Universal Health Services, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014; filed November 7, 2014. UHS operates acute-care hospitals, behavioral-health facilities, surgical hospitals, ambulatory surgery centers and radiation oncology centers. At quarter-end, it owned or operated 24 acute-care hospitals and 215 behavioral-health centers in the United States, United Kingdom, Puerto Rico and the U.S. Virgin Islands. The third quarter included the acquisition of Cygnet Health Care Limited, adding 18 United Kingdom facilities and 734 beds.
Financial performance and position
Amounts below are in thousands, except per-share data and percentages.
| Metric | Q3 2014 | Q3 2013 | Change | Nine months 2014 | Nine months 2013 | Change |
|---|---|---|---|---|---|---|
| Net revenues | $2,017,758 | $1,816,369 | 11% | $5,957,745 | $5,482,976 | 9% |
| Income from operations | $176,611 | $224,886 | (21%) | $741,019 | $772,862 | (4%) |
| Operating margin | 8.8% | 12.4% | (3.6 pts) | 12.4% | 14.1% | (1.7 pts) |
| Income before taxes | $144,478 | $192,572 | (25%) | $638,606 | $662,374 | (4%) |
| Net income attributable to UHS | $82,797 | $114,587 | (28%) | $372,546 | $386,212 | (4%) |
| Diluted EPS | $0.82 | $1.15 | (29%) | $3.71 | $3.89 | (5%) |
| Operating cash flow | Not presented quarterly | Not presented quarterly | — | $689,554 | $575,923 | 20% |
- The provision for doubtful accounts declined to $157.8 million in the quarter and $541.9 million year to date, compared with $318.4 million and $811.8 million, respectively, in the comparable periods. UHS attributed the reduction primarily to a higher uninsured-patient discount, effective January 1, 2014, and related patient eligibility reclassifications.
- Cash and cash equivalents were $39.7 million at September 30, 2014, compared with $17.2 million at December 31, 2013. Accounts receivable were $1.24 billion, and total current assets were $1.62 billion.
- Capital expenditures were $309.4 million and acquisitions required $402.4 million during the first nine months. Net cash used in investing activities was $707.8 million.
- Total debt carrying value was approximately $3.45 billion, or 49% of total capitalization, compared with 51% at December 31, 2013. Debt fair value was approximately $3.49 billion.
- UHS had $478 million of net available capacity under its $800 million revolving credit facility and $27 million of additional capacity under its $360 million accounts-receivable securitization program. Management stated that available liquidity, operating cash flow and capital-market access should fund requirements for the next twelve months.
Material changes versus the prior comparable period
- Same-facility acute-care net revenue increased 7.9% in the quarter and 8.4% year to date. Same-facility acute-care income before taxes increased 72% in the quarter to $113.2 million and 69% year to date to $367.9 million. Adjusted admissions increased 4.1% in the quarter and 2.3% year to date.
- Same-facility behavioral-health net revenue increased 6.2% in the quarter and 5.3% year to date. Same-facility behavioral-health income before taxes increased 8% in the quarter and 4% year to date, although the year-to-date margin declined to 24.1% from 24.4%.
- Consolidated earnings were reduced by a $36.2 million pretax debt-extinguishment charge and a $44 million third-quarter, $49 million year-to-date charge related to the Garden City shareholder litigation settlement, net of insurance recoveries.
- Year-to-date results also benefited from the absence of a $65 million favorable reduction in professional and general liability reserves recorded in 2013.
- Electronic-health-record incentive income declined substantially: $1.4 million in the third quarter and $4.0 million year to date, compared with $23.1 million and $27.9 million, respectively, in 2013. UHS reported an unfavorable pretax EHR impact of approximately $7 million in the quarter and $21 million year to date.
- UHS refinanced and restructured debt in August 2014. It issued $300 million of 3.750% senior secured notes due 2019 and $300 million of 4.750% senior secured notes due 2022, repaid a $550 million term loan B, redeemed $250 million of 7.00% senior unsecured notes, and extended its principal credit agreement maturity to August 2019.
- The quarterly dividend increased from $0.05 to $0.10 per share. UHS repurchased $25.2 million of shares during the quarter under a new $400 million authorization.
Guidance, outlook, risks and unusual items
- Management expected approximately $90 million to $100 million of capital expenditures during the final three months of 2014 and expected to finance capital expenditures, acquisitions, dividends and potential repurchases with internally generated funds and additional financing.
- UHS estimated a net approximately 1.9% annual decrease in acute-care Medicare IPPS payments under the 2015 rule, or approximately $13 million, excluding sequestration. It estimated a 2.1% increase for psychiatric prospective-payment-system rates and a net 0.7% increase in 2015 Medicare outpatient prospective-payment-system payments.
- UHS estimated approximately $70 million of 2014 net revenue from Texas Medicaid supplemental and affiliated-hospital indigent-care programs, approximately $61 million of net benefit from provider-tax programs, and approximately $50 million from Texas and South Carolina DSH programs, assuming renewal and funding conditions. These estimates are subject to regulatory and governmental approvals.
- UHS reported $33 million of Illinois receivables and $107 million of Texas Medicaid supplemental-program receivables at September 30, 2014. Collection timing remains uncertain; no additional reserves were recorded. CMS had deferred federal matching funds on certain Texas Medicaid uncompensated-care payments, although UHS stated its Texas hospitals were not then in the affected geographic areas.
- CMS continued a Medicare and Medicaid payment suspension at River Point Behavioral Health and extended it for another 180 days in August 2014. A prolonged suspension could materially adversely affect that facility, although its results were not material to consolidated results for the periods presented.
- UHS faces ongoing DOJ, OIG and other government investigations involving behavioral-health facilities and other historical matters. The company stated that the scope, liability and potential financial exposure remain uncertain and cannot currently be estimated beyond recorded reserves.
- Professional and general liability reserves were $209 million and workers’ compensation reserves were $66 million at September 30, 2014. UHS remains materially self-insured and stated that adverse claims development could materially affect future results.
- The company reported $94 million of standby letters of credit and surety bonds, including $73 million related to self-insurance.
Most important facts for investors to verify
- Whether acute-care volume, payer mix and Affordable Care Act-related coverage improvements can offset reimbursement pressure, Medicare reductions and higher operating costs.
- The collectability and timing of the $107 million Texas and $33 million Illinois receivables, including any expansion of CMS payment deferrals.
- The final cost and approval status of the $65 million Garden City settlement and the potential exposure from ongoing government investigations.
- Whether the August refinancing reduces borrowing costs and refinancing risk without materially increasing leverage or covenant pressure.
- The performance and integration of Cygnet, the acquired commercial insurer and other 2014 acquisitions, including goodwill of $3.30 billion at quarter-end.
- The effect of lower EHR incentive income, Medicare and Medicaid policy changes, DSH reductions, readmission and value-based-purchasing penalties, and the Two Midnight rule.
- The company’s ability to fund planned capital expenditures, acquisitions, dividends and share repurchases while maintaining sufficient liquidity.