UNIVERSAL HEALTH SERVICES INC quarterly report, Q2 FY2017

Universal Health Services, Inc. 10-Q Summary

Business Context and Reporting Period

Universal Health Services, Inc. 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 June 30, 2017, the Company operated 320 inpatient and 33 outpatient and other facilities. The filing covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods. Results include the December 2016 acquisition of Cambian Adult Services and the 2016 opening of Henderson Hospital.

Financial Performance and Key Metrics

Metric	Q2 2017	Q2 2016	Six Months 2017	Six Months 2016
Net revenues	$2.612 billion	$2.431 billion	$5.225 billion	$4.881 billion
Income from operations	$330.2 million	$333.3 million	$684.1 million	$689.6 million
Operating margin	12.6%	13.7%	13.1%	14.1%
Net income attributable to UHS	$185.4 million	$185.6 million	$391.4 million	$376.3 million
Diluted EPS	$1.91	$1.89	$4.03	$3.81
Net cash from operating activities	Not separately provided	Not separately provided	$533.6 million	$836.4 million

Q2 net revenue increased 7.5%, while six-month revenue increased 7.1%. Net income attributable to UHS was essentially flat in the quarter and increased 4.0% for the six months. Q2 diluted EPS increased 1.1%, and six-month diluted EPS increased 5.8%. Higher labor and other operating costs reduced margins, while lower income attributable to noncontrolling interests and tax benefits from the adoption of ASU 2016-09 supported per-share results.

Acute care same-facility revenue increased 5.1% in Q2 and 4.9% for the six months. Acute care admissions increased 7.1% in Q2 and 5.6% for the six months, with occupancy of 60% and 62%, respectively. Behavioral health same-facility revenue increased 2.2% in Q2 and 1.8% for the six months, but same-facility income before taxes declined 5% and 6%, respectively. Behavioral health occupancy remained 77%.

Cash Flow, Liquidity and Debt

Cash and cash equivalents were $66.4 million at June 30, 2017, compared with $33.7 million at December 31, 2016.
Operating cash flow declined $302.8 million year over year to $533.6 million, primarily due to working-capital timing, forward-exchange-contract cash flows and other changes.
Capital expenditures were $262.5 million in the first six months; the Company expects an additional $265 million to $290 million during the remaining six months of 2017.
Cash used in financing activities was $197.3 million, including $147.5 million of share repurchases, $45.7 million of net debt repayments and $19.3 million of dividends.
Debt had a carrying value of approximately $4.1 billion and fair value of approximately $4.2 billion at June 30, 2017. Total debt represented 46% of total capitalization.
The $800 million revolving facility had $455 million outstanding and $277 million of available capacity, net of letters of credit and short-term borrowings. The term loan A had $1.820 billion outstanding, and the accounts receivable securitization had $400 million outstanding.
In July 2017, after the quarter end, the accounts receivable securitization borrowing capacity increased to $440 million from $400 million; its December 2018 maturity was unchanged.
Management stated that operating cash flow, cash, available borrowing capacity and capital-market access should provide sufficient resources for the next twelve months. The Company was in compliance with its debt covenants.

Material Changes Versus the Prior Comparable Period

Revenue growth was driven by same-facility performance, Cambian Adult Services, Henderson Hospital and other Nevada facilities.
Acute care income before taxes increased $21 million in Q2 and $22 million for the six months, while behavioral health income before taxes decreased $21 million and $34 million, respectively.
Consolidated interest expense increased $5 million in Q2 and $11 million for the six months because of higher average borrowings and borrowing costs.
Professional and general liability reserves increased by $15 million in Q2 based on unfavorable changes in estimated prior-year claims.
The Company recorded a $7 million pre-tax reserve related to Massachusetts Health Safety Net Care Pool payments received by certain behavioral health facilities.
Uncompensated care increased to $485 million in Q2 and $901 million for the six months, from $339 million and $684 million, respectively, in the prior-year periods.
The Company repurchased approximately 984,000 shares under its repurchase program during Q2 for $115.9 million and paid a quarterly dividend of $0.10 per share.

Guidance, Outlook, Commentary and Risks

Management expected 2017 capital expenditures of approximately $527 million to $552 million in total.
The Company estimated a 2017 net benefit of approximately $149 million from Texas and other state Medicaid supplemental payment programs, subject to governmental approvals, funding transfers and other conditions outside its control.
Behavioral health operations faced shortages of psychiatrists, nurses and mental-health technicians, which constrained available capacity in certain markets.
The U.K. Competition and Markets Authority commenced a Phase 2 review of the Cambian acquisition. UHS could be required to divest portions of Cambian or existing U.K. operations, and integration remained restricted pending approval.
River Point Behavioral Health continued to experience a Medicare payment suspension; Florida Medicaid suspended payments were partially lifted effective June 27, 2017. The remaining suspension materially affected the facility but not consolidated results.
UHS and certain facilities faced DOJ and other governmental investigations concerning behavioral health billing and False Claims Act matters. The Company stated that potential liability and financial exposure were uncertain.
Shareholder class-action and derivative litigation related to behavioral health practices was pending. The Company denied liability and could not estimate potential losses.
Potential repayment demands related to Pennsylvania Medicaid DSH payments included approximately $4 million for FFY 2011, additional FFY 2012 claims and new FFY 2013 requests. Appeals were pending.
Illinois receivables totaled approximately $49 million, including $31 million outstanding more than 60 days, due to state budget and funding pressures. No reserve had been recorded.
Major ongoing risks include changes to the ACA, Medicare and Medicaid reimbursement, Medicaid supplemental and DSH programs, managed-care pricing, labor availability, litigation and investigations, self-insurance claims, acquisition integration, and refinancing risk.

Important Facts for Investors to Verify

Whether behavioral health margins and staffing capacity improve, particularly at same-facility operations.
The status and ultimate outcome of the DOJ behavioral health investigation, Escobar litigation and shareholder lawsuits.
The resolution of Pennsylvania DSH repayment demands and the Massachusetts Health Safety Net reserve.
Renewal and funding of Medicaid supplemental payment programs and the effect of future DSH reductions.
Collection of Illinois receivables and changes in doubtful-account allowances.
The CMA’s final decision regarding the Cambian acquisition and any required divestitures.
Debt maturities, interest-rate exposure, revolver availability and continued covenant compliance.
Actual 2017 capital spending, operating cash flow conversion and share-repurchase activity relative to management’s plans.