Universal Health Services, Inc. — Form 10-Q Summary
Business Context and Reporting Period
UHS is a healthcare holding company operating through subsidiaries that provide acute-care hospital, outpatient, behavioral-health and related services. As of March 31, 2018, it owned or operated 327 inpatient facilities and 32 outpatient and other facilities across the United States, the United Kingdom, Puerto Rico, the U.S. Virgin Islands and Washington, D.C. The filing covers the three months ended March 31, 2018; financial statements are unaudited.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net revenues | $2.688 billion | $2.613 billion | +2.9% |
| Income from operations | $333.8 million | $353.9 million | -5.7% |
| Income before income taxes | $296.2 million | $318.4 million | -6.9% |
| Net income | $228.7 million | $210.5 million | +8.6% |
| Net income attributable to UHS | $223.8 million | $206.1 million | +8.6% |
| Diluted EPS | $2.36 | $2.12 | +11.3% |
| Operating margin | 12.4% | 13.5% | -110 basis points |
| Net margin attributable to UHS | 8.3% | 7.9% | +40 basis points |
| Effective tax rate | 22.8% | 33.9% | -1,110 basis points |
| Net cash from operating activities | $364.1 million | $483.1 million | -24.6% |
| Capital expenditures | $189.0 million | $144.3 million | +31.0% |
Revenue growth was primarily driven by a 3.4% increase in same-facility acute-care and behavioral-health revenue, partly offset by facility closures or restructurings. Acute-care net revenue increased 4.0% to $1.446 billion, while behavioral-health net revenue increased 1.6% to $1.238 billion.
Acute-care same-facility admissions increased 3.1%, adjusted admissions increased 2.3%, and occupancy rose to 66% from 62%. Behavioral-health same-facility admissions increased 2.1%, adjusted admissions increased 1.6%, and occupancy remained 77%. Behavioral-health margins declined as labor costs increased and certain facilities were closed, restructured or remained below operating potential.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $73.1 million at March 31, 2018, compared with $74.4 million at December 31, 2017. Cash, cash equivalents and restricted cash totaled $166.2 million.
- Total assets were $11.024 billion; accounts receivable, net, were $1.570 billion.
- Current maturities of long-term debt were $126.2 million and long-term debt was $3.795 billion. Carrying value and fair value of total debt were each approximately $3.9 billion.
- Total debt represented approximately 43% of total capitalization, compared with 45% at December 31, 2017.
- The $800 million revolving credit facility had $285 million outstanding and $446 million of available capacity after letters of credit and other borrowings. The credit agreement matures in August 2019, and UHS was in compliance with its covenants.
- The accounts-receivable securitization had $440 million outstanding and no available capacity at March 31, 2018. A late-April amendment extended the program through April 2021 and increased capacity to $450 million.
- UHS stated that operating cash flow, cash, borrowing capacity and capital-market access should provide sufficient resources for the next twelve months, subject to its ability to obtain financing on acceptable terms.
Material Changes Versus the Prior Comparable Period
- Net income attributable to UHS increased despite a decline in operating income and pretax income, primarily because the Tax Cuts and Jobs Act reduced the U.S. federal corporate tax rate and lowered the effective tax rate.
- Operating margin declined because salaries, wages and benefits rose to 48.4% of revenue from 47.4%, while total operating expenses rose to 87.6% of revenue from 86.5%.
- Operating cash flow declined $119 million, primarily because of weaker accounts-receivable cash flow, lower accrued and deferred tax benefits, and $46 million of cash outflows for foreign-currency hedging contracts versus $8 million in the prior-year quarter.
- Capital spending increased by approximately $45 million. Financing cash usage decreased to $140.7 million from $279.4 million because debt repayments and share repurchases were lower.
- UHS acquired a 109-bed behavioral-health facility in Gulfport, Mississippi, as part of approximately $20.9 million of acquisition and property spending.
- UHS adopted ASC 606 using the modified retrospective method on January 1, 2018. The reported impact on first-quarter net revenue was an increase of approximately $2.5 million versus amounts that would have been reported without adoption.
Guidance, Outlook, Risks and Unusual Items
- Management expects to spend approximately $411 million to $436 million on capital expenditures during the remaining nine months of 2018.
- Management estimated that Texas and other state Medicaid supplemental programs would generate approximately $156 million of net benefit for full-year 2018, net of approximately $172 million of provider taxes. These estimates depend on government approvals, funding transfers and program terms outside UHS’s control.
- CMS’s proposed fiscal 2019 IPPS rule was estimated by UHS to increase its overall acute-care Medicare payments by approximately 1.6%; the proposed psychiatric PPS rule was estimated to increase payments by approximately 1.25%. These are estimates and may change in final rules.
- UHS recorded a $13 million pretax increase in the reserve associated with the DOJ civil investigation of certain behavioral-health facilities, bringing the aggregate pretax reserve to $35 million. The investigation and related payment suspension remain unresolved.
- CMS’s Medicare payment suspension at River Point Behavioral Health remained in effect. Approximately $10 million had been withheld since inception through March 31, 2018.
- UHS faces ongoing government investigations, False Claims Act matters, shareholder litigation, derivative actions and other legal proceedings. Potential exposure for several matters is uncertain and could materially affect future results, cash flows, financial condition or reputation.
- UHS is substantially self-insured. Professional and general liability reserves totaled $232 million and workers’ compensation reserves totaled $70 million at March 31, 2018. Management cautioned that future reserve adjustments could be material.
- Illinois receivables totaled approximately $35 million, including $15 million outstanding more than 60 days, because of state budget and funding pressures. No related reserve was recorded, although collection is not assured.
- Other significant risks include reimbursement reductions, Medicaid supplemental-payment changes, labor shortages, managed-care pricing pressure, regulatory compliance, litigation, acquisition integration, patient-volume trends, interest rates and access to capital.
Important Facts for Investors to Verify
- Whether the $35 million reserve for the DOJ behavioral-health investigation will be sufficient and whether additional payments, penalties or operational restrictions will arise.
- The timing and potential financial effect of resolving the River Point payment suspension and other government investigations.
- Collection trends for accounts receivable, including the $35 million due from Illinois, and the increase in days sales outstanding to 53 days from 50 days.
- The sustainability of Medicaid supplemental programs, including Texas UC/UPL and DSRIP, California’s hospital fee program and future Medicaid DSH reductions.
- Refinancing and repayment plans for debt and credit facilities maturing or requiring scheduled payments beginning in 2019.
- Whether planned 2018 capital expenditures can be funded through operating cash flow and available financing while maintaining covenant compliance.
- The impact of behavioral-health staffing shortages, facility restructuring and regulatory scrutiny on admissions, occupancy and margins.