Universal Health Services, Inc. — 2018 Form 10-K Summary
Business context and reporting period
UHS filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2018. The company operates acute care hospitals, outpatient facilities, behavioral health facilities and a commercial health insurer through its subsidiaries. As of February 27, 2019, UHS owned or operated 350 inpatient facilities and 37 outpatient and other facilities across 37 states, Washington, D.C., the United Kingdom and Puerto Rico.
Net revenue was approximately 53% acute care, outpatient and commercial health insurance and 47% behavioral health. UHS acquired The Danshell Group, comprising 25 U.K. behavioral health facilities, and a 109-bed behavioral health facility in Gulfport, Mississippi, for total 2018 acquisition spending of approximately $110 million.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net revenues | $10.772 billion | $10.410 billion | Up 3.5% |
| Income from operations | $1.175 billion | $1.280 billion | Down $105 million |
| Income before taxes | $1.035 billion | $1.135 billion | Down 8.8% |
| Net income attributable to UHS | $779.7 million | $752.3 million | Up 3.6% |
| Diluted EPS | $8.31 | $7.81 | Up 6.4% |
| Net margin | 7.2% | 7.2% | Flat |
| Cash from operating activities | $1.341 billion | $1.183 billion | Up $158 million |
| Capital expenditures, net | $665.0 million | $557.5 million | Up $107.5 million |
| Total debt after financing costs | $3.999 billion | $4.040 billion | Down $41 million |
| Total assets | $11.265 billion | $10.762 billion | Up $504 million |
The effective tax rate declined to 22.9% from 32.0%, primarily reflecting the Tax Cuts and Jobs Act of 2017. The lower tax rate more than offset the decline in pre-tax income and increased net income attributable to UHS. Return on average equity was 14.7%, compared with 15.5% in 2017.
Acute care same-facility net revenue increased 4.6%, and income before taxes increased 8% to $710.8 million. Acute care admissions increased 2.2%, patient days increased 4.9%, and available-bed occupancy increased to 62% from 60%.
Behavioral health same-facility net revenue increased 2.6%, but income before taxes declined 1% to $997.6 million. Admissions increased 3.3%, while patient days increased only 0.8% and available-bed occupancy declined to 76% from 77%. Management cited clinician shortages and managed Medicaid and Medicare pressure on length of stay.
For the fourth quarter of 2018, net revenues were $2.754 billion, net income attributable to UHS was $158.1 million and diluted EPS was $1.70. Fourth-quarter results included a $31.9 million pre-tax increase to the DOJ investigation reserve and a $49.3 million pre-tax impairment charge related to the Foundations tradename.
Cash flow, debt and liquidity
- Operating cash flow of $1.341 billion exceeded capital expenditures of $665 million, before acquisitions, share repurchases and other financing uses.
- Investing cash outflow was $813 million, including capital expenditures, $110 million of acquisitions, $36 million of information technology spending and $15 million invested in a joint venture.
- Financing cash outflow was $492 million. UHS repaid $830 million of debt, raised $791 million through new term loans, repurchased $397 million of common stock and paid $37 million of dividends.
- At December 31, 2018, UHS had $105 million of cash and cash equivalents and $199.7 million of cash, cash equivalents and restricted cash.
- The amended revolving credit facility totaled $1 billion, with no revolver borrowings outstanding and approximately $960 million of available capacity after letters of credit and short-term borrowings.
- Debt included a $2.0 billion Term Loan A, a $500 million Term Loan B, $390 million of accounts receivable securitization borrowings and $1.1 billion of senior secured notes. Total debt represented approximately 43% of total capitalization.
- Management expects 2019 capital expenditures of approximately $675 million to $725 million, including approximately $250 million for projects already in progress.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by a 3.6% increase in same-facility revenue of $369 million.
- Operating margin declined to 10.9% from 12.3%, reflecting higher labor, supplies and other operating costs, the DOJ reserve increase and the intangible asset impairment.
- UHS recorded a $102 million pre-tax increase to the reserve for the civil aspects of the DOJ investigation, bringing the aggregate reserve to $123 million at year-end, compared with $22 million at December 31, 2017.
- UHS recorded a $49 million pre-tax impairment of the Foundations tradename, partly related to the closure of a Malibu facility damaged in California wildfires and lower projected growth and cash flows.
- Interest expense increased to $155 million from $145 million, while the average cost of borrowing increased to 3.8% from 3.2%.
- The company completed a debt refinancing that extended the revolving credit and Term Loan A maturities to October 2023 and added a Term Loan B maturing in October 2025. UHS also redeemed its $300 million 3.75% senior notes due 2019.
- UHS increased its stock repurchase authorization by $500 million to $1.7 billion and repurchased approximately $401 million of shares under the program during 2018.
- Uncompensated care at acute care hospitals increased to $1.895 billion at charges from $1.768 billion, with uninsured discounts rising to $1.133 billion.
Guidance, outlook, risks and unusual items
- Management expects approximately $178 million of net benefit in 2019 from Texas and other state Medicaid supplemental payment programs, subject to continued governmental approvals, funding transfers and program terms.
- Management expects approximately $33 million of 2019 Texas and South Carolina Medicaid DSH reimbursements and approximately $26 million from Nevada’s supplemental payment program.
- Medicaid supplemental payment programs are subject to future reductions, including the scheduled elimination of Texas DSRIP funding in federal fiscal year 2022 and potential changes to Texas uncompensated-care funding beginning in federal fiscal year 2020.
- Major risks include Medicare and Medicaid reimbursement changes, managed-care pricing pressure, uninsured and underinsured patients, labor shortages and wage inflation, regulatory compliance, government investigations, malpractice and self-insurance claims, cybersecurity, competition and acquisition integration.
- UHS is involved in DOJ, OIG, CMS and state investigations concerning behavioral health billing, medical necessity, admissions, discharge decisions, length of stay and patient-care requirements. The ultimate exposure may exceed recorded reserves, and the filing does not provide a reliable estimate of the potential additional loss.
- River Point Behavioral Health remained subject to a Medicare payment suspension; approximately $9 million had been withheld through December 31, 2018.
- UHS faces shareholder class and derivative litigation related to behavioral health operations and corporate disclosures. Potential liability or financial exposure was described as uncertain.
- UHS had $3.8 billion of goodwill at year-end and recorded no goodwill impairment in 2018, but future operating deterioration could result in impairment charges.
- The company expects to adopt the new lease standard in 2019, which is expected to materially increase recognized right-of-use assets and lease liabilities, although management does not expect a material income-statement impact.
- UHS maintains significant self-insurance exposure. Professional and general liability reserves were $243 million and workers’ compensation reserves were $72 million at year-end.
Most important facts an investor should verify
- Reconcile the reported increase in net income and EPS with the decline in pre-tax income and operating margin, focusing on the Tax Cuts and Jobs Act benefit and unusual charges.
- Assess the adequacy of the $123 million DOJ-related reserve and the potential financial, operational and reputational effects of the ongoing investigations.
- Monitor behavioral health staffing availability, occupancy, length of stay, reimbursement rates and the performance of the Danshell and other acquired facilities.
- Validate the sustainability of the approximately $208 million 2018 net benefit from Medicaid supplemental payment programs and the $178 million 2019 estimate.
- Review debt maturities, floating-rate exposure, LIBOR transition risk, credit agreement covenants and the company’s capacity to fund planned capital expenditures and repurchases.
- Evaluate collectability of accounts receivable, particularly the $32 million due from Illinois, including $18 million outstanding for more than 60 days.
- Review the impact of the new lease standard, potential goodwill or intangible impairments, self-insurance claims and pending litigation beyond recorded reserves.