UNIVERSAL HEALTH SERVICES INC annual report, FY2017

Universal Health Services, Inc. — FY2017 Form 10-K Summary

Business context and reporting period

UHS owns and operates acute-care hospitals, outpatient facilities and behavioral-health facilities. As of February 28, 2018, it operated 326 inpatient facilities and 32 outpatient and other facilities across the United States, United Kingdom, Puerto Rico and the U.S. Virgin Islands. The filing covers the fiscal year ended December 31, 2017; the requested “2017 Q4” information is included only as part of the annual filing.

Acute care, outpatient facilities and commercial health insurer activities represented 53% of consolidated net revenue; behavioral health represented 47%.
U.K. behavioral-health revenue increased to approximately $429 million from $241 million in 2016, primarily reflecting the Cambian Adult Services acquisition completed in December 2016.

Key financial metrics

Metric	2017	2016	Change
Net revenues	$10.410 billion	$9.766 billion	+6.6%
Income from operations	$1.280 billion	$1.281 billion	Essentially flat
Operating margin	12.3%	13.1%	Down 0.8 percentage points
Income before income taxes	$1.135 billion	$1.156 billion	-1.8%
Net income attributable to UHS	$752.3 million	$702.4 million	+7.1%
Net margin	7.2%	7.2%	Flat
Diluted EPS	$7.81	$7.14	+9.4%
Cash flow from operations	$1.183 billion	$1.334 billion	-11.3%
Capital expenditures, net	$557.5 million	$519.9 million	+7.2%

Acute-care net revenue increased 7.3% to $5.485 billion, with same-facility revenue up 4.7% and same-facility pre-tax income up 9.0%. Same-facility admissions increased 6.2%, while occupancy based on available beds increased to 61% from 60%.
Behavioral-health net revenue increased 5.6% to $4.907 billion, substantially due to Cambian. Same-facility revenue rose 1.7%, but same-facility pre-tax income declined 7.0%, and the margin declined to 21.0% from 22.8%.
Salaries, wages and benefits increased to $4.981 billion, or 47.8% of net revenue, from 47.0%, reflecting labor and staffing pressures.
The provision for doubtful accounts increased to $869.1 million from $741.6 million. The allowance for doubtful accounts was $480.3 million at year-end versus $410.4 million in 2016.
Cash and cash equivalents were $74.4 million at December 31, 2017. Accounts receivable were $1.501 billion, and days sales outstanding remained 53 days.
Total debt before unamortized financing costs was $4.059 billion; debt as a percentage of total capitalization was 45%, down from 48%. Debt fair value was approximately $4.1 billion.
UHS repurchased $322.2 million of shares under its repurchase program and paid $38.2 million in dividends, or $0.40 per share. The remaining repurchase authorization was approximately $363.7 million at year-end.

Material changes versus the prior comparable period

Revenue growth was driven by 3.3% same-facility growth and $331 million of revenue from acquired or newly opened facilities, primarily Cambian and Henderson Hospital.
Pre-tax income declined despite revenue growth because of higher interest expense, weaker behavioral-health performance, and approximately $20 million of charges related to legal and other matters.
Net income attributable to UHS increased because of lower noncontrolling interests, following the 2016 purchase of minority interests in six Las Vegas acute-care hospitals, and lower income taxes.
The effective tax rate declined to 32.0% from 35.4%. The 2017 result included a $30 million deferred-tax benefit from the Tax Cuts and Jobs Act, an $11 million provisional repatriation tax, and a $22 million benefit from adopting ASU 2016-09.
Operating cash flow declined by $151 million, primarily because of unfavorable foreign-exchange contract cash flows and working-capital timing, partially offset by improved accounts receivable cash flow.
Net investing cash use declined to $624.4 million from $1.187 billion because 2017 included only $22.9 million of acquisition spending versus $613.8 million in 2016.

Guidance, outlook, commentary, risks and unusual items

Management expects 2018 capital expenditures of approximately $600 million to $625 million, including approximately $280 million for projects already in progress at December 31, 2017.
Management expects a 2018 net benefit of approximately $156 million from state Medicaid supplemental payment programs, net of approximately $172 million of provider taxes, subject to governmental approvals, funding transfers and other conditions.
The 2018 Medicare IPPS final rule was estimated to increase UHS payments by approximately 1.8%; the company estimated a 4.8% increase in 2018 acute-care OPPS payments excluding behavioral-health partial-hospitalization effects.
Texas Medicaid waiver changes are expected to reduce or modify supplemental funding beginning in later years. DSRIP funding is scheduled to be eliminated in federal fiscal year 2022, while the company could not estimate the impact of 2020 and 2021 changes.
UHS expects its 2018 effective tax rate to be significantly lower than the 2017 rate because of the reduced U.S. federal corporate tax rate, although the 2017 tax accounting remained provisional in certain respects.
The DOJ and other agencies continue investigating billing and practices at UHS behavioral-health facilities. UHS recorded a $22 million reserve for the civil aspects of the coordinated investigation, but stated that the ultimate settlement or related costs could differ materially.
River Point Behavioral Health remained subject to a Medicare payment suspension; approximately $10 million had been withheld through December 31, 2017. The Medicaid suspension was partially lifted in June 2017.
Other significant contingencies include the Escobar False Claims Act litigation, shareholder securities and derivative actions, a Texas physician litigation matter with an approximately $9 million reserved amount, and Pennsylvania Medicaid DSH repayment demands totaling approximately $15 million for federal fiscal years 2011 through 2013.
Principal operating risks include government and commercial reimbursement pressure, Medicaid supplemental-program changes, behavioral-health regulatory investigations, uninsured-care and collection risk, nursing and clinician shortages, competition, cyber and HIPAA incidents, foreign-exchange exposure, litigation, self-insurance claims and refinancing needs.
The company had $3.825 billion of goodwill at year-end and reported no goodwill impairment in 2017. Future deterioration in facility performance could result in impairment charges.
Liquidity appears adequate for the next twelve months based on operating cash flow, cash, available credit capacity and capital-market access, according to management. The revolving facility had $329 million of available capacity and the receivables securitization program had $20 million available.

Most important facts for an investor to verify

Whether behavioral-health margins recover from the 2017 decline and whether clinician shortages continue to constrain available beds and admissions.
The ultimate resolution, additional reserves and cash impact of the DOJ behavioral-health investigation and related False Claims Act and shareholder litigation.
The collectability and timing of approximately $25 million of Illinois receivables, including $8 million outstanding more than 60 days at year-end.
The sustainability of Medicaid supplemental payments, including Texas UC/DSRIP, California, Nevada and DSH programs, and the effect of scheduled future reductions.
Refinancing requirements for approximately $546 million of debt due within one year, the August 2019 credit agreement maturity and the August 2019 senior notes maturity.
Whether 2018 capital spending of $600 million to $625 million can be funded while maintaining share repurchases, dividends and debt reduction.
Changes in uncompensated care, doubtful-account provisions and the $480 million allowance for doubtful accounts.
Finalization of provisional Tax Cuts and Jobs Act accounting and the resulting sustainable effective tax rate.