UNIVERSAL HEALTH SERVICES INC annual report, FY2011

Universal Health Services, Inc. — 2011 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2011. The filing is an annual report, not a standalone quarterly filing; selected fourth-quarter results are included below. UHS operates acute-care hospitals, behavioral-health facilities, surgical hospitals, ambulatory surgery centers and radiation-oncology centers. As of February 24, 2012, it operated 25 acute-care hospitals and 198 behavioral-health centers across 36 states, Washington, D.C., Puerto Rico and the U.S. Virgin Islands.

Key financial metrics

Metric	2011	2010	Change
Net revenues	$7.500 billion	$5.568 billion	+35%
Income from operations	$897.1 million	$505.7 million	+77%
Income before taxes	$696.3 million	$428.1 million	+63%
Net income attributable to UHS	$398.2 million	$230.2 million	+73%
Diluted EPS	$4.04	$2.34	+73%
Net margin	5.3%	4.1%	+1.2 percentage points
Cash from operating activities	$718.3 million	$501.3 million	+43%
Capital expenditures, net	$285.7 million	$239.3 million	+19%
Long-term debt	$3.651 billion	$3.912 billion	-7%
Total debt / capitalization	61%	66%	Down 5 points

Fourth-quarter results

Net revenue was $1.839 billion, compared with $1.559 billion in fourth-quarter 2010.
Net income attributable to UHS was $95.3 million, compared with $37.2 million in fourth-quarter 2010.
Diluted EPS was $0.98, compared with $0.38 in fourth-quarter 2010.
Fourth-quarter 2011 results included a favorable $10.4 million pretax reduction to professional and general liability self-insurance reserves, benefiting after-tax EPS by approximately $0.07.

Operating performance and material changes

The 2011 revenue increase was driven primarily by the November 2010 acquisition of Psychiatric Solutions, Inc. (PSI), which contributed approximately $1.68 billion of incremental 2011 revenue, and a 5% increase in same-facility revenue of approximately $267 million.
Behavioral-health revenue increased to $3.401 billion from $1.635 billion, and pretax income increased to $732.7 million from $353.2 million. Behavioral health represented 45% of consolidated revenue versus 30% in 2010.
Acute-care revenue increased 4% to $4.072 billion on a same-facility basis, but acute-care pretax income declined to $351.9 million from $363.4 million. Same-facility inpatient admissions declined 2.2%, available-bed occupancy declined to 58% from 59%, and margin declined to 8.6% from 9.3% on an all-facility basis.
Acute-care performance benefited from favorable first-half trends in payer mix, patient acuity, uninsured volumes and supplies expense; management stated that these trends moderated during the second half.
Interest expense increased to $200.8 million from $77.6 million, primarily due to debt used to finance the PSI acquisition and related financing-fee amortization.
UHS spent $60.5 million to repurchase 1.6 million Class B shares and paid $19.5 million in dividends. The quarterly dividend remained $0.05 per share.
UHS received $67.6 million from asset and business divestitures and paid $29.5 million for 2011 acquisitions and deposits, excluding assumed third-party debt.

Cash flow, debt and liquidity

Operating cash flow increased to $718.3 million. Accounts receivable used $134.8 million of operating cash flow, and days sales outstanding increased to 47 days from 43 days.
Accounts receivable, net, was $969.8 million at year-end, with an allowance for doubtful accounts of approximately $253 million. The filing identifies $54 million due from Illinois, including approximately $41 million outstanding more than 60 days, without a specific reserve.
Year-end cash and cash equivalents were $41.2 million. Total debt was approximately $3.65 billion, including $1.02 billion of Term Loan A, $1.44 billion of Term Loan B, $240 million under the accounts-receivable securitization program and $250 million of 7% senior notes due 2018.
UHS had $482 million of available borrowing capacity under its credit and securitization facilities after letters of credit and short-term borrowings. The company reported compliance with all debt covenants.
The revolving credit facility and Term Loan A mature in 2015; Term Loan B matures in 2016. Contractual cash obligations totaled approximately $4.96 billion, including $3.65 billion of debt principal and $744.8 million of estimated future interest.
Management expects 2012 capital expenditures of approximately $350 million to $375 million, including approximately $165 million for projects already in progress, and expects to fund operations, capital expenditures and acquisitions through operating cash flow and available financing.

Guidance, outlook and risks

Management did not provide formal consolidated revenue or earnings guidance in the filing. The principal 2012 quantitative outlook is capital spending of $350 million to $375 million.
State Medicaid rates were estimated to have declined approximately 3% to 4%, or $45 million to $55 million annually, from prior state fiscal-year averages. Further reductions were proposed in certain states.
UHS is exposed to Medicare and Medicaid reimbursement changes, managed-care rate pressure, utilization controls, uninsured and underinsured patients, collection risk, labor shortages and rising healthcare staffing costs.
Revenue and earnings are concentrated in Nevada, Texas and California. Nevada, Texas and California facilities contributed 18%, 18% and 10% of consolidated revenue, respectively, in 2011.
The PSI acquisition increased goodwill to approximately $2.63 billion at year-end. The 2011 goodwill impairment test indicated no impairment, but adverse operating performance or market conditions could result in future impairment charges.
UHS is subject to DOJ, CMS, Medicaid and other regulatory investigations and litigation, including False Claims Act matters, ICD billing investigations, investigations involving former PSI facilities and ongoing compliance matters at Two Rivers Psychiatric Hospital. Reserves were recorded where appropriate, but the filing states that potential losses in excess of recorded amounts cannot be estimated for certain matters.
Two Rivers remained eligible for Medicare and Medicaid reimbursement under a settlement and corrective-action plan, but UHS could not assure that certification would not ultimately be lost.
Approximately $11 million of Medicaid electronic-health-record incentive payments were received in 2011 and deferred pending satisfaction of meaningful-use requirements. Acute-care EHR implementation was planned through 2013; failure to qualify could reduce future reimbursement.
Variable-rate debt exposes pretax income to interest-rate changes; the filing estimates that a 1% change in rates would affect pretax income by approximately $30 million.

Unusual and nonrecurring items

The 2010 comparison period included $53.2 million of PSI acquisition transaction costs, whereas no transaction costs were recorded in 2011.
2011 included an $11 million favorable reduction to professional and general liability reserves, compared with a $49 million reduction in 2010; this created an unfavorable year-over-year comparison effect.
Three former PSI facilities were divested in 2011 under the FTC agreement and reported as discontinued operations. Hospital San Juan Capestrano was sold in January 2012; its gain was expected to be recorded in first-quarter 2012.
Discontinued operations generated $5.2 million of after-tax income in 2011, including a $0.4 million pretax divestiture gain.
UHS recorded $48 million of interest-rate swap liabilities at December 31, 2011, versus $10 million at December 31, 2010.

Investor verification checklist

Verify whether Medicaid rate reductions, DSH and supplemental-payment programs, particularly in Texas, Pennsylvania, Virginia, Illinois and Washington, D.C., are sustainable and whether further reductions occur.
Assess the collectability and aging of Illinois receivables and the adequacy of the $253 million consolidated doubtful-account allowance.
Track acute-care admissions, occupancy, payer mix, uninsured volumes and same-facility margins as indicators of underlying performance excluding PSI acquisition effects.
Review debt maturities, floating-rate exposure, covenant headroom and the $482 million of reported unused capacity.
Monitor goodwill impairment sensitivity, particularly the approximately $2.24 billion behavioral-health goodwill balance.
Follow DOJ, CMS, False Claims Act, Medicaid recoupment and Two Rivers matters for potential cash payments, penalties, certification risk or reputational effects.
Reconcile 2011 earnings and cash flow for reserve releases, deferred EHR incentives, divestitures and other nonrecurring items.