Universal Health Services, Inc. 2018 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
UHS owns and operates acute-care hospitals, outpatient facilities and behavioral-health facilities in the United States, United Kingdom, Puerto Rico and Washington, D.C. At September 30, 2018, it operated 350 inpatient and 32 outpatient and other facilities. The filing covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Financial statements are unaudited.
Financial Performance and Key Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net revenues | $2.649 billion | $2.542 billion | $8.018 billion | $7.767 billion |
| Income from operations | $257.2 million | $257.3 million | $915.4 million | $941.4 million |
| Operating margin | 9.7% | 10.1% | 11.4% | 12.1% |
| Income before taxes | $229.1 million | $220.4 million | $827.1 million | $833.1 million |
| Net income attributable to UHS | $171.7 million | $141.2 million | $621.6 million | $532.7 million |
| Diluted EPS | $1.84 | $1.47 | $6.60 | $5.50 |
| Net cash from operations | Not separately provided | Not separately provided | $975.5 million | $878.7 million |
- Q3 net revenue increased 4.2%; nine-month revenue increased 3.2%.
- Q3 net income attributable to UHS increased 21.6%, while nine-month net income increased 16.7%, primarily because of lower effective tax rates following the Tax Cuts and Jobs Act.
- Effective tax rates declined to 23.7% in Q3 and 23.3% for the nine months, compared with 34.0% and 34.4%, respectively, in 2017.
- Q3 same-facility acute-care revenue increased 6.7%, and income before taxes increased 32% to $146.8 million. Nine-month same-facility acute-care revenue increased 4.5%, with income before taxes up 11% to $514.4 million.
- Q3 same-facility behavioral-health revenue increased 2.5%, while income before taxes increased 2%. For nine months, revenue increased 2.8%, but income before taxes declined 0.3% and margin fell to 20.7% from 21.3%.
- Acute-care admissions increased 0.9% in Q3 and 2.0% for nine months; occupancy increased to 61% and 63%, respectively, from 59% and 60%.
- Behavioral-health admissions increased 5.1% in Q3 and 2.9% for nine months. Occupancy was 76% in Q3 and 77% for nine months.
Liquidity, Capital Spending and Debt
- Cash and cash equivalents were $83.7 million at September 30, 2018, compared with $74.4 million at December 31, 2017. Cash, cash equivalents and restricted cash totaled $177.7 million.
- Operating cash flow was $975.5 million for the first nine months, up from $878.7 million. Accounts receivable increased and days sales outstanding rose to 53 days from 51 days.
- Investing activities used $655.2 million, including $521.3 million of capital expenditures, $108.0 million for acquisitions and property, and $25.5 million for information technology. The company expects approximately $140 million to $160 million of additional capital expenditures during the final three months of 2018.
- Financing activities used $308.2 million, including $261.3 million for share repurchases, $28.1 million for dividends and $100.0 million of net debt repayments.
- Total debt was approximately $4.0 billion, or approximately 43% of total capitalization. The company had $282 million of available revolving capacity under the facility in effect at September 30, 2018, plus $25 million of available securitization capacity. The company was in compliance with required debt covenants.
- Subsequent to quarter-end, UHS increased its revolving facility to $1.0 billion, increased term-loan A commitments to $2.0 billion and extended maturities to 2023. It also added a $500 million tranche B term loan maturing in 2025 and provided notice to redeem the $300 million of 2019 senior secured notes.
Material Changes, Outlook and Unusual Items
- The company acquired The Danshell Group, comprising 25 U.K. behavioral-health facilities, and a 109-bed behavioral-health facility in Mississippi. It also divested an 18-bed U.K. facility and other property.
- UHS recorded a $48 million pre-tax increase to its reserve during Q3, and a $70 million increase during the first nine months, related to the DOJ civil investigation of behavioral-health billing practices. The aggregate reserve was $90 million at September 30, 2018.
- An unrealized gain on Premier shares contributed $11 million to Q3 pre-tax income and $19 million for the first nine months.
- Management estimated a 2018 net benefit of approximately $191 million from state Medicaid supplemental payment programs, net of provider taxes. These programs depend on government approvals, funding transfers and other factors outside UHS’s control.
- Management estimated a Medicare IPPS payment increase of approximately 2.7% for federal fiscal 2019 and a behavioral-health Psych PPS increase of approximately 1.35%. These are estimates, not guarantees.
- Management stated that operating cash flow, cash, cash equivalents and capital-market access should provide sufficient resources for the next 12 months, including capital expenditures, acquisitions, dividends, repurchases and debt requirements.
- Behavioral-health operations remain exposed to clinician shortages and managed Medicaid and managed Medicare pressure on length of stay and reimbursement.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. The reported impact was a $4.2 million reduction to Q3 net revenue and a $10.9 million reduction to nine-month net revenue, offset by lower other operating expense.
Principal Risks and Contingencies
- The DOJ, OIG, CMS and other agencies continue investigating behavioral-health facilities. River Point Behavioral Health remains subject to a Medicare payment suspension; approximately $9 million had been withheld through September 30, 2018.
- UHS faces False Claims Act, shareholder, derivative, professional-liability and other litigation. The company states that potential exposure for several matters is uncertain and that future adjustments could be material.
- Professional and general liability reserves totaled $243 million, and workers’ compensation reserves totaled $71 million, at September 30, 2018. Management warns that reserve estimates may change materially.
- Illinois receivables totaled approximately $24 million, including approximately $10 million outstanding more than 60 days. No reserve was recorded, but collection is subject to state budget and funding pressures.
- UHS remains sensitive to Medicare and Medicaid reimbursement changes, Medicaid supplemental-payment reductions, DSH cuts, provider-tax changes, payor collection risk, labor shortages, regulatory compliance, litigation, acquisitions, interest rates and access to financing.
Important Facts for Investors to Verify
- Progress and ultimate cost of the DOJ behavioral-health investigation and whether the $90 million reserve is adequate.
- Sustainability and renewal terms of Medicaid supplemental programs, particularly Texas UC/UPL and DSRIP, and the estimated $191 million 2018 net benefit.
- Execution of the post-quarter-end refinancing, redemption of the 2019 notes and resulting interest expense and leverage.
- Whether revenue growth converts into improved consolidated margins after considering labor costs, uncompensated care and behavioral-health staffing constraints.
- Collection of Illinois receivables and trends in days sales outstanding.
- Capital expenditure levels, acquisition integration and the effect of continued share repurchases on liquidity and share count.