Universal Health Services, Inc. — Q1 2022 Form 10-Q Summary
Business context and reporting period
UHS is a healthcare services company operating acute care hospitals, outpatient facilities and behavioral health facilities in the United States, United Kingdom, Puerto Rico and Washington, D.C. As of March 31, 2022, it owned or operated 364 inpatient and 41 outpatient or other facilities. The filing covers the unaudited three months ended March 31, 2022, compared with the three months ended March 31, 2021.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net revenues | $3.293 billion | $3.013 billion | +9.3% |
| Income from operations | $232.9 million | $295.7 million | -21.3% |
| Operating margin | 7.1% | 9.8% | -2.7 percentage points |
| Income before income taxes | $200.0 million | $272.9 million | -26.7% |
| Net income attributable to UHS | $153.9 million | $209.1 million | -26.4% |
| Diluted EPS | $2.02 | $2.43 | -16.9% |
| Net cash provided by operating activities | $445.4 million | $71.8 million | +520% |
| Capital expenditures | $200.0 million | $247.5 million | -19.2% |
Revenue growth reflected a 7.2% increase in same-facility revenue and other increases, including supplemental Medicaid reimbursement programs and facilities opened or acquired during the prior year. However, salaries, wages and benefits increased to 51.4% of revenue from 49.7%, while total operating expenses increased to 92.9% of revenue from 90.2%.
- Acute care same-facility revenue increased 9.7%, but income before taxes declined 12% to $152.5 million; the margin fell to 8.3% from 10.4%.
- Acute care admissions increased 2.8%, adjusted admissions increased 5.7%, and occupancy remained 69%.
- Behavioral health same-facility revenue increased 3.8%, while income before taxes declined 8% to $217.6 million; the margin fell to 16.3% from 18.3%.
- Behavioral health admissions declined 2.3%, adjusted admissions declined 1.9%, and occupancy declined to 70% from 72%.
- The effective income tax rate increased to 24.5% from 23.4%.
Liquidity, cash flow and debt
- Cash and cash equivalents were $106.0 million at March 31, 2022, compared with $115.3 million at December 31, 2021. Cash, cash equivalents and restricted cash totaled $175.1 million.
- Operating cash flow of $445.4 million was substantially higher than the prior-year amount, which was depressed by the repayment of $695 million of Medicare accelerated payments.
- Investing cash outflow was $169.0 million, including $200.0 million of capital expenditures and $10.2 million of proceeds from asset and business sales.
- Financing cash outflow was $278.0 million, including $365.5 million of share repurchases, $14.9 million of dividends and $12.0 million of debt repayments, partially offset by $117.4 million of additional borrowings.
- Total debt had a carrying value of approximately $4.3 billion and fair value of approximately $4.0 billion. Debt represented approximately 42% of total capitalization.
- The revolving credit facility had $460 million outstanding and $736 million of available capacity, net of letters of credit. The $1.679 billion tranche A term loan and $2.0 billion of senior secured notes were also outstanding.
- UHS was in compliance with its debt covenants as of March 31, 2022 and stated that available cash, operating cash flow, credit capacity and capital-market access should fund requirements for the next 12 months.
- Management expects 2022 capital expenditures of approximately $950 million to $1.1 billion, including $750 million to $900 million during the remaining nine months.
Material changes and unusual items
- COVID-19 patient volumes generally declined late in the quarter, but Delta and Omicron-related activity earlier in the quarter continued to affect operations.
- A nationwide clinical labor shortage materially increased temporary labor, wages and benefits and caused certain behavioral health facilities to limit patient volumes.
- The company recorded approximately $12 million of estimated net CHIRP Medicaid revenue related to September 1, 2021 through December 31, 2021. Total net benefit from state Medicaid supplemental payment programs was $99 million in Q1 2022 versus $65 million in Q1 2021.
- UHS repurchased approximately 2.65 million shares for $350.2 million under its repurchase program and authorized an additional $1.4 billion of repurchases. The quarterly dividend remained $0.20 per share.
- UHS completed a related-party real estate transaction with Universal Health Realty Income Trust. The transaction was accounted for as a financing arrangement, resulting in approximately $83 million of debt rather than derecognition of the transferred properties.
- A newly constructed 170-bed acute care hospital in Reno opened in early April 2022, after the reporting period.
- No acquisitions occurred during the quarter; UHS received approximately $10 million from asset and business sales.
Guidance, outlook and risks
Management did not provide consolidated earnings guidance in the filing. It expects COVID-19-related disruption, labor scarcity, elevated wage rates and potential supply pressures to continue during 2022, but stated that the future effect cannot be fully quantified.
- Management estimates 2022 net benefits from Texas and other state Medicaid supplemental payment programs of approximately $406 million, compared with $430 million recorded in 2021. These estimates depend on continued program approvals, intergovernmental transfers and other conditions outside UHS’s control.
- UHS estimates 2022 Medicare IPPS payments will increase approximately 2.4% under the proposed fiscal 2023 rule and psychiatric PPS payments approximately 2.7%, subject to final rules and other adjustments.
- Key risks include COVID-19 resurgence, staffing shortages, inflation in labor and supply costs, reimbursement reductions, Medicaid supplemental-payment changes, Medicare sequestration, regulatory compliance, cybersecurity, payer collectability and substantial indebtedness.
- UHS had $358 million of professional and general liability accruals and $118 million of workers’ compensation accruals at March 31, 2022. Management noted that future reserve adjustments could be material.
- The company is involved in healthcare regulatory inquiries, litigation and appeals, including Pennsylvania Medicaid DSH repayment claims, a shareholder derivative action, the George Washington University dispute and an ERISA retirement-plan class action. Potential exposure for several matters could not be reasonably estimated.
- Off-balance-sheet standby letters of credit and surety bonds totaled $171 million, primarily related to self-insurance programs.
Investor verification checklist
- Verify whether labor costs and temporary staffing normalize, and whether behavioral health volume restrictions are reduced.
- Track actual Medicaid supplemental payments against the estimated $406 million 2022 net benefit and monitor CHIRP, DSH and Texas waiver developments.
- Assess cash generation after the planned $950 million to $1.1 billion of capital spending, dividends and continued share repurchases.
- Review debt maturities, floating-rate exposure, covenant compliance and the company’s ability to refinance on acceptable terms.
- Monitor COVID-19 developments, reimbursement changes, Medicare sequestration and the termination of the HRSA COVID-19 uninsured program.
- Follow professional liability reserve trends and the outcomes of disclosed litigation, government investigations and Medicaid repayment appeals.