Business Context and Reporting Period
Universal Health Services, Inc. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. UHS operates acute-care hospitals, outpatient facilities and behavioral-health facilities through subsidiaries in 37 states, Washington, D.C., Puerto Rico and the United Kingdom. At September 30, 2019, it owned or operated 353 inpatient and 40 outpatient or other facilities.
Financial Highlights
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net revenues | $2.822 billion | $2.649 billion | $8.482 billion | $8.018 billion |
| Income from operations | $188.9 million | $257.2 million | $874.9 million | $915.4 million |
| Operating margin | 6.7% | 9.7% | 10.3% | 11.4% |
| Income before taxes | $138.1 million | $229.1 million | $745.2 million | $827.1 million |
| Net income attributable to UHS | $97.2 million | $171.7 million | $569.7 million | $621.6 million |
| Diluted EPS | $1.10 | $1.84 | $6.35 | $6.60 |
| Effective tax rate | 26.9% | 23.7% | 22.2% | 23.3% |
- Revenue increased 6.6% in the quarter and 5.8% for the first nine months. Same-facility revenue increased 6.0% and 5.3%, respectively.
- Acute-care same-facility revenue increased 9.3% in the quarter and 7.6% year to date. Same-facility acute-care admissions increased 6.6% and 5.7%, respectively.
- Behavioral-health same-facility revenue increased 2.1% in the quarter and 2.6% year to date. Same-facility behavioral-health income before taxes declined 2% in the quarter but increased 1% year to date.
- Net cash provided by operating activities was $1.049 billion versus $949.4 million in the prior-year period. Capital expenditures were $480.2 million, compared with $521.3 million in 2018.
- Cash, cash equivalents and restricted cash totaled $154.8 million at September 30, 2019, down from $199.7 million at December 31, 2018. Cash and cash equivalents alone were $58.9 million.
- Accounts receivable were $1.544 billion, and reported days sales outstanding improved to 50 days from 53 days at September 30, 2018.
- Total debt carrying value was approximately $3.95 billion, or approximately 42% of total capitalization. Debt fair value was approximately $3.97 billion.
- UHS had no borrowings under its $1.0 billion revolving credit facility and reported $967 million of available capacity, net of letters of credit and short-term borrowings. The accounts-receivable securitization had $365 million outstanding and $85 million available.
Material Changes Versus the Prior Comparable Period
- Quarterly net income attributable to UHS fell 43.4%, while nine-month net income declined 8.4%, despite revenue growth.
- The primary quarterly earnings charge was a $97.6 million pre-tax impairment related to Foundations Recovery Network: $74.9 million for a trade-name intangible asset and $22.7 million for real-property assets. Management cited canceled planned facilities, lower projected volumes and cash flows, and competitive pressures.
- Behavioral-health operating income declined substantially because of the impairment and higher operating costs. Behavioral-health salaries, wages and benefits rose to 53.4% of segment revenue in the quarter from 52.4%.
- Other expense worsened primarily because marketable securities generated a $15 million unrealized loss in Q3 2019 versus an $11 million unrealized gain in Q3 2018. For the first nine months, the comparable amounts were a $13 million loss versus an $18 million gain.
- Interest expense increased to $41.4 million from $39.5 million in the quarter and to $123.6 million from $115.1 million year to date, reflecting higher borrowing costs and average debt levels.
- Financing cash outflows increased to $680.2 million from $308.2 million, principally because share repurchases rose to $588.0 million from $261.3 million. The company repurchased $79.5 million of shares under its program during the quarter.
- UHS adopted the new lease standard on January 1, 2019, recognizing $329.3 million of operating lease right-of-use assets and corresponding liabilities.
- UHS increased its quarterly dividend from $0.10 to $0.20 per share beginning with the third quarter of 2019.
Guidance, Outlook, Risks and Unusual Items
- Management expected approximately $195 million to $245 million of capital expenditures during the remaining nine months of 2019, based on the filing’s then-current outlook.
- Management estimated approximately $225 million of 2019 net benefit from various state Medicaid supplemental payment programs, after approximately $193 million of provider taxes. These amounts depend on continued approvals, funding transfers and program terms.
- Texas DSRIP funding is expected to decline by approximately $3 million in FFY 2020 and $4 million in FFY 2021 and to end in FFY 2022; the future value-based purchasing replacement remained uncertain.
- UHS reached an agreement in principle for a $127 million civil settlement with the DOJ and various states concerning behavioral-health investigations, subject to approvals and definitive agreements. The recorded pre-tax DOJ reserve was $134 million at September 30, 2019, and a related $6 million tax expense was recorded for estimated nondeductible amounts. A corporate integrity agreement was also under negotiation.
- River Point Behavioral Health remained subject to a Medicare payment suspension; cumulative funds withheld were approximately $8.6 million through September 30, 2019.
- UHS recorded reserves for professional and general liability and workers’ compensation claims totaling $323 million. Management warned that reserve adjustments could be material because of the uncertainty of claims.
- Approximately $29 million of receivables were due from Illinois, including $13 million outstanding for more than 60 days. No reserve was recorded, but management acknowledged that ultimate collection is not assured.
- Key industry risks include reimbursement reductions, Medicaid and Medicare policy changes, healthcare reform uncertainty, labor shortages, competition, litigation and regulatory investigations, uninsured patient collections, state supplemental-payment programs, and LIBOR transition risk.
- The company stated that it was in compliance with debt covenants and that operating cash flow, cash, and capital-market access were expected to provide sufficient resources for the next 12 months. No new material off-balance-sheet changes were reported; standby letters of credit and surety bonds totaled $108 million.
Facts Investors Should Verify
- Final terms, approvals, cash-payment timing and tax treatment of the DOJ behavioral-health settlement and corporate integrity agreement.
- Whether Foundations’ impairment signals further behavioral-health deterioration or additional impairment risk.
- Sustainability of Medicaid supplemental payments, including Texas UC/UPL, DSRIP, DSH, Nevada and California programs.
- Collection timing and ultimate recoverability of Illinois accounts receivable and other government-payer balances.
- Capital allocation priorities among debt reduction, the $2.7 billion share-repurchase authorization, dividends and capital expenditures.
- Operating-cost trends, particularly behavioral-health labor availability, salaries and benefits, and their effect on margins.
- Refinancing and interest-rate exposure under the approximately $3.95 billion debt balance, including the transition away from LIBOR and the expiration of prior interest-rate swaps.