Business Context and Reporting Period
Universal Health Services, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2020. UHS operated 356 inpatient and 41 outpatient and other facilities across the United States, the United Kingdom, Puerto Rico and Washington, D.C., with reportable segments comprising acute care hospital services and behavioral health services.
Results were materially affected by the COVID-19 pandemic. Patient volumes declined most sharply in April and began improving in May and June as restrictions eased and elective procedures resumed, although infection rates were increasing in several operating states.
Financial Highlights
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net revenues | $2.730 billion | $2.855 billion | $5.559 billion | $5.660 billion |
| Income from operations | $358.0 million | $345.6 million | $594.7 million | $686.0 million |
| Operating margin | 13.1% | 12.1% | 10.7% | 12.1% |
| Income before taxes | $335.7 million | $310.8 million | $526.4 million | $607.1 million |
| Net income attributable to UHS | $251.9 million | $238.3 million | $394.0 million | $472.5 million |
| Diluted EPS | $2.95 | $2.66 | $4.58 | $5.23 |
- Q2 net revenue declined 4.4%, while net income attributable to UHS increased 5.7% and diluted EPS increased 10.9%, helped by lower interest expense, lower share count and approximately $218 million of governmental stimulus revenue.
- Six-month net revenue declined 1.8%, while net income attributable to UHS declined 16.6% and diluted EPS declined 12.4%.
- Q2 effective tax rate was 23.6%, compared with 22.4% in the prior-year quarter; the six-month rate was 23.8%, compared with 21.2%.
- Governmental stimulus revenue recognized in the first six months totaled approximately $218 million: $157 million in acute care and $61 million in behavioral health.
Cash Flow, Liquidity and Debt
- Six-month operating cash flow was $1.451 billion, compared with $672.6 million in 2019. The increase primarily reflected $477.1 million of Medicare accelerated payments and deferred governmental stimulus grants, improved accounts receivable collections and deferred tax payments.
- Capital expenditures were $354.6 million; investing cash flow was negative $296.8 million.
- Financing cash flow was negative $674.3 million, including $459.3 million of debt repayments, $200.1 million of share repurchases and $17.3 million of dividends paid in the first quarter.
- Cash and cash equivalents were $539.6 million at June 30, 2020; cash, cash equivalents and restricted cash totaled $584.3 million, versus $105.7 million at December 31, 2019.
- Debt carrying value and estimated fair value were each approximately $3.5 billion, down from approximately $4.0 billion at year-end 2019. Debt represented approximately 38% of total capitalization, compared with 42% at year-end.
- UHS had no revolver borrowings and approximately $997 million of available revolving capacity, net of letters of credit. The accounts receivable securitization facility had no borrowings and approximately $378 million of available capacity.
- Medicare accelerated payments of approximately $375 million had been received by July 31, 2020 and are expected to be recouped through future Medicare claims beginning in August 2020, potentially through April 2021.
Material Changes Versus the Prior Comparable Period
- Same-facility acute care revenue declined 3.5% in Q2 and 1.6% for the six-month period. Q2 acute-care admissions declined 18.6%, adjusted admissions declined 24.8% and occupancy fell to 56% from 64%.
- Same-facility behavioral health revenue declined 3.8% in Q2 and 0.8% for the six-month period. Q2 behavioral-health admissions declined 14.8%, adjusted admissions declined 15.4% and occupancy fell to 69% from 77%.
- Excluding stimulus revenue, Q2 same-facility acute care revenue declined approximately 14.0% and behavioral health revenue declined approximately 8.5%.
- Interest expense declined to $25.5 million in Q2 from $42.5 million and to $61.8 million for the six months from $82.1 million, primarily due to lower average borrowings and borrowing costs.
- UHS recorded a $20 million increase to self-insured professional and general liability reserves during the first quarter. Total professional and general liability and workers’ compensation reserves were $340 million at June 30, 2020.
- UHS repurchased $200.1 million of shares during the first six months, but suspended its stock repurchase program and quarterly dividend program as COVID-19 measures. The remaining repurchase authorization was $559.6 million.
- Accounts receivable days sales outstanding improved to 47 days from 51 days at June 30, 2019.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide a consolidated earnings or revenue forecast. Full-year 2020 capital expenditures were projected at approximately $650 million to $700 million, including $295 million to $345 million expected during the second half.
- UHS had received approximately $320 million of governmental stimulus funds by June 30 and an additional approximately $69 million in July. The filing states that unused Provider Relief Fund amounts may ultimately need to be returned.
- UHS estimates a 2020 net benefit of approximately $248 million from various state Medicaid supplemental payment programs, subject to state and federal approvals, funding transfers and other conditions outside its control.
- On July 6, 2020, UHS finalized a previously disclosed behavioral-health government settlement. Payments made on July 9 totaled approximately $117.3 million before certain accrued interest, fees and claims; additional relator-related fees and costs were expected to be approximately $6 million. The company had previously reserved approximately $134 million. UHS entered into a five-year Corporate Integrity Agreement.
- The COVID-19 recovery remains uncertain, including risks from renewed restrictions, reduced elective procedures, higher uninsured and underinsured volumes, increased personal protective equipment costs, labor pressures, supply-chain disruption and liability exposure.
- Other material risks include Medicaid supplemental payment reductions or program changes, potential recoupment of Pennsylvania Medicaid DSH payments, regulatory and False Claims Act matters, self-insurance reserve volatility, reimbursement pressure, and the eventual repayment of Medicare accelerated payments.
- UHS was in compliance with its debt covenants at June 30, 2020. Management stated that cash, operating cash flow and available financing were sufficient for the next twelve months, but cautioned that future financing may not be available on acceptable terms.
Investor Verification Items
- Verify the sustainability of reported earnings after excluding approximately $218 million of recognized governmental stimulus revenue and considering the repayment of approximately $375 million of Medicare accelerated payments.
- Track acute-care and behavioral-health admissions, occupancy, elective procedure volumes and payer mix as COVID-19 conditions evolve.
- Review the final accounting and cash impact of the behavioral-health settlement, Corporate Integrity Agreement and any remaining relator-related obligations.
- Assess exposure to Medicaid supplemental programs, DSH payment reductions, pending audits and potential Pennsylvania repayment claims.
- Monitor self-insured professional liability and workers’ compensation reserves, including the risk of further adverse reserve adjustments.
- Confirm debt maturities, required term-loan amortization, revolver availability and compliance with applicable financial covenants.
- Evaluate whether the suspended dividend and share-repurchase programs are reinstated and whether capital expenditures remain within the projected $650 million to $700 million range.