completed a partial sale transaction involving Valley Hospital and Summerlin Hospital, recording a pre-tax gain of approximately $55 million.
Outlook, Risks, and Contingencies
- Hurricane Georges Impact: The Company incurred an estimated $5.5 million pre-tax adverse financial effect due to property damage and curtailed business in Puerto Rico and Louisiana. Insurance recovery amounts are currently unestimable.
- Year 2000 Issue: The Company is assessing remediation costs for software and hardware. While costs incurred to date are not material, the total cost is not yet estimable. Failure to resolve issues could materially adversely affect operations.
- Regulatory and Reimbursement Risks: The Company faces pressure from Medicare and Medicaid programs, including the Balanced Budget Act of 1997. A significant portion of revenue (approx. 45-50%) comes from fixed payment services. Changes in reimbursement rates or managed care contracts pose risks.
- Liquidity: Operating cash flow decreased by $27 million in the nine-month period, primarily due to a $29 million increase in accounts receivable. The Company has $20 million unused capacity in its commercial paper facility and $192 million in its revolving credit facility.
- 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
- Insurance Recovery: Verify the final amount recoverable from insurance policies regarding Hurricane Georges damages.
- Accounts Receivable: Monitor the collection of the $29 million increase in receivables, specifically payments from managed care providers.
- Year 2000 Costs: Track the total estimated remediation costs once the assessment phase is complete in Q1 1999.
- Acquisition Integration: Assess the operating margin performance of the newly acquired Puerto Rico and Las Vegas facilities, which currently have lower margins.
- Debt Servicing: Review the impact of increased interest expenses on future cash flows given the higher debt load from recent acquisitions.