Universal Health Services, Inc. — Q1 2013 Form 10-Q Summary
Business Context and Reporting Period
Universal Health Services, Inc. is a healthcare holding company operating through subsidiaries. As of March 31, 2013, it owned or operated 23 acute care hospitals and 197 behavioral health centers across 37 states, Washington, D.C., Puerto Rico and the U.S. Virgin Islands, plus surgical hospitals, ambulatory surgery centers and radiation oncology centers. The unaudited quarterly report covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012.
The October 2012 acquisition of Ascend Health Corporation added nine behavioral health facilities and materially increased the behavioral health contribution to consolidated revenue.
Financial Performance and Position
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net revenues before doubtful accounts | $2.078 billion | $1.942 billion | Up 7.0% |
| Provision for doubtful accounts | $246.7 million | $148.6 million | Up $98.1 million |
| Net revenues | $1.832 billion | $1.793 billion | Up 2.2% |
| Income from operations | $243.9 million | $269.0 million | Down 9.3% |
| Operating margin | 13.3% | 15.0% | Down 170 basis points |
| Income before income taxes | $204.0 million | $222.3 million | Down 8.2% |
| Net income | $129.9 million | $142.6 million | Down 8.9% |
| Net income attributable to UHS | $119.8 million | $128.6 million | Down 6.9% |
| Diluted EPS | $1.21 | $1.31 | Down 7.6% |
| Net cash from operating activities | $187.8 million | $127.2 million | Up $60.5 million |
Net income attributable to UHS represented approximately 6.5% of net revenues, compared with 7.2% in the prior-year quarter. Interest expense declined to $39.9 million from $46.7 million, primarily because of lower average borrowing costs and reduced financing-fee amortization. The effective income tax rate was 36.3%, compared with 35.9%.
At March 31, 2013, cash and cash equivalents were $17.4 million, accounts receivable were $1.149 billion, and total assets were $8.317 billion. Total debt was $3.67 billion on a carrying-value basis, or 56% of total capitalization, compared with 58% at December 31, 2012. Debt fair value was $3.75 billion.
Capital expenditures were $95.9 million and electronic health-record implementation costs were $16.4 million during the quarter. Net cash used in investing activities was $105.7 million. Financing activities used $88.2 million, including $69.9 million of debt repayments, $14.0 million of share repurchases related to employee tax withholding, $4.9 million of dividends and $10.1 million of distributions to noncontrolling interests. Cash declined by $6.1 million to $17.4 million.
Material Changes Versus the Prior Comparable Period
- Consolidated net revenue increased $38.6 million, driven by $27 million of same-facility growth and revenue from the Ascend facilities, partly offset by the absence of approximately $36 million of prior-year revenue from a Medicare underpayment settlement.
- The provision for doubtful accounts increased substantially to $246.7 million from $148.6 million, reflecting continuing collection and self-pay pressures. Accounts receivable allowances were $367 million at March 31, 2013, compared with $311 million at December 31, 2012.
- Acute care same-facility net revenue increased 0.7%, but income before taxes fell 24% to $82.4 million. Admissions declined 1.3%, adjusted admissions declined 1.5%, and the acute-care pretax margin fell to 9.1% from 12.0%.
- Behavioral health same-facility net revenue increased 2.4% to $864.0 million, while pretax income increased 9% to $212.9 million. Occupancy improved to 76% from 75%, although patient days declined 0.3%.
- Same-facility acute-care profitability was pressured by higher salaries, wages and benefits and other operating expenses as percentages of revenue.
- Q1 2012 included approximately $30 million of favorable pretax impact from an industry-wide Medicare settlement and approximately $8 million of unfavorable adjustments related to Medicare disproportionate-share calculations and Florida county reimbursements.
- Q1 2013 included $4.7 million of electronic health-record incentive income, offset by implementation-related expenses; the filing reports a net pretax EHR charge of approximately $0.5 million.
- Operating cash flow improved because the prior-year period had higher receivables, including receivables related to the Medicare settlement and delayed Illinois collections.
Guidance, Outlook, Risks and Unusual Items
- Management expected to spend approximately $265 million to $290 million on capital expenditures during the remaining nine months of 2013, including projects such as the 140-bed Temecula Valley Hospital scheduled to open in fall 2013.
- Management stated that operating cash flow, cash, available revolver capacity and access to capital markets should provide sufficient resources for the next twelve months, while noting that future financing may not be available on acceptable terms.
- The $800 million revolving credit facility had $660 million of available capacity at March 31, 2013, net of $119 million of borrowings and $21 million of letters of credit. The accounts receivable securitization had $257 million outstanding and $18 million of additional capacity, with scheduled maturity on October 25, 2013; management expected to refinance it through the credit agreement if necessary.
- The company was in compliance with its debt covenants at March 31, 2013. Scheduled remaining 2013 Term Loan A and A2 installments were approximately $54 million, with approximately $72 million due in 2014.
- Medicare sequestration reductions of up to 2% began affecting payments in 2013. Management estimated an approximately $39 million annual reduction to Medicare net revenues effective April 1, 2013.
- Management estimated aggregate Medicaid rate reductions of approximately 1%, or approximately $15 million annually, for the 2013 state fiscal years. Medicaid supplemental and disproportionate-share programs remain dependent on state funding, regulatory approvals and intergovernmental transfers.
- Illinois receivables totaled approximately $72 million at March 31, 2013, including $46 million outstanding more than 60 days. The company received approximately $47 million from Illinois in April 2013, but had not established a specific reserve for the remaining balance.
- Professional and general liability accruals were $284 million, and workers’ compensation liability accruals were $66 million. The company remains substantially self-insured and warns that claim frequency or severity could materially affect future results.
- The company disclosed multiple government subpoenas and investigations involving behavioral health facilities and prior-period billing and compliance matters. The focus, scope and potential exposure for several investigations remained uncertain; management could not estimate any loss in excess of recorded accruals.
- Two Rivers Psychiatric Hospital successfully passed its required February 2013 survey and was restored to deemed status, completing the related 2011 settlement requirements.
- Electronic health-record implementation was complete at 18 acute-care hospitals, and 13 hospitals had met meaningful-use criteria as of March 31, 2013. Hospitals failing to qualify by 2015 may face reduced Medicare payment updates.
- There were no acquisitions during the quarter. The company received approximately $7 million from divestitures of real property. The filing also reports discontinued operations associated with Auburn Regional Medical Center and Peak Behavioral Health Services.
Most Important Facts for Investors to Verify
- Whether the sharp increase in doubtful-account provisions continues and how effectively self-pay, uninsured and government receivables are collected.
- The effect of Medicare sequestration, future Medicare DSH and Medicaid DSH reductions, Medicaid rate changes, and Texas supplemental-payment rules on revenue and margins.
- Acute-care volume trends, labor-cost inflation and whether acute-care operating margins recover from the Q1 decline.
- Integration and performance of the Ascend behavioral health facilities, including occupancy, reimbursement and cost trends.
- Refinancing of the $257 million accounts receivable securitization before its October 2013 maturity and continued availability under the revolving credit facility.
- Potential financial, regulatory, operational and reputational effects of the disclosed OIG, DOJ, state investigations and self-insurance claims.
- Completion costs, opening timing and expected returns for the Temecula Valley Hospital and other capital projects.
- The timing and amount of future EHR incentive income and any risk of meaningful-use penalties.