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, 2000
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.
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(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
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(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, 2000:
Class A 1,978,312
Class B 27,655,865
Class C 204,028
Class D 22,841
Page One of Eighteen Pages
UNIVERSAL HEALTH SERVICES, INC.
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I N D E X
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PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Statements of Income -
Three and Nine Months Ended September 30, 2000 and 1999.. Three
Condensed Consolidated Balance Sheets - September 30, 2000
and December 31, 1999.................................... Four
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2000 and 1999............ Five
Notes to Condensed Consolidated Financial Statements....... Six, Seven,
Eight & Nine
Item 2. Management's Discussion and Analysis of Operations
and Financial Condition........................... Ten, Eleven,
Twelve, Thirteen,
Fourteen, Fifteen,
Sixteen
PART II. OTHER INFORMATION................................ Seventeen
SIGNATURE.................................................. Eighteen
Page Two of Eighteen Pages
PART I. FINANCIAL INFORMATION
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(000s omitted except per share amounts)
(unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------------- ------------------------------
2000 1999 2000 1999
-------------- ----------- ------------- -------------
Net revenues $ 561,790 $ 489,828 $ 1,627,622 $ 1,522,990
Operating charges:
Salaries, wages and benefits 219,371 196,523 632,902 591,772
Other operating expenses 132,123 116,183 369,669 347,425
Supplies expense 74,780 70,677 221,295 213,177
Provision for doubtful accounts 49,221 44,926 136,084 125,997
Depreciation and amortization 28,475 26,695 84,278 80,870
Lease and rental expense 12,482 12,219 36,351 36,771
Interest expense, net 6,994 6,503 21,514 19,551
-------------- ----------- ------------- -------------
523,446 473,726 1,502,093 1,415,563
-------------- ----------- ------------- -------------
Income before minority interests and
income taxes 38,344 16,102 125,529 107,427
Minority interests in earnings (losses)
of consolidated entities 3,172 (579) 9,686 6,172
-------------- ----------- ------------- -------------
Income before income taxes 35,172 16,681 115,843 101,255
Provision for income taxes 12,837 5,887 41,570 37,409
-------------- ----------- ------------- -------------
Net income $22,335 $ 10,794 $ 74,273 $ 63,846
============== =========== ============= =============
Earnings per common share - basic $0.75 $0.34 $2.46 $2.01
============== =========== ============= =============
Earnings per common share - diluted $0.72 $0.34 $2.39 $1.97
============== =========== ============= =============
Weighted average number of common
shares - basic 29,893 31,425 30,201 31,697
Weighted average number of common
share equivalents 3,951 626 1,818 670
-------------- ----------- ------------- -------------
Weighted average number of common
shares and equivalents - diluted 33,844 32,051 32,019 32,367
============== =========== ============= =============
See accompanying notes to these condensed consolidated financial statements.
Page Three of Eighteen Pages
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000s omitted, unaudited)
September 30, December 31,
2000 1999
---------------- ----------------
Assets
------
Current assets:
Cash and cash equivalents $ 5,975 $ 6,181
Accounts receivable, net 349,006 307,294
Supplies 43,404 41,173
Deferred income taxes 26,924 26,768
Other current assets 26,948 21,833
---------------- ----------------
Total current assets 452,257 403,249
---------------- ----------------
Property and equipment 1,316,325 1,173,427
Less: accumulated depreciation (495,147) (437,837)
---------------- ----------------
821,178 735,590
Funds restricted for construction 39,961 41,463
---------------- ----------------
861,139 777,053
---------------- ----------------
Other assets:
Excess of cost over fair value of net
assets acquired 316,681 276,031
Deferred charges 17,514 10,870
Other 53,578 30,770
---------------- ----------------
387,773 317,671
---------------- ----------------
$ 1,701,169 $ 1,497,973
================ ================
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current maturities of long-term debt $ 559 $ 3,506
Accounts payable and accrued liabilities 235,534 213,694
Federal and state taxes 6,126 -----
---------------- ----------------
Total current liabilities 242,219 217,200
---------------- ----------------
Other noncurrent liabilities 76,781 73,705
---------------- ----------------
Minority interest 119,979 115,635
---------------- ----------------
Long-term debt, net of current maturities 533,110 419,203
---------------- ----------------
Deferred income taxes 38,116 30,619
---------------- ----------------
Common stockholders' equity:
Class A Common Stock, 2,023,566 shares
outstanding in 2000, 2,030,566 in 1999 20 20
Class B Common Stock, 27,497,716 shares
outstanding in 2000, 28,392,100 in 1999 275 284
Class C Common Stock, 204,593 shares
outstanding in 2000, 204,593 in 1999 2 2
Class D Common Stock, 22,967 shares
outstanding in 2000, 24,857 in 1999 ----- -----
Capital in excess of par, net of deferred
compensation of $587 in 2000
and $116 in 1999 133,434 158,345
Retained earnings 557,233 482,960
---------------- ----------------
690,964 641,611
---------------- ----------------
$ 1,701,169 $ 1,497,973
================ ================
See accompanying notes to these condensed consolidated financial statements.
Page Four of Eighteen Pages
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000s omitted - unaudited)
Nine Months Ended
September 30,
2000 1999
----------- -----------
Cash Flows from Operating Activities:
Net income $74,273 $63,846
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation & amortization 84,278 80,870
Minority interests in earnings of consolidated entities 9,686 6,172
Changes in assets & liabilities, net of effects from
acquisitions and dispositions:
Accounts receivable (20,233) (15,731)
Accrued interest (3,770) (3,380)
Accrued and deferred income taxes 20,321 (5,969)
Other working capital accounts 14,174 34,200
Other assets and deferred charges (11,985) (2,930)
Increase in working capital accounts at purchased facilities (12,279) ----
Other 985 2,176
Accrued insurance expense, net of commercial premiums paid 6,473 6,963
Payments made in settlement of self-insurance claims (8,005) (9,314)
----------- -----------
Net cash provided by operating activities 153,918 156,903
----------- -----------
Cash Flows from Investing Activities:
Property and equipment additions, net (71,583) (48,546)
Acquisition of businesses (139,020) (31,588)
Investment in business (12,277) ----
Proceeds received from divestitures, net 5,753 15,431
----------- -----------
Net cash used in investing activities (217,127) (64,703)
----------- -----------
Cash Flows from Financing Activities:
Additional borrowings, net of financing costs 242,628 ----
Reduction of long-term debt (142,737) (19,504)
Distributions to minority partners (4,447) (11,891)
Issuance of common stock 3,544 1,490
Repurchase of common shares (35,985) (56,467)
----------- -----------
Net cash provided by (used in) financing activities 63,003 (86,372)
----------- -----------
(Decrease) Increase in cash and cash equivalents (206) 5,828
Cash and cash equivalents, Beginning of Period 6,181 1,260
----------- -----------
Cash and cash equivalents, End of Period $5,975 $7,088
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Interest paid $22,081 $22,931
=========== ===========
Income taxes paid, net of refunds $21,276 $43,469
=========== ===========
See accompanying notes to these condensed consolidated financial statements.
Page Five of Eighteen Pages
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, 1999. 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) Commitments and Contingencies
Under certain agreements, the Company has committed or guaranteed an aggregate
of $57 million related principally to the Company's self-insurance programs and
as support for various debt instruments and loan guarantees, including a $40
million surety bond related to the Company's 1997 acquisition of an 80% interest
in The George Washington University Hospital.
During the fourth quarter of 1999, the Company made a decision to close/sell one
of its specialized women's centers and in January of 2000, a temporary
injunction was issued preventing closure until a trial on the merits which began
on October 24, 2000. The Company is involved in litigation with respect to this
facility in which the plaintiffs are seeking monetary damages as well as
specific performance of a lease agreement. During the fourth quarter of 1999,
the Company recorded a $5.3 million charge to reduce the carrying value of the
facility to its estimated realizable value of approximately $9 million, based on
an independent appraisal, and may incur additional charges in the event it is
unable to close or sell the facility for a significant period of time or suffers
an unfavorable outcome from this litigation.
(4) Acquisitions
During the third quarter of 2000, the Company paid a combined purchase price of
$139 million to acquire the assets and operations of the following facilities
(the purchase of the Charter Behavioral Health Systems facilities and the
hospital in Enid, Oklahoma excluded working capital): (i) 12 behavioral health
businesses and operating assets from Charter Behavioral Health Systems and
Crescent Real Estate Funding VII LP consisting of 1,400 licensed beds; (ii) a
277-bed acute care facility located in Enid, Oklahoma, and; (iii) a 77-bed acute
care facility located in Eagle Pass, Texas. Subject to the terms of the
purchase agreement of the facility located in Eagle Pass, Texas, the Company
expects to build a replacement hospital within five years.
During the second quarter of 2000, Meridell Achievement Center, Inc., a
subsidiary of the Company, exercised its option pursuant to its lease with
Universal Health Realty Income Trust, to purchase the leased property upon the
December 31, 2000 expiration of the initial lease term. The purchase price,
which is based on the fair market value of the property as defined in the lease,
will be $5,450,000.
Page Six of Eighteen Pages
Subsequent to the end of the third quarter of 2000, the Company executed a
purchase agreement to acquire the assets and operations of a 96-bed acute care
facility located in Murrieta, California. The transaction, which is subject to
normal regulatory approvals, is expected to be completed in December, 2000.
Also subsequent to the third quarter of 2000, the Company executed a definitive
purchase agreement to acquire the assets of two behavioral health care
facilities located in Boston, Massachusetts for approximately $6 million. The
Company expects these purchase transactions to be completed on or around
December 31, 2000.
(5) New Accounting Pronouncement
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities-Deferral of the Effective Date of SFAS No. 133", which
deferred the effective date of SFAS No. 133 for one year.
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. The Statement requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of the transactions that
receive hedge accounting.
The Company will be required to adopt SFAS No. 133 effective as of January 1,
2001 and has not yet quantified the impact of adopting this statement on its
financial statements. Further, the Company has not determined the method of
adoption of SFAS No. 133. However, SFAS No. 133 could increase the volatility
in earnings and other comprehensive income.
(6) Segment Reporting
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.
Page Seven of Eighteen Pages
Three Months Ended September 30, 2000
------------------------------------------------------------------------
Behavioral
Acute Care Health Total
Services Services Other Consolidated
------------------------------------------------------------------------
(Dollar amounts in thousands)
Gross inpatient revenues $ 776,568 $152,508 $ 4,826 $ 933,902
Gross outpatient revenues $ 280,121 $ 27,673 $ 27,392 $ 335,186
Total net revenues $ 453,817 $ 91,694 $ 16,279 $ 561,790
EBITDAR (A) $ 82,504 $ 16,534 ($12,743) $ 86,295
Total assets as of 9/30/00 $1,294,626 $241,453 $ 165,090 $1,701,169
Licensed beds 5,053 2,944 -------- 7,997
Available beds 4,264 2,856 -------- 7,120
Patient days 246,407 162,422 -------- 408,829
Admissions 52,184 13,456 -------- 65,640
Average length of stay 4.7 12.1 -------- 6.2
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
Nine Months Ended September 30, 2000
-----------------------------------------------------------------------
Behavioral
Acute Care Health Total
Services Services Other Consolidated
-----------------------------------------------------------------------
(Dollar amounts in thousands)
Gross inpatient revenues $2,309,343 $390,140 $ 16,172 $2,715,655
Gross outpatient revenues $ 811,114 $ 71,938 $ 86,670 $ 969,722
Total net revenues $1,334,552 $240,745 $ 52,325 $1,627,622
EBITDAR (A) $ 251,715 $ 45,402 ($29,445) $ 267,672
Total assets as of 9/30/00 $1,294,626 $241,453 $ 165,090 $1,701,169
Licensed beds 4,908 2,349 -------- 7,257
Available beds 4,175 2,310 -------- 6,485
Patient days 754,973 406,177 -------- 1,161,150
Admissions 159,151 34,192 -------- 193,343
Average length of stay 4.7 11.9 -------- 6.0
Page Eight of Eighteen Pages
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
(A) EBITDAR - Earnings before interest, income taxes, depreciation,
amortization, lease & rental and minority interest expense.
(7) Earnings Per Share Data ("EPS")
The following table sets forth the computation of basic and diluted earnings per
share for the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------- ------- ------- -------
In thousands, except per share data
Basic:
Net income $22,335 $10,794 $74,273 $63,846
Average shares outstanding 29,893 31,425 30,201 31,697
------- ------- ------- -------
Basic EPS $ 0.75 $ 0.34 $ 2.46 $ 2.01
======= ======= ======= =======
Diluted:
Net income $22,335 $10,794 $74,273 $63,846
Add discounted convertible
debenture interest,
net of income tax effect 1,970 ------- 2,208 -------
------- ------- ------- -------
Totals $24,305 $10,794 $76,481 $63,846
======= ======= ======= =======
Average shares outstanding 29,893 31,425 30,201 31,697
Net effect of dilutive stock
options and grants based on the
treasury stock method 662 626 582 670
Assumed conversion
of discounted convertible
debentures 3,289 ------- 1,236 -------
------- ------- ------- -------
Totals 33,844 32,051 32,019 32,367
------- ------- ------- -------
Diluted EPS $ 0.72 $ 0.34 $ 2.39 $ 1.97
======= ======= ======= =======
Page Nine of Eighteen Pages
Item 2. 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 payors; 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 and, other factors referenced in
the Company's 1999 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 15% to $562 million for the three months ended September
30, 2000 as compared to $490 million in the same prior year period and increased
7% to $1.628 billion for the nine months ended September 30, 2000 as compared to
$1.523 billion during the comparable 1999 nine month period. The $72 million
increase in net revenues during the three month period ended September 30, 2000
as compared to the comparable prior year period was due primarily to: (i) a $47
million or 10% increase in revenues generated at the Company's acute care and
behavioral health care facilities owned in both periods, and; (ii) $27 million
of revenues generated at two acute care and twelve behavioral health care
facilities acquired during the third quarter of 2000. The $105 million
increase in net revenues during the nine month period ended September 30, 2000
as compared to the comparable prior year period was due primarily to: (i) a $66
million or 5% increase in revenues generated at the Company's acute care and
behavioral health care facilities owned in both periods, and; (ii) $39 million
of revenues generated at two acute care and twelve behavioral health care
facilities acquired during the third quarter of 2000 and three behavioral health
care facilities acquired during the second quarter of 1999.
Earnings before interest, income taxes, depreciation, amortization and lease and
rental expense (before deducting minority interests in earnings of consolidated
entities) ("EBITDAR") increased 40% to $86 million for the three month period
ended September 30, 2000 from $62 million in the comparable prior year quarter
and increased 9% to $268 million during the nine month period ended September
30, 2000 as compared to $245 million during the comparable 1999 nine month
period. Overall operating margins were 15.4% in the 2000 third quarter as
compared to 12.6% in the 1999 third quarter and were 16.4% for the nine month
period ended September 30, 2000 as compared to 16.1% during the nine month
period ended September 30, 1999.
Acute Care Services
- -------------------
Net revenues from the Company's acute care hospitals, ambulatory treatment
centers and specialized
Page Ten of Eighteen Pages
women's health centers accounted for 83% and 85% of consolidated net revenues
for quarters ended September 30, 2000 and 1999, respectively, and 85% and 86%
for the nine month periods ended September 30, 2000 and 1999, respectively. Net
revenues at the Company's acute care facilities owned in both quarters ended
September 30, 2000 and 1999 increased 10% in the 2000 third quarter as compared
to the comparable 1999 quarter. Admissions to the Company's acute care
facilities owned in both quarters increased 1% during the quarter ended
September 30, 2000 over the comparable 1999 quarter and patient days at these
facilities increased 4% for the three months ended September 30, 2000 as
compared to the comparable prior year quarter. The average length of stay at the
acute care facilities owned during both periods increased 3% to 4.7 days for the
three month period ended September 30, 2000 as compared to 4.6 days in the
comparable prior year quarter. The increase in the net revenues at facilities
owned in both three month periods ended September 30, 2000 and 1999 was due
primarily to an increase in prices charged to private payors including health
maintenance organizations and preferred provider organizations as well as an
increase in net revenues at the Company's acute care facilities located in Las
Vegas, Nevada and Amarillo, Texas.
Net revenues at the Company's acute care facilities owned in both nine month
periods ended September 30, 2000 and 1999 increased 4% in the 2000 nine month
period as compared to the comparable 1999 period. Admissions to the Company's
acute care facilities owned in both nine month periods increased 3% during the
nine month period ended September 30, 2000 over the comparable 1999 period and
patient days at these facilities increased 4% for the nine month ended September
30, 2000 as compared to the comparable prior year period. The average length of
stay at the acute care facilities owned during both nine month periods increased
to 4.8 days in the 2000 period as compared to 4.7 days during the 1999 period.
The Company's facilities have experienced an increase in inpatient acuity and
intensity of services as less intensive services shift from an inpatient basis
to an outpatient basis due to technological and pharmaceutical improvements and
continued pressures by payors, including Medicare, Medicaid and managed care
companies to reduce admissions and lengths of stay. To accommodate the
increased utilization of outpatient services, the Company has expanded or
redesigned several of its outpatient facilities and services. Gross outpatient
revenues at the Company's acute care facilities owned during the three month
periods ending September 30, 2000 and 1999 increased 16% in the third quarter of
2000 as compared to the comparable 1999 quarter and comprised 27% of the
Company's acute care gross patient revenue in the each of the quarters ended
September 30, 2000 and 1999. Gross outpatient revenues at these facilities
increased 13% during the nine month period ended September 30, 2000 as compared
to the comparable prior year period and comprised 26% of the Company's acute
care gross patient revenue in each of the nine month periods ended September 30,
2000 and 1999. Despite the increase in patient volume at the Company's
facilities, 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. Additionally, 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. The Company expects the
increased competition, admission constraints and payor pressures to continue.
The increase in net revenue as discussed above includes the effect of lower
payments from the government under the Medicare program as a result of the
Balanced Budget Act of 1997 ("BBA-97") (see General Trends for additional
disclosure).
At the Company's acute care facilities, operating expenses, (salaries, wages and
benefits, other operating expenses, supplies expense and provision for doubtful
accounts) as a percentage of net revenues were 81.8% and 85.1% for the three
months ended September 30, 2000 and 1999, respectively, and 81.1% and 81.3% for
the nine months ended September 30, 2000 and 1999, respectively. Operating
margins (EBITDAR) at these facilities were 18.2% and 14.9% during the quarters
ended September 30, 2000 and 1999, respectively, and 18.9% and 18.7% during the
nine month periods ended September 30, 2000 and 1999, respectively. The
increase in operating margins during the three month period ended September 30,
2000 as compared to the comparable prior year period was due primarily to
increased profitability at the Company's three acute care facilities located in
Las Vegas, Nevada and increased prices charged to private payors including
health maintenance organizations and preferred provider organizations. Partially
offsetting the increased operating margins at the Company's acute care
facilities were reductions to net
Page Eleven of Eighteen Pages
revenues stemming from BBA-97 and Medicaid program redesigns by Texas and South
Carolina which reduced the Company's Medicaid disproportionate share
reimbursements by approximately $11 million annually beginning in the third
quarter of 1999 (see General Trends for additional disclosure). Despite the
improvement in operating margins during the third quarter of 2000, as compared
to the comparable prior year period, pressure on operating margins may continue
due to, among other things, the changes in the Medicare payments mandated by
BBA-97 which became effective on October 1, 1997, reductions in Medicaid
disproportionate share reimbursements and the continuing industry-wide trend
towards managed care which limits the Company's ability to increase its prices.
Behavioral Health Services
- --------------------------
Net revenues from the Company's behavioral health services facilities accounted
for 16% and 14% of consolidated net revenues for the three month periods ended
September 30, 2000 and 1999, respectively, and 15% and 13% for the nine month
periods ended September 30, 2000 and 1999, respectively. The increase during
the three and nine month periods as compared to the comparable prior year
periods was due primarily to the purchase of twelve behavioral health facilities
during the third quarter of 2000. Net revenues at the Company's behavioral
health services facilities owned in both periods increased 6% during the three
month period ended September 30, 2000 as compared to the comparable prior year
quarter. Admissions and patient days at these facilities increased 8% and 6%,
respectively, during the three month period ended September 30, 2000 as compared
to the comparable prior year quarter. The average length of stay at the
behavioral health services facilities owned in both periods decreased 2% to 11.8
days during the 2000 third quarter as compared to 12.0 days in the comparable
prior year period.
Net revenues at the Company's behavioral health services facilities owned in
both nine month periods increased 6% during the nine month period ended
September 30, 2000 as compared to the comparable prior year period. Admissions
and patient days at these facilities increased 5% and 4%, respectively, during
the nine month period ended September 30, 2000 as compared to the comparable
prior year period. The average length of stay at the behavioral health services
facilities owned in both periods remained unchanged at 11.6 days in each period.
At the Company's behavioral health care facilities, operating expenses
(salaries, wages and benefits, other operating expenses, supplies expense and
provision for doubtful accounts) as a percentage of net revenues were 82.0% and
84.4% for the three month periods ended September 30, 2000 and 1999,
respectively, and 81.1% and 82.3% for the nine month periods ended September 30,
2000 and 1999, respectively. Operating margins (EBITDAR) at these facilities
were 18.0% and 15.6% during the three months periods ended September 30, 2000
and 1999, respectively, and 18.9% and 17.7% during the nine month periods ended
September 30, 2000 and 1999, respectively.
Other Operating Results
- -----------------------
The Company recorded minority interest in the earnings (losses) of consolidated
entities amounting to $3.2 million and ($600,000) for the three months ended
September 30, 2000 and 1999, respectively, and $9.7 million and $6.2 million for
the nine month periods ended September 30, 2000 and 1999, respectively. The
minority interest 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,
D.C. The change during the three and nine month periods ended September 30,
2000 as compared to the comparable prior year periods was due primarily to
improvement in the unfavorable operating performance trends experienced during
1999 at the Company's acute care facilities located in Las Vegas, Nevada.
Interest expense increased 8% or $491,000 for the three months ended September
30, 2000 and 10% or $2.0 million for the nine months ended September 30, 2000,
over the comparable prior year periods, due primarily to: (i) increased
borrowings used to finance the acquisition of twelve behavioral health care
facilities and two acute care facilities during the third quarter of 2000; (ii)
increased borrowings used to finance various repurchases of the Company's common
stock during 1999 and the nine months of 2000, and; (iii) an increase in the net
average cost of borrowings on the Company's floating rate debt.
Page Twelve of Eighteen Pages
The effective tax rate was 36% and 35% for the three months ended September 30,
2000 and 1999, respectively, and 36% and 37% for the nine month periods ended
September 30, 2000 and 1999, respectively.
General Trends
- --------------
A significant portion of the Company's revenue is derived from fixed payment
services, including Medicare and Medicaid which accounted for 43% and 45% of the
Company's net patient revenues during the three month periods ended September
30, 2000 and 1999, respectively, and 44% and 45% of the Company's net patient
revenues during the nine month periods ended September 30, 2000 and 1999,
respectively. The Medicare program reimburses the Company's hospitals primarily
based on established rates by a diagnosis related group for acute care hospitals
and by a 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 BBA-97, there were no increases in the rates
paid to hospitals for inpatient care through September 30, 1998 and
reimbursement for bad debt expenses and capital costs as well as other items
have been reduced. Inpatient operating payment rates increased 0.5% for the
period of October 1, 1998 through September 30, 1999, however, the modest rate
increase was less than inflation and was 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 BBA-97. Inpatient operating payment
rates were increased 1.1% for the period of October 1, 1999 through September
30, 2000, however, the modest increase was less than inflation and is expected
to be more than offset by the negative impact of increasing the qualification
threshold for additional payments for treating costly inpatient cases
(outliers). Members Congress and the President are discussing the terms of a
Balanced Budget Refinement Act which may provide for increases in Medicare
reimbursements to health care providers, including hospitals. Since the terms of
this package have not been finalized and approved, the Company can not estimate
the impact of the Balanced Budget Refinement Act on its future results of
operations. Payments for Medicare outpatient services historically have been
paid based on costs, subject to certain adjustments and limits. BBA-97 requires
that payment for those services be converted to PPS, which was implemented on
August 1, 2000. The implementation of outpatient PPS has not had a material
impact on the Company's 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. 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, five of the Company's facilities located in
Texas (including one purchased during the third quarter of 2000) 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 BBA-97 and
program redesigns by the two states, the Company's Medicaid disproportionate
share reimbursements were been reduced by approximately $11 million annually
(based on each state's fiscal years covering the period of July, 1999 through
August, 2000). Included in the
Page Thirteen of Eighteen Pages
Company's financial results was an aggregate of $7.6 million and $8.9 million
for the three month periods ended September 30, 2000 and 1999, respectively, and
$22.9 million and $29.3 million for the nine month periods ended September 30,
2000 and 1999, respectively, recorded in conection with these programs. South
Carolina's program has been renewed for the 2001 fiscal year and although the
Company has received notification of renewal for the Texas Medicaid
disproportionate share program, the Company has filed an appeal to have the
level of reimbursement reviewed. Assuming a favorable ruling on its Texas
appeal, the Company estimates that the combined Medicaid disproportionate share
payments from South Carolina and Texas will be reduced by approximately $3
million to $4 million annually (based on each state's fiscal year covering the
period of July, 2000 through August, 2001). If the Company is unsuccessful in
its appeal, the reduction in the Texas Medicaid disproportionate share program
(for the fiscal year of September, 2000 through August, 2001), could have a
material adverse effect on the Company's future results of operations. Further
reductions in reimbursements or failure to renew these programs, which are
scheduled to terminate in the third quarter of 2001, could have a material
adverse effect 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. Approximately 36% and 35% of the Company's net patient
revenues for the three month periods ended September 30, 2000 and 1999,
respectively, and 34% and 32% of the Company's net patient revenues for the nine
month periods ended September 30, 2000 and 1999, respectively, were generated
from managed care companies, which includes health maintenance organizations and
preferred provider organizations. In general, the Company expects the percentage
of its business from managed care programs 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.
Health Insurance Portability and Accountability Act of 1996
- -----------------------------------------------------------
Regulations related to the Health Insurance Portability and Accountability Act
of 1996 ("HIPAA") are expected to impact the Company and others in the
healthcare industry by:
. Establishing standardized code sets for financial and clinical
electronic data interchange ("EDI") transactions to enable more
efficient flow of information. Currently there is no common standard for
the transfer of information between the constituents in healthcare and
therefore providers have had to conform to each standard utilized by
every party with which they interact. The goal of HIPAA is to create one
common national standard for EDI and once the HIPAA regulation takes
effect, payors will be required to accept the national standard employed
by providers.
. Mandating the adoption of security standards to preserve the
confidentiality of health information that identifies individuals.
Currently there is no recognized healthcare standard that includes all
the necessary components to protect the data integrity and
confidentiality of a patient's personal health record. The Department of
Health and Human Services, with assistance from standard development
organizations and business interests, is currently developing the
standard.
. Creating unique identifiers for the four constituents in healthcare:
payors, providers, patients and employers. HIPAA will mandate the need
for the unique identifiers for healthcare providers in an effort to ease
the administrative challenge of maintaining and transmitting clinical
data across disparate episodes of patient care.
The Secretary of the Department of Health and Human Services issued some of the
new HIPAA regulations in the third quarter of 2000 related to administrative
simplification with the requirement that these guidelines be implemented within
two years of their release. Non-compliance may result in fines, loss of
accreditation and/or threat of civil litigation. This HIPAA assessment is based
on information currently available to the Company and the Company has begun
preliminary planning for implementation of the necessary changes required
pursuant to the terms of HIPAA. However, the Company can not currently estimate
the implementation cost of the
Page Fourteen of Eighteen Pages
HIPAA related modifications and consequently can give no assurance that issues
related to HIPAA 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 $154 million during the nine
months ended September 30, 2000 and $157 million during the comparable prior
year period. Included in the net $3 million decrease during the 2000 nine month
period as compared to the 1999 comparable period was: (i) $30 million of
unfavorable working capital changes; (ii) combined working capital balance as of
September 30, 2000 of $12 million accumulated at twelve behavioral health care
facilities and one acute care facility purchased during the third quarter of
2000 (working capital for these facilities was not included in the purchase
transactions); (iii) a $22 million reduction in net income taxes paid, and; (iv)
a $17 million increase in net income plus the addback of depreciation and
amortization expense and minority interest in earnings of consolidated entities.
The unfavorable change in other working capital accounts was due primarily to
unfavorable timing of accrued compensation disbursements during the first nine
months of 2000 as compared to the comparable prior year period. The $22 million
reduction in net income taxes paid is due to anticipation of higher tax benefits
from employee stock option exercises and the decrease in deferred taxes
attributable to the prior year's overpayment.
During the first nine months of 2000, the Company spent approximately $72
million to finance capital expenditures as compared to $49 million in the prior
year's comparable period. In addition, the Company spent $139 million to
acquire the assets and operations of twelve behavioral health care facilities
and two acute care hospitals and $12 million to acquire a minority ownership
equity interest in Broadlane, an e-commerce marketplace for the purchase and
sale of health care supplies, equipment and services to the healthcare industry.
Also during the first nine months of 2000, the Company received net proceeds of
$6 million resulting from: (i) the divestiture of a 49% equity interest in a
limited liability company that operated a specialized women's health center in
Oklahoma, (ii) its ownership interest in two physician practices located in
Oklahoma, and; (iii) the divestiture of the real estate assets of a behavioral
health facility located in Florida.
During 1998 and 1999, the Company's Board of Directors approved stock purchase
programs authorizing the Company to purchase up to six million shares of its
outstanding Class B Common Stock on the open market at prevailing market prices
or in negotiated transactions off the market. Pursuant to the terms of these
programs, the Company purchased 580,500 shares at an average purchase price of
$42.90 per share ($24.9 million in the aggregate) during 1998, 2,028,379 shares
at an average purchase price of $35.10 per share ($71.2 million in the
aggregate) during 1999 and 1,204,000 shares at an average purchase price of
$29.89 per share ($36.0 million in the aggregate) during the first nine months
of 2000. Since inception of the stock purchase program in 1998 through
September 30, 2000, the Company purchased a total of 3,812,879 shares at an
average purchase price of $34.65 per share ($132.1 million in the aggregate).
During the second quarter of 2000, the Company issued discounted convertible
debentures that are due in 2020 ("Debentures"). The Debentures, which had an
aggregate issue price of $250 million or $587 million aggregate principal amount
at maturity, were issued at a price of $425.90 per $1,000 principal amount of
Debenture. The Debentures will pay cash interest on the principal amount at the
rate of 0.426% per annum, resulting in a yield to maturity of 5.0%. The
Debentures will be convertible at the option of the holders thereof into 5.6024
shares of the Company's Common Stock per $1,000 face amount of Debenture
(equivalent at issuance to $76.02 per share of common stock). The securities
were not registered or required to be registered under the Securities Act of
1933 (the "Securities Act") and were sold in the United States in a private
placement under Rule 144A under the Securities Act, and were not offered or sold
in the United States absent registration or an applicable exemption from
registration requirements. Pursuant to an agreement with the holders of the
debentures, the debentures and the underlying Class B Common Stock were
registered for resale under the securities act. The Company used the net
proceeds generated from the Debenture issuance to repay debt which was
reborrowed to finance the previously disclosed acquisitions, (see Note 4 to the
Condensed Consolidated Financial Statements) and for other general corporate
purposes.
Page Fifteen of Eighteen Pages
As of September 30, 2000, the Company had $357 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. A facility fee ranging from 1/8% to 3/8% is required on
the total commitment. The margins over the certificate of deposit, the Euro-
dollar rates and the facility fee are based upon the Company's leverage ratio.
As of September 30, 2000, the Company had $10 million of unused borrowing
capacity under the terms of its $100 million, annually renewable, commercial
paper program. A large portion of the Company's accounts receivable are pledged
as collateral to secure this program. This annually renewable program, which
began in 1993, is scheduled to expire or be renewed on October 30th of each
year. The commercial paper program has been renewed for the period of October
31, 2000 through October 30, 2001. The Company's total debt as a percentage of
total capitalization was 44% at September 30, 2000 and 40% at December 31, 1999.
The Company expects to finance all capital expenditures and acquisitions with
internally generated funds, borrowed funds and issuance of securities.
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 Sixteen of Eighteen Pages
PART II. OTHER INFORMATION
---------------------------
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------------
There are no material changes in quantitative and qualitative disclosures in
2000 other than the changes as described below. Reference is made to Item 7 in
the Annual Report on Form 10-K for the year ended December 31, 1999.
During the second quarter of 2000, the Company entered into a five year interest
rate swap having a notional principal amount of $135 million whereby the Company
pays a floating rate and the counter-party pays the Company a fixed rate of
8.75%. The counter-party has the right to cancel the swap at any time during
the swap term with thirty days notice. Simultaneously, the Company entered into
a fixed rate swap having a notional principal amount of $135 million whereby the
Company pays a fixed rate of 6.76% and receives a floating rate from the
counter-party. The Company also reduced the maturity date of interest rate
swaps totaling $75 million notional principal from August, 2010 to August, 2005.
The table box below presents updated information about the Trust's interest rate
swap agreements as of June 30, 2000, including the swap agreements with a
notional principal amount of $75 million, which became effective subsequent to
the end of the second quarter of 2000.
Maturity Date, Fiscal Year Ending December 31
---------------------------------------------
(Dollars in thousands) 2001 2002 2003 2004 2005 Total
-------- ------- ------- ------- ---------------------- --------
Interest rate swaps:
Pay fixed/receive variable
notional amount $135,000 $135,000
Average pay rate 6.761%
Average receive rate 3 Month LIBOR
Pay variable/receive fixed
notional amounts $135,000(a) $135,000
Average pay rate 3 Month LIBOR & spread
Average receive rate 8.75%
Pay fixed/receive variable
notional amounts $75,000 $ 75,000
Average pay rate 6.70%
Average receive rate 3 Month LIBOR
(a) Counter party has the right to cancel at any time within 30 days notice
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 Seventeen of Eighteen
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 13, 2000 /s/ Kirk E. Gorman
-------------------------------------------
Kirk E. Gorman, Senior Vice President and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer).
Page Eighteen of Eighteen Pages
5
1,000
U.S. DOLLARS
9-MOS
DEC-31-2000
JAN-01-2000
SEP-30-2000
1
5,975
0
349,006
0
43,404
452,257
1,356,286
495,147
1,701,169
242,219
533,110
0
0
297
690,667
1,701,169
0
1,627,622
0
1,223,866
130,315
136,084
21,514
115,843
41,570
74,273
0
0
0
74,273
$2.46
$2.39
