Universal Health Services, Inc. — Fiscal 2015 Form 10-K
Reporting period: Year ended December 31, 2015. The filing also provides unaudited fourth-quarter results; this is an annual Form 10-K rather than a standalone Q4 filing.
Business Context
UHS owns and operates acute care hospitals, behavioral health facilities, surgical hospitals, ambulatory surgery centers and radiation oncology centers. As of February 25, 2016, it operated 24 inpatient acute care hospitals, three freestanding emergency departments, 213 inpatient behavioral health facilities and 16 outpatient behavioral health facilities across the United States, the United Kingdom, Puerto Rico, the U.S. Virgin Islands and Washington, D.C.
Acute care, surgical, insurer, surgery-center and radiation-oncology operations represented 51% of consolidated net revenue, while behavioral health represented 49%. UHS spent $534 million on 2015 acquisitions, primarily behavioral health assets in the United Kingdom and Foundations Recovery Network.
Financial and Operating Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net revenues | $9.043 billion | $8.205 billion | +10% |
| Income from operations | $1.259 billion | $1.063 billion | +18% |
| Income before income taxes | $1.146 billion | $930 million | +23% |
| Net income attributable to UHS | $681 million | $545 million | +25% |
| Diluted EPS | $6.76 | $5.42 | +25% |
| Net margin | 7.5% | 6.6% | +0.9 percentage points |
| Operating margin | 13.9% | 13.0% | +0.9 percentage points |
| Cash provided by operating activities | $1.021 billion | $1.036 billion | -1% |
| Capital expenditures, net | $379 million | $391 million | -3% |
| Total debt | $3.450 billion | $3.279 billion | +$172 million |
| Total debt to capitalization | 45% | 47% | -2 percentage points |
- Cash and cash equivalents were $61 million at year-end, compared with $32 million in 2014. Accounts receivable were $1.302 billion, net of a $399 million allowance for doubtful accounts.
- Acute-care same-facility revenue increased 9%, adjusted admissions increased 5.4% and occupancy based on available beds increased to 59% from 58%. Same-facility acute-care income before taxes rose 17% to $543 million.
- Behavioral-health same-facility revenue increased 5%, adjusted admissions increased 2.9% and occupancy based on available beds increased to 76% from 75%. Same-facility behavioral-health income before taxes increased 6% to $995 million.
- Medicare and Medicaid represented 35% of net patient revenue, while managed care represented 52%. Uncompensated care at acute-care hospitals increased to $1.203 billion from $1.136 billion, including $696 million of uninsured discounts.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected a 7% increase in same-facility revenue, additional United Kingdom behavioral health facilities, a full year of the acquired Prominence Health Plan and the fourth-quarter acquisition of Foundations Recovery Network.
- Income growth benefited from stronger acute-care and behavioral-health operations, lower interest expense and the absence of the $36 million debt-extinguishment charge recorded in 2014.
- 2014 included a $48 million charge related to the Garden City legal settlement and a $20 million reduction in prior-year professional and general liability reserves. These items did not recur in the same form in 2015.
- Electronic health-record implementation produced a net unfavorable pretax impact of approximately $18 million in 2015, compared with an $8 million unfavorable impact in 2014.
- Operating cash flow declined modestly because of unfavorable changes in accrued compensation, accounts payable and income taxes, partly offset by higher earnings and improved accounts receivable collections. Days sales outstanding improved to 53 days from 57 days.
- UHS repurchased $166 million of shares under its public program and $58 million for tax withholding, paid $40 million of dividends and increased the quarterly dividend to $0.10 per share throughout 2015.
Debt, Liquidity and Capital Allocation
- Total debt was $3.450 billion, including $1.718 billion under the Term Loan A, $400 million under the accounts-receivable securitization program, $300 million of 2019 senior secured notes, $300 million of 2022 senior secured notes and $400 million of 7.125% notes due June 30, 2016.
- The $800 million revolving credit facility had $300 million drawn and $461 million of available capacity after outstanding short-term borrowings and letters of credit. The accounts-receivable securitization program was fully drawn at $400 million.
- The company was in compliance with all debt covenants at December 31, 2015 and stated that operating cash flow, cash, available revolver capacity and capital-market access should fund requirements for the next twelve months.
- 2016 capital expenditures were expected to be approximately $400 million to $425 million, including approximately $165 million for projects already in progress and completion of Henderson Hospital.
- Contractual cash obligations totaled approximately $4.740 billion, including $3.450 billion of debt, $331 million of operating leases, $110 million of construction commitments and $369 million of estimated future debt interest.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide formal consolidated earnings guidance in the filing. It expected 2016 capital expenditures of $400 million to $425 million and anticipated Medicaid supplemental-program net benefits of approximately $80 million, Texas-related net benefits of approximately $55 million and DSRIP net benefits of approximately $25 million, subject to program conditions and approvals.
- Medicare reimbursement remained pressured by sequestration, documentation-and-coding adjustments, DSH reductions, value-based purchasing and readmission-related penalties. Management estimated the overall impact of the fiscal 2016 IPPS final rule at approximately a 0.1% decrease before sequestration.
- UHS had significant regulatory exposure. A coordinated Department of Justice investigation covered numerous behavioral-health facilities and UHS as a corporate entity, with potential False Claims Act and fraud-and-abuse liability not estimable from the filing.
- River Point Behavioral Health remained subject to Medicare and Medicaid payment suspensions, materially harming that facility’s results. Timberlawn lost its Medicare provider agreement in August 2015 and was seeking re-enrollment; its Texas license revocation and administrative penalty were being contested. Texoma Medical Center remained under a CMS Systems Improvement Agreement through October 2016 unless completed earlier.
- Seven Pennsylvania behavioral-health facilities faced approximately $4 million of demanded repayment of alleged excess fiscal 2011 Medicaid DSH payments. Appeals were pending, and similar actions for later years were possible.
- Key operating risks include reimbursement reductions, government audits and payment suspensions, uninsured and underinsured patients, labor and nursing shortages, competition, regulatory compliance, malpractice claims, cybersecurity incidents, foreign-exchange exposure and integration of acquisitions.
- Goodwill was $3.596 billion, including $3.207 billion in behavioral health. No goodwill impairment was recorded in 2015, but management stated that adverse operating performance or market conditions could require future impairment charges.
- Internal control over financial reporting was assessed as effective by management and PricewaterhouseCoopers. The 2015 acquisitions, including Foundations and Alpha Hospitals, representing approximately 1% of consolidated assets and revenue, were excluded from management’s control assessment.
Most Important Facts for Investors to Verify
- Whether the growth in 2015 same-facility volumes and margins continued after excluding acquisitions, EHR effects, reserve changes and other unusual items.
- The refinancing or repayment of the $400 million 7.125% notes due June 30, 2016 and the effect on interest expense and liquidity.
- The collectability and timing of state receivables, including $28 million due from Illinois and $80 million due from Texas at year-end; the Texas DSRIP portion was collected in January 2016.
- The potential financial exposure from the DOJ investigations, payment suspensions, Timberlawn and Texoma regulatory matters, and the Pennsylvania DSH repayment dispute.
- The renewal or reduction of Medicaid supplemental, DSH, UC and DSRIP programs and the resulting effect on revenue and cash flow.
- Execution of the $400 million to $425 million 2016 capital program, completion and opening of Henderson Hospital, and integration and profitability of the 2015 acquisitions.
- Changes in the $399 million doubtful-account allowance, $204 million professional and general liability reserve and $3.596 billion goodwill balance.