Business Context and Reporting Period
Universal Health Services, Inc. filed this Form 10-K for the fiscal year ended December 31, 2010. The company owns and operates acute-care hospitals, behavioral-health facilities, surgical hospitals, ambulatory surgery centers and radiation oncology centers through its subsidiaries. As of February 28, 2011, UHS operated 25 acute-care hospitals and 206 behavioral-health centers across 37 states, Washington, D.C., Puerto Rico and the U.S. Virgin Islands.
The November 15, 2010 acquisition of Psychiatric Solutions, Inc. (PSI) materially expanded the behavioral-health business. PSI contributed revenue only from the acquisition date through year-end; therefore, 2010 results are not fully comparable with 2009.
Key Financial Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net revenues | $5.568 billion | $5.202 billion | +7% |
| Income from operations | $505.7 million | $520.5 million | -3% |
| Income before taxes from continuing operations | $428.1 million | $474.7 million | -10% |
| Net income attributable to UHS | $230.2 million | $260.4 million | -12% |
| Diluted EPS attributable to UHS | $2.34 | $2.64 | -11% |
| Net margin | 4.1% | 5.0% | Down 0.9 percentage points |
| Cash provided by operating activities | $501.3 million | $541.3 million | -7% |
| Capital expenditures, net | $239.3 million | $379.7 million | -37% |
| Long-term debt | $3.912 billion | $956.4 million | Substantial increase |
| Total debt to capitalization | 66% | 35% | Up 31 percentage points |
Cash and cash equivalents were $29.5 million at December 31, 2010, compared with $9.2 million at year-end 2009. UHS reported $577 million of unused borrowing capacity under its senior credit and accounts-receivable securitization facilities, net of outstanding letters of credit and short-term borrowings. The company was in compliance with its debt covenants.
Acute-care and related services represented 70% of 2010 consolidated net revenue, compared with 74% in 2009. Behavioral-health services represented 30%, compared with 25% in 2009. Medicare and Medicaid represented 38% of net patient revenue, while managed-care entities represented 46%.
Same-facility acute-care revenue increased 2% to $3.902 billion, but income before taxes declined 9% to $327.7 million, reducing the margin from 9.5% to 8.4%. Same-facility behavioral-health revenue increased 6% to $1.393 billion, and income before taxes increased 12% to $314.5 million, increasing the margin from 21.3% to 22.6%.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by $227 million of behavioral-health revenue from PSI facilities acquired in November and a $169 million increase in same-facility revenue.
- Acute-care performance weakened because of declining commercial-payor utilization, higher uninsured and underinsured volumes, Texas Medicaid reductions, and increases in salary, wage, benefit and supply costs.
- Behavioral-health results improved through same-facility growth and the contribution of PSI and other recently acquired or opened facilities. All behavioral-health revenue increased 24% to $1.635 billion.
- Operating income declined despite higher revenue because of $53.2 million of PSI transaction costs, higher interest expense, a $7 million write-off of certain acute-care construction costs, and a $9 million split-dollar life-insurance charge.
- Interest expense increased to $77.6 million from $45.8 million, primarily because of debt raised to finance the PSI acquisition. The effective rate on relevant credit facilities and related instruments was 5.0%.
- Operating cash flow declined $39.9 million, while investing cash use increased to $2.194 billion, including $1.958 billion for acquisitions, $239 million for capital expenditures and $18 million for EHR implementation.
- Financing activities provided $1.713 billion, including proceeds from the new credit facilities, accounts-receivable securitization and $250 million of 7.00% senior notes.
- Acute-care charity care and uninsured discounts increased to $807 million from $671 million. The provision for doubtful accounts increased to $546.9 million from $508.6 million, and the allowance for doubtful accounts rose to $248.6 million from $168.9 million.
Guidance, Outlook, Risks and Unusual Items
UHS expected 2011 capital expenditures of approximately $350 million to $375 million and stated that it expected to finance capital expenditures, acquisitions, dividends and potential share repurchases with internally generated funds and additional financing. No specific earnings or revenue guidance was provided.
- Management expected potential 2011 Medicaid pressure, particularly in Texas and other states with budget deficits. Texas Medicaid rate changes could reduce inpatient Medicaid reimbursement by up to approximately $5 million annually beginning in September 2011. Estimated 2011 UPL and affiliated-hospital indigent-care payments were approximately $35 million, and estimated DSH reimbursements were approximately $47 million, subject to program conditions and renewals.
- The PSI acquisition created substantial integration risk, increased leverage and introduced inherited litigation, regulatory investigations and potential Medicaid recoupment claims.
- Southwest Healthcare System remained subject to CMS and California Department of Public Health agreements concerning Medicare certification and hospital licensure. A full certification survey was expected around mid-2011. Failure to achieve substantial compliance could materially impair the facilities’ ability to operate.
- UHS was subject to False Claims Act matters, including the Marion Youth Center litigation, a DOJ investigation concerning implantable cardioverter defibrillators, investigations involving former PSI facilities, and Virginia Medicaid recoupment claims. Certain exposures were described as uncertain or not reasonably estimable.
- UHS agreed to divest three former PSI facilities and one legacy Puerto Rico facility pursuant to its FTC agreement. The agreement was not final as of the filing date, and the facilities were classified as held for sale. The 2010 discontinued-operations contribution was immaterial.
- Professional and general liability reserves totaled $289 million at year-end 2010, including $51 million of estimated pre-acquisition PSI claims. Favorable prior-year reserve adjustments reduced expense by $49 million in 2010, creating a potentially nonrecurring benefit.
- Variable-rate debt exposed pretax income to interest-rate changes; management estimated that a 1% change in interest rates would affect pretax income by approximately $30 million. UHS entered into interest-rate caps with a $1.0 billion notional amount and forward-starting swaps with a $600 million notional amount.
- Health-care reform was expected to affect Medicare and Medicaid reimbursement through market-basket reductions, value-based purchasing, readmission penalties and future DSH reductions. The company could not quantify the overall impact.
The quarterly data show fourth-quarter 2010 revenue of $1.559 billion and net income attributable to UHS of $37.2 million, compared with fourth-quarter 2009 revenue of $1.291 billion and net income attributable to UHS of $60.9 million. Fourth-quarter 2010 included PSI transaction costs, favorable insurance-reserve adjustments, the construction-project write-off and the split-dollar life-insurance charge.
Most Important Facts for Investors to Verify
- Whether UHS can integrate PSI and achieve the expected operating efficiencies without additional restructuring, legal or compliance costs.
- The sustainability of 2010 earnings after excluding favorable self-insurance reserve adjustments and considering PSI transaction costs and other unusual charges.
- Acute-care same-facility trends, including occupancy, admissions, commercial-payor utilization, uninsured volumes, bad debt and labor costs.
- Actual 2011 Medicaid, UPL and DSH reimbursement levels and the effect of state budget actions and rate changes.
- The outcome of the Southwest Healthcare System CMS certification survey and California licensing process.
- Debt repayment capacity, refinancing of the $200 million of 6.75% senior notes due in November 2011, covenant compliance and exposure to variable interest rates.
- Potential liabilities from False Claims Act matters, DOJ investigations, PSI-related litigation, Medicaid recoupment claims and self-insured professional liability claims.
- Completion and timing of the required divestitures under the FTC agreement and any resulting gain, loss or operational disruption.
- Progress, cost and eligibility for Medicare and Medicaid EHR incentive payments, as well as potential penalties for failing to meet meaningful-use requirements.