10-Q 1 d545907d10q.htm UNIVERSAL HEALTH SERVICES INC--FORM 10-Q Universal Health Services Inc--Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(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, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 1-10765

 

 

UNIVERSAL HEALTH SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   23-2077891

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

UNIVERSAL CORPORATE CENTER

367 SOUTH GULPH ROAD

KING OF PRUSSIA, PENNSYLVANIA 19406

(Address of principal executive offices) (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 by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

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, 2013:

 

Class A

     6,595,708   

Class B

     90,905,041   

Class C

     664,000   

Class D

     30,053   

 

 

 


Table of Contents

UNIVERSAL HEALTH SERVICES, INC.

INDEX

 

     PAGE NO.  

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Condensed Consolidated Statements of Income—Three and Six Months Ended June 30, 2013 and 2012

     3   

Condensed Consolidated Statements of Comprehensive Income—Three and Six Months Ended June  30, 2013 and 2012

     4   

Condensed Consolidated Balance Sheets—June 30, 2013 and December 31, 2012

     5   

Condensed Consolidated Statements of Cash Flows—Six Months Ended June 30, 2013 and 2012

     6   

Notes to Condensed Consolidated Financial Statements

     7   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     28   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     54   

Item 4. Controls and Procedures

     54   

PART II. Other Information

  

Item 1. Legal Proceedings

     54   

Item 1A. Risk Factors

     56   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     56   

Item 6. Exhibits

     56   

Signatures

     58   

EXHIBIT INDEX

     59   

In this Report on Form 10-Q for the quarterly period ended June 30, 2013, “we,” “us,” “our” and the “Company” refer to Universal Health Services, Inc. and its subsidiaries. UHS is a registered trademark of UHS of Delaware, Inc., the management company for, and a wholly-owned subsidiary of Universal Health Services, Inc. Universal Health Services, Inc. is a holding company and operates through its subsidiaries including its management company, UHS of Delaware, Inc. All healthcare and management operations are conducted by subsidiaries of Universal Health Services, Inc. To the extent any reference to “UHS” or “UHS facilities” in this report including letters, narratives or other forms contained herein relates to our healthcare or management operations it is referring to Universal Health Services, Inc.’s subsidiaries including UHS of Delaware, Inc. Further, the terms “we,” “us,” “our” or the “Company” in such context similarly refer to the operations of Universal Health Services Inc.’s subsidiaries including UHS of Delaware, Inc. Any reference to employees or employment contained herein refers to employment with or employees of the subsidiaries of Universal Health Services, Inc. including UHS of Delaware, Inc.

 

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PART I. FINANCIAL INFORMATION

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(amounts in thousands, except per share amounts)

(unaudited)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2013     2012     2013     2012  

Net revenues before provision for doubtful accounts

   $ 2,081,662      $ 1,907,789      $ 4,160,010      $ 3,849,412   

Less: Provision for doubtful accounts

     246,687        184,706        493,403        333,293   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

     1,834,975        1,723,083        3,666,607        3,516,119   

Operating charges:

        

Salaries, wages and benefits

     897,334        854,863        1,799,630        1,726,977   

Other operating expenses

     325,562        345,061        706,569        696,361   

Supplies expense

     202,344        197,816        406,986        403,176   

Depreciation and amortization

     81,682        72,983        161,494        144,775   

Lease and rental expense

     24,082        23,983        48,747        47,425   

Electronic health records incentive income

     (83     (1,955     (4,795     (1,955
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,530,921        1,492,751        3,118,631        3,016,759   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     304,054        230,332        547,976        499,360   

Interest expense, net

     38,236        45,888        78,174        92,598   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     265,818        184,444        469,802        406,762   

Provision for income taxes

     98,015        67,000        172,064        146,748   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     167,803        117,444        297,738        260,014   

Less: Income attributable to noncontrolling interests

     15,962        9,883        26,113        23,846   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to UHS

   $ 151,841      $ 107,561      $ 271,625      $ 236,168   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share attributable to UHS

   $ 1.55      $ 1.11      $ 2.77      $ 2.44   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share attributable to UHS

   $ 1.53      $ 1.10      $ 2.75      $ 2.41   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares—basic

     98,033        96,691        97,872        96,642   

Add: Other share equivalents

     1,178        1,038        1,019        1,118   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares and equivalents—diluted

     99,211        97,729        98,891        97,760   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in thousands, unaudited)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2013     2012     2013     2012  

Net income

   $ 167,803      $ 117,444      $ 297,738      $ 260,014   

Other comprehensive income (loss):

        

Unrealized derivative gains on cash flow hedges

     5,282        212        9,817        1,827   

Amortization of terminated hedge

     (84     (84     (168     (168
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income before tax

     5,198        128        9,649        1,659   

Income tax expense related to items of other comprehensive income

     1,960        50        3,638        632   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income, net of tax

     3,238        78        6,011        1,027   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     171,041        117,522        303,749        261,041   

Less: Comprehensive income attributable to noncontrolling interests

     15,962        9,883        26,113        23,846   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to UHS

   $ 155,079      $ 107,639      $ 277,636      $ 237,195   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, unaudited)

 

     June 30,     December 31,  
     2013     2012  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 12,558      $ 23,471   

Accounts receivable, net

     1,149,477        1,067,197   

Supplies

     100,324        99,000   

Other current assets

     86,733        87,936   

Deferred income taxes

     134,888        104,461   

Assets of facilities held for sale

     0        25,431   
  

 

 

   

 

 

 

Total current assets

     1,483,980        1,407,496   
  

 

 

   

 

 

 

Property and equipment

     5,519,819        5,368,345   

Less: accumulated depreciation

     (2,116,414     (1,986,110
  

 

 

   

 

 

 
     3,403,405        3,382,235   
  

 

 

   

 

 

 

Other assets:

    

Goodwill

     3,041,346        3,036,765   

Deferred charges

     66,910        75,888   

Other

     321,612        298,459   
  

 

 

   

 

 

 
   $ 8,317,253      $ 8,200,843   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Current maturities of long-term debt

   $ 73,579      $ 2,589   

Accounts payable and accrued liabilities

     958,952        889,557   

Liabilities of facilities held for sale

     0        850   

Federal and state taxes

     16,619        1,062   
  

 

 

   

 

 

 

Total current liabilities

     1,049,150        894,058   
  

 

 

   

 

 

 

Other noncurrent liabilities

     310,948        395,355   

Long-term debt

     3,473,106        3,727,431   

Deferred income taxes

     206,818        183,747   

Redeemable noncontrolling interests

     233,417        234,303   

Equity:

    

UHS common stockholders’ equity

     2,991,457        2,713,345   

Noncontrolling interest

     52,357        52,604   
  

 

 

   

 

 

 

Total equity

     3,043,814        2,765,949   
  

 

 

   

 

 

 
   $ 8,317,253      $ 8,200,843   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands, unaudited)

 

     Six months
ended June 30,
 
     2013     2012  

Cash Flows from Operating Activities:

    

Net income

   $ 297,738      $ 260,014   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation & amortization

     161,677        148,703   

Stock-based compensation expense

     13,579        10,996   

Gains on sales of assets and businesses, net of losses

     (2,277     0   

Changes in assets & liabilities, net of effects from acquisitions and dispositions:

    

Accounts receivable

     (82,224     (63,937

Accrued interest

     13,199        15,873   

Accrued and deferred income taxes

     18,365        3,955   

Other working capital accounts

     32,421        (13,085

Other assets and deferred charges

     9,069        13,866   

Other

     4,083        2,050   

Accrued insurance expense, net of commercial premiums paid

     (22,590     42,241   

Payments made in settlement of self-insurance claims

     (37,038     (47,814
  

 

 

   

 

 

 

Net cash provided by operating activities

     406,002        372,862   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Property and equipment additions, net of disposals

     (175,944     (182,351

Proceeds received from sale of assets and businesses

     34,008        53,461   

Acquisition of property and businesses

     (1,320     (11,476

Costs incurred for purchase and implementation of electronic health records application

     (33,396     (28,008

Return of deposit on terminated purchase agreement

     0        6,500   
  

 

 

   

 

 

 

Net cash used in investing activities

     (176,652     (161,874
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Reduction of long-term debt

     (196,096     (195,686

Additional borrowings

     11,000        0   

Repurchase of common shares

     (21,373     (2,927

Dividends paid

     (9,795     (9,673

Issuance of common stock

     2,735        2,575   

Profit distributions to noncontrolling interests

     (26,734     (13,565
  

 

 

   

 

 

 

Net cash used in financing activities

     (240,263     (219,276
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (10,913     (8,288

Cash and cash equivalents, beginning of period

     23,471        41,229   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 12,558      $ 32,941   
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information:

    

Interest paid

   $ 54,067      $ 62,158   
  

 

 

   

 

 

 

Income taxes paid, net of refunds

   $ 152,553      $ 141,571   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) General

This Quarterly Report on Form 10-Q is for the quarterly period ended June 30, 2013. In this Quarterly Report, “we,” “us,” “our” and the “Company” refer to Universal Health Services, Inc. and its subsidiaries.

The condensed consolidated financial statements include the accounts of our majority-owned subsidiaries and partnerships and limited liability companies controlled by us, or our subsidiaries, as managing general partner or managing member. The condensed consolidated financial statements included herein have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and reflect all adjustments (consisting only of normal recurring adjustments) which, in our opinion, are necessary to fairly state results for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although we believe that the accompanying disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, significant accounting policies and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012.

(2) Relationship with Universal Health Realty Income Trust and Related Party Transactions

Relationship with Universal Health Realty Income Trust:

At June 30, 2013, we held approximately 6.2% of the outstanding shares of Universal Health Realty Income Trust (the “Trust”). We serve as Advisor to the Trust under an annually renewable advisory agreement pursuant to the terms of which we conduct the Trust’s day-to-day affairs, provide administrative services and present investment opportunities. In addition, certain of our officers and directors are also officers and/or directors of the Trust. Management believes that it has the ability to exercise significant influence over the Trust, therefore we account for our investment in the Trust using the equity method of accounting. We earned an advisory fee from the Trust, which is included in net revenues in the accompanying condensed consolidated statements of income, of $585,000 and $520,000 during the three-month periods ended June 30, 2013 and 2012, respectively, and $1.2 million and $1.0 million during the six-month periods ended June 30, 2013 and 2012, respectively. Our pre-tax share of income from the Trust was $213,000 and $591,000 for the three-month periods ended June 30, 2013 and 2012, respectively, and $513,000 and $891,000 for the six-month periods ended June 30, 2013 and 2012, respectively. The carrying value of this investment was $8.8 million and $9.3 million at June 30, 2013 and December 31, 2012, respectively, and is included in other assets in the accompanying condensed consolidated balance sheets. The market value of this investment, based on the closing price of the Trust’s stock on the respective dates, was $34.0 million at June 30, 2013 and $39.9 million at December 31, 2012.

Total rent expense under the operating leases on the hospital facilities with the Trust was $3.9 million and $4.1 million during the three-month periods ended June 30, 2013 and 2012, respectively, and $8.0 million and $8.3 million for the six month periods ended June 30, 2013 and 2012, respectively. In addition, certain of our subsidiaries are tenants in several medical office buildings owned by limited liability companies in which the Trust holds either 100% ownership interests or non-controlling majority ownership interests.

The table below details the renewal options and terms for each of our four hospital facilities leased from the Trust:

 

Hospital Name

   Type of Facility    Annual
Minimum
Rent
     End of Lease Term      Renewal
Term
(years)
 

McAllen Medical Center

   Acute Care    $ 5,485,000         December, 2016         15 (a) 

Wellington Regional Medical Center

   Acute Care    $ 3,030,000         December, 2016         15 (b) 

Southwest Healthcare System, Inland Valley Campus

   Acute Care    $ 2,648,000         December, 2016         15 (b) 

The Bridgeway

   Behavioral Health    $ 930,000         December, 2014         10 (c) 

 

(a) We have three 5-year renewal options at existing lease rates (through 2031).
(b) We have one 5-year renewal option at existing lease rates (through 2021) and two 5-year renewal options at fair market value lease rates (2022 through 2031).
(c) We have two 5-year renewal options at fair market value lease rates (2015 through 2024).

Other Related Party Transactions:

In December, 2010, our Board of Directors approved the Company’s entering into supplemental life insurance plans and agreements on the lives of our chief executive officer and his wife. As a result of these agreements, based on actuarial tables and other assumptions, during the life expectancies of the insureds, we would pay approximately $25 million in premiums and certain trusts, owned by our chief executive officer, would pay approximately $8 million in premiums. Based on the projected premiums mentioned

 

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above, and assuming the policies remain in effect until the death of the insureds, we will be entitled to receive death benefit proceeds of no less than $33 million representing the $25 million of aggregate premiums paid by us as well as the $8 million of aggregate premiums paid by the trusts. These agreements did not have a material effect on our consolidated financial statements or results of operations during 2012 or the first six months of 2013.

A member of our Board of Directors and member of the Executive Committee is Of Counsel to the law firm used by us as our principal outside counsel. This Board member is also the trustee of certain trusts for the benefit of our Chief Executive Officer (“CEO”) and his family. This law firm also provides personal legal services to our CEO.

(3) Other Noncurrent liabilities and Redeemable/Noncontrolling Interests

Other noncurrent liabilities include the long-term portion of our professional and general liability, workers’ compensation reserves, pension liability, and interest rate swaps.

Outside owners hold noncontrolling, minority ownership interests of: (i) approximately 28% in our five acute care facilities located in Las Vegas, Nevada; (ii) 20% in an acute care facility located in Washington, D.C.; (iii) approximately 11% in an acute care facility located in Laredo, Texas, and; (iv) 20% in a behavioral health care facility located in Philadelphia, Pennsylvania. The redeemable noncontrolling interest balances of $233 million and $234 million as of June 30, 2013 and December 31, 2012, respectively, and the noncontrolling interest balances of $52 million and $53 million as of June 30, 2013 and December 31, 2012, respectively, consist primarily of the third-party ownership interests in these hospitals.

In connection with the five acute care facilities located in Las Vegas, Nevada, the minority ownership interests of which are reflected as redeemable noncontrolling interests on our Consolidated Balance Sheet, the outside owners have certain “put rights”, that are currently exercisable, that if exercised, require us to purchase the minority member’s interests at fair market value. The put rights are exercisable upon the occurrence of: (i) certain specified financial conditions falling below established thresholds; (ii) breach of the management contract by the managing member (a subsidiary of ours), or; (iii) if the minority member’s ownership percentage is reduced to less than certain thresholds. In connection with the behavioral health care facility located in Philadelphia, Pennsylvania, the minority ownership interest of which is also reflected as redeemable noncontrolling interests on our Consolidated Balance Sheet, the outside owner has a “put option” to put its entire ownership interest to us at any time. If exercised, the put option requires us to purchase the minority member’s interest at fair market value. As of June 30, 2013, we believe the fair market value of the minority ownership interests in these facilities approximates the book value of the redeemable noncontrolling interests.

(4) Long-term debt and cash flow hedges

Debt:

On May 16, 2013, we entered into a third amendment (the “Third Amendment”) to the credit agreement, dated as of November 15, 2010 (as amended from time to time, the “Credit Agreement”), among UHS, the several banks and other financial institutions from time to time parties thereto, JPMorgan Chase Bank, N.A., as administrative agent and the other agents party thereto. The Third Amendment was effective on May 16, 2013. The Third Amendment provides for a reduction in the interest rates payable in connection with certain borrowings under the Credit Agreement. Upon the effectiveness of the Third Amendment, UHS replaced its existing $745.9 million senior secured Tranche B term loan with a new senior secured Tranche B-1 term loan in the same amount on substantially the same terms as the Tranche B term loan, other than lower interest rates. Borrowings under the Tranche B-1 term loan bear interest at a rate per annum equal to, at our election, one, two, three or six month LIBOR, plus an applicable margin of 2.25% or ABR plus an applicable margin of 1.25%. The minimum ABR and LIBOR rates for the Tranche B term loan of 2.0% and 1.0%, respectively, were eliminated.

In September, 2012, we entered into a second amendment (“Second Amendment”) to our Credit Agreement which provided for: (i) a new $900 million Term Loan-A (“Term Loan A2”) at the same interest rates as our existing Term Loan A and a final maturity date of August 15, 2016; (ii) the extension of the maturity date on a substantial portion of our $800 million revolving credit facility commitment with $777 million of the commitment extended to mature on August 15, 2016 and the remaining $23 million commitment scheduled to mature on November 15, 2015 (there were no borrowings outstanding pursuant to our revolving credit facility as of June 30, 2013), and; (iii) the extension of the maturity date on a substantial portion of our Term Loan-A borrowings which, based upon the outstanding Term Loan-A borrowings as of June 30, 2013, $919 million is scheduled to mature on August 15, 2016 and the remaining $44 million is scheduled to mature on November 15, 2015. The Second Amendment also provides for increased flexibility for refinancing and certain other modifications but substantially all other terms of the Credit Agreement remain unchanged.

In September, 2012, we used $700 million of the proceeds from the new Term Loan A2 facility to extinguish a portion of our higher priced, Term Loan-B facility. Pricing under the new Term Loan A2 facility was 1% lower than the Term Loan-B facility and did not include a LIBOR Floor whereas, at that time, the Term Loan-B facility had a 1% LIBOR Floor (which has since been eliminated as part of the above-mentioned Third Amendment in May, 2013). During the third quarter of 2012, in connection with the extinguishment of a portion of our Term Loan-B facility, we recorded a pre-tax charge of $29 million to write-off the related portion of the Term Loan-B deferred financing costs.

 

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The Credit Agreement, as amended, is a senior secured facility which provided for an initial aggregate commitment amount of $3.43 billion, comprised of an $800 million revolving credit facility, a $988 million Term Loan-A facility, a $746 million Term Loan-B facility and a $900 million Term Loan-A2 facility. The revolving credit facility includes a $125 million sub-limit for letters of credit. The Credit Agreement is secured by substantially all of the assets of the Company and our material subsidiaries and guaranteed by our material subsidiaries.

Borrowings under the Credit Agreement bear interest at either (1) the ABR rate which is defined as the rate per annum equal to, at our election: the greatest of (a) the lender’s prime rate, (b) the weighted average of the federal funds rate, plus 0.5% and (c) one month LIBOR rate plus 1%, in each case, plus an applicable margin based upon our consolidated leverage ratio at the end of each quarter ranging from 0.50% to 1.25% for revolving credit, Term Loan-A and Term Loan-A2 borrowings and 1.25% for Term Loan B borrowings or (2) the one, two, three or six month LIBOR rate (at our election), plus an applicable margin based upon our consolidated leverage ratio at the end of each quarter ranging from 1.50% to 2.25% for revolving credit, Term Loan-A and Term Loan-A2 borrowings and 2.25% for Term Loan-B borrowings. The current applicable margins are 0.75% for ABR-based loans, 1.75% for LIBOR-based loans under the revolving credit, Term Loan-A and Term Loan-A2 facilities and 2.25% under the Term Loan-B facility.

As of June 30, 2013, we had no borrowings outstanding pursuant to the terms of our $800 million revolving credit facility and we had $769 million of available borrowing capacity, net of $10 million of outstanding borrowings pursuant to a short-term, on-demand credit facility and $21 million of outstanding letters of credit. The $10 million of outstanding borrowings under a short-term, on-demand credit facility as of June 30, 2013 are classified as long-term on our Consolidated Balance Sheet since we have the intent and ability to refinance through available borrowings under the terms of our Credit Agreement.

During the first six months of 2013, we made scheduled principal payments of $36 million on the Term Loan-A and Term Loan A2 facilities. Quarterly installment payments (“Installment Payments”) are due on the Term Loan-A and Term Loan-A2 facilities which, during 2013 and 2014, approximate $36 million during the remaining six months of 2013 and $72 million in 2014. No Installment Payments are due on the Term Loan-B facility. The Installment Payments due on the Term Loan-A and Term Loan-A2 facilities during the remainder of 2013 and the first six months of 2014 are classified as current maturities of long-term debt on our Consolidated Balance Sheet as of June 30, 2013.

Our accounts receivable securitization program (“Securitization”) with a group of conduit lenders and liquidity banks was amended in October, 2010. We increased the size of the Securitization from $200 million to $240 million (the “Commitments”), and extended the maturity date to October 25, 2013. In May, 2012, we further increased the size of the securitization by $35 million to $275 million. Substantially all of the patient-related accounts receivable of our acute care hospitals (“Receivables”) serve as collateral for the outstanding borrowings. The interest rate on the borrowings is based on the commercial paper rate plus a spread of 0.475% and there is a facility fee of 0.375% required on 102% on the Commitments. We have accounted for this Securitization as borrowings. We maintain effective control over the Receivables since, pursuant to the terms of the Securitization, the Receivables are sold from certain of our subsidiaries to special purpose entities that are wholly-owned by us. The Receivables, however, are owned by the special purpose entities, can be used only to satisfy the debts of the wholly-owned special purpose entities, and thus are not available to us except through our ownership interest in the special purpose entities. The wholly-owned special purpose entities use the Receivables to collateralize the loans obtained from the group of third-party conduit lenders and liquidity banks. The group of third-party conduit lenders and liquidity banks do not have recourse to us beyond the assets of the wholly-owned special purpose entities that securitize the loans. At June 30, 2013, we had $260 million of outstanding borrowings and $15 million of additional capacity pursuant to the terms of our accounts receivable securitization program. In the event we do not either enter into a new financing agreement, or an agreement to extend the scheduled maturity date of the Securitization, we expect to have the borrowing capacity and intend to refinance the Securitization upon its scheduled maturity utilizing borrowings under our Credit Agreement. Therefore, outstanding borrowings as of June 30, 2013 under the Securitization are classified as long-term on our Consolidated Balance Sheet.

Our $250 million, 7.00% senior unsecured notes (the “Unsecured Notes”) are scheduled to mature on October 1, 2018. The Unsecured Notes were issued on September 29, 2010 and registered in April, 2011. Interest on the Unsecured Note is payable semiannually in arrears on April 1st and October 1st of each year. The Unsecured Notes can be redeemed in whole at anytime subject to a make-whole call at treasury rate plus 50 basis points prior to October 1, 2014. They are also redeemable in whole or in part at a price of: (i) 103.5% on or after October 1, 2014; (ii) 101.75% on or after October 1, 2015, and; (iii) 100% on or after October 1, 2016. These Unsecured Notes are guaranteed by a group of subsidiaries (each of which is a 100% directly or indirectly owned subsidiary of Universal Health Services, Inc.) which fully and unconditionally guarantee the Unsecured Notes on a joint and several basis, subject to certain customary automatic release provisions.

 

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On June 30, 2006, we issued $250 million of senior notes which have a 7.125% coupon rate and mature on June 30, 2016 (the “7.125% Notes”). Interest on the 7.125% Notes is payable semiannually in arrears on June 30th and December 30th of each year. In June, 2008, we issued an additional $150 million of 7.125% Notes which formed a single series with the original 7.125% Notes issued in June, 2006. Other than their date of issuance and initial price to the public, the terms of the 7.125% Notes issued in June, 2008 are identical to and trade interchangeably with, the 7.125% Notes which were originally issued in June, 2006.

In connection with the entering into of the Credit Agreement on November 15, 2010, and in accordance with the Indenture dated January 20, 2000 governing the rights of our existing notes, we entered into a supplemental indenture pursuant to which our 7.125% Notes (due in 2016) were equally and ratably secured with the lenders under the Credit Agreement with respect to the collateral for so long as the lenders under the Credit Agreement are so secured.

Our Credit Agreement includes a material adverse change clause that must be represented at each draw. The Credit Agreement contains covenants that include a limitation on sales of assets, mergers, change of ownership, liens and indebtedness, transactions with affiliates and dividends; and requires compliance with financial covenants including maximum leverage and minimum interest coverage ratios. We are in compliance with all required covenants as of June 30, 2013.

As of June 30, 2013, the carrying value of our debt was $3.55 billion and the fair-value of our debt was $3.60 billion. The fair value of our debt was computed based upon quotes received from financial institutions and we consider these to be “level 2” in the fair value hierarchy as outlined in the authoritative guidance for disclosures in connection with debt instruments.

Cash Flow Hedges:

We manage our ratio of fixed and floating rate debt with the objective of achieving a mix that management believes is appropriate. To manage this risk in a cost-effective manner, we, from time to time, enter into interest rate swap agreements in which we agree to exchange various combinations of fixed and/or variable interest rates based on agreed upon notional amounts. We account for our derivative and hedging activities using the Financial Accounting Standard Board’s (“FASB”) guidance which requires all derivative instruments, including certain derivative instruments embedded in other contracts, to be carried at fair value on the balance sheet. For derivative transactions designated as hedges, we formally document all relationships between the hedging instrument and the related hedged item, as well as its risk-management objective and strategy for undertaking each hedge transaction.

Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability, with a corresponding amount recorded in accumulated other comprehensive income (“AOCI”) within shareholders’ equity. Amounts are reclassified from AOCI to the income statement in the period or periods the hedged transaction affects earnings. We use interest rate derivatives in our cash flow hedge transactions. Such derivatives are designed to be highly effective in offsetting changes in the cash flows related to the hedged liability. For derivative instruments designated as cash flow hedges, the ineffective portion of the change in expected cash flows of the hedged item are recognized currently in the income statement.

For hedge transactions that do not qualify for the short-cut method, at the hedge’s inception and on a regular basis thereafter, a formal assessment is performed to determine whether changes in the fair values or cash flows of the derivative instruments have been highly effective in offsetting changes in cash flows of the hedged items and whether they are expected to be highly effective in the future.

The fair value of interest rate swap agreements approximates the amount at which they could be settled, based on estimates obtained from the counterparties. We assess the effectiveness of our hedge instruments on a quarterly basis. We performed periodic assessments of the cash flow hedge instruments during 2012 and the first six months of 2013 and determined the hedges to be highly effective. We also determined that any portion of the hedges deemed to be ineffective was de minimis and therefore there was no material effect on our consolidated financial position, operations or cash flows. The counterparties to the interest rate swap agreements expose us to credit risk in the event of nonperformance. However, at June 30, 2013, each swap agreement entered into by us was in a net liability position which would require us to make the net settlement payments to the counterparties. We do not anticipate nonperformance by our counterparties. We do not hold or issue derivative financial instruments for trading purposes.

During the first quarter of 2011, we entered into a forward starting interest rate cap on a total notional amount of $450 million from December, 2011 to December, 2012 reducing to $400 million from December, 2012 to December, 2013 whereby we paid a premium of $740,000 in exchange for the counterparty agreeing to pay the difference between 7.00% and three-month LIBOR if the three-month LIBOR rate rises above 7.00% during the term of the cap. If the three-month LIBOR does not reach 7.00% during the term of the cap, no payment is made to us.

We also entered into six additional forward starting interest rate swaps in the first quarter of 2011 whereby we pay a fixed rate on a total notional amount of $425 million and receive three-month LIBOR. Three of these swaps with a total notional amount of $225 million became effective in March, 2011 and will mature in May, 2015. The average fixed rate payable on these swaps is 1.91%. The three remaining interest rate swaps with total notional amounts of $100 million, $25 million and $75 million became effective in December, 2011 and have/had fixed rates of 2.50%, 1.96% and 1.32%, and maturity dates in December, 2014, December, 2013 and December, 2012, respectively.

 

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During the fourth quarter of 2010, we entered into four forward starting interest rate swaps whereby we pay a fixed rate on a total notional amount of $600 million and receive three-month LIBOR. Each of the four swaps became effective in December, 2011 and will mature in May, 2015. The average fixed rate payable on these swaps is 2.38%.

We measure our interest rate swaps at fair value on a recurring basis. The fair value of our interest rate swaps is based primarily on quotes from banks. We consider those inputs to be “level 2” in the fair value hierarchy as outlined in the authoritative guidance for disclosures in connection with derivative instruments and hedging activities. The fair value of our interest rate swaps was an aggregate gross and net liability of $31 million at June 30, 2013, of which $18 million is included accounts payable and accrued liabilities and $13 million is included in other noncurrent liabilities on the accompanying balance sheet. The fair value of our interest rate swaps was an aggregate gross and net liability of $41 million at December 31, 2012, substantially all of which is included in other noncurrent liabilities on the accompanying balance sheet.

(5) Commitments and Contingencies

Professional and General Liability, Workers’ Compensation Liability and Property Insurance

Professional and General Liability and Workers Compensation Liability:

Effective January 1, 2008, most of our subsidiaries became self-insured for professional and general liability exposure up to $10 million per occurrence. Prior to our acquisition of Psychiatric Solutions, Inc. (“PSI”) in November, 2010, our subsidiaries purchased several excess policies through commercial insurance carriers which provide for coverage in excess of $10 million up to $200 million per occurrence and in the aggregate. However, we are liable for 10% of the claims paid pursuant to the commercially insured coverage in excess of $10 million up to $60 million per occurrence and in the aggregate.

Prior to our acquisition in November, 2010, the PSI subsidiaries were commercially insured for professional and general liability insurance claims in excess of a $3 million self-insured retention to a limit of $75 million. PSI utilized its captive insurance company and that captive insurance company remains in place after our acquisition of PSI to manage the self-insured retention for all former PSI subsidiaries for claims incurred prior to January 1, 2011. The captive insurance company also continues to insure all professional and general liability claims, regardless of date incurred, for the former PSI subsidiaries located in Florida and Puerto Rico.

Since our acquisition of PSI on November 15, 2010, the former PSI subsidiaries are self-insured for professional and general liability exposure up to $3 million per occurrence and our legacy subsidiaries (which are not former PSI subsidiaries) are self-insured for professional and general liability exposure up to $10 million per occurrence. Effective November, 2010, our subsidiaries (including the former PSI subsidiaries) were provided with several excess policies through commercial insurance carriers which provide for coverage in excess of the applicable per occurrence self-insured retention (either $3 million or $10 million) up to $200 million per occurrence and in the aggregate. We remain liable for 10% of the claims paid pursuant to the commercially insured coverage in excess of $10 million up to $60 million per occurrence and in the aggregate. The 9 behavioral health facilities acquired from Ascend Health Corporation in October, 2012 have general and professional liability policies through commercial insurance carriers which provide for up to $20 million of aggregate coverage, subject to a $10,000 per occurrence deductible. These facilities, like our other facilities, are also provided excess coverage through commercial insurance carriers for coverage in excess of the underlying commercial policy limitations up to $200 million per occurrence and in the aggregate.

Our estimated liability for self-insured professional and general liability claims is based on a number of factors including, among other things, the number of asserted claims and reported incidents, estimates of losses for these claims based on recent and historical settlement amounts, estimates of incurred but not reported claims based on historical experience, and estimates of amounts recoverable under our commercial insurance policies. While we continuously monitor these factors, our ultimate liability for professional and general liability claims could change materially from our current estimates due to inherent uncertainties involved in making this estimate. Given our significant self-insured exposure for professional and general liability claims, there can be no assurance that a sharp increase in the number and/or severity of claims asserted against us will not have a material adverse effect on our future results of operations.

As of June 30, 2013, the total accrual for our professional and general liability claims, including the estimated claims related to the facilities acquired from PSI, was $217 million, of which $48 million is included in current liabilities. As of December 31, 2012, the total accrual for our professional and general liability claims, including the estimated claims related to the facilities acquired from PSI, was $279 million, of which $48 million is included in current liabilities.

During the second quarter of 2013, pursuant to a reserve analysis, we recorded reductions to our professional and general liability self-insurance reserves (relating to years prior to 2013) amounting to $65 million in the aggregate. The favorable changes in our estimated future claims payments relating to years prior to 2013 were due to: (i) an increased weighting given to company-specific metrics (to 100% from 75%), and decreased general industry metrics (to 0% from 25%), related to projected incidents per exposure, historical

 

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claims experience and loss development factors; (ii) historical data which measured the realized favorable impact of medical malpractice tort reform experienced in several states in which we operate, and; (iii) a decrease in claims related to certain higher risk specialties (such as obstetrical) due to a continuation of the company-wide patient safety initiative undertaken during the last several years. As the number of our facilities and our patient volumes have increased, thereby providing for a statistically significant data group, and taking into consideration our long-history of company-specific risk management programs and claims experience, our reserve analyses have included a greater emphasis on our historical professional and general liability experience which has developed favorably as compared to general industry trends.

The total accrual for our workers’ compensation liability claims was $68 million as of June 30, 2013 and $66 million as of December 31, 2012, of which $35 million is included in current liabilities as of each date.

Property Insurance:

We have commercial property insurance policies covering catastrophic losses, including windstorm damage, up to a $1 billion policy limit per occurrence, subject to a $250,000 deductible for the majority of our properties (the properties acquired from Psychiatric Solutions, Inc. are subject to a $50,000 deductible). Losses resulting from named windstorms are subject to deductibles between 3% and 5% of the declared total insurable value of the property. In addition, we have commercial property insurance policies covering catastrophic losses resulting from earthquake and flood damage, each subject to aggregated loss limits (as opposed to per occurrence losses). Our earthquake limit is $250 million, subject to a deductible of $250,000, except for facilities located within documented fault zones. Earthquake losses that affect facilities located in fault zones within the United States are subject to a $100 million limit and will have applied deductibles ranging from 1% to 5% of the declared total insurable value of the property. The earthquake limit in Puerto Rico is $25 million. Flood losses have either a $250,000 or $500,000 deductible, based upon the location of the facility. The 9 behavioral health facilities acquired from Ascend Health Corporation in October, 2012 have commercial property insurance policies which provide for full replacement cost coverage, subject to a $10,000 deductible.

Other

As of June 30, 2013 and December 31, 2012, our accounts receivable includes approximately $30 million and $70 million, respectively, due from Illinois. Although the outstanding balance has been reduced significantly during the second quarter of 2013 as a result of substantial cash remittances received from the state (approximately $72 million was due from Illinois as of March 31, 2013), collection of the outstanding receivables continues to be delayed due to state budgetary and funding pressures. Approximately $7 million as of June 30, 2013 and $51 million as of December 31, 2012, of the receivables due from Illinois were outstanding in excess of 60 days, as of each respective date. Although the remaining accounts receivable due from Illinois could remain outstanding for the foreseeable future, since we expect to eventually collect all amounts due to us, no related reserves have been established in our consolidated financial statements. However, we can provide no assurance that we will eventually collect all amounts due to us from Illinois. Failure to ultimately collect all outstanding amounts due from Illinois would have an adverse impact on our future consolidated results of operations and cash flows.

As of June 30, 2013 we were party to certain off balance sheet arrangements consisting of standby letters of credit and surety bonds which totaled $91 million consisting of: (i) $70 million related to our self-insurance programs, and; (ii) $21 million of other debt and public utility guarantees.

Legal Proceedings

We are subject to claims and suits in the ordinary course of business, including those arising from care and treatment afforded by our hospitals and are party to litigation, as outlined below.

Office of Inspector General (“OIG”) and Other Government Investigations

In September, 2010, we, along with many other companies in the healthcare industry, received a letter from the United States Department of Justice (“DOJ”) advising of a False Claim Act investigation being conducted in connection with the implantation of implantable cardioverter defibrillators (“ICDs”) from 2003 to the present at several of our acute care facilities. The DOJ alleges that ICDs were implanted and billed by our facilities in contravention of a National Claims Determination regarding these devices. We have established a reserve in connection with this matter which did not have a material impact on our consolidated financial statements.

In July, 2012, one of our subsidiaries, Peachford Behavioral Health System of Atlanta located in Atlanta, Georgia, received a subpoena from the OIG for the Department of Health and Human Services requesting various documents from 2004 to the present. We have provided all requested documents. At present, we are uncertain as to the focus, scope or extent of the investigation, liability of the facility and/or potential financial exposure, if any, in connection with this matter.

 

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In February, 2013, the OIG served a subpoena requesting various documents from January 2008 to the present directed at Universal Health Services, Inc. (“UHS”) concerning it and UHS of Delaware, Inc., and several UHS owned facilities including: Keys of Carolina, Old Vineyard Behavioral Health, The Meadows Psychiatric Center, Streamwood Behavioral Health, Hartgrove Hospital, Rock River Academy and Residential Treatment Center, Roxbury Treatment Center, Harbor Point Behavioral Health Center, f/k/a, The Pines Residential Treatment Center, including the Crawford, Brighton and Kempsville campuses, Wekiva Springs Center and River Point Behavioral Health. Prior to receiving this subpoena: (i) the Keys of Carolina and Old Vineyard received notification during the second half of 2012 from the United States Department of Justice of its intent to proceed with an investigation following requests for documents from January, 2007 to the present from the North Carolina state Attorney General’s Office; (ii) Harbor Point Behavioral Health Center received a subpoena in December, 2012 from the Attorney General of the Commonwealth of Virginia requesting various documents from July 2006 to the present, and; (iii) The Meadows Psychiatric Center received a subpoena from the OIG in February, 2013 requesting certain documents from 2008 to the present. In April 2013, the OIG served facility specific subpoenas on Wekiva Springs Center and River Point Behavioral Health requesting various documents from January 2005 to the present. In June, 2013, the OIG served a subpoena on Coastal Harbor Health System in Savannah, Georgia requesting documents from January, 2009 to the present. In July 2013, another subpoena was issued to Wekiva Springs and River Point requesting additional records. At present, we are uncertain as to the focus, scope or extent of the investigations, liability of the facilities and/or potential financial exposure, if any, in connection with these matters. Unrelated to these matters, the Keys of Carolina was closed and the real property was sold in January, 2013.

Matters Relating to PSI:

The following matters pertain to PSI or former PSI facilities (owned by subsidiaries of Psychiatric Solutions, Inc.) which were in existence prior to the acquisition of PSI and for which we have assumed the defense as a result of our acquisition which was completed in November, 2010:

Garden City Employees’ Retirement System v. PSI:

This is a purported shareholder class action lawsuit filed in the United States District Court for the Middle District of Tennessee against PSI and the former directors in 2009 alleging violations of federal securities laws. We intend to defend the case vigorously. Should we be deemed liable in this matter, we believe we would be entitled to commercial insurance recoveries for amounts paid by us, subject to certain limitations and deductibles. Included in our consolidated balance sheets as of December 31, 2012 and 2011, is an estimated reserve (current liability) and corresponding commercial insurance recovery (current asset) which did not have a material impact on our financial statements. Although we believe the commercial insurance recoveries are adequate to satisfy potential liability and related legal fees in connection with this matter, we can provide no assurance that the ultimate liability will not exceed the commercial insurance recoveries which would make us liable for the excess.

Department of Justice Investigation of Friends Hospital:

In October, 2010, Friends Hospital in Philadelphia, Pennsylvania, received a subpoena from the DOJ requesting certain documents from the facility. The requested documents have been collected and provided to the DOJ for review and examination. Another subpoena was issued to the facility in July 2011 requesting additional documents, which have been collected and delivered to the DOJ. At present, we are uncertain as to the focus, scope or extent of the investigation, liability of the facility and/or potential financial exposure, if any, in connection with this matter.

Department of Justice Investigation of Riveredge Hospital:

In 2008, Riveredge Hospital in Chicago, Illinois received a subpoena from the DOJ requesting certain information from the facility. Additional requests for documents were also received from the DOJ in 2009 and 2010. The requested documents have been provided to the DOJ. At present, we are uncertain as to the focus, scope or extent of the investigation, liability of the facility and/or potential financial exposure, if any, in connection with this matter.

Virginia Department of Medical Assistance Services Recoupment Claims:

The Virginia Department of Medical Assistance Services (“DMAS”) has conducted audits at seven former PSI Residential Treatment Centers operated in the Commonwealth of Virginia to confirm compliance with provider rules under the state’s Medicaid Provider Services Manual (“Manual”). As a result of those audits, DMAS claims the facilities failed to comply with the requirements of the Manual and has requested repayment of Medicaid payments to those facilities. PSI had previously filed appeals to repayment demands at each facility which are currently pending. We have recently reached a preliminary settlement of this matter which requires finalization of a definitive agreement and approval of Virginia state officials. The aggregate refund of Medicaid payments made to those facilities, as requested by DMAS, and the settlement amount is not material to our consolidated financial position or results of operations.

 

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General:

The healthcare industry is subject to numerous laws and regulations which include, among other things, matters such as government healthcare participation requirements, various licensure, certifications, 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. Currently, and from time to time, some of our facilities are subjected to inquiries and/or actions and receive notices of potential non-compliance of laws and regulations from various federal and state agencies. Providers that are found to have violated these laws and regulations may be excluded from participating in government healthcare programs, subjected to potential licensure, certification, and/or accreditation revocation, subjected to fines or penalties or required to repay amounts received from the government for previously billed patient services. We monitor all aspects of our business and have developed a comprehensive ethics and compliance program that is designed to meet or exceed applicable federal guidelines and industry standards. Because the law in this area is complex and constantly evolving, governmental investigation or litigation may result in interpretations that are inconsistent with industry practices, including ours. Although we believe our policies, procedures and practices comply with governmental regulations, there is no assurance that we will not be faced with sanctions, fines or penalties in connection with such inquiries or actions, including with respect to the investigations and other matters discussed herein. Even if we were to ultimately prevail, such inquiries and/or actions could have a material adverse effect on us.

The outcome of any current or future litigation or governmental or internal investigations, including the matters described above, cannot be accurately predicted, nor can we predict any resulting penalties, fines or other sanctions that may be imposed at the discretion of federal or state regulatory authorities. We record accruals for such contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time regarding the matters specifically described above because the inherently unpredictable nature of legal proceedings may be exacerbated by various factors, including, but not limited to: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties, or; (vii) there is a wide range of potential outcomes. It is possible that the outcome of these matters could have a material adverse impact on our future results of operations, financial position, cash flows and, potentially, our reputation.

In addition, various suits and claims arising against us in the ordinary course of business are pending. In the opinion of management, the outcome of such claims and litigation will not materially affect our consolidated financial position or results of operations.

(6) Segment Reporting

Our reportable operating segments consist of acute care hospital 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 as well as the operating results for our other operating entities including outpatient surgery and radiation centers. The chief operating decision making group for our acute care hospital services and behavioral health care services is comprised of the Chief Executive Officer, the President and the Presidents of each operating segment. The Presidents of each operating segment also manage the profitability of each respective segment’s various facilities. The operating segments are managed separately because each operating segment represents a business unit that offers different types of healthcare services or operates in different healthcare environments. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies included in our Annual Report on Form 10-K for the year ended December 31, 2012. The corporate overhead allocations, as reflected below, are utilized for internal reporting purposes and are comprised of each period’s projected corporate-level operating expenses (excluding interest expense). The overhead expenses are captured and allocated directly to each segment, to the extent possible, with the non-directly allocated overhead expenses allocated based upon each segment’s respective percentage of total facility-based operating expenses.

 

     Three months ended June 30, 2013  
     Acute Care     Behavioral              
     Hospital     Health           Total  
     Services     Services     Other     Consolidated  
     (Amounts in thousands)  

Gross inpatient revenues

   $ 3,321,154      $ 1,598,383        —        $ 4,919,537   

Gross outpatient revenues

   $ 1,708,200      $ 193,703      $ 10,625      $ 1,912,528   

Total net revenues

   $ 894,646      $ 929,470      $ 10,859      $ 1,834,975   

Income/(loss) before allocation of corporate overhead and income taxes

   $ 118,390      $ 240,556      ($ 93,128   $ 265,818   

Allocation of corporate overhead

   ($ 46,109   ($ 22,461   $ 68,570        0   

Income/(loss) after allocation of corporate overhead and before income taxes

   $ 72,281      $ 218,095      ($ 24,558   $ 265,818   

Total assets as of 6/30/13

   $ 3,126,223      $ 4,919,566      $ 271,464      $ 8,317,253   

 

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     Six months ended June 30, 2013  
     Acute Care     Behavioral              
     Hospital     Health           Total  
     Services     Services     Other     Consolidated  
     (Amounts in thousands)  

Gross inpatient revenues

   $ 6,828,424      $ 3,174,531        —        $ 10,002,955   

Gross outpatient revenues

   $ 3,359,775      $ 379,505      $ 21,473      $ 3,760,753   

Total net revenues

   $ 1,803,380      $ 1,839,014      $ 24,213      $ 3,666,607   

Income/(loss) before allocation of corporate overhead and income taxes

   $ 199,019      $ 461,331      ($ 190,548   $ 469,802   

Allocation of corporate overhead

   ($ 92,221   ($ 44,828   $ 137,049        0   

Income/(loss) after allocation of corporate overhead and before income taxes

   $ 106,798      $ 416,503      ($ 53,499   $ 469,802   

Total assets as of 6/30/13

   $ 3,126,223      $ 4,919,566      $ 271,464      $ 8,317,253   
     Three months ended June 30, 2012  
     Acute Care     Behavioral              
     Hospital     Health           Total  
     Services     Services     Other     Consolidated  
     (Amounts in thousands)  

Gross inpatient revenues

   $ 3,034,707      $ 1,416,820        —        $ 4,451,527   

Gross outpatient revenues

   $ 1,540,569      $ 162,162      $ 12,723      $ 1,715,454   

Total net revenues

   $ 843,597      $ 870,267      $ 9,219      $ 1,723,083   

Income/(loss) before allocation of corporate overhead and income taxes

   $ 63,817      $ 223,324      ($ 102,697   $ 184,444   

Allocation of corporate overhead

   ($ 39,363   ($ 20,974   $ 60,337        0   

Income/(loss) after allocation of corporate overhead and before income taxes

   $ 24,454      $ 202,350      ($ 42,360   $ 184,444   

Total assets as of 6/30/12

   $ 2,892,535      $ 4,420,939      $ 445,174      $ 7,758,648   
     Six months ended June 30, 2012  
     Acute Care     Behavioral              
     Hospital     Health           Total  
     Services     Services     Other     Consolidated  
     (Amounts in thousands)  

Gross inpatient revenues

   $ 6,312,862      $ 2,832,358        —        $ 9,145,220   

Gross outpatient revenues

   $ 3,089,419      $ 322,835      $ 24,993      $ 3,437,247   

Total net revenues

   $ 1,770,128      $ 1,730,587      $ 15,404      $ 3,516,119   

Income/(loss) before allocation of corporate overhead and income taxes

   $ 194,127      $ 424,249      ($ 211,614   $ 406,762   

Allocation of corporate overhead

   ($ 78,722   ($ 41,938   $ 120,660        0   

Income/(loss) after allocation of corporate overhead and before income taxes

   $ 115,405      $ 382,311      ($ 90,954   $ 406,762   

Total assets as of 6/30/12

   $ 2,892,535      $ 4,420,939      $ 445,174      $ 7,758,648   

 

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(7) Earnings Per Share Data (“EPS”) and Stock Based Compensation

Basic earnings per share are based on the weighted average number of common shares outstanding during the period. Diluted earnings per share are based on the weighted average number of common shares outstanding during the period adjusted to give effect to common stock equivalents.

The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data):

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     (amounts in thousands)  
     2013     2012     2013     2012  

Basic and Diluted:

        

Net income attributable to UHS

   $ 151,841      $ 107,561      $ 271,625      $ 236,168   

Less: Net income attributable to unvested restricted share grants

     (88     (126     (157     (294
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to UHS – basic and diluted

   $ 151,753      $ 107,435      $ 271,468      $ 235,874   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares – basic

     98,033        96,691        97,872        96,642   

Net effect of dilutive stock options and grants based on the treasury stock method

     1,178        1,038        1,019        1,118   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares and equivalents – diluted

     99,211        97,729        98,891        97,760   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per basic share attributable to UHS

   $ 1.55      $ 1.11      $ 2.77      $ 2.44   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per diluted share attributable to UHS

   $ 1.53      $ 1.10      $ 2.75      $ 2.41   
  

 

 

   

 

 

   

 

 

   

 

 

 

The “Net effect of dilutive stock options and grants based on the treasury stock method”, for all periods presented above, excludes certain outstanding stock options applicable to each period since the effect would have been anti-dilutive. There were no significant anti-dilutive stock options during the three and six months ended June 30, 2013. The excluded weighted-average stock options totaled 2.6 million for each of the three months and six months ended June 30, 2012. All classes of our common stock have the same dividend rights.

Stock-Based Compensation: During the three-month periods ended June 30, 2013 and 2012, compensation cost of $6.1 million ($3.8 million after-tax) and $4.7 million ($2.9 million after-tax), respectively, was recognized related to outstanding stock options. During the six-month periods ended June 30, 2013 and 2012, compensation cost of $12.8 million ($8.0 million after-tax) and $9.6 million ($6.0 million after-tax), respectively, was recognized related to outstanding stock options. In addition, during the three-month periods ended June 30, 2013 and 2012, compensation cost of approximately $307,000 ($191,000 after-tax) and $593,000 ($369,000 after-tax), respectively, was recognized related to restricted stock. During the six-month periods ended June 30, 2013 and 2012, compensation cost of approximately $712,000 ($443,000 after-tax) and $1.2 million ($727,000 after-tax), respectively, was recognized related to restricted stock. As of June 30, 2013 there was $52.3 million of unrecognized compensation cost related to unvested options and restricted stock which is expected to be recognized over the remaining weighted average vesting period of 2.8 years. There were 2,777,400 stock options granted (net of cancellations) during the first six months of 2013 with a weighted-average grant date fair value of $13.31 per share.

 

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(8) Dispositions and acquisitions

Six-month periods ended June 30, 2013 and 2012:

Acquisitions:

During the first six months of 2013, we spent approximately $1 million in connection with the acquisition of real property located in Pennsylvania.

During the first six months of 2012, we spent $11 million in connection with the acquisition of a physician practice and various real properties.

Divestitures:

During the first six months of 2013, we received aggregate cash proceeds of approximately $34 million for the divestiture of Peak Behavioral Health Services (“Peak”), a 104-bed behavioral health care facility located in Santa Teresa, New Mexico, and certain real property, including three previously closed behavioral health care facilities. In connection with the receipt of antitrust clearance from the Federal Trade Commission in connection with our acquisition of Ascend Health Corporation in October of 2012, we agreed to divest Peak Behavioral Health Services. The assets and liabilities for Peak were reflected as “held for sale” on our Consolidated Balance Sheet as of December 31, 2012. The pre-tax net gain on these divestitures did not have a material impact on our consolidated results of operations during the three or six-month periods ended June 30, 2013.

During the first six months of 2012, we received aggregate cash proceeds of approximately $53 million for the divestiture of: (i) the Hospital San Juan Capestrano, a 108-bed behavioral health care facility located in Rio Piedras, Puerto Rico, that was sold in January, 2012 pursuant to our agreement with the Federal Trade Commission in connection with our acquisition of Psychiatric Solutions, Inc., and; (ii) the real property of a previously closed behavioral health care facility. The pre-tax net gain on these divestitures did not have a material impact on our consolidated results of operations during the first six months of 2012.

(9) Dividends

We declared and paid dividends of $4.9 million, or $.05 per share, during the second quarter of 2013 and $4.8 million, or $.05 per share, during the second quarter of 2012. We declared and paid dividends of $9.8 million and $9.7 million during the six-month periods ended June 30, 2013 and 2012, respectively.

(10) Pension Plan

The following table shows the components of net periodic pension cost for our defined benefit pension plan as of June 30, 2013 and 2012 (amounts in thousands):

 

    

Three months ended

June 30,

   

Six months ended

June 30,

 
     2013     2012     2013     2012  

Service cost

   $ 277      $ 286      $ 530      $ 572   

Interest cost

     1,230        1,165        2,264        2,330   

Expected return on assets

     (2,435     (2,111     (3,801     (3,651

Recognized actuarial loss

     717        1,055        1,653        2,110   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ (211   $ 395      $ 646      $ 1,361   
  

 

 

   

 

 

   

 

 

   

 

 

 

During the six months ended June 30, 2013, there were no contributions made to our pension plan.

(11) Income Taxes

As of January 1, 2013, our unrecognized tax benefits were approximately $7 million. The amount, if recognized, that would affect the effective tax rate is approximately $4 million. During the quarter ended June 30, 2013, changes to the estimated liabilities for uncertain tax positions (including accrued interest) relating to tax positions taken during prior and current periods did not have a material impact on our financial statements.

We recognize accrued interest and penalties associated with uncertain tax positions as part of the tax provision. As of June 30, 2013, we have approximately $2 million of accrued interest and penalties. The U.S. federal statute of limitations remains open for the 2009 and subsequent years. Foreign and U.S. state and local jurisdictions have statutes of limitations generally ranging from 3 to 4 years. The statute of limitations on certain jurisdictions could expire within the next twelve months.

 

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We operate in multiple jurisdictions with varying tax laws. We are subject to audits by any of these taxing authorities. Our tax returns have been examined by the Internal Revenue Service (“IRS”) through the year ended December 31, 2006. We believe that adequate accruals have been provided for federal, foreign and state taxes.

(12) Supplemental Condensed Consolidating Financial Information

Certain of our senior notes are guaranteed by a group of subsidiaries (the “Guarantors”). The Guarantors, each of which is a 100% directly owned subsidiary of Universal Health Services, Inc., fully and unconditionally guarantee the senior notes on a joint and several basis, subject to certain customary release provisions.

The following financial statements present condensed consolidating financial data for (i) Universal Health Services, Inc. (on a parent company only basis), (ii) the combined Guarantors, (iii) the combined non guarantor subsidiaries (all other subsidiaries), (iv) an elimination column for adjustments to arrive at the information for the parent company, Guarantors, and non guarantors on a consolidated basis, and (v) the parent company and our subsidiaries on a consolidated basis.

Investments in subsidiaries are accounted for by the parent company and the Guarantors using the equity method for this presentation. Results of operations of subsidiaries are therefore classified in the parent company’s and Guarantors’ investment in subsidiaries accounts. The elimination entries set forth in the following condensed consolidating financial statements eliminate distributed and undistributed income of subsidiaries, investments in subsidiaries, and intercompany balances and transactions between the parent, Guarantors, and non guarantors.

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2013

(amounts in thousands)

 

                             Total  
                 Non     Consolidating     Consolidated  
     Parent     Guarantors     Guarantors     Adjustments     Amounts  

Net revenues before provision for doubtful accounts

   $ 0      $ 1,416,011      $ 672,949      $ (7,298   $ 2,081,662   

Less: Provision for doubtful accounts

     0        150,294        96,393        0        246,687   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

     0        1,265,717        576,556        (7,298     1,834,975   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating charges:

          

Salaries, wages and benefits

     0        639,421        257,913        0        897,334   

Other operating expenses

     0        193,388        139,063        (6,889     325,562   

Supplies expense

     0        123,894        78,450        0        202,344   

Depreciation and amortization

     0        57,597        24,085        0        81,682   

Lease and rental expense

     0        15,536        8,955        (409     24,082   

Electronic health records incentive income

     0        (452     369        0        (83
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     0        1,029,384        508,835        (7,298     1,530,921   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     0        236,333        67,721        0        304,054   

Interest expense

     36,772        846        618        0        38,236   

Interest (income) expense, affiliate

     0        24,391        (24,391     0        0   

Equity in net income of consolidated affiliates

     (174,539     (38,497     0        213,036        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     137,767        249,593        91,494        (213,036     265,818   

Provision for income taxes

     (14,074     93,570        18,519        0        98,015   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     151,841        156,023        72,975        (213,036     167,803   

Less: Income attributable to noncontrolling interests

     0        0        15,962        0        15,962   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to UHS

   $ 151,841      $ 156,023      $ 57,013      $ (213,036   $ 151,841   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2013

(amounts in thousands)

 

                             Total  
                 Non     Consolidating     Consolidated  
     Parent     Guarantors     Guarantors     Adjustments     Amounts  

Net revenues before provision for doubtful accounts

   $ 0      $ 2,837,863      $ 1,336,155      $ (14,008   $ 4,160,010   

Less: Provision for doubtful accounts

     0        300,062        193,341        0        493,403   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

     0        2,537,801        1,142,814        (14,008     3,666,607   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating charges:

          

Salaries, wages and benefits

     0        1,285,015        514,615        0        1,799,630   

Other operating expenses

     0        437,807        282,266        (13,504     706,569   

Supplies expense

     0        252,604        154,382        0        406,986   

Depreciation and amortization

     0        113,376        48,118        0        161,494   

Lease and rental expense

     0        31,211        18,040        (504     48,747   

Electronic health records incentive income

     0        (3,568     (1,227     0        (4,795
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     0        2,116,445        1,016,194        (14,008     3,118,631   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     0        421,356        126,620        0        547,976   

Interest expense

     74,718        1,700        1,756        0        78,174   

Interest (income) expense, affiliate

     0        48,782        (48,782     0        0   

Equity in net income of consolidated affiliates

     (317,745     (70,278     0        388,023        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     243,027        441,152        173,646        (388,023     469,802   

Provision for income taxes

     (28,598     158,893        41,769        0        172,064   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     271,625        282,259        131,877        (388,023     297,738   

Less: Income attributable to noncontrolling interests

     0        0        26,113        0        26,113   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to UHS

   $ 271,625      $ 282,259      $ 105,764      $ (388,023   $ 271,625   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2012

(amounts in thousands)

 

                             Total  
                 Non     Consolidating     Consolidated  
     Parent     Guarantors     Guarantors     Adjustments     Amounts  

Net revenues before provision for doubtful accounts

   $ 0      $ 1,293,848      $ 620,494      $ (6,553   $ 1,907,789   

Less: Provision for doubtful accounts

     0        105,390        79,316        0        184,706   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

     0        1,188,458        541,178        (6,553     1,723,083   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating charges:

          

Salaries, wages and benefits

     0        608,937        245,926        0        854,863   

Other operating expenses

     0        223,553        127,967        (6,459     345,061   

Supplies expense

     0        122,524        75,292        0        197,816   

Depreciation and amortization

     0        50,997        21,986        0        72,983   

Lease and rental expense

     0        14,394        9,683        (94     23,983   

Electronic health records incentive income

     0        (1,955     0        0        (1,955
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     0        1,018,450        480,854        (6,553     1,492,751   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     0        170,008        60,324        0        230,332   

Interest expense

     44,298        838        752        0        45,888   

Interest (income) expense, affiliate

     0        22,783        (22,783     0        0   

Equity in net income of consolidated affiliates

     (134,904     (28,548     0        163,452        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     90,606        174,935        82,355        (163,452     184,444   

Provision for income taxes

     (16,955     62,521        21,434        0        67,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     107,561        112,414        60,921        (163,452     117,444   

Less: Income attributable to noncontrolling interests

     0        0        9,883        0        9,883   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to UHS

   $ 107,561      $ 112,414      $ 51,038      $ (163,452   $ 107,561   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(amounts in thousands)

 

                             Total  
                 Non     Consolidating     Consolidated  
     Parent     Guarantors     Guarantors     Adjustments     Amounts  

Net revenues before provision for doubtful accounts

   $ 0      $ 2,627,313      $ 1,234,978      $ (12,879   $ 3,849,412   

Less: Provision for doubtful accounts

     0        194,768        138,525        0        333,293   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

     0        2,432,545        1,096,453        (12,879     3,516,119   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating charges:

          

Salaries, wages and benefits

     0        1,230,001        496,976        0        1,726,977   

Other operating expenses

     0        459,381        249,670        (12,690     696,361   

Supplies expense

     0        250,833        152,343        0        403,176   

Depreciation and amortization

     0        102,257        42,518        0        144,775   

Lease and rental expense

     0        29,238        18,376        (189     47,425   

Electronic health records incentive income

     0        (1,955     0        0        (1,955
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     0        2,069,755        959,883        (12,879     3,016,759   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     0        362,790        136,570        0        499,360   

Interest expense

     89,452        1,625        1,521        0        92,598   

Interest (income) expense, affiliate

     0        45,565        (45,565     0        0   

Equity in net income of consolidated affiliates

     (291,382     (69,625     0        361,007        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     201,930        385,225        180,614        (361,007     406,762   

Provision for income taxes

     (34,238     136,629        44,357        0        146,748   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     236,168        248,596        136,257        (361,007     260,014   

Less: Income attributable to noncontrolling interests

     0        0        23,846        0        23,846   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to UHS

   $ 236,168      $ 248,596      $ 112,411      $ (361,007   $ 236,168   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2013

(amounts in thousands)

 

                               Total  
                  Non      Consolidating     Consolidated  
     Parent     Guarantors      Guarantors      Adjustments     Amounts  

Net income

   $ 151,841      $ 156,023       $ 72,975       $ (213,036   $ 167,803   

Other comprehensive income (loss):

            

Unrealized derivative gains on cash flow hedges

     5,282        0         0         0        5,282   

Amortization of terminated hedge

     (84     0         0         0        (84
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Other comprehensive income before tax

     5,198        0         0         0        5,198   

Income tax expense related to items of other comprehensive income

     1,960        0         0         0        1,960   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total other comprehensive income, net of tax

     3,238        0         0         0        3,238   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income

     155,079        156,023         72,975         (213,036     171,041   

Less: Comprehensive income attributable to noncontrolling interests

     0        0         15,962         0        15,962   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to UHS

   $ 155,079      $ 156,023       $ 57,013       $ (213,036   $ 155,079   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES  
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME  
FOR THE SIX MONTHS ENDED JUNE 30, 2013  
(amounts in thousands)   
                               Total  
                  Non      Consolidating     Consolidated  
     Parent     Guarantors      Guarantors      Adjustments     Amounts  

Net income

   $ 271,625      $ 282,259       $ 131,877       $ (388,023   $ 297,738   

Other comprehensive income (loss):

            

Unrealized derivative gains on cash flow hedges

     9,817        0         0         0        9,817   

Amortization of terminated hedge

     (168     0         0         0        (168
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Other comprehensive income before tax

     9,649        0         0         0        9,649   

Income tax expense related to items of other comprehensive income

     3,638        0         0         0        3,638   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total other comprehensive income, net of tax

     6,011        0         0         0        6,011   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income

     277,636        282,259         131,877         (388,023     303,749   

Less: Comprehensive income attributable to noncontrolling interests

     0        0         26,113         0        26,113   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to UHS

   $ 277,636      $ 282,259       $ 105,764       $ (388,023   $ 277,636   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

22


Table of Contents

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2012

(amounts in thousands)

 

                               Total  
                  Non      Consolidating     Consolidated  
     Parent     Guarantors      Guarantors      Adjustments     Amounts  

Net income

   $ 107,561      $ 112,414       $ 60,921       $ (163,452   $ 117,444   

Other comprehensive income (loss):

            

Unrealized derivative gains on cash flow hedges

     212        0         0         0        212   

Amortization of terminated hedge

     (84     0         0         0        (84
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Other comprehensive income before tax

     128        0         0         0        128   

Income tax expense related to items of other comprehensive income

     50        0         0         0        50   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total other comprehensive income, net of tax

     78        0         0         0        78   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income

     107,639        112,414         60,921         (163,452     117,522   

Less: Comprehensive income attributable to noncontrolling interests

     0        0         9,883         0        9,883   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to UHS

   $ 107,639      $ 112,414       $ 51,038       $ (163,452   $ 107,639   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES  
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME  
FOR THE SIX MONTHS ENDED JUNE 30, 2012  
(amounts in thousands)   
                               Total  
                  Non      Consolidating     Consolidated  
     Parent     Guarantors      Guarantors      Adjustments     Amounts  

Net income

   $ 236,168      $ 248,596       $ 136,257       $ (361,007   $ 260,014   

Other comprehensive income (loss):

            

Unrealized derivative gains on cash flow hedges

     1,827        0         0         0        1,827   

Amortization of terminated hedge

     (168     0         0         0        (168
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Other comprehensive income before tax

     1,659        0         0         0        1,659   

Income tax expense related to items of other comprehensive income

     632        0         0         0        632   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total other comprehensive income, net of tax

     1,027        0         0         0        1,027   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income

     237,195        248,596         136,257         (361,007     261,041   

Less: Comprehensive income attributable to noncontrolling interests

     0        0         23,846         0        23,846   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to UHS

   $ 237,195      $ 248,596       $ 112,411       $ (361,007   $ 237,195   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

23


Table of Contents

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF JUNE 30, 2013

(amounts in thousands)

 

                              Total  
                  Non     Consolidating     Consolidated  
     Parent      Guarantors     Guarantors     Adjustments     Amounts  

Assets

           

Current assets:

           

Cash and cash equivalents

   $ 0       $ 3,570      $ 8,988      $ 0      $ 12,558   

Accounts receivable, net

     3,977         780,362        365,138        0        1,149,477   

Supplies

     0         62,380        37,944        0        100,324   

Other current assets

     2,477         74,488        9,768        0        86,733   

Deferred income taxes

     91,321         43,567        0        0        134,888   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     97,775         964,367        421,838        0        1,483,980   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Investments in subsidiaries

     6,099,224         1,394,110        0        (7,493,334     0   

Intercompany receivable

     453,498         0        462,047        (915,545     0   

Intercompany note receivable

     0         0        1,007,453        (1,007,453     0   

Property and equipment

     0         3,981,118        1,538,701        0        5,519,819   

Less: accumulated depreciation

     0         (1,384,909     (731,505     0        (2,116,414
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     0         2,596,209        807,196        0        3,403,405   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Other assets:

           

Goodwill

     820         2,544,014        496,512        0        3,041,346   

Deferred charges

     58,717         5,702        2,491        0        66,910   

Other

     8,646         237,414        75,552        0        321,612   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
   $ 6,718,680       $ 7,741,816      $ 3,273,089      $ (9,416,332   $ 8,317,253   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

           

Current liabilities:

           

Current maturities of long-term debt

   $ 71,903       $ 591      $ 1,085      $ 0      $ 73,579   

Accounts payable and accrued liabilities

     42,144         740,872        175,936        0        958,952   

Federal and state taxes

     16,093         526        0        0        16,619   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     130,140         741,989        177,021        0        1,049,150   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payable

     0         915,545        0        (915,545     0   

Other noncurrent liabilities

     18,456         186,685        105,807        0        310,948   

Long-term debt

     3,428,610         5,245        39,251        0        3,473,106   

Intercompany note payable

     0         1,007,453        0        (1,007,453     0   

Deferred income taxes

     150,017         56,801        0        0        206,818   

Redeemable noncontrolling interests

     0         0        233,417        0        233,417   

UHS common stockholders’ equity

     2,991,457         4,828,098        2,665,236        (7,493,334     2,991,457   

Noncontrolling interest

     0         0        52,357        0        52,357   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     2,991,457         4,828,098        2,717,593        (7,493,334     3,043,814   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
   $ 6,718,680       $ 7,741,816      $ 3,273,089      $ (9,416,332   $ 8,317,253   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

24


Table of Contents

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2012

(amounts in thousands)

 

                              Total  
                  Non     Consolidating     Consolidated  
     Parent      Guarantors     Guarantors     Adjustments     Amounts  

Assets

           

Current assets:

           

Cash and cash equivalents

   $ 0       $ 11,949      $ 11,522      $ 0      $ 23,471   

Accounts receivable, net

     7,154         741,983        318,060        0        1,067,197   

Supplies

     0         61,100        37,900        0        99,000   

Other current assets

     2,188         75,117        10,631        0        87,936   

Deferred income taxes

     61,364         43,555        322        (780     104,461   

Assets of facilities held for sale

     0         0        25,431        0        25,431   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     70,706         933,704        403,866        (780     1,407,496   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Investments in subsidiaries

     5,781,479         1,323,832        0        (7,105,311     0   

Intercompany receivable

     644,105         0        360,538        (1,004,643     0   

Intercompany note receivable

     0         0        1,007,453        (1,007,453     0   

Property and equipment

     0         3,867,471        1,500,874        0        5,368,345   

Less: accumulated depreciation

     0         (1,288,975     (697,135     0        (1,986,110
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     0         2,578,496        803,739        0        3,382,235   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Other assets:

           

Goodwill

     820         2,554,531        481,414        0        3,036,765   

Deferred charges

     67,831         5,839        2,218        0        75,888   

Other

     9,645         209,558        79,256        0        298,459   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
   $ 6,574,586       $ 7,605,960      $ 3,138,484      $ (9,118,187   $ 8,200,843   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

           

Current liabilities:

           

Current maturities of long-term debt

   $ 0       $ 990      $ 1,599      $ 0      $ 2,589   

Accounts payable and accrued liabilities

     10,985         740,484        138,088        0        889,557   

Liabilities of facilities held for sale

     0         0        850        0        850   

Federal and state taxes

     0         900        620        (458     1,062   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     10,985         742,374        141,157        (458     894,058   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payable

     0         1,004,643        0        (1,004,643     0   

Other noncurrent liabilities

     46,048         243,478        105,829        0        395,355   

Long-term debt

     3,676,940         5,372        45,119        0        3,727,431   

Intercompany note payable

     0         1,007,453        0        (1,007,453     0   

Deferred income taxes

     127,268         56,801        0        (322     183,747   

Redeemable noncontrolling interests

     0         0        234,303        0        234,303   

UHS common stockholders’ equity

     2,713,345         4,545,839        2,559,472        (7,105,311     2,713,345   

Noncontrolling interest

     0         0        52,604        0        52,604   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     2,713,345         4,545,839        2,612,076        (7,105,311     2,765,949   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
   $ 6,574,586       $ 7,605,960      $ 3,138,484      $ (9,118,187   $ 8,200,843   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2013

(amounts in thousands)

 

                              Total  
                 Non     Consolidating      Consolidated  
     Parent     Guarantors     Guarantors     Adjustments      Amounts  

Net cash provided by operating activities

   $ 16,014      $ 242,016        147,972      $ 0       $ 406,002   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash Flows from Investing Activities:

           

Property and equipment additions, net of disposals

     0        (133,607     (42,337     0         (175,944

Proceeds received from sale of assets and businesses

     0        7,552        26,456        0         34,008   

Acquisition of property and businesses

     0        (1,320     0        0         (1,320

Costs incurred for purchase and implementation of electronic health records application

     0        (33,396     0        0         (33,396
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     0        (160,771     (15,881     0         (176,652
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash Flows from Financing Activities:

           

Reduction of long-term debt

     (189,188     (526     (6,382     0         (196,096

Additional borrowings

     11,000        0        0        0         11,000   

Repurchase of common shares

     (21,373     0        0        0         (21,373

Dividends paid

     (9,795     0        0        0         (9,795

Issuance of common stock

     2,735        0        0        0         2,735   

Profit distributions to noncontrolling interests

     0        0        (26,734     0         (26,734

Changes in intercompany balances with affiliates, net

     190,607        (89,098     (101,509     0         0   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in financing activities

     (16,014     (89,624     (134,625     0         (240,263
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Decrease in cash and cash equivalents

     0        (8,379     (2,534     0         (10,913

Cash and cash equivalents, beginning of period

     0        11,949        11,522        0         23,471   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $ 0      $ 3,570      $ 8,988      $ 0       $ 12,558   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

26


Table of Contents

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(amounts in thousands)

 

                              Total  
                 Non     Consolidating      Consolidated  
     Parent     Guarantors     Guarantors     Adjustments      Amounts  

Net cash provided by operating activities

   $ 2,144      $ 279,941        90,777      $ 0       $ 372,862   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash Flows from Investing Activities:

           

Property and equipment additions, net of disposals

     0        (153,894     (28,457     0         (182,351

Proceeds received from sale of assets and businesses

     0        49,984        3,477        0         53,461   

Acquisition of property and businesses

     0        (11,476     0        0         (11,476

Costs incurred for purchase and implementation of electronic health records application

     0        (28,008     0        0         (28,008

Return of deposit on terminated purchase agreement

     6,500        0        0        0         6,500   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash provided by (used in) investing activities

     6,500        (143,394     (24,980     0         (161,874
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash Flows from Financing Activities:

           

Reduction of long-term debt

     (191,898     (2,289     (1,499     0         (195,686

Repurchase of common shares

     (2,927     0        0        0         (2,927

Dividends paid

     (9,673     0        0        0         (9,673

Issuance of common stock

     2,575        0        0        0         2,575   

Profit distributions to noncontrolling interests

     0        0        (13,565     0         (13,565

Changes in intercompany balances with affiliates, net

     193,279        (144,331     (48,948     0         0   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in financing activities

     (8,644     (146,620     (64,012     0         (219,276
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

(Decrease) increase in cash and cash equivalents

     0        (10,073     1,785        0         (8,288

Cash and cash equivalents, beginning of period

     0        33,221        8,008        0         41,229   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $ 0      $ 23,148      $ 9,793      $ 0       $ 32,941   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

(13) Recent Accounting Standards

In February 2013, the Financial Accounting Standards Board issued an Accounting Standards Update on reporting of amounts reclassified out of accumulated other comprehensive income. This guidance, which is effective for fiscal years beginning after December 15, 2012, requires companies to provide information about amounts reclassified out of accumulated other comprehensive income by component (the respective line items of the income statement). The adoption of this standard on January 1, 2013 had no impact on our financial position or overall results of operations.

 

27


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Our principal business is owning and operating, through our subsidiaries, acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers and radiation oncology centers. As of June 30, 2013, we owned and/or operated 23 acute care hospitals and 195 behavioral health centers located in 37 states, Washington, D.C., Puerto Rico and the U.S. Virgin Islands. As part of our ambulatory treatment centers division, we manage and/or own outright or in partnerships with physicians, 5 surgical hospitals and surgery and radiation oncology centers located in 4 states. In October, 2012, we acquired Ascend Health Corporation (“Ascend”). Ascend was the largest private behavioral health provider with 9 owned or leased freestanding inpatient facilities located in 5 states.

Net revenues from our acute care hospitals, surgical hospitals, surgery centers and radiation oncology centers accounted for 49% of our consolidated net revenues during each of the three-month periods ended June 30, 2013 and 2012 and 50% and 51% during the six-month periods ended June 30, 2013 and 2012, respectively. Net revenues from our behavioral health care facilities accounted for 51% of our consolidated net revenues during each of the three-month periods ended June 30, 2013 and 2012 and 50% and 49% during the six-month periods ended June 30, 2013 and 2012, respectively.

Services provided by our hospitals include general and specialty surgery, internal medicine, obstetrics, emergency room care, radiology, oncology, diagnostic care, coronary care, pediatric services, pharmacy services and/or behavioral health services. We provide capital resources as well as a variety of management services to our facilities, including central purchasing, information services, finance and control systems, facilities planning, physician recruitment services, administrative personnel management, marketing and public relations.

Forward-Looking Statements and Risk Factors

You should carefully review the information contained in this Quarterly Report, and should particularly consider any risk factors that we set forth in this Quarterly Report and in other reports or documents that we file from time to time with the Securities and Exchange Commission (the “SEC”). In this Quarterly Report, we state our beliefs of future events and of our future financial performance. This Quarterly Report contains “forward-looking statements” that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, and the benefits and synergies to be obtained from our completed and any future acquisitions, and statements of our goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “appears,” “projects” and similar expressions, as well as statements in future tense, identify forward-looking statements. In evaluating those statements, you should specifically consider various factors, including the risks related to healthcare industry trends and those detailed in our filings with the SEC including those set forth herein and in our Annual Report on Form 10-K for the year ended December 31, 2012 in Item 1A Risk Factors and in Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward Looking Statements and Risk Factors. Those factors may cause our actual results to differ materially from any of our forward-looking statements.

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and/or our good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Such factors include, among other things, the following:

 

   

our ability to comply with the existing laws and government regulations, and/or changes in laws and government regulations;

 

   

an increasing number of legislative initiatives have recently been passed into law that may result in major changes in the health care delivery system on a national or state level. No assurances can be given that the implementation of these new laws will not have a material adverse effect on our business, financial condition or results of operations;

 

   

possible unfavorable changes in the levels and terms of reimbursement for our charges by third party payors or government programs, including Medicare or Medicaid;

 

   

an increase in the number of uninsured and self-pay patients treated at our acute care facilities that unfavorably impacts our ability to satisfactorily and timely collect our self-pay patient accounts;

 

   

our ability to enter into managed care provider agreements on acceptable terms and the ability of our competitors to do the same, including contracts with United/Sierra Healthcare in Las Vegas, Nevada;

 

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the outcome of known and unknown litigation, government investigations, false claim act allegations, and liabilities and other claims asserted against us, including matters as disclosed in Item 1. Legal Proceedings;

 

   

the potential unfavorable impact on our business of deterioration in national, regional and local economic and business conditions, including a continuation or worsening of unfavorable credit market conditions;

 

   

competition from other healthcare providers (including physician owned facilities) in certain markets, including McAllen/Edinburg, Texas, the site of one of our largest acute care facilities and Riverside County, California;

 

   

technological and pharmaceutical improvements that increase the cost of providing, or reduce the demand for healthcare;

 

   

our ability to attract and retain qualified personnel, nurses, physicians and other healthcare professionals and the impact on our labor expenses resulting from a shortage of nurses and other healthcare professionals;

 

   

demographic changes;

 

   

our level of indebtedness has increased substantially as a result of our 2010 acquisition of PSI, and increased more as a result of our acquisition of Ascend Health Corporation in October, 2012, which could, among other things, adversely affect our ability to raise additional capital to fund operations, limit our ability to react to changes in the economy or our industry and could potentially prevent us from meeting our obligations under the agreements related to our indebtedness;

 

   

our ability to successfully integrate and improve our recent acquisitions and the availability of suitable acquisitions and divestiture opportunities;

 

   

as discussed below in Sources of Revenue, we receive revenues from various state and county based programs, including Medicaid in all the states in which we operate, (we receive Medicaid revenues in excess of $90 million annually from each of Texas, Pennsylvania, Washington, D.C., Illinois, Virginia and Massachusetts); CMS-approved Medicaid supplemental programs in certain states including Oklahoma, California and Arkansas, and; state Medicaid disproportionate share hospital payments in certain states including Texas and South Carolina. We are therefore particularly sensitive to potential reductions in Medicaid and other state based revenue programs (which have been implemented in various forms with respect to our areas of operation in the respective states’ 2012, 2013 and 2014 fiscal years) as well as regulatory, economic, environmental and competitive changes in those states. We can provide no assurance that reductions to revenues earned pursuant to these programs, particularly in the above-mentioned states, will not have a material adverse effect on our future results of operations;

 

   

our ability to continue to obtain capital on acceptable terms, including borrowed funds, to fund the future growth of our business;

 

   

some of our acute care facilities continue to experience decreasing inpatient admission trends;

 

   

our financial statements reflect large amounts due from various commercial and private payors and there can be no assurance that failure of the payors to remit amounts due to us will not have a material adverse effect on our future results of operations;

 

   

in March, 2010, the Health Care and Education Reconciliation Act of 2010 and the Patient Protection and Affordable Care Act were enacted into law and created significant changes to health insurance coverage for U.S. citizens as well as material revisions to the federal Medicare and state Medicaid programs. The two combined primary goals of these acts are to provide for increased access to coverage for healthcare and to reduce healthcare-related expenses. Medicare, Medicaid and other health care industry changes are scheduled to be implemented at various times during this decade. We cannot predict the effect, if any, these enactments will have on our future results of operations;

 

   

the Department of Health and Human Services (“HHS”) published final regulations in July, 2010 implementing the health information technology (“HIT”) provisions of the American Recovery and Reinvestment Act (referred to as the “HITECH Act”). The final regulation defines the “meaningful use” of Electronic Health Records (“EHR”) and establishes the requirements for the Medicare and Medicaid EHR payment incentive programs. The implementation period for these new Medicare and Medicaid incentive payments started in federal fiscal year 2011 and can end as late as 2016 for Medicare and 2021 for the state Medicaid programs. Our acute care hospitals may qualify for these EHR incentive payments upon implementation of the EHR application assuming they meet the “meaningful use criteria”. Certain of our acute care hospitals implemented EHR applications in 2011 and 2012 and we continued the implementation at each of our acute care hospitals, on a facility-by-facility basis, until completion which occurred in June, 2013. As of June 30, 2013, fifteen of our acute care hospitals met the “meaningful use” criteria and we expect the remainder to do so by the end of 2013. However, there can be no assurance that all of our acute care hospitals will ultimately qualify for these incentive payments and, should we qualify, we are unable to quantify the amount of incentive payments we may receive since the amounts are dependent upon various factors including the implementation timing at each hospital. Should we (our acute care hospitals) qualify for incentive payments, there may be timing differences in the recognition of the incentive income and expenses recorded in connection with the implementation of the EHR applications which may cause material period-to-period changes in our future results of operations. Hospitals that do not qualify as a meaningful user of EHR by 2015 are subject to a reduced market basket update to the inpatient prospective payment system standardized amount in 2015 and each subsequent fiscal year. Although we believe that our acute care hospitals will be in compliance with the EHR standards by 2015, there can be no assurance that all of our facilities will be in compliance and therefore not subject to the penalty provision of the HITECH Act;

 

   

in August, 2011, the Budget Control Act of 2011 (the “2011 Act”) was enacted into law. The 2011 Act imposed annual spending limits for most federal agencies and programs aimed at reducing budget deficits by $917 billion between 2012 and 2021, according to a report released by the Congressional Budget Office. Among its other provisions, the law established a bipartisan

 

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Congressional committee, known as the Joint Select Committee on Deficit Reduction (the “Joint Committee”), which was tasked with making recommendations aimed at reducing future federal budget deficits by an additional $1.5 trillion over 10 years. The Joint Committee was unable to reach an agreement by the November 23, 2011 deadline and, as a result, across-the-board cuts to discretionary, national defense and Medicare spending were implemented on March 1, 2013 resulting in Medicare payment reductions of up to 2% per fiscal year (approximately $39 million annual reduction to our Medicare net revenues effective as of April 1, 2013) with a uniform percentage reduction across all Medicare programs. We cannot predict whether Congress will attempt to suspend or restructure the automatic budget cuts or what other deficit reduction initiatives may be proposed by Congress;

 

   

as of June 30, 2013 and December 31, 2012, our accounts receivable includes approximately $30 million and $70 million, respectively, due from Illinois. Although the outstanding balance has been reduced significantly during the second quarter of 2013 as a result of substantial cash remittances received from the state (approximately $72 million was due from Illinois as of March 31, 2013), collection of the outstanding receivables continues to be delayed due to state budgetary and funding pressures. Approximately $7 million as of June 30, 2013 and $51 million as of December 31, 2012, of the receivables due from Illinois were outstanding in excess of 60 days, as of each respective date. Although the remaining accounts receivable due from Illinois could remain outstanding for the foreseeable future, since we expect to eventually collect all amounts due to us, no related reserves have been established in our consolidated financial statements. However, we can provide no assurance that we will eventually collect all amounts due to us from Illinois. Failure to ultimately collect all outstanding amounts due from Illinois would have an adverse impact on our future consolidated results of operations and cash flows.

 

   

the ability to obtain adequate levels of general and professional liability insurance on current terms;

 

   

changes in our business strategies or development plans;

 

   

fluctuations in the value of our common stock, and;

 

   

other factors referenced herein or in our other filings with the Securities and Exchange Commission.

Given these uncertainties, risks and assumptions, as outlined above, you are cautioned not to place undue reliance on such forward-looking statements. Our actual results and financial condition could differ materially from those expressed in, or implied by, the forward-looking statements. Forward-looking statements speak only as of the date the statements are made. We assume no obligation to publicly update any forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except as may be required by law. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. We consider our critical accounting policies to be those that require us to make significant judgments and estimates when we prepare our consolidated financial statements. For a summary of our significant accounting policies, please see Note 1 to the Consolidated Financial Statements as included in our Annual Report on Form 10-K for the year ended December 31, 2012.

Revenue recognition: We record revenues and related receivables for health care services at the time the services are provided. Medicare and Medicaid revenues represented 36% and 39% of our net patient revenues during the three-month periods ended June 30, 2013 and 2012, respectively, and 36% and 39% during the six-month periods ended June 30, 2013 and 2012, respectively. Revenues from managed care entities, including health maintenance organizations and managed Medicare and Medicaid programs, accounted for 49% and 50% of our net patient revenues during the three-month periods ended June 30, 2013 and 2012, respectively, and 48% and 49% during the six-month periods ended June 30, 2013 and 2012, respectively.

Provision for Doubtful Accounts: On a consolidated basis, we monitor our total self-pay receivables to ensure that the total allowance for doubtful accounts provides adequate coverage based on historical collection experience. Our accounts receivable are recorded net of allowance for doubtful accounts of $404 million at June 30, 2013 and $311 million at December 31, 2012.

As of June 30, 2013 and December 31, 2012, our accounts receivable includes approximately $30 million and $70 million, respectively, due from Illinois. Although the outstanding balance has been reduced significantly during the second quarter of 2013 as a result of substantial cash remittances received from the state (approximately $72 million was due from Illinois as of March 31, 2013), collection of the outstanding receivables continues to be delayed due to state budgetary and funding pressures. Approximately $7 million as of June 30, 2013 and $51 million as of December 31, 2012, of the receivables due from Illinois were outstanding in excess of 60 days, as of each respective date. Although the remaining accounts receivable due from Illinois could remain outstanding for the foreseeable future, since we expect to eventually collect all amounts due to us, no related reserves have been established in our consolidated financial statements. However, we can provide no assurance that we will eventually collect all amounts due to us from Illinois. Failure to ultimately collect all outstanding amounts due from Illinois would have an adverse impact on our future consolidated results of operations and cash flows.

 

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Accounting for Medicare and Medicaid Electronic Health Records Incentive Payments: In July 2010, the Department of Health and Human Services published final regulations implementing the health information technology provisions of the American Recovery and Reinvestment Act. The regulation defines the “meaningful use” of Electronic Health Records (“EHR”) and established the requirements for the Medicare and Medicaid EHR payment incentive programs. The implementation period for these new Medicare and Medicaid incentive payments started in federal fiscal year 2011 and can end as late as 2016 for Medicare and 2021 for the state Medicaid programs. We recognize income related to Medicare and Medicaid incentive payments using a gain contingency model that is based upon when our eligible hospitals have demonstrated “meaningful use” of certified EHR technology for the applicable period and the cost report information for the full cost report year that will determine the final calculation of the incentive payment is available.

Medicare EHR incentive payments: Federal regulations require that Medicare EHR incentive payments be computed based on the Medicare cost report that begins in the federal fiscal period in which a hospital meets the applicable “meaningful use” requirements. Since the annual Medicare cost report periods for each of our acute care hospitals ends on December 31st, we will recognize Medicare EHR incentive income for each hospital during the fourth quarter of the year in which the facility meets the “meaningful use” criteria and during the fourth quarter of each applicable subsequent year.

Medicaid EHR incentive payments: Medicaid EHR incentive payments are determined based upon prior period cost report information available at the time our hospitals meet the “meaningful use” criteria. Therefore, the majority of the Medicaid EHR incentive income recognition occurs in the period in which the applicable hospitals are deemed to have met initial “meaningful use” criteria. Upon meeting subsequent fiscal year “meaningful use” criteria, our hospitals may become entitled to additional Medicaid EHR incentive payments which will be recognized as incentive income in future periods. Medicaid EHR incentive payments received prior to our hospitals meeting the “meaningful use” criteria are included in other current liabilities (as deferred EHR incentive income) in our consolidated balance sheet.

Self-Insured Risks: We provide for self-insured risks, primarily general and professional liability claims and workers’ compensation claims. Our estimated liability for self-insured professional and general liability claims is based on a number of factors including, among other things, the number of asserted claims and reported incidents, estimates of losses for these claims based on recent and historical settlement amounts, estimate of incurred but not reported claims based on historical experience, and estimates of amounts recoverable under our commercial insurance policies. All relevant information, including our own historical experience is used in estimating the expected amount of claims. While we continuously monitor these factors, our ultimate liability for professional and general liability claims could change materially from our current estimates due to inherent uncertainties involved in making this estimate. Our estimated self-insured reserves are reviewed and changed, if necessary, at each reporting date and changes are recognized currently as additional expense or as a reduction of expense. Given our significant self-insured exposure for professional and general liability claims, there can be no assurance that a sharp increase in the number and/or severity of claims asserted against us will not have a material adverse effect on our future results of operations.

As of June 30, 2013, the total accrual for our professional and general liability claims, including the estimated claims related to the facilities acquired from PSI, was $217 million, of which $48 million is included in current liabilities. As of December 31, 2012, the total accrual for our professional and general liability claims, including the estimated claims related to the facilities acquired from PSI, was $279 million, of which $48 million is included in current liabilities.

During the second quarter of 2013, pursuant to a reserve analysis, we recorded reductions to our professional and general liability self-insurance reserves (relating to years prior to 2013) amounting to $65 million in the aggregate. The favorable changes in our estimated future claims payments relating to years prior to 2013 were due to: (i) an increased weighting given to company-specific metrics (to 100% from 75%), and decreased general industry metrics (to 0% from 25%), related to projected incidents per exposure, historical claims experience and loss development factors; (ii) historical data which measured the realized favorable impact of medical malpractice tort reform experienced in several states in which we operate, and; (iii) a decrease in claims related to certain higher risk specialties (such as obstetrical) due to a continuation of the company-wide patient safety initiative undertaken during the last several years. As the number of our facilities and our patient volumes have increased, thereby providing for a statistically significant data group, and taking into consideration our long-history of company-specific risk management programs and claims experience, our reserve analyses have included a greater emphasis on our historical professional and general liability experience which has developed favorably as compared to general industry trends.

Recent Accounting Standards: For a summary of accounting standards, please see Note 13 to the Consolidated Financial Statements, as included herein.

Results of Operations

Three-month periods ended June 30, 2013 and 2012:

The following table summarizes our results of operations and is used in the discussion below for the three-month periods ended June 30, 2013 and 2012 (dollar amounts in thousands):

 

     Three months ended     Three months ended  
     June 30, 2013     June 30, 2012  
           % of Net           % of Net  
     Amount     Revenues     Amount     Revenues  

Net revenues before provision for doubtful accounts

   $ 2,081,662        $ 1,907,789     

Less: Provision for doubtful accounts

     246,687          184,706     
  

 

 

     

 

 

   

Net revenues

     1,834,975        100.0     1,723,083        100.0

Operating charges:

        

Salaries, wages and benefits

     897,334        48.9     854,863        49.6

Other operating expenses

     325,562        17.7     345,061        20.0

Supplies expense

     202,344        11.0     197,816        11.5

Depreciation and amortization

     81,682        4.5     72,983        4.2

Lease and rental expense

     24,082        1.3     23,983        1.4

EHR incentive income

     (83     0.0     (1,955     -0.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal-operating expenses

     1,530,921        83.4     1,492,751        86.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     304,054        16.6     230,332        13.4

Interest expense, net

     38,236        2.1     45,888        2.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     265,818        14.5     184,444        10.7

Provision for income taxes

     98,015        5.3     67,000        3.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     167,803        9.1     117,444        6.8

Less: Income attributable to noncontrolling interests

     15,962        0.9     9,883        0.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to UHS

   $ 151,841        8.3   $ 107,561        6.2
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Net revenues increased 6.5% or $112 million to $1.83 billion during the three-month period ended June 30, 2013 as compared to $1.72 billion during the comparable quarter of 2012. The net increase was attributable to: (i) a $69 million or 4.0% increase in net revenues generated at our acute care hospitals and behavioral health care facilities owned during both periods (which we refer to as “same facility”), and; (ii) other combined net increase of $43 million consisting primarily of the revenues generated during the second quarter of 2013 at the nine behavioral health facilities acquired from Ascend Health Corporation in October, 2012.

Income before income taxes (before deduction for income attributable to noncontrolling interests) increased $81 million to $266 million during the three-month period ended June 30, 2013 as compared to $184 million during the comparable quarter of 2012. The net increase in our income before income taxes during the second quarter of 2013, as compared to the comparable prior year quarter, was due to:

 

  a. an increase of $2 million at our acute care facilities as discussed below in Acute Care Hospital Services, excluding impact of the items mentioned in c. and f. below;

 

  b. an increase of $10 million at our behavioral health care facilities, as discussed below in Behavioral Health Services, excluding the impact of the item mentioned in c. and e. below;

 

  c. an increase of $65 million resulting from a reduction to our professional and general liability self-insurance reserves relating to years prior to 2013, based upon a reserve analysis ($51 million is applicable to our acute care hospitals and $14 million is applicable to our behavioral health care facilities);

 

  d. an increase of $8 million due to a decrease in interest expense resulting from a decrease in our average effective interest rate, partially offset by an increase in our average outstanding borrowings;

 

  e. a decrease of $6 million consisting of the 2011 portion of net Medicaid supplemental revenues recorded during the second quarter of 2012 related to new programs initiated in certain states in which we operate behavioral health care facilities;

 

  f. an increase of $1 million related to the incentive income, net of expenses, recorded during the second quarter of 2013, as compared to the second quarter of 2012, in connection with the implementation of EHR applications at our acute care hospitals, and;

 

  g. $1 million of other combined net increases.

Net income attributable to UHS increased $44 million to $152 million during the three-month period ended June 30, 2013 as compared to $108 million during the comparable quarter of 2012. The increase during the second quarter of 2013, as compared to the comparable prior year quarter, consisted of:

 

   

an increase of $81 million in income before income taxes, as discussed above;

 

   

a decrease of $6 million due to an increase in income attributable to noncontrolling interests, and;

 

   

a decrease of $31 million resulting from an increase in the provision for income taxes resulting primarily from the income tax provision recorded on the $75 million increase in pre-tax income ($81 million increase in income before income taxes and the $6 million decrease in income due to an increase in the income attributable to noncontrolling interests) as well as the income tax provision recorded during the second quarter of 2013 on the gain realized on the sale of Peak Behavioral Health Services (see Provision for Income Taxes and Effective Tax Rates).

 

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Six-month periods ended June 30, 2013 and 2012:

The following table summarizes our results of operations and is used in the discussion below for the six-month periods ended June 30, 2013 and 2012 (dollar amounts in thousands):

 

     Six months ended     Six months ended  
     June 30, 2013     June 30, 2012  
           % of Net           % of Net  
     Amount     Revenues     Amount     Revenues  

Net revenues before provision for doubtful accounts

   $ 4,160,010        $ 3,849,412     

Less: Provision for doubtful accounts

     493,403          333,293     
  

 

 

     

 

 

   

Net revenues

     3,666,607        100.0     3,516,119        100.0

Operating charges:

        

Salaries, wages and benefits

     1,799,630        49.1     1,726,977        49.1

Other operating expenses

     706,569        19.3     696,361        19.8

Supplies expense

     406,986        11.1     403,176        11.5

Depreciation and amortization

     161,494        4.4     144,775        4.1

Lease and rental expense

     48,747        1.3     47,425        1.3

EHR incentive income

     (4,795     -0.1     (1,955     -0.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal-operating expenses

     3,118,631        85.1     3,016,759        85.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     547,976        14.9     499,360        14.2

Interest expense, net

     78,174        2.1     92,598        2.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     469,802        12.8     406,762        11.6

Provision for income taxes

     172,064        4.7     146,748        4.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     297,738        8.1     260,014        7.4

Less: Income attributable to noncontrolling interests

     26,113        0.7     23,846        0.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to UHS

   $ 271,625        7.4   $ 236,168        6.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues increased 4.3%, or $150 million, to $3.67 billion during the six-month period ended June 30, 2013 as compared to $3.52 billion during the comparable period of 2012. The net increase was attributable to: (i) a $96 million or 2.8% increase in net revenue