Business Context and Reporting Period
Company: Universal Health Services, Inc. (UHS)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: UHS owns and operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers, and radiation oncology centers. As of February 28, 2008, the company operated 31 acute care hospitals (including one under construction and four closed due to Hurricane Katrina) and 113 behavioral health centers across 32 states, Washington D.C., and Puerto Rico.
Key Financial Metrics (Year Ended Dec 31, 2007)
| Metric | 2007 Value | 2006 Value |
|---|---|---|
| Net Revenues | $4,751,005,000 | $4,191,300,000 |
| Net Income | $170,387,000 | $259,458,000 |
| Net Margin | 3.6% | 6.2% |
| Cash from Operating Activities | $348,495,000 | $169,239,000 |
| Capital Expenditures (Net) | $339,813,000 | $341,140,000 |
| Total Assets | $3,608,657,000 | $3,277,042,000 |
| Long-Term Borrowings | $1,008,786,000 | $821,363,000 |
| Debt to Total Capitalization | 40% | 37% |
| Diluted EPS | $3.18 | $4.56 |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 13% ($560 million) driven by an 8% increase in same-facility revenues, $174 million from acquisitions, and $71 million from a construction management contract.
- Profitability Decline: Net income decreased 34% ($89 million). The primary driver was the absence of $168 million in pre-tax hurricane insurance recoveries recorded in 2006. Excluding this one-time item, operating income at acute care facilities increased by $9 million and behavioral health facilities by $16 million.
- Expense Increases: Interest expense rose $19 million due to higher average borrowings. The provision for doubtful accounts increased to $416 million (8.8% of revenue) from $349 million (8.3% of revenue) due to rising uninsured patient volumes.
- Acquisitions: The company spent $102 million on acquisitions in 2007, including the Texoma Healthcare System in Texas and several behavioral health facilities.
Guidance, Outlook, and Risks
- Capital Expenditures: UHS expects to spend approximately $400 million to $425 million on capital expenditures in 2008, including completion of major construction projects.
- Competitive Pressures: The company anticipates continued unfavorable impacts on patient volumes and profitability in the McAllen/Edinburg, Texas market due to increased capacity from a physician-owned competitor.
- Regulatory Risks: Significant exposure to changes in Medicare and Medicaid reimbursement rates. The company is subject to ongoing federal investigations regarding compliance with Medicare/Medicaid rules at its South Texas Health System affiliates (False Claims Act and Grand Jury investigations).
- Legal Contingencies: A wage and hour class action lawsuit in California was settled in Q3 2007 for $10.4 million. The company maintains significant self-insured reserves for professional and general liability claims ($258 million as of year-end).
- Uninsured Patients: The company notes a continuing increase in uninsured and underinsured patients, which adversely affects the provision for doubtful accounts and charity care costs.
Investor Verification Checklist
- Hurricane Impact: Verify the status of the four Louisiana facilities damaged by Hurricane Katrina and the timeline for potential reopening or asset liquidation.
- South Texas Investigation: Monitor developments in the federal False Claims Act and Grand Jury investigations regarding physician employment and referral practices in the South Texas Health System.
- McAllen Market Performance: Track quarterly patient volumes and margins in the McAllen/Edinburg market to assess the erosion caused by new competitor capacity.
- Reimbursement Rates: Review updates on Medicare Severity-DRG implementation and Medicaid supplemental payment eligibility, particularly in Texas.
- Debt Covenants: Confirm continued compliance with leverage and fixed charge coverage ratios given the increase in long-term debt to $1.01 billion.