Universal Health Services, Inc. — Q3 2015 Form 10-Q Summary
Business context and reporting period
UHS owns and operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers and radiation oncology centers through subsidiaries. As of September 30, 2015, it operated 24 acute care hospitals and 217 behavioral health centers in the United States, United Kingdom, Puerto Rico and the U.S. Virgin Islands, and was constructing an acute care hospital in Henderson, Nevada. The filing covers the three and nine months ended September 30, 2015; financial statements are unaudited.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net revenues | $2.228 billion | $2.039 billion | $6.728 billion | $6.029 billion |
| Income from operations | $275.2 million | $176.6 million | $937.6 million | $741.0 million |
| Operating margin | 12.4% | 8.7% | 13.9% | 12.3% |
| Income before taxes | $248.0 million | $144.5 million | $852.8 million | $638.6 million |
| Net income attributable to UHS | $150.3 million | $82.8 million | $506.8 million | $372.5 million |
| Diluted EPS | $1.48 | $0.82 | $5.02 | $3.71 |
| Net margin attributable to UHS | 6.7% | 4.1% | 7.5% | 6.2% |
The provision for doubtful accounts was $211.4 million in Q3 and $543.6 million for the first nine months. Cash provided by operating activities was $796.5 million for 9M 2015 versus $689.6 million in 9M 2014. Capital expenditures were $269.6 million and acquisitions used $183.1 million. Ending cash was $39.5 million.
At September 30, 2015, current assets were $1.697 billion and current liabilities were $1.196 billion. Debt consisted of $84.9 million of current maturities and $3.010 billion of long-term debt; carrying value and fair value of total debt were each approximately $3.1 billion. The company had no borrowings under its $800 million revolving facility and reported $744 million of available capacity, net of specified borrowings and letters of credit. The accounts receivable securitization had $300 million outstanding and $60 million of additional capacity.
Material changes versus the prior comparable period
- Q3 net revenue increased 9%, primarily from 6% same-facility revenue growth and $53 million of revenue from 21 U.K. behavioral health facilities acquired since September 2014.
- 9M net revenue increased 12%, including 7% same-facility growth and $137 million from the acquired U.K. facilities.
- Q3 income attributable to UHS increased 81% and 9M income increased 36%. Comparability benefited from the absence of approximately $44 million related to a 2014 legal settlement and $36 million of 2014 debt-extinguishment costs.
- Interest expense declined $5 million in Q3 and $18 million for 9M, reflecting lower average borrowings, lower swap expense and lower financing-fee amortization.
- Same-facility acute care pre-tax income declined 7% in Q3 because of higher uncompensated care and temporary nursing costs, but increased 18% for 9M. Same-facility behavioral health pre-tax income increased 4% in Q3 and 8% for 9M.
- Acute-care same-facility admissions increased 4.0% in Q3 and 4.4% for 9M; behavioral-health same-facility admissions increased 1.9% and 4.0%, respectively.
- Debt declined from $3.279 billion at December 31, 2014 to approximately $3.095 billion at September 30, 2015, while debt as a percentage of total capitalization decreased from 47% to 43%.
- The 2014 comparative income statement was reclassified to present provider taxes in other operating expenses rather than as a reduction of revenue; management stated the change was not material to previously issued statements.
Guidance, outlook, commentary and unusual items
- Management expected approximately $100 million to $130 million of capital expenditures during the remaining three months of 2015 and expected to fund capital expenditures, acquisitions, dividends and potential repurchases with internally generated funds and additional financing.
- Management stated that operating cash flow, cash, available revolver and securitization capacity, and capital-market access were sufficient for the next 12 months, while cautioning that future financing may not be available on acceptable terms.
- UHS expected 2016 Texas and South Carolina Medicaid DSH reimbursements to be similar to 2015 levels. It estimated approximately $15 million of additional net Texas uncompensated-care benefit, $18 million of additional Texas DSRIP benefit and $17 million from other provider-tax programs during the remaining three months of 2015, subject to program conditions and approvals.
- In October 2015, after the quarter, UHS acquired Foundations Recovery Network for approximately $350 million, adding four inpatient facilities, 322 beds and eight outpatient centers.
- UHS changed its annual goodwill and indefinite-lived intangible asset testing date from September 1 to October 1. The September 1 test indicated no impairment; an additional October 1 test was planned.
- Seven interest-rate swaps with total notional value of $825 million matured in May 2015. UHS entered into new swaps covering $900 million of notional value, with average fixed rates of 1.40% and 1.23%, scheduled to mature in 2019.
Risks and contingencies
- The Department of Justice and OIG investigation into behavioral health facilities was expanded to include UHS as a corporate entity and focuses on potential False Claims Act issues. The company could not estimate potential liability or financial exposure.
- CMS continued a 180-day Medicare payment suspension at River Point Behavioral Health; the suspension materially harmed that facility, although it did not materially affect consolidated results through September 30, 2015.
- Timberlawn’s Medicare and Medicaid provider agreement was terminated effective August 14, 2015. The facility remained open and reached an agreement with CMS regarding reapplication, but the termination materially harmed its results and financial condition.
- Texoma Medical Center remained under a CMS Systems Improvement Agreement through October 2, 2016 unless completed earlier; it remained eligible for Medicare and Medicaid reimbursement during the agreement.
- Pennsylvania demanded approximately $4 million of alleged excess FFY2011 Medicaid DSH payments from facilities including seven UHS behavioral health hospitals. UHS is contesting the demand; additional repayment claims for later years are possible.
- Accounts receivable included approximately $24 million due from Illinois and $83 million due from Texas Medicaid supplemental programs. No reserves were recorded for these balances; $31 million of the Texas uncompensated-care balance was subsequently received in October 2015.
- Professional and general liability and workers’ compensation reserves totaled $280 million, and self-insurance estimates could change materially. Standby letters of credit and surety bonds totaled $125 million.
- UHS had $400 million of 7.125% notes maturing in June 2016, classified as long-term because management intended and expected to refinance them. The company was in compliance with its debt covenants.
- Healthcare reimbursement, Medicaid supplemental programs, Medicare payment reductions, regulatory investigations, litigation, labor costs, managed-care pricing and collection of uninsured or self-pay accounts remain significant risks.
Most important facts for investors to verify
- Whether the DOJ/OIG investigation, River Point payment suspension, Timberlawn reapplication and related regulatory matters result in penalties, repayment obligations or further facility restrictions.
- The collectability and timing of Illinois and Texas receivables, including the portion not subsequently received.
- The refinancing or repayment plan for the $400 million of notes due in June 2016 and the maturity of the $360 million receivables securitization in October 2016.
- The sustainability of earnings growth after excluding 2014 legal and debt-extinguishment charges and incorporating the October 2015 Foundations acquisition.
- The effect of uncompensated care, temporary nursing costs and payer-mix changes on acute-care margins.
- The renewal and funding of Medicaid DSH, uncompensated-care, DSRIP and other supplemental payment programs.
- The outcome of the October 1, 2015 goodwill impairment test and the company’s subsequent accounting for the Foundations acquisition.