1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ............to..........
Commission file number 0-10454
UNIVERSAL HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2077891
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
UNIVERSAL CORPORATE CENTER
367 SOUTH GULPH ROAD
KING OF PRUSSIA, PENNSYLVANIA 19406
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (610) 768-3300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common shares outstanding, as
of October 31, 1996:
Class A 2,065,019
Class B 29,788,444
Class C 207,640
Class D 37,335
Page One of Twelve Pages
2
UNIVERSAL HEALTH SERVICES, INC.
I N D E X
PART I. FINANCIAL INFORMATION....................................................... PAGE NO.
Item 1. Financial Statements
Consolidated Statements of Income -
Three Months Ended September 30, 1996 and 1995................................. Three
Nine Months Ended September 30, 1996 and 1995
Condensed Consolidated Balance Sheets - September 30, 1996
and December 31, 1995.......................................................... Four
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995.................................. Five
Notes to Condensed Consolidated Financial Statements.............................. Six
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition ......................................... Seven, Eight, Nine, Ten
PART II. OTHER INFORMATION.......................................................... Eleven
SIGNATURE.....................................................................................Twelve
Page Two of Twelve Pages
3
PART I. FINANCIAL INFORMATION
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(000s omitted except per share amounts)
(unaudited)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
Net revenues $303,479 $234,144 $862,089 $669,024
Operating charges:
Operating expenses 118,127 92,068 330,077 260,629
Salaries and wages 107,568 83,120 303,399 238,758
Provision for doubtful accounts 26,411 21,823 72,809 55,065
Depreciation and amortization 19,210 13,218 50,714 36,276
Lease and rental expense 9,441 9,248 28,419 26,796
Interest expense, net 5,223 3,368 15,843 6,409
-------- -------- -------- --------
285,980 222,845 801,261 623,933
-------- -------- -------- --------
Income before income taxes 17,499 11,299 60,828 45,091
Provision for income taxes 6,214 4,070 21,826 16,466
-------- -------- -------- --------
Net income $ 11,285 $ 7,229 $ 39,002 $ 28,625
======== ======== ======== ========
Earnings per common
and common share equivalents: $ 0.34 $ 0.26 $ 1.29 $ 1.02
======== ======== ======== ========
Weighted average number of
common shares and equivalents: 32,849 28,116 30,173 28,008
======== ======== ======== ========
See accompanying notes to these condensed consolidated financial statements.
Page Three of Twelve Pages
4
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000s omitted)
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ -----------
(UNAUDITED)
------------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 105 $ 34
Accounts receivable, net 135,989 114,163
Supplies 21,451 18,207
Deferred income taxes 10,886 18,989
Other current assets 4,970 5,529
--------- ---------
Total current assets 173,401 156,922
--------- ---------
Property and equipment 824,421 641,528
Less: accumulated depreciation (264,147) (248,540)
--------- ---------
560,274 392,988
--------- ---------
OTHER ASSETS:
Excess of cost over fair value of net
assets acquired 151,834 136,206
Deferred income taxes 18,660 17,283
Deferred charges 14,119 11,466
Other 41,809 33,186
--------- ---------
226,422 198,141
--------- ---------
$ 960,097 $ 748,051
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 8,095 $ 7,125
Accounts payable and accrued liabilities 151,154 126,018
Federal and state taxes 1,489 1,874
--------- ---------
Total current liabilities 160,738 135,017
--------- ---------
Other noncurrent liabilities 84,074 78,248
--------- ---------
Long-term debt, net of current maturities 274,430 237,086
--------- ---------
COMMON STOCKHOLDERS' EQUITY:
Class A Common Stock, 2,065,019 shares
outstanding in 1996, 1,092,527 in 1995 21 11
Class B Common Stock, 29,780,400 shares
outstanding in 1996, 12,658,818 in 1995 298 127
Class C Common Stock, 207,640 shares
outstanding in 1996, 109,622 in 1995 2 1
Class D Common Stock, 39,083 shares
outstanding in 1996, 20,503 in 1995 -- --
Capital in excess of par, net of deferred
compensation of $452,000 in 1996
and $941,000 in 1995 193,852 89,881
Retained earnings 246,682 207,680
--------- ---------
440,855 297,700
--------- ---------
$ 960,097 $ 748,051
========= =========
See accompanying notes to these condensed consolidated
financial statements.
Page Four of Twelve Pages
5
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000s omitted - unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 39,002 $ 28,625
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation & amortization 50,714 36,276
Provision for self-insurance reserves 11,608 11,106
Changes in assets & liabilities, net of effects from
acquisitions and dispositions:
Accounts receivable 9,282 14,927
Accrued interest (3,504) (6)
Accrued and deferred income taxes 9,592 (13,766)
Other working capital accounts 18,287 8,684
Other assets and deferred charges (7,015) (7,377)
Other (2,050) 1,515
Payments made in settlement of self-insurance claims (6,157) (5,349)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 119,759 74,635
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions, net (79,187) (38,473)
Acquisition of businesses (168,429) (187,346)
Notes receivable related to acquisitions (7,000) --
Acquisition of assets held for lease -- (3,062)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (254,616) (228,881)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional borrowings 34,655 152,662
Issuance of common stock, net of issuance costs 100,273 960
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 134,928 153,622
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 71 (624)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 34 780
========= =========
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 105 $ 156
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 19,347 $ 6,415
========= =========
Income taxes paid, net of refunds $ 12,456 $ 30,232
========= =========
See accompanying notes to these condensed
consolidated financial statements.
Page Five of Twelve Pages
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UNIVERSAL HEALTH SERVICES,INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL
The consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission and reflect all adjustments which, in the opinion of the
Company, are necessary to fairly present results for the interim periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the accompanying disclosures are adequate to make the
information presented not misleading. It is suggested that these financial
statements be read in conjunction with the financial statements, accounting
policies and the notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
(2) EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common shares
outstanding during the year adjusted to give effect to common stock equivalents.
In April 1996, the Company declared a two for one stock split in the form of a
100% stock dividend which was paid on May 17, 1996 to shareholders of record as
of May 6, 1996. All classes of common stock participated on a pro rata basis.
The weighted average number of common shares and equivalents and earnings per
common and common equivalent share for the three and nine months ended September
30, 1996 and 1995 have been adjusted to reflect the two for one stock split.
(3) UNUSUAL ITEMS
Included in operating expenses during the 1995 nine month period was a $2.7
million pre-tax charge related to the Company's divestiture of two acute care
hospitals in connection with the acquisition of a 225-bed acute care facility
located in Aiken, South Carolina. Operating expenses for the nine months ended
September 30, 1995 were favorably impacted by reductions in certain reserve
balances totaling $1.9 million.
(4) OTHER LIABILITIES
Other noncurrent liabilities include the long-term portion of the Company's
professional and general liability reserves, workers' compensation reserves,
pension reserves and minority interests in majority owned subsidiaries and
partnerships.
(5) COMMITMENTS AND CONTINGENCIES
Under certain agreements, the Company has committed or guaranteed an aggregate
of $16.4 million related principally to the Company's self-insurance programs
and as support for various debt instruments and loan guarantees.
Page Six of Twelve Pages
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
AND FINANCIAL CONDITION
GENERAL
The matters discussed in this report as well as the news releases issued from
time to time by the Company contain certain forward-looking statements that
involve risks and uncertainties, including, among other things, that the
majority of the Company's revenues are produced by a small number of its total
facilities, possible changes in levels and terms of reimbursement for the
Company's charges by government programs or other third party payors, the
ability of the Company to successfully integrate its recent and proposed
acquisitions and the ability to continue to finance its growth on favorable
terms.
RESULTS OF OPERATIONS
Net revenues increased 30% or $69 million for the three months ended September
30, 1996 and 29% or $193 million for the nine months ended September 30, 1996
over the comparable prior year periods due primarily to the acquisitions of: (i)
a 360-bed medical complex located in Amarillo, Texas acquired during the second
quarter of 1996; (ii) five behavioral health centers located in Pennsylvania and
Texas acquired during the second and third quarters of 1996, and; (iii) a
225-bed acute care facility and a 512-bed acute care facility, both of which
were acquired during the third quarter of 1995. Also contributing to the
increase in net revenues was an increase in net revenues at hospital facilities
owned during both periods as revenues at these facilities increased 2% or $4
million for the three months ended September 30, 1996 and 3% or $15 million for
the nine months ended September 30, 1996 over the comparable prior year periods.
Earnings before interest, income taxes, depreciation, amortization and lease and
rental expense (EBITDAR) increased 38% or $14 million to $51 million for the
three months ended September 30, 1996 as compared to $37 million in the
comparable prior year period and 36% or $41 million to $156 million for the nine
months ended September 30, 1996 as compared to $115 million in the comparable
prior year period. Overall operating margins were 16.9% and 15.9% for the three
months ended September 30, 1996 and 1995 and 18.1% and 17.1% for the nine months
ended September 30, 1996 and 1995, respectively.
ACUTE CARE SERVICES
Net revenues from the Company's acute care hospitals and ambulatory treatment
centers as a percentage of consolidated net revenues accounted for 85% and 86%
for the three month periods ended September 30, 1996 and 1995, respectively, and
86% for each of the nine month periods ended September 30, 1996 and 1995.
Inpatient admissions at the Company's acute care hospitals owned during both
periods decreased 2% during the three month period ended September 30, 1996 as
compared to the comparable prior year period and increased 2% during the nine
month period ended September 30, 1996 as compared to the nine month period in
the prior year. Patient days at these facilities decreased 5% and 2% for the
three and nine month periods ended September 30, 1996 as compared to the
comparable prior year periods, respectively, while the length of stay decreased
4% and 3% for the three and nine month periods ended September 30, 1996 as
compared to the comparable prior year periods, respectively. Despite the decline
in patient days and the average length of stay at the Company's acute care
facilities owned during both periods, net revenues increased 2% for the three
month period ended September 30, 1996 and 3% for the nine month period ended
September 30, 1996 over the comparable prior year periods due to an increase in
outpatient activity.
Page Seven of Twelve Pages
8
Outpatient activity at the Company's acute care hospitals continues to increase
as a result of advances in medical technologies, which allow more services to be
provided on an outpatient basis, and increased pressure from Medicare, Medicaid,
health maintenance organizations (HMOs), preferred provider organizations (PPOs)
and insurers to reduce hospital stays and provide services, where possible, on a
less expensive outpatient basis. To accommodate the increased utilization of
outpatient services, the Company has expanded or redesigned several of its
outpatient facilities and services.
BEHAVIORAL HEALTH SERVICES
Net revenues from the Company's behavioral health services facilities as a
percentage of consolidated net revenues accounted for 15% and 13% for the three
month periods ended September 30, 1996 and 1995, respectively, and 14% for each
of the nine month periods ended September 30, 1996 and 1995. Net revenues at the
Company's behavioral health centers owned during both periods increased 3% and
1% during the three and nine month periods ended September 30, 1996 over the
comparable prior year periods, respectively. Inpatient admissions at these
facilities increased 4% for the three month period ended September 30, 1996 as
compared to the comparable prior year quarter while patient days decreased 5%
during the 1996 third quarter as compared to the comparable 1995 quarter due to
an 8% decrease in the average length of stay. For the nine month period ended
September 30, 1996, inpatient admissions at the Company's behavioral health
centers owned during both periods increased 6% over the comparable 1995 nine
month period as patient days remained unchanged due to a 5% decrease in the
average length of stay at these facilities. The reduction in the average length
of stay is a result of changing practices in the delivery of behavioral health
services and continued cost containment pressures from payors which includes a
greater emphasis on the utilization of outpatient services. Management of the
Company has responded to these trends by developing and marketing new outpatient
treatment programs.
OTHER OPERATING RESULTS
Depreciation and amortization expense increased 45% or $6.0 million to $19.2
million for the three months ended September 30, 1996 and 40% or $14.4 million
to $50.7 million for the nine months ended September 30,1996 as compared to the
comparable prior year periods. These increases were due primarily to the
Company's acquisition of one acute care hospital and five behavioral health
centers acquired during the second and third quarters of 1996 and two acute care
hospitals acquired during the third quarter of 1995. Partially offsetting these
increases was the effect of three acute care facilities divested in July and
October of 1995.
Interest expense increased $1.9 million to $5.2 million and $9.4 million to
$15.8 million for the three and nine month periods ended September 30, 1996 over
the comparable 1995 periods, respectively. The increased interest expense
resulted from increased borrowings used to finance the purchase of the acute
care hospital and five behavioral health centers acquired during the second and
third quarters of 1996 and the acquisition of two acute care hospitals during
the third quarter of 1995. In June 1996, the Company issued four million shares
of its Class B Common Stock at a price of $26 per share. The total net proceeds
of $99.1 million generated from this stock issuance were used to partially
finance the purchase transactions mentioned above
The effective tax rates were 35.5% and 36.0% for the three month periods ended
September 30, 1996 and 1995 and 35.9% and 36.5% for the nine month periods ended
September 30, 1996 and 1995, respectively.
Page Eight of Twelve Pages
9
GENERAL TRENDS
An increased proportion of the Company's revenue is derived from fixed payment
services, including Medicare and Medicaid which accounted for 49% and 46% of the
Company's net patient revenues for the three months ended September 30, 1996 and
1995 and 50% and 46% of the Company's net patient revenues for the nine months
ended September 30, 1996 and 1995, respectively. The Company expects the
Medicare and Medicaid revenues to continue to increase as a larger portion of
the general population qualifies for coverage as a result of the aging of the
population and expansion of state Medicaid programs. The Medicare program
reimburses the Company's hospitals primarily based on established rates by a
diagnosis related group for acute care hospitals and by cost based formula for
psychiatric hospitals.
In addition to the Medicare and Medicaid programs, other payors continue to
actively negotiate the amounts they will pay for services performed. In general,
the Company expects the percentage of its business from managed care programs,
including HMOs and PPOs to grow. The consequent growth in managed care networks
and the resulting impact of these networks on the operating results of the
Company's facilities vary among the markets in which the Company operates.
In recent years, an increasing number of legislative initiatives have been
introduced or proposed in Congress and in state legislatures that would effect
major changes in the healthcare system, either nationally or at the state level.
Among the proposals that have been introduced are price controls on hospitals,
insurance market reforms to increase the availability of group health insurance
to small businesses, requirements that all businesses offer health coverage to
their employees and the creation of a government health insurance plan or plans
that would cover all citizens and increase payments by beneficiaries. The
Company cannot predict whether any of the above proposals or any other proposals
will be adopted, and if adopted, no assurance can be given that the
implementation of such reforms will not have a material adverse effect on the
Company's business. In Texas, a law has been passed which mandates that the
state senate apply for a waiver from current Medicaid regulations to allow the
state to require that certain Medicaid participants be serviced through managed
care providers. The Company is unable to predict whether Texas will be granted
such a waiver or the effect on the Company's business of such waiver. Upon
meeting certain conditions, and serving a disproportionately high share of
Texas' low income patients, three of the Company's acute care facilities located
in Texas (including Northwest Texas Health Systems which was acquired by the
Company in May, 1996) became eligible and received additional reimbursement from
the state's disproportionate share hospital fund. Included in the Company's
financials was an aggregate of $4.7 million and $3.1 million for the three
months ended September 30, 1996 and 1995 and $10.1 million and $10.6 million for
the nine months ended September 30, 1996 and 1995, respectively, received
pursuant to the terms of this program. The program is scheduled to terminate in
August, 1997 and the Company cannot predict whether this program will continue
beyond the scheduled termination date.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $119.8 million for the nine months
ended September 30, 1996 and $74.6 million for the nine months ended September
30, 1995. The $45.2 million increase during the 1996 nine month period as
compared to the 1995 comparable period was due primarily to a $25.3 million
increase in net income plus the addback of non-cash charges (depreciation,
amortization and provision for self-insurance reserves), a $17.8 million
decrease in the payment of income taxes due to the 1995 period including the
payment of previously deferred taxes related to the sale of two hospitals and
$2.1 million of other net working capital changes. The net cash provided by
operating activities substantially exceeded the scheduled maturities of
long-term debt.
Page Nine of Twelve Pages
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During the second quarter of 1996, the Company acquired an acute care hospital
located in Amarillo, Texas for $125.5 million in cash and four behavioral health
centers located in Pennsylvania for $39.5 million in cash and up to $5 million
which is contingent upon future operating performance of the facilities. Also in
connection with the acquisition of the four behavioral health centers, the
Company advanced $7 million pursuant to the terms of a loan agreement which is
scheduled to mature in September of 1997. During the third quarter of 1996, the
Company completed the acquisition of a behavioral health center located in Texas
for $3.3 million in cash. During the nine month period of 1996, the Company
spent $79 million to finance capital expenditures, including $28 million spent
on the construction of a new medical complex in Summerlin, Nevada and a new
acute care facility in Edinburg, Texas.
The above mentioned acquisitions and capital expenditures were financed through
the Company's operating cash flow ($119.8 million), additional borrowings under
the Company's revolving credit facility ($34.7 million) and the net proceeds
generated from the issuance of four million shares of the Company's Class B
Common Stock issued at $26 per share (generating net proceeds of $99.1 million).
The Company expects to finance all capital expenditures and acquisitions with
internally generated funds and borrowed funds. As of September 30, 1996, the
Company had $167 million of unused borrowing capacity under its commercial paper
and revolving credit facilities.
Page Ten of Twelve Pages
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PART II. OTHER INFORMATION
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K
None
11. Statement re computation of per share earnings is set forth on Page six in
Note 2 of the Notes to Condensed Consolidated Financial Statements.
All other items of this Report are inapplicable.
Page Eleven of Twelve Pages
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UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Universal Health Services, Inc.
(Registrant)
Date: November 8, 1996
/s/ Kirk E. Gorman
-----------------------------------------
Kirk E. Gorman, Senior Vice President and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer).
Page Twelve of Twelve Pages
5
1000
U.S. DOLLARS
9-MOS
DEC-31-1996
JAN-01-1996
SEP-30-1996
1
105
0
135989
0
21451
173401
824421
264147
960097
160738
274430
0
0
321
440534
960097
0
862089
0
633476
79133
72809
15843
60828
21826
39002
0
0
0
39002
1.29
1.29
NOTE: The EPS-PRIMARY and EPS-fully diluted reflect the impact of a 2 for 1
stock split in the form of a 100% stock dividend which was paid on May 17, 1996
to shareholders of record as of May 6, 1996.
