Back to GetFilings.com
================================================================================
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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 (I.R.S. Employer
Incorporation or Organization) Identification No.)
UNIVERSAL CORPORATE CENTER
367 SOUTH GULPH ROAD
KING OF PRUSSIA, PENNSYLVANIA 19406
-----------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (610) 768-3300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common shares outstanding, as
of July 31, 2002:
Class A 3,848,886
Class B 55,594,467
Class C 387,848
Class D 36,882
================================================================================
Page 1 of 25 Pages
UNIVERSAL HEALTH SERVICES, INC.
I N D E X
PART I. FINANCIAL INFORMATION ..................................................... PAGE NO.
--------
Item 1. Financial Statements
Consolidated Statements of Income -
Three and Six Months Ended June 30, 2002 and 2001 ............................ 3
Condensed Consolidated Balance Sheets - June 30, 2002
and December 31, 2001 ........................................................ 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2002 and 2001 ...................................... 5
Notes to Condensed Consolidated Financial Statements ............................ 6 through 12
Item 2. Management's Discussion and Analysis of
Operations and Financial Condition ........................................ 13 through 22
PART II. OTHER INFORMATION ........................................................ 23 through 24
SIGNATURES ......................................................................... 25
Page 2 of 25 Pages
PART I. FINANCIAL INFORMATION
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(000s omitted except per share amounts)
(unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net revenues $ 805,945 $ 718,596 $ 1,610,316 $ 1,395,545
Operating charges:
Salaries, wages and benefits 321,595 282,278 641,302 550,560
Other operating expenses 198,296 169,876 390,192 320,782
Supplies expense 103,857 92,979 207,365 182,347
Provision for doubtful accounts 52,845 62,678 110,739 117,905
Depreciation and amortization 30,900 32,248 60,308 62,043
Lease and rental expense 15,290 13,470 30,480 26,110
Interest expense, net 8,153 10,506 17,117 18,962
----------- ----------- ----------- -----------
730,936 664,035 1,457,503 1,278,709
----------- ----------- ----------- -----------
Income before minority interests, effect of foreign
exchange and derivative transactions and income taxes 75,009 54,561 152,813 116,836
Minority interests in earnings of consolidated entities 4,688 3,699 10,561 7,624
Losses (gains) on foreign exchange and derivative transactions 249 (26) 15 1,401
----------- ----------- ----------- -----------
Income before income taxes 70,072 50,888 142,237 107,811
Provision for income taxes 25,725 18,498 52,217 39,250
----------- ----------- ----------- -----------
Net income $ 44,347 $ 32,390 $ 90,020 $ 68,561
=========== =========== =========== ===========
Earnings per common share - basic $ 0.74 $ 0.54 $ 1.50 $ 1.15
=========== =========== =========== ===========
Earnings per common share - diluted $ 0.69 $ 0.51 $ 1.40 $ 1.08
=========== =========== =========== ===========
Weighted average number of common shares - basic 59,934 59,918 59,898 59,873
Weighted average number of common share equivalents 7,320 7,306 7,253 7,313
----------- ----------- ----------- -----------
Weighted average number of common shares and equivalents - diluted 67,254 67,224 67,151 67,186
=========== =========== =========== ===========
See accompanying notes to these condensed consolidated financial statements.
Page 3 of 25 Pages
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000s omitted, unaudited)
June 30, December 31,
-------- ------------
2002 2001
---- ----
Assets
------
Current assets:
Cash and cash equivalents $ 14,820 $ 22,848
Accounts receivable, net 464,987 418,083
Supplies 59,280 54,764
Deferred income taxes 34,944 25,227
Other current assets 34,429 27,340
--------------- ----------------
Total current assets 608,460 548,262
--------------- ----------------
Property and equipment 1,774,850 1,625,807
Less: accumulated depreciation (647,165) (594,602)
--------------- ----------------
1,127,685 1,031,205
Other assets:
Goodwill 391,929 372,627
Deferred charges 17,672 16,533
Other 63,144 145,957
--------------- ----------------
472,745 535,117
--------------- ----------------
$ 2,208,890 $ 2,114,584
=============== ================
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current maturities of long-term debt $ 2,641 $ 2,436
Accounts payable and accrued liabilities 344,124 319,395
Federal and state taxes ----- 885
--------------- ----------------
Total current liabilities 346,765 322,716
--------------- ----------------
Other noncurrent liabilities 119,366 110,385
--------------- ----------------
Minority interest 127,862 125,914
--------------- ----------------
Long-term debt, net of current maturities 688,018 718,830
--------------- ----------------
Deferred income taxes 27,471 28,839
--------------- ----------------
Common stockholders' equity:
Class A Common Stock, 3,848,886 shares
outstanding in 2002, 3,848,886 in 2001 38 38
Class B Common Stock, 55,689,608 shares
outstanding in 2002, 55,603,686 in 2001 557 556
Class C Common Stock, 387,848 shares
outstanding in 2002, 387,848 in 2001 4 4
Class D Common Stock, 37,222 shares
outstanding in 2002, 39,109 in 2001 ----- -----
Capital in excess of par, net of deferred
compensation of $0 in 2002
and $203 in 2001 139,442 137,400
Retained earnings 766,084 676,064
Accumulated other comprehensive income (loss) (6,717) (6,162)
--------------- ----------------
899,408 807,900
--------------- ----------------
$ 2,208,890 $ 2,114,584
=============== ================
See accompanying notes to these condensed consolidated financial
statements.
Page 4 of 25 Pages
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000s omitted - unaudited)
Six Months Ended
----------------
June 30,
--------
2002 2001
--------- ---------
Cash Flows from Operating Activities:
Net income $ 90,020 $ 68,561
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation & amortization 60,308 62,043
Accretion of discount on convertible debentures 5,417 5,125
Losses on foreign exchange and derivative transactions 15 1,401
Changes in assets & liabilities, net of effects from
acquisitions and dispositions:
Accounts receivable (23,182) 10,558
Accrued interest 786 (55)
Accrued and deferred income taxes (9,310) 3,658
Other working capital accounts 819 10,021
Other assets and deferred charges (4,774) 2,805
Increase in working capital at acquired facilities ------ (13,201)
Other 2,089 (4,662)
Minority interest in earnings of consolidated entities, net of distributions 1,948 337
Accrued insurance expense, net of commercial premiums paid 27,852 12,298
Payments made in settlement of self-insurance claims (17,922) (6,088)
--------- ---------
Net cash provided by operating activities 134,066 152,801
--------- ---------
Cash Flows from Investing Activities:
Property and equipment additions, net (97,152) (69,408)
Acquisition of businesses ------ (179,240)
Proceeds received from divestitures, net 1,750 ------
--------- ---------
Net cash used in investing activities (95,402) (248,648)
--------- ---------
Cash Flows from Financing Activities:
Additional borrowings, net of financing costs 39,311 133,534
Reduction of long-term debt (84,255) (25,000)
Issuance of common stock 1,320 1,293
Repurchase of common shares (3,068) ------
--------- ---------
Net cash (used in) provided by fnancing activities (46,692) 109,827
--------- ---------
(Decrease) increase in cash and cash equivalents (8,028) 13,980
Cash and cash equivalents, Beginning of Period 22,848 10,545
--------- ---------
Cash and cash equivalents, End of Period $ 14,820 $ 24,525
========= =========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 10,914 $ 13,892
========= =========
Income taxes paid, net of refunds $ 60,848 $ 35,592
========= =========
See accompanying notes to these condensed consolidated financial statements.
Page 5 of 25 Pages
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) General
The consolidated financial statements include the accounts of Universal Health
Services, Inc. (the "Company"), its majority-owned subsidiaries and partnerships
controlled by the Company or its subsidiaries as managing general partner. The
consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission and reflect all normal and recurring adjustments which,
in the opinion of the Company, are necessary to fairly present results for the
interim periods. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the accompanying disclosures are
adequate to make the information presented not misleading. It is suggested that
these financial statements be read in conjunction with the financial statements,
significant accounting policies and the notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001. Certain prior
year amounts have been reclassified to conform with current year financial
statement presentation.
(2) Related Party Transactions
At June 30, 2002, the Company held approximately 6.6% of the outstanding shares
of Universal Health Realty Income Trust (the "Trust"). The Company serves as
Advisor to the Trust under an annually renewable advisory agreement pursuant to
the terms of which the Company conducts the Trust's day to day affairs, provides
administrative services and presents investment opportunities. In connection
with this advisory agreement, the Company earned an advisory fee from the Trust
of approximately $300,000 in each of the three month periods ended June 30, 2002
and 2001 and $700,000 in each of the six month periods ended June 30, 2002 and
2001 which are included in net revenues in the accompanying consolidated
statements of income. In addition, certain officers and directors of the Company
are also officers and/or directors of the Trust. Management believes that it has
the ability to exercise significant influence over the Trust and therefore the
Company accounts for its investment in the Trust using the equity method of
accounting. The Company's pre-tax share of income from the Trust was $400,000
and $300,000 during the three month periods ended June 30, 2002 and 2001,
respectively, and $700,000 and $600,000 during the six month periods ended June
30, 2002 and 2001, respectively, and is included in net revenues in the
accompanying consolidated statements of income. As of June 30, 2002, the Company
leased six hospital facilities from the Trust with terms expiring in 2003
through 2006. These leases contain up to six 5-year renewal options. Total rent
expense under these operating leases was $4.3 and $4.1 million during the three
month periods ended June 30, 2002 and 2001, respectively, and $8.5 million and
$8.2 million during the six month periods ended June 30, 2002 and 2001,
respectively.
(3) Other Noncurrent and Minority Interest Liabilities
Other noncurrent liabilities include the long-term portion of the Company's
professional and general liability, compensation reserves, and pension
liability.
The minority interest liability consists primarily of a 27.5% outside ownership
interest in three acute care facilities located in Las Vegas, Nevada, a 20%
outside ownership in an acute care facility located in Washington D.C. and a 20%
outside ownership interest in an operating company that owns nine hospitals in
France.
(4) Commitment and Contingencies
Under certain agreements, the Company has committed or guaranteed an aggregate
of $53 million related principally to the Company's self-insurance programs and
as support for various debt instruments and loan guarantees, including a $29
million surety bond related to the Company's 1997 acquisition of an 80%
ownership interest in The George Washington University Hospital.
Page 6 of 25 Pages
For the period from January 1, 1998 through December 31, 2001, most of the
Company's subsidiaries were covered under commercial insurance policies with
PHICO, a Pennsylvania based insurance company. The policies provided for a
self-insured retention limit for professional and general liability claims for
the Company's subsidiaries up to $1 million per occurrence, with an average
annual aggregate for covered subsidiaries of $7 million through 2001. These
subsidiaries maintained excess coverage up to $100 million with other major
insurance carriers.
Early in the first quarter of 2002, PHICO was placed in liquidation by the
Pennsylvania Insurance Commissioner and as a result, the Company recorded a
pre-tax charge to earnings of $40 million during the fourth quarter of 2001 to
reserve for malpractice expenses that may result from PHICO's liquidation. PHICO
continues to have substantial liability to pay claims on behalf of the Company
and although those claims could become the Company's liability, the Company may
be entitled to receive reimbursement from state insurance guaranty funds and/or
PHICO's estate for a portion of certain claims ultimately paid by the Company.
The Company expects that the cash payments related to these claims will be made
over the next eight years as the cases are settled or adjudicated. In estimating
the $40 million pre-tax charge during the fourth quarter of 2001, the Company
evaluated all known factors at that time. As of June 30, 2002, these factors
have not substantially changed. However, there can be no assurance that the
Company's ultimate liability will not be materially different than the estimated
charge recorded. Additionally, if the ultimate PHICO liability assumed by the
Company is substantially greater than the established reserve, there can be no
assurance that the additional amount required will not have a material adverse
effect on the Company's future results of operations.
(5) Financial Instruments
Fair Value Hedges: The Company has two floating rate swaps having a combined
notional principal amount of $60 million in which the Company receives a fixed
rate of 6.75% and pays a floating rate equal to 6 month LIBOR plus a spread. The
term of these swaps is ten years and they are both scheduled to expire on
November 15, 2011. During the three months ended June 30, 2002, the Company
recorded a decrease of $2.9 million in other non-current liabilities to
recognize the fair value of these swaps and a $2.9 million increase in long-term
debt to recognize the difference between the carrying value and fair value of
the related hedged liability. During the six months ended June 30, 2002, the
Company recorded a decrease of $2.4 million in other non-current liabilities to
recognize the fair value of these swaps and a $2.4 million increase in long-term
debt to recognize the difference between the carrying value and fair value of
the related hedged liability. During the three and six month periods ended June
30, 2001, the Company recorded increases of $700,000 and $2.1 million,
respectively, in other assets and long-term debt to recognize the increased
value of the fair-value hedging instruments.
Cash Flow Hedges: During the three months ended June 30, 2002 and 2001, the
Company recorded in other comprehensive income ("OCI"), a pre-tax loss of $2.8
million ($1.8 million after-tax) and pre-tax income of $2.1 million ($1.4
million after-tax), respectively, to recognize the change in fair value of all
derivatives that are designated as cash flow hedging instruments. During the six
months ended June 30, 2002 and 2001, the Company recorded in other comprehensive
income ("OCI"), pre-tax losses of $1.2 million ($700,000 after-tax) and $3.1
million ($1.9 million after-tax), respectively, to recognize the change in fair
value of all derivatives that are designated as cash flow hedging instruments.
The income or losses are reclassified into earnings as the underlying hedged
item affects earnings, such as when the forecasted interest payment occurs.
Assuming market rates remain unchanged from June 30, 2002, it is expected that
$5.6 million of pre-tax net losses in accumulated OCI will be reclassified into
earnings within the next twelve months. The Company also recorded after-tax
income of $19,000 and $28,000 during the three and six months ended June 30,
2002, respectively, and approximately $100,000 during the six months ended June
30, 2001 (the majority of which was recorded during the quarter ended March 31,
2001), to recognize the ineffective portion of the cash flow hedging
instruments. As of June 30, 2002, the maximum length of time over which the
Company is hedging its exposure to the variability in future cash flows for
forecasted transactions is through August, 2005.
Page 7 of 25 Pages
As of June 30, 2002, the Company has one fixed rate swap with a notional
principal amount of $125 million which expires in August, 2005. The Company pays
a fixed rate of 6.76% and receives a floating rate equal to three month LIBOR.
As of June 30, 2002, the floating rate of the $125 million of interest rate
swaps was 1.90%. Also as of June 30, 2002, a majority-owned subsidiary of the
Company has a fixed rate swap denominated in Euros with an initial notional
principal amount of Euro 45.8 million which expires on June 30, 2005.
(6) New Accounting Standards
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all
business combinations to be accounted for using the purchase method and
establishes criteria for the recognition of intangible assets apart from
goodwill. SFAS No. 141 applies to all business combinations initiated after June
30, 2001. SFAS No. 142 required the Company to cease amortizing goodwill that
existed as of June 30, 2001. Recorded goodwill balances will be reviewed for
impairment at least annually and written down if the carrying value of the
goodwill balance exceeds its fair value.
The Company adopted SFAS No. 142 on January 1, 2002. As required by SFAS No.
142, the Company performed an impairment test on goodwill as of January 1, 2002,
which indicated no impairment of goodwill. As of January 1, 2002, the Company is
no longer amortizing goodwill. The Company has selected September 1st as its
annual assessment date for impairment testing. Goodwill amortization in 2001 was
approximately $24 million on a pre-tax and approximately $15.6 million or $0.24
pre diluted share on an after-tax basis.
The following table sets forth the computation of basic and diluted earnings per
share for the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
(In thousands, except per share data
Reported net income $44,347 $32,390 $90,020 $68,561
Add back: goodwill amortization after-tax -- 3,932 -- 7,777
------- ------- ------- -------
Adjusted net income $44,347 $36,322 $90,020 $76,338
======= ======= ======= =======
Basic earnings per share
Reported net income $ 0.74 $ 0.54 $ 1.50 $ 1.15
Goodwill amortization -- 0.06 -- 0.12
------- ------- ------- -------
Adjusted net income $ 0.74 $ 0.60 $ 1.50 $ 1.27
======= ======= ======= =======
Diluted earnings per share:
Reported net income $ 0.69 $ 0.51 $ 1.40 $ 1.08
Goodwill amortization -- 0.06 -- 0.12
------- ------- ------- -------
Adjusted net income $ 0.69 $ 0.57 $ 1.40 $ 1.20
======= ======= ======= =======
Changes in the carrying amount of goodwill for the six-month period ended June
30, 2002 were as follows (in thousands):
Behavioral
Acute Care Health Total
Services Services Other Consolidated
-------- -------- ----- ------------
Balance, January 1, 2002 $277,692 $54,122 $40,813 $372,627
Goodwill acquired during the period 17,197 328 1,777 19,302
Goodwill written off related to sale of business unit -- -- -- --
-------- -------- ------- --------
Balance, June 30 ,2002 $294,889 $54,450 $42,590 $391,929
======== ======== ======= ========
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". The Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
associated asset retirement costs. The Statement requires that the fair value of
a liability for an asset retirement obligation be recognized in the period in
which it is incurred. The asset retirement obligations will be capitalized as
part of the carrying amount of the long-lived asset. The Statement applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and normal operation of
long-lived assets. The Statement is effective January 1, 2003 for the Company,
with earlier adoption permitted. Management does not believe that this Statement
will have a material effect on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". The Statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". This Statement also supersedes Accounting Principles Board
Opinion (APB) No. 30 provisions related to accounting and reporting for the
disposal of a segment of a business. This Statement establishes a single
accounting model, based on the framework established in SFAS No. 121, for
long-lived assets to be disposed of by sale. The Statement retains most of the
requirements in SFAS No. 121 related to the recognition of impairment of
long-lived assets to be held and used. The Company adopted the provisions of
this Statement as of January 1, 2002. The adoption of this Statement did not
have a material effect on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit of Disposal activities." The Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The Statement generally
requires that a cost associated with an exit or disposal activity be
recognized and measured initially at its fair value in the period in which the
liability is incurred. The Statement is effective for all exit or disposal
activities initiated after December 31, 2002, with earlier application
encouraged. Management does not believe that this Statement will have a material
effect on the Company's financial statements.
(7) Segment Reporting
The Company's reportable operating segments consist of acute care 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 the Company's other operating
entities including outpatient
Page 8 of 25 Pages
surgery and radiation centers and an 80% ownership interest in an operating
company that owns nine hospitals located in France. The financial and
statistical data presented for the nine hospitals located in France is for the
three and six month periods ended May 31st as these facilities are included in
the Company's annual statements on the basis of the year ended November 30th.
The chief operating decision making group for the Company's acute care services
and behavioral health care services located in the U.S. and Puerto Rico is
comprised of the Company's President and Chief Executive Officer, and the lead
executives of each of the Company's two primary operating segments. The lead
executive for each operating segment also manages the profitability of each
respective segment's various hospitals. The acute care and behavioral health
services' operating segments are managed separately because each operating
segment represents a business unit that offers different types of healthcare
services. The accounting policies of the operating segments are the same as
those described in the summary of significant accounting policies included in
the Company's Annual Report of Form 10-K for the year ended December 31, 2001,
except for the adoption of SFAS Nos. 142 and 144, effective January 1, 2002.
There was no impact on the segment data presented as a result of the adoption of
these pronouncements.
Three Months Ended June 30, 2002
------------------------------------------------------------------------
Behavioral
Acute Care Health Total
Services Services Other Consolidated
------------------------------------------------------------------------
(Dollar amounts in thousands)
Gross inpatient revenues $1,242,178 $248,255 $ 23,819 $1,514,252
Gross outpatient revenues $ 456,875 $ 39,450 $ 39,655 $ 535,980
Total net revenues $ 620,388 $143,423 $ 42,134 $ 805,945
Operating income (a) $ 107,925 $ 29,942 ($8,515) $ 129,352
Total assets as of 6/30/02 $1,620,272 $276,095 $ 312,523 $2,208,890
Licensed beds 5,846 3,749 1,083 10,678
Available beds 4,777 3,605 1,083 9,465
Patient days 300,761 255,016 82,324 638,101
Admissions 65,605 21,176 16,502 103,283
Average length of stay 4.6 12.0 5.0 6.2
Three Months Ended June 30, 2001
------------------------------------------------------------------------
Behavioral
Acute Care Health Total
Services Services Other Consolidated
------------------------------------------------------------------------
(Dollar amounts in thousands)
Gross inpatient revenues $ 993,179 $232,652 $ 14,049 $1,239,880
Gross outpatient revenues $ 363,231 $ 38,111 $ 38,128 $ 439,470
Total net revenues $ 547,208 $140,153 $ 31,235 $ 718,596
Operating income (a) $ 95,587 $ 28,497 ($ 13,299) $ 110,785
Total assets as of 6/30/01 $1,448,446 $290,705 $ 241,468 $1,980,619
Licensed beds 5,475 3,735 663 9,873
Available beds 4,624 3,591 663 8,878
Patient days 279,070 244,080 52,206 575,356
Admissions 59,001 19,760 12,328 91,089
Average length of stay 4.7 12.4 4.2 6.3
Page 9 of 25 Pages
Six Months Ended June 30, 2002
------------------------------------------------------------------------
Behavioral
Acute Care Health Total
Services Services Other Consolidated
------------------------------------------------------------------------
(Dollar amounts in thousands)
Gross inpatient revenues $ 2,528,504 $ 490,634 $ 45,339 $ 3,064,477
Gross outpatient revenues $ 881,418 $ 77,750 $ 77,180 $ 1,036,348
Total net revenues $ 1,244,316 $ 285,544 $ 80,456 $ 1,610,316
Operating income (a) $ 215,823 $ 58,409 ($13,514) $ 260,718
Total assets as of 6/30/02 $ 1,620,272 $ 276,095 $ 312,523 $ 2,208,890
Licensed beds 5,846 3,749 1,083 10,678
Available beds 4,777 3,605 1,083 9,465
Patient days 624,065 503,984 165,125 1,293,174
Admissions 132,465 42,427 34,320 209,212
Average length of stay 4.7 11.9 4.8 6.2
Six Months Ended June 30, 2001
------------------------------------------------------------------------
Behavioral
Acute Care Health Total
Services Services Other Consolidated
------------------------------------------------------------------------
(Dollar amounts in thousands)
Gross inpatient revenues $ 2,011,533 $ 460,515 $ 17,242 $ 2,489,290
Gross outpatient revenues $ 705,257 $ 74,135 $ 68,674 $ 848,066
Total net revenues $ 1,075,785 $ 272,731 $ 47,029 $ 1,395,545
Operating income (a) $ 199,077 $ 54,682 ($29,808) $ 223,951
Total assets as of 6/30/01 $ 1,448,446 $ 290,705 $ 241,468 $ 1,980,619
Licensed beds 5,436 3,717 332 9,485
Available beds 4,585 3,573 332 8,490
Patient days 566,367 477,095 52,206 1,095,668
Admissions 119,116 39,508 12,328 170,952
Average length of stay 4.8 12.1 4.2 6.4
(a) Operating income is defined as net revenues less salaries, wages &
benefits, other operating expenses, supplies expense and provision for
doubtful accounts.
Below is a reconciliation of consolidated operating income to
consolidated net income before income taxes:
Three Months
Ended June 30,
(amounts in thousands)
---------------------------------
2002 2001
---------------------------------
Consolidated operating income $129,352 $110,785
Less: Depreciation & amortization 30,900 32,248
Page 10 of 25 Pages
Lease & rental expense 15,290 13,470
Interest expense, net 8,153 10,506
Minority interests in earnings of consolidated entities 4,688 3,699
Losses (gains) on foreign exchange and derivative trans. 249 (26)
------------------------------
Consolidated income before income taxes $70,072 $50,888
==============================
Six Months
Ended June 30,
(amounts in thousands)
------------------------------
2002 2001
------------------------------
Consolidated operating income $260,718 $223,951
Less: Depreciation & amortization 60,308 62,043
Lease & rental expense 30,480 26,110
Interest expense, net 17,117 18,962
Minority interests in earnings of consolidated entities 10,561 7,624
(Gains) losses on foreign exchange and derivative trans. 15 1,401
------------------------------
Consolidated income before income taxes $142,237 $107,811
==============================
(8) Earnings Per Share Data ("EPS")
Basic earnings per share are based on the weighted average number of common
shares outstanding during the year. Diluted earnings per share are based on the
weighted average number of common shares outstanding during the year adjusted to
give effect to common stock equivalents. In April, 2001, the Company declared a
two-for-one stock split in the form of a 100% stock dividend which was paid on
June 1, 2001. All references to share quantities and earnings per share for all
periods presented have been adjusted to reflect the two-for-one stock split.
The following table sets forth the computation of basic and diluted earnings per
share for the periods indicated.
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
(In thousands, except per share data)
Basic:
Net income $44,347 $32,390 $90,020 $68,561
Average shares outstanding 59,934 59,918 59,898 59,873
------ ------ ------ ------
Basic EPS $ 0.74 $ 0.54 $ 1.50 $ 1.15
====== ====== ====== ======
Diluted:
Net income $44,347 $32,390 $90,020 $68,561
Add discounted convertible
debenture interest,
net of income tax effect 2,091 2,049 4,183 4,019
----- ----- ----- -----
Page 11 of 25 Pages
Totals $ 46,438 $ 34,439 $ 94,203 $ 72,580
======== ======== ======== ========
Average shares outstanding 59,934 59,918 59,898 59,873
Net effect of dilutive stock
options and grants based on the
treasury stock method 742 728 675 735
Assumed conversion
of discounted convertible
debentures 6,578 6,578 6,578 6,578
-------- -------- -------- --------
Totals 67,254 67,224 67,151 67,186
-------- -------- -------- --------
Diluted EPS $ 0.69 $ 0.51 $ 1.40 $ 1.08
======== ======== ======== ========
(9) Comprehensive Income (Loss)
Comprehensive income (loss) represents net income plus the results of certain
non-shareholders' equity changes not reflected in the Consolidated Statements of
Income. The components of comprehensive income (loss), net of income taxes,
(except for foreign currency translation adjustments which are not currently
adjusted for income taxes since they relate to indefinite investments in
non-United States subsidiaries) are as follows (amounts in thousands):
Three Months Ended Six Months Ended
------------------ ----------------
June 30. June 30,
------- --------
2002 2001 2002 2001
---- ---- ---- ----
Net income $44,347 $32,390 $90,020 $68,561
Other comprehensive income (loss):
Foreign currency translation adjustments 234 1,907 181 782
Cumulative effect of change in accounting
principle(SFAS No. 133) on other
comprehensive income (net of income tax effect) ----- ----- ---- (4,779)
Unrealized derivative gains (losses) on cash flow hedges
(net of income tax effect) (1,792) 1,347 (736) (1,933)
------- ------- ------- -------
Comprehensive income $42,789 $35,644 $89,465 $62,631
======= ======= ======= =======
Page 12 of 25 Pages
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
CONDITION
Forward-Looking Statements
The matters discussed in this report as well as the news releases issued from
time to time by the Company include certain statements containing the words
"believes", "anticipates", "intends", "expects" and words of similar import,
which constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance achievements of the Company or industry results
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, the following: that the majority of the Company's revenues
are produced by a small number of its total facilities; possible changes in the
levels and terms of reimbursement for the Company's charges by government
programs, including Medicare or Medicaid or other third party payors; industry
capacity; demographic changes; existing laws and government regulations and
changes in or failure to comply with laws and governmental regulations; the
ability to enter into managed care provider agreements on acceptable terms;
liability and other claims asserted against the Company; competition; the loss
of significant customers; technological and pharmaceutical improvements that
increase the cost of providing, or reduce the demand for healthcare; the ability
to attract and retain qualified personnel, including nurses and physicians, the
ability of the Company to successfully integrate its recent acquisitions; the
Company's ability to finance growth on favorable terms and, other factors
referenced in the Company's 2001 Form 10-K or herein. Additionally, the
Company's financial statements reflect large amounts due from various commercial
payors and there can be no assurance that failure of the payors to remit amounts
due to the Company will not have a material adverse effect on the Company's
future results of operations. Given these uncertainties, prospective investors
are cautioned not to place undue reliance on such forward-looking statements.
The Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
Results of Operations
Net revenues increased 12% to $806 million for the three months ended June 30,
2002 as compared to $719 million during last year's second quarter and increased
15% to $1.6 billion during the six months ended June 30, 2002 as compared to
$1.4 billion during the comparable prior year period. The $87 million increase
in net revenues during the 2002 second quarter, as compared to the comparable
prior year quarter, was due primarily to: (i) a $49 million or 7% increase in
net revenues generated at behavioral health care facilities and acute care
hospitals (located in the U.S., Puerto Rico and France) owned during both
periods, and; (ii) $38 million of revenues generated at acute care hospitals
located in the U.S. and France purchased subsequent to the second quarter of
2001. The $215 million increase in net revenues during the six month period
ended June 30, 2002, as compared to the comparable prior year six month period,
was due primarily to: (i) a $115 million or 8% increase in net revenues
generated at behavioral health care and acute care hospitals (located in the
U.S., Puerto Rico and France) owned during both periods, and; (ii) $98 million
of revenues generated at behavioral health care facilities and acute care
hospitals located in the U.S. and France purchased at various times subsequent
to January 1, 2001.
Net revenues from the Company's acute care facilities (including the nine
hospitals located in France) and ambulatory treatment centers accounted for 82%
of consolidated net revenues during the three and six month periods ended June
30, 2002 and 80% of consolidated net revenues during the three and six month
periods ended June 30, 2001. Net revenues from the Company's behavioral health
services facilities accounted for 18% of consolidated net revenues during the
three and six month periods ended June 30, 2002 and 20% of consolidated net
revenues for the three and six month periods ended June 30, 2001.
Page 13 of 25 Pages
Operating income (defined as net revenues less salaries, wages & benefits, other
operating expenses, supplies expense and provision for doubtful accounts)
increased 17% to $129 million for the three month period ended June 30, 2002
from $111 million in the comparable prior year quarter and increased 16% to $261
million during the six month period ended June 30, 2002 as compared to $224
million in the comparable prior year six month period. Overall operating margins
(defined as operating income divided by net revenues) were 16.0% and 15.4%
during the three month periods ended June 30, 2002 and 2001, respectively, and
16.2% and 16.0% during the six month periods ended June 30, 2002 and 2001,
respectively. Contributing to the increase in the overall operating margins
during the three and six month periods of 2002, as compared to the comparable
prior year periods, was a decrease in the provision for doubtful accounts. The
provision for doubtful accounts, as a percentage of net revenues, decreased to
6.6% during the 2002 second quarter as compared to 8.7% during the 2001 second
quarter and decreased to 6.9% during the 2002 six month period as compared to
8.4% in the comparable 2001 six month period. The improvement in the bad debt
expense as a percentage of net revenues was primarily attributable to improved
billing and collection procedures, an increase in collection of amounts
previously reserved and more aggressive efforts to properly categorize charges
related to charity care. The improvement in operating margins resulting from the
decrease in the provision for doubtful accounts during the 2002 periods as
compared to the comparable 2001 periods was partially offset by a significant
increase in professional and general liability insurance expense and an increase
in salaries, wages and benefits. The increase in professional and general
liability insurance was caused by unfavorable pricing and availability trends of
commercial insurance. As a result, as of January 1, 2002, the Company's
subsidiaries assumed a greater portion of the hospital professional and general
liability risk and the Company expects its total insurance expense including
professional and general liability, property, auto and workers' compensation to
increase approximately $25 million in 2002 as compared to 2001. The increase in
salaries, wages and benefits was caused primarily by rising labor rates
particularly in the area of skilled nursing. The Company expects the expense
factors mentioned above to continue to pressure future operating margins.
Acute Care Services
On a same facility basis, net revenues at the Company's acute care hospitals
located in the U.S. and Puerto Rico increased 8% in the 2002 second quarter as
compared to the comparable 2001 quarter as admissions and patient days at these
facilities increased 6% and 3%, respectively. The average length of stay at
these facilities decreased to 4.6 days for three month period ended June 30,
2002 as compared to 4.7 days during the 2001 comparable quarter. Net revenues at
these hospitals increased 10% during the six month period ended June 30, 2002 as
compared to the comparable prior year period as admissions and patient days at
these facilities increased 6% and 5%, respectively. The average length of stay
at the acute care hospitals owned during both periods decreased to 4.7 days for
the six month period ended June 30, 2002 as compared to 4.8 days during the 2001
comparable period.
In addition to the increase in inpatient volumes, the Company's same facility
net revenues were favorably impacted by an increase in prices charged to private
payors including health maintenance organizations and preferred provider
organizations as well as an increase in Medicare reimbursements which commenced
on April 1, 2001. On a same facility basis, net revenue per adjusted admission
(adjusted for outpatient activity) at the Company's acute care facilities
located in the U.S. and Puerto Rico increased 1% and 4% during the three and six
month periods ended June 30, 2002, respectively, as compared to the comparable
prior year periods. Net revenue per adjusted patient day at these facilities
increased 4% in each of the three and six month periods ended June 30, 2002,
respectively, as compared to the comparable prior year periods. Included in the
same facility acute care financial results and patient statistical data are the
operating results generated at the 60-bed McAllen Heart Hospital which was
acquired by the Company in March of 2001. Upon acquisition, the facility began
operating under the same license as an integrated department of McAllen Medical
Center and therefore the financial and statistical results are not separable.
Despite the increase in patient volume at the Company's acute care hospitals,
inpatient utilization continues to be negatively affected by payor-required,
pre-admission authorization and by payor pressure
Page 14 of 25 Pages
to maximize outpatient and alternative healthcare delivery services for less
acutely ill patients. Additionally, the hospital industry in the United States
as well as the Company's acute care facilities continue to have significant
unused capacity which has created substantial competition for patients. The
Company expects the increased competition, admission constraints and payor
pressures to continue. The increase in net revenue was negatively effected by
lower payments from the government under the Medicare program as a result of the
Balanced Budget Act of 1997 ("BBA-97") and discounts to insurance and managed
care companies (see General Trends for additional disclosure). The Company
anticipates that the percentage of its revenue from managed care business will
continue to increase in the future. The Company generally receives lower
payments per patient from managed care payors than it does from traditional
indemnity insurers.
At the Company's acute care hospitals located in the U.S. and Puerto Rico,
operating expenses, (salaries, wages & benefits, other operating expenses,
supplies expense and provision for doubtful accounts) as a percentage of net
revenues were 82.6% and 82.5% for the three month periods ended June 30, 2002
and 2001, respectively, and 82.7% and 81.5% for the six month periods ended June
30, 2002 and 2001, respectively. Operating margins (defined as net revenues less
operating expenses divided by net revenues) at these facilities were 17.4% and
17.5% during the three month periods ended June 30, 2002 and 2001, respectively,
and 17.3% and 18.5% during the six month periods ended June 30, 2002 and 2001,
respectively. On a same facility basis, operating expenses as a percentage of
net revenues at the Company's acute care hospitals located in the U.S. and
Puerto Rico were 82.2% and 82.5% for the three month periods ended June 30, 2002
and 2001, respectively, and 82.2% and 81.5% for the six month periods ended June
30, 2002 and 2001, respectively. Operating margins at these facilities were
17.8% and 17.5% during the three month periods ended June 30, 2002 and 2001,
respectively, and 17.8% and 18.5% during the six month periods ended June 30,
2002 and 2001, respectively.
Favorably impacting the operating margins at the Company's acute care hospitals
located in the U.S. and Puerto Rico during the 2002 periods as compared to the
comparable prior year periods was a reduction in the provision for doubtful
accounts which, as a percentage of net revenues, decreased to 7.7% and 8.1% for
the three and six months ended June 30, 2002, respectively, as compared to 9.9%
and 9.5% in the comparable prior year periods, respectively. This improvement
was primarily caused by improved billing and collection procedures, an increase
in the collection of amounts previously reserved and more aggressive efforts to
properly categorize charges related to charity care. Unfavorably impacting the
operating margins at these facilities during the three and six month periods
ended June 30, 2002, as compared to the comparable prior year periods, was an
increase in other operating expenses and salaries, wages and benefits. As a
percentage of net revenues, other operating expenses increased to 24.0% and
23.7% for the three and six months ended June 30, 2002, respectively, as
compared to 22.5% and 21.7% during the comparable prior year periods,
respectively. The increase in other operating expenses was due primarily to a
significant increase in professional and general liability insurance expense
caused by unfavorable pricing and availability trends of commercial insurance,
as mentioned above. Salaries, wages and benefits as a percentage of net revenues
increased to 36.6% and 36.4% for the three and six month periods ended June 30,
2002, respectively, as compared to 35.5% in each of the comparable prior year
periods. The increase in salaries, wages and benefits was due primarily to
rising labor rates particularly in the area of skilled nursing. The Company
expects the expense factors mentioned above to continue to pressure future
operating margins.
Behavioral Health Services
Net revenues at the Company's behavioral health services facilities owned in
both three month periods increased 2% during the three month period ended June
30, 2002 as compared to the comparable prior year quarter. Admissions and
patient days at these facilities increased 7% and 5%, respectively, during the
three month period ended June 30, 2002 as compared to the comparable prior year
quarter. The average length of stay at the behavioral health services facilities
owned in both periods decreased to 12.0 days during the 2002 second quarter as
compared to 12.4 days in the comparable prior year period. Net revenues at the
Company's behavioral health services facilities owned in both six month periods
increased 3% during the six month period ended June 30, 2002 as compared to the
comparable prior year
Page 15 of 25 Pages
six month period. Admissions and patient days at these facilities increased 6%
and 4%, respectively, during the six month period ended June 30, 2002 as
compared to the comparable prior year period. The average length of stay at the
behavioral health services facilities owned in both periods decreased to 11.9
days during the 2002 six month period as compared to 12.1 days in the comparable
prior year period. Net revenue per adjusted admission (adjusted for outpatient
activity) at the Company's behavioral heath care facilities owned in both
periods decreased 4% and 2% during the three and six month periods ended June
30, 2002, respectively, as compared to the comparable prior year periods. Net
revenue per adjusted patient day at these facilities decreased 1% during the
second quarter of 2002 as compared to the prior year's second quarter and
remained relatively unchanged during the six months ended June 30, 2002 as
compared to the comparable prior year period.
At the Company's behavioral health care facilities, operating expenses
(salaries, wages & benefits, other operating expenses, supplies expense and
provision for doubtful accounts) as a percentage of net revenues were 79.1% and
79.7% for the three month periods ended June 30, 2002 and 2001, respectively,
and 79.5% and 80.0% for the six month periods ended June 30, 2002 and 2001,
respectively. Operating margins (defined as net revenues less operating expenses
divided by net revenues) at these facilities were 20.9% and 20.3% during the
three month periods ended June 30, 2002 and 2001, respectively, and 20.5% and
20.0% in the comparable prior year periods, respectively. On a same facility
basis, operating expenses as a percentage of net revenues and operating margins
were the same as mentioned above for the three month periods ended June 30, 2002
and 2001 as all behavioral health care facilities were owned in both three month
periods. On a same facility basis for the six month periods, operating expenses
as a percentage of net revenues were 79.4% and 80.0% for the six month periods
ended June 30, 2002 and 2001, respectively. Operating margins at these
facilities were 20.6% and 20.0% during the six month periods ended June 30, 2002
and 2001, respectively. In an effort to maintain and potentially further improve
the operating margins at its behavioral health care facilities, management of
the Company continues to implement cost controls and price increases and has
also increased its focus on receivables management.
Other Operating Results
The Company recorded minority interest expense in the earnings of consolidated
entities amounting to $4.7 million and $3.7 million for the three months ended
June 30, 2002 and 2001, respectively, and $10.6 million and $7.6 million for the
six month periods ended June 30, 2002 and 2001, respectively. The minority
interest expense includes the minority ownerships' share of the net income of
four acute care facilities located in the U.S., three of which are located in
Las Vegas, Nevada and one located in Washington, D.C, and nine acute care
facilities located in France.
Depreciation and amortization expense decreased $1.3 million and $1.7 million
during the three and six month periods ended June 30, 2002 as compared to the
comparable prior year periods, respectively. Effective January 1, 2002, the
Company adopted the provisions of SFAS No. 142, "Goodwill and Other Intangible
Assets" and accordingly, ceased amortizing goodwill as of that date. For the
year ended December 31, 2001, the Company recorded approximately $24 million of
goodwill amortization expense or approximately $6 million and $12 million during
the three and six month periods ended June 30, 2001. Partially offsetting the
decrease caused by the adoption of SFAS No. 142 was an increase in depreciation
expense during three and six month periods of 2002, as compared to the
comparable 2001 periods, caused by depreciation expense attributable to capital
additions and acquisitions.
The effective tax rate was 36.7% and 36.4% for the three months ended June 30,
2002 and 2001, respectively, and 36.7% and 36.4% for the six months ended June
30, 2002 and 2001, respectively.
General Trends
A significant portion of the Company's revenue is derived from fixed payment
services, including Medicare and Medicaid which accounted for 44% and 42% of the
Company's net patient revenues during the three month periods ended June 30,
2002 and 2001, respectively, and 42% and 41% during the six month periods ended
June 30, 2002 and 2001, respectively. Within the statutory framework of the
Medicare and Medicaid
Page 16 of 25 Pages
programs, there are substantial areas subject to administrative rulings,
interpretations and discretion which may affect payments made under either or
both of such programs and reimbursement is subject to audit and review by third
party payors. Management believes that adequate provision has been made for any
adjustment that might result therefrom.
The Federal government makes payments to participating hospitals under its
Medicare program based on various formulas. The Company's general acute care
hospitals are subject to a prospective payment system ("PPS"). For inpatient
services, PPS pays hospitals a predetermined amount per diagnostic related group
("DRG") based upon a hospital's location and the patient's diagnosis. Beginning
August 1, 2000 under a new outpatient prospective payment system ("OPPS")
mandated by the Balanced Budget Act of 1997, both general acute and behavioral
health hospitals' outpatient services are paid a predetermined amount per
Ambulatory Payment Classification based upon a hospital's location and the
procedures performed. The Medicare, Medicaid and SCHIP Balanced Budget
Refinement Act of 1999 ("BBRA of 1999") included "transitional corridor
payments" through fiscal year 2003, which provide some financial relief for any
hospital that generally incurs a reduction to its Medicare outpatient
reimbursement under the new OPPS.
Behavioral health facilities, which are excluded from the inpatient services
PPS, are cost reimbursed by the Medicare program, but are generally subject to a
per discharge ceiling, calculated based on an annual allowable rate of increase
over the hospital's base year amount under the Medicare law and regulations.
Capital related costs are exempt from this limitation. In the Balanced Budget
Act of 1997 ("BBA-97"), Congress significantly revised the Medicare payment
provisions for PPS-excluded hospitals, including behavioral health services
facilities. Effective for Medicare cost reporting periods beginning on or after
October 1, 1997, different caps are applied to behavioral health services
hospitals' target amounts depending upon whether a hospital was excluded from
PPS before or after that date, with higher caps for hospitals excluded before
that date. Congress also revised the rate-of-increase percentages for
PPS-excluded hospitals and eliminated the new provider PPS-exemption for
psychiatric hospitals. In addition, the Health Care Financing Administration,
now known as the Center for Medicare and Medicaid Services ("CMS"), has
implemented requirements applicable to behavioral health services hospitals that
share a facility or campus with another hospital. The BBRA of 1999 requires that
CMS develop an inpatient behavioral health services per diem prospective payment
system effective for the federal fiscal year beginning October 1, 2002, however,
it is likely the implementation will be delayed. Upon implementation, this new
prospective payment system will replace the current inpatient behavioral health
services payment system described above.
On August 30, 1991, the CMS issued final Medicare regulations establishing a PPS
for inpatient hospital capital-related costs. These regulations apply to
hospitals which are reimbursed based upon the prospective payment system and
took effect for cost report years beginning on or after October 1, 1991. For
most of the Company's hospitals, the new methodology began on January 1, 1992.
In 2001, the tenth year of the phase-in, most of the Company's hospitals were
paid by the Medicare program based on the federal capital rate (three hospitals
still receive hold harmless payments, which are described below).
The regulations provide for the use of a 10-year transition period during which
a blend of the old and new capital payment provision is utilized. One of two
methodologies applies during the 10-year transition period. If the hospital's
hospital-specific capital rate exceeds the federal capital rate, the hospital is
paid per discharge on the basis of a "hold harmless" methodology, which is the
higher of a blend of a portion of old capital costs and an amount for new
capital costs based on a proportion of the federal capital rate, or 100% of the
federal capital rate. Alternatively, with limited exceptions, if the
hospital-specific rate is below the federal capital rate, the hospital receives
payments based upon a "fully prospective" methodology, which is a blend of the
hospital's hospital-specific capital rate and the federal capital rate. Each
hospital's hospital-specific rate was determined based upon allowable capital
costs incurred during the "base year", which, for most of the Company's
hospitals, was the year ended December 31, 1990. Updated amounts and factors
necessary to determine PPS rates for Medicare hospital inpatient services for
operating costs and capital related costs are published annually.
In addition to the trends described above that continue to have an impact on the
operating results, there are a number of other more general factors affecting
the Company's business. BBA-97 called for the
Page 17 of 25 Pages
government to trim the growth of federal spending on Medicare by $115 billion
and on Medicaid by $13 billion over the following years. The act also called for
reductions in the future rate of increases to payments made to hospitals and
reduced the amount of reimbursement for outpatient services, bad debt expense
and capital costs. Some of these reductions were reversed with the passage on
December 15, 2000 of the Medicare, Medicaid and SCHIP Benefits Improvement and
Protection Act of 2000 ("BIPA") which, among other things, increased Medicare
and Medicaid payments to healthcare providers by $35 billion over 5 years with
approximately $12 billion of this amount targeted for hospitals and $11 billion
for managed care payors. These increased reimbursements to hospitals pursuant to
the terms of BIPA commenced in April, 2001. BBA-97 established the annual update
for Medicare at market basket minus 1.1% in both fiscal years 2001 (October 1,
2000 and through September 30, 2001) and 2002 and BIPA revised the update at the
full market basket in fiscal year 2001 and market basket minus .55% in fiscal
years 2002 and 2003. Additionally, BBA-97 reduced reimbursement to hospitals for
Medicare bad debts to 55% and BIPA increased the reimbursement to 70%, with an
effective date for the Company of January 1, 2001. It is possible that future
federal budgets will contain certain further reductions or increases in the rate
of increase of Medicare and Medicaid spending.
The Company can provide no assurances that the reductions in the PPS update, and
other changes required by BBA-97, will not adversely affect the Company's
operations. However, within certain limits, a hospital can manage its costs,
and, to the extent this is done effectively, a hospital may benefit from the DRG
system. However, many hospital operating costs are incurred in order to satisfy
licensing laws, standards of the Joint Commission on the Accreditation of
Healthcare Organizations ("JCAHO") and quality of care concerns. In addition,
hospital costs are affected by the level of patient acuity, occupancy rates and
local physician practice patterns, including length of stay and number and type
of tests and procedures ordered. A hospital's ability to control or influence
these factors which affect costs is, in many cases, limited.
In 1991, the Texas legislature authorized the LoneSTAR Health Initiative, a
pilot program in two areas of the state, to establish for Medicaid beneficiaries
a healthcare delivery system based on managed care principles. The program is
now known as the STAR program, which is short for State of Texas Access Reform.
Since 1995, the Texas Health and Human Services Commission, with the help of
other Texas agencies such as the Texas Department of Health, has rolled out STAR
Medicaid managed care pilot programs in several geographic areas of the state.
Under the STAR program, the Texas Department of Health either contracts with
health maintenance organizations in each area to arrange for covered services to
Medicaid beneficiaries, or contracts directly with healthcare providers and
oversees the furnishing of care in the role of the case manager. Two carve-out
pilot programs are the STAR+PLUS program, which provides long-term care to
elderly and disabled Medicaid beneficiaries in the Harris County service area,
and the NorthSTAR program, which furnishes behavioral health services to
Medicaid beneficiaries in the Dallas County service area. Effective in the fall
of 1999, however, the Texas legislature imposed a moratorium on the
implementation of additional pilot programs until the 2001 legislative session.
A study on the effectiveness of Medicaid managed care was issued in November,
2000. In June 2001, the state enacted House Bill 3038, which requires the
enrollment in group health plans of Medicaid and SCHIP recipients who are
eligible for such plans, if the state determines that such enrollment is
cost-effective. The effective date for this requirement was September 1, 2001.
The state has indicated, however, that it will not be expanding the Medicaid
Managed Care program to any additional areas within the next year.
Upon meeting certain conditions, and serving a disproportionately high share of
Texas' and South Carolina's low income patients, five of the Company's
facilities located in Texas and one facility located in South Carolina became
eligible and received additional reimbursement from each state's
disproportionate share hospital fund. Included in the Company's financial
results was an aggregate of $8.8 million and $9.1 million for the three month
periods ended June 30, 2002 and 2001, respectively, and $17.2 million and $15.5
million for the six month periods ended June 30, 2002 and 2001, respectively.
Failure to renew these programs upon their scheduled termination date (June 30,
2002 for South Carolina and August 31, 2002 for Texas), or reductions in
reimbursements, could have a material adverse effect on the Company's future
results of operations.
Page 18 of 25 Pages
The healthcare industry is subject to numerous laws and regulations which
include, among other things, matters such as government healthcare participation
requirements, various licensure and accreditations, reimbursement for patient
services, and Medicare and Medicaid fraud and abuse. Providers that are found to
have violated these laws and regulations may be excluded from participating in
government healthcare programs, subjected to fines or penalties or required to
repay amounts received from government for previously billed patient services.
While management of the Company believes its policies, procedures and practices
comply with governmental regulations, no assurance can be given that the Company
will not be subjected to governmental inquiries or actions.
Pressures to control health care costs and a shift away from traditional
Medicare to Medicare managed care plans have resulted in an increase in the
number of patients whose health care coverage is provided under managed care
plans. Approximately 37% and 39% for the three month periods ended June 30, 2002
and 2001, respectively, and 39% and 37% for the six month periods ended June 30,
2002 and 2001, respectively, of the Company's net patient revenues were
generated from managed care companies, which includes health maintenance
organizations and preferred provider organizations. In general, the Company
expects the percentage of its business from managed care programs to continue to
grow. The consequent growth in managed care networks and the resulting impact of
these networks on the operating results of the Company's facilities vary among
the markets in which the Company operates. Typically, the Company receives lower
payments per patient from managed care payors than it does from traditional
indemnity insurers, however, during the past two years, the Company secured
price increases from many of its commercial payors including managed care
companies.
For the period from January 1, 1998 through December 31, 2001, most of the
Company's subsidiaries were covered under commercial insurance policies with
PHICO, a Pennsylvania based insurance company. The policies provided for a
self-insured retention limit for professional and general liability claims for
the Company's subsidiaries up to $1 million per occurrence, with an average
annual aggregate for covered subsidiaries of $7 million through 2001. These
subsidiaries maintain excess coverage up to $100 million with other major
insurance carriers.
Early in the first quarter of 2002, PHICO was placed in liquidation by the
Pennsylvania Insurance Commissioner and as a result, the Company recorded a
pre-tax charge to earnings of $40 million during the fourth quarter of 2001 to
reserve for malpractice expenses that may result from PHICO's liquidation. PHICO
continues to have substantial liability to pay claims on behalf of the Company
and although those claims could become the Company's liability, the Company may
be entitled to receive reimbursement from state insurance guaranty funds and/or
PHICO's estate for a portion of certain claims ultimately paid by the Company.
The Company expects that the cash payments related to these claims will be made
over the next eight years as the cases are settled or adjudicated. In estimating
the $40 million pre-tax charge during the fourth quarter of 2001, the Company
evaluated all known factors at that time. As of June 30, 2002, these factors
have not substantially changed. However, there can be no assurance that the
Company's ultimate liability will not be materially different than the estimated
charge recorded. Additionally, if the ultimate PHICO liability assumed by the
Company is substantially greater than the established reserve, there can be no
assurance that the additional amount required will not have a material adverse
effect on the Company's future results of operations.
Due to unfavorable pricing and availability trends in the professional and
general liability insurance markets, the cost of commercial professional and
general liability insurance coverage has risen significantly. As a result, the
Company expects its total insurance expense including professional and general
liability, property, auto and workers' compensation to increase approximately
$25 million in 2002 as compared to 2001. The Company's subsidiaries have also
assumed a greater portion of the hospital professional and general liability
risk for its facilities. Effective January 1, 2002, most of the Company's
subsidiaries are self-insured for malpractice exposure up to $25 million per
occurrence. The Company purchased an umbrella excess policy through a commercial
insurance carrier for coverage in excess of $25 million per occurrence with a
$75 million aggregate limitation.
The Company maintains a non-contributory defined benefit plan which covers
employees of one of the Company's subsidiaries. The benefits are based on years
of service and the employee's highest
Page 19 of 25 Pages
compensation for any five years of employment. The Company's funding policy is
to contribute annually at least the minimum amount that should be funded in
accordance with the provisions of ERISA. The plan had invested assets with a
market value as of June 30, 2002 of $46.6 million of which 70% were invested in
equity based securities and 30% in fixed income securities. As a result of the
unfavorable general market conditions and lower than anticipated returns on
assets, there can be no assurance that the Company's future expense and required
fundings related to this plan will not be substantially higher than those
experienced in previous years.
Health Insurance Portability and Accountability Act of 1996
The Health Insurance Portability and Accountability Act (HIPAA) was enacted in
August, 1996 to assure health insurance portability, reduce healthcare fraud and
abuse, guarantee security and privacy of health information and enforce
standards for health information. Organizations are required to be in compliance
with certain HIPAA provisions beginning as early as October, 2002. Provisions
not yet finalized are required to be implemented two years after the effective
date of the regulation. Organizations are subject to significant fines and
penalties if found not to be compliant with the provisions outlined in the
regulations. Regulations related to HIPAA are expected to impact the Company and
others in the healthcare industry by:
(i) Establishing standardized code sets for financial and clinical electronic
data interchange ("EDI") transactions to enable more efficient flow of
information. Currently there is no common standard for the transfer of
information between the constituents in healthcare and therefore providers
have had to conform to each standard utilized by every party with which
they interact. The goal of HIPAA is to create one common national standard
for EDI and once the HIPAA regulation takes effect, payors will be
required to accept the national standard employed by providers. The final
regulations establishing electronic data transmission standards that all
healthcare providers must use when submitting or receiving certain
healthcare transactions electronically were published in August, 2000 and
compliance with these regulations is required by October, 2002, unless a
summary plan is submitted to CMS prior to that date requesting a one-year
extension to October, 2003. The Company is in the process of applying for
the one-year extension.
(ii) Mandating the adoption of security standards to preserve the
confidentiality of health information that identifies individuals.
Currently there is no recognized healthcare standard that includes all the
necessary components to protect the data integrity and confidentiality of
a patient's electronically maintained or transmitted personal health
record. The final regulations containing the privacy standards were
released in December, 2000 which require compliance by April, 2003.
(iii) Creating unique identifiers for the four constituents in healthcare:
payors, providers, patients and employers. HIPAA will mandate the need for
the unique identifiers for healthcare providers in an effort to ease the
administrative challenge of maintaining and transmitting clinical data
across disparate episodes of patient care.
The Company is in the process of implementation of the necessary changes
required pursuant to the terms of HIPAA. The Company expects that the
implementation cost of the HIPAA related modifications will not have a material
adverse effect on the Company's financial condition or results of operations.
Liquidity and Capital Resources
Net cash provided by operating activities was $134 million during the six months
ended June 30, 2002 and $153 million during the comparable prior year period.
The $19 million decrease during the 2002 six month period as compared to the
2001 comparable period was primarily attributable to: (i) a favorable $19
million change due to an increase in net income plus the addback of adjustments
to reconcile net
Page 20 of 25 Pages
cash provided by operating activities (depreciation & amortization, accretion of
discount on convertible debentures and losses on foreign exchange and derivative
transactions); (ii) a $34 million unfavorable change in accounts receivable;
(iii) a $13 million unfavorable change in accrued and deferred income taxes,
and; (iv) $9 million of other net favorable working capital changes.
The Company spent approximately $97 million during the first six months of 2002
and $69 million during the first six months of 2001 to finance capital
expenditures. The Company expects to spend an additional $103 million to $128
million to finance capital expenditures during the second half of 2002 thereby
making the estimated capital expenditures for the full year of 2002
approximately $200 to $225 million. Included in the 2002 projected capital
expenditures will be the remaining expenditures on the new George Washington
University Hospital located in Washington, D.C (scheduled to open in late
August, 2002), a major renovation and modernization of Auburn Regional Medical
Center located in Auburn, Washington (scheduled to be completed in December of
2002), the first phase of a new 176-bed acute care hospital located in Las
Vegas, Nevada (projected to be completed in the third quarter of 2003), a major
new cardiology wing and bed expansion of Northwest Texas Healthcare System
located in Amarillo, Texas (projected to be completed in the third quarter of
2003) and construction of a new 120-bed acute care hospital in Manatee County,
Florida (scheduled to open in late fourth quarter of 2003).
As of June 30, 2002, the Company had $333 million of unused borrowing capacity
under the terms of its $400 million unsecured non-amortizing revolving credit
agreement, which expires on December 13, 2006. The agreement includes a $50
million sublimit for letters of credit of which $38 million was available at
March 31, 2002. The interest rate on borrowings is determined at the Company's
option at the prime rate, certificate of deposit rate plus .925% to 1.275%,
Euro-dollar plus .80% to 1.150% or a money market rate. A facility fee ranging
from .20% to .35% is required on the total commitment. The margins over the
certificate of deposit, the Euro-dollar rates and the facility fee are based
upon the Company's leverage ratio. As of June 30, 2002, the applicable margins
over the certificate of deposit and the Euro-dollar rate were 1.125% and 1.00%,
respectively, and the commitment fee was .25%. There are no compensating balance
requirements.
As of June 30, 2002, the Company had no unused borrowing capacity under the
terms of its $100 million, annually renewable, commercial paper program. A large
portion of the Company's accounts receivable are pledged as collateral to secure
this program. This annually renewable program, which began in 1993, is scheduled
to expire or be renewed in October of each year. The commercial paper program
has been renewed for the period of October 24, 2001 through October 23, 2002.
During 2002, a majority-owned subsidiary of the Company entered into a senior
line of credit agreement denominated in Euros amounting to 45.8 million Euros
($42.7 million based on the end of period currency exchange rate). The loan,
which is non-recourse to the Company, amortizes to zero over the life of the
agreement and matures on December 31, 2007. Interest on the loan is at the
option of the Company's majority-owned subsidiary and can be based on the one,
two, three or six month EURIBOR plus a spread of 2.5%. The Company's
majority-owned subsidiary also entered into an interest rate swap agreement,
denominated in Euros, as a hedge to this debt facility. The initial notional
principal amount of the swap is 30.5 million Euros ($28.5 million) decreasing to
27.5 million Euros on December 30, 2002 ($25.6 million), 23.4 million Euros on
December 30, 2003 ($21.8 million) and 18.3 million Euros on December 30, 2004
($17.1 million). The swap matures on June 30, 2005. The swap requires the
Company's majority-owned subsidiary to pay a fixed rate of 4.715% and receive a
variable rate equal to the six month EURIBOR. As of June 30, 2002, the variable
rate on the swap was 3.5%.
The Company's total debt as a percentage of total capitalization was 43% at June
30, 2002 and 47% at December 31, 2001.
In April, 2001, the Company declared a two-for-one stock split in the form of a
100% stock dividend which was paid on June 1, 2001 to shareholders of record as
of May 16, 2001. All references to share quantities and earnings per share for
all periods presented have been adjusted to reflect the two-for-one stock split.
Page 21 of 25 Pages
During 1998 and 1999, the Company's Board of Directors approved stock purchase
programs authorizing the Company to purchase up to 12 million shares of its
outstanding Class B Common Stock on the open market at prevailing market prices
or in negotiated transactions off the market. Pursuant to the terms of these
programs, the Company purchased an additional 77,342 shares during the six
months ended June 30, 2002 at an average purchase price of $39.67 per share
($3.1 million in the aggregate). Since inception of the stock purchase program
in 1998 through June 30, 2002, the Company purchased a total of 7,881,157 shares
at an average purchase price of $18.13 per share ($142.9 million in the
aggregate).
The Company expects to finance all capital expenditures and acquisitions with
internally generated funds and borrowed funds. Additional funds may be obtained
either through refinancing the existing revolving credit agreement and/or the
commercial paper facility and/or the issuance of equity or long-term debt.
Pages 22 of 25 Pages
PART II. OTHER INFORMATION
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the quantitative and qualitative
disclosures in 2002 other than the changes as described below. Reference is made
to Item 7 in the Annual Report on Form 10-K for the year ended December 31,
2001.
During 2002, a majority-owned subsidiary of the Company entered into a senior
line of credit agreement denominated in Euros amounting to 45.8 million Euros
($42.7 million based on the end of period currency exchange rate). The loan,
which is non-recourse to the Company, amortizes to zero over the life of the
agreement and matures on December 31, 2007. Interest on the loan is at the
option of the Company's majority-owned subsidiary and can be based on the one,
two, three or six month EURIBOR plus a spread of 2.5%. The Company's
majority-owned subsidiary also entered into an interest rate swap agreement,
denominated in Euros, as a hedge to this debt facility. The initial notional
principal amount of the swap is 30.5 million Euros ($28.5 million) decreasing to
27.5 million Euros on December 30, 2002 ($25.6 million), 23.4 million Euros on
December 30, 2003 ($21.8 million) and 18.3 million Euros on December 30, 2004
($17.1 million). The swap matures on June 30, 2005. The swap requires the
Company's majority-owned subsidiary to pay a fixed rate of 4.715% and receive a
variable rate equal to the six month EURIBOR. As of June 30, 2002, the variable
rate on the swap was 3.5%. The debt and swap notional amounts show below are
denominated in Euros and have been converted to U.S. dollars using the end of
period currency exchange rate.
Maturity Date, Fiscal Year Ending December 31
(Dollars in thousands)
2002 2003 2004 2005 2006 Thereafter Total
- -------------------------------------------------------------------------------------------------------------
Variable Rate
Long-term debt: $ 4,268 $ 5,697 $ 7,116 $ 8,545 $ 8,545 $ 8,554 $ 42,725
Interest rate swaps:
Pay fixed/receive variable:
Notional amounts: $ 28,483 25,637 $21,841 $17,097
Average pay rate: 4.715% 4.715% 4.715% 4.715%
Average receive rate: 6 Month 6 Month 6 Month 6 Month
EURIBOR EURIBOR EURIBOR EURIBOR
Page 23 of 25 Pages
Item 4. Submission of Matters to a Vote of Security Holders
(a) The following information relates to matters submitted to the election of
shareholders of Universal Health Services, Inc. (the "Company") at the Annual
Meeting of Stockholders held on May 15, 2002.
(b) Not applicable
(c) At the meeting, the following proposals, as described in the proxy statement
delivered to all the Company's stockholders were approved by the votes
indicated:
Election by Class A & Class C stockholders of Class III Director, Alan B.
Miller:
Votes cast in favor 4,624,582
Votes against 0
Election by Class B & Class D stockholders of Class III Director, John F.
Williams, Jr., M.D., Ed.D:
Votes cast in favor 48,374,654
Votes withheld 1,184,931
Adoption of the Company's Executive Incentive Plan:
Votes cast in favor 47,672,523
Votes withheld 159,181
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Report on Form 8-K dated June 18, 2002, reported under Item 4, Changes in
Registrant's Certifying Accountant, that Universal Health Services, Inc. (the
"Company") informed its independent accountants, Arthur Andersen LLP, that they
would be dismissed effective as of June 18, 2002 and that the Company retained
KPMG LLP as its independent accountants, effective as of June 18, 2002.
11. Statement re computation of per share earnings is set forth in Note 8 of
the Notes to Condensed Consolidated Financial Statements.
All other items of this Report are inapplicable.
Page 24 of 25 Pages
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Universal Health Services, Inc.
(Registrant)
Date: August 13, 2002 /s/ Alan B. Miller
-----------------------------------
Alan B. Miller, President and
Chief Executive Officer
/s/ Kirk E. Gorman
-----------------------------------
Kirk E. Gorman, Senior Vice President and
Chief Financial Officer
Principal Financial Officer and
Duly Authorized Officer).
Page 25 of 25 Pages