Universal Health Services, Inc. — Q3 2010 Form 10-Q Summary
Business context and reporting period
UHS owns and operates acute-care hospitals, behavioral-health facilities, surgical hospitals, ambulatory surgery centers and radiation oncology centers. As of September 30, 2010, it owned or operated, or had under construction, 25 acute-care hospitals and 102 behavioral-health centers, plus seven surgical hospitals and surgery and radiation oncology centers. The unaudited filing covers the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods.
Key financial metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Net revenues | $1.323 billion | $1.295 billion | $4.009 billion | $3.911 billion |
| Income from operations | $104.7 million | $101.9 million | $375.0 million | $401.7 million |
| Operating margin | 7.9% | 7.9% | 9.4% | 10.3% |
| Net income attributable to UHS | $55.6 million | $51.1 million | $193.0 million | $199.5 million |
| Diluted EPS | $0.57 | $0.52 | $1.96 | $2.02 |
| Net cash from operating activities | Not separately provided | Not separately provided | $399.6 million | $484.3 million |
Q3 net income attributable to UHS represented a 4.2% margin versus 3.9% in the prior-year quarter. Nine-month net income attributable to UHS represented a 4.8% margin versus 5.1%. The effective tax rate was 29.4% in Q3 and 33.6% for the first nine months, compared with 35.2% and 35.8%, respectively, in the prior-year periods.
At September 30, 2010, cash and cash equivalents were $9.6 million, restricted cash was $257.0 million, accounts receivable were $609.1 million and total assets were $4.268 billion. Current maturities of long-term debt were $401.7 million and long-term debt was $614.9 million. Debt carrying value was approximately $1.02 billion, with fair value of approximately $1.06 billion. The company had $150 million drawn on its $800 million revolving credit facility, $588 million of available capacity after outstanding letters of credit, and no borrowings under its accounts receivable securitization program.
Material changes versus the prior comparable period
- Q3 revenue increased 2% to $1.323 billion, primarily from a 3% increase in same-facility revenue; the comparison was partly offset by $9 million of prior-year construction-management revenue that did not recur.
- For the first nine months, revenue increased 3% to $4.009 billion, while income from operations declined 7% and operating margin fell from 10.3% to 9.4%.
- Acute-care revenue increased 2% in Q3 and 2% for the nine months, but acute-care income before taxes declined 5% in Q3 and 14% for the nine months. Management cited lower commercial-payor utilization, more uninsured and underinsured patients, reduced Texas Medicaid revenue, and salary and supply cost increases.
- Behavioral-health same-facility revenue increased 6% in both Q3 and the nine-month period. Same-facility income before taxes increased 13% in Q3 and 15% for the nine months, reflecting admission growth and operating leverage.
- Net cash from operations declined $84.7 million year over year, primarily due to unfavorable changes in accounts receivable, working capital, taxes, other assets and the absence of prior-year construction-management receivable collections.
- Charity care and uninsured discounts increased to $214 million in Q3 and $580 million for the nine months, from $169 million and $509 million, respectively. A new classification of certain patients as charity care reduced both revenue and doubtful-account expense by approximately $17 million, without affecting net income.
- UHS issued $250 million of 7% senior notes due October 1, 2018. The proceeds and related amounts, totaling $257 million, were held in escrow and classified as restricted cash. The debt was classified as current until the planned PSI transaction closes.
- UHS paid $15 million of dividends during the first nine months and repurchased approximately $4 million of Class B shares. The quarterly dividend was $0.05 per share.
Guidance, outlook, commentary, risks and unusual items
- UHS expected to acquire Psychiatric Solutions, Inc. in November 2010 for approximately $2.0 billion in cash, including assumed net debt of approximately $1.1 billion, for total consideration of approximately $3.1 billion. The transaction remained subject to regulatory and other customary closing conditions.
- Committed financing for the PSI acquisition totaled $3.45 billion, consisting of an $800 million revolving facility, a $1.05 billion term loan A and a $1.6 billion term loan B. Management expected to use this financing and the senior-note proceeds to fund the acquisition and repay existing revolving borrowings. The transaction would substantially increase leverage and integration risk.
- Management expected approximately $65 million to $75 million of capital expenditures during the remaining three months of 2010. No specific earnings or revenue guidance was provided.
- Southwest Healthcare System remained subject to CMS and California Department of Public Health agreements concerning Medicare participation and hospital licensure. A full certification survey was expected around mid-2011; failure to achieve substantial compliance could materially impair the facilities’ ability to operate. The system represented approximately 1% of UHS income from operations after noncontrolling interests for the first nine months of 2010.
- UHS disclosed a Department of Justice False Claims Act investigation involving implantable cardioverter defibrillators. The company stated that the scope, liability and potential financial exposure were uncertain.
- A Virginia behavioral-health False Claims Act case was permitted to proceed in part. UHS had established a reserve that did not materially affect the financial statements. Other disclosed settlements were not expected to materially affect consolidated results, although some remained subject to court approval.
- Professional and general liability claims were accrued at $263 million. UHS was self-insured up to $10 million per occurrence and retained additional exposure under its commercial coverage. Outstanding letters of credit and surety bonds totaled $79 million.
- Key operating risks include reimbursement reductions, Medicaid funding changes, uninsured-patient growth, collection risk, healthcare reform implementation, regulatory investigations, competition, labor costs and the ability to integrate PSI. UHS also cited potential Medicare and Medicaid rate reductions and uncertainty regarding electronic-health-record incentive payments and penalties.
Most important facts for investors to verify
- Whether the PSI acquisition closed on the anticipated terms and how the resulting debt, interest expense, covenant compliance and integration costs affected subsequent periods.
- Progress toward resolving the Southwest Healthcare System CMS and CDPH compliance matters and the outcome of the anticipated 2011 certification survey.
- Developments, reserves and potential exposure associated with the DOJ ICD investigation and the Virginia False Claims Act litigation.
- Whether acute-care margins recover from higher labor and supply costs, lower occupancy, Medicaid pressure and increased uninsured and charity-care levels.
- Changes in accounts receivable allowances, charity-care classification and cash conversion, given the decline in operating cash flow and the $195 million doubtful-account allowance at September 30, 2010.
- Actual leverage and liquidity after the planned refinancing, including the replacement of the existing revolving facility and the use of restricted cash.