UNIVERSAL HEALTH SERVICES INC quarterly report, Q1 FY2019

Universal Health Services, Inc. — Q1 2019 Form 10-Q Summary

Business context and reporting period

UHS owns and operates acute-care hospitals, outpatient facilities and behavioral-health facilities in the United States, the United Kingdom, Puerto Rico and Washington, D.C. At March 31, 2019, it operated 353 inpatient and 38 outpatient or other facilities. The filing covers the unaudited three months ended March 31, 2019, compared with the three months ended March 31, 2018.

Key financial metrics

Metric	Q1 2019	Q1 2018	Change
Net revenues	$2.804 billion	$2.688 billion	+4.3%
Income from operations	$340.4 million	$333.8 million	+2.0%
Operating margin	12.1%	12.4%	Down 0.3 points
Income before taxes	$296.3 million	$296.2 million	Flat
Net income attributable to UHS	$234.2 million	$223.8 million	+4.6%
Diluted EPS	$2.57	$2.36	+8.9%
Net cash from operating activities	$390.9 million	$409.9 million	Down $19.0 million
Capital expenditures	$169.8 million	$189.0 million	Down $19.2 million

Net income attributable to UHS benefited from a lower effective tax rate of 19.9%, compared with 22.8% in the prior-year quarter. The reduction primarily reflected favorable employee share-based payment accounting. The diluted share count declined to 91.0 million from 94.7 million, primarily because of share repurchases.

Acute-care same-facility revenue increased 4.7%, while income before taxes declined 5.0% to $193.8 million. Acute-care admissions increased 5.2%, adjusted admissions increased 4.9%, and occupancy remained 66%. Behavioral-health same-facility revenue increased 3.0%, and income before taxes increased 2.2% to $251.4 million; occupancy remained 77%.

Liquidity, debt and balance sheet

Cash and cash equivalents were $62.7 million at March 31, 2019, compared with $105.2 million at December 31, 2018. Including restricted cash, total cash was $157.6 million.
Total debt had a carrying and fair value of approximately $3.9 billion, compared with approximately $4.0 billion at year-end 2018. Debt represented approximately 42% of total capitalization.
UHS had no borrowings under its $1.0 billion revolving credit facility and reported $973 million of available capacity, net of letters of credit and short-term borrowings.
Accounts-receivable securitization borrowings were $290 million, with $160 million of available capacity.
Long-term debt included approximately $1.988 billion outstanding under the tranche A term loan, $499 million under the tranche B term loan and $1.1 billion of senior secured notes.
UHS was in compliance with all required debt covenants at March 31, 2019.
The company adopted ASC 842 on January 1, 2019, recognizing $342.0 million of operating lease right-of-use assets and $342.2 million of operating lease liabilities.

Material changes versus the prior comparable period

Revenue growth included a $103 million increase from same-facility operations and approximately $14 million from other factors, primarily the 25 U.K. behavioral-health facilities acquired in the 2018 Danshell Group transaction.
Acute-care profitability weakened despite higher volume, with same-facility income before taxes down approximately $10 million. Salaries, wages and benefits increased to 48.7% of consolidated revenue from 48.4%.
Behavioral-health profitability increased approximately $5 million on a same-facility basis.
Q1 2018 included a $13 million increase to the reserve related to the behavioral-health government investigation; no comparable increase was recorded in Q1 2019.
Q1 2019 included a $4 million unrealized loss on marketable securities, contributing to other expense.
Operating cash flow declined because of a larger use of cash in accounts receivable, partly offset by favorable working-capital changes.
Financing cash use increased to $266.3 million from $140.7 million, primarily due to $143.8 million of share repurchases versus $9.4 million in the prior-year quarter.
UHS paid a quarterly dividend of $0.10 per share and repurchased 840,699 shares for $106.3 million under its repurchase program, in addition to shares withheld for employee tax obligations.

Guidance, outlook, commentary and risks

Management expected capital expenditures of approximately $505 million to $555 million during the remaining nine months of 2019.
Management estimated a 2019 aggregate net benefit of approximately $178 million from Texas and other state Medicaid supplemental payment programs, net of approximately $186 million of provider taxes. This estimate depends on continued regulatory approvals, program terms and required governmental transfers.
Management estimated an approximately 2.7% increase in acute-care Medicare IPPS payments under the proposed federal fiscal 2020 rule and an approximately 1.85% increase in psychiatric PPS payments.
UHS stated that operating cash flow, cash, and capital-market access were expected to provide sufficient resources for the next twelve months. No specific earnings or revenue guidance was provided.
The DOJ and other agencies continued a coordinated investigation involving behavioral-health facilities. UHS had a $123 million pre-tax reserve at March 31, 2019, was engaged in settlement discussions, and stated that ultimate exposure could differ materially from the reserve.
River Point Behavioral Health remained subject to a Medicare payment suspension; cumulative funds withheld were approximately $9 million through March 31, 2019.
Other unresolved matters include the DOJ investigation of Turning Point Hospital, False Claims Act litigation, shareholder class and derivative actions, and Pennsylvania Medicaid DSH repayment demands. Potential exposure for several matters was not estimable.
Professional and general liability and workers’ compensation accruals totaled $317 million at March 31, 2019. Management cautioned that reserve adjustments could materially affect future results.
Approximately $34 million of accounts receivable was due from Illinois, including approximately $19 million outstanding more than 60 days. No reserve was recorded, but collection could be delayed or impaired.
Key industry risks include changes to Medicare and Medicaid reimbursement, reductions in Medicaid supplemental and DSH programs, healthcare reform uncertainty, payer collection risk, labor shortages, litigation and regulatory investigations, competition, acquisition integration, severe weather and Brexit-related disruption.

Most important facts for investors to verify

Whether the DOJ behavioral-health investigation is resolved above or below the $123 million reserve and whether additional penalties, repayment obligations or compliance requirements arise.
The sustainability of Medicaid supplemental-payment programs, including the estimated $178 million 2019 net benefit and future Texas DSRIP and uncompensated-care changes.
Acute-care cost trends and whether higher admissions can offset weaker same-facility margins.
Collection timing and ultimate recoverability of Illinois and other government-payer receivables.
Debt reduction, floating-rate exposure and refinancing capacity, particularly following the April 15, 2019 maturity of $1.0 billion of interest-rate swaps.
Actual 2019 capital spending, operating cash flow and the pace of share repurchases relative to leverage and liquidity.