1 ================================================================================ FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (MARK ONE) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 OR (_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ............to.......... Commission file number 0-10454 UNIVERSAL HEALTH SERVICES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) <TABLE> <S> <C> DELAWARE 23-2077891 - ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) </TABLE> 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, 1997: Class A 2,060,929 Class B 30,100,075 Class C 207,230 Class D 32,361 ================================================================================ Page One of Thirteen Pages
2 UNIVERSAL HEALTH SERVICES, INC. I N D E X <TABLE> <CAPTION> PART I. FINANCIAL INFORMATION......................................................... PAGE NO. -------- <S> <C> Item 1. Financial Statements Consolidated Statements of Income - Three and Nine Months Ended September 30, 1997 and 1996................................Three Condensed Consolidated Balance Sheets - September 30, 1997 and December 31, 1996 ..................................................................Four Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 1997 and 1996...........................................Five Notes to Condensed Consolidated Financial Statements................................Six & Seven Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................Eight, Nine,Ten & Eleven PART II. OTHER INFORMATION.................................................................Twelve SIGNATURE.................................................................................Thirteen </TABLE> Page Two of Thirteen Pages
3 PART I. FINANCIAL INFORMATION UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (000s omitted except per share amounts) (unaudited) <TABLE> <CAPTION> THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ---------------------------- ---------------------------- 1997 1996 1997 1996 ---------------------------- ---------------------------- <S> <C> <C> <C> <C> Net revenues $ 362,377 $ 299,994 $1,046,373 $ 848,589 Operating charges: Operating expenses 147,267 118,127 413,206 330,077 Salaries and wages 129,489 107,568 368,374 303,399 Provision for doubtful accounts 29,080 22,926 80,193 59,309 Depreciation and amortization 20,055 19,210 58,898 50,714 Lease and rental expense 10,041 9,441 28,469 28,419 Interest expense, net 4,566 5,223 14,906 15,843 ---------- ---------- ---------- ---------- 340,498 282,495 964,046 787,761 ---------- ---------- ---------- ---------- Income before income taxes 21,879 17,499 82,327 60,828 Provision for income taxes 8,060 6,214 30,071 21,826 ---------- ---------- ---------- ---------- Net income $ 13,819 $ 11,285 $ 52,256 $ 39,002 ========== ========== ========== ========== Earnings per common and common share equivalents: $ 0.42 $ 0.34 $ 1.58 $ 1.29 ========== ========== ========== ========== Weighted average number of common shares and equivalents: 33,134 32,849 33,078 30,173 ========== ========== ========== ========== </TABLE> See accompanying notes to these condensed consolidated financial statements. Page Three of Thirteen Pages
4 UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (000s omitted) <TABLE> <CAPTION> SEPTEMBER 30, DECEMBER 31, ------------- ------------ 1997 1996 ---- ---- (UNAUDITED) <S> <C> <C> ASSETS CURRENT ASSETS: Cash and cash equivalents $ 7,919 $ 288 Accounts receivable, net 166,750 145,364 Supplies 27,468 22,019 Deferred income taxes 5,907 12,313 Other current assets 7,885 13,969 ----------- ----------- Total current assets 215,929 193,953 ----------- ----------- Property and equipment 936,497 839,564 Less: accumulated depreciation (313,947) (271,936) ----------- ----------- 622,550 567,628 Funds restricted for construction 40,440 ----- ----------- ----------- 662,990 567,628 ----------- ----------- OTHER ASSETS: Excess of cost over fair value of net assets acquired 148,229 150,336 Deferred income taxes 11,284 9,993 Deferred charges 11,606 11,237 Other 32,439 32,648 ----------- ----------- 203,558 204,214 ----------- ----------- $ 1,082,477 $ 965,795 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 5,239 $ 6,866 Accounts payable and accrued liabilities 173,909 132,441 Federal and state taxes ----- 772 ----------- ----------- Total current liabilities 179,148 140,079 ----------- ----------- Other noncurrent liabilities 120,305 97,102 ----------- ----------- Long-term debt, net of current maturities 272,245 275,634 ----------- ----------- COMMON STOCKHOLDERS' EQUITY: Class A Common Stock, 2,060,929 shares outstanding in 1997, 2,060,929 in 1996 21 21 Class B Common Stock, 30,080,995 shares outstanding in 1997, 29,816,153 in 1996 301 298 Class C Common Stock, 207,230 shares outstanding in 1997, 207,230 in 1996 2 2 Class D Common Stock, 32,009 shares outstanding in 1997, 36,805 in 1996 ----- ----- Capital in excess of par, net of deferred compensation of $365,000 in 1997 and $377,000 in 1996 199,848 194,308 Retained earnings 310,607 258,351 ----------- ----------- 510,779 452,980 ----------- ----------- $ 1,082,477 $ 965,795 =========== =========== </TABLE> See accompanying notes to these condensed consolidated financial statements. Page Four of Thirteen Pages
5 UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (000s omitted - unaudited) <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, ------------- 1997 1996 --------- --------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 52,256 $ 39,002 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization 58,898 50,714 Provision for self-insurance reserves 14,515 11,608 Changes in assets & liabilities, net of effects from acquisitions and dispositions: Accounts receivable (1,148) 9,282 Accrued interest (3,179) (3,504) Accrued and deferred income taxes 7,363 9,592 Other working capital accounts 34,506 18,287 Other assets and deferred charges (464) (7,015) Other 5,088 (2,050) Payments made in settlement of self-insurance claims (13,652) (6,157) --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 154,183 119,759 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Property and equipment additions, net (103,703) (79,187) Funds restricted for construction related to acquisition (40,000) ---- Proceeds received from sale of minority interest 4,000 ---- Acquisition of business (3,218) (168,429) Notes receivable related to acquisitions ---- (7,000) --------- --------- NET CASH USED IN INVESTING ACTIVITIES (142,921) (254,616) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Reduction of long-term debt (5,016) ---- Additional borrowings ---- 34,655 Issuance of common stock 1,385 100,273 --------- --------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (3,631) 134,928 --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS 7,631 71 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 288 34 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,919 $ 105 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 18,085 $ 19,347 ========= ========= Income taxes paid, net of refunds $ 22,708 $ 12,456 ========= ========= </TABLE> See accompanying notes to these condensed consolidated financial statements. Page Five of Thirteen 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, 1996. Prior to 1997, the Company included charity care services as a component of its provision for doubtful accounts. Effective January 1, 1997, in accordance with health care industry practice, the Company began excluding charity care from net revenues, and has reclassified the 1996 amounts to conform with this presentation. The change in presentation has no effect on reported net income. (2) EARNINGS PER SHARE Earnings per share are based on the weighted average number of common shares outstanding during the year adjusted to give effect to common stock equivalents. In April 1996, the Company declared a two-for-one stock split in the form of a 100% stock dividend which was paid in May, 1996. All classes of common stock participated on a pro rata basis. The weighted average number of common shares and equivalents and earnings per common and common equivalent share for the three and nine months ended September 30, 1996 have been adjusted to reflect the two-for-one stock split. The Financial Accounting Standards Board issued Statement 128, Earnings per Share, which is effective for financial statements for periods ending after December 15, 1997. Pursuant to the provisions of Statement 128, the Company's basic earnings per share would have been $.43 and $.35 for the three month periods ended September 30, 1997 and 1996 and $1.62 and $1.33 for the nine months ended September 30, 1997 and 1996, respectively. The diluted earnings per share would have been $.42 and $.34 for the three month periods ended September 30, 1997 and 1996 and $1.58 and $1.29 for the nine months ended September 30, 1997 and 1996, respectively. (3) OTHER LIABILITIES Other noncurrent liabilities include the long-term portion of the Company's professional and general liability, workers' compensation reserves and minority interest. (4) COMMITMENT AND CONTINGENCIES Under certain agreements, the Company has committed or guaranteed an aggregate of $13 million related principally to the Company's self-insurance programs and as support for various debt instruments and loan guarantees. Page Six of Thirteen Pages
7 (5) SUBSEQUENT EVENTS Subsequent to September 30, 1997 the Company agreed in principle to form a limited liability company ("LLC") in Las Vegas, Nevada with Quorum Health Group, Inc. ("Quorum"). Pursuant to the preliminary terms of this newly created entity, the Company would contribute Valley Hospital Medical Center (a 417-bed acute care facility) and the newly constructed Summerlin Hospital (a 148-bed acute care facility) while Quorum would contribute cash and Desert Springs Hospital (a 241-bed acute care facility). The Company expects to own a 64% interest in the LLC and Quorum will own a 36% interest. Completion of this transaction, which is not expected to have a material effect on operating income, is subject to execution of a definitive agreement which is currently being negotiated. Pending satisfactory completion of an agreement, the Company will record this transaction using the purchase method of accounting and expects to record a significant gain which will be credited to equity in accordance with SEC Staff Accounting Bulletin Number 51. The Company expects this transaction to be completed during the fourth quarter of 1997. Page Seven of Thirteen Pages
8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The matters discussed in this report as well as the news releases issued from time to time by the Company contain certain forward-looking statements that involve risks and uncertainties, including, among other things, that the majority of the Company's revenues are produced by a small number of its total facilities, possible changes in levels and terms of reimbursement for the Company's charges by government programs or other third party payors, the ability of the Company to successfully integrate its recent and proposed acquisitions and the ability to continue to finance its growth on favorable terms. RESULTS OF OPERATIONS Net revenues increased 21% or $62 million for the three months ended September 30, 1997 and 23% or $198 million for the nine months ended September 30, 1997, over the comparable prior year periods. Net revenues at hospital facilities owned during both periods increased $33 million or 11% and $80 million or 10% for the three and nine months ended September 30, 1997, respectively, over the comparable prior year periods. Also contributing to the increase in net revenues for the three and nine month periods was the acquisition of a 80% interest in a partnership which owns the operations of a 501-bed acute care facility located in Washington, DC (acquired during the third quarter of 1997) and contributing to the increase in net revenues for the nine month period were the acquisitions of a 357-bed medical complex located in Amarillo, Texas and four behavioral health centers located in Pennsylvania (all of which were acquired during the second quarter of 1996). Earnings before interest, income taxes, depreciation, amortization and lease and rental expense (EBITDAR) increased 10% or $5 million for the three months ended September 30, 1997 and 19% or $29 million for the nine months ended September 30, 1997 as compared to the comparable prior year periods. Overall operating margins were 16% and 17% for the three months ended September 30, 1997 and 1996, respectively, and 18% for the nine months ended September 30, 1997 and 1996. The decrease in the overall operating margins during the 1997 third quarter as compared to the 1996 comparable quarter was due primarily to: (i) lower operating margins generated at the operating entities of the medical complex in Summerlin, Nevada which opened during the fourth quarter of 1996 (outpatient surgery center, medical office building and radiation therapy center), and; (ii) lower operating margin generated at the 501-bed acute care facility located in Washington, DC in which the Company acquired an 80% interest in during the third quarter of 1997. ACUTE CARE SERVICES Net revenues from the Company's acute care hospitals, ambulatory treatment centers and women's center accounted for 85% of consolidated net revenues for the three month periods ended September 30, 1997 and 1996, and 85% and 86% of consolidated net revenues for the nine month periods ended September 30, 1997 and 1996, respectively. Net revenues at the Company's acute care hospitals owned during both periods increased 12% for the three months ended September 30, 1997 and 11% for the nine month period ended September 30, 1997, over the comparable prior year periods. Inpatient admissions at these facilities increased 8% and 5% for the three and nine month periods ended September 30, 1997 as compared to the comparable prior year periods, respectively. Patient days at the Company's acute care facilities owned during both periods increased 5% and 4% for the three and nine months ended September 30, 1997 over the comparable prior year periods, respectively. Outpatient activity at the Company's acute care hospitals continues to increase as gross outpatient revenues at the acute care facilities owned during both periods increased 12% for each of the three and nine month periods ended September 30, 1997 over the comparable prior year periods. Gross outpatient revenues comprised 27% of the Company's acute care gross patient revenues during the third quarters of 1997 and 1996 and 26% for the nine months ended September 30, 1997 as compared Page Eight of Thirteen Pages
9 to 25% for the prior year nine month period. The increase is primarily the result of advances in medical technologies, which allow more services to be provided on an outpatient basis, and increased pressure from Medicare, Medicaid, health maintenance organizations (HMOs), preferred provider organizations (PPOs) and insurers to reduce hospital stays and provide services, where possible, on a less expensive outpatient basis. To accommodate the increased utilization of outpatient services, the Company has expanded or redesigned several of its outpatient facilities and services. BEHAVIORAL HEALTH SERVICES Net revenues from the Company's behavioral health services facilities accounted for 14% and 15% of the Company's consolidated net revenues for the three month periods ended September 30, 1997 and 1996, respectively, and 15% and 14% of consolidated net revenues for the nine month periods ended September 30, 1997 and 1996, respectively. Net revenues at the Company's behavioral health centers owned during both periods increased 5% and 1% for the three and nine month periods ended September 30, 1997 over the comparable prior year periods, respectively. Inpatient admissions at these facilities increased 12% and 8% during the three and nine month periods ended September 30, 1997 over the comparable prior year periods, respectively. Patient days at the Company's behavioral health services facilities increased 10% and 5% for the three and nine month periods ended September 30, 1997 over the comparable prior year periods, respectively. The average length of stay at these facilities were 12.0 days and 12.2 days for the quarters ended September 30, 1997 and 1996, respectively, and 11.9 days and 12.3 days for the nine month periods ended September 30, 1997 and 1996. The Company's behavioral health services facilities continue to experience pressure from payors to reduce the average length of stay as a large portion of the Company's behavioral health services' revenues are reimbursed on a per diem basis. The reduction in the average length of stay is a result of changing practices in the delivery of behavioral health services and continued cost containment pressures from payors which includes a greater emphasis on the utilization of outpatient services. OTHER OPERATING RESULTS Depreciation and amortization expense increased 4% or $800,000 for the three months ended September 30, 1997 and 16% or $8 million for the nine months ended September 30, 1997, over the comparable prior year periods due primarily to the acquisitions mentioned above. Interest expense decreased $700,000 or 13% for the three month period ended September 30, 1997 and $1 million or 6% for the nine month period ended September 30, 1997 over the comparable prior year periods due primarily to lower average outstanding borrowings and the interest income generated on the $40 million project fund restricted for the construction of a replacement acute care facility in Washington, DC. In June 1996, the Company issued four million shares of its Class B Common Stock at a price of $26 per share. The total net proceeds of $99.1 million generated from this stock issuance were used to partially finance the 1996 acquisitions of a 357-bed medical complex in Amarillo, Texas and four behavioral health centers located in Pennsylvania. The effective tax rate was 37% for each of the three and nine month periods ended September 30, 1997 and 36% for each of the three and nine month periods ended September 30, 1996. GENERAL TRENDS An increased proportion of the Company's revenue is derived from fixed payment services, including Medicare and Medicaid which accounted for 49% of the Company's net patient revenues for each of the three month periods ended September 30, 1997 and 1996 and 50% for each of the nine month periods ended September 30, 1997 and 1996, respectively. The Company expects the Medicare and Medicaid revenues to increase as a larger portion of the general population qualifies for coverage as a result of the aging of the population and expansion of state Medicaid programs. The Medicare Page Nine of Thirteen Pages
10 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. In addition to the Medicare and Medicaid programs, other payors continue to actively negotiate the amounts they will pay for services performed. In general, the Company expects the percentage of its business from managed care programs, including HMOs and PPOs to grow. The consequent growth in managed care networks and the resulting impact of these networks on the operating results of the Company's facilities vary among the markets in which the Company operates. In addition to the trends described above that continue to have an impact on operating results, there are a number of other more general factors affecting the Company's business. In August 1997, a five year budget plan was approved which calls for a $115 billion reduction in the rate of increase in Medicare spending over the next five years. Included in this proposal is a $39 billion reduction in the future rate of increases to payments made to hospitals. No assurance can be given that the implementation of this plan will not have a material adverse effect on the Company's business. In Texas, a law has been passed which mandates that the state senate apply for a waiver from current Medicaid regulations to allow the state to require that certain Medicaid participants be serviced through managed care providers. The Company is unable to predict whether Texas will be granted such a waiver or the effect on the Company's business of such waiver. Upon meeting certain conditions, and serving a disproportionately high share of Texas' and South Carolina's low income patients, three of the Company's facilities located in Texas and one in South Carolina became eligible and received additional reimbursement from each state's disproportionate share hospital fund. Included in the Company's financials was an aggregate of $8.3 million and $4.7 million for the three month periods ended September 30, 1997 and 1996 and $24.7 million and $10.1 million for the nine months ended September 30, 1997 and 1996, respectively, received pursuant to the terms of these programs. These programs have been renewed and are scheduled to terminate in the third quarter of 1998. The Company cannot predict whether these programs will continue beyond the scheduled termination dates. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $154 million for the nine months ended September 30, 1997 and $120 million for the nine months ended September 30, 1996. The $34 million net increase during the 1997 nine month period as compared to the 1996 comparable period was due primarily to a $24 million increase in the net income plus the addback of the non-cash charges (depreciation, amortization and provision for self-insurance reserves) and a $27 million increase in other net working capital changes partially offset by a $10 million increase in income tax payments and a $7 million increase in payments made in settlement of self-insurance reserves. During the first nine months of 1997, the Company spent $104 million to finance capital expenditures including a total of $56 million on the construction of a new medical complex in Summerlin, Nevada (including a 148-bed acute care facility which opened in the fourth quarter of 1997) and a new 129-bed replacement facility in Edinburg, Texas which opened during the third quarter of 1997. The Company also reduced outstanding debt by $5 million. During the nine months of 1997, Company entered into a new revolving credit agreement. The new agreement, which matures in July 2002, provides for up to $300 million of borrowing capacity. During the term of this agreement, the Company has the option to petition the banks to increase the borrowing capacity to $400 million. The agreement 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. As of September 30, 1997, the Company had $265 million of unused borrowing capacity available under the terms of its new revolving credit and existing commercial paper facilities. Page Ten of Thirteen Pages
11 Subsequent to September 30, 1997, the Company entered into interest rate protection to fix the rate of interest on a notional principal amount of $50 million for a period of three years. The average fixed rate obtained through these interest rate swaps is 6.125% including the Company's current borrowing spread of .35%. The counterparty of these interest rate swaps has the right to terminate the swap after the second year. The Company also entered into $75 million of forward starting interest rate swaps starting in August, 2000 locking in a fixed rate of 7.09% through August, 2010. Page Eleven of Thirteen Pages
12 PART II. OTHER INFORMATION UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.1 Deferred Compensation Plan for Universal Health Services Board of Directors. 27. Financial Data Schedule (b) Reports on Form 8-K None 11. Statement re computation of per share earnings is set forth on Page six in Note 2 of the Notes to Condensed Consolidated Financial Statements. All other items of this Report are inapplicable. Page Twelve of Thirteen Pages
13 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, 1997 /s/ Kirk E. Gorman ------------------------------------------ Kirk E. Gorman, Senior Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer). Page Thirteen of Thirteen Pages