Business Context and Reporting Period
Company: Universal Health Services, Inc. (UHS)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: UHS owns and operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers, and radiation oncology centers. As of March 31, 2010, the company operated 25 acute care hospitals and 102 behavioral health centers across 32 states, Washington D.C., and Puerto Rico.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Revenues | $1,347,153 | $1,312,419 |
| Income from Operations | $140,548 | $136,750 |
| Net Income (Total) | $82,762 | $82,034 |
| Net Income Attributable to UHS | $71,819 | $67,541 |
| Diluted EPS (Attributable to UHS) | $0.73 | $0.68 |
| Operating Cash Flow | $135,717 | $152,254 |
| Cash and Equivalents (End of Period) | $6,865 | $9,423 |
| Long-Term Debt | $891,615 | $956,429 |
| Current Ratio | 1.37 | 1.37 |
Note: All amounts in thousands except per share data.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 3% ($35 million) year-over-year, driven primarily by a 4% increase in same-facility revenues at acute care and behavioral health facilities. This was partially offset by a $20 million decrease due to the completion of a construction management contract in late 2009.
- Profitability: Net income attributable to UHS increased 6% ($4 million). Operating margins remained stable at 10.4%.
- Segment Performance:
- Acute Care: Income before taxes decreased 10% ($12 million) due to Medicaid revenue reductions in Texas, increased uncompensated care, and higher labor/supply costs.
- Behavioral Health: Income before taxes increased 16% ($11 million) on a same-facility basis, driven by a 7% revenue increase and improved operating margins.
- Debt Reduction: Long-term debt decreased by approximately $65 million due to net repayments on the revolving credit facility.
- Cash Flow: Operating cash flow decreased $17 million, primarily due to the collection of construction management receivables in Q1 2009 which did not recur.
Guidance, Outlook, Risks, and Contingencies
Outlook and Capital Expenditures
Management expects to spend approximately $250 million to $290 million on capital expenditures for the remainder of 2010. Financing is expected to come from internally generated funds and existing credit facilities. No specific earnings guidance was provided in this filing.
Material Risks and Contingencies
- Southwest Healthcare System (SWHCS): CMS intends to terminate SWHCS's Medicare provider agreement effective June 1, 2010, and the California Department of Public Health plans to revoke its hospital license. SWHCS generated approximately 4% of the company's income from operations in 2009. Management is appealing these actions, but failure to resolve them could have a material adverse effect.
- Healthcare Reform: The Patient Protection and Affordable Care Act and the Reconciliation Act introduce immediate and future reductions to Medicare market basket updates and changes to Medicaid eligibility and payments. The long-term financial impact is uncertain.
- Legal Proceedings:
- False Claims Act: The DOJ and Virginia Attorney General intervened in a qui tam case regarding Virginia behavioral health facilities. UHS has filed motions to dismiss.
- Two Rivers Psychiatric Hospital: A termination notice from CMS was rescinded in April 2010 following a resurvey.
- Class Action: A wage and hour lawsuit (Ethridge v. UHS) is pending; potential exposure is currently undetermined.
- Insurance and Liability: The company is self-insured for malpractice up to $10 million per occurrence. Total accrual for professional and general liability claims was $275 million as of March 31, 2010.
Investor Verification Checklist
- SWHCS Resolution: Monitor the outcome of the appeals regarding the Medicare termination and license revocation for Southwest Healthcare System, given its 4% contribution to operating income.
- Medicaid Reimbursement: Verify the impact of Texas Medicaid rate reductions and potential further cuts in other states with budget deficits.
- Uncompensated Care Trends: Review future quarters for continued increases in the provision for doubtful accounts and charity care, which pressured acute care margins.
- Debt Maturity: Note the $800 million revolving credit facility and $200 million senior notes maturing in 2011; assess refinancing risks in the current credit environment.
- Legal Reserves: Track developments in the Virginia False Claims Act case and the wage and hour class action to assess potential reserve adjustments.