UNIVERSAL HEALTH SERVICES INC quarterly report, Q2 FY2021

Universal Health Services, Inc. — Q2 2021 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, 2021, it owned or operated 360 inpatient facilities and 39 outpatient and other facilities. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared with the same periods in 2020.

Financial performance and liquidity

Metric	Q2 2021	Q2 2020	Six months 2021	Six months 2020
Net revenues	$3.198 billion	$2.730 billion	$6.211 billion	$5.559 billion
Income from operations	$439.0 million	$358.0 million	$734.6 million	$594.7 million
Operating margin	13.7%	13.1%	11.8%	10.7%
Net income attributable to UHS	$325.0 million	$251.9 million	$534.1 million	$394.0 million
Net margin attributable to UHS	10.2%	9.2%	8.6%	7.1%
Diluted EPS	$3.79	$2.95	$6.22	$4.58
Net cash provided by operating activities	Not separately provided	Not separately provided	$119.4 million	$1.451 billion

Q2 revenue increased 17.1% and net income attributable to UHS increased 29.0%. For the six-month period, revenue increased 11.7% and net income attributable to UHS increased 35.6%. The effective tax rate was 23.8% in Q2 and 23.6% for the six-month period.

Acute-care services generated $1.754 billion of Q2 revenue and $3.449 billion for the six-month period. Same-facility acute-care revenue increased 18.5% in Q2 and 15.0% for the six-month period, including prior-year stimulus revenue.
Behavioral-health services generated $1.431 billion of Q2 revenue and $2.747 billion for the six-month period. Same-facility behavioral-health revenue increased 13.7% in Q2 and 7.2% for the six-month period, including prior-year stimulus revenue.
Q2 acute-care occupancy increased to 63% from 56%; behavioral-health occupancy increased to 72% from 69%.
Cash and cash equivalents were $199.0 million at June 30, 2021, down from $1.224 billion at December 31, 2020. Cash, cash equivalents and restricted cash totaled $253.7 million.
Accounts receivable were $1.788 billion, and days sales outstanding increased to 52 days from 47 days at June 30, 2020.
Total debt was approximately $3.6 billion, or approximately 36% of total capitalization. UHS had no revolving-credit borrowings and $996 million of available revolving capacity, net of letters of credit.

Material changes versus the prior comparable periods

Results benefited from recovery in non-COVID-19 patient activity as COVID-19 patient volumes generally declined following vaccination efforts, although management reported a material increase in COVID-19 patients in many markets later in the period.
Prior-year results included approximately $218 million of governmental stimulus revenue in both the second-quarter and six-month 2020 comparisons. UHS recorded approximately $3 million and $13 million of state and local stimulus revenue in Q2 and the first six months of 2021, respectively, and returned approximately $189 million of federal CARES Act funds during Q2 2021.
UHS repaid $695 million of Medicare accelerated payments in March 2021. These repayments, together with lower deferred government funding, drove the substantial year-over-year decline in operating cash flow.
Q2 and six-month 2021 results included a $36 million increase to professional and general liability reserves, compared with a $20 million increase in the first six months of 2020.
UHS recorded approximately $55 million of Kentucky Medicaid Hospital Rate Increase Program revenue in Q2 2021, retroactive to July 1, 2020. It also recorded $13 million of incremental Texas DSRIP revenue in Q2.
Commercial insurance proceeds related to the prior information-technology incident and COVID-19 impact contributed approximately $19 million to Q2 2021 results, including $15 million in acute care and $4 million in behavioral health.
UHS resumed share repurchases during Q2, purchasing approximately 2.21 million shares for $350 million under its repurchase program. It paid $33.8 million of dividends during the first six months, including $16.8 million in Q2.

Cash flow, capital allocation and outlook

Six-month investing cash outflow was $483.7 million, including $482.2 million of capital expenditures.
Management expects full-year 2021 capital expenditures of approximately $850 million to $1.0 billion, with $368 million to $518 million expected during the second half.
Six-month financing cash outflow was $661.9 million, including $278.8 million of debt reduction, $368.1 million of share repurchases and $33.8 million of dividends.
Management estimates aggregate net benefit from state Medicaid supplemental payment programs of approximately $355 million in 2021, including approximately $55 million from Kentucky. This estimate depends on government approvals, funding transfers and program terms.
Management states that operating cash flow, cash balances and capital-market access should provide sufficient resources for the next twelve months, but acknowledges that financing may not be available on acceptable terms if needed.

Risks, contingencies and unusual items

COVID-19 variants, renewed patient surges, staffing and supply shortages, elective-procedure disruption and related cost increases could materially affect future results. Management cannot quantify the pandemic’s future duration or severity.
UHS has significant exposure to Medicaid supplemental programs, including Texas, California, Nevada and Kentucky. Program renewals, audits, required governmental transfers and regulatory changes could materially reduce revenue.
The Texas DSRIP funding pool is being eliminated for federal fiscal year 2022, except for certain carryover projects. The future financial impact of its replacement programs is not yet clear.
UHS maintains substantial self-insured professional and general liability exposure. Accrued professional and general liability claims were $322 million and workers’ compensation claims were $109 million at June 30, 2021. Future reserve adjustments could be material.
Legal and regulatory matters include shareholder derivative litigation, the George Washington University dispute, Pennsylvania Medicaid disproportionate-share payment appeals, an ERISA retirement-plan class action and other government inquiries. The filing states that potential losses in excess of accrued amounts generally cannot be estimated.
UHS reported $168 million of standby letters of credit and surety bonds, primarily related to self-insurance programs.
Three hospitals are leased from Universal Health Realty Income Trust. Two leases expire in December 2021; UHS has notified the Trust of its intent to terminate one lease and has proposed a property substitution, subject to due diligence and definitive agreements.
UHS’s debt includes $1.850 billion outstanding under term loan A, approximately $488 million under term loan B, $400 million of 2026 senior secured notes and $800 million of 2030 senior secured notes. Term loan A matures in October 2023 and term loan B in October 2025.

Most important facts for an investor to verify

Whether post-pandemic patient volumes, occupancy and payer mix continue to support the improved operating margins.
The sustainability and audit risk of Medicaid supplemental payments, including the Kentucky HRIP, Texas programs and DSH reserves.
Operating cash generation after the one-time repayment of Medicare accelerated payments and the return of CARES Act funds.
Professional liability reserve development and the outcome of pending litigation and government investigations.
Capital expenditure requirements, continued share repurchases and dividend capacity relative to cash balances and debt maturities.
The effect of COVID-19 variants, labor availability, wage inflation, supply costs and cybersecurity events on future results.