Universal Health Services, Inc. — 2011 First-Quarter 10-Q Summary
Business Context and Reporting Period
UHS filed an unaudited Form 10-Q for the three months ended March 31, 2011. The company operated 25 acute care hospitals, 206 behavioral health centers, and additional surgical, ambulatory surgery and radiation oncology facilities across 37 states, Washington, D.C., Puerto Rico and the U.S. Virgin Islands. The November 2010 acquisition of Psychiatric Solutions, Inc. (PSI) materially expanded the behavioral health platform and affects comparability with the first quarter of 2010.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net revenues | $1.911 billion | $1.347 billion | +42% |
| Income from operations | $260.4 million | $140.5 million | +85% |
| Operating margin | 13.6% | 10.4% | +3.2 percentage points |
| Income before taxes | $204.0 million | $128.2 million | +59% |
| Net income attributable to UHS | $114.2 million | $71.8 million | +59% |
| Diluted EPS | $1.15 | $0.73 | +$0.42 |
| Net cash from operating activities | $183.2 million | $139.5 million | +$43.7 million |
| Capital expenditures and EHR investment | $64.7 million | $66.3 million | Comparable level |
| Cash and cash equivalents at period end | $52.1 million | $6.9 million | +$45.2 million |
Net income margin attributable to UHS increased to approximately 6.0% from 5.3%. The effective tax rate was 36.3%, compared with 35.4% in the prior-year quarter. Interest expense increased to $56.4 million from $12.4 million, primarily because of debt incurred to finance the PSI acquisition and the additional $250 million of 7.0% senior notes.
Liquidity, Debt and Capital Resources
- Total debt was $3.854 billion at March 31, 2011, with a fair value of approximately $3.90 billion; debt represented 65% of total capitalization, compared with 66% at December 31, 2010.
- Available borrowing capacity under the credit agreement and accounts receivable securitization program was $507 million, net of $68 million of letters of credit.
- The accounts receivable securitization program had $240 million outstanding and commitments of $240 million. The company had no borrowings under its short-term, on-demand credit facility.
- UHS repaid $136.4 million of debt and incurred $23.1 million of financing costs during the quarter, partly offset by $73.5 million of additional borrowings.
- The company amended its senior secured credit agreement in March 2011, reducing applicable borrowing margins. UHS reported compliance with all debt covenants at quarter-end.
- The $200 million of 6.75% senior notes maturing in November 2011 were classified as long-term debt because management expected to refinance them through the credit agreement.
- Management expected approximately $290 million to $315 million of capital expenditures during the remaining nine months of 2011 and intended to fund capital expenditures, acquisitions, dividends and potential repurchases through internally generated cash and additional financing.
Material Changes Versus the Prior Comparable Period
- PSI facilities contributed approximately $481 million of consolidated revenue and approximately $103 million of pre-tax income in the quarter. Behavioral health revenue increased 144% on an all-facility basis, while same-facility behavioral health revenue increased 7%.
- Same-facility acute care revenue increased 7% and pre-tax income increased 25% to $127.0 million. Adjusted admissions increased 0.6%, while inpatient admissions declined 1.0%; occupancy remained 63%.
- Same-facility behavioral health admissions increased 6.8%, adjusted admissions increased 6.4%, and occupancy remained 75%.
- Operating margin improved as operating expenses declined to 86.4% of revenue from 89.6%. Acute care performance benefited from favorable payor mix and acuity, stabilized uninsured volumes and lower supplies expense.
- Provision for doubtful accounts increased to $153.1 million from $125.4 million, although it declined to 8.0% of revenue from 9.3%. Accounts receivable allowances for doubtful accounts and charity care were $268 million and $122 million, respectively, at March 31, 2011.
- Operating cash flow increased despite a $103.9 million increase in accounts receivable, partly attributed to claims-processing delays involving a new Medicare fiscal intermediary. Days sales outstanding increased to 44 days from 43 days.
- Charity care and uninsured discounts based on established charges increased to $223 million from $176 million; estimated related cost increased to $39 million from $35 million.
- Three former PSI facilities were classified as discontinued operations and held for sale pursuant to the FTC remedy for the PSI acquisition. Their first-quarter income after tax was $1.4 million.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal earnings or revenue guidance. It provides capital expenditure expectations of $290 million to $315 million for the remaining nine months of 2011.
- Management identified reimbursement pressure from Medicare, Medicaid and managed care programs, including potential Medicaid reductions in Texas and other states. Texas Medicaid rate changes could reduce inpatient Medicaid reimbursement by up to $5 million annually beginning September 1, 2011.
- UHS received approximately $10 million of net UPL and affiliated hospital indigent-care payments in each first quarter. Assuming consistent hospital-district transfers, management estimated approximately $24 million of additional payments for the remaining nine months of 2011.
- Texas and South Carolina disproportionate-share hospital programs contributed approximately $12 million in the quarter. Management estimated approximately $35 million of additional reimbursements during the remaining nine months if the programs were renewed at similar levels.
- Southwest Healthcare System remained subject to CMS and California Department of Public Health compliance agreements. A mid-2011 certification survey could affect Medicare participation and hospital licensure; failure to achieve substantial compliance could materially impair operations.
- After quarter-end, CMS issued a termination notice for Two Rivers Psychiatric Hospital’s Medicare and Medicaid participation. A court temporarily abated the termination, and UHS reported a tentative agreement with CMS to rescind the notice subject to a corrective-action plan and future surveys.
- UHS faced multiple government investigations and litigation matters, including False Claims Act allegations, an ICD billing investigation, PSI-related investigations and Medicaid recoupment claims. Several exposures were described as uncertain or not reasonably estimable.
- Professional and general liability claims were accrued at $297 million, including claims related to acquired PSI facilities. Letters of credit and surety bonds totaled $80 million, including $60 million supporting self-insurance programs.
- Electronic health record implementations were scheduled through 2013 or 2014, depending on the filing discussion. Incentive payments and potential penalties depend on achieving applicable meaningful-use requirements; the filing does not quantify expected incentive payments.
- Interest-rate caps and swaps were used to manage floating-rate exposure. The fair value of interest-rate swaps was a liability of approximately $8 million at March 31, 2011.
Most Important Facts for Investors to Verify
- Separate PSI acquisition-driven growth from same-facility operating performance when evaluating revenue and earnings trends.
- Confirm the refinancing plan and available capacity for the $200 million of notes maturing in November 2011.
- Monitor leverage, interest expense, covenant compliance and the effect of variable interest rates on cash flow.
- Track CMS and CDPH certification outcomes for Southwest Healthcare System and the resolution of Two Rivers’ Medicare participation status.
- Assess exposure to Medicaid rate reductions, UPL and DSH program renewals, Medicare reimbursement changes and managed-care pricing.
- Review accounts receivable collection trends, claims-processing delays, doubtful-account reserves and the rising level of charity care and uninsured discounts.
- Evaluate potential liabilities from False Claims Act investigations, PSI-related matters, self-insured claims and other litigation.
- Confirm the timing and proceeds of the required divestitures of the four facilities held for sale.