UNIVERSAL HEALTH SERVICES INC quarterly report, Q2 FY2012

Universal Health Services, Inc. 2012 Second-Quarter Form 10-Q Summary

Business Context and Reporting Period

UHS filed its unaudited Form 10-Q for the three and six months ended June 30, 2012. The company operated 25 acute care hospitals, 194 behavioral health centers and six surgical hospitals and surgery/radiation oncology centers across 36 states, Washington, D.C., Puerto Rico and the U.S. Virgin Islands.

Key Financial Metrics

MetricThree months ended June 30, 2012Three months ended June 30, 2011Six months ended June 30, 2012Six months ended June 30, 2011
Net revenues$1.730 billion$1.714 billion$3.527 billion$3.441 billion
Income from operations$230 million$232 million$499 million$493 million
Income before taxes$184 million$182 million$407 million$386 million
Net income attributable to UHS$108 million$104 million$236 million$218 million
Diluted EPS$1.10$1.04$2.41$2.20
Operating margin13.3%13.5%14.2%14.3%
  • Net revenues increased 1% in the quarter and 3% year to date. The provision for doubtful accounts was $185 million in the quarter and $333 million year to date, compared with $155 million and $304 million, respectively, in the prior-year periods.
  • Net income attributable to UHS increased 4% in the quarter and 8% year to date. The effective tax rate was 36.3% for the quarter and 36.1% year to date.
  • Operating cash flow was $373 million for the first six months, compared with $356 million in 2011. Capital expenditures were $182 million, and electronic health record implementation costs were $28 million.
  • Cash and cash equivalents were $33 million at June 30, 2012, versus $41 million at December 31, 2011. Accounts receivable increased to $1.020 billion from $970 million.
  • Total debt was approximately $3.46 billion at June 30, 2012, with a reported fair value of $3.53 billion. Debt represented 58% of total capitalization, compared with 61% at December 31, 2011.
  • Available borrowing capacity under the senior secured credit agreement was $623 million, and the accounts receivable securitization facility had $45 million of remaining capacity. The company was in compliance with its debt covenants.

Material Changes Versus the Prior Comparable Period

  • Acute care same-facility net revenue declined 2% in the quarter and 1% year to date. Acute care pre-tax income declined 19% in the quarter and 15% year to date, reflecting lower admissions, weaker payor mix and higher labor costs as a percentage of revenue.
  • Acute care inpatient admissions decreased 4.3% in the quarter and 3.0% year to date; adjusted admissions increased 0.4% year to date. Occupancy declined to 53% in the quarter and 55% year to date.
  • Behavioral health same-facility net revenue increased 4% in the quarter and 5% year to date. Same-facility pre-tax income increased 12% in the quarter and 9% year to date, with improved admissions and operating margins.
  • Interest expense declined $4 million in the quarter and $14 million year to date, primarily because of lower average borrowings and lower effective interest rates.
  • Results benefited from approximately $33 million of net pre-tax income year to date from an industry-wide Medicare underpayment settlement, approximately $14 million from Oklahoma supplemental Medicaid reimbursements and approximately $9 million from new Indiana and Ohio supplemental Medicaid programs.
  • Results were reduced by approximately $8 million year to date from revised Medicare disproportionate-share calculations and Florida county reimbursement receivable write-offs, and by approximately $8 million after noncontrolling interests from EHR implementation costs.

Guidance, Outlook, Risks and Unusual Items

  • Management expected to spend approximately $175 million to $190 million on capital expenditures during the remaining six months of 2012.
  • UHS signed an agreement to acquire Ascend Health Corporation for $500 million in cash, plus assumed net debt of approximately $17 million. Closing was expected in the fourth quarter of 2012, subject to regulatory approvals.
  • UHS agreed to sell Auburn Regional Medical Center for approximately $98 million, including estimated working capital, with closing expected in the fourth quarter of 2012. Management expected a substantial gain upon closing.
  • Medicaid rate reductions in the company’s operating states were estimated at approximately $45 million to $55 million annually relative to the prior fiscal-year rates. Additional 2013 fiscal-year reductions were estimated at $8 million to $15 million annually.
  • A proposed change to Texas Medicaid disproportionate-share reimbursement could reduce future reimbursements by approximately $16 million annually if implemented as drafted.
  • UHS had $72 million of receivables due from Illinois, including $52 million outstanding more than 60 days. No specific reserve was recorded, but management stated that collection was uncertain.
  • Key risks include reimbursement reductions, Medicare and Medicaid policy changes, uninsured and self-pay collection trends, declining acute care admissions, labor shortages, leverage and acquisition integration, regulatory investigations, litigation and self-insured professional liability exposure.
  • Nine acute care hospitals had implemented EHR applications by June 30, 2012. One hospital had met meaningful-use criteria; eight additional hospitals were expected to qualify by year-end 2012. Failure to qualify could result in future Medicare payment penalties.
  • Two Rivers Psychiatric Hospital passed an initial CMS survey in April 2012 but remained subject to a second survey expected in late 2012 or early 2013. Peachford Behavioral Health System received an HHS Office of Inspector General subpoena in July 2012; the scope and potential exposure were unclear.

Most Important Facts for Investors to Verify

  • Whether the Ascend acquisition and Auburn Regional Medical Center divestiture closed on the expected terms and how they affected leverage, earnings and cash flow.
  • Acute care volume, occupancy, payor mix, labor-cost trends and the sustainability of the weaker acute care margins.
  • Collection of Illinois receivables and the adequacy of the company’s doubtful-account allowance.
  • Final Texas Medicaid DSH methodology and the continuation of Medicaid supplemental, DSH and provider-tax programs.
  • Progress toward EHR meaningful-use requirements, receipt and timing of incentive payments and potential Medicare penalties.
  • Available liquidity after the Ascend transaction, planned capital spending and debt repayments, together with compliance with credit-agreement covenants.
  • Developments in the Peachford, DOJ, CMS, False Claims Act and other regulatory or litigation matters, including any exposure beyond recorded reserves.