Universal Health Services, Inc. — 2017 Third-Quarter Form 10-Q
Business context and reporting period
UHS filed an unaudited Form 10-Q for the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. The company operates acute-care hospitals and outpatient facilities, behavioral-health facilities, and related healthcare businesses. At September 30, 2017, UHS owned or operated 324 inpatient and 33 outpatient or other facilities across the United States, the United Kingdom, Puerto Rico and the U.S. Virgin Islands. The December 2016 acquisition of Cambian Adult Services expanded the U.K. behavioral-health platform.
Financial performance and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net revenues | $2.542 billion, up 5.5% | $7.767 billion, up 6.5% |
| Income from operations | $257.3 million; 10.1% margin | $941.4 million; 12.1% margin |
| Income before taxes | $220.4 million; 8.7% margin | $833.1 million; 10.7% margin |
| Net income attributable to UHS | $141.2 million, down from $151.9 million | $532.7 million, up from $528.2 million |
| Diluted EPS | $1.47, versus $1.54 | $5.50, versus $5.36 |
| Net cash from operating activities | Not separately provided for the quarter | $878.3 million, versus $1.137 billion |
Operating and net-income margins declined year over year. The principal pressure was higher labor and other operating costs, particularly in behavioral health. Interest expense increased to $37.0 million in the quarter and $108.4 million for the nine months, compared with $32.1 million and $92.2 million, respectively.
At September 30, 2017, cash and cash equivalents were $65.4 million, compared with $33.7 million at December 31, 2016. Accounts receivable were $1.452 billion, with reported days sales outstanding of 51 days versus 49 days at September 30, 2016. The allowance for doubtful accounts was $469 million. Cash flow used in investing activities was $467.7 million, including $418.7 million of capital expenditures. Cash flow used in financing activities was $380.4 million, including $143.5 million of debt repayments, $242.9 million of share repurchases and $28.8 million of dividends.
Total debt was approximately $4.0 billion carrying value at September 30, 2017, or 45% of total capitalization. Debt included $1.798 billion outstanding under the term loan A, $380 million under the revolving facility, $435 million under the accounts-receivable securitization program and $1.4 billion of senior secured notes. Revolving-facility availability was $366 million net of letters of credit and other borrowings; securitization availability was $5 million. UHS stated that it was in compliance with its debt covenants and believed operating cash flow, cash, available borrowing capacity and capital-market access were sufficient for the next twelve months.
Material changes versus the prior comparable period
- Quarterly revenue increased $132 million, primarily from same-facility growth of $47 million and $85 million from Cambian and the newly opened Henderson Hospital.
- Nine-month revenue increased $477 million, including $212 million of same-facility growth and $265 million from acquisitions, Henderson Hospital and other items.
- Acute-care income before taxes increased $9 million in the quarter and $32 million for the nine months. Same-facility acute-care pre-tax income was essentially flat, while Nevada facilities acquired or opened in 2016 contributed to growth.
- Behavioral-health income before taxes decreased $17 million in the quarter and $51 million for the nine months. Same-facility behavioral-health pre-tax income fell 9% in the quarter and 7% for the nine months, with margins declining to 19.6% and 21.2%, respectively.
- Same-facility acute-care admissions increased 5.1% in the quarter and 5.5% for the nine months; same-facility behavioral-health admissions increased 1.3% and 2.5%, respectively. Behavioral-health occupancy was 74% in the quarter and 76% for the nine months.
- Operating cash flow declined $258 million year over year, largely because of unfavorable changes in foreign-exchange contracts, working capital and taxes. The comparison also benefited from $36 million of excess stock-compensation tax benefits in 2016 that were not repeated in 2017.
- UHS repurchased $229 million of shares in the first nine months under its repurchase program, in addition to $14 million withheld for stock-compensation taxes. The company paid quarterly dividends of $0.10 per share.
Guidance, outlook, commentary and unusual items
- Management expected fourth-quarter 2017 capital expenditures of approximately $110 million to $140 million.
- The company estimated an aggregate 2017 net benefit of approximately $161 million from Texas and other state Medicaid supplemental-payment programs, net of approximately $159 million of provider taxes. These programs depend on continued governmental approval and required intergovernmental transfers.
- The 2018 Medicare IPPS final rule was estimated to increase UHS payments by approximately 1.8%, excluding sequestration. The company estimated a 1.25% increase for psychiatric prospective-payment-system reimbursement and a net 4.2% increase in 2018 Medicare outpatient reimbursement, including behavioral-health partial-hospitalization effects.
- Hurricanes Harvey, Irma and Maria reduced estimated pre-tax results by approximately $13 million to $15 million in the quarter and nine-month period. Some Houston behavioral-health beds remained closed, and Puerto Rico facilities continued operating on auxiliary power.
- UHS recorded an approximately $9 million expense and liability related to a Texas court order; the total order, including prejudgment interest, was approximately $8.5 million. UHS also recorded a $15 million increase in professional and general liability reserves during the second quarter and a $7 million reserve related to Massachusetts Health Safety Net Care Pool payments.
- The U.K. Competition and Markets Authority required divestiture of one 18-bed facility acquired with Cambian; the facility generated less than $1 million of annual pre-tax income.
- Behavioral-health operations remain exposed to shortages of psychiatrists, nurses and mental-health technicians, which have caused temporary bed closures in certain markets.
- UHS faces continuing DOJ, OIG and state investigations concerning behavioral-health billing and practices, including a False Claims Act investigation and the Escobar litigation. The company stated that potential liability and financial exposure cannot presently be estimated. River Point Behavioral Health continued to experience a material facility-level Medicare payment suspension, although its Medicaid suspension was partially lifted in June 2017.
- Other contingencies include Pennsylvania Medicaid DSH repayment demands of approximately $15 million for federal fiscal years 2011 through 2013, shareholder securities and derivative litigation, and various legacy investigations. UHS stated that adverse outcomes could materially affect future results, cash flows, financial condition and reputation.
- UHS adopted ASU 2016-09, producing approximately $1 million of tax benefit in the quarter and $9 million for the nine months. Revenue-recognition, lease and hedging standards had not yet been fully adopted; management expected the future lease standard to create significant right-of-use assets and lease liabilities.
Most important facts for investors to verify
- Whether behavioral-health same-facility margins recover as hurricane effects, staffing shortages and regulatory scrutiny continue.
- The collectability and aging of receivables, particularly $52 million due from Illinois, including $35 million outstanding more than 60 days.
- The renewal, funding and economics of Medicaid supplemental, DSH and other state reimbursement programs.
- The ultimate financial exposure from DOJ investigations, False Claims Act matters, shareholder litigation, Pennsylvania DSH repayment demands and other contingencies.
- Debt maturities and refinancing requirements, including the 2019 credit agreement and senior secured notes, as well as interest-rate exposure.
- Whether operating cash flow remains sufficient to fund capital expenditures, dividends, acquisitions and share repurchases without increasing leverage.
- The effect of the Cambian integration, required U.K. divestiture and evolving U.S. healthcare legislation on future revenue and reimbursement.