Universal Health Services, Inc. — FY2012 Form 10-K Summary
Business context and reporting period
Universal Health Services, Inc. (UHS) filed its annual report for the fiscal year ended December 31, 2012. UHS operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers and radiation oncology centers through its subsidiaries. As of February 28, 2013, it operated 23 acute care hospitals, 197 behavioral health centers and five surgical or ambulatory facilities across 37 states, Washington, D.C., Puerto Rico and the U.S. Virgin Islands.
Behavioral health represented approximately 50% of consolidated net revenue in 2012, compared with 49% in 2011. Acute care and related services represented the remaining 50%, compared with 51% in 2011.
Key financial metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net revenues | $6.961 billion | $6.760 billion | +3% |
| Income from operations | $942.6 million | $897.1 million | +5% |
| Income before taxes | $763.7 million | $696.3 million | +10% |
| Net income | $489.0 million | $448.9 million | +9% |
| Net income attributable to UHS | $443.4 million | $398.2 million | +11% |
| Diluted EPS attributable to UHS | $4.53 | $4.04 | +12% |
| Net margin | 6.4% | 5.9% | +0.5 percentage points |
| Cash from operating activities | $815.3 million | $718.3 million | +13% |
| Capital expenditures | $363.2 million | $285.7 million | +27% |
| Long-term debt | $3.727 billion | $3.651 billion | +2% |
| Cash and cash equivalents | $23.5 million | $41.2 million | Declined |
Operating income margin increased to 13.5% from 13.3%. The effective income tax rate was 36.0%, compared with 35.5% in 2011. Total debt represented 58% of total capitalization at year-end, compared with 61% in 2011. UHS reported $574 million of available borrowing capacity under its revolving credit facility, net of borrowings and letters of credit.
Material changes versus the prior comparable period
- Ascend acquisition: UHS paid approximately $503 million in October 2012 for nine behavioral health facilities with approximately 800 licensed beds. The acquisition contributed approximately $42 million of 2012 revenue and increased goodwill by approximately $434.6 million. The acquisition was not material to 2012 attributable earnings after acquisition-related costs and financing costs.
- Acute care weakness: Same-facility acute care revenue increased less than 1%, while income before taxes declined 15% to $291.1 million. Inpatient admissions declined 2.0%, patient days declined 1.7%, and available-bed occupancy decreased to 56% from 58%.
- Behavioral health improvement: Same-facility behavioral health revenue increased 4%, and income before taxes increased 10% to $810.2 million. Admissions increased 4.9%, while occupancy remained 74%.
- Payor and collection pressure: The consolidated provision for doubtful accounts increased to $726.7 million from $596.6 million. The allowance for doubtful accounts increased to $311.4 million from $253.4 million, and days sales outstanding rose to 56 days from 51 days.
- Debt refinancing: UHS issued a $900 million Term Loan A2 in September 2012 and used $700 million to extinguish part of the higher-priced Term Loan B. It recorded a $29.2 million pre-tax write-off of deferred financing costs.
- Divestitures: UHS received $149.3 million from asset and business sales, including $93 million from the sale of Auburn Regional Medical Center. The Auburn sale generated a pre-tax gain of approximately $26 million.
- Shareholder returns: Dividends increased to $0.60 per share, including a $0.40 special dividend, from $0.20 per share in 2011. UHS repurchased $19.2 million of shares, primarily for employee tax-withholding obligations, and did not repurchase shares under its public program.
Cash flow, liquidity and capital structure
- Operating cash flow was $815.3 million. Investing cash use was $789.6 million, driven by $363.2 million of capital expenditures, $527.8 million of acquisitions and $54.4 million of electronic health record implementation costs, partially offset by asset-sale proceeds.
- Financing cash use was $43.4 million. UHS repaid $849.6 million of debt and raised $913.5 million of new borrowings, primarily through Term Loan A2.
- The company had $3.73 billion of long-term debt, including approximately $3.03 billion of variable-rate debt. Management estimated that a 1% change in interest rates would affect pre-tax income by approximately $21 million.
- Management stated that operating cash flow, cash, available borrowing capacity and access to capital markets should provide sufficient resources for the next twelve months, while acknowledging financing-market and refinancing risks.
- UHS expected 2013 capital expenditures of approximately $360 million to $385 million, including approximately $145 million for projects already in progress.
Guidance, outlook, risks and unusual items
- Management did not provide a formal earnings or revenue forecast in the filing. It expected continued investment in existing facilities, completion of the Temecula Valley Hospital in late 2013, and continued acquisition activity subject to market and regulatory conditions.
- UHS estimated aggregate Medicaid rate reductions of approximately 1%, or roughly $15 million annually, for the states’ 2013 fiscal years. Provider-tax and supplemental Medicaid programs were expected to provide an aggregate net benefit of approximately $48 million in 2013, subject to regulatory and funding conditions.
- UHS estimated that future reductions to Medicare disproportionate share hospital payments could reduce annual Medicare fee-for-service DSH payments by 40% to 50% beginning October 1, 2013. The filing also discussed potential Medicare sequestration and documentation-and-coding reductions.
- 2012 results included approximately $30 million of EHR incentive income, approximately $30 million of related operating costs, a $30 million favorable Medicare settlement impact before related costs, a $26 million Auburn divestiture gain and a $27 million reduction in prior-year professional liability reserves.
- Total uncompensated care at acute care hospitals, measured at established charges, increased to $1.046 billion from $955.7 million. The estimated cost of providing uncompensated care increased to $177.2 million from $172.7 million.
- Goodwill totaled $3.037 billion at year-end, including approximately $446 million recorded for the Ascend acquisition. The 2012 impairment test indicated no goodwill impairment, but future deterioration in operating performance could result in impairment charges.
- UHS had $70 million of receivables due from Illinois, including approximately $51 million outstanding more than 60 days. No reserve was recorded because management expected collection, but the filing states that ultimate collection is uncertain.
- The company remained subject to government investigations, subpoenas, False Claims Act matters, healthcare compliance risks and litigation. The filing states that potential losses beyond recorded reserves could not be estimated and could materially affect future results.
- UHS carried $279 million of professional and general liability reserves and $66 million of workers’ compensation reserves at December 31, 2012. It also had $80 million of letters of credit and surety bonds.
- Ascend was excluded from management’s and the auditor’s internal-control assessment because it was acquired during 2012; Ascend represented 6% of consolidated assets and 1% of consolidated revenue for 2012. Management and PwC nevertheless concluded that UHS maintained effective internal control over financial reporting.
Most important facts for investors to verify
- Whether acute care admissions, occupancy, payor mix and same-facility margins recover after the 2012 deterioration.
- The sustainability and regulatory status of Medicaid supplemental payments, DSH funding and other state-based reimbursement programs.
- The effect of Medicare DSH reductions, sequestration, documentation-and-coding adjustments and value-based purchasing on future reimbursement.
- Whether UHS can integrate Ascend and realize expected operating benefits without additional compliance, liability or impairment charges.
- The collectability of Illinois receivables and the trend in accounts receivable days outstanding and doubtful-account provisions.
- Debt maturities and refinancing requirements concentrated around 2016, including the company’s ability to maintain covenant compliance and manage variable-rate exposure.
- The potential financial and reputational impact of pending government investigations, subpoenas, litigation and self-insured professional liability claims.
- The impact of uncompensated care, labor shortages, wage inflation and managed-care pricing pressure on future margins.