UNIVERSAL HEALTH SERVICES INC quarterly report, Q1 FY2012

Universal Health Services, Inc. — Q1 2012 Form 10-Q Summary

Business Context and Reporting Period

UHS owns and operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers and radiation oncology centers. As of March 31, 2012, it operated 25 acute care hospitals and 196 behavioral health centers, plus six surgical hospitals and surgery and radiation oncology centers. This unaudited Form 10-Q covers the three months ended March 31, 2012, compared with the three months ended March 31, 2011.

Key Financial Metrics

Metric	Q1 2012	Q1 2011	Change
Net revenues	$1.825 billion	$1.757 billion	+4%
Income from operations	$269.0 million	$260.4 million	+3%
Operating margin	14.7%	14.8%	Down 0.1 point
Income before income taxes	$222.3 million	$204.0 million	+9%
Net income	$142.6 million	$130.0 million	+10%
Net income attributable to UHS	$128.6 million	$114.2 million	+13%
Net margin attributable to UHS	7.0%	6.5%	Up 0.5 point
Diluted EPS	$1.31	$1.15	+14%
Net cash from operating activities	$127.2 million	$183.2 million	Down $56.0 million
Cash and equivalents at period-end	$42.0 million	$52.1 million	Down $10.1 million

Net revenues before doubtful accounts were $1.977 billion, with a $151.7 million provision for doubtful accounts. Income tax expense was $79.7 million, producing a 35.9% reported effective tax rate, or 38.3% after excluding income attributable to noncontrolling interests.

Segment and Operating Performance

Acute care: Same-facility net revenues increased 1% to $929.7 million, but same-facility income before taxes decreased 15% to $107.9 million. Inpatient admissions declined 2.0%, occupancy decreased to 57% from 60%, and adjusted admissions increased 1.6%. Higher labor costs and difficult prior-year comparisons pressured margins.
Behavioral health: Same-facility net revenues increased 5% to $854.8 million, while income before taxes increased 7% to $197.9 million. Inpatient admissions increased 8.6%, adjusted admissions increased 9.2%, and occupancy improved to 76% from 75%.
Acute care and related services represented approximately 53% of consolidated net revenues, while behavioral health represented approximately 47%.

Cash Flow, Debt and Liquidity

Operating cash flow declined to $127.2 million, primarily because accounts receivable increased $146.7 million and working capital absorbed cash.
Investing activities used $47.1 million, including $92.6 million of property and equipment additions and $14.5 million for electronic health records implementation. Asset and business divestitures generated $53.5 million, and a terminated purchase agreement returned a $6.5 million deposit.
Financing activities used $79.4 million, including $70.9 million of debt reduction, $4.8 million of dividends, $2.0 million of share repurchases and $2.6 million of distributions to noncontrolling interests.
Total long-term debt was $3.582 billion, with total debt carrying value of approximately $3.58 billion and estimated fair value of $3.65 billion. Debt represented 60% of total capitalization at March 31, 2012, compared with 61% at December 31, 2011.
Available borrowing capacity under the credit agreement and receivables securitization arrangements was $509 million, net of outstanding borrowings, letters of credit and short-term facility borrowings. The $240 million receivables securitization facility was fully drawn.
UHS was in compliance with all debt covenants. Major credit facilities mature in 2015 and 2016, and $250 million of 7.00% senior notes mature in 2018.

Material Changes Versus the Prior Comparable Period

Revenue growth included approximately $36 million from an HHS/CMS settlement relating to historical Medicare inpatient underpayments. After related expenses and noncontrolling interests, the settlement increased pretax results by approximately $30 million.
Q1 2012 pretax results also benefited by approximately $11 million from Oklahoma SHOPP Medicaid supplemental reimbursements, including amounts retroactive to July 1, 2011.
These benefits were partly offset by approximately $8 million of unfavorable effects from revised Medicare DSH SSI ratios and Florida county reimbursement receivable write-offs.
Interest expense declined $9.7 million to $46.7 million, primarily because of lower borrowing costs following the 2011 credit agreement amendment and lower average borrowings.
Accounts receivable increased to $1.117 billion from $969.8 million at December 31, 2011. Days sales outstanding increased to 56 days from 48 days in the prior-year quarter.
UHS divested Hospital San Juan Capestrano in January 2012 and received approximately $53 million from asset and business divestitures. No acquisitions occurred during the quarter.
The company adopted ASU 2011-07, which reclassified doubtful-account provisions as a deduction from revenue; the adoption did not affect overall results of operations or financial position.

Guidance, Outlook, Commentary and Risks

Management expected capital expenditures of approximately $260 million to $285 million during the remaining nine months of 2012, including continued investment in facilities and the Temecula Valley Hospital project.
Management expected to fund capital expenditures, acquisitions, dividends and potential share repurchases through internally generated cash and available financing, but noted that future financing may not be available on acceptable terms.
Medicaid rate reductions in the states where UHS operates were estimated at approximately 3% to 4%, or $45 million to $55 million annually, compared with 2011 fiscal-year rates. Further reductions remained possible.
A proposed Texas Medicaid DSH methodology could reduce future reimbursements by approximately $16 million annually beginning July 1, 2012. Collection of approximately $20 million of Texas DSH receivables was also dependent on intergovernmental transfers.
Illinois receivables increased to approximately $73 million, including approximately $50 million outstanding more than 60 days. No reserve was recorded because management expected collection, but acknowledged the possibility of adverse effects if amounts are not collected.
UHS remained exposed to healthcare reimbursement changes, uninsured and self-pay collection risk, labor shortages, regulatory and fraud investigations, litigation, competition, debt obligations, interest-rate risk and potential Medicare reductions of up to 2% per fiscal year beginning in 2013 if applicable budget provisions were triggered.
Professional and general liability claims were accrued at approximately $297 million. Standby letters of credit and surety bonds totaled $83 million, including $66 million related to self-insurance programs.
Two Rivers Psychiatric Hospital passed an initial CMS survey in April 2012 but remained subject to a further survey in late 2012 or early 2013. The filing stated that loss of Medicare certification could not be ruled out.
Subsequent to quarter-end, UHS agreed to sell Auburn Regional Medical Center for approximately $98 million, subject to regulatory approvals, and terminated a planned Knapp Medical Center acquisition.

Most Important Facts for Investors to Verify

How much of the Q1 earnings increase was attributable to the nonrecurring HHS/CMS settlement and Oklahoma SHOPP reimbursements.
Whether acute-care volume, occupancy and same-facility margins recover from the Q1 deterioration.
Collection timing and ultimate recoverability of Illinois, Texas DSH and other government-related receivables.
Actual implementation and financial benefits or penalties associated with electronic health records meaningful-use requirements.
Progress on debt reduction, available revolver capacity, covenant compliance and the fully drawn receivables securitization facility.
Impact of proposed Texas DSH changes, Medicaid rate reductions and potential Medicare payment reductions.
Outcomes of DOJ investigations, false-claims matters, CMS compliance reviews and self-insured liability claims.
Closing and gain recognition for the Auburn Regional Medical Center sale, as well as the effect of the terminated Knapp acquisition.