Universal Health Services, Inc. — 2013 Form 10-K 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. As of February 27, 2014, it operated 24 acute care hospitals, 193 behavioral health centers and five surgical or ambulatory facilities across 37 states, Washington, D.C., Puerto Rico and the U.S. Virgin Islands. The filing covers the fiscal year ended December 31, 2013; fourth-quarter data is provided in the filing but this is an annual Form 10-K.
Acute care and related surgical operations represented 49% of consolidated net revenues in 2013, while behavioral health represented 50%. The company completed the rollout of electronic health record applications at its acute care hospitals in June 2013, excluding the newly opened Temecula Valley Hospital.
Key Financial Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net revenues | $7.284 billion | $6.961 billion | +5% |
| Income from operations | $1.015 billion | $943 million | +8% |
| Operating margin | 13.9% | 13.5% | +40 bps |
| Income before taxes | $869 million | $764 million | +14% |
| Net income attributable to UHS | $511 million | $443 million | +15% |
| Net margin | 7.0% | 6.4% | +60 bps |
| Diluted EPS | $5.14 | $4.53 | +13% |
| Cash flow from operations | $884 million | $799 million | +11% |
| Capital expenditures, net | $358 million | $363 million | Approximately flat |
| Long-term borrowings | $3.210 billion | $3.727 billion | -$518 million |
| Total debt capitalization | 51% | 58% | Improved |
Cash and cash equivalents were $17 million at year-end, compared with $23 million in 2012. Accounts receivable, net, increased to $1.117 billion from $1.067 billion, with an allowance for doubtful accounts of $395 million. Days sales outstanding remained 56 days.
The company used $383 million in investing activities and $507 million in financing activities. Financing cash outflows included $440 million of net debt repayments, $61 million of distributions to noncontrolling interests, $27 million of share repurchases related to employee tax withholding and $20 million of dividends. No shares were repurchased under the public repurchase program.
Operating Performance and Changes Versus 2012
- Same-facility acute care revenue increased 4%, but same-facility acute care income before taxes declined 5% to $277 million. Acute care margins declined to 7.9% from 8.6%, reflecting reimbursement and payor-mix pressure, higher labor costs and start-up losses at Temecula Valley Hospital.
- All acute care revenue increased 3% to $3.576 billion, while income before taxes increased modestly to $342 million. Same-facility admissions increased 0.2%, adjusted admissions increased 1.0% and adjusted patient days increased 2.2%.
- Same-facility behavioral health revenue increased 3% and income before taxes increased 4% to $854 million. Occupancy improved to 75% from 74%, admissions increased 3.2% and average length of stay declined to 13.4 days from 13.7 days.
- All behavioral health revenue increased 6% to $3.668 billion and income before taxes increased 7% to $896 million, benefiting from a full-year contribution from the nine facilities acquired from Ascend in October 2012.
- Net revenues before doubtful-account provisions increased 9% to $8.411 billion, but the provision for doubtful accounts increased 55% to $1.127 billion. Acute care accounted for approximately 90% of the consolidated provision.
- Uncompensated care at acute care hospitals was $999 million based on established charges, compared with $1.046 billion in 2012. The mix shifted toward uninsured discounts, which increased to $405 million from $267 million, while charity care declined to $593 million from $778 million.
- Interest expense declined to $146 million from $179 million, primarily because of lower borrowing costs and the May 2013 refinancing amendment.
- Professional and general liability reserves were reduced by $81 million in 2013, compared with a $27 million reduction in 2012. This favorable reserve adjustment materially benefited reported earnings.
- Electronic health record incentive income was $61 million, offset by approximately $43 million of related expenses, for an estimated favorable pretax impact of approximately $19 million.
Debt, Liquidity and Capital Commitments
Total debt carrying value was $3.309 billion, including approximately $2.351 billion of Term Loan A, Term Loan B and Term Loan A2 borrowings, $650 million of senior notes, $240 million of accounts receivable securitization borrowings and other debt. Approximately $2.805 billion of debt matures in 2016, creating a significant refinancing concentration.
At December 31, 2013, UHS had no borrowings under its $800 million revolving facility and reported $755 million of available capacity after short-term borrowings and letters of credit. The accounts receivable securitization program had $240 million outstanding and $35 million of additional capacity. Management stated that operating cash flow, cash, available borrowing capacity and capital-market access were sufficient for the next twelve months, subject to financing-market conditions.
UHS expected 2014 capital expenditures of approximately $360 million to $385 million, including approximately $155 million for projects already in progress. Contractual cash obligations totaled approximately $4.589 billion, including $3.309 billion of debt, $307 million of operating leases, $153 million of construction commitments and $261 million of purchase and other obligations.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide a consolidated earnings or revenue forecast in the filing. It expected 2014 net benefits of approximately $46 million from Medicaid provider-tax programs and approximately $49 million from Texas and South Carolina Medicaid disproportionate-share programs, assuming renewals and conditions similar to those in effect.
- Management estimated the federal fiscal 2014 Medicare inpatient payment rule would increase overall reimbursement by approximately 1.0%, excluding sequestration. Medicare sequestration reduced Medicare net revenues by approximately $35 million annually beginning April 1, 2013.
- The Medicare “Two Midnight” rule could adversely affect future acute care reimbursement, although the ultimate impact was unclear. Medicaid reimbursement also remained exposed to state budget constraints, provider-tax changes, DSH reductions and Texas supplemental-payment uncertainty.
- Illinois receivables were approximately $49 million at year-end, including $28 million outstanding more than 60 days. Texas receivables included approximately $46 million related to Medicaid supplemental programs. No reserves were recorded for these balances, although collection timing and ultimate recovery were uncertain.
- UHS reported approximately $3.049 billion of goodwill, primarily related to the PSI and Ascend acquisitions. The September 2013 impairment test identified no impairment, but adverse operating performance could lead to future impairment charges.
- UHS received $37 million from 2013 divestitures, including the sale of Peak Behavioral Health Services, and recorded an aggregate pretax gain of approximately $3 million. The 2012 comparison included a $26 million gain on the sale of Auburn Regional Medical Center.
- Government investigations and subpoenas remained outstanding involving several behavioral health facilities, including River Point Behavioral Health, Wekiva Springs, Friends Hospital and Riveredge Hospital. The company could not estimate potential exposure for several matters.
- The company carried $206 million of professional and general liability reserves and $64 million of workers’ compensation reserves. Actual claims could exceed estimates or insurance coverage.
- Additional risks include reimbursement reductions, uninsured-patient volumes, managed-care pricing pressure, nurse and physician shortages, regulatory compliance, malpractice claims, cybersecurity incidents, competition, acquisition integration and concentrated exposure to Nevada, Texas and California.
Most Important Facts for Investors to Verify
- Whether acute care operating margins and patient volumes improve after the 2013 decline in same-facility pretax income.
- The sustainability of earnings benefits from the $81 million liability-reserve reduction and $19 million net EHR contribution.
- Collection of Illinois and Texas receivables and any resulting impact on cash flow or reserves.
- Refinancing plans for approximately $2.805 billion of debt scheduled to mature in 2016.
- The durability of Medicaid supplemental, provider-tax and DSH programs assumed in the 2014 outlook.
- The outcome and potential financial exposure of open DOJ, OIG and state Medicaid investigations.
- Goodwill impairment sensitivity, particularly in the behavioral health segment.
- The effect of Medicare sequestration, the Two Midnight rule, Medicare DSH reductions and other Affordable Care Act reimbursement changes.