1
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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, 1999
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 1-10765
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, 1999:
Class A 2,056,929
Class B 28,370,893
Class C 207,230
Class D 24,953
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Page One of Seventeen 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 and Nine Months Ended September 30, 1999 and 1998............. Three
Condensed Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998............................ Four
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998....................... Five
Notes to Condensed Consolidated
Financial Statements.......................... ..................... Six, Seven & Eight
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. Nine, Ten, Eleven, Twelve,
Thirteen, Fourteen & Fifteen
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ Sixteen
PART II. OTHER INFORMATION............................................... Sixteen
SIGNATURE................................................................. Seventeen
Page Two of Seventeen 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,
------------------------------ ---------------------------------
1999 1998 1999 1998
------------------------------ ---------------------------------
Net revenues $ 489,828 $ 456,090 $ 1,522,990 $ 1,393,765
Operating charges:
Operating expenses 201,709 192,055 609,559 568,131
Salaries and wages 181,674 165,547 542,815 492,393
Provision for doubtful accounts 44,926 31,116 125,997 101,372
Depreciation and amortization 26,695 27,160 80,870 77,868
Lease and rental expense 12,219 11,232 36,771 34,809
Interest expense, net 6,503 7,139 19,551 20,529
-------------- -------------- ---------------- ---------------
473,726 434,249 1,415,563 1,295,102
-------------- -------------- ---------------- ---------------
Income before minority interests and income taxes 16,102 21,841 107,427 98,663
Minority interests in earnings (losses) of
consolidated entities (579) 1,413 6,172 6,687
-------------- -------------- ---------------- ---------------
Income before income taxes 16,681 20,428 101,255 91,976
Provision for income taxes 5,887 7,035 37,409 32,472
-------------- -------------- ---------------- ---------------
Net income $ 10,794 $ 13,393 $ 63,846 $ 59,504
============== ============== ================ ===============
Earnings per common share - basic $ 0.34 $ 0.41 $ 2.01 $ 1.83
============== ============== ================ ===============
Earnings per common share - diluted $ 0.34 $ 0.40 $ 1.97 $ 1.78
============== ============== ================ ===============
Weighted average number of common shares - basic 31,425 32,643 31,697 32,595
Weighted average number of common share equivalents 626 690 670 786
-------------- -------------- ---------------- ---------------
Weighted average number of common shares
and equiv. - diluted 32,051 33,333 32,367 33,381
============== ============== ================ ===============
See accompanying notes to these condensed consolidated financial statements.
Page Three of Seventeen Pages
4
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000s omitted)
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,088 $ 1,260
Accounts receivable, net 285,067 256,354
Supplies 38,554 38,842
Deferred income taxes 26,762 10,838
Other current assets 13,574 12,321
----------------- -----------------
Total current assets 371,045 319,615
----------------- -----------------
Property and equipment 1,167,777 1,161,939
Less: accumulated depreciation (423,352) (396,530)
----------------- -----------------
744,425 765,409
Funds restricted for construction 41,036 43,413
----------------- -----------------
785,461 808,822
----------------- -----------------
OTHER ASSETS:
Excess of cost over fair value of net
assets acquired 288,669 279,141
Deferred charges 11,968 13,533
Other 28,183 26,984
----------------- -----------------
328,820 319,658
----------------- -----------------
$ 1,485,326 $ 1,448,095
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 3,806 $ 4,082
Accounts payable and accrued liabilities 201,709 165,718
Federal and state taxes ----- 253
----------------- -----------------
Total current liabilities 205,515 170,053
----------------- -----------------
Other noncurrent liabilities 91,613 80,172
----------------- -----------------
Minority interest 122,104 129,423
----------------- -----------------
Long-term debt, net of current maturities 400,445 418,188
----------------- -----------------
Deferred income taxes 27,049 23,252
----------------- -----------------
COMMON STOCKHOLDERS' EQUITY:
Class A Common Stock, 2,056,929 shares
outstanding in 1999, 2,057,929 in 1998 21 21
Class B Common Stock, 28,600,123 shares
outstanding in 1999, 29,901,218 in 1998 286 299
Class C Common Stock, 207,230 shares
outstanding in 1999, 207,230 in 1998 2 2
Class D Common Stock, 25,007 shares
outstanding in 1999, 28,788 in 1998 ----- -----
Capital in excess of par, net of deferred
compensation of $240,000 in 1999
and $185,000 in 1998 169,260 221,500
Retained earnings 469,031 405,185
----------------- -----------------
638,600 627,007
----------------- -----------------
$ 1,485,326 $ 1,448,095
================= =================
See accompanying notes to these condensed consolidated financial statements.
Page Four of Seventeen Pages
5
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000s omitted - unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 63,846 $ 59,504
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation & amortization 80,870 77,868
Earnings of minority partners, net of losses 6,172 6,687
Changes in assets & liabilities, net of effects from
acquisitions and dispositions:
Accounts receivable (15,731) (28,875)
Accrued interest (3,380) (2,024)
Accrued and deferred income taxes (5,969) 971
Other working capital accounts 34,200 25,765
Other assets and deferred charges (2,930) (497)
Other 2,176 (5,088)
Accrued insurance expense, net of commercial premiums paid 6,963 7,688
Payments made in settlement of self-insurance claims (9,314) (15,191)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 156,903 126,808
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions, net (48,546) (71,055)
Proceeds received from merger, sale or disposition of assets 15,431 10,955
Acquisition of businesses (31,588) (188,280)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (64,703) (248,380)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction of long-term debt (19,504) --
Additional borrowings -- 129,376
Distributions to minority partners (11,891) (236)
Issuance of common stock 1,490 1,487
Repurchase of common shares (56,467) (6,047)
--------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (86,372) 124,580
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 5,828 3,008
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,260 332
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,088 $ 3,340
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 22,931 $ 22,553
========= =========
Income taxes paid, net of refunds $ 43,469 $ 32,025
========= =========
See accompanying notes to these condensed consolidated financial statements.
Page Five of Seventeen Pages
6
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, 1998.
Certain prior year amounts have been reclassified to conform with current year
financial presentation.
(2) OTHER NONCURRENT AND MINORITY INTEREST LIABILITIES
Other noncurrent liabilities include the long-term portion of the Company's
professional and general liability, compensation reserves, and pension
liability.
The minority interest liability consists primarily of a 27.5% outside ownership
interest in three acute care facilities located in Las Vegas, Nevada and a 20%
outside ownership in an acute care facility located in Washington D.C.
(3) COMMITMENT AND CONTINGENCIES
Under certain agreements, the Company has committed or guaranteed an aggregate
of $54 million related principally to the Company's self-insurance programs and
as support for various debt instruments and loan guarantees, including a $40
million letter of credit related to the Company's 1997 acquisition of an 80%
interest in The George Washington University Hospital.
(4) NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". The
Statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. In June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133," which delayed the effective date
of SFAS No. 133 for one year until January 1, 2001. The Registrant does not
expect the adoption of this statement to have a material impact on its financial
position or results of operations.
The Company expects to adopt Statement 133 in January 2001 and has not yet
quantified the impact on its financial statements. However, the Statement could
increase the volatility in earnings and other comprehensive income.
SEGMENT REPORTING (UNAUDITED)
The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information", in 1998. SFAS No. 131 established standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to stockholders. Operating segments are defined as components of
an
Page Six of Seventeen Pages
7
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing performance.
The Company's reportable operating segments consist of acute care services and
behavioral health care services. The "Other" segment column below includes
centralized services including information services, purchasing, reimbursement,
accounting, taxation, legal, advertising, design and construction, and patient
accounting. Also included are the operating results of the Company's other
operating entities including the outpatient surgery and radiation therapy
centers and specialized women's health centers. The chief operating decision
making group for the Company's acute care services and behavioral health care
services is comprised of the Company's President and Chief Executive Officer,
and the lead executives of each of the Company's two primary operating segments.
The lead executive for each operating segment also manages the profitability of
each respective segment's various hospitals. The operating segments are managed
separately because each operating segment represents a business unit that offers
different types of healthcare services. The accounting policies of the operating
segments are the same as those described in the summary of significant
accounting policies.
THREE MONTHS ENDED SEPTEMBER 30, 1999
----------------------------------------------------------------
BEHAVIORAL
ACUTE CARE HEALTH TOTAL
SERVICES SERVICES OTHER CONSOLIDATED
-------- -------- ----- ------------
(Dollar amounts in thousands)
Gross inpatient revenues $653,539 $107,534 $7,644 $768,717
Gross outpatient revenues $237,090 $22,717 $27,430 $287,237
Total net revenues $400,630 $68,388 $20,810 $489,828
EBITDAR (A) $59,658 $10,640 ($8,779) $61,519
Total assets as of 9/30/99 $1,197,631 $156,121 $131,574 $1,485,326
Licensed beds 4,794 2,066 -------- 6,860
Available beds 4,091 2,051 -------- 6,142
Patient days 231,624 115,783 -------- 347,407
Admissions 50,563 9,622 -------- 60,185
Average length of stay 4.6 12.0 -------- 5.8
THREE MONTHS ENDED SEPTEMBER 30, 1998
-------------------------------------------------------------------
BEHAVIORAL
ACUTE CARE HEALTH TOTAL
SERVICES SERVICES OTHER CONSOLIDATED
-------- -------- ----- ------------
(Dollar amount in thousands)
Gross inpatient revenues $595,295 $84,724 $5,363 $685,382
Gross outpatient revenues $215,575 $21,735 $21,691 $259,001
Total net revenues $380,999 $58,054 $17,037 $456,090
EBITDAR (A) $70,845 $10,370 ($13,843) $67,372
Total assets as of 9/30/98 $1,217,484 $129,959 $118,847 $1,466,290
Licensed beds 4,824 1,779 -------- 6,603
Available beds 4,043 1,764 -------- 5,807
Patient days 216,933 91,308 -------- 308,241
Admissions 47,235 8,321 -------- 55,556
Average length of stay 4.6 11.0 -------- 5.5
Page Seven of Seventeen Pages
8
NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------------------------------------
BEHAVIORAL
ACUTE CARE HEALTH TOTAL
SERVICES SERVICES OTHER CONSOLIDATED
-------- -------- ----- ------------
(Dollar amounts in thousands)
Gross inpatient revenues $2,042,486 $303,900 $20,180 $2,366,566
Gross outpatient revenues $710,450 $73,288 $79,045 $862,783
Total net revenues $1,264,206 $198,925 $59,859 $1,522,990
EBITDAR (A) $236,595 $35,303 ($27,279) $244,619
Total assets as of 9/30/99 $1,197,631 $156,121 $131,574 $1,485,326
Licensed beds 4,811 1,947 -------- 6,758
Available beds 4,101 1,932 -------- 6,033
Patient days 719,504 327,778 -------- 1,047,282
Admissions 152,729 28,155 -------- 180,884
Average length of stay 4.7 11.6 -------- 5.8
NINE MONTHS ENDED SEPTEMBER 30, 1998
-----------------------------------------------------------------
BEHAVIORAL
ACUTE CARE HEALTH TOTAL
SERVICES SERVICES OTHER CONSOLIDATED
-------- -------- ----- ------------
(Dollar amount in thousands)
Gross inpatient revenues $1,804,158 $257,827 $15,574 $2,077,559
Gross outpatient revenues $626,471 $68,500 $55,571 $750,542
Total net revenues $1,170,015 $176,414 $47,336 $1,393,765
EBITDAR (A) $236,790 $31,402 ($36,323) $231,869
Total assets as of 9/30/98 $1,217,484 $129,959 $118,847 $1,466,290
Licensed beds 4,652 1,779 -------- 6,431
Available beds 3,942 1,764 -------- 5,706
Patient days 655,728 274,902 -------- 930,630
Admissions 138,667 24,628 -------- 163,295
Average length of stay 4.7 11.2 -------- 5.7
EBITDAR - Earnings before interest, income taxes, depreciation, amortization,
lease & rental and minority interest expense.
Page Eight of Seventeen Pages
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
FORWARD-LOOKING STATEMENTS
The matters discussed in this report as well as the news releases issued from
time to time by the Company include certain statements containing the words
"believes", "anticipates", "intends", "expects" and words of similar import,
which constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance achievements of the Company or industry results
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, the following: that the majority of the Company's revenues
are produced by a small number of its total facilities; possible changes in the
levels and terms of reimbursement for the Company's charges by government
programs, including Medicare or Medicaid or other third party payers; industry
capacity; demographic changes; existing laws and government regulations and
changes in or failure to comply with laws and governmental regulations; the
ability to enter into managed care provider agreements on acceptable terms;
liability and other claims asserted against the Company; competition; the loss
of significant customers; technological and pharmaceutical improvements that
increase the cost of providing, or reduce the demand for healthcare; the ability
to attract and retain qualified personnel, including physicians, the ability of
the Company to successfully integrate its recent acquisitions; the Company's
ability to finance growth on favorable terms; the impact of Year 2000 issues;
and, other factors referenced in the Company's 1998 Form 10-K or herein. Given
these uncertainties, prospective investors are cautioned not to place undue
reliance on such forward-looking statements. The Company disclaims any
obligation to update any such factors or to publicly announce the result of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
RESULTS OF OPERATIONS
Net revenues increased 7% or $34 million for the three months ended September
30, 1999 and 9% or $129 million for the nine months ended September 30, 1999,
over the comparable prior year periods. The $34 million increase during the
third quarter of 1999, over the comparable prior year quarter, consists
primarily of the following: (i) a 2.9% or $13 million increase in net revenues
at the Company's acute care and behavioral health care facilities owned during
both periods, and; (ii) $17 million of net revenues generated at three
behavioral health care facilities located in Illinois, Indiana and New Jersey
and an acute care facility located in Laredo, Texas (net of revenues generated
at facility exchanged for the Laredo facility) all of which were acquired during
the second quarter of 1999.
The $129 million increase in net revenues during the nine months ended September
30, 1999, over the comparable prior year period, was primarily attributable to:
(i) a 4.6% or $62 million increase in net revenues at the Company's acute care
and behavioral health care facilities owned during both periods (excluding a
favorable $3.1 million prior year net revenue adjustment recorded in the second
quarter of 1999 resulting from an adjustment to contractual allowances recorded
in a prior year); (ii) $27 million of net revenues generated at three behavioral
health care facilities located in Illinois, Indiana and New Jersey and an acute
care facility located in Laredo, Texas (net of revenues generated at facility
exchanged for the Laredo facility) all of which were acquired during the second
quarter of 1999, and; (iii) the acquisition of four acute care facilities
located in Puerto Rico and Las Vegas which were acquired during the first
quarter of 1998 ($25 million).
Earnings before interest, income taxes, depreciation, amortization and lease and
rental expense (before deducting minority interests in earnings of consolidated
entities) ("EBITDAR") decreased to $62 million for the three months ended
September 30, 1999 from $67 million in the comparable prior year quarter.
EBITDAR increased to $245 million for the nine months ended September 30, 1999
as compared to $232 million during the prior year nine month period. Overall
operating margins were
Page Nine of Seventeen Pages
10
12.6% and 14.8% during the three month periods ended September 30, 1999 and
1998, respectively, and 16.1% and 16.6% during the nine month periods ended
September 30, 1999 and 1998, respectively. The decrease in EBITDAR during the
third quarter of 1999 and the decreases in the overall operating margins during
the three and nine month periods ended September 30, 1999, as compared to the
comparable prior year periods, were primarily due to decreases in operating
performance at the Company's acute care facilities, as discussed below.
ACUTE CARE SERVICES
Net revenues from the Company's acute care hospitals, ambulatory treatment
centers and specialized women's health centers accounted for 85% and 87% of
consolidated net revenues for the three month periods ended September 30, 1999
and 1998, respectively, and 86% and 87% of consolidated net revenues for the
nine month periods ended September 30, 1999 and 1998. Net revenues at the
Company's acute care facilities owned in both periods increased 3.4% and 5.0%
during the three and nine month periods ended September 30, 1999 as compared to
the comparable prior year periods, respectively, (excluding the favorable $3.1
million net revenue adjustment included in the 1999 nine month period, as
mentioned above). The 3.4% increase in same facility net revenue during the
third quarter of 1999, as compared to the comparable prior year quarter, was due
primarily to a 5.4% increase in admissions and a 5.8% increase in patient days
at these facilities. The average length of stay at the acute care facilities
owned in both periods remained unchanged at 4.6 days during the three month
periods ended September 30, 1999 and 1998. The 5.0% increase in same facility
net revenue during the nine month period ended September 30, 1999, as compared
to the comparable prior year nine month period, was due primarily to a 5.6%
increase in admissions and a 5.3% increase in patient days. The average length
of stay at the acute care facilities owned in both periods remained unchanged at
4.7 days during the nine month periods ended September 30, 1999 and 1998.
The increase in net revenues at the Company's acute care facilities was caused
primarily by an increase in inpatient admissions and an increase in outpatient
activity. Outpatient activity continues to increase as gross outpatient revenues
at the Company's acute care facilities owned in both three month periods ended
September 30, 1999 and 1998 increased 9% during the three month period ended
September 30, 1999, as compared to the comparable prior year quarter, and
comprised 27% of the Company's acute care gross patient revenue in each of the
quarters ended September 30, 1999 and 1998. Gross outpatient revenues at the
Company's acute care facilities owned in both nine month periods ended September
30, 1999 and 1998 increased 11% during the nine month period ended September 30,
1999, as compared to the comparable prior year nine month period, and comprised
26% of the Company's acute care gross patient revenue in each of the nine month
periods ended September 30, 1999 and 1998. The increase in net revenues at the
Company's acute care facilities resulting from increased inpatient and
outpatient volume was partially offset by lower payments from the government
under the Medicare program as a result of The Balanced Budget Act of 1997.
The increase in outpatient revenues is primarily the result of advances in
medical technologies and pharmaceutical improvements, which allow more services
to be provided on an outpatient basis, and increased pressure from Medicare,
Medicaid, managed care companies and other insurers to reduce hospital stays and
provide services, where possible, on a less expensive outpatient basis. The
hospital industry in the United States as well as the Company's acute care
facilities continue to have significant unused capacity which has created
substantial competition for patients. Inpatient utilization continues to be
negatively affected by payor-required, pre-admission authorization and by payor
pressure to maximize outpatient and alternative healthcare delivery services for
less acutely ill patients. The Company expects the increased competition,
admission constraints and payor pressures to continue. The Company's ability to
maintain or increase its operating margins is dependent upon its ability to
successfully respond to these trends as well as reductions in spending on
governmental health care programs.
Earnings before interest, income taxes, depreciation, amortization and lease and
rental expense (before deducting minority interests in earnings of consolidated
entities) ("EBITDAR") at the Company's acute care facilities decreased to $60
million for the three months ended September 30, 1999 from
Page Ten of Seventeen Pages
11
$71 million in the comparable prior year quarter and remained unchanged at $237
million for both nine month periods ended September 30, 1999 and 1998. Operating
margins at the Company's acute care facilities were 14.9% and 18.6% during the
three month periods ended September 30, 1999 and 1998, respectively, and 18.7%
and 20.2% during the nine month periods ended September 30, 1999 and 1998,
respectively.
During the 1999 third quarter the Company's acute care division experienced
earnings pressure due to government reimbursement reductions, continued
increases in the provision for doubtful accounts and weakened operating
performance at facilities in Las Vegas, Nevada and Amarillo, Texas. As a
percentage of acute care net revenues, the provision for doubtful accounts for
the Company's acute care facilities was 10.1% and 7.1% for the three months
ended September 30, 1999 and 1998, respectively, and 9.2% and 7.7% for the nine
months ended September 30, 1999 and 1998, respectively. The increase in bad debt
expense as a percentage of net revenues was due to: (i) a reduction in the
reimbursement for Medicare bad debts as mandated by The Balanced Budget Act of
1997; (ii) continued delays in payments from health maintenance organizations;
(iii) an increase in the number of uninsured patients seeking treatment at the
Company's facilities, and; (iv) billing and collection issues related to the
Company's Las Vegas facilities. The operating performance at the Company's
facility in Amarillo, Texas has been negatively impacted by reduced level of
business in a few high margin services and higher than anticipated indigent care
costs. The Company will continue to allocate additional resources devoted to
addressing the operational issues at its facilities in Las Vegas and Amarillo.
Also unfavorably impacting the operating performance of the Company's acute care
facilities during the third quarter of 1999, including its facility in Amarillo
Texas, was a reduction in Medicaid disproportionate share reimbursement received
by facilities located in Texas and South Carolina. Beginning in the third
quarter of 1999, as a result of reductions stemming from The Balanced Budget Act
of 1997 and program redesigns by the two states, the Company's Medicaid
disproportionate share reimbursements have been reduced by approximately $11
million annually (see General Trends for additional disclosure).
BEHAVIORAL HEALTH SERVICES
Net revenues from the Company's behavioral health services facilities accounted
for 14% and 13% of consolidated net revenues for the three month periods ended
September 30, 1999 and 1998, respectively, and 13% of consolidated net revenues
in each of the nine month periods ended September 30, 1999 and 1998. Net
revenues at the Company's behavioral health services facilities owned in both
periods remained relatively unchanged for the three month period ended September
30, 1999, as compared to the comparable prior year quarter, and increased 2.2%
for the nine month period ended September 30, 1999, as compared to the
comparable prior year period. For the three month period ended September 30,
1999, admissions at the Company's behavioral health services facilities owned in
both periods decreased 1.3% as compared to the comparable prior year quarter
while patient days increased 5.2% due to a 6.6% increase in the average length
of stay to 11.7 days in the 1999 third quarter as compared to 11.0 days during
the 1998 third quarter. For the nine month period ended September 30, 1999,
admissions at the Company's behavioral health services facilities owned in both
periods increased 3.8%, as compared to the comparable prior year nine month
period, while patient days increased 6.3% in the 1999 nine month period as
compared to the comparable prior year period. The average length of stay at the
Company's behavioral health services facilities owned during both periods
increased 2.4% to 11.4 days during the nine months ended September 30, 1999 as
compared to 11.2 days during the comparable prior year period. The increase in
the average length of stay during the three and nine month periods ended
September 30, 1999, as compared to the comparable prior year periods, was due to
a greater emphasis on child, adolescent and specialty programs.
Earnings before interest, income taxes, depreciation, amortization and lease and
rental expense (before deducting minority interests in earnings of consolidated
entities) ("EBITDAR") at the Company's behavioral health care facilities
increased to $11 million for the three months ended September 30, 1999 from $10
million in the comparable prior year quarter and $35 million for the nine months
ended September 30, 1999 as compared to $31 million during the prior year nine
month period. Operating margins at the Company's behavioral health care
facilities were 15.6% and 17.9% during the three month periods
Page Eleven of Seventeen Pages
12
ended September 30, 1999 and 1998, respectively, and 17.7% and 17.8% during the
nine month periods ended September 30, 1999 and 1998, respectively. The decrease
in the operating margin during the third quarter of 1999, as compared to the
1998 third quarter, was due primarily to lower payments from the government
under the Medicare program as a result of The Balance Budget Act of 1997 and
lower margins on the adolescent and specialty programs.
OTHER OPERATING RESULTS
The Company recorded minority interest expense/(income) in the earnings/(losses)
of consolidated entities amounting to ($579,000) and $1.4 million for the three
months ended September 30, 1999 and 1998, respectively, and $6.2 million and
$6.7 million for the nine months ended September 30, 1999 and 1998,
respectively. The minority interest expense/(income) recorded during both
periods consists primarily of the minority ownership's share of the net income
of four acute care facilities, three of which are located in Las Vegas, Nevada
and one located in Washington, DC. The $2.0 million change during the third
quarter of 1999, as compared to the 1998 comparable quarter, was due primarily
to the unfavorable operating performance trends experienced at the Company's
acute care facilities located in Las Vegas, Nevada.
Depreciation and amortization expense remained relatively unchanged at $27
million in each of the three month periods ended September 30, 1999 and 1998.
For the nine month period ended September 30, 1999, depreciation and
amortization expense increased 4% to $81 million as compared to $78 million in
the comparable prior year period. The increase was due primarily to the four
acute care hospitals acquired during the first quarter of 1998 (three in Puerto
Rico and one in Las Vegas) and three behavioral health care facilities acquired
during the second quarter of 1999.
Interest expense decreased 9% or $600,000 and 5% or $1.0 million during the
three and nine month periods ended September 30, 1999, as compared to the
comparable prior year periods, respectively, due primarily to lower average
outstanding borrowings.
The effective tax rate was 35.3% and 34.4% for the three months ended September
30, 1999 and 1998, respectively, and 36.9% and 35.3% for the nine months ended
September 30, 1999 and 1998, respectively. The increase in the effective tax
rate during the 1999 periods as compared to the comparable prior year periods
was due to a reduction in the tax benefits related to the financing of employee
benefit programs.
GENERAL TRENDS
A significant portion of the Company's revenue is derived from fixed payment
services, including Medicare and Medicaid which accounted for 45% of the
Company's net patient revenues during each of the three and nine month periods
ended September 30, 1999 and 1998. 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 behavioral health facilities.
Historically, rates paid under Medicare's prospective payment system ("PPS") for
inpatient services have increased, however, these increases have been less than
cost increases. Pursuant to the terms of The Balanced Budget Act of 1997 (the
"1997 Act"), there were no increases in the rates paid to hospitals for
inpatient care through September 30, 1998. The modest rate increases that became
effective on October 1, 1998 were more than offset by the negative impact of
converting reimbursement on skilled nursing facility patients from a cost based
reimbursement to a prospective payment system and from lower DRG payments on
certain patient transfers mandated by the 1997 Act. Reimbursement for bad debt
expense and capital costs as well as other items have been reduced. Outpatient
reimbursement for Medicare patients is scheduled to convert to a PPS during the
second quarter of 2000. Since final provisions of the outpatient Medicare PPS
are not yet available, the Company can not completely estimate the resulting
impact on its future results of operations.
Page Twelve of Seventeen Pages
13
Congress is considering passage of federal legislation that will restore a
potion of the Medicare reimbursement reductions that were mandated by The
Balanced Budget Act of 1997. Reimbursement for services that will be impacted by
the potential legislation include outpatient services, skilled nursing facility
services, home health services and teaching hospital reimbursement. The
potential impact of this legislation can not be determined by the Company at
this time and although the Company believes the ultimate impact of this
legislation will be favorable, the Company does not expect the resulting impact
to have a material effect on its future results of operations.
The healthcare industry is subject to numerous laws and regulations which
include, among other things, matters such as government healthcare participation
requirements, various licensure and accreditations, reimbursement for patient
services, and Medicare and Medicaid fraud and abuse. Recently, government action
has increased with respect to investigations and/or allegations concerning
possible violations of fraud and abuse and false claims statutes and/or
regulations by healthcare providers. Providers that are found to have violated
these laws and regulations may be excluded from participating in government
healthcare programs, subjected to fines or penalties or required to repay
amounts received from government for previously billed patient services. While
management of the Company believes its policies, procedures and practices comply
with governmental regulations, no assurance can be given that the Company will
not be subjected to governmental inquiries or actions.
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 a waiver. Upon meeting certain
conditions, and serving a disproportionately high share of Texas' and South
Carolina's low income patients, three of the Company's facilities located in
Texas and one facility located in South Carolina became eligible and received
additional reimbursement from each state's disproportionate share hospital fund.
Beginning in the third quarter of 1999, as a result of reductions stemming from
The Balanced Budget Act of 1997 and program redesigns by the two states, the
Company's Medicaid disproportionate share reimbursements have been reduced by
approximately $11 million annually. Included in the Company's financial results
was an aggregate of $8.2 million and $9.2 million for the three month periods
ended September 30, 1999 and 1998, respectively, and $28.4 million and $26.4
million for the nine months ended September 30, 1999 and 1998, respectively.
Failure to renew these programs, which are scheduled to terminate in the third
quarter of 2000, or further reductions in reimbursements could have additional
material adverse effects on the Company's future results of operations.
In addition to the Medicare and Medicaid programs, other payors, including
managed care companies, 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 health maintenance organizations
and preferred provider organizations 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.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company's computer
programs, certain building infrastructure components (including elevators, alarm
systems and certain HVAC systems) and certain computer aided medical equipment
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in system failures or
miscalculations causing disruption of operations or medical equipment
malfunctions that could affect patient diagnosis and treatment.
The Company has undertaken steps to inventory and assess applications and
equipment at risk to be affected by Year 2000 issues and to convert, remediate
or replace such applications and equipment. The Company has completed its
assessment of its major financial, clinical and peripheral software and
Page Thirteen of Seventeen Pages
14
The Company has undertaken steps to inventory and assess applications and
equipment at risk to be affected by Year 2000 issues and to convert, remediate
or replace such applications and equipment. The Company has completed its
assessment of its major financial, clinical and peripheral software and believes
that such software is substantially Year 2000 compliant. The Company also
believes its biomedical equipment is substantially Year 2000 compliant and it
intends to replace equipment that is not Year 2000 compliant before the year end
. The Company believes that Year 2000 related remediation costs incurred through
September 30, 1999 have not had a material impact on its results of operations.
Some replacement or upgrade of systems and equipment would take place in the
normal course of business. Several systems, key to the Company's operations,
have been scheduled to be replaced through vendor supplied systems before Year
2000. The costs of repairing existing systems is expensed as incurred. The
Company has allocated a portion of its 1999 capital budget as Year 2000
contingency funds and expects that all of the capital costs can be accommodate
within that budget. The Company presently believes that with modifications to
existing software and conversions to new software, the Year 2000 issue will not
pose material operational problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 issue could have a material impact on the operations of the Company.
The majority of the software used by the Company is purchased from third
parties. The Company is relying on software (including the Company's major
outsourcing vendor which provides the financial and clinical applications for
the majority of the Company's acute care facilities), hardware and other
equipment vendors to verify Year 2000 compliance of their products. The Company
also depends on: fiscal intermediaries which process claims and make payments
for the Medicare program; health maintenance organizations, insurance companies
and other private payors; vendors of medical supplies and pharmaceuticals used
in patient care; and, providers of utilities such as electricity, water, natural
gas and telephone services. As part of its Year 2000 strategy, the Company
intends to seek assurances from these parties that their services and products
will not be interrupted or malfunction due to the Year 2000 problem. Failure of
third parties to resolve their Year 2000 issues could have a material adverse
effect on the Company's results of operations and its ability to provide health
care services.
The Company developed contingency plans in all hospitals that it believes will
reduce disruption in service that may be caused by the Year 2000 problem. As
part of the contingency plan, each hospital has a disaster plan, which is
reviewed regularly. These disaster plans are designed to enable the hospital to
continue to function during natural disasters and other crises. The plans
contemplate moving patients to other facilities if the hospital is not able to
continue to care for them. In some cases, the facility may not be able to
develop contingency plans which allow the hospital to continue to operate. For
example, the affected hospital may not be able to secure supplies of fuel to
operate its backup generators if electrical supplies fail for an extended
period. Despite these contingency plans no assurance can be given that the
Company's facilities will be able to continue to operate in all circumstances.
This Year 2000 assessment is based on information currently available to the
Company and the Company will revise its assessment at it implements its Year
2000 strategy. The Company can provide no assurance that applications and
equipment the Company believes to be Year 2000 compliant will not experience
difficulties or that the Company will not experience difficulties obtaining
resources needed to make modifications to or replace the Company's affected
systems and equipment. Failure by the Company or third parties on which it
relies to resolve Year 2000 issues could have a material adverse effect on the
Company's results of operations and its ability to provide health care services.
Consequently, the Company can give no assurances that issues related to Year
2000 will not have a material adverse effect on the Company's financial
condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $157 million for the nine months
ended September 30, 1999 as compared to $127 million for the nine month period
ended September 30, 1998. The $30 million net increase during the 1999 nine
month period as compared to the comparable prior year period
Page Fourteen of Seventeen Pages
15
was primarily attributable to: (i) a $7 million favorable increase in net income
plus the addback of depreciation and amortization expense and earnings of
minority partners, net of losses; (ii) a $6 million favorable decrease in
payments made in settlement of self-insurance claims; (iii) a $13 million
favorable change in accounts receivable, and; (iv) $4 million of other net
favorable working capital changes.
During the first nine months of 1999, the Company spent approximately $49
million to finance capital expenditures at its existing hospitals as compared to
$71 million in the prior year nine month period. During the second quarter of
1999, the Company acquired three behavioral health care facilities located in
Illinois, Indiana and New Jersey for a combined purchase price of approximately
$27 million. Also during the second quarter of 1999, the Company exchanged the
operations and assets of 147-bed acute care facility located in Victoria, Texas
for the assets and operations of a 117-bed acute care facility located in
Laredo, Texas. In connection with this transaction, the Company also spent $5
million to purchase additional land in Laredo, Texas on which it expects to
construct a replacement hospital scheduled to be completed in 2001. During the
nine month period ended September 30, 1999, the Company received total proceeds
of $15 million for the sale of: (i) the real property of a medical office
building; (ii) a minority ownership interest in a radiation therapy center and
an outpatient surgery center, and; (iii) the operations of two outpatient
surgery centers. The net gain/loss resulting from these transactions did not
have a material impact on the results of operations for the three or nine month
periods ended September 30, 1999.
During the first quarter of 1998, the Company completed its acquisition of three
acute care hospitals located in Puerto Rico for a combined purchase price of
$186 million. These acquisitions were financed with funds borrowed under the
Company's revolving credit facility. Also during the first quarter of 1998, the
Company contributed substantially all of the assets, liabilities and operations
of Valley Hospital Medical Center, a 417-bed acute care facility, and Summerlin
Hospital Medical Center, a 148-bed acute care facility in exchange for a 72.5%
interest in a series of newly-formed limited liability companies ("LLCs").
Quorum Health Group, Inc. ("Quorum") holds the remaining 27.5% interest in the
LLCs. Quorum obtained its interest by contributing substantially all of the
assets, liabilities and operations of Desert Springs Hospital, a 241-bed acute
care facility and $11 million of net cash.
During the third quarter of 1998, the Company's Board of Directors approved a
stock repurchase program authorizing the Company to purchase up to two million
shares or approximately 6% of its outstanding Class B Common Stock. This initial
repurchase program was completed during the third quarter of 1999, at which
time, the Board of Directors approved a plan for repurchase of up to an
additional two million shares of the Company's Class B Common Stock. Pursuant to
the stock repurchase program, the Company, from time to time and as conditions
allow, may purchase shares on the open market at prevailing market prices or in
negotiated transactions off the market. Pursuant to the terms of these programs,
the Company repurchased 1,531,579 shares at an average repurchase price of
$36.85 per share ($56.5 million in the aggregate) during the nine months ended
September 30, 1999. Since inception of the initial program through September 30,
1999, the Company repurchased 2,112,079 shares at an average repurchase price of
$38.63 per share ($81.4 million in the aggregate).
As of September 30, 1999, the Company had $210 million of unused borrowing
capacity under the terms of its $400 million revolving credit agreement which
matures in July 2002 and provides for interest at the Company's option at the
prime rate, certificate of deposit plus 3/8% to 5/8%, Euro-dollar plus 1/4% to
1/2% or money market. As of September 30, 1999, the Company had $5 million of
unused borrowing capacity under the terms of its $100 million, annually
renewable, commercial paper program. The Company's total debt as a percentage of
total capitalization was 39% at September 30, 1999 and 40% at December 31, 1998.
The Company expects to finance all capital expenditures and acquisitions with
internally generated funds and borrowed funds. Additional borrowed funds may be
obtained either through refinancing the existing revolving credit agreement, the
commercial paper facility or the issuance of long-term securities.
Page Fifteen of Seventeen Pages
16
PART II. OTHER INFORMATION
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the quantitative and qualitative
disclosures in 1999. Reference is made to Item 7 in the Annual Report on Form
10-K for the year ended December 31, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K
None
All other items of this Report are inapplicable.
Page Sixteen of Seventeen Pages
17
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 11, 1999 /s/ Kirk E. Gorman
---------------------------------------
Kirk E. Gorman, Senior Vice President and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer).
Page Seventeen of Seventeen Pages
5
1,000
U.S. DOLLARS
9-MOS
DEC-31-1999
JAN-01-1999
SEP-30-1999
1
7,088
0
285,067
0
38,554
371,045
1,208,813
423,352
1,485,326
205,515
400,445
0
0
309
638,291
1,485,326
0
1,522,990
0
1,152,374
123,813
125,997
19,551
101,255
37,409
63,846
0
0
0
63,846
2.01
1.97
