Universal Health Services, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Universal Health Services, Inc. operates acute care hospitals, outpatient facilities and behavioral health facilities in the United States, United Kingdom and Puerto Rico. As of March 31, 2023, it owned or operated 358 inpatient facilities and 40 outpatient and other facilities. The filing covers the unaudited three months ended March 31, 2023, compared with the same period in 2022.
Financial results and key metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net revenues | $3.468 billion | $3.293 billion | +5.3% |
| Income from operations | $278.7 million | $232.9 million | +19.7% |
| Operating margin | 8.0% | 7.1% | +0.9 percentage points |
| Income before taxes | $214.1 million | $200.0 million | +7.1% |
| Net income attributable to UHS | $163.1 million | $153.9 million | +6.0% |
| Net margin attributable to UHS | 4.7% | 4.7% | Approximately unchanged |
| Diluted EPS | $2.28 | $2.02 | +12.9% |
| Cash provided by operating activities | $290.8 million | $445.4 million | -$154.7 million |
| Capital expenditures | $168.8 million | $200.0 million | -$31.3 million |
Acute care net revenues increased 3.2% to $1.974 billion, while income before taxes declined 10% to $133.3 million. Same-facility acute care revenue increased 3.5%, but margin declined to 8.1% from 8.5%, reflecting higher other operating and physician-related expenses, lower COVID-19 acuity and a shift from inpatient to outpatient surgeries.
Behavioral health net revenues increased 9.1% to $1.490 billion, while income before taxes increased 29% to $266.4 million. Same-facility behavioral health revenue increased 9.7%, and the pretax margin expanded to 18.4% from 15.8%, supported by higher admissions, occupancy and revenue per adjusted patient day.
Interest expense increased to $50.9 million from $21.7 million. The company reported an average effective borrowing rate of approximately 4.7% versus 2.0% in the prior-year quarter. The effective income tax rate was 24.2%, compared with 24.5%.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $110.0 million at March 31, 2023; cash, cash equivalents and restricted cash totaled $209.0 million.
- Total debt had a carrying value of approximately $4.8 billion and fair value of approximately $4.5 billion. Debt represented approximately 44% of total capitalization.
- The $1.2 billion revolving credit facility had $875 million of available capacity, net of $322 million of borrowings and $3 million of letters of credit.
- The tranche A term loan had $2.32 billion outstanding. Senior secured notes had $2.0 billion of aggregate principal outstanding, with maturities in 2026, 2030 and 2032.
- The company was in compliance with its debt covenants as of March 31, 2023 and stated that operating cash flow, cash, available commitments and capital-market access should fund requirements for the next twelve months.
- UHS repurchased $78.7 million of Class B common stock under its repurchase program, paid $14.2 million of dividends, or $0.20 per share, and had approximately $868.7 million remaining under the repurchase authorization at March 31, 2023.
Material changes versus the prior comparable period
- Revenue growth was led by behavioral health, while acute care profitability declined despite higher volumes.
- COVID-19 inpatient admissions represented 4% of acute care admissions in Q1 2023 versus 14% in Q1 2022. Related Medicare add-on revenue declined to approximately $5 million from $16 million, and no COVID-19 uninsured-program revenue was recorded versus $17 million in Q1 2022.
- Operating cash flow declined primarily because of unfavorable working-capital timing, including disbursements for accrued compensation and accounts payable.
- Days sales outstanding increased to 53 days from 48 days, partly because of receivables at the Reno acute care hospital opened in April 2022.
- Desert Springs Hospital Medical Center discontinued inpatient operations during Q1 2023, reducing acute care revenue by approximately $32 million and contributing to operating losses.
- No acquisitions were completed during Q1 2023 or Q1 2022. Q1 2023 proceeds from asset and business sales were approximately $9 million.
Guidance, outlook, risks and unusual items
- UHS expects full-year 2023 capital expenditures of approximately $725 million to $875 million, including $169 million spent in Q1.
- Management estimates a 2023 net benefit of approximately $490 million from state Medicaid supplemental payment programs, subject to state and federal approvals and other conditions.
- A proposed Texas rule could retroactively reduce annual Medicaid DSH and uncompensated-care payments by approximately $32 million if implemented as proposed.
- The company expects the nationwide shortage of nurses and other clinical personnel, temporary labor costs, wage inflation, supply costs and broader inflation to continue affecting results, although some labor pressures moderated.
- Higher interest rates materially increased borrowing costs and could reduce cash flow and access to capital on favorable terms.
- Medicaid redeterminations began April 1, 2023, and the COVID-19 public health emergency was expected to expire May 11, 2023. The company could not quantify the resulting effects on enrollment, reimbursement or operating results.
- Other significant risks include changes to Medicare and Medicaid reimbursement, Medicaid DSH reductions scheduled from federal fiscal year 2024, regulatory and government investigations, litigation, self-insurance claims, cybersecurity threats, payer collection risk and foreign-exchange exposure.
- Professional and general liability reserves were $392 million and workers’ compensation reserves were $128 million at March 31, 2023. Management stated that future reserve adjustments could be material.
- Off-balance-sheet standby letters of credit and surety bonds totaled approximately $180 million, including $170 million related to self-insurance programs.
Important facts for investors to verify
- Whether behavioral health growth and improved margins persist, and whether acute care margins recover from higher operating and physician-related costs.
- The effect of elevated interest rates on interest expense, leverage, free cash flow and refinancing needs before 2026 maturities.
- The final outcome of the proposed Texas Medicaid payment changes and the renewal and funding of other supplemental Medicaid programs.
- The effect of Medicaid eligibility redeterminations and the expiration of COVID-era reimbursement flexibilities.
- Whether the $725 million to $875 million capital-expenditure plan can be funded while maintaining share repurchases and dividends.
- Trends in accounts receivable, the 53-day DSO, uninsured discounts and payer collection risk.
- Potential changes to professional-liability reserves, Pennsylvania DSH repayment claims, government inquiries and other unresolved legal matters.