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 June 30, 1994
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 July 31, 1994.
Class A 1,090,527
Class B 13,062,174
Class C 109,622
Class D 23,506
=============================================================================
Page One of Twelve Pages
2
UNIVERSAL HEALTH SERVICES, INC.
I N D E X
PART I. FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . PAGE NO.
--------
Item 1. Financial Statements
Condensed Consolidated Statements of Income -
Three Months Ended June 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . Three
Six Months Ended June 30, 1994 and 1993
Condensed Consolidated Balance Sheets - June 30, 1994
and December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Four
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . Five
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . Six & Seven
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition . . . . . . . . . . . . . . . . . Eight, Nine & Ten
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Eleven
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Twelve
Page Two of Twelve Pages
3
PART I. FINANCIAL INFORMATION
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(000's omitted except per share amounts)
(unaudited)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- --------------------------
1994 1993 1994 1993
------------------------- --------------------------
Net revenues $ 192,199 $ 187,453 $ 386,631 $ 382,758
Operating charges:
Operating expenses 158,665 157,944 316,070 320,017
Depreciation and amortization 10,316 9,196 20,236 18,327
Lease and rental expense 8,505 8,480 16,996 16,826
Interest expense 1,356 2,098 3,178 4,733
----------- ----------- ----------- -----------
178,842 177,718 356,480 359,903
----------- ----------- ----------- -----------
Income before income taxes 13,357 9,735 30,151 22,855
Provision for income taxes 5,204 3,257 11,711 7,766
----------- ----------- ----------- -----------
NET INCOME $ 8,153 $ 6,478 $ 18,440 $ 15,089
=========== =========== =========== ===========
Earnings per common
and common equivalent share: $ 0.57 $ 0.46 $ 1.29 $ 1.06
=========== =========== =========== ===========
Weighted average number of
common shares and equivalents: 14,395 14,862 14,578 14,875
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financia
Page Three of Twelve Pages
4
UNIVERSAL HEALTH SERVICES,INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's omitted)
JUNE 30, DECEMBER 31,
-------- -----------
1994 1993
---- -----
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,658 $ 569
Accounts receivable, net 77,979 78,605
Supplies 13,370 12,617
Deferred income taxes 14,424 7,733
Other current assets 2,799 2,475
------------- -------------
Total current assets 112,230 101,999
------------- -------------
Property and equipment 559,076 533,941
Less: accumulated depreciation (248,563) (231,509)
------------- -------------
310,513 302,432
------------- -------------
OTHER ASSETS:
Excess of cost over fair value of net
assets acquired 36,021 38,089
Deferred charges 1,449 1,697
Other 20,787 16,205
------------- -------------
58,257 55,991
------------- -------------
$ 481,000 $ 460,422
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 4,940 $ 4,313
Accounts payable and accrued liabilities 82,297 79,639
Federal and state taxes 0 2,547
------------- -------------
Total current liabilities 87,237 86,499
------------- -------------
Deferred income taxes 3,863 3,863
------------- -------------
Other noncurrent liabilities 72,284 70,491
------------- -------------
Long-term debt, net of current maturities 54,884 75,081
------------- -------------
COMMON STOCKHOLDERS' EQUITY:
Class A Common Stock, 1,090,527 shares
outstanding in 1994, 1,139,123 in 1993 11 11
Class B Common Stock, 13,091,284 shares
outstanding in 1994, 12,171,454 in 1993 131 122
Class C Common Stock, 109,622 shares
outstanding in 1994, 114,482 in 1993 1 1
Class D Common Stock, 23,697 shares
outstanding in 1994, 26,223 in 1993 0 0
Capital in excess of par, net of deferred
compensation of $554,000 in 1994
and $291,000 in 1993 100,673 80,878
Retained earnings 161,916 143,476
------------- -------------
262,732 224,488
------------- -------------
$ 481,000 $ 460,422
============== =============
See accompanying notes to consolidated financial statements.
Page Four of Twelve Pages
5
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
----------------
JUNE 30,
--------
(000'S UNAUDITED)
-------------------
1994 1993
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $18,440 $15,089
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation & amortization 20,236 18,327
Provision for self-insurance reserves 5,857 12,050
Reserve for loss on disposition of businesses 0 2,929
Changes in assets & liabilities, net of effects from
acquisitions and dispositions:
Accounts receivable 661 4,265
Accrued interest (2,107) (1,593)
Accrued and deferred income taxes (9,238) (6,944)
Other working capital accounts 5,507 8,214
Other assets and deferred charges (924) (3,283)
Other 3,468 484
Payments made in settlement of self-insurance claims (6,724) (5,643)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 35,176 43,895
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions (21,358) (23,735)
Acquisition of property previously leased 0 (3,218)
Acquisition of businesses (1,898) (668)
Advances under long-term notes receivable (4,147) 0
Disposition of assets 500 3,500
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (26,903) (24,121)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional borrowings 10,614 0
Reduction of long-term debt (16,195) (25,407)
Issuance of common stock 397 68
Repurchase of common shares 0 (701)
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (5,184) (26,040)
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,089 (6,266)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 569 6,686
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $3,658 $420
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $5,285 $6,326
========== ==========
Income taxes paid, net of refunds $20,949 $14,710
========== ==========
See accompanying notes to consolidated financial statements.
Page Five of Twelve Pages
6
UNIVERSAL HEALTH SERVICES, INC.
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, 1993.
(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 of 1994, the Company called for the redemption of the
$29.9 million, 7 1/2% convertible bonds, of which $10.6 million were redeemed
at par for cash and $19.3 million were converted to 820,103 newly issued shares
of the Company's Class B Common Stock. The bond redemption reduced the
Company's fully diluted number of shares outstanding by 451,233. Prior to this
redemption, the earnings per share were historically adjusted to reflect the
assumed conversion of the Company's convertible debentures. Accordingly, the
earnings per share for the first three months of the six month period ended
June 30, 1994 and the three and six months ended June 30, 1993 have been
adjusted to reflect the assumed conversion of the Company's convertible
debentures.
(3) 1994 AND 1993 UNUSUAL ITEMS
Included in net revenues for the three month period ended June 30, 1994 is $3.0
million of additional revenues received from special Medicaid reimbursement
programs. Included in operating expenses for the three months ended June 30,
1994 is a $2.8 million write-down recorded against the book value of the real
property of a psychiatric hospital owned by the Company and leased to an
unaffiliated third party, which is currently in default under the terms of the
lease. Also included in operating expenses during the second quarter of 1994
is a $1.1 million favorable adjustment made to reduce the Company's worker's
compensation reserves.
Included in net revenues for the three month period ended June 30, 1993 is $4.6
million of additional revenues received from special Medicaid reimbursement
programs. Included in operating expenses for the three months ended June 30,
1993 is a $3.2 million increase in the reserves for the Company's professional
and general liability self-insurance reserves.
Included in net revenues for the six month period ended June 30, 1994 is $6.0
of additional revenues received from special Medicaid reimbursement programs.
Included in operating expenses for the six months ended June 30, 1994 is the
$2.8 million property write-down and the $1.1 million favorable adjustment made
to reduce the Company's workers' compensation reserves, as mentioned above, and
$2.5 million of expenses related to the disposition of businesses.
Included in net revenues for the six month period ended June 30, 1993 is $9.2
million of additional revenues received from a special Medicaid reimbursement
program. Included in operating expenses for the six months ended June 30, 1993
is approximately $4.1 million of expense related to the disposition of
ancillary businesses and a $3.2 million increase in the reserves for the
Company's general and professional self-insurance reserves.
Page Six of Twelve Pages
7
(4) OTHER LIABILITIES
Other noncurrent liabilities include the long-term portion of the Company's
professional and general liability and workers' compensation reserves.
(5) COMMITMENTS AND CONTINGENCIES
Under certain agreements, the Company has committed or guaranteed an aggregate
of $24,000,000 related principally to the Company's self- insurance programs
and as support for various debt instruments and loan guarantees.
(6) ACQUISITIONS
During the second quarter of 1994, the Company acquired majority interests in
partnerships which own and operate two radiation therapy centers located in
Indiana for $1.9 million in cash. One of these centers is currently operating
and the other center, which is currently under construction, is scheduled to
commence operations during the third quarter of 1994. Also during the second
quarter, the Company advanced $4.1 million in loans and entered into
contractual arrangements to manage, (with the intent of acquiring majority
interest in partnerships which will own and operate), four radiation therapy
centers located in Kentucky. Two of these centers are currently operating and
the other two, which are currently being constructed, are scheduled to commence
operations during the fourth quarter of 1994 and the first quarter of 1995.
(7) SUBSEQUENT EVENTS
Subsequent to June 30, 1994, the Company agreed to acquire a 112 bed acute care
hospital for approximately $14 million and invest up to an additional $20
million to $30 million to renovate the existing facility and construct an
additional facility in Edinburg, Texas. This acquisition is expected to be
finalized during the third or fourth quarter of 1994. The Company also
purchased a majority interest in a partnership which will own and operate an
ambulatory surgery center in California. Additionally, the Company merged the
operations of an additional ambulatory surgery center into its majority owned
partnership which owns and operates an existing ambulatory surgery center
located in California.
Page Seven of Twelve Pages
8
ITEM 2. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net revenues for the three and six months ended June 30, 1994 increased 11% and
9%, respectively, over the comparable 1993 periods at facilities owned during
both years after excluding the effects of additional revenues received from
special Medicaid reimbursement programs. Despite the continued shift in the
delivery of healthcare services to outpatient care, the Company's acute care
hospitals owned during both periods experienced a 13% and 11% increase in net
revenues resulting from an 11% and 10% increase in admissions and an 8%
increase in patient days during the three and six month period ended June 30,
1994 as compared to the comparable 1993 periods, respectively, due to the
expansion of service lines at many of its hospitals and additional capacity at
two of the Company's larger facilities. Gross outpatient revenues at the
Company's acute care hospitals owned during both periods increased 13% for the
three months ended June 30, 1994 and 16% for the six month period ended June
30, 1994 over the comparable prior year periods and continues to comprise 24%
of gross patient revenues for the three months ended June 30, 1994 and 1993 and
23% for the six months ended June 30, 1994 and 1993. Advances in medical
technologies permit more services to be provided on an outpatient basis, and
there is increased pressure from Medicare, Medicaid, health maintenance
organizations (HMOs), preferred provider organizations (PPOs) and insurers to
reduce hospital stays and provide services, when possible, on a less expensive
outpatient basis.
To take advantage of the trend toward increased outpatient services, the
Company has continued to invest in the acquisition and development of
outpatient surgery and radiation therapy centers. The Company currently
operates or manages fifteen ambulatory treatment centers, which have
contributed to the increase in the Company's outpatient revenue. The Company
expects the growth in outpatient services to continue, although the rate of
growth may be moderated in the future.
Net revenues at the Company's psychiatric hospitals decreased approximately 4%
and 7%, for the three and six months ended June 30, 1994 as compared to the
comparable 1993 periods, respectively. These decreases were primarily due to a
2% and 5% decrease in patient days at the Company's psychiatric hospitals for
the three and six months ended June 30, 1994 as compared to the comparable 1993
periods, respectively. Although admissions at the Company's psychiatric
facilities increased 16% and 12% for the three and six months ended June 30,
1994 over the comparable 1993 periods, the average length of stay at these
facilities decreased 15% in both of the 1994 periods as compared to the
comparable 1993 periods due to increased emphasis on outpatient treatment
programs. The shift to outpatient care was reflected in higher revenues from
outpatient services, as gross outpatient revenues at the Company's psychiatric
hospitals increased 19% for the three months ended June 30, 1994 and 17% for
the six month period ended June 30, 1994 over the comparable prior year periods
and now comprise 15% and 14% of gross psychiatric patient revenues for the
three and six months ended June 30, 1994, respectively, as compared to 14% and
13% in the comparable 1993 periods, respectively. The trend in outpatient
treatment for psychiatric patients is expected to continue as a result of
advances in patient care and continued cost containment pressures from payors.
The Company received $3.0 million and $4.5 million for the three months ended
June 30, 1994 and 1993 and $6.0 million and $9.1 million for the six months
ended June 30, 1994 and 1993, respectively, from the special Medicaid
reimbursement programs mentioned above. These programs are scheduled to
terminate in August, 1994 and the Company cannot predict whether these programs
will continue beyond the scheduled termination date.
An increased proportion of the Company's revenue is derived from fixed payment
services, including Medicare and Medicaid which accounted for 46% and 40% of
the Company's net patient revenues for the three months ended June 30, 1994 and
1993, respectively and 44% and 40% of the Company's net patient revenues for
the six months ended June 30, 1994 and 1993, respectively, excluding the
additional
Page Eight of Twelve Pages
9
revenues received from special Medicaid reimbursement programs. The Company
expects Medicare and Medicaid revenues to continue to increase due to the
general aging of the population and expansion of state Medicaid programs. 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 continue 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.
Excluding the effects of the unusual revenue items describe above and the
unusual expense items included in the three and six month periods ended June
30, 1994 and 1993 described below, operating expenses as a percentage of net
revenues decreased to 83% and 82% for the three and six months ended June 30,
1994 as compared to 85% and 84% for the three and six months ended June 30,
1993. Included in operating expenses for the three and six months ended June
30, 1994 is a $2.8 million write-down recorded against the book value of the
real property of a psychiatric hospital owned by the Company and leased to an
unaffiliated third party, which is currently in default under the terms of
the lease, and a $1.1 million favorable adjustment made to reduce the Company's
workers' compensation reserves. Also included in operating expenses for the
six months ended June 30, 1994 is approximately $2.5 million of expenses
related to the disposition of businesses. Included in operating expenses for
the three and six months ended June 30, 1993 is a $3.2 million increase in the
reserves for the Company's professional and general liability self-insurance
reserves and also included in operating expenses for the six months ended June
30, 1993 is approximately $4.1 million of expenses related to the disposition
of ancillary businesses. The increase in the operating margin for the three
and six months ended June 30, 1994 over the comparable 1993 periods is
partially due to the sale of two low margin hospitals during 1993 and lower
insurance costs in 1994. Although the rate of inflation has not had a
significant impact on the results of operations, pressure on operating margins
is expected to continue because, while Medicare fixed payment rates are indexed
for inflation annually, the increases have historically lagged behind actual
inflation.
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. The Company and the healthcare industry as a whole
face increased uncertainty with respect to the level of payor payments because
of national and state efforts to reform healthcare. These efforts include
proposals at all levels of government to contain healthcare costs while making
quality, affordable health services available to more Americans. The Company
is unable to predict which proposals will be adopted or the resulting
implications for providers at this time. However, the Company believes that
the delivery of primary care, emergency care, obstetrical and psychiatric
services will be an integral component of any strategy for controlling
healthcare costs and it also believes it is well positioned to provide these
services.
Interest expense decreased 35% and 33% for the three and six months ended June
30, 1994 as compared to the comparable 1993 periods due to lower average
outstanding borrowings.
Depreciation and amortization expense increased 12% and 10% for the three and
six months ended June 30, 1994 as compared to the comparable 1993 periods due
primarily to increased depreciation and amortization expense related to the
Company's acquisitions of ambulatory treatment centers.
The effective tax rate was 39.0% and 33.5% for the three months ended June 30,
1994 and 1993, respectively, and 38.8% and 34.0% for the six months ended June
30, 1994 and 1993, respectively. The increase in the effective rate during the
1994 periods as compared to the 1993 periods was due primarily to the 1993
periods including a reduction in the state tax provision.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 1994, net cash provided by operating activities
was $35.2 million as compared to $43.9 million in the comparable 1993 period.
The decrease during the 1994 period as compared to the 1993 period was
primarily due to a $3.2 million decrease in the revenues from special Medicaid
reimbursement programs, and a $6.2 million increase in income tax payments.
Page Nine of Twelve Pages
10
During the first six months of 1994, the Company used $21.4 million of its
operating cash flow to finance capital expenditures, $4.1 million to advance
loans to its managed radiation therapy centers located in Kentucky, $1.9
million to acquire majority interest in partnerships which own and operate
ambulatory treatment centers and $5.6 million to reduce outstanding debt.
Subsequent to June 30, 1994, the Company replaced its existing $72.4 million
revolving credit agreement with a new $125 million revolving credit agreement.
The new agreement, which expires in August of 1999, provides for interest, at
the Company's option, at the prime rate, the certificate of deposit rate plus
5/8% to 1 1/8% or the Euro-dollar rate plus 1/2% to 1%. The margins over the
certificate of deposit and the Euro-dollar rates are based upon certain
leverage and coverage ratios. A commitment fee ranging from 1/8% to 3/8% is
required on the unused portion of this commitment. At June 30, 1994, the
Company had approximately $10 million of unused borrowing capacity under its
commercial paper program and $123 million of unused borrowing capacity under
the terms of its new $125 million revolving credit facility.
Page Ten of Twelve Pages
11
PART II. OTHER INFORMATION
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The following information relates to matters submitted to the stockholders
of Universal Health Services, Inc. (the "Company") at the Annual Meeting of
Stockholders held on May 18, 1994.
(b) Not applicable.
(c) At the meeting, the following proposals, as described in the proxy
statement delivered to all the Company's stockholders were approved by the
votes indicated:
Adoption of the Amendment to the Company's 1989 Non-Employee Director Stock
Option Plan
Votes cast in favor 13,644,098
Votes cast against 24,815
Votes abstained 2,324
Broker non-votes 0
Adoption of the Company's 1994 Executive Incentive Plan:
Votes cast in favor 13,621,936
Votes cast against 44,467
Votes abstained 4,834
Broker non-votes 0
Election by Class A & Class C stockholders of Class I Directors, Dr. Martin
Meyerson and Mr. John H. Herrell:
Martin Meyerson John H. Herrell
--------------- ---------------
Votes cast in favor 1,251,140 1,251,140
Votes withheld 0 0
(d) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit:
10.1 Credit Agreement dated as of August 2, 1994 among Universal Health
Services, Inc., Certain Participating Banks and Morgan Guaranty Trust Company
of New York, as Agent.
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: August 11, 1994 /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
13
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
10.1 Credit Agreement dated as of August 2, 1994 among
Universal Health Services, Inc., Certain
Participating Banks and Morgan Guaranty Trust
Company of New York, as Agent.