Universal Health Services, Inc. ( UHS)

Q3 2011 Earnings Conference Call

October 28, 2011 9:00 AM ET


Steve Filton – SVP, CFO and Secretary

Alan Miller – Chairman and CEO


Adam Feinstein – Barclays Capital

Tom Gallucci – Lazard Capital Markets

Justin Lake – UBS

Ralph Giacobbe – Credit Suisse

A. J. Rice – Susquehanna Financial

Darren Lehrich – Deutsche Bank

Christine Arnold – Cowen & Co.

Kevin Fishbeck – Bank of America/Merrill Lynch.

Gary Lieberman – Wells Fargo Securities

Frank Morgan – RBC Capital Markets

John Ransom – Raymond James & Associates

Whit Mayo – Robert W. Baird

Gary Taylor – Citibank



Good morning. My name is Tiktera [ph] and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions)

Thank you. Mr. Filton, you may begin your conference.

Steve Filton

Thank you. Good morning. I am Steve Filton. Alan Miller, our CEO, is also joining us this morning. Welcome to this review of Universal Health Services results for the third quarter ended September 30, 2011. As discussed in our press release last night the company recorded net income per diluted share of $0.86 for the quarter compared to the as adjusted $0.55 per diluted share recorded during the third quarter of 2010 as calculated on the supplemental schedules included with last night’s press release.

During this conference call we will be using words such as expects, believes, anticipates, estimates, and similar words that represent forecast projections and forward-looking statements.

For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of the section on risk factors and forward-looking statements in our Form 10-K for the year ended December 31, 2010, and our Form 10-Q for the quarter ended June 30, 2011. We’d like to highlight just a couple of developments and business trends before opening the call up to questions.

On a same-facility basis in our acute care division, revenue increased 3.1% during the third quarter of 2011. Adjusted admissions to our hospitals owned for more than a year were essentially flat for the quarter. On a same-facility basis, revenue per adjusted admission increased 3.5% over last year’s quarter. As expected, the robust acute care revenue growth experienced earlier in the year has moderated, as improvements in payer mix weakened in the third quarter. You also should note that UHS recorded no high-tech revenues in the third quarter.

We define operating margin as operating income or net revenue less salaries, wages, and benefits, other operating expenses, supplies expense and provision for doubtful accounts divided by net revenues. The impact of the prior year items recorded during the 2010 periods and as reflected on the supplemental schedules are not included in our divisional operating margins.

On a same-facility basis, operating margins for our acute care hospitals decreased to 12.3% during the third quarter of 2011 from 13.0% during the third quarter of 2010. As noted previously, the margin decline resulted mainly from a weaker payer mix.

Our acute care hospitals provided charity care and uninsured discounts based on charges at established rates amounting to 246 million and 233 million during the three month periods ended September 30, 2011 and 2010 respectively. As a percentage of gross revenue the combined total of bad debt, charity care and uninsured discount was slightly lower than last year’s third quarter.

On a same-facility basis, revenues in our behavioral health division increased 6.8% during the third quarter of 2011. Adjusted patient days at our behavioral health facilities owned for more than a year increased 3.8% during the third quarter and revenue per adjusted day increased 2.9% compared to the comparable prior year quarter.

Operating margins for our behavioral health hospitals owned for more than a year increased to 26.2% during the quarter ended September 30, 2011 as compared to 26.0% during the comparable prior year period, despite the temporary closure of some capacity at one of our Pennsylvania facilities to repair certain physical plant problems. In addition, the results of the recently acquired PSI facilities largely met our financial expectations for the third quarter.

Our cash flow from operating activities was $207 million during the third quarter of 2011 as compared to $185 million in the third quarter of 2010. Our accounts receivable days outstanding increased to 47 days during the third quarter of 2011 from 42 days in the 2010 third quarter. Favorably impacting our cash flow from operating activities was the postponement of third-quarter federal estimated income tax payments granted by the Internal Revenue Service to certain tax payers located in areas that were impacted by recent flooding.

This postponement deferred an estimated federal income tax payment of approximately $30 million to $35 million from September 2011 to October 2011. Regarding the FTC required divestitures, we have signed an agreement to sell the Puerto Rico assets including San Juan Capestrano hospital and affiliated outpatient centers, and expect to enter into an agreement to sell Montevista and Red Rock hospital located in Las Vegas shortly.

Provided the divestitures are approved by the FTC, we anticipate completing the divestitures in both markets late in the fourth quarter, or early in 2012.

At September 30, 2011, our ratio of debt to total capitalization was 62% and the ratio of debt to EBITDA was 3.4 times. We spent $79 million on capital expenditures during the third quarter. We have opened or expect to open by the end of the year a total of approximately 250 new behavioral health beds at some of our busiest facilities during 2011. During the quarter we spent $38 million to repurchase approximately a million of our own shares. At September 30, we had approximately 700,000 shares remaining under our existing share repurchase authorization, a portion of which has already been exhausted in the fourth quarter.

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