Business Context and Reporting Period
Universal Health Services, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2019. UHS operates acute care hospitals, outpatient facilities and behavioral health facilities in the United States, United Kingdom, Puerto Rico and Washington, D.C. At June 30, 2019, it owned or operated 353 inpatient facilities and 38 outpatient and other facilities. Reportable segments are acute care hospital services and behavioral health services.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net revenues | $2.855 billion, up 6.5% | $5.660 billion, up 5.4% |
| Income from operations | $346 million; 12.1% margin | $686 million; 12.1% margin |
| Income before taxes | $311 million; 10.9% margin | $607 million; 10.7% margin |
| Net income attributable to UHS | $238 million, up 5.4% | $472 million, up 5.0% |
| Diluted EPS | $2.66, versus $2.39 | $5.23, versus $4.76 |
| Operating cash flow | Not separately provided | $624 million, versus $607 million |
- Acute care same-facility revenue increased 9.0% in the quarter and 6.8% year to date. Same-facility acute care admissions increased 5.2% and adjusted admissions increased 5.0% in both periods. Second-quarter occupancy rose to 64% from 62%.
- Behavioral health same-facility revenue increased 2.7% in the quarter and 2.9% year to date. Same-facility behavioral health income before taxes increased 4% in the quarter and 3% year to date, with occupancy of 77% in both periods.
- Operating cash flow was partly offset by a $101 million increase in accounts receivable during the first six months. Days sales outstanding improved to 51 days from 53 days at June 30, 2018.
- Capital expenditures were $324 million year to date. Investing cash outflow was $296 million, while financing cash outflow was $370 million, including $495 million of share repurchases and $18 million of dividends.
- Cash and cash equivalents were $61 million at June 30, 2019, or $157 million including restricted cash, compared with $105 million and $200 million, respectively, at December 31, 2018.
- Debt carrying value was approximately $4.15 billion and fair value was $4.17 billion. Total debt represented approximately 44% of total capitalization, compared with 43% at year-end 2018.
- Available capacity was approximately $851 million under the $1 billion revolving facility and $13 million under the $450 million accounts receivable securitization program. UHS was in compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected same-facility improvement and approximately $16 million of second-quarter and $30 million of year-to-date revenue from 25 U.K. behavioral health facilities acquired with The Danshell Group in 2018.
- Net income benefited from lower effective tax rates: 22.4% versus 23.5% in the quarter and 21.2% versus 23.2% year to date. The changes included a favorable state tax-law adjustment and benefits related to employee share-based payment accounting.
- Interest expense increased to $42 million from $38 million in the quarter and to $82 million from $76 million year to date, reflecting higher average borrowing costs and debt levels.
- Weighted-average diluted shares declined to 89.2 million from 94.3 million in the quarter and to 90.1 million from 94.5 million year to date, primarily because of share repurchases.
- UHS adopted the lease standard effective January 1, 2019, recognizing $332 million of operating lease right-of-use assets and corresponding operating lease liabilities at June 30, 2019.
- UHS recorded $11 million of additional pre-tax reserve expense in the quarter and year to date related to the behavioral health government investigation. The aggregate reserve was $134 million at June 30, 2019, compared with $123 million at December 31, 2018.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expected capital expenditures of approximately $350 million to $400 million during the remaining six months of 2019. The filing states that internally generated funds and available financing are expected to support operations, capital expenditures, acquisitions, dividends and potential repurchases for the next twelve months.
- Management estimated a 2019 net benefit of approximately $195 million from state Medicaid supplemental payment programs, net of approximately $188 million of provider taxes. These amounts depend on continued governmental approvals, funding transfers and program terms.
- Texas DSRIP funding is expected to decline in future waiver years and be eliminated in federal fiscal year 2022. Medicaid DSH reductions are scheduled to begin in federal fiscal year 2020, creating reimbursement risk.
- CMS rules discussed in the filing implied an estimated 2.1% overall increase in UHS Medicare acute-care inpatient payments for fiscal 2020, a 1.7% increase for psychiatric prospective payments, and an estimated 3.1% increase in 2020 outpatient payments. These are estimates and not company-wide earnings guidance.
- In July 2019, after the reporting date, UHS reached an agreement in principle for a $127 million civil settlement with the DOJ and various state attorneys general regarding behavioral health investigations. Definitive agreements, required approvals and a potential corporate integrity agreement remained pending, and final costs could differ from the reserve.
- Other material contingencies include a continuing Medicare payment suspension at River Point Behavioral Health, with approximately $9 million withheld through June 30, 2019; a DOJ investigation of Turning Point Hospital for which potential exposure could not be estimated; shareholder class and derivative litigation; and Pennsylvania Medicaid DSH repayment demands.
- Illinois accounts receivable totaled approximately $26 million, including $12 million outstanding more than 60 days. No reserve was recorded, but UHS stated that ultimate collection cannot be assured.
- UHS is substantially self-insured. Professional and general liability reserves were $248 million and workers’ compensation reserves were $74 million at June 30, 2019. Management cautioned that future reserve adjustments could be material.
- On July 25, 2019, the board increased the stock repurchase authorization to $2.7 billion, with approximately $1.017 billion remaining available. It also increased the quarterly dividend from $0.10 to $0.20 per share beginning with the third-quarter 2019 dividend.
Most Important Facts for Investors to Verify
- Whether the $127 million behavioral health settlement and potential corporate integrity agreement are finalized, and whether total payments, related costs or tax treatment differ from the $134 million reserve.
- The sustainability of Medicaid supplemental payments, including Texas UC/UPL and DSRIP, and the impact of scheduled DSH reductions and future program renewals.
- Cash generation after capital spending, substantial share repurchases, dividend increases and remaining 2019 capital expenditures.
- Debt maturities, floating-rate exposure following the April 2019 expiration of $1 billion of interest-rate swaps, borrowing costs and compliance with leverage covenants.
- Collection of Illinois receivables and the adequacy of professional liability, workers’ compensation and Medicaid DSH reserves.
- Operating trends in acute care admissions, occupancy, payer mix, behavioral health utilization and labor costs, particularly as reimbursement and healthcare reform policies change.