Universal Health Services, Inc. — 2012 Q3 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2012. UHS operates acute-care hospitals, behavioral-health facilities, surgical hospitals, ambulatory surgery centers and radiation oncology centers through subsidiaries. As of October 31, 2012, it operated 24 acute-care hospitals and 197 behavioral-health centers, including facilities acquired from Ascend after quarter-end.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net revenues | $1.680 billion | $1.663 billion | $5.196 billion | $5.097 billion |
| Income from operations | $168.7 million | $195.5 million | $668.1 million | $688.2 million |
| Operating margin | 10.0% | 11.8% | 12.9% | 13.5% |
| Net income attributable to UHS | $71.8 million | $85.1 million | $308.0 million | $302.9 million |
| Diluted EPS | $0.73 | $0.86 | $3.15 | $3.06 |
| Net cash from operations | Not separately reported | Not separately reported | $535.0 million | $562.5 million |
- Q3 net revenues increased 1%; nine-month net revenues increased 2%.
- Q3 income attributable to UHS declined 16%, while nine-month income attributable to UHS increased 2%.
- Interest expense decreased to $45.2 million in Q3 and $137.8 million for nine months, versus $48.5 million and $154.7 million, respectively.
- Cash and cash equivalents were $25.7 million at September 30, 2012, versus $41.2 million at December 31, 2011.
- Accounts receivable were $1.043 billion, with an allowance for doubtful accounts of approximately $339 million. Days sales outstanding increased to 55 days from 50 days a year earlier.
- Total debt was $3.443 billion at September 30, 2012, down from $3.654 billion at December 31, 2011; debt represented 57% of total capitalization versus 61% at year-end 2011.
- Revolving-credit availability was $678 million, and accounts-receivable securitization capacity was $215 million.
Material changes versus the prior comparable period
- Acute-care same-facility net revenue declined less than 1% in Q3 and approximately 1% for nine months. Acute-care admissions declined 2.6% in Q3 and 2.9% for nine months; occupancy declined to 54% and 57%, respectively, from 56% and 59%.
- Acute-care same-facility income before taxes decreased 19% in Q3 and 16% for nine months, reflecting weak demand, deteriorating payor mix and higher salary and other operating costs.
- Behavioral-health same-facility net revenue increased 3% in Q3 and 4% for nine months. Same-facility income before taxes increased 8% in Q3 and 9% for nine months, with higher admissions and occupancy.
- Provision for doubtful accounts increased to $188.9 million from $152.0 million in Q3 and to $522.2 million from $456.0 million for nine months.
- UHS recognized $12.5 million of EHR incentive income for nine months, compared with none in the prior-year period. EHR implementation costs resulted in a net unfavorable pre-tax impact of approximately $6 million for nine months.
- A $29.2 million pre-tax charge was recorded in Q3 for the write-off of deferred financing costs related to extinguishing part of the Term Loan B facility.
- Operating cash flow decreased $27.5 million year over year, while capital expenditures and EHR spending increased to $324.0 million combined from $223.3 million.
Debt, transactions, outlook and risks
- On September 21, 2012, UHS added a $900 million Term Loan A2, used $700 million to repay higher-priced Term Loan B debt, and extended most revolving-credit and Term Loan A maturities to August 15, 2016. UHS was in compliance with its debt covenants at quarter-end.
- In October 2012, UHS completed the $500 million cash acquisition of Ascend Health Corporation, adding nine psychiatric inpatient facilities. FTC clearance requires divestiture of Peak Behavioral Health Services within approximately six months.
- In October 2012, UHS sold Auburn Regional Medical Center for approximately $93 million, including estimated working capital; management expected a substantial pre-tax gain in Q4 2012.
- Management expected approximately $85 million to $95 million of capital expenditures during the remaining three months of 2012. EHR implementation was expected to be substantially complete by mid-2013.
- Management estimated aggregate Medicaid rate reductions of approximately 1%, or $15 million annually, for the applicable 2013 state fiscal years, following estimated 3% to 4% reductions in the prior period.
- Potential Medicare payment reductions under the Budget Control Act were estimated at up to 2% per fiscal year, or approximately $32 million of annual Medicare net revenue impact.
- Illinois receivables increased to approximately $76 million, including $55 million outstanding more than 60 days. No specific reserve was recorded, but failure to collect could adversely affect cash flow and results.
- UHS remains subject to DOJ, HHS Office of Inspector General and other regulatory investigations, litigation, self-insurance exposure and potential Medicare or Medicaid reimbursement changes. The filing states that possible losses beyond recorded accruals cannot presently be estimated.
Investor verification priorities
- Verify the integration, financing and leverage impact of the post-quarter-end Ascend acquisition and the required Peak divestiture.
- Monitor acute-care admission, occupancy, payor-mix and uncompensated-care trends, particularly the deterioration in acute-care margins.
- Reconcile cash generation with capital spending, EHR implementation costs and the planned Q4 capital expenditures.
- Track Illinois receivable collections and the adequacy of the doubtful-account allowance.
- Assess exposure to Medicaid rate reductions, DSH and supplemental-payment programs, Medicare sequestration or other reimbursement changes.
- Review regulatory investigations, professional-liability reserves, debt maturities, interest-rate exposure and the company’s ability to maintain covenant compliance.