Universal Health Services, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing is an annual report, not a quarterly filing; fourth-quarter data is presented as unaudited supplemental information. UHS operated 24 acute care hospitals, 216 behavioral health centers and five surgical, ambulatory surgery and radiation oncology facilities across the United States, United Kingdom, Puerto Rico and the U.S. Virgin Islands.
Key Financial Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net revenues | $8.065 billion | $7.284 billion | +11% |
| Income from operations | $1.063 billion | $1.015 billion | +5% |
| Income before taxes | $930 million | $869 million | +7% |
| Net income attributable to UHS | $545 million | $511 million | +7% |
| Diluted earnings per share | $5.42 | $5.14 | +5% |
| Net margin | 6.8% | 7.0% | Down 0.2 points |
| Cash from operating activities | $1.036 billion | $884 million | +17% |
| Capital expenditures, net | $391 million | $358 million | +9% |
| Long-term borrowings | $3.210 billion | $3.210 billion | Approximately flat |
| Total debt to capitalization | 47% | 51% | Improved |
At December 31, 2014, cash and cash equivalents were $32 million, accounts receivable were $1.283 billion, total assets were $8.974 billion and UHS common stockholders’ equity was $3.736 billion. The allowance for doubtful accounts was approximately $325 million.
Fourth-quarter 2014 net revenues were $2.108 billion, net income attributable to UHS was $173 million and diluted EPS was $1.71, compared with fourth-quarter 2013 revenue of $1.801 billion, UHS-attributable net income of $125 million and diluted EPS of $1.24.
Material Changes Versus Prior Comparable Period
- Revenue growth reflected an 8% increase in same-facility revenue, acquisitions and a full year of operations at Temecula Valley Hospital.
- Acute care same-facility revenue increased 10%; same-facility income before taxes increased 75% to $484 million. Admissions increased 0.6%, adjusted admissions increased 3.1% and available-bed occupancy improved to 58% from 56%.
- Behavioral health same-facility revenue increased 6% and income before taxes increased 5% to $930 million. Admissions increased 4.7%, while occupancy remained 75%.
- The provision for doubtful accounts declined to $699 million from $1.127 billion, primarily because UHS increased its uninsured discount from 30% to 60% effective January 1, 2014 and reclassified certain accounts based on ultimate Medicaid eligibility. This accounting change did not materially affect net revenue or net income but reduced the provision for doubtful accounts.
- Operating margin declined to 13.2% from 13.9%, while net margin declined to 6.8% from 7.0%. Expenses increased due in part to acquisitions, labor and other operating costs.
- Interest expense declined to $134 million from $146 million, aided by lower average borrowings and borrowing costs.
- 2014 results included a $36 million pretax debt-extinguishment charge and a net $44 million pretax charge related to settlement of the Garden City shareholder litigation, partly offset by a $20 million favorable reduction in prior-year professional and general liability reserves and an $8 million pretax gain from divestitures.
Business Development, Debt and Liquidity
UHS spent approximately $431 million on 2014 acquisitions, including Cygnet Health Care Limited in the United Kingdom, Prominence Health Plan, Psychiatric Institute of Washington, Palo Verde Behavioral Health, real estate related to The Bridgeway and Cygnet Hospital-Harrow, and physician practices. Acquired businesses contributed approximately $175 million of 2014 revenue from their acquisition dates; their impact on 2014 UHS-attributable earnings was not material.
In August 2014, UHS refinanced and extended its credit structure. The amended credit agreement includes an $800 million revolving facility, an approximately $1.775 billion Term Loan A facility scheduled to mature in 2019, a $360 million accounts receivable securitization program, and $600 million of senior secured notes due in 2019 and 2022. UHS redeemed its $250 million, 7% senior unsecured notes and repaid $550 million of Term Loan B borrowings.
UHS had $640 million of available revolver capacity, net of outstanding borrowings and letters of credit, and $30 million of unused accounts receivable securitization capacity at year-end. Management stated that operating cash flow, cash, available borrowing capacity and capital-market access should fund operating, investing and financing needs for the next twelve months. The company was in compliance with all debt covenants at December 31, 2014.
2015 expected capital expenditures are approximately $375 million to $400 million, including approximately $155 million for projects already in progress. Contractual cash obligations totaled approximately $4.683 billion, including $3.279 billion of debt principal, $335 million of operating leases and $151 million of construction commitments.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide a specific consolidated earnings or revenue forecast in the filing. It expects to finance 2015 capital expenditures and acquisitions with internally generated funds and additional financing as needed.
- Medicare payment changes, sequestration, documentation and coding adjustments, DSH reductions, value-based purchasing and readmission penalties may pressure reimbursement. UHS estimated that the 2015 IPPS rule would reduce its annual Medicare revenue by approximately $13 million, before sequestration effects.
- UHS depends materially on Medicaid and supplemental payment programs. Accounts receivable included approximately $44 million due from Illinois and $102 million due from Texas at year-end; no reserves were recorded for these balances. Approximately $24 million related to Texas DSRIP receivables was collected in January 2015.
- A proposed Texas rule could shift $136 million of funding from private-hospital uncompensated-care pools to large public hospitals for the 2014 program year. UHS stated that it could not estimate the effect.
- CMS and Florida authorities continued payment suspensions involving River Point Behavioral Health during 2014. The facility was not material to consolidated 2014 results, but a prolonged suspension could materially affect that facility’s future results and financial condition.
- UHS and certain facilities were subject to DOJ, OIG and other investigations involving behavioral health billing and potential False Claims Act matters. The company could not estimate potential liability or any loss range beyond accrued amounts.
- The company is exposed to self-insured professional and general liability claims, with a $193 million accrual at year-end, and workers’ compensation claims of $67 million. Future reserve adjustments could materially affect results.
- Goodwill totaled approximately $3.291 billion, or roughly 37% of total assets. The 2014 impairment test indicated no impairment, but adverse operating or market conditions could result in future impairment charges.
- Other risks include labor shortages and wage inflation, competition, managed-care rate pressure, cybersecurity and HIPAA compliance, foreign exchange exposure, regulatory changes, physician retention, concentration in Texas, Nevada and California, and concentrated voting control by the Miller family.
Most Important Facts for Investors to Verify
- Whether acute-care volume, occupancy and payer-mix improvements continue after the 2014 benefit from expanded insurance coverage and reduced uninsured patients.
- The collectability and aging of Illinois and Texas supplemental-payment receivables, and the impact of future Medicaid program or DSH changes.
- The status and potential financial exposure of the behavioral health False Claims Act investigations and the River Point payment suspension.
- Debt maturities, refinancing requirements, covenant headroom, floating-rate exposure and the effect of the 2014 refinancing on future interest expense.
- Whether the company achieves its $375 million to $400 million 2015 capital-expenditure plan while continuing acquisitions, dividends and share repurchases.
- The sustainability of reported profitability after excluding favorable insurance-reserve revisions, EHR incentives, divestiture gains and other unusual items.