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 March 31, 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) 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 April 30, 1997: Class A 2,060,929 Class B 30,022,477 Class C 207,230 Class D 33,954 Page One of Twelve Pages
2 UNIVERSAL HEALTH SERVICES, INC. I N D E X <TABLE> <S> <C> PART I. FINANCIAL INFORMATION............................................................ PAGE NO. -------- Item 1. Financial Statements Consolidated Statements of Income - Three Months Ended March 31, 1997 and 1996.......................................... Three Condensed Consolidated Balance Sheets - March 31, 1997 and December 31, 1996............................................................... Four Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 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 PART II. OTHER INFORMATION............................................................... Eleven SIGNATURE................................................................................. Twelve </TABLE> Page Two of Twelve Pages
3 PART I. FINANCIAL INFORMATION UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (000s omitted except per share amounts) (unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, --------------------- 1997 1996 --------------------- <S> <C> <C> Net revenues $340,170 $266,523 Operating charges: Operating expenses 129,674 102,335 Salaries and wages 119,747 94,500 Provision for doubtful accounts 23,663 16,674 Depreciation and amortization 19,028 14,783 Lease and rental expense 9,121 9,405 Interest expense, net 4,956 4,648 -------- -------- 306,189 242,345 -------- -------- Income before income taxes 33,981 24,178 Provision for income taxes 12,451 8,677 -------- -------- NET INCOME $ 21,530 $ 15,501 ======== ======== Earnings per common and common share equivalents: $ 0.65 $ 0.54 ======== ======== Weighted average number of common shares and equivalents: 32,986 28,712 ======== ======== </TABLE> See accompanying notes to these condensed consolidated financial statements. Page Three of Twelve Pages
4 UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (000s omitted) <TABLE> <CAPTION> MARCH 31, DECEMBER 31, --------- ------------ 1997 1996 ---- ---- (UNAUDITED) <S> <C> <C> ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,281 $ 288 Accounts receivable, net 154,952 145,364 Supplies 21,915 22,019 Deferred income taxes 9,809 12,313 Other current assets 14,414 13,969 --------- --------- Total current assets 203,371 193,953 --------- --------- Property and equipment 870,620 839,564 Less: accumulated depreciation (286,761) (271,936) --------- --------- 583,859 567,628 --------- --------- OTHER ASSETS: Excess of cost over fair value of net assets acquired 146,491 150,336 Deferred income taxes 11,284 9,993 Deferred charges 10,804 11,237 Other 34,154 32,648 --------- --------- 202,733 204,214 --------- --------- $ 989,963 $ 965,795 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 6,319 $ 6,866 Accounts payable and accrued liabilities 144,752 132,441 Federal and state taxes 10,113 772 --------- --------- Total current liabilities 161,184 140,079 --------- --------- Other noncurrent liabilities 91,967 97,102 --------- --------- Long-term debt, net of current maturities 258,693 275,634 --------- --------- 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, 29,986,504 shares outstanding in 1997, 29,816,153 in 1996 300 298 Class C Common Stock, 207,230 shares outstanding in 1997, 207,230 in 1996 2 2 Class D Common Stock, 34,216 shares outstanding in 1997, 36,805 in 1996 -- -- Capital in excess of par, net of deferred compensation of $460,000 in 1997 and $377,000 in 1996 197,915 194,308 Retained earnings 279,881 258,351 --------- --------- 478,119 452,980 --------- --------- $ 989,963 $ 965,795 ========= ========= </TABLE> See accompanying notes to these condensed consolidated financial statements. Page Four of Twelve Pages
5 UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (000s omitted) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, 1997 1996 --------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 21,530 $ 15,501 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization 19,028 14,783 Provision for self-insurance reserves 4,516 3,044 Changes in assets & liabilities, net of effects from acquisitions and dispositions: Accounts receivable (9,588) (2,237) Accrued interest (3,159) (3,447) Accrued and deferred income taxes 12,070 8,117 Other working capital accounts 7,916 3,810 Other assets and deferred charges (1,929) (3,377) Other 983 801 Payments made in settlement of self-insurance claims (2,354) (4,314) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 49,013 32,681 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property and equipment additions, net (30,558) (25,729) -------- -------- NET CASH USED IN INVESTING ACTIVITIES (30,558) (25,729) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Reduction of long-term debt (17,488) (6,830) Issuance of common stock 1,026 606 -------- -------- NET CASH USED IN FINANCING ACTIVITIES (16,462) (6,224) -------- -------- INCREASE IN CASH AND CASH EQUIVALENTS 1,993 728 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 288 34 ======== ======== CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,281 $ 762 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 8,115 $ 8,095 ======== ======== Income taxes paid, net of refunds $ 381 $ 782 ======== ======== </TABLE> See accompanying notes to these condensed consolidated financial statements. Page Five of Twelve 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 months ended March 31, 1996 have been adjusted to reflect the two-for-one stock split. The Financial Accounting Standards Board recently 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 $.67 and $.56 for the three month periods ended March 31, 1997 and 1996, respectively, and the diluted earnings per share would have been $.65 and $.54 for the three month periods ended March 31, 1997 and 1996, respectively. (3) OTHER LIABILITIES Other noncurrent liabilities include the long-term portion of the Company's professional and general liability and workers' compensation reserves. (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 Twelve Pages
7 (5) SUBSEQUENT EVENTS Subsequent to the end of the 1997 first quarter, the Company executed a joint venture partnership agreement, subject to regulatory approval, for the ownership and operation of The George Washington University Hospital, a 501-bed acute care facility located in Washington, D.C. The partnership has recently filed for certificate of need approval. The Company also entered into a management agreement, which commenced in April 1997, to manage the operations of the hospital. Pursuant to the terms of the partnership agreement, the Company will provide an immediate commitment of $80 million ($40 million in cash and a $40 million letter of credit) as part of a total intended investment by the partnership of $125 million over the next ten years for enhancement of the hospital's operations. The Company will hold an 80% interest in the partnership and The George Washington University will hold a 20% interest. Page Seven of Twelve 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 growth on favorable terms. RESULTS OF OPERATIONS Net revenues increased 28% or $74 million for the three months ended March 31, 1997 over the comparable prior year period due primarily to 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. Also contributing to the increase in net revenues for the three months ended March 31, 1997 as compared to the comparable prior year quarter was a 6% or $14 million increase in net revenues at hospital facilities owned during both periods. Earnings before interest, income taxes, depreciation, amortization and lease and rental expense (EBITDAR) increased 27% or $14 million to $67 million for the three months ended March 31, 1997 as compared to $53 million in the comparable prior year period. Overall operating margins were 19.7% and 19.9% for the three months ended March 31, 1997 and 1996, respectively. ACUTE CARE SERVICES Net revenues from the Company's acute care hospitals, ambulatory treatment centers and women's center accounted for 85% and 88% of consolidated net revenues for the three month periods ended March 31, 1997 and 1996, respectively. Net revenues at the Company's acute care hospitals owned during both periods increased 7% for the three month period ended March 31, 1997 over the comparable prior year period while inpatient admissions at these facilities remained relatively unchanged. Patient days at the Company's acute care facilities owned during both periods decreased 2% during the 1997 first quarter as compared to the comparable prior year period due to a 2% decrease in the average length of stay. 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 11% for the three months ended March 31, 1997 as compared to the comparable prior year period and comprised 24% of the Company's acute care gross patient revenues during the first quarter of 1997 as compared to 23% during the 1996 first quarter. 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. Page Eight of Twelve Pages
9 BEHAVIORAL HEALTH SERVICES Net revenues from the Company's behavioral health services facilities accounted for 14% and 12% of the Company's consolidated net revenues for the three month periods ended March 31, 1997 and 1996, respectively. Net revenues at the Company's behavioral health centers owned during both periods decreased 2% for the three month period ended March 31, 1997 as compared to the comparable 1996 quarter. Admissions at the facilities owned during both periods increased 9% during the 1997 first quarter over the comparable 1996 quarter while patient days remained relatively unchanged due to 9% decrease in the average length of stay which decreased to 11.0 days in the 1997 quarter as compared to 12.1 days during the 1996 quarter. The reduction in the average length of stay is a result of changing practices in the delivery of behavioral health services and continued cost containment pressures from payors which includes a greater emphasis on the utilization of outpatient services. Management of the Company has responded to these trends by developing and marketing new outpatient treatment programs. The shift to outpatient care is reflected in higher revenues from outpatient services, as gross outpatient revenues at the Company's behavioral health services facilities owned during both periods increased 14% during the three months ended March 31, 1997 as compared to the comparable prior year period and comprised 18% of the Company's behavioral health services' revenues for the three months ended March 31, 1997 as compared to 17% during the 1996 first quarter. OTHER OPERATING RESULTS Depreciation and amortization expense increased 29% or $4 million for the three months ended March 31, 1997 as compared to the comparable prior year period due primarily to the 1996 acquisitions mentioned above. Interest expense increased 7% or $300,000 during the 1997 first quarter as compared to the comparable 1996 period due to the increased borrowings used to partially finance the 1996 acquisitions mentioned above. 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 also used to partially finance the 1996 purchase transactions mentioned above The effective tax rate was 37% and 36% for the three month periods ended March 31, 1997 and 1996, respectively. GENERAL TRENDS An increased proportion of the Company's revenue is derived from fixed payment services, including Medicare and Medicaid which accounted for 51% and 48% of the Company's net patient revenues for the three months ended March 31, 1997 and 1996, respectively. The Company expects the Medicare and Medicaid revenues to continue to increase as a larger portion of the general population qualifies for coverage as a result of the aging of the population and expansion of state Medicaid programs. The Medicare program reimburses the Company's hospitals primarily based on established rates by a diagnosis related group for acute care hospitals and by cost based formula for 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. Page Nine of Twelve Pages
10 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 May 1997, the President and members of Congress agreed on a tentative five year budget plan which calls for a $115 billion reduction in the rate of increase in Medicare spending over the next five years. Included in this proposal are reductions in the future rate of increases to payments made to hospitals. The Company cannot predict whether the above proposal or any other proposal will ultimately be adopted, and if adopted, no assurance can be given that the implementation of such plans 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 financial results was an aggregate of $8.1 million for the three months ended March 31, 1997 (including the additional reimbursement received by an acute care facility acquired during the second quarter of 1996) and $1.8 million for the three months ended March 31, 1996 received pursuant to the terms of these programs. These programs are scheduled to terminate in the third quarter of 1997 and the Company cannot predict whether these programs will continue beyond their scheduled termination date. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $49 million for the three months ended March 31, 1997 and $33 million for the three months ended March 31, 1996. The $16 million increase during the 1997 three month period as compared to the 1996 comparable period was due primarily to a $12 million increase in the net income plus the addback of the non-cash charges (depreciation, amortization and provision for self-insurance reserves) and $4 million of other net working capital changes. During the first quarter of 1997, the Company spent $31 million to finance capital expenditures including a total of $17 million on the construction of a new medical complex (including a 149-bed acute care facility) in Summerlin, Nevada and a new 130-bed replacement facility in Edinburg, Texas. The Company also reduced outstanding debt by $17 million. During the first quarter of 1997, the Company amended its commercial paper credit facility to increase the borrowing capacity to $75 million from $50 million and to reduce the commitment fee. As of March 31, 1997, the Company had $206 million of unused borrowing capacity available under its commercial paper and revolving credit facilities. Page Ten of Twelve Pages
11 PART II. OTHER INFORMATION UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.1 Agreement of Limited Partnership of Direct Hospital Partners, L.P. (a District of Columbia Limited Partnership) by and among UHS of D.C., Inc. and The George Washington University. 10.2 Amendment No. 2, dated as of April 17, 1997 to Pooling Agreement dated as of November 16, 1993, among UHS Receivables Corp., a Delaware corporation, Sheffield Receivables Corporation, a Delaware corporation, and First Bank National Association, a national banking association, as trustee. 27. Financial Data Schedule (b) Reports on Form 8-K None 11. Statement re computation of per share earnings is set forth on Page six in Note 2 of the Notes to Condensed Consolidated Financial Statements. All other items of this Report are inapplicable. Page Eleven of Twelve Pages
12 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: May 12, 1997 /s/ Kirk E. Gorman ------------------------------------------- Kirk E. Gorman, Senior Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer). Page Twelve of Twelve Pages