UNIVERSAL HEALTH SERVICES INC quarterly report, Q2 FY2023

Universal Health Services, Inc. — Q2 2023 Form 10-Q Summary

Business context and reporting period

UHS operates acute-care hospitals, outpatient facilities and behavioral-health facilities in the United States, United Kingdom and Puerto Rico. As of June 30, 2023, it owned or operated 358 inpatient facilities and 42 outpatient and other facilities. Reported results cover the three and six months ended June 30, 2023, compared with the corresponding 2022 periods; financial statements are unaudited.

Key financial metrics

Metric	Q2 2023	Q2 2022	Six months 2023	Six months 2022
Net revenues	$3.548 billion	$3.323 billion	$7.016 billion	$6.616 billion
Income from operations	$280.1 million	$233.4 million	$558.8 million	$466.3 million
Operating margin	7.9%	7.0%	8.0%	7.0%
Net income attributable to UHS	$171.3 million	$164.1 million	$334.4 million	$318.0 million
Diluted EPS	$2.42	$2.20	$4.70	$4.22
Net income margin	4.8%	4.9%	4.8%	4.8%
Net interest expense	$48.8 million	$25.7 million	$99.7 million	$47.3 million

Revenue increased 6.8% in the quarter and 6.0% year to date. Same-facility revenue increased 8.9% in Q2 and 7.5% for the first six months. Acute-care same-facility revenue rose 9.7% in Q2 and 6.6% year to date; behavioral-health same-facility revenue rose 7.8% and 8.7%, respectively.

Q2 acute-care inpatient admissions increased 7.0%, adjusted admissions increased 7.7%, and occupancy improved to 66% from 61%.
Q2 behavioral-health admissions increased 3.0%, adjusted admissions increased 3.3%, and occupancy remained 72%.
Six-month same-facility income before taxes increased 11% in acute care and 14% in behavioral health.
Six-month operating cash flow was $653.7 million, compared with $478.0 million in 2022.
Capital expenditures were $336.7 million; investing cash flow was negative $348.0 million.
Financing cash flow was negative $329.6 million, including $209.8 million of share repurchases, $93.6 million of debt repayments and $28.3 million of dividends.

Balance sheet, debt and liquidity

Cash and cash equivalents were $79.5 million at June 30, 2023, compared with $102.8 million at December 31, 2022. Cash, cash equivalents and restricted cash totaled $179.3 million.
Accounts receivable were $2.103 billion; days sales outstanding increased to 54 days from 50 days at June 30, 2022.
Total debt carrying value was approximately $4.7 billion, with fair value of approximately $4.4 billion. Debt represented approximately 44% of total capitalization.
The revolving credit facility had $946 million of available capacity, net of $250 million drawn and $4 million of letters of credit. The tranche A term loan had $2.31 billion outstanding.
Senior secured notes totaled $2.0 billion, comprising maturities in 2026, 2030 and 2032. The company was in compliance with its debt covenants.
Management stated that operating cash flow, cash, available commitments and capital-market access should provide sufficient resources for the next 12 months, although refinancing may not be available on acceptable terms.

Material changes versus the prior comparable period

Revenue growth and higher patient volumes improved operating income, while operating margin expanded by approximately 90 basis points in both the quarter and year-to-date period.
Interest expense increased 90% in Q2 and 111% year to date. The average effective borrowing rate increased to approximately 4.8% from 2.4% in Q2 and from 2.17% to 4.8% year to date, while average borrowings also increased.
Acute-care physician-related expenses increased $33 million in Q2 and $61 million year to date, particularly for emergency-room and anesthesiology services.
Behavioral-health salaries, wages and benefits increased 9.9% in Q2 and 9.0% year to date on a same-facility basis.
UHS recorded approximately $20 million of additional professional and general liability reserves in Q2 and the first six months, partially offset by a $10 million reduction in workers’ compensation reserves.
Desert Springs Hospital Medical Center discontinued inpatient operations in the first quarter of 2023, reducing revenue by approximately $44 million in Q2 and $76 million year to date compared with 2022.
The company recorded an approximately $11 million unrealized loss on certain equity securities in Q2, compared with a slight gain in the prior-year quarter.
The company repurchased $210 million of shares year to date, compared with $565 million in the prior-year period.

Guidance, outlook, risks and unusual items

UHS expects full-year 2023 capital expenditures of approximately $725 million to $875 million; $337 million had been spent through June 30.
Management estimates approximately $495 million of 2023 net benefit from state Medicaid supplemental-payment programs, based on continued approvals and funding transfers. The filing does not provide formal consolidated revenue or earnings guidance.
Medicaid supplemental payments, provider-tax arrangements and DSH programs are subject to regulatory approval, audits, funding transfers and potential methodology changes. UHS expects an approximately $8 million annual reduction in Texas Medicaid DSH and UC payments under a state rule effective October 1, 2023.
Professional and general liability claims were accrued at $417 million at June 30, 2023, up from $372 million at year-end 2022. Management cautions that reserve estimates and future adjustments are uncertain.
The Pennsylvania Medicaid DSH repayment dispute involves claimed overpayments for federal fiscal years 2011–2015; the potential ultimate exposure is unresolved. UHS also disclosed a shareholder derivative lawsuit concerning 2020 stock-option awards, with uncertain potential liability.
Key operating risks include clinical labor shortages, higher temporary labor and physician costs, inflation, elevated interest rates, reimbursement pressure, Medicaid eligibility redeterminations, the end of the COVID-19 public health emergency, cybersecurity threats, litigation and regulatory investigations.
COVID-related revenue benefits largely ended: the filing reports no Q2 or year-to-date revenue from the uninsured COVID-care program or Medicare sequestration relief, although Medicare’s COVID inpatient add-on contributed approximately $1 million in Q2 and $6 million year to date.
The company maintains $180 million of standby letters of credit and surety bonds, primarily related to self-insurance programs.

Most important facts for investors to verify

Whether revenue growth and occupancy gains persist while acute-care physician costs and behavioral-health labor costs remain elevated.
The sustainability and regulatory status of Medicaid supplemental payments, DSH programs and provider-tax financing.
Interest-rate sensitivity, debt maturities beginning in 2026, refinancing needs and available revolver capacity.
Future professional-liability reserve development and outcomes of the Pennsylvania DSH dispute, shareholder litigation and other regulatory matters.
Actual 2023 capital spending, operating cash conversion and the pace of share repurchases relative to debt reduction.
Accounts-receivable collection trends, including the increase in days sales outstanding to 54 days.