UHS

Business Context and Reporting Period

Company: Universal Health Services, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2001
Business Overview: The Company operates acute care and behavioral health care services. The reporting period reflects significant expansion through acquisitions, including facilities in Puerto Rico, California, Massachusetts, Texas, Nevada, and a 93% interest in an operating company owning eight hospitals in France.

Key Financial Metrics

Note: EBITDAR is defined as Earnings before interest, income taxes, depreciation, amortization, lease & rental, minority interest expense, and losses on foreign exchange and derivative transactions.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 25% to $677 million. This was driven by $86 million in revenue from 19 facilities acquired since Q3 2000 and a 10% organic increase at facilities owned in both periods.
• Profitability: Net income rose 26% to $36.2 million. However, overall operating margins decreased slightly from 17.4% in Q1 2000 to 16.7% in Q1 2001, attributed to lower margins at recently acquired facilities and increased employee benefit expenses.
• Acquisitions: The Company invested approximately $189 million in Q1 2001 to acquire six new facilities and a French hospital group. This was funded primarily by $147 million in additional borrowings.
• Segment Performance:
  • Acute Care: Revenues increased 10% organically due to higher prices from private payors and increased patient volumes. Outpatient revenues grew 24%.
  • Behavioral Health: Revenues increased 8% organically due to higher patient volume. Operating margins improved to 19.8% from 18.3% in the prior year.
• Foreign Exchange: A pre-tax loss of $1.3 million was recorded due to fluctuations related to an intercompany loan denominated in French francs.

Guidance, Outlook, and Risks

• Regulatory Impact (BIPA): The Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) is expected to increase net revenues and pre-tax income by approximately $5 million to $10 million in 2001, with payments commencing in April 2001.
• Medicaid Disproportionate Share: The Company recorded reduced reimbursements for Texas and South Carolina programs totaling $6.4 million in Q1 2001. These programs are scheduled to terminate in Q3 2001, and failure to renew could materially adversely affect future results.
• Managed Care: Managed care payors accounted for 35% of net patient revenues. The Company expects this percentage to grow, though managed care payors generally provide lower payments per patient than traditional indemnity insurers.
• Liquidity: As of March 31, 2001, the Company had $208 million of unused borrowing capacity under its $400 million revolving credit agreement. The commercial paper program had no unused capacity.
• Corporate Action: A two-for-one stock split was declared subsequent to the quarter end, payable on June 1, 2001, subject to shareholder approval.
• Risks: Key risks include changes in government reimbursement rates (Medicare/Medicaid), compliance with HIPAA regulations, liability insurance costs, and the integration of recent acquisitions.

Investor Verification Checklist

• Verify the sustainability of the 10% organic revenue growth in acute care facilities amidst payor pressure.
• Confirm the timeline and financial impact of the Texas and South Carolina Medicaid disproportionate share program terminations scheduled for Q3 2001.
• Assess the integration progress and margin performance of the 19 facilities acquired since Q3 2000, which are currently dragging down overall operating margins.
• Monitor the utilization of the $208 million remaining credit facility capacity given the recent $189 million acquisition spend.
• Review the status of the appeal regarding reduced Medicaid reimbursements in Texas.