Universal Health Services, Inc. — FY2016 Form 10-K Summary
Business context and reporting period
Universal Health Services, Inc. operates acute care hospitals, outpatient facilities and behavioral health facilities through subsidiaries. As of February 28, 2017, the company operated 319 inpatient and 33 outpatient or other facilities across the United States, the United Kingdom, Puerto Rico and the U.S. Virgin Islands. The filing covers the fiscal year ended December 31, 2016; the source does not represent a standalone quarterly filing, although fourth-quarter results are disclosed.
Acute care, outpatient and commercial-insurance operations represented 52% of consolidated net revenue in 2016, while behavioral health operations represented 48%.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net revenue | $9.766 billion | $9.043 billion | +8% |
| Income from operations | $1.281 billion | $1.259 billion | +2% |
| Income before taxes | $1.156 billion | $1.146 billion | +1% |
| Net income attributable to UHS | $702.4 million | $680.5 million | +3% |
| Diluted EPS | $7.14 | $6.76 | +6% |
| Net margin | 7.2% | 7.5% | Down 0.3 percentage points |
| Cash flow from operations | $1.288 billion | $1.021 billion | +$268 million |
| Capital expenditures, net | $519.9 million | $379.3 million | +$140.6 million |
| Long-term borrowings | $4.030 billion | $3.369 billion | +$661.6 million |
Operating margin declined to 13.1% from 13.9%. Salaries, wages and benefits increased to $4.586 billion, or 47.0% of revenue, from 46.6%, while other operating expenses rose to 24.2% of revenue from 23.4%.
Acute care revenue increased 10% to $5.113 billion, and acute care income before taxes increased 6% to $550.1 million. Same-facility acute care admissions increased 4.3%, adjusted admissions increased 5.2%, and available-bed occupancy increased to 60% from 59%.
Behavioral health revenue increased 6% to $4.645 billion, while income before taxes increased 1% to $1.031 billion. Same-facility behavioral health revenue increased 3%, but same-facility income before taxes declined 1% to $1.024 billion, with margin falling to 23.1% from 24.0%. Management cited shortages of psychiatrists, nurses and mental-health technicians that constrained available capacity at certain facilities.
Accounts receivable, net, increased to $1.440 billion from $1.302 billion, with an allowance for doubtful accounts of approximately $410 million. Days sales outstanding remained 53 days. Cash and cash equivalents declined to $33.7 million from $61.2 million.
Material changes versus the prior comparable period
- Revenue growth reflected a $542 million, or 6%, increase from same-facility operations and approximately $181 million from acquisitions and other activity.
- UHS acquired the Cambian Adult Services division in the United Kingdom for approximately $473 million in late December 2016. The acquisition contributed no 2016 consolidated revenue because it closed near year-end and remained subject to regulatory review.
- UHS acquired Desert View Hospital, a 25-bed Nevada acute care facility, and spent approximately $614 million on acquisitions and property during 2016.
- The company purchased third-party minority interests in six Las Vegas acute care hospitals for $418 million, plus $27 million related to returned reserve capital. This reduced noncontrolling interests and increased the portion of earnings attributable to UHS.
- UHS issued $400 million of additional 4.75% senior notes due 2022 and $400 million of 5.00% senior notes due 2026. It repaid $400 million of 7.125% senior notes that matured in June 2016.
- Net cash used in investing activities increased to $1.187 billion, principally because of acquisitions and higher capital spending. Net cash used in financing activities was $125.9 million.
- Share repurchases increased to $289.9 million under the repurchase program, compared with $166.2 million in 2015. The company also repurchased shares for tax withholding, resulting in total common-share repurchases of $353.4 million.
- Uncompensated care at acute care hospitals increased to $1.454 billion at established charges from $1.203 billion. Estimated cost of uncompensated care increased to $213.8 million from $184.2 million.
Liquidity, debt and capital allocation
Total debt before unamortized financing costs was $4.162 billion at December 31, 2016, compared with $3.450 billion at year-end 2015. Debt represented 48% of total capitalization, compared with 45% in 2015. The company reported $297 million of available capacity under its $800 million revolving credit facility, net of letters of credit and short-term borrowings, and $1 million of capacity under its $400 million accounts-receivable securitization program.
Management stated that operating cash flow, cash, available borrowing capacity and access to capital markets were sufficient to fund operating, investing and financing requirements for the next twelve months. The company was in compliance with its debt covenants at December 31, 2016. Expected 2017 capital expenditures were approximately $475 million to $500 million, including approximately $175 million for projects already in progress.
Guidance, outlook, management commentary and risks
- Management expected approximately $145 million of net benefit in 2017 from Texas and other state Medicaid supplemental-payment programs, compared with $161 million in 2016. The estimate depends on continued program approval and governmental funding transfers.
- UHS expects continued pressure from Medicare and Medicaid reimbursement changes, Medicare sequestration, reductions in disproportionate-share-hospital payments and potential changes to the Affordable Care Act following the 2016 election.
- The company faces exposure to managed-care rate pressure, uninsured and underinsured patients, collection risk, labor shortages, rising wages, competition, utilization controls and value-based reimbursement programs.
- The Cambian acquisition remained subject to review by the U.K. Competition and Markets Authority. UHS could be required to divest portions of the acquired business or existing U.K. operations.
- UHS disclosed a continuing DOJ/OIG coordinated investigation involving numerous behavioral health facilities and potential False Claims Act issues. Potential liability or financial exposure was described as uncertain.
- The Escobar False Claims Act litigation survived dismissal after a revised First Circuit opinion in the fourth quarter of 2016 and was remanded for further proceedings. The government indicated in January 2017 that it was considering intervention.
- A purported shareholder class action, Heed v. Universal Health Services, was filed in December 2016 concerning disclosures about behavioral health facility practices. Potential exposure was uncertain.
- River Point Behavioral Health remained subject to Medicare and Medicaid payment suspensions, materially affecting that facility even though the consolidated impact was not material in 2016 or 2015.
- Pennsylvania demanded repayment of alleged excess Medicaid DSH payments for federal fiscal years 2011 and 2012. UHS appealed; federal-share recoupment had begun, and the ultimate impact remained uncertain.
- Professional and general liability reserves totaled $207 million, and workers’ compensation reserves totaled $67 million at year-end. The company is substantially self-insured and stated that future reserve adjustments could materially affect results.
Most important facts for an investor to verify
- Whether the revenue growth and earnings trajectory are sustainable after separating same-facility performance from acquisition-related growth.
- The impact of labor shortages, wage inflation and constrained behavioral-health capacity on margins.
- The status and potential financial exposure of the DOJ/OIG investigations, Escobar litigation, shareholder litigation and Pennsylvania DSH repayment appeals.
- Whether Cambian receives final regulatory approval without material divestitures or integration restrictions.
- The renewal and funding outlook for Medicaid supplemental-payment programs and the effect of future DSH reductions.
- Debt maturities, refinancing needs and sensitivity to interest rates; management estimated that a 1% change in variable rates would affect pretax income by approximately $17 million.
- Collectability of Illinois receivables, which totaled approximately $38 million at year-end, including $25 million outstanding more than 60 days.
- Goodwill impairment risk, as goodwill totaled approximately $3.784 billion and future impairment depends on facility profitability and market-value assumptions.