Business Context and Reporting Period
Company: Universal Health Services, Inc. (UHS)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: UHS is a holding company that owns and operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers, and radiation oncology centers. As of February 25, 2010, the company operated 25 acute care hospitals and 102 behavioral health centers across 32 states, Washington D.C., and Puerto Rico. Revenue is derived primarily from acute care (74%) and behavioral health (25%) facilities.
Key Financial Metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Net Revenues | $5,202,379,000 | $5,022,417,000 | +3.6% |
| Income from Continuing Operations (Pre-Tax) | $474,722,000 | $357,012,000 | +33.0% |
| Net Income Attributable to UHS | $260,373,000 | $199,377,000 | +30.6% |
| Diluted EPS (Attributable to UHS) | $2.64 | $1.96 | +34.7% |
| Operating Cash Flow | $533,305,000 | $494,187,000 | +7.9% |
| Capital Expenditures (Net) | $379,748,000 | $354,537,000 | +7.1% |
| Total Assets | $3,964,463,000 | $3,742,462,000 | +5.9% |
| Long-Term Borrowings | $956,429,000 | $990,661,000 | -3.5% |
| Debt to Total Capitalization | 35% | 39% | -4 pts |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased by $180 million (3.6%) driven by a $182 million increase in same-facility revenues and $22 million from new acquisitions/openings, partially offset by a decrease in construction management contract revenues.
- Profitability Drivers: The significant increase in pre-tax income ($118 million) was largely due to:
- A $30 million favorable reduction in self-insurance reserves (professional liability and workers' compensation) related to prior years.
- A $25 million favorable impact from the absence of the $25 million reserve recorded in 2008 for the South Texas Health System investigation (which was settled in 2009).
- Improved operating margins in acute care facilities due to moderated salary increases and supply cost savings.
- Acquisitions and Divestitures: In 2009, UHS spent $12 million on acquisitions (including a behavioral health facility in Colorado) and received $10 million from divestitures.
- Stock Split: A two-for-one stock split was executed in December 2009; all historical share data has been adjusted.
Guidance, Outlook, Risks, and Contingencies
- Capital Expenditure Outlook: Management expects to spend between $315 million and $355 million on capital expenditures in 2010, including the completion of the Palmdale Regional Medical Center.
- Regulatory Risks:
- Two Rivers Psychiatric Hospital: Facing potential termination of Medicare/Medicaid certification. A temporary restraining order is currently in place, but the outcome remains uncertain.
- Southwest Healthcare System (SWHCS): Entered into an agreement with CMS requiring an independent quality monitor. A full certification survey occurred in January 2010; results were pending at the time of filing.
- Virginia Behavioral Health Facilities: Subject to a False Claims Act qui tam case involving Marion Youth Center. A reserve has been established, but the ultimate settlement amount is undetermined.
- Reimbursement Risks: Significant exposure to Medicaid funding reductions in Texas, Nevada, and California due to state budget deficits. The company estimates a $12 million annual reduction in Texas Medicaid reimbursement retroactive to September 2009.
- Debt Maturity: $200 million in senior notes and a portion of the revolving credit facility mature in 2011. Management believes refinancing will be possible but terms may be less favorable.
Investor Verification Checklist
- Self-Insurance Reserves: Verify the sustainability of the $30 million reduction in liability reserves recorded in 2009 and the adequacy of remaining reserves ($266 million accrual).
- Medicaid Funding: Monitor state budget decisions in Texas, Nevada, and California regarding Medicaid reimbursement rates and Disproportionate Share Hospital (DSH) funding renewals.
- Regulatory Outcomes: Track the final resolution of the Two Rivers Psychiatric Hospital certification appeal and the SWHCS CMS survey results.
- Debt Refinancing: Assess the cost and terms of refinancing the $200 million senior notes and credit facility maturing in 2011.
- Uninsured Patient Trends: Review the impact of rising uninsured patient volumes on the provision for doubtful accounts and charity care expenses ($671 million in 2009).