UNIVERSAL HEALTH SERVICES INC quarterly report, Q1 FY2016

Universal Health Services, Inc. — Q1 2016 Form 10-Q Summary

Business Context and Reporting Period

UHS is a healthcare holding company operating through subsidiaries. As of March 31, 2016, it owned or operated 24 acute care hospitals, 3 free-standing emergency departments, 214 inpatient and 16 outpatient behavioral health facilities, and other surgical and radiation oncology facilities across the United States, the United Kingdom, Puerto Rico, the U.S. Virgin Islands and Washington, D.C. The report covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015. The financial statements are unaudited.

Financial Performance and Key Metrics

Metric	Q1 2016	Q1 2015	Change
Net revenues	$2.450 billion	$2.225 billion	Up 10.1%
Income from operations	$356.3 million	$327.1 million	Up 8.9%
Operating margin	14.5%	14.7%	Down 20 basis points
Income before income taxes	$326.7 million	$297.0 million	Up 10.0%
Net income	$215.7 million	$194.3 million	Up 11.0%
Net income attributable to UHS	$190.8 million	$174.3 million	Up 9.4%
Diluted EPS	$1.93	$1.73	Up 11.6%
Net cash from operating activities	$464.2 million	$271.3 million	Up $192.9 million

Net revenues before doubtful-account provisions increased 10.1% to $2.620 billion, while the provision for doubtful accounts increased to $169.8 million from $154.7 million. Salaries, wages and benefits represented 46.9% of net revenues versus 46.4% in the prior-year quarter. The effective tax rate was 34.0%, compared with 34.6%.

Acute care net revenues increased 12.3% to $1.287 billion, with pretax income rising 19.8% to $185.9 million. On a same-facility basis, acute care adjusted admissions increased 7.8%, inpatient admissions increased 6.5%, and income before taxes increased 20.3% to $195.1 million. Behavioral health net revenues increased 7.9% to $1.161 billion, while pretax income increased 4.8% to $265.6 million. Same-facility behavioral health pretax income increased 0.7% to $261.8 million, with margin declining to 24.0% from 24.7%.

Liquidity, Debt and Cash Flow

• Cash and cash equivalents were $54.6 million at March 31, 2016, compared with $61.2 million at December 31, 2015.
• Accounts receivable, net, increased to $1.375 billion from $1.302 billion. Reported days sales outstanding improved to 51 days from 56 days at March 31, 2015.
• Total debt was approximately $3.3 billion at March 31, 2016, compared with approximately $3.5 billion at December 31, 2015. Debt represented 43% of total capitalization versus 45% at year-end.
• The $800 million revolving credit facility had $195 million outstanding and $552 million of available capacity, net of specified borrowings and letters of credit. The accounts receivable securitization program had $350 million outstanding and $50 million available.
• Operating cash flow of $464.2 million exceeded capital expenditures of $127.2 million and acquisition spending of $19.5 million.
• Financing activities used $323.2 million, including $166.7 million of debt repayments, $171.0 million of share repurchases and $9.8 million of dividends. The company repurchased 1.344 million shares under its repurchase program for $152.4 million.

Material Changes Versus the Prior Comparable Period

• Revenue growth included $173 million from facilities operated in both periods and approximately $51 million from acquired or otherwise added facilities, including U.K. behavioral health facilities and Foundations Recovery Network locations.
• Acute care same-facility volume and pricing improved, while behavioral health same-facility revenue increased modestly and labor costs rose as a percentage of revenue.
• Operating cash flow improved substantially, primarily due to favorable working-capital timing, including accrued compensation and accounts payable.
• Capital expenditures increased to $127.2 million from $89.3 million, including construction spending for Henderson Hospital, a planned 142-bed acute care facility expected to open in the fourth quarter of 2016.
• UHS increased its stock-repurchase authorization by $400 million in February 2016, bringing total authorization to $800 million.

Outlook, Commentary, Risks and Unusual Items

• Management expects approximately $275 million to $300 million of capital expenditures during the remaining nine months of 2016 and expects to fund capital expenditures and acquisitions with internally generated funds and additional financing as needed.
• Management stated that operating cash flow, cash, available credit capacity and capital-market access should provide sufficient resources for the next twelve months, while cautioning that financing may not be available on acceptable terms.
• CMS’s proposed federal fiscal 2017 IPPS rule was estimated by UHS to produce an approximately 0.1% decrease in its overall acute-care Medicare payments, including estimated DSH effects but excluding sequestration.
• UHS agreed after quarter-end to purchase third-party minority interests in six Las Vegas acute-care hospitals for $445 million, including purchase price and return of capital. The transaction reduced the company’s ability to refinance the $400 million of 7.125% notes due June 30, 2016 through its revolving facility; those notes were therefore classified as current maturities at March 31, 2016.
• UHS remains subject to extensive DOJ and OIG investigations involving behavioral health facilities, including potential False Claims Act, Stark Law and physician-compensation matters. The company states that potential liability and financial exposure cannot currently be estimated.
• CMS payment suspension at River Point Behavioral Health was extended for another 180 days effective March 2016 and materially harmed that facility’s results, although it did not materially affect consolidated results.
• Timberlawn Mental Health System’s Medicare provider agreement remained terminated, and the company was contesting a proposed Texas license revocation and administrative penalty. Texoma Medical Center remained under a CMS Systems Improvement Agreement through October 2, 2016 unless completed earlier.
• Seven Pennsylvania behavioral health facilities were contesting approximately $4 million of alleged excess FFY2011 Medicaid DSH payments. Unsuccessful appeals could adversely affect future results.
• Receivables included approximately $16 million due from Illinois and $37 million due from Texas Medicaid supplemental programs. No reserves were recorded for these amounts, but collection remains subject to state funding and regulatory risks.
• Professional and general liability and workers’ compensation accruals totaled $277 million, including $82 million classified as current. Standby letters of credit and surety bonds totaled $129 million.
• UHS was in compliance with its debt covenants as of March 31, 2016. Disclosure controls and procedures were determined to be effective, with no material changes in internal control over financial reporting.

Important Facts for Investors to Verify

• Completion, funding and operating ramp-up of Henderson Hospital and the $445 million Las Vegas minority-interest acquisition.
• Repayment or refinancing of the $400 million 7.125% notes due June 30, 2016 and the effect on leverage and liquidity.
• Progress and potential financial exposure from DOJ/OIG investigations, River Point’s payment suspension, Timberlawn’s regulatory status and Texoma’s Systems Improvement Agreement.
• Collectability of Illinois and Texas receivables and continuation of Medicaid supplemental, DSH, UC and DSRIP programs.
• Whether acute-care volume and pricing gains can offset labor-cost inflation and whether behavioral health margins stabilize.
• Actual 2016 capital expenditures, acquisition spending, share repurchases and remaining availability under the $800 million repurchase authorization.