Universal Health Services, Inc. — Q1 2017 Form 10-Q Summary
Business context and reporting period
UHS owns and operates acute care hospitals, outpatient facilities, and behavioral health facilities in the United States, United Kingdom, Puerto Rico, and the U.S. Virgin Islands. As of March 31, 2017, it operated 318 inpatient and 33 outpatient and other facilities. The unaudited report covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016.
UHS completed the approximately $473 million acquisition of Cambian Adult Services in late December 2016, adding behavioral health facilities in the U.K. The acquisition and the opening of Henderson Hospital contributed to reported growth.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net revenues | $2.613 billion | $2.450 billion | +6.7% |
| Provision for doubtful accounts | $212.6 million | $169.8 million | +25.2% |
| Income from operations | $353.9 million | $356.3 million | -0.7% |
| Operating margin | 13.5% | 14.5% | -100 bps |
| Income before income taxes | $318.4 million | $326.7 million | -2.5% |
| Net income | $210.5 million | $215.7 million | -2.4% |
| Net income attributable to UHS | $206.1 million | $190.8 million | +8.0% |
| Diluted EPS | $2.12 | $1.93 | +9.8% |
| Net cash from operating activities | $483.0 million | $475.2 million | +1.6% |
Net income attributable to UHS increased primarily because income attributable to noncontrolling interests declined by $20.5 million, largely reflecting the May 2016 purchase of minority interests in six Las Vegas acute care hospitals. The effective tax rate was 33.9%, compared with 34.0%; adoption of ASU 2016-09 provided an approximately $7 million tax benefit.
Operating performance and margins
- Acute care net revenue increased 8.0% to $1.390 billion; pretax income increased 1.0% to $187.8 million, but margin declined to 13.5% from 14.4%.
- Same-facility acute care revenue increased 4.8%, with inpatient admissions up 4.3% and adjusted admissions up 5.1%. Same-facility acute care pretax income declined 3.4% to $188.8 million, and margin fell to 14.2% from 15.4%.
- Behavioral health net revenue increased 4.9% to $1.218 billion, principally from Cambian. Pretax income declined 5.1% to $251.9 million, and margin declined to 20.7% from 22.9%.
- Same-facility behavioral health revenue increased 1.4%, while pretax income declined 6.7% to $250.0 million. Management cited higher salaries, wages, and other operating expenses and shortages of clinicians, nurses, and mental health technicians that constrained available capacity.
- Gross uncompensated care at acute care hospitals increased to $416 million from $345 million; estimated cost of uncompensated care increased to $57 million from $48 million.
Cash flow, liquidity, debt, and balance sheet
| Metric | March 31, 2017 | December 31, 2016 |
|---|---|---|
| Cash and cash equivalents | $63.0 million | $33.7 million |
| Total assets | $10.448 billion | $10.318 billion |
| Total debt carrying value | Approximately $3.9 billion | Approximately $4.1 billion |
| Total debt / total capitalization | 45% | 48% |
- Operating cash flow was $483.0 million. Investing cash use was $174.6 million, including $144.3 million of capital expenditures, $17.8 million for acquisitions and property, $9.5 million for information technology, and $3.0 million for insurance subsidiary capital reserves.
- Financing cash use was $279.4 million, including $260.6 million of debt reductions, $29.2 million of share repurchases, and $9.7 million of dividends.
- The $800 million revolving credit facility had $217 million outstanding and approximately $515 million of available capacity, net of letters of credit and short-term borrowings. The $400 million accounts receivable securitization program was fully drawn with no additional capacity.
- Senior secured notes totaled $1.4 billion, with maturities in 2019, 2022, and 2026. UHS was in compliance with its debt covenants.
- Days sales outstanding improved to 50 days from 51 days. Accounts receivable included approximately $45 million due from Illinois, of which approximately $25 million was more than 60 days outstanding; no reserve was recorded.
Material changes versus the prior comparable period
- Revenue growth reflected $76 million of same-facility growth and $87 million of primarily acquisition- and new-hospital-related revenue.
- Operating and pretax margins contracted despite higher revenue, driven by increased labor and other operating costs and weaker same-facility behavioral health profitability.
- Interest expense increased to $35.5 million from $29.6 million, reflecting higher average borrowings and a slightly higher average borrowing cost.
- Debt declined following substantial repayments, while capital expenditures increased to $144.3 million from $127.2 million.
- Share repurchases declined to $29.2 million from $171.0 million in the prior-year quarter.
Guidance, outlook, commentary, risks, and unusual items
- UHS expected to spend approximately $330 million to $355 million on capital expenditures during the remaining nine months of 2017.
- Management expected approximately $145 million of 2017 net benefit from Texas and other state Medicaid supplemental payment programs, subject to state and CMS approvals and required governmental funding transfers. Q1 net benefit was $35 million, compared with $38 million.
- The U.K. Competition and Markets Authority referred the Cambian acquisition to a Phase 2 investigation after the quarter-end. UHS stated it could be required to divest portions of Cambian or existing U.K. operations and could not integrate the acquired facilities pending approval.
- Medicaid supplemental payments, DSH payments, reimbursement rates, ACA-related changes, Medicare sequestration, and potential reductions in federal and state healthcare funding remain significant risks. UHS estimated that proposed changes to Medicare DSH allocation could materially reduce payments beginning in federal fiscal year 2019.
- UHS continued to face DOJ, OIG, CMS, and state investigations concerning behavioral health facilities, including a continuing Medicare and Medicaid payment suspension at River Point Behavioral Health. Potential liability and financial exposure were not estimable.
- The Massachusetts Attorney General intervened in the Escobar False Claims Act matter and filed a complaint in intervention in April 2017. UHS also disclosed shareholder class and derivative actions relating to behavioral health practices.
- Pennsylvania sought repayment of approximately $4 million of alleged FFY2011 Medicaid DSH overpayments and made similar FFY2012 demands. UHS appealed and stated that an adverse outcome could affect future results and financial condition.
- Professional and general liability and workers’ compensation accruals totaled $271 million at March 31, 2017. UHS remained substantially self-insured and warned that reserve adjustments could materially affect future results.
- UHS adopted ASU 2016-09 on January 1, 2017. The adoption produced a $7 million Q1 tax benefit and changed the classification of excess tax benefits in the cash flow statement.
Most important facts for investors to verify
- Whether behavioral health labor shortages and related cost inflation continue to pressure same-facility margins.
- The outcome and timing of the CMA review of the Cambian acquisition, including any required divestitures or integration restrictions.
- The status and potential financial exposure of behavioral health investigations, the Escobar litigation, and shareholder litigation.
- Collectability of Illinois receivables and the adequacy of doubtful-account allowances, particularly as the provision increased materially.
- Renewal, funding, and methodology changes affecting Medicaid supplemental and DSH programs.
- Debt repayment requirements, refinancing needs beginning in 2019, available revolver capacity, and interest-rate exposure.
- Whether projected 2017 capital expenditures and cash needs can be funded from operating cash flow without materially increasing leverage.