UNIVERSAL HEALTH SERVICES INC quarterly report, Q1 FY2020

Universal Health Services, Inc. — Q1 2020 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. The filing covers the unaudited three months ended March 31, 2020, compared with the three months ended March 31, 2019. UHS operated 357 inpatient and 42 outpatient and other facilities at March 31, 2020.

COVID-19 materially affected operations beginning in the second half of March 2020. Patient-volume reductions continued through April and into May, and management stated that the duration and severity of the impact could not be estimated.

Financial performance and key metrics

Metric	Q1 2020	Q1 2019	Change
Net revenues	$2.830 billion	$2.804 billion	Up 0.9%
Income from operations	$236.7 million	$340.4 million	Down 30.5%
Operating margin	8.4%	12.1%	Down 3.7 percentage points
Income before income taxes	$190.8 million	$296.3 million	Down 35.6%
Net income	$144.5 million	$237.4 million	Down 39.1%
Net income attributable to UHS	$142.0 million	$234.2 million	Down 39.3%
Net margin attributable to UHS	5.0%	8.4%	Down 3.4 percentage points
Diluted EPS	$1.64	$2.57	Down 36.2%
Net cash from operating activities	$502.1 million	$431.8 million	Up $70.3 million
Capital expenditures	$184.1 million	$169.8 million	Up $14.3 million

Revenue growth was limited to 0.9%, while salaries, wages and benefits increased 4.9%, other operating expenses increased 7.0%, and supplies expense increased 3.4%. The resulting cost pressure reduced operating margin substantially.

Acute care revenue increased 0.4% to $1.521 billion; income before taxes declined 46% to $103.5 million, with margin falling to 6.8% from 12.7%.
Behavioral health revenue increased 1.5% to $1.306 billion; income before taxes declined 3% to $237.7 million, with margin falling to 18.2% from 19.0%.
Same-facility acute care admissions decreased 3.6%, adjusted admissions decreased 4.0%, and occupancy declined to 65% from 66%.
Same-facility behavioral health admissions decreased 1.5%, adjusted admissions decreased 2.0%, and occupancy declined to 75% from 77%.
Uncompensated care at acute care hospitals increased to $634 million of charges from $474 million, while estimated cost increased to $71 million from $54 million.

Cash flow, liquidity and debt

Cash, cash equivalents and restricted cash were $99.2 million at March 31, 2020, down from $105.7 million at December 31, 2019. Cash and cash equivalents alone were $54.6 million.
Operating cash flow of $502.1 million exceeded capital expenditures of $184.1 million.
Financing activities used $371.8 million, including $185.1 million of debt repayments, $172.1 million of share repurchases and $17.3 million of dividends.
Total debt was approximately $3.8 billion at March 31, 2020, compared with approximately $4.0 billion at December 31, 2019. Debt represented approximately 41% of total capitalization, versus 42% at year-end.
The $1.0 billion revolving credit facility had no borrowings and $998 million of available capacity, net of letters of credit. The accounts receivable securitization facility had $260 million outstanding and $190 million available.
UHS was in compliance with its debt covenants at March 31, 2020.
Accounts receivable were $1.487 billion, and reported days sales outstanding improved to 48 days from 51 days at March 31, 2019. Illinois receivables totaled approximately $23 million, including $11 million outstanding more than 60 days.

Material changes versus the prior comparable period

Revenue increased modestly, but profitability declined sharply because of COVID-19-related volume declines, higher labor and operating costs, and a $20 million increase in self-insured professional and general liability reserves.
Acute care same-facility admissions were approximately 29% lower and patient days approximately 19% lower from March 17 through March 31, 2020, compared with the same period in 2019. Behavioral health admissions were approximately 25% lower and patient days approximately 12% lower.
Management reported that April 2020 acute care admissions and patient days decreased approximately 31% and 20%, respectively, while behavioral health admissions and patient days decreased approximately 28% and 16%, respectively.
UHS repurchased approximately $196.6 million of shares during the quarter, compared with approximately $143.8 million of repurchases in the prior-year quarter. The company subsequently suspended its stock repurchase program.
Quarterly dividends increased to $0.20 per share from $0.10 per share for Q1 2019, but UHS suspended future dividend declarations and payments as part of its COVID-19 initiatives.
UHS revised expected 2020 capital expenditures from $775 million-$825 million to $575 million-$625 million, reflecting reduced spending on planned projects.
The 2019 comparative cash flow statement was revised to correct nonmaterial classification errors involving foreign exchange contract cash flows.

Guidance, outlook, management commentary and risks

Management expects COVID-19 developments to materially affect 2020 financial performance but cannot quantify the duration or severity of the impact.
As of May 6, 2020, UHS had received approximately $376 million of Medicare accelerated payments, approximately $239 million of Public Health and Social Services Emergency Fund and other COVID-19-related grants, and approximately $5 million of state and local grants. No CARES Act grant income was recognized in Q1 2020.
Medicare accelerated payments are expected to be repaid through future Medicare claim offsets beginning in July 2020, likely through December 2020 and potentially as late as April 2021.
Management stated that operating cash flow, cash and access to capital markets should provide sufficient resources for operating, investing and financing requirements for the next twelve months, but warned that future financing may not be available on acceptable terms.
Medicaid supplemental payment programs generated a Q1 net benefit of approximately $60 million, compared with $43 million in Q1 2019. UHS estimates a 2020 aggregate net benefit of approximately $237 million, subject to continued program approvals and other conditions outside its control.
Key risks include continued volume declines, increased uninsured and underinsured patients, staffing and supply-chain pressures, higher personal protective equipment costs, reimbursement changes, Medicaid funding reductions, regulatory compliance, litigation, debt refinancing and potential impairment of goodwill or long-lived assets.

Contingencies and unusual items

UHS maintained a $134 million reserve related to the civil aspects of the DOJ investigation of behavioral health facilities. The company had an agreement in principle for a $127 million settlement, subject to approvals and definitive agreements, and was negotiating a corporate integrity agreement.
Professional and general liability reserves totaled $261 million at March 31, 2020, up from $242 million at December 31, 2019. Workers’ compensation reserves totaled $84 million, up from $81 million.
Minority owners of two behavioral health facilities have put options requiring UHS to purchase their interests at fair market value if exercised.
UHS disclosed various unresolved shareholder, derivative, governmental, Medicaid DSH and other legal matters for which potential additional exposure cannot be reliably estimated.

Investor verification checklist

Verify the pace and sustainability of patient-volume recovery after the COVID-19-related April and May declines.
Confirm the timing, conditions and accounting treatment of CARES Act grants and the repayment schedule for Medicare accelerated payments.
Monitor liquidity, debt maturities, covenant compliance and the refinancing environment.
Assess whether the $575 million-$625 million capital expenditure plan is maintained or further reduced.
Track the DOJ behavioral health settlement, corporate integrity agreement and potential amounts payable beyond the $134 million reserve.
Evaluate the collectability of Illinois receivables and the potential effect of Medicaid supplemental payment, DSH and provider-tax program changes.
Reconcile future results against the company’s non-GAAP same-facility measures and the reported $20 million liability-reserve increase.