Universal Health Services, Inc. Reports 2018 Third Quarter Financial Results And Narrows 2018 Full Year Earnings Guidance Range

KING OF PRUSSIA, Pa., Oct. 25, 2018 /PRNewswire/ -- Universal Health Services, Inc. (NYSE: UHS) announced today that its reported net income attributable to UHS was $171.7 million, or $1.84 per diluted share, during the third quarter of 2018 as compared to $141.2 million, or $1.47 per diluted share, during the comparable quarter of 2017. Net revenues increased 4.2% to $2.65 billion during the third quarter of 2018 as compared to $2.54 billion during the third quarter of 2017.

For the three-month period ended September 30, 2018, our adjusted net income attributable to UHS, as calculated on the attached Schedule of Non-GAAP Supplemental Information (“Supplemental Schedule”), was $208.8 million, or $2.23 per diluted share, as compared to $143.4 million, or $1.49 per diluted share, during the third quarter of 2017.

Included in our reported and our adjusted net income attributable to UHS during the third quarter of 2018, is a pre-tax unrealized gain of $10.5 million, or $.09 per diluted share (included in “Other (income) expense, net”), resulting from an increase in the market value of shares of certain marketable securities held for investment and classified as available for sale.

As reflected on the Supplemental Schedule, included in our reported results during the third quarter of 2018, is a net aggregate unfavorable after-tax impact of $37.1 million, or $.39 per diluted share, substantially all of which resulted from an unfavorable after-tax impact of $36.6 million, or $.39 per diluted share, resulting from a $48.0 million pre-tax increase in the reserve established in connection with the discussions with the Department of Justice (“DOJ Reserve”), as discussed below.

As reflected on the Supplemental Schedule, included in our reported results during the third quarter of 2017, is a net aggregate unfavorable after-tax impact of $2.1 million, or $.02 per diluted share, consisting of: (i) an unfavorable after-tax impact of $2.6 million, or $.03 per diluted share, related to the depreciation and amortization expense recorded in connection with the implementation of electronic health records (“EHR”) applications at our acute care hospitals, partially offset by; (ii) a favorable after-tax impact of $487,000, or $.01 per diluted share, resulting from our January 1, 2017 adoption of ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09").

As calculated on the attached Supplemental Schedule, our earnings before interest, taxes, depreciation & amortization (“EBITDA net of NCI”), was $377.7 million during the third quarter of 2018 as compared to $363.4 million during the third quarter of 2017. Our adjusted earnings before interest, taxes, depreciation & amortization (“Adjusted EBITDA net of NCI”), which excludes the impact of the above-mentioned $48.0 million pre-tax increase in the DOJ Reserve and $11.4 million of other income, net, was $414.3 million during the third quarter of 2018 as compared to $363.4 million during the third quarter of 2017.

Consolidated Results of Operations, As Reported and As Adjusted – Nine-month periods ended September 30, 2018 and 2017:
Reported net income attributable to UHS was $621.6 million, or $6.60 per diluted share, during the nine-month period ended September 30, 2018 as compared to $532.7 million, or $5.50 per diluted share, during the comparable period of 2017. Net revenues increased 3.2% to $8.02 billion during the first nine months of 2018 as compared to $7.77 billion during the first nine months of 2017.

For the nine-month period ended September 30, 2018, our adjusted net income attributable to UHS, as calculated on the attached Supplemental Schedule, was $674.3 million, or $7.16 per diluted share, as compared to $535.8 million, or $5.53 per diluted share, during the comparable nine-month period of 2017.

Included in our reported and our adjusted net income attributable to UHS during the first nine months of 2018, is a pre-tax unrealized gain of $18.5 million, or $.15 per diluted share (included in “Other (income) expense, net”), resulting from an increase in the market value of shares of certain marketable securities held for investment and classified as available for sale.

As reflected on the Supplemental Schedule, included in our reported results during the nine-month period ended September 30, 2018, is a net aggregate unfavorable after-tax impact of $52.6 million, or $.56 per diluted share, consisting of: (i) an unfavorable after-tax impact of $53.7 million, or $.57 per diluted share, resulting from a $70.4 million pre-tax increase in the DOJ Reserve, as discussed below, partially offset by; (ii) a favorable after-tax impact of $1.1 million, or $.01 per diluted share, resulting from our adoption of ASU 2016-09.

As reflected on the Supplemental Schedule, included in our reported results during the nine-month period ended September 30, 2017, is a net aggregate unfavorable after-tax impact of $3.1 million, or $.03 per diluted share, consisting of: (i) an unfavorable after-tax impact of $11.7 million, or $.12 per diluted share, related to the depreciation and amortization expense recorded in connection with the implementation of EHR applications at our acute care hospitals, partially offset by; (ii) a favorable after-tax impact of $8.6 million, or $.09 per diluted share, resulting from our adoption of ASU 2016-09.

As calculated on the attached Supplemental Schedule, our earnings before interest, taxes, depreciation & amortization (“EBITDA net of NCI”), was $1.264 billion during the first nine months of 2018 as compared to $1.262 billion during the first nine months of 2017. Our adjusted earnings before interest, taxes, depreciation & amortization (“Adjusted EBITDA net of NCI”), which excludes the impact of the $70.4 million pre-tax increase in the DOJ Reserve and $26.7 million of other income, net, was $1.308 billion during the nine-month period ended September 30, 2018 as compared to $1.262 billion during the first nine months of 2017.

Acute Care Services – Three and nine-month periods ended September 30, 2018 and 2017:
During the third quarter of 2018, at our acute care hospitals owned during both periods (“same facility basis”), adjusted admissions (adjusted for outpatient activity) increased 1.5% and adjusted patient days increased 4.1%, as compared to the third quarter of 2017. At these facilities, net revenue per adjusted admission increased 6.6% while net revenue per adjusted patient day increased 3.9% during the third quarter of 2018 as compared to the comparable quarter of 2017. Net revenues from our acute care services on a same facility basis increased 6.7% during the third quarter of 2018 as compared to the comparable quarter of the prior year.

During the nine-month period ended September 30, 2018, at our acute care hospitals on a same facility basis, adjusted admissions increased 2.0% and adjusted patient days increased 4.8%, as compared to the comparable period of 2017. At these facilities, net revenue per adjusted admission increased 4.2% while net revenue per adjusted patient day increased 1.5% during the first nine months of 2018 as compared to the comparable period of 2017. Net revenues from our acute care services on a same facility basis increased 4.5% during the first nine months of 2018 as compared to the comparable period of the prior year.

Behavioral Health Care Services – Three and nine-month periods ended September 30, 2018 and 2017:
During the third quarter of 2018, at our behavioral health care facilities on a same facility basis, adjusted admissions increased 4.7% while adjusted patient days increased 0.6% as compared to the third quarter of 2017. At these facilities, net revenue per adjusted admission decreased 1.9% while net revenue per adjusted patient day increased 2.1% during the third quarter of 2018 as compared to the comparable quarter in 2017. On a same facility basis, our behavioral health care services’ net revenues increased 2.5% during the third quarter of 2018 as compared to the third quarter of 2017.

During the nine-month period ended September 30, 2018, at our behavioral health care facilities on a same facility basis, adjusted admissions increased 2.5% while adjusted patient days increased 0.2% as compared to the comparable period of 2017. At these facilities, net revenue per adjusted admission increased 0.7% while net revenue per adjusted patient day increased 3.0% during the first nine months of 2018 as compared to the comparable period in 2017. On a same facility basis, our behavioral health care services’ net revenues increased 2.8% during the first nine months of 2018 as compared to the comparable period of 2017.

Net Cash Provided by Operating Activities and Share Repurchase Program:
For the nine months ended September 30, 2018, our net cash provided by operating activities was $975 million as compared to $879 million generated during the first nine months of 2017. The $97 million increase was due to: (i) a $98 million favorable change in cash flows from foreign currency forward exchange contracts related to our investments in the U.K; (ii) an $84 million unfavorable change in accounts receivable; (iii) a $65 million favorable change in other working capital accounts resulting primarily from changes in accrued expenses and accounts payable due to timing of disbursements, and; (iv) $18 million of other combined net favorable changes.

In November of 2017, our Board of Directors authorized a $400 million increase to our stock repurchase program, which increased the aggregate authorization to $1.2 billion from the previous $800 million authorization approved during 2016 and 2014. Pursuant to this program, we may purchase shares of our Class B Common Stock, from time to time as conditions allow, on the open market or in negotiated private transactions.

In conjunction with our stock repurchase program, during the third quarter of 2018, we have repurchased 940,059 shares at an aggregate cost of approximately $117.9 million (approximately $125 per share). During the first nine months of 2018, we have repurchased approximately 2.10 million shares at an aggregate cost of $252.0 million (approximately $120 per share). Since inception of the program in 2014 through September 30, 2018, we have repurchased approximately 9.45 million shares at an aggregate cost of $1.09 billion (approximately $115 per share).

Narrowing of 2018 Full Year Earnings Guidance Range:
Based upon the operating trends and financial results experienced during the first nine months of 2018, we are narrowing our estimated range of adjusted net income attributable to UHS for the year ended December 31, 2018 to $9.25 to $9.60 per diluted share as compared to the previously provided range of $9.25 to $9.90 per diluted share. This revised estimated guidance range decreases the upper end of the previously provided range by 3.0% while the lower end of the range remains unchanged.

This revised estimated earnings guidance range excludes the unfavorable impact of the reserve established in connection with the civil aspects of the government’s investigation of our certain of our behavioral health care facilities (“DOJ Reserve”), as discussed below, and excludes the impact on our provision for income taxes and net income attributable to UHS resulting from of our adoption of ASU 2016-09.

Included in the revised estimated earnings guidance range for the year ended December 31, 2018 is the above-mentioned pre-tax unrealized gain of $18.5 million, or $.15 per diluted share, recorded during the first nine months of 2018 resulting from an increase in the market value of shares of certain marketable securities held for investment and classified as available for sale. The revised estimated earnings guidance range for the full year of 2018 assumes no change in the market value of these marketable securities during the fourth quarter of 2018.

In addition, this revised estimated earnings guidance range excludes the impact of future items, if applicable and material, that are nonrecurring or non-operational in nature including items such as, but not limited to, gains/losses on sales of assets and businesses, costs related to extinguishment of debt, reserves for settlements, legal judgments and lawsuits, impairments of long-lived and intangible assets, impact of share repurchases and other amounts that may be reflected in our financial statements that relate to prior periods. It is also subject to certain conditions including those as set forth below in General Information, Forward-Looking Statements and Risk Factors and Non-GAAP Financial Measures.

Conference call information:
We will hold a conference call for investors and analysts at 9:00 a.m. eastern time on October 26, 2018. The dial-in number is 1-877-648-7971.

A live broadcast of the conference call will be available on our website at www.uhsinc.com. A replay of the call will be available following the conclusion of the live call and will be available for one full year.

DOJ Reserve:
During the three and nine-month periods ended September 30, 2018, we recorded pre-tax increases of approximately $48.0 million and $70.4 million, respectively, to the reserve established in connection with the civil aspects of the government’s investigation of certain of our behavioral health care facilities, increasing the aggregate pre-tax reserve to approximately $90 million as of September 30, 2018. Changes in the reserve may be required in future periods as discussions with the Department of Justice continue and additional information becomes available. We cannot predict the ultimate resolution of this matter and therefore can provide no assurance that final amounts paid in settlement or otherwise, if any, or associated costs, will not differ materially from our established reserve. Please see Item 1-Legal Proceedings in our Form 10-Q for the quarterly period ended June 30, 2018 for additional disclosure in connection with this matter.

Credit Facilities:
Earlier this week we entered into a sixth amendment to our credit agreement originally dated as of November 15, 2010 to, among other things: (i) increase the aggregate amount of the revolving credit facility by $200 million to $1 billion; (ii) increase the aggregate amount of the tranche A term loan by approximately $290 million to $2 billion, and; (iii) extend the maturity date of the credit agreement from August 7, 2019 to October 23, 2023. We also anticipate adding an additional seven-year tranche B term loan facility in the aggregate principal amount of up to $500 million in the very near future.

Adoption of New Revenue Recognition Standard:
On January 1, 2018, we adopted, using the modified retrospective approach, ASU 2014-09 and ASU 2016-08, “Revenue from Contracts with Customers (Topic 606)” and “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”, respectively, which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The most significant change from the adoption of the new standard relates to our estimation for the allowance for doubtful accounts. Under the previous standards, our estimate for amounts not expected to be collected based upon our historical experience, were reflected as provision for doubtful accounts, included within net revenue. Under the new standard, our estimate for amounts not expected to be collected based on historical experience will continue to be recognized as a reduction to net revenue, however, not reflected separately as provision for doubtful accounts. Under the new standard, subsequent changes in estimate of collectability due to a change in the financial status of a payor, for example a bankruptcy, will be recognized as bad debt expense in operating charges. The adoption of this ASU in 2018, and amounts recognized as bad debt expense and included in other operating expenses, did not have a material impact on our consolidated financial statements.

Tax Cuts and Jobs Act of 2017:
Effective January 1, 2018, our provision for income taxes, net income attributable to UHS, and net income attributable to UHS per diluted share, were favorably impacted by the Tax Cuts and Jobs Act of 2017 which made broad and complex changes to the U.S. tax code including, among other things, reducing the U.S. federal corporate tax rate from 35% to 21%.

General Information, Forward-Looking Statements and Risk Factors and Non-GAAP Financial Measures:
One of the nation’s largest and most respected hospital companies, Universal Health Services, Inc. (“UHS”) has built an impressive record of achievement and performance. Growing steadily since its inception into an esteemed Fortune 500 corporation, UHS today has annual revenue exceeding $10 billion. In 2018, UHS was recognized as one of the World’s Most Admired Companies by Fortune; ranked #268 on the Fortune 500; and in 2017, listed #275 in Forbes inaugural ranking of America’s Top 500 Public Companies.

Our operating philosophy is as effective today as it was 40 years ago, enabling us to provide compassionate care to our patients and their loved ones: Build or acquire high quality hospitals in rapidly growing markets, invest in the people and equipment needed to allow each facility to thrive, and become the leading healthcare provider in each community we serve.

Headquartered in King of Prussia, PA, UHS has more than 83,000 employees and through its subsidiaries operates 350 inpatient acute care hospitals and behavioral health facilities and 32 outpatient and other facilities located in 37 states, Washington, D.C., the United Kingdom and Puerto Rico. It acts as the advisor to Universal Health Realty Income Trust, a real estate investment trust (NYSE:UHT). For additional information on the Company, visit our web site: http://www.uhsinc.com.

This press release contains forward-looking statements based on current management expectations. Numerous factors, including those disclosed herein, those related to healthcare industry trends and those detailed in our filings with the Securities and Exchange Commission (as set forth in Item 1A-Risk Factors and in Item 7-Forward-Looking Statements and Risk Factors in our Form 10-K for the year ended December 31, 2017 and in Item 2-Forward-Looking Statements and Risk Factors in our Form 10-Q for the quarterly period ended June 30, 2018), may cause the results to differ materially from those anticipated in the forward-looking statements. Many of the factors that will determine our future results are beyond our capability to control or predict. These statements are subject to risks and uncertainties and therefore actual results may differ materially. Readers should not place undue reliance on such forward-looking statements which reflect management’s view only as of the date hereof. We undertake no obligation to revise or update any forward-looking statements, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.

We believe that operating income, operating margin, adjusted net income attributable to UHS, adjusted net income attributable to UHS per diluted share, EBITDA net of NCI and adjusted EBITDA net of NCI, which are non-GAAP financial measures (“GAAP” is Generally Accepted Accounting Principles in the United States of America), are helpful to our investors as measures of our operating performance. In addition, we believe that, when applicable, comparing and discussing our financial results based on these measures, as calculated, is helpful to our investors since it neutralizes the effect in each year of material items impacting our net income attributable to UHS, such as, changes in the reserve established in connection with our discussions with the Department of Justice, our adoption of ASU 2016-09, and other potential material items that are nonrecurring or non-operational in nature including, but not limited to, reserves for various matters including settlements, legal judgments and lawsuits, costs related to extinguishment of debt, gains/losses on sales of assets and businesses, impairments of long-lived and intangible assets, and other amounts that may be reflected in the current or prior year financial statements that relate to prior periods. To obtain a complete understanding of our financial performance these measures should be examined in connection with net income attributable to UHS, as determined in accordance with GAAP, and as presented in the condensed consolidated financial statements and notes thereto in this report or in our other filings with the Securities and Exchange Commission including our Reports on Form 10-K for the year ended December 31, 2017 and Form 10-Q for the quarterly period ended June 30, 2018. Since the items included or excluded from these measures are significant components in understanding and assessing financial performance under GAAP, these measures should not be considered to be alternatives to net income as a measure of our operating performance or profitability. Since these measures, as presented, are not determined in accordance with GAAP and are thus susceptible to varying calculations, they may not be comparable to other similarly titled measures of other companies. Investors are encouraged to use GAAP measures when evaluating our financial performance.