Universal Health Services, Inc. — Form 10-Q Summary
Business Context and Reporting Period
UHS operates acute care hospitals, outpatient facilities and behavioral health facilities in the United States, United Kingdom, Puerto Rico and Washington, D.C. As of June 30, 2022, it owned or operated 361 inpatient facilities and 41 outpatient and other facilities. The unaudited filing covers the three and six months ended June 30, 2022, with comparisons to the corresponding 2021 periods.
Financial Results and Key Metrics
| Metric | Q2 2022 | Q2 2021 | Change | Six Months 2022 | Six Months 2021 |
|---|---|---|---|---|---|
| Net revenues | $3.323 billion | $3.198 billion | +3.9% | $6.616 billion | $6.211 billion |
| Income from operations | $233.4 million | $439.0 million | -46.8% | $466.3 million | $734.6 million |
| Operating margin | 7.0% | 13.7% | -6.7 pts. | 7.0% | 11.8% |
| Net income attributable to UHS | $164.1 million | $325.0 million | -49.5% | $318.0 million | $534.1 million |
| Diluted EPS | $2.20 | $3.79 | -42.0% | $4.22 | $6.22 |
| Income before taxes | $209.7 million | $426.8 million | -50.9% | $409.7 million | $699.7 million |
| Net cash from operations | Not separately disclosed | Not separately disclosed | — | $478.0 million | $119.4 million |
Salaries, wages and benefits increased to 50.9% of quarterly revenue from 46.5% in the prior-year quarter and to 51.1% of six-month revenue from 48.1%. Total operating expenses represented 93.0% of revenue in both the quarter and six-month period, compared with 86.3% and 88.2%, respectively, in the prior-year periods. The six-month effective tax rate was 24.4%, compared with 23.6% in 2021.
- Acute care: Same-facility revenue increased 3.3% in the quarter and 6.5% year to date, but same-facility income before taxes declined 49% and 33%, respectively. Quarterly admissions declined 0.9%, while adjusted admissions declined 0.7%; occupancy was 62%, compared with 63%.
- Behavioral health: Same-facility revenue increased 0.5% in the quarter and 2.1% year to date, while same-facility income before taxes declined 20% and 15%, respectively. Quarterly occupancy remained 72%; six-month occupancy was 71%, compared with 72%.
- Cash flow and investment: Capital expenditures were $408.0 million in the first six months. Investing cash outflow was $325.6 million, and financing cash outflow was $124.0 million.
- Liquidity: Cash and cash equivalents were $132.7 million at June 30, 2022; cash, cash equivalents and restricted cash totaled $201.9 million. Accounts receivable were $1.835 billion, with reported days sales outstanding of 50 days.
- Debt: Carrying value of debt was approximately $4.7 billion and fair value was approximately $4.3 billion. Total debt was approximately 45% of total capitalization, compared with 41% at December 31, 2021.
- Revolving capacity: The revolving credit facility had $140 million outstanding and $1.056 billion of available capacity, net of letters of credit, at June 30, 2022. UHS reported compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue increased, but profitability deteriorated substantially because labor shortages, temporary labor costs, wage premiums, supply costs and other operating expenses grew faster than revenue.
- UHS reported a significant decline in COVID-related acute-care patient volumes in the second quarter. Non-COVID volumes did not recover sufficiently to offset the decline, producing revenue and earnings below management’s original expectations.
- Clinical staffing shortages limited patient volumes at certain behavioral health facilities and materially affected first-half results.
- UHS opened a 170-bed acute care hospital in Reno, Nevada, in April 2022. Start-up losses reduced acute-care and consolidated earnings.
- UHS recorded approximately $16 million of additional professional and general liability reserves in the second quarter and first half of 2022, compared with approximately $36 million in the comparable 2021 periods.
- In June 2022, UHS added a $700 million tranche A term loan, used primarily to repay revolving credit borrowings. The facility transitioned benchmark provisions from LIBOR to SOFR-based borrowings.
- UHS repurchased $565.2 million of common stock in the first six months, including approximately $195.6 million in the second quarter, and paid $29.4 million of dividends year to date.
- Foreign currency translation losses reduced comprehensive income by $45.8 million in the first half of 2022, compared with a $12.0 million loss in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- Management expects COVID-19-related disruption and the clinical staffing shortage to continue affecting results during the remainder of 2022. The filing states that the financial impact cannot be fully quantified.
- UHS expects full-year 2022 capital expenditures of approximately $800 million to $850 million, including $392 million to $442 million during the second half.
- Management expects an aggregate 2022 net benefit of approximately $452 million from various state Medicaid supplemental payment programs, net of approximately $266 million of provider taxes. These estimates depend on regulatory approvals, hospital eligibility and required intergovernmental transfers.
- UHS estimates the 2023 Medicare inpatient prospective payment update will increase payments approximately 4.4%, including applicable adjustments. The filing also discusses uncertainty surrounding 340B reimbursement and Medicare sequestration.
- Principal risks include COVID-19 and other public health events, labor and nurse shortages, inflation in labor and supply costs, reimbursement reductions, Medicaid supplemental-payment changes, uninsured and self-pay collections, regulatory investigations, cybersecurity incidents, substantial indebtedness and refinancing conditions.
- Self-insured professional and general liability reserves totaled $382 million at June 30, 2022, and workers’ compensation reserves totaled $121 million. Management warns that future reserve adjustments could be material.
- UHS is involved in litigation and regulatory matters, including the Pennsylvania Medicaid disproportionate-share payment dispute, shareholder derivative litigation, an ERISA class action and other healthcare-related investigations. Potential exposure is generally not estimable from the filing.
- A proposed settlement with George Washington University would include UHS’s purchase of the University’s 20% interest in GW Hospital, subject to regulatory approval. UHS does not expect a material impact if finalized.
- The accounts receivable securitization facility had no borrowings at June 30, 2022 and was subsequently extended in July 2022 to September 20, 2022.
Investor Verification Checklist
- Verify whether labor costs, temporary staffing usage and behavioral health capacity constraints improve or continue to compress margins.
- Track acute-care admissions, occupancy, COVID-related volumes and the performance of the Reno hospital.
- Confirm renewal, approval and funding assumptions underlying the estimated $452 million Medicaid supplemental-payment benefit.
- Review debt maturities, SOFR-linked borrowing costs, leverage covenant headroom and available revolving capacity.
- Assess the sustainability of large share repurchases relative to operating cash flow and capital expenditure requirements.
- Monitor professional liability, workers’ compensation and Medicaid DSH reserves for adverse revisions.
- Follow the George Washington University settlement approval and the outcomes of Pennsylvania Medicaid, ERISA, shareholder and other legal matters.
- Reconcile management’s non-GAAP “same facility” measures with consolidated GAAP results when evaluating operating trends.