Universal Health Services, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly filing for the three and six months ended June 30, 2013, compared with the corresponding 2012 periods. UHS operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers and radiation oncology centers. At June 30, 2013, it owned or operated 23 acute care hospitals and 195 behavioral health centers in 37 states, Washington, D.C., Puerto Rico and the U.S. Virgin Islands. The October 2012 acquisition of Ascend Health Corporation added nine behavioral health facilities.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Change |
|---|
| Net revenues | $1.835 billion | $1.723 billion | 6.5% increase |
| Income from operations | $304.1 million | $230.3 million | 32.0% increase |
| Operating margin | 16.6% | 13.4% | Up 3.2 percentage points |
| Net income attributable to UHS | $151.8 million | $107.6 million | 41.2% increase |
| Diluted EPS | $1.53 | $1.10 | 39.1% increase |
| Net margin attributable to UHS | 8.3% | 6.2% | Up 2.1 percentage points |
| Metric | Six months 2013 | Six months 2012 | Change |
|---|
| Net revenues | $3.667 billion | $3.516 billion | 4.3% increase |
| Income from operations | $548.0 million | $499.4 million | 9.7% increase |
| Operating margin | 14.9% | 14.2% | Up 0.7 percentage points |
| Net income attributable to UHS | $271.6 million | $236.2 million | 15.0% increase |
| Diluted EPS | $2.75 | $2.41 | 14.1% increase |
| Net margin attributable to UHS | 7.4% | 6.7% | Up 0.7 percentage points |
- Q2 net revenues increased $112 million, including a $69 million increase from same-facility operations and approximately $43 million primarily from Ascend facilities.
- Six-month net revenues increased $150 million, including $96 million from same-facility operations and approximately $54 million primarily from Ascend facilities.
- Q2 same-facility behavioral health revenue increased 3%, while same-facility acute care revenue increased 4.9%. Six-month same-facility behavioral health revenue increased 3%, while acute care revenue increased 2.8%.
- The provision for doubtful accounts increased to $246.7 million in Q2 2013 from $184.7 million and to $493.4 million for the six months from $333.3 million. Accounts receivable were $1.149 billion at June 30, 2013, net of a $404 million allowance.
- Medicare and Medicaid represented 36% of net patient revenues in both the Q2 and six-month 2013 periods; managed care represented 49% in Q2 and 48% for the six months.
Cash flow, liquidity and debt
- Six-month operating cash flow was $406.0 million, compared with $372.9 million in 2012.
- Investing cash outflow was $176.7 million, including $175.9 million of property and equipment additions and $33.4 million for electronic health record implementation. UHS received $34.0 million from asset and business divestitures.
- Financing cash outflow was $240.3 million, including $196.1 million of debt repayments, $21.4 million of share repurchases related to employee tax withholding, $9.8 million of dividends and $26.7 million of distributions to noncontrolling interests.
- Cash and cash equivalents declined to $12.6 million at June 30, 2013 from $23.5 million at December 31, 2012. Days sales outstanding increased to 57 days from 53 days at June 30, 2012.
- Carrying value of debt was $3.55 billion and fair value was $3.60 billion. Total debt was 54% of total capitalization, compared with 58% at December 31, 2012.
- UHS had no borrowings under its $800 million revolving credit facility and reported $769 million of available capacity, net of short-term borrowings and letters of credit. The accounts receivable securitization had $260 million outstanding and $15 million of additional capacity.
- UHS expects to spend approximately $175 million to $200 million on capital expenditures during the remaining six months of 2013. Management believes operating cash flow, cash, available revolver capacity and capital-market access are sufficient for the next twelve months, subject to financing-market conditions.
Material changes, outlook and unusual items
- Q2 pretax income increased $81 million. A $65 million reduction in prior-year professional and general liability reserves was the largest contributor and is not indicative of recurring operating performance.
- The reserve reduction followed a claims analysis that placed greater weight on company-specific experience, favorable tort-reform effects and lower claims in certain higher-risk specialties. The professional and general liability accrual declined to $217 million from $279 million at December 31, 2012.
- Q2 results included approximately $8 million of pretax revenue related to a California Medicaid supplemental payment program approved retroactive to July 1, 2011. The total retroactive California benefit was $11 million, including $8 million applicable to prior years.
- UHS completed the divestiture of Peak Behavioral Health Services in May 2013 and received approximately $34 million from that transaction and related real-property sales. The transaction generated a $3.1 million pretax gain within discontinued operations.
- The May 2013 credit agreement amendment replaced the $745.9 million Tranche B term loan with a same-sized Tranche B-1 loan at lower pricing and eliminated the prior LIBOR and ABR floors. Net interest expense declined by $7.7 million in Q2 and $14.4 million for the six months.
- Electronic health record implementation was completed at all acute care hospitals in June 2013. Fifteen hospitals met meaningful-use criteria at quarter-end, and management expected the remainder to do so by year-end. EHR incentive income was $4.8 million for the six months, while implementation produced an approximately $8 million pretax unfavorable impact in the period.
- Medicare sequestration reduced Medicare net revenues by approximately $39 million annually beginning April 1, 2013. Management estimates aggregate Medicaid rates declined approximately 1%, or $15 million annually, in the 2013 state fiscal years and expects a similar reduction for 2014.
- No material changes to previously reported risk factors were disclosed. The filing provides no formal earnings or revenue guidance.
Risks and contingencies
- Approximately $30 million of accounts receivable was due from Illinois at June 30, 2013, with $7 million outstanding more than 60 days. No reserve was recorded, but delayed or failed collection could adversely affect cash flow and earnings.
- UHS is subject to multiple DOJ, OIG and state investigations and subpoenas involving alleged billing, Medicaid and behavioral-health matters. The company states that the scope, liability and potential exposure cannot currently be estimated; outcomes could materially affect results, cash flow, financial position or reputation.
- The company is substantially self-insured for professional and general liability and workers’ compensation claims. A sharp increase in claim frequency or severity could materially affect future results.
- Debt agreements contain leverage, interest coverage and other restrictive covenants; UHS was in compliance at June 30, 2013. The $260 million receivables securitization was scheduled to mature October 25, 2013 and was expected to be refinanced through the credit facility if not extended.
- Key ongoing risks include Medicare and Medicaid reimbursement reductions, Medicaid DSH and supplemental-payment changes, uninsured and self-pay collections, managed-care pricing, labor costs, regulatory compliance, acquisition integration, competition and the company’s high debt burden.
Important facts for investors to verify
- Separate recurring operating performance from the $65 million favorable liability-reserve adjustment, retroactive Medicaid benefits and other prior-period items.
- Trend the sharp increase in doubtful-account provisions, the $404 million allowance and the 57-day DSO.
- Confirm refinancing or extension of the October 2013 accounts receivable securitization maturity.
- Monitor execution of the planned $175 million to $200 million second-half capital program and its effect on cash and leverage.
- Assess the effect of Medicare sequestration, Medicaid rate reductions, DSH changes and other reimbursement-policy developments.
- Follow the unresolved government investigations, legal proceedings and self-insurance reserve estimates.
