Universal Health Services, Inc. — 2014 Second-Quarter Form 10-Q
Reporting period: Three and six months ended June 30, 2014; filed August 8, 2014. The interim financial statements are unaudited. UHS owned or operated 24 acute care hospitals, 195 behavioral health centers and additional surgical, ambulatory and radiation oncology facilities across 37 states, Washington, D.C., Puerto Rico and the U.S. Virgin Islands.
Financial Highlights
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net revenues | $2.020 billion | $1.835 billion | $3.940 billion | $3.667 billion |
| Income from operations | $293.4 million | $304.1 million | $564.4 million | $548.0 million |
| Income before taxes | $258.3 million | $265.8 million | $494.1 million | $469.8 million |
| Net income attributable to UHS | $151.7 million | $151.8 million | $289.7 million | $271.6 million |
| Diluted EPS | $1.51 | $1.53 | $2.89 | $2.75 |
| Net cash from operating activities | Not separately provided | Not separately provided | $458.4 million | $390.9 million |
- Net revenue increased 10% year over year in the quarter and 8% for the first six months.
- Operating margin was 14.5% in the quarter versus 16.6% in the prior-year quarter, and 14.3% for the six months versus 14.9%.
- Net income attributable to UHS margin was 7.5% in the quarter versus 8.3%, and 7.4% for the six months in both periods.
- The effective tax rate was 35.5% for both the quarter and six months, compared with 36.9% and 36.6%, respectively, in the prior-year periods.
- Cash and cash equivalents were $14.7 million at June 30, 2014, compared with $17.2 million at December 31, 2013. Accounts receivable were $1.186 billion, compared with $1.117 billion at year-end.
- Net cash used in investing activities was $254.7 million, including $186.8 million of capital expenditures and $71.0 million for acquisitions. Net cash used in financing activities was $206.2 million.
- Total debt was approximately $3.15 billion at June 30, 2014, or 47% of total capitalization, compared with 51% at December 31, 2013. Debt fair value was approximately $3.20 billion.
Material Changes Versus the Prior Comparable Period
- Same-facility acute care revenue increased 11.5% in the quarter and 8.6% for the six months. Same-facility acute care income before taxes increased 84% in the quarter and 68% for the six months, supported by higher adjusted admissions, patient days, occupancy and revenue per adjusted admission.
- Same-facility behavioral health revenue increased 6% in the quarter and 5% for the six months. Same-facility behavioral health income before taxes increased 6% in the quarter and 3% for the six months, while margins were broadly stable to lower.
- Quarterly and six-month consolidated pretax results were affected by a $65 million professional and general liability reserve reduction recorded in the second quarter of 2013. Excluding this prior-year benefit, underlying operating performance improved materially.
- The provision for doubtful accounts declined to $176.0 million in the quarter from $246.7 million and to $384.1 million for the six months from $493.4 million. The allowance for doubtful accounts was $237 million at June 30, 2014 versus $395 million at December 31, 2013.
- Interest expense declined to $35.1 million from $38.2 million in the quarter and to $70.3 million from $78.2 million for the six months, primarily due to lower average borrowings and borrowing costs.
- Uncompensated care at acute care hospitals increased to $267 million in the quarter from $258 million and to $586 million for the six months from $489 million, driven primarily by higher uninsured discounts.
- UHS acquired a commercial health insurer, a 124-bed behavioral health facility in Washington, D.C., related management contracts and a 48-bed behavioral health facility in Tucson for an aggregate $71 million. It also recorded a $10 million pretax gain on the sale of a non-operating investment.
Liquidity, Debt and Capital Resources
- At June 30, 2014, UHS had $913 million outstanding under term loan A, $861 million under term loan A2, $550 million under term loan B and no revolving-credit borrowings. The accounts receivable securitization had $130 million outstanding and $145 million of additional capacity.
- The $800 million revolving credit facility had $776 million of available capacity after short-term borrowings and letters of credit. UHS was in compliance with its debt covenants.
- Management stated that operating cash flow, cash, available revolver capacity and access to capital markets should provide sufficient resources for the next twelve months.
- UHS expected to spend approximately $180 million to $195 million on capital expenditures during the remaining six months of 2014.
- Subsequent to quarter-end, UHS refinanced its credit facilities, combining term loans into a $1.774 billion Term Loan A due 2019, repaid the $550 million term loan B, increased securitization capacity to $360 million, issued $600 million of senior secured notes due 2019 and 2022, and redeemed $250 million of 7% notes. The company expected a third-quarter debt-extinguishment charge.
Guidance, Outlook, Commentary and Risks
- No consolidated earnings guidance was provided in the filing. Management expected approximately $180 million to $195 million of remaining-2014 capital expenditures and expected potential additional Texas DSRIP revenue of approximately $10 million in the fourth quarter, subject to approvals and other conditions.
- CMS's 2015 IPPS rule was estimated to reduce UHS Medicare revenue by approximately 1.9%, or $13 million annually, including DSH and outlier adjustments. The proposed 2015 OPPS rule was estimated to produce a 0.4% net decrease, largely due to behavioral health partial-hospitalization rates.
- Key reimbursement risks include Medicare sequestration, DSH reductions, Medicaid funding and supplemental-payment programs, managed-care pricing, the Two Midnight rule, value-based purchasing and readmission penalties.
- Receivables included approximately $28 million due from Illinois, with $5 million outstanding more than 60 days, and approximately $32 million due from Texas Medicaid supplemental programs. No related reserves were recorded, but UHS warned that noncollection could adversely affect cash flow and results.
- River Point Behavioral Health remained subject to Medicare and Medicaid payment suspensions amid government investigations. A prolonged suspension could materially affect the facility, although its results were not material to consolidated results through June 30, 2014.
- Government investigations and subpoenas involve multiple behavioral health facilities and alleged Medicare or Medicaid compliance issues. The filing states that potential additional losses cannot currently be estimated.
- A former PSI shareholder litigation matter had a $25 million reserve and $20 million of expected insurance recoveries at June 30, 2014; trial was scheduled for mid-September 2014, and a potentially material uninsured exposure remained possible.
- UHS is substantially self-insured for professional and general liability and workers’ compensation claims. Accrued professional and general liability claims totaled $204 million and workers’ compensation claims totaled $64 million at June 30, 2014.
- The board increased the quarterly dividend from $0.05 to $0.10 per share, payable in September 2014, and authorized a new $400 million Class B share-repurchase program.
Important Facts for Investors to Verify
- Reconcile reported revenue growth and margin compression with the $65 million prior-year liability-reserve benefit and the changing doubtful-account provision.
- Assess the sustainability and collectability of Illinois and Texas receivables and Medicaid supplemental, DSH and DSRIP revenue.
- Review the post-quarter-end refinancing, including the debt-extinguishment charge, new secured notes, maturities, interest rates and covenant capacity.
- Monitor River Point payment suspensions and the broader DOJ/OIG investigations for potential repayment, penalty, exclusion or reputational exposure.
- Evaluate the impact of Medicare and Medicaid reimbursement changes, including the 2015 IPPS and OPPS rules, DSH reductions and value-based purchasing programs.
- Verify the adequacy of self-insurance reserves and the $25 million PSI litigation reserve relative to possible uninsured losses.
- Confirm that operating cash flow and available financing remain sufficient to fund planned capital expenditures, acquisitions, dividends and share repurchases.