Business Context and Reporting Period
Company: Universal Health Services, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2001
Business Overview: The Company operates acute care services (including hospitals in the U.S. and France) and behavioral health care services. The reporting period reflects significant growth driven by the acquisition of 27 facilities in the U.S. and France since the third quarter of 2000.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended 9/30/01 | 3 Months Ended 9/30/00 | 9 Months Ended 9/30/01 | 9 Months Ended 9/30/00 |
|---|---|---|---|---|
| Net Revenues | $720,784 | $561,790 | $2,116,329 | $1,627,622 |
| Net Income | $30,254 | $22,335 | $98,815 | $74,273 |
| Diluted EPS | $0.48 | $0.36 | $1.56 | $1.19 |
| EBITDAR | $107,644 | $86,295 | $331,595 | $267,672 |
| Operating Margin | 14.9% | 15.4% | 15.7% | 16.4% |
| Cash from Operations (9mo) | $262,789 | $157,121 | ||
| Total Debt (Long-term + Current) | $625,131 | $548,753 | ||
| Cash & Equivalents | $24,591 | $10,545 |
Note: EBITDAR is defined as Earnings before interest, income taxes, depreciation, amortization, lease & rental, minority interest expense, and gains/losses on foreign exchange and derivative transactions.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 28% ($159 million) for the quarter and 30% ($489 million) for the nine-month period. Growth was driven by $79 million in revenue from 27 acquired facilities (quarterly) and organic growth of 15% at same facilities.
- Profitability: Net income increased 35% for the quarter and 33% for the nine-month period. However, operating margins declined slightly (14.9% vs. 15.4% for the quarter) due to rising costs.
- Expense Pressures: Operating expenses as a percentage of revenue increased. Key drivers included rising labor rates (skilled nursing), increased pharmaceutical costs, higher bad debt provisions, and increased insurance expenses due to unfavorable market trends.
- Segment Performance:
- Acute Care: Revenue increased 16% (same facility basis) due to price increases and higher volumes. Operating margins declined to 15.8% (quarterly) from 17.7%.
- Behavioral Health: Revenue increased 9% (same facility basis). Operating margins improved to 18.7% (quarterly) from 18.1%.
- Debt and Liquidity: Total debt increased to fund acquisitions. Cash provided by operating activities surged to $263 million (9 months) compared to $157 million in the prior year, aided by a $35 million favorable change in accounts receivable.
Guidance, Outlook, Risks, and Unusual Items
- Subsequent Events (Post-Sept 30, 2001):
- Redeemed $135 million of 8.75% Senior Notes on October 9, 2001, resulting in an expected $1.6 million loss on debt extinguishment in Q4.
- Issued $200 million of new notes in November 2001 at a 6.75% coupon rate, maturing in 2011.
- Agreed to purchase a 150-bed hospital in Lansdale, PA, and a 204-bed facility in France.
- Insurance Contingency: The Pennsylvania Insurance Commissioner placed PHICO Insurance Company (providing majority of liability coverage) under rehabilitation. No provision was made for potential losses as they could not be reasonably estimated, but an inability of PHICO to pay claims could materially adversely affect results.
- Regulatory Risks:
- Medicare/Medicaid: Reimbursement rates are subject to legislative changes (BBA-97, BIPA). The Company estimates BIPA will increase 2001 net revenues by $5–$10 million.
- HIPAA: Compliance with new electronic data and privacy standards is required by 2002–2003; implementation costs are currently unquantified.
- Derivatives: Adoption of SFAS No. 133 resulted in unrealized derivative losses recorded in Other Comprehensive Income. A fair-value interest rate swap was terminated in Q3, resulting in a $3.8 million net payment to the Company.
Investor Verification Checklist
- Insurance Solvency: Verify the financial status of PHICO Insurance Company and the potential exposure of Universal Health Services to uncovered liability claims.
- Debt Refinancing: Confirm the final terms and closing of the new $400 million revolving credit facility and the impact of the new $200 million note issuance on interest expense.
- Acquisition Integration: Assess the operational performance and integration costs of the 27 facilities acquired since late 2000, particularly the French hospitals.
- Margin Compression: Monitor trends in labor costs, pharmaceutical expenses, and bad debt provisions to determine if operating margin declines are temporary or structural.
- Regulatory Compliance: Track the Company's progress and costs associated with HIPAA implementation and potential changes in Medicare/Medicaid reimbursement rates.