Universal Health Services, Inc. — Q3 2016 Form 10-Q Summary
Business Context and Reporting Period
UHS owns and operates acute care hospitals, behavioral health facilities, surgical hospitals, ambulatory surgery centers and radiation oncology centers. As of September 30, 2016, it operated 25 acute care hospitals, 4 free-standing emergency departments, and 213 inpatient and 19 outpatient behavioral health facilities across the United States, the United Kingdom, Puerto Rico and the U.S. Virgin Islands. The report covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. The financial statements are unaudited.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net revenues | $2.410 billion | $2.228 billion | $7.291 billion | $6.728 billion |
| Income from operations | $277.6 million | $275.2 million | $967.2 million | $937.6 million |
| Income before taxes | $245.4 million | $248.0 million | $875.0 million | $852.8 million |
| Net income attributable to UHS | $151.9 million | $150.3 million | $528.2 million | $506.8 million |
| Diluted EPS | $1.54 | $1.48 | $5.36 | $5.02 |
| Operating margin | 11.5% | 12.4% | 13.3% | 13.9% |
| Net margin attributable to UHS | 6.3% | 6.7% | 7.2% | 7.5% |
Net revenues increased 8% in both the quarter and nine-month period. Same-facility acute care revenue increased 9.0% in the quarter and 9.5% year to date, supported by higher admissions, adjusted admissions and revenue per adjusted admission. Same-facility behavioral health revenue increased 2.7% in both periods, while related pre-tax income declined 3% in the quarter and 1% year to date.
Cash and cash equivalents were $61.7 million at September 30, 2016, compared with $61.2 million at December 31, 2015. Net cash provided by operating activities was $1.100 billion for the first nine months, compared with $796.5 million in 2015. Capital expenditures were $396.2 million, and acquisition-related investing cash outflows were $136.2 million.
Total debt had a carrying value of approximately $3.6 billion and fair value of approximately $3.7 billion at September 30, 2016. Current maturities of long-term debt were $91.2 million and long-term debt was $3.543 billion. Total debt represented 45% of total capitalization. The company had $746 million of available capacity under its $800 million revolving facility, net of letters of credit, and $75 million of capacity under its accounts receivable securitization program.
Material Changes Versus the Prior Comparable Period
- Quarterly net income attributable to UHS increased 1%, while nine-month net income increased 4%.
- Quarterly and year-to-date diluted EPS increased from $1.48 to $1.54 and from $5.02 to $5.36, respectively, aided by share repurchases and fewer weighted-average shares.
- Operating margins declined because salaries, wages and benefits and other operating expenses grew faster than revenue. Behavioral health same-facility margins were particularly pressured.
- Interest expense increased by $5 million in the quarter and $7 million year to date, primarily due to higher average borrowings.
- In May 2016, UHS purchased third-party minority interests in six Las Vegas acute care hospitals for $418 million, plus $27 million of returned reserve capital.
- In June 2016, UHS issued $400 million of 4.75% senior secured notes due 2022 and $400 million of 5.00% senior secured notes due 2026, increased its term loan A by $200 million, and repaid $400 million of 7.125% notes that matured.
- UHS repurchased $253 million of common stock through its open-market program during the first nine months and paid $29.2 million of dividends, or $0.10 per share in the third quarter.
- Accounts receivable days sales outstanding improved to 49 days from 54 days at September 30, 2015, although the provision for doubtful accounts increased to $578.8 million from $543.6 million for the first nine months.
Guidance, Outlook, Risks and Unusual Items
- Management expected approximately $120 million to $140 million of capital expenditures during the remaining three months of 2016.
- Management stated that operating cash flow, cash, available credit facilities and access to capital markets should provide sufficient resources for operating, investing and financing needs for the next twelve months.
- UHS estimated a net benefit of approximately $176 million for 2016 from various state Medicaid supplemental payment programs, net of approximately $164 million of provider taxes. These programs are subject to legislative, regulatory and funding changes.
- The CMS payment suspension at River Point Behavioral Health was extended for another 180 days effective August 30, 2016. The suspension materially harmed that facility, although it did not materially affect consolidated results for the nine-month period.
- Timberlawn Mental Health System was reenrolled in Medicare effective September 21, 2016 after completing CMS settlement requirements. Its prior provider-agreement termination had materially harmed the facility.
- UHS is subject to ongoing DOJ, OIG and state investigations involving behavioral health facilities, including potential False Claims Act, Stark law and billing issues. The company could not estimate potential liability or financial exposure.
- Pennsylvania sought repayment of alleged Medicaid DSH overpayments for federal fiscal years 2011 and 2012. UHS appealed; federal-share recoupment had begun, while state-share recoupment was postponed pending appeals.
- UHS had $278 million accrued for professional and general liability and workers’ compensation claims, including $82 million classified as current liabilities. It also had $127 million of standby letters of credit and surety bonds.
- Key industry risks include Medicare and Medicaid reimbursement reductions, future Medicaid DSH cuts, managed-care pricing pressure, uninsured and self-pay collections, labor shortages, regulatory compliance, litigation, acquisitions, debt refinancing and interest-rate exposure.
Important Facts for Investors to Verify
- Whether behavioral health labor shortages and regulatory matters continue to pressure same-facility margins and volumes.
- The outcome and potential financial exposure from DOJ/OIG investigations, the Pennsylvania DSH repayment claims and other healthcare-related litigation.
- The sustainability and renewal terms of state Medicaid supplemental, DSH, UC and DSRIP programs, including the estimated 2016 net benefit.
- Debt repayment requirements, covenant compliance, interest-rate exposure and the availability of revolving and securitization capacity.
- The collectability and aging of state receivables, particularly amounts due from Illinois and Texas.
- Actual 2016 capital spending, the operating performance of the Henderson hospital opened October 31, 2016, and the integration benefits from recent acquisitions.
- The filing reports effective disclosure controls and no material changes in internal control over financial reporting.