UNIVERSAL HEALTH SERVICES INC quarterly report, Q3 FY2022

Universal Health Services, Inc. — Q3 2022 Form 10-Q Summary

Business context and reporting period

UHS operates acute care hospitals, outpatient facilities and behavioral health facilities in the United States, United Kingdom, Puerto Rico and Washington, D.C. As of September 30, 2022, it owned or operated 359 inpatient facilities and 41 outpatient and other facilities. The filing covers the three and nine months ended September 30, 2022; financial statements are unaudited.

Financial performance and key metrics

Metric	Q3 2022	Q3 2021	9M 2022	9M 2021
Net revenues	$3.336 billion	$3.156 billion	$9.952 billion	$9.367 billion
Income from operations	$275.9 million	$314.8 million	$742.2 million	$1.049 billion
Operating margin	8.3%	10.0%	7.5%	11.2%
Net income attributable to UHS	$182.8 million	$218.4 million	$500.8 million	$752.5 million
Diluted EPS	$2.50	$2.60	$6.71	$8.83
Interest expense, net	$35.7 million	$21.2 million	$83.0 million	$64.5 million

Q3 revenue increased 5.7%; nine-month revenue increased 6.3%. Same-facility revenue increased 4.1% in Q3 and 4.4% for the nine-month period.
Q3 income attributable to UHS declined 16%, while nine-month income declined 33%. Higher labor, other operating and interest costs more than offset revenue growth.
Salaries, wages and benefits rose to 50.3% of Q3 revenue from 49.3% and to 50.9% for the nine-month period from 48.5%.
Acute care same-facility Q3 income before taxes declined 34% to $139.7 million, while behavioral health same-facility income before taxes increased 23% to $246.6 million. For the nine-month period, acute care same-facility income before taxes declined 33% and behavioral health declined 5%.
Acute care inpatient admissions declined 2.4% in Q3, while adjusted admissions increased 1.9%. Behavioral health inpatient admissions increased 4.3% and occupancy improved to 72% from 70%.

Cash flow, liquidity and debt

Net cash provided by operating activities was $698.7 million for the first nine months of 2022, compared with $561.7 million in 2021. The comparison benefited substantially from the $695 million Medicare accelerated-payment repayment recorded in 2021.
Capital expenditures were $569.6 million through September 30, 2022. Management expects full-year 2022 capital expenditures of approximately $760 million to $810 million, including $190 million to $240 million during the fourth quarter.
Cash, cash equivalents and restricted cash totaled $165.4 million at September 30, 2022, including $74.6 million of cash and cash equivalents.
Carrying-value debt was approximately $4.7 billion, compared with $4.2 billion at December 31, 2021. Debt represented approximately 45% of total capitalization, versus 41% at year-end 2021.
At September 30, 2022, the revolving credit facility had $189 million outstanding and approximately $1.007 billion of available capacity, net of letters of credit. The company reported compliance with all debt covenants.
The company had $2.0 billion of senior secured notes outstanding, maturing in 2026, 2030 and 2032. Floating-rate debt exposure increased interest expense as average borrowings and borrowing costs rose.
UHS repurchased $723.4 million of common stock during the first nine months and paid $44.2 million in dividends. Remaining repurchase authorization was approximately $1.05 billion at September 30, 2022.

Material changes versus the prior comparable period

Revenue growth did not translate into earnings growth because of clinical labor shortages, higher temporary labor and wage premiums, inflation in operating costs, increased interest rates and start-up losses at the newly opened 170-bed Reno acute care hospital.
COVID-19 admissions represented 6% of acute care inpatient admissions in Q3 2022 versus 14% in Q3 2021. Lower COVID-19 volumes reduced acuity and related government reimbursement, although they also reduced supply usage and premium labor needs.
Acute care occupancy declined to 62% in Q3 from 71%; adjusted admissions increased because of continued outpatient activity and a shift from inpatient to outpatient surgeries.
UHS entered into a $700 million incremental tranche A term loan in June 2022, with proceeds primarily used to repay revolving borrowings. The term loan facility had $2.353 billion outstanding at September 30, 2022.
In August 2022, UHS acquired the remaining 20% interest in George Washington University Hospital for $51 million, bringing ownership to 100%.
UHS recorded approximately $16 million of additional self-insured professional and general liability reserves in the first nine months of 2022, compared with $41 million in the prior-year period.

Guidance, outlook, risks and unusual items

Management expects staffing shortages and associated higher labor costs to continue having a materially unfavorable effect for the foreseeable future. Some behavioral health facilities have limited patient volumes because vacant positions could not be filled.
Management expects approximately $491 million of 2022 net benefit from state Medicaid supplemental payment programs, net of approximately $289 million of provider taxes. This estimate depends on continued regulatory approvals, hospital eligibility and required intergovernmental transfers.
Texas Quality Incentive Fund revenue was approximately $25 million through Q3; management anticipated an additional approximately $5 million in Q4 2022.
Management believes operating cash flow, cash balances, credit availability and capital-market access are sufficient to fund requirements for the next 12 months, but cautions that refinancing may not be available on acceptable terms.
Key risks include COVID-19 developments, staffing shortages, inflation, higher interest rates, payer reimbursement pressure, Medicaid and Medicare policy changes, loss or reduction of supplemental Medicaid payments, cybersecurity incidents, litigation and self-insurance claims.
UHS maintains substantial self-insured professional and general liability exposure. The net accrual for professional and general liability claims was $388 million at September 30, 2022; workers’ compensation liabilities were $123 million.
The company disclosed preliminary settlements in the Knight shareholder derivative action and the Boley ERISA class action, each subject to final documentation and court approval. The George Washington University litigation was finalized and dismissed after regulatory approval, without a material financial statement impact.
The filing provides no formal earnings or revenue guidance. It does provide capital expenditure expectations and estimates for certain Medicaid supplemental payment programs.

Most important facts for investors to verify

Whether acute care volumes, occupancy and surgical mix recover sufficiently to offset labor, inflation and interest-cost pressures.
The sustainability and regulatory approval of Medicaid supplemental payment programs, particularly Texas, California, Kentucky, Florida and Nevada programs.
Actual full-year capital expenditures versus the $760 million to $810 million expectation and the effect on free cash flow.
Debt refinancing needs, floating-rate exposure, covenant compliance and the availability of the $1.007 billion revolving credit capacity.
Developments in self-insurance reserves, Medicaid DSH and disproportionate-share payment audits, and other legal contingencies.
Finalization and court approval of the disclosed preliminary settlements and any resulting cash or insurance payments.
The effect of the Reno hospital start-up losses and other newly opened facilities on consolidated margins.