Business Context and Reporting Period
Company: Universal Health Services, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2006
Operations: The company owns and operates acute care hospitals, behavioral health centers, and ambulatory surgery/radiation oncology centers. As of March 31, 2006, it operated 28 acute care hospitals and 101 behavioral health centers. Four acute care facilities in Louisiana remain closed and non-operational due to damage from Hurricane Katrina.
Key Financial Metrics
| Metric (in thousands) | Q1 2006 | Q1 2005 |
|---|---|---|
| Net Revenues | $1,034,289 | $1,006,645 |
| Net Income | $51,084 | $61,409 |
| Diluted EPS | $0.88 | $0.99 |
| Operating Cash Flow | $110,340 | $134,612 |
| Long-Term Debt | $603,533 | $637,654 |
| Cash and Equivalents | $8,211 | $54,188 |
| Days Sales Outstanding (DSO) | 47 days | 51 days |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 3% ($28 million) year-over-year. This was driven by a 4% increase in same-facility revenues and $47 million from newly acquired behavioral health facilities, partially offset by a $61 million revenue loss from Hurricane Katrina-closed facilities.
- Profitability Decline: Net income decreased 17% ($10 million). This was primarily due to a $6 million after-tax decrease in income from discontinued operations (sales of Puerto Rico hospitals and Florida home health business in Q1 2005) and a $5 million decrease in income from continuing operations.
- Hurricane Impact: The quarter included $6.9 million in hurricane-related expenses and $22.3 million in hurricane insurance recoveries. Net cash provided by operating activities decreased $24 million, largely due to lower net income and hurricane-related expenses.
- Segment Performance:
- Acute Care: Same-facility income before taxes decreased 28% ($23 million) due to increased uninsured patients and competitive pressures in the McAllen/Edinburg, Texas market.
- Behavioral Health: Same-facility income before taxes increased 15% ($6 million) driven by higher admissions and revenue per patient day.
Guidance, Outlook, and Risks
- Capital Expenditures: The company expects to spend approximately $242 million to $252 million on capital expenditures for the remainder of 2006, including new construction in Las Vegas, Texas, and McAllen.
- Accounting Changes: Effective January 1, 2006, the company adopted SFAS No. 123R, requiring the expensing of stock-based compensation. This is expected to reduce 2006 net income by approximately $3.8 million ($0.06 per diluted share).
- Regulatory Risks:
- Medicare: CMS proposed changes to DRG relative weights for 2007 that could materially adversely impact reimbursements.
- Medicaid: Potential reductions in funding, particularly in Texas, and the termination of specific per diem programs pose risks.
- Legal Proceedings:
- False Claims Act: Under investigation by the U.S. Attorney's office in Houston regarding physician employment and referral practices in South Texas (McAllen/Edinburg).
- Wage and Hour: Facing a potential class-action lawsuit in California regarding missed breaks and labor code violations.
- Insurance: The company is self-insured for malpractice up to $20 million per occurrence. Unfavorable trends in the insurance market could materially affect future results.
Investor Verification Checklist
- Hurricane Recovery: Verify the timeline for reopening Louisiana facilities and the finality of insurance claim settlements.
- McAllen Market Competition: Assess the long-term impact of physician-owned competition and new capacity on the profitability of the South Texas Health System.
- Uninsured Patient Trends: Monitor the ratio of uninsured patients and the effectiveness of the new uninsured discount policy implemented in Q1 2006.
- Regulatory Changes: Track the finalization of CMS DRG proposals and Texas Medicaid funding levels for 2006-2007.
- Legal Exposure: Review updates on the False Claims Act investigation and the California wage and hour class action certification status.