XNYS:UHS Universal Health Services Inc Class B Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(MARK ONE)

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

For the quarterly period ended June 30, 2012

OR

 

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

For the transition period from                  to                 

Commission file number 1-10765

 

 

UNIVERSAL HEALTH SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   23-2077891

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

UNIVERSAL CORPORATE CENTER

367 SOUTH GULPH ROAD

KING OF PRUSSIA, PENNSYLVANIA 19406

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (610) 768-3300

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

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

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common shares outstanding, as of July 31, 2012:

 

Class A

     6,625,708   

Class B

     89,576,045   

Class C

     664,000   

Class D

     32,148   

 

 

 


Table of Contents

UNIVERSAL HEALTH SERVICES, INC.

INDEX

 

     PAGE NO.  

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Condensed Consolidated Statements of Income—Three and Six Months Ended June 30, 2012 and 2011

     3   

Condensed Consolidated Statements of Comprehensive Income—Three and Six Months Ended June  30, 2012 and 2011

     4   

Condensed Consolidated Balance Sheets—June 30, 2012 and December 31, 2011

     5   

Condensed Consolidated Statements of Cash Flows—Six Months Ended June 30, 2012 and 2011

     6   

Notes to Condensed Consolidated Financial Statements

     7   

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

     28   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     49   

Item 4. Controls and Procedures

     49   

PART II. Other Information

  

Item 1. Legal Proceedings

     50   

Item 1A. Risk Factors

     52   

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

     52   

Item 6. Exhibits

     52   

Signatures

     54   

EXHIBIT INDEX

     55   

In this Report on Form 10-Q for the quarterly period ended June 30, 2012, “we,” “us,” “our” and the “Company” refer to Universal Health Services, Inc. and its subsidiaries. UHS is a registered trademark of UHS of Delaware, Inc., the management company for, and a wholly-owned subsidiary of Universal Health Services, Inc. Universal Health Services, Inc. is a holding company and operates through its subsidiaries including its management company, UHS of Delaware, Inc. All healthcare and management operations are conducted by subsidiaries of Universal Health Services, Inc. To the extent any reference to “UHS” or “UHS facilities” in this report including letters, narratives or other forms contained herein relates to our healthcare or management operations it is referring to Universal Health Services, Inc.’s subsidiaries including UHS of Delaware, Inc. Further, the terms “we,” “us,” “our” or the “Company” in such context similarly refer to the operations of Universal Health Services Inc.’s subsidiaries including UHS of Delaware, Inc. Any reference to employees or employment contained herein refers to employment with or employees of the subsidiaries of Universal Health Services, Inc. including UHS of Delaware, Inc.

 

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PART I. FINANCIAL INFORMATION

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(amounts in thousands, except per share amounts)

(unaudited)

 

      Three months ended
June 30,
     Six months ended
June 30,
 
     2012      2011      2012      2011  

Net revenues before provision for doubtful accounts

   $ 1,914,463       $ 1,869,414       $ 3,860,675       $ 3,744,842   

Less: Provision for doubtful accounts

     184,660         154,950         333,283         304,120   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net revenues

     1,729,803         1,714,464         3,527,392         3,440,722   

Operating charges:

           

Salaries, wages and benefits

     856,878         836,559         1,730,872         1,667,317   

Other operating expenses

     347,412         349,454         700,985         688,811   

Supplies expense

     198,100         202,003         403,740         405,282   

Depreciation and amortization

     73,078         71,215         144,970         140,809   

Lease and rental expense

     24,003         22,996         47,465         45,853   
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,499,471         1,482,227         3,028,032         2,948,072   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

     230,332         232,237         499,360         492,650   

Interest expense, net

     45,888         49,808         92,598         106,225   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     184,444         182,429         406,762         386,425   

Provision for income taxes

     67,000         66,395         146,748         140,404   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

     117,444         116,034         260,014         246,021   

Less: Income attributable to noncontrolling interests

     9,883         12,385         23,846         28,179   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to UHS

   $ 107,561       $ 103,649       $ 236,168       $ 217,842   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share attributable to UHS

   $ 1.11       $ 1.06       $ 2.44       $ 2.23   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share attributable to UHS

   $ 1.10       $ 1.04       $ 2.41       $ 2.20   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares—basic

     96,691         97,563         96,642         97,472   

Add: Other share equivalents

     1,038         1,695         1,118         1,591   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares and equivalents—diluted

     97,729         99,258         97,760         99,063   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in thousands, unaudited)

 

      Three months ended
June 30,
    Six months ended
June 30,
 
     2012     2011     2012     2011  

Net income

   $ 117,444      $ 116,034      $ 260,014      $ 246,021   

Other comprehensive income (loss):

        

Unrealized derivative gains (losses) on cash flow hedges

     212        (20,583     1,827        (18,276

Amortization of terminated hedge

     (84     (84     (168     (168
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income before tax

     128        (20,667     1,659        (18,444

Income tax expense related to items of other comprehensive income

     50        (7,916     632        (7,056
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income, net of tax

     78        (12,751     1,027        (11,388
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     117,522        103,283        261,041        234,633   

Less: Comprehensive income attributable to noncontrolling interests

     9,883        12,385        23,846        28,179   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to UHS

   $ 107,639      $ 90,898      $ 237,195      $ 206,454   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, unaudited)

 

     June 30,
2012
    December 31,
2011
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 32,941      $ 41,229   

Accounts receivable, net

     1,019,929        969,802   

Supplies

     96,882        96,775   

Other current assets

     99,534        99,859   

Deferred income taxes

     122,795        108,324   

Current assets held for sale

     84,365        48,916   
  

 

 

   

 

 

 

Total current assets

     1,456,446        1,364,905   
  

 

 

   

 

 

 

Property and equipment

     5,172,407        5,106,160   

Less: accumulated depreciation

     (1,875,492     (1,818,180
  

 

 

   

 

 

 
     3,296,915        3,287,980   
  

 

 

   

 

 

 

Other assets:

    

Goodwill

     2,610,637        2,627,602   

Deferred charges

     106,095        111,780   

Other

     288,555        272,978   
  

 

 

   

 

 

 
   $ 7,758,648      $ 7,665,245   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Current maturities of long-term debt

   $ 2,497      $ 2,479   

Accounts payable and accrued liabilities

     852,256        832,125   

Current liabilities held for sale

     15,966        2,329   

Federal and state taxes

     12,893        0   
  

 

 

   

 

 

 

Total current liabilities

     883,612        836,933   
  

 

 

   

 

 

 

Other noncurrent liabilities

     393,928        401,908   

Long-term debt

     3,458,509        3,651,428   

Deferred income taxes

     206,403        209,592   

Redeemable noncontrolling interests

     226,537        218,266   

UHS common stockholders’ equity

     2,536,884        2,296,352   

Noncontrolling interest

     52,775        50,766   
  

 

 

   

 

 

 

Total equity

     2,589,659        2,347,118   
  

 

 

   

 

 

 
   $ 7,758,648      $ 7,665,245   
  

 

 

   

 

 

 

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

 

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UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands, unaudited)

 

     Six months ended June 30,  
     2012     2011  

Cash Flows from Operating Activities:

    

Net income

   $ 260,014      $ 246,021   

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

    

Depreciation & amortization

     148,703        144,949   

Stock-based compensation expense

     10,996        8,665   

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

    

Accounts receivable

     (63,937     (77,661

Accrued interest

     15,873        (2,309

Accrued and deferred income taxes

     3,955        55,420   

Other working capital accounts

     (13,085     (48,417

Other assets and deferred charges

     13,866        11,525   

Other

     2,050        3,468   

Accrued insurance expense, net of commercial premiums paid

     42,241        47,480   

Payments made in settlement of self-insurance claims

     (47,814     (33,365
  

 

 

   

 

 

 

Net cash provided by operating activities

     372,862        355,776   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Property and equipment additions, net of disposals

     (182,351     (116,240

Proceeds received from sale of assets and businesses

     53,461        2,041   

Acquisition of property and businesses

     (11,476     0   

Costs incurred for purchase and implementation of electronic health records application

     (28,008     (11,416

Return of deposit on terminated purchase agreement

     6,500        0   
  

 

 

   

 

 

 

Net cash used in investing activities

     (161,874     (125,615
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Reduction of long-term debt

     (195,686     (200,566

Additional borrowings

     0        36,000   

Financing costs

     0        (23,534

Repurchase of common shares

     (2,927     (6,163

Dividends paid

     (9,673     (9,763

Issuance of common stock

     2,575        2,408   

Profit distributions to noncontrolling interests

     (13,565     (23,201
  

 

 

   

 

 

 

Net cash used in financing activities

     (219,276     (224,819
  

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

     (8,288     5,342   

Cash and cash equivalents, beginning of period

     41,229        29,474   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 32,941      $ 34,816   
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information:

    

Interest paid

   $ 62,158      $ 102,213   
  

 

 

   

 

 

 

Income taxes paid, net of refunds

   $ 141,571      $ 83,532   
  

 

 

   

 

 

 

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

 

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UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) General

This Quarterly Report on Form 10-Q is for the quarterly period ended June 30, 2012. In this Quarterly Report, “we,” “us,” “our” and the “Company” refer to Universal Health Services, Inc. and its subsidiaries.

The condensed consolidated financial statements include the accounts of our majority-owned subsidiaries and partnerships and limited liability companies controlled by us, or our subsidiaries, as managing general partner or managing member. The condensed consolidated financial statements included herein have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and reflect all normal and recurring adjustments which, in our opinion, are necessary to fairly state results for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although we believe that the accompanying disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, significant accounting policies and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011.

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

Relationship with Universal Health Realty Income Trust:

At June 30, 2012, we held approximately 6.2% of the outstanding shares of Universal Health Realty Income Trust (the “Trust”). We serve as Advisor to the Trust under an annually renewable advisory agreement pursuant to the terms of which we conduct the Trust’s day-to-day affairs, provide administrative services and present investment opportunities. In addition, certain of our officers and directors are also officers and/or directors of the Trust. Management believes that it has the ability to exercise significant influence over the Trust, therefore we account for our investment in the Trust using the equity method of accounting. We earned an advisory fee from the Trust, which is included in net revenues in the accompanying condensed consolidated statements of income, of $520,000 and $480,000 during the three-month periods ended June 30, 2012 and 2011, respectively and $1.0 million and $951,000 during the six-month periods ended June 30, 2012 and 2011, respectively. Our pre-tax share of income from the Trust was $591,000 and $260,000 for the three-month periods ended June 30, 2012 and 2011, respectively, and $891,000 and $560,000 for the six-month periods ended June 30, 2012 and 2011, respectively. The carrying value of this investment was $9.0 million and $9.9 million at June 30, 2012 and December 31, 2011, respectively, and is included in other assets in the accompanying condensed consolidated balance sheets. The market value of this investment, based on the closing price of the Trust’s stock on the respective dates, was $32.7 million at June 30, 2012 and $30.7 million at December 31, 2011.

Total rent expense under the operating leases on the hospital facilities with the Trust was $4.1 million during each of the three-month periods ended June 30, 2012 and 2011, and $8.2 million and $8.3 million for the six-month periods ended June 30, 2012 and 2011, respectively. In addition, certain of our subsidiaries are tenants in several medical office buildings owned by limited liability companies in which the Trust holds either 100% ownership interests or non-controlling majority ownership interests.

The table below details the renewal options and terms for each of our four hospital facilities leased from the Trust, giving effect to the above-mentioned renewals:

 

Hospital Name

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

McAllen Medical Center

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

Wellington Regional Medical Center

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

Southwest Healthcare System, Inland Valley Campus

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

The Bridgeway

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

 

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

Other Related Party Transactions:

In December, 2010, our Board of Directors approved the Company’s entering into supplemental life insurance plans and agreements on the lives of our chief executive officer and his wife. As a result of these agreements, based on actuarial tables and other assumptions, during the life expectancies of the insureds, we would pay approximately $25 million in premiums and certain trusts, owned by our chief executive officer, would pay approximately $8 million in premiums. Based on the projected premiums mentioned above, and assuming the policies remain in effect until the death of the insureds, we will be entitled to receive death benefit proceeds of no less than $33 million representing the $25 million of aggregate premiums paid by us as well as the $8 million of aggregate premiums paid by the trusts. These agreements did not have a material effect on our consolidated financial statements or results of operations during 2011 or the first six months of 2012.

In connection with the commencement of Marvin G. Pember’s employment with us in August, 2011 as Senior Vice President and President of our Acute Care division, we agreed to purchase his former personal residence located in Indiana if it remained unsold to a third-party for

 

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longer than 180 days after commencement of his employment. Since the property remained unsold, the purchase occurred in June, 2012 for approximately $1 million which represents the fair-market value as derived by third-party appraisals. We are actively marketing the property for sale to a third-party buyer.

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

(3) Other Noncurrent liabilities and Redeemable/Noncontrolling Interests

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

Outside owners hold noncontrolling, minority ownership interests of: (i) approximately 28% in our five acute care facilities located in Las Vegas, Nevada; (ii) 20% in an acute care facility located in Washington, D.C.; (iii) approximately 11% in an acute care facility located in Laredo, Texas, and; (iv) 20% in a behavioral health care facility located in Philadelphia, Pennsylvania. The redeemable noncontrolling interest balances of $227 million and $218 million as of June 30, 2012 and December 31, 2011, respectively, and the noncontrolling interest balances of $53 million and $51 million at June 30, 2012 and December 31, 2011, respectively, consist primarily of the third-party ownership interests in these hospitals.

In connection with the five acute care facilities located in Las Vegas, Nevada, the minority ownership interests of which are reflected as redeemable noncontrolling interests on our Consolidated Balance Sheet, the outside owners have certain “put rights”, that are currently exercisable, that if exercised, require us to purchase the minority member’s interests at fair market value. The put rights are exercisable upon the occurrence of: (i) certain specified financial conditions falling below established thresholds; (ii) breach of the management contract by the managing member (a subsidiary of ours), or; (iii) if the minority member’s ownership percentage is reduced to less than certain thresholds. In connection with the behavioral health care facility located in Philadelphia, Pennsylvania, the minority ownership interest of which is also reflected as redeemable noncontrolling interests on our Consolidated Balance Sheet, the outside owner has a “put option” to put its entire ownership interest to us at any time. If exercised, the put option requires us to purchase the minority member’s interest at fair market value. As of June 30, 2012, we believe the fair market value of the minority ownership interests in these facilities approximates the book value of the redeemable noncontrolling interests.

(4) Long-term debt and cash flow hedges

Debt:

On November 15, 2010, we entered into a credit agreement (the “Credit Agreement”) with various financial institutions. The Credit Agreement is a senior secured facility which provided an initial aggregate commitment amount of $3.45 billion, comprised of a new $800 million revolving credit facility, a $1.05 billion Term Loan A facility and a $1.6 billion Term Loan B facility. Prior to the effectiveness of the Credit Agreement Amendment in March, 2011 (as discussed below), we prepaid the principal amount and permanently reduced the Term Loan B commitment by $125 million. During the first six months of 2012, we made scheduled principal payments of $36 million on the Term Loan A and $13 million on the Term Loan B. The revolving credit facility and the Term Loan A mature on November 15, 2015 and the Term Loan B matures on November 15, 2016. The revolving credit facility includes a $125 million sub-limit for letters of credit. The Credit Agreement is secured by substantially all of the assets of the Company and our material subsidiaries and guaranteed by our material subsidiaries.

On March 15, 2011, we entered into a first amendment to the Credit Agreement (the “Amendment”) which became effective immediately and provides, among other things, for a reduction in the interest rates payable in connection with borrowings under the Credit Agreement. Upon the effectiveness of the Amendment, borrowings under the Credit Agreement bear interest at the ABR rate which is defined as the rate per annum equal to, at our election (1) the greatest of (a) the lender’s prime rate, (b) the weighted average of the federal funds rate, plus 0.5% and (c) one month Eurodollar rate plus 1%, in each case, plus an applicable margin based upon our consolidated leverage ratio at the end of each quarter ranging from 0.50% to 1.25% for revolving credit and Term Loan A borrowings and 1.75% to 2.00% for Term Loan B borrowings or (2) the one, two, three or six month Eurodollar rate (at our election), plus an applicable margin based upon our consolidated leverage ratio at the end of each quarter ranging from 1.50% to 2.25% for revolving credit and Term Loan A borrowings and ranging from 2.75% to 3.00% for Term Loan B borrowings. The current applicable margins are 0.75% for ABR-based loans, 1.75% for Eurodollar-based loans under the revolving credit and Term Loan A facilities and 2.75% under the Term Loan B facility. Upon the effectiveness of the Amendment, the minimum Eurodollar rate for the Term Loan B facility was reduced from 1.50% to 1.00%. In connection with the Amendment, we paid a fee of 1.00% of the amounts outstanding under the Term Loan B in accordance with the terms of the Credit Agreement.

As of June 30, 2012, we had $623 million of available borrowing capacity pursuant to the terms of our Credit Agreement, net of $115 million of outstanding borrowings and $62 million of outstanding letters of credit.

In October, 2010, we amended our accounts receivable securitization program (“Securitization”) with a group of conduit lenders and liquidity banks. We increased the size of the Securitization to $240 million (the “Commitments”), from $200 million, and extended the maturity date to October 25, 2013. In May, 2012, we further increased the size of the securitization by $35 million to $275 million. Substantially all of the patient-related accounts receivable of our acute care hospitals (“Receivables”) serve as collateral for the outstanding borrowings. The interest rate on the borrowings is based on the commercial paper rate plus a spread of 0.475% and there is a facility fee of 0.375% required on 102% on the Commitments. We have accounted for this Securitization as borrowings. We maintain

 

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effective control over the Receivables since, pursuant to the terms of the Securitization, the Receivables are sold from certain of our subsidiaries to special purpose entities that are wholly-owned by us. The Receivables, however, are owned by the special purpose entities, can be used only to satisfy the debts of the wholly-owned special purpose entities, and thus are not available to us except through our ownership interest in the special purpose entities. The wholly-owned special purpose entities use the Receivables to collateralize the loans obtained from the group of third-party conduit lenders and liquidity banks. The group of third-party conduit lenders and liquidity banks do not have recourse to us beyond the assets of the wholly-owned special purpose entities that securitize the loans. At June 30, 2012, we had $230 million of outstanding borrowings and $45 million of additional capacity pursuant to the terms of our accounts receivable securitization program.

As of June 30, 2012, we had no outstanding borrowings under a short-term, on-demand credit facility. When applicable, outstanding borrowings pursuant to this facility are classified as long-term debt on our Consolidated Balance Sheet since we have the intent and ability to refinance through available borrowings under the terms of our Credit Agreement.

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

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

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

Our Credit Agreement includes a material adverse change clause that must be represented at each draw. The Credit Agreement contains covenants that include a limitation on sales of assets, mergers, change of ownership, liens and indebtedness, transactions with affiliates and dividends; and requires compliance with financial covenants including maximum leverage and minimum interest coverage ratios. We are in compliance with all required covenants as of June 30, 2012.

The carrying amount and fair value of our debt was $3.46 billion and $3.53 billion at June 30, 2012, respectively. The fair value of our debt was computed based upon quotes received from financial institutions and we consider these to be “level 2” in the fair value hierarchy as outlined in the authoritative guidance for disclosures in connection with debt instruments.

Cash Flow Hedges:

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

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

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

 

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The fair value of interest rate swap agreements approximates the amount at which they could be settled, based on estimates obtained from the counterparties. We assess the effectiveness and consideration of nonperformance risk of our hedge instruments on a quarterly basis. We performed periodic assessments of the cash flow hedge instruments during 2011 and the first six months of 2012 and determined the hedges to be highly effective. We also determined that no significant portion of the hedges is ineffective as of June 30, 2012. The counterparties to the interest rate swap agreements expose us to credit risk in the event of nonperformance. We do not anticipate nonperformance by our counterparties. At June 30, 2012, each swap agreement entered into by us was in a net liability position which would require us to make the net settlement payments to the counterparties. We do not hold or issue derivative financial instruments for trading purposes.

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

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

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

During the fourth quarter of 2007, we entered into an interest rate swap whereby we pay a fixed rate on a total notional principal amount of $75 million and receive three-month LIBOR. The fixed rate payable is 4.76% and it matures in October, 2012.

We measure our interest rate swaps at fair value on a recurring basis. The fair value of our interest rate swaps is based primarily on quotes from banks. We consider those inputs to be “level 2” in the fair value hierarchy as outlined in the authoritative guidance for disclosures in connection with derivative instruments and hedging activities. The fair value of our interest rate swaps was a liability of $46 million at June 30, 2012, of which $1 million is included in other current liabilities and $45 million is included in other noncurrent liabilities on the accompanying balance sheet.

(5) Commitments and Contingencies

Professional and General Liability Claims and Property Insurance

Professional and General Liability

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

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

Since our acquisition of PSI on November 15, 2010, the former PSI subsidiaries are self-insured for professional and general liability exposure up to $3 million per occurrence and our legacy subsidiaries (which are not former PSI subsidiaries) are self-insured for professional and general liability exposure up to $10 million per occurrence. Effective November, 2010, our subsidiaries (including the former PSI subsidiaries) were provided with several excess policies through commercial insurance carriers which provide for coverage in excess of the applicable per occurrence self-insured retention (either $3 million or $10 million) up to $200 million per occurrence and in the aggregate. We remain liable for 10% of the claims paid pursuant to the commercially insured coverage in excess of $10 million up to $60 million per occurrence and in the aggregate.

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

 

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As of June 30, 2012 and December 31, 2011, the total accrual for our professional and general liability claims, including the estimated claims related to the facilities acquired from PSI, was $288 million and $292 million, respectively, of which $60 million is included in current liabilities as of each date.

Property Insurance

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

Other

As of June 30, 2012 and December 31, 2011, our accounts receivable includes approximately $72 million and $54 million, respectively, due from Illinois. Collection of these receivables continues to be delayed due to state budgetary and funding pressures. Approximately $52 million as of June 30, 2012, and $41 million as of December 31, 2011, of the receivables due from Illinois have been outstanding in excess of 60 days, as of each respective date, and a large portion will likely remain outstanding for the foreseeable future. Since we expect to eventually collect all amounts due to us, no related reserves have been established in our consolidated financial statements. However, we can provide no assurance that we will eventually collect all amounts due to us from Illinois. Failure to ultimately collect all outstanding amounts due from Illinois would have an adverse impact on our future consolidated results of operations and cash flows.

As of June 30, 2012, we were party to certain off balance sheet arrangements consisting of standby letters of credit and surety bonds which totaled $81 million consisting of: (i) $65 million related to our self-insurance programs, and; (ii) $16 million of other debt and public utility guarantees.

Legal Proceedings

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

Martin v. UHS of Delaware:

UHS of Delaware, Inc., a wholly-owned subsidiary of ours, has been named as defendants in a state False Claim Act case in Sacramento County Superior Court. Plaintiffs are a former student and employees of the Elmira School who claim that the UHS schools in California unlawfully retained public education funding from the state of California for the operation of these schools but failed to meet state requirements pertaining to the operation of non-public schools. During the second quarter of 2012, we reached a settlement in connection with this matter which requires finalization of a definitive agreement which is subject to approval of the California Attorney General’s Office and Superior Court presiding over the case. We have established a reserve in connection with this matter which did not have a material impact on our consolidated financial statements.

Department of Justice ICD Investigation:

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

Two Rivers Psychiatric Hospital:

In April, 2011, the Centers for Medicare and Medicaid Services (“CMS”) issued notice of its decision terminating Two Rivers Psychiatric Hospital (“Two Rivers”) in Kansas City, Missouri from participation in the Medicare and Medicaid program. The termination notice was issued as a result of surveys conducted which allegedly found Two Rivers to be out of compliance with the conditions of participation required for participation in the Medicare program and for Two Rivers’ alleged failure to alleviate an “immediate jeopardy” situation. Two Rivers filed an administrative appeal with the U.S. Department of Health and Human Services, Departmental Appeal Board, Civil Remedies Division, seeking review and reversal of that decision. In addition, Two Rivers filed a complaint in the U.S. District Court for the Western District of Missouri seeking a temporary restraining order and preliminary injunction against CMS rescinding the termination action. Later in April, 2011, the District Court issued a temporary restraining order abating the termination action pending a preliminary injunction hearing or an agreement with CMS. In May, 2011, Two Rivers and CMS entered into a settlement agreement which resulted in the rescission of the termination notice and actions by CMS. Pursuant to the terms of the agreement, Two Rivers was required to submit an acceptable plan of correction relative to the immediate jeopardy citation and engage independent experts in various disciplines to analyze and develop

 

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implementation plans for Two Rivers to meet the applicable Medicare conditions of participation. Both of these actions have occurred. Pursuant to the agreement, CMS conducted an initial survey of Two Rivers in April 2012 to determine if the Medicare conditions of participation, which formed the basis of the termination action in April 2011, have been met. In late April, 2012, CMS advised Two Rivers that it has successfully passed this initial survey. Pursuant to the terms of the agreement, a second survey will be conducted either late 2012 or early 2013 to further confirm that Two Rivers is in compliance with all Medicare/Medicaid Conditions of Participation. During the term of this agreement, Two Rivers remains eligible to receive reimbursements for services rendered to Medicare and Medicaid beneficiaries. Two Rivers remains fully committed to providing high-quality healthcare to their patients and the community it serves. We therefore intend to work expeditiously and collaboratively with CMS in an effort to resolve these matters. We can provide no assurance that Two Rivers will not ultimately lose its Medicare certification. The operating results of Two Rivers did not have a material impact on our consolidated results of operations or financial condition for the six-month period ended June 30, 2012 or the year ended December 31, 2011.

Office of Inspector General Investigation of Peachford Hospital:

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

Matters Relating to PSI:

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

Garden City Employees’ Retirement System v. PSI:

This is a purported shareholder class action lawsuit filed in the United States District Court for the Middle District of Tennessee against PSI and the former directors in 2009 alleging violations of federal securities laws. We intend to defend the case vigorously. Should we be deemed liable in this matter, we believe we would be entitled to commercial insurance recoveries for amounts paid by us, subject to certain limitations and deductibles. Included in our consolidated balance sheets as of June 30, 2012 and December 31, 2011, is an estimated reserve (current liability) and corresponding commercial insurance recovery (current asset) which did not have a material impact on our financial statements. Although we believe the commercial insurance recoveries are adequate to satisfy potential liability and related legal fees in connection with this matter, we can provide no assurance that the ultimate liability will not exceed the commercial insurance recoveries which would make us liable for the excess.

Department of Justice Investigation of Friends Hospital:

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

Department of Justice Investigation of Riveredge Hospital:

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

Virginia Department of Medical Assistance Services Recoupment Claims:

The Virginia Department of Medical Assistance Services (“DMAS”) has conducted audits at seven former PSI Residential Treatment Centers operated in the Commonwealth of Virginia to confirm compliance with provider rules under the state’s Medicaid Provider Services Manual (“Manual”). As a result of those audits, DMAS claims the facilities failed to comply with the requirements of the Manual and has requested repayment of Medicaid payments to those facilities. PSI had previously filed appeals to repayment demands at each facility which are currently pending. The aggregate refund of Medicaid payments made to those facilities, as requested by DMAS, and the corresponding reserve established on our consolidated balance sheet, was not material to our consolidated financial position or results of operations.

General:

The healthcare industry is subject to numerous laws and regulations which include, among other things, matters such as government healthcare participation requirements, various licensure, certifications, and accreditations, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Government action has increased with respect to investigations and/or allegations concerning possible violations of fraud and abuse and false claims statutes and/or regulations by healthcare providers. Currently, and from time to time, some of our facilities are subjected to inquiries and/or actions and receive notices of potential non-compliance of laws and regulations from various

 

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

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

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

(6) Segment Reporting

Our reportable operating segments consist of acute care hospital services and behavioral health care services. The “Other” segment column below includes centralized services including information services, purchasing, reimbursement, accounting, taxation, legal, advertising, design and construction and patient accounting as well as the operating results for our other operating entities including outpatient surgery and radiation centers. The chief operating decision making group for our acute care hospital services and behavioral health care services is comprised of the Chief Executive Officer, the President and the Presidents of each operating segment. The Presidents of each operating segment also manage the profitability of each respective segment’s various facilities. The operating segments are managed separately because each operating segment represents a business unit that offers different types of healthcare services or operates in different healthcare environments. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies included in our Annual Report on Form 10-K for the year ended December 31, 2011. The corporate overhead allocations, as reflected below, are utilized for internal reporting purposes and are comprised of each period’s projected corporate-level operating expenses (excluding interest expense). The overhead expenses are captured and allocated directly to each segment, to the extent possible, with the non-directly allocated overhead expenses allocated based upon each segment’s respective percentage of total facility-based operating expenses.

 

     Three months ended June 30, 2012  
     Acute Care
Hospital
Services
    Behavioral
Health
Services
    Other     Total
Consolidated
 
     (Amounts in thousands)  

Gross inpatient revenues

   $ 3,034,837      $ 1,423,894        —        $ 4,458,731   

Gross outpatient revenues

   $ 1,540,569      $ 162,475      $ 12,723      $ 1,715,767   

Total net revenues

   $ 845,552      $ 875,031      $ 9,220      $ 1,729,803   

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

   $ 61,602      $ 224,963      ($ 102,121   $ 184,444   

Allocation of corporate overhead

     ($37,979     ($21,071   $ 59,050        0   

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

   $ 23,623      $ 203,892        ($43,071   $ 184,444   

Total assets as of 6/30/12

   $ 2,957,192      $ 4,431,758      $ 369,698      $ 7,758,648   

 

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     Six months ended June 30, 2012  
     Acute Care
Hospital
Services
    Behavioral
Health
Services
    Other     Total
Consolidated
 
     (Amounts in thousands)  

Gross inpatient revenues

   $ 6,312,862      $ 2,845,979        —        $ 9,158,841   

Gross outpatient revenues

   $ 3,089,419      $ 323,733      $ 24,993      $ 3,438,145   

Total net revenues

   $ 1,772,083      $ 1,739,904      $ 15,405      $ 3,527,392   

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

   $ 191,450      $ 427,459      ($ 212,147   $ 406,762   

Allocation of corporate overhead

     ($78,722     ($42,132   $ 120,854        0   

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

   $ 112,728      $ 385,327        ($91,293   $ 406,762   

Total assets as of 6/30/12

   $ 2,957,192      $ 4,431,758      $ 369,698      $ 7,758,648   
     Three months ended June 30, 2011  
     Acute Care
Hospital
Services
    Behavioral
Health
Services
    Other     Total
Consolidated
 
     (Amounts in thousands)  

Gross inpatient revenues

   $ 2,951,260      $ 1,404,643        —        $ 4,355,903   

Gross outpatient revenues

   $ 1,364,531      $ 157,748      $ 14,671      $ 1,536,950   

Total net revenues

   $ 863,907      $ 844,734      $ 5,823      $ 1,714,464   

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

   $ 91,145      $ 189,590        ($98,306   $ 182,429   

Allocation of corporate overhead

     ($30,518     ($15,691   $ 46,209        0   

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

   $ 60,627      $ 173,899        ($52,097   $ 182,429   

Total assets as of 6/30/11

   $ 2,779,803      $ 4,381,320      $ 404,630      $ 7,565,753   
     Six months ended June 30, 2011  
     Acute Care
Hospital
Services
    Behavioral
Health
Services
    Other     Total
Consolidated
 
     (Amounts in thousands)  

Gross inpatient revenues

   $ 6,107,084      $ 2,795,844        —        $ 8,902,928   

Gross outpatient revenues

   $ 2,684,482      $ 307,343      $ 27,540      $ 3,019,365   

Total net revenues

   $ 1,755,295      $ 1,673,678      $ 11,749      $ 3,440,722   

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

   $ 218,129      $ 375,378        ($207,082   $ 386,425   

Allocation of corporate overhead

     ($63,324     ($31,416   $ 94,740        0   

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

   $ 154,805      $ 343,962      ($ 112,342   $ 386,425   

Total assets as of 6/30/11

   $ 2,779,803      $ 4,381,320      $ 404,630      $ 7,565,753   

 

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

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

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

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     (amounts in thousands)  
     2012     2011     2012     2011  

Basic and Diluted:

        

Net income attributable to UHS

   $ 107,561      $ 103,649      $ 236,168      $ 217,842   

Less: Net income attributable to unvested restricted share grants

     (126     (126     (294     (275
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to UHS—basic and diluted

   $ 107,435      $ 103,523      $ 235,874      $ 217,567   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares—basic

     96,691        97,563        96,642        97,472   

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

     1,038        1,695        1,118        1,591   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares and equivalents—diluted

     97,729        99,258        97,760        99,063   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per basic share attributable to UHS:

   $ 1.11      $ 1.06      $ 2.44      $ 2.23   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per diluted share attributable to UHS:

   $ 1.10      $ 1.04      $ 2.41      $ 2.20   
  

 

 

   

 

 

   

 

 

   

 

 

 

The “Net effect of dilutive stock options and grants based on the treasury stock method”, for all periods presented above, excludes certain outstanding stock options applicable to each period since the effect would have been anti-dilutive. The excluded weighted-average stock options totaled 2.6 million for each of the three months and six months ended June 30, 2012. There were no significant anti-dilutive stock options during the three and six months ended June 30, 2011. All classes of our common stock have the same dividend rights.

Stock-Based Compensation: During the three-month periods ended June 30, 2012 and 2011, compensation cost of $4.7 million ($2.9 million after-tax) and $4.2 million ($2.6 million after-tax), respectively, was recognized related to outstanding stock options. During the six-month periods ended June 30, 2012 and 2011, compensation cost of $9.6 million ($6.0 million after-tax) and $7.7 million ($4.7 million after-tax), respectively, was recognized related to outstanding stock options. In addition, during the three-month periods ended June 30, 2012 and 2011, compensation cost of approximately $593,000 ($369,000 after-tax) and $455,000 ($281,000 after-tax), respectively, was recognized related to restricted stock. During the six-month periods ended June 30, 2012 and 2011, compensation cost of approximately $1.2 million ($727,000 after-tax) and $906,000 ($559,000 after-tax), respectively, was recognized related to restricted stock. As of June 30, 2012 there was $45.3 million of unrecognized compensation cost related to unvested options and restricted stock which is expected to be recognized over the remaining weighted average vesting period of 2.9 years. There were 2,870,200 stock options granted (net of cancellations) during the first six months of 2012 with a weighted-average grant date fair value of $10.72 per share. There were 54,127 restricted stock shares granted during the first six months of 2012, with a weighted-average grant date fair value of $36.95 per share.

(8) Dispositions and acquisitions

Six-month period ended June 30, 2012:

Acquisitions:

In June, 2012, we executed a definitive agreement to acquire Ascend Health Corporation (“Ascend”) for $500 million in cash. Including the assumption of $17 million in Ascend net debt, the total transaction consideration is approximately $517 million. Ascend is the largest private psychiatric hospital provider with 9 owned or leased freestanding psychiatric inpatient facilities located in 5 states including Texas, Arizona, Utah, Oregon and Washington. We expect to complete the transaction in the fourth quarter of 2012, subject to customary closing conditions, including regulatory approvals and clearance under the Hart-Scott-Rodino Act.

 

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

As a result of the third-party seller’s inability to obtain the removal of the deed restriction on its hospital, we provided the seller with a notice of termination of the previously executed purchase agreement in connection with our planned acquisition of the Knapp Medical Center located in Weslaco, Texas. In connection with this termination, our $6.5 million deposit was refunded to us in March, 2012.

Divestitures:

During the first six months of 2012, we received aggregate cash proceeds of approximately $53 million for the divestiture of: (i) the Hospital San Juan Capestrano, a 108-bed behavioral health care facility located in Rio Piedras, Puerto Rico, that was sold in January, 2012 pursuant to our agreement with the Federal Trade Commission in connection with our acquisition of Psychiatric Solutions, Inc., and; (ii) the real property of a previously closed behavioral health care facility. The pre-tax net gain on these divestitures did not have a material impact on our consolidated results of operations during the first six months of 2012. The assets and liabilities for the Hospital San Juan Capestrano were reflected as “held for sale” on our Consolidated Balance Sheet as of December 31, 2011.

In addition, we executed a definitive agreement to sell Auburn Regional Medical Center, a 213-bed acute care hospital located in Auburn, Washington, for total cash proceeds of approximately $98 million including estimated working capital. The transaction, which is subject to customary regulatory approvals, is expected to occur in the fourth quarter of 2012. We expect to realize a substantial gain on the divestiture of this hospital which will be recorded in our consolidated financial statements upon closing of the transaction. The operating results for Auburn Regional Medical Center are reflected as discontinued operations for each of the periods presented herein. Since the hospital’s income/loss before income taxes is not material to our consolidated financial statements it is included in other operating expenses. The assets and liabilities for Auburn Regional Medical Center are reflected as “held for sale” on our Consolidated Balance Sheet as of June 30, 2012.

Six-month period ended June 30, 2011:

Acquisitions:

There were no acquisitions during the first six months of 2011.

Divestitures:

During the first six months of 2011, we received cash proceeds of $2 million for: (i) sale of the real property of a closed acute care hospital (during first quarter), and; (ii) installment payment for our ownership interest in an outpatient surgery center (during second quarter). These transactions did not have a material impact on our consolidated financial statements or results of operations.

(9) Dividends

We declared and paid dividends of $4.8 million, or $.05 per share, during the second quarter of 2012 and $4.9 million, or $.05 per share, during the second quarter of 2011. We declared and paid dividends of $9.7 million and $9.8 million during the six-month periods ended June 30, 2012 and 2011, respectively.

(10) Pension Plan

The following table shows the components of net periodic pension cost for our defined benefit pension plan as of June 30, 2012 and 2011 (amounts in thousands):

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2012     2011     2012     2011  

Service cost

   $ 286      $ 247      $ 572      $ 581   

Interest cost

     1,165        1,071        2,330        2,523   

Expected return on assets

     (2,111     (1,774     (3,651     (3,283

Recognized actuarial loss

     1,055        470        2,110        1,214   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 395      $ 14      $ 1,361      $ 1,035   
  

 

 

   

 

 

   

 

 

   

 

 

 

During the six months ended June 30, 2012, we made contributions totaling $7.1 million to our pension plan.

 

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(11) Income Taxes

As of January 1, 2012, our unrecognized tax benefits were approximately $7 million. The amount, if recognized, that would affect the effective tax rate is approximately $5 million. During the quarter ended June 30, 2012, changes to the estimated liabilities for uncertain tax positions (including accrued interest) relating to tax positions taken during prior and current periods did not have a material impact on our financial statements.

We recognize accrued interest and penalties associated with uncertain tax positions as part of the tax provision. As of June 30, 2012, we have approximately $1 million of accrued interest and penalties. The U.S. federal statute of limitations remains open for the 2008 and subsequent years. Foreign and U.S. state and local jurisdictions have statutes of limitations generally ranging from 3 to 4 years. The statute of limitations on certain jurisdictions could expire within the next twelve months.

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

(12) Supplemental Condensed Consolidating Financial Information

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

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

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

 

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UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2012

(amounts in thousands)

 

     Parent     Guarantors     Non
Guarantors
    Consolidating
Adjustments
    Total
Consolidated
Amounts
 

Net revenues before provision for doubtful accounts

   $ 0      $ 1,295,803      $ 625,213      $ (6,553   $ 1,914,463   

Less: Provision for doubtful accounts

     0        105,390        79,270        0        184,660   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

     0        1,190,413        545,943        (6,553     1,729,803   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating charges:

          

Salaries, wages and benefits

     0        608,937        247,941        0        856,878   

Other operating expenses

     0        223,553        130,318        (6,459     347,412   

Supplies expense

     0        122,524        75,576        0        198,100   

Depreciation and amortization

     0        50,997        22,081        0        73,078   

Lease and rental expense

     0        14,394        9,703        (94     24,003   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     0        1,020,405        485,619        (6,553     1,499,471   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     0        170,008        60,324        0        230,332   

Interest expense

     44,298        838        752        0        45,888   

Interest (income) expense, affiliate

     0        22,783        (22,783     0        0   

Equity in net income of consolidated affiliates

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

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

Provision for income taxes

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

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

Less: Income attributable to noncontrolling interests

     0        0        9,883        0        9,883   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to UHS

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(amounts in thousands)

 

     Parent     Guarantors     Non
Guarantors
    Consolidating
Adjustments
    Total
Consolidated
Amounts
 

Net revenues before provision for doubtful accounts

   $ 0      $ 2,629,267      $ 1,244,287      $ (12,879   $ 3,860,675   

Less: Provision for doubtful accounts

     0        194,768        138,515        0        333,283   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

     0        2,434,499        1,105,772        (12,879     3,527,392   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating charges:

          

Salaries, wages and benefits

     0        1,229,795        501,077        0        1,730,872   

Other operating expenses

     0        459,587        254,088        (12,690     700,985   

Supplies expense

     0        250,833        152,907        0        403,740   

Depreciation and amortization

     0        102,256        42,714        0        144,970   

Lease and rental expense

     0        29,238        18,416        (189     47,465   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     0        2,071,709        969,202        (12,879     3,028,032   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     0        362,790        136,570        0        499,360   

Interest expense

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

Interest (income) expense, affiliate

     0        45,565        (45,565     0        0   

Equity in net income of consolidated affiliates

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

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

Provision for income taxes

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

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

Less: Income attributable to noncontrolling interests

     0        0        23,846        0        23,846   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to UHS

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2011

(amounts in thousands)

 

                             Total  
                 Non     Consolidating     Consolidated  
     Parent     Guarantors     Guarantors     Adjustments     Amounts  

Net revenues before provision for doubtful accounts

   $ 0      $ 1,265,907      $ 609,853      $ (6,346   $ 1,869,414   

Less: Provision for doubtful accounts

     0        80,327        74,623        0        154,950   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

     0        1,185,580        535,230        (6,346     1,714,464   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating charges:

          

Salaries, wages and benefits

     0        597,724        238,835        0        836,559   

Other operating expenses

     0        236,064        119,641        (6,251     349,454   

Supplies expense

     0        126,185        75,818        0        202,003   

Depreciation and amortization

     0        51,088        20,127        0        71,215   

Lease and rental expense

     0        15,325        7,766        (95     22,996   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     0        1,026,386        462,187        (6,346     1,482,227   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     0        159,194        73,043        0        232,237   

Interest expense, net

     48,386        809        613        0        49,808   

Interest (income) expense, affiliate

     0        15,904        (15,904     0        0   

Equity in net income of consolidated affiliates

     (133,832     (38,049     0        171,881        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     85,446        180,530        88,334        (171,881     182,429   

Provision for income taxes

     (18,203     65,171        19,427        0        66,395   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     103,649        115,359        68,907        (171,881     116,034   

Less: Income attributable to noncontrolling interests

     0        0        12,385        0        12,385   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to UHS

   $ 103,649      $ 115,359      $ 56,522      $ (171,881   $ 103,649   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2011

(amounts in thousands)

 

                             Total  
                 Non     Consolidating     Consolidated  
     Parent     Guarantors     Guarantors     Adjustments     Amounts  

Net revenues before provision for doubtful accounts

   $ 0      $ 2,550,935      $ 1,206,560      $ (12,653   $ 3,744,842   

Less: Provision for doubtful accounts

     0        170,756        133,364        0        304,120   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

     0        2,380,179        1,073,196        (12,653     3,440,722   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating charges:

          

Salaries, wages and benefits

     0        1,190,926        476,391        0        1,667,317   

Other operating expenses

     0        467,052        234,222        (12,463     688,811   

Supplies expense

     0        253,889        151,393        0        405,282   

Depreciation and amortization

     0        101,721        39,088        0        140,809   

Lease and rental expense

     0        30,995        15,048        (190     45,853   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     0        2,044,583        916,142        (12,653     2,948,072   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     0        335,596        157,054        0        492,650   

Interest expense, net

     103,256        1,602        1,367        0        106,225   

Interest (income) expense, affiliate

     0        31,808        (31,808     0        0   

Equity in net income of consolidated affiliates

     (281,440     (88,251     0        369,691        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     178,184        390,437        187,495        (369,691     386,425   

Provision for income taxes

     (39,658     140,132        39,930        0        140,404   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     217,842        250,305        147,565        (369,691     246,021   

Less: Income attributable to noncontrolling interests

     0        0        28,179        0        28,179   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to UHS

   $ 217,842      $ 250,305      $ 119,386      $ (369,691   $ 217,842   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2012

(amounts in thousands)

 

                                                 
                               Total  
                  Non      Consolidating     Consolidated  
     Parent     Guarantors      Guarantors      Adjustments     Amounts  

Net income

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

Other comprehensive income (loss):

            

Unrealized derivative gains on cash flow hedges

     212        0         0         0        212   

Amortization of terminated hedge

     (84     0         0         0        (84
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Other comprehensive income before tax

     128        0         0         0        128   

Income tax expense related to items of other comprehensive income

     50        0         0         0        50   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total other comprehensive income, net of tax

     78        0         0         0        78   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income

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

Less: Comprehensive income attributable to noncontrolling interests

     0        0         9,883         0        9,883   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to UHS

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

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(amounts in thousands)

 

                                                                                         
                               Total  
                  Non      Consolidating     Consolidated  
     Parent     Guarantors      Guarantors      Adjustments     Amounts  

Net income

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

Other comprehensive income (loss):

            

Unrealized derivative gains on cash flow hedges

     1,827        0         0         0        1,827   

Amortization of terminated hedge

     (168     0         0         0        (168
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Other comprehensive income before tax

     1,659        0         0         0        1,659   

Income tax expense related to items of other comprehensive income

     632        0         0         0        632   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total other comprehensive income, net of tax

     1,027        0         0         0        1,027   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income

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

Less: Comprehensive income attributable to noncontrolling interests

     0        0         23,846         0        23,846   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to UHS

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

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2011

(amounts in thousands)

 

                                                 
      Parent     Guarantors      Non
Guarantors
     Consolidating
Adjustments
    Total
Consolidated
Amounts
 

Net income

   $   103,649      $ 115,359       $ 68,907       $ (171,881   $ 116,034   

Other comprehensive income (loss):

            

Unrealized derivative losses on cash flow hedges

     (20,583     0         0         0        (20,583

Amortization of terminated hedge

     (84     0         0         0        (84
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Other comprehensive income before tax

     (20,667     0         0         0        (20,667

Income tax expense related to items of other comprehensive income

     (7,916     0         0         0        (7,916
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total other comprehensive income, net of tax

     (12,751     0         0         0        (12,751
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income

     90,898        115,359         68,907         (171,881     103,283   

Less: Comprehensive income attributable to noncontrolling interests

     0        0         12,385         0        12,385   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to UHS

   $ 90,898      $ 115,359       $ 56,522       $ (171,881   $ 90,898   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2011

(amounts in thousands)

 

                                                                                         
      Parent     Guarantors      Non
Guarantors
     Consolidating
Adjustments
    Total
Consolidated
Amounts
 

Net income

   $ 217,842      $ 250,305       $ 147,565       $ (369,691   $ 246,021   

Other comprehensive income (loss):

            

Unrealized derivative losses on cash flow hedges

     (18,276     0         0         0        (18,276

Amortization of terminated hedge

     (168     0         0         0        (168
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Other comprehensive income before tax

     (18,444     0         0         0        (18,444

Income tax expense related to items of other comprehensive income

     (7,056     0         0         0        (7,056
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total other comprehensive income, net of tax

     (11,388     0         0         0        (11,388
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income

     206,454        250,305         147,565         (369,691     234,633   

Less: Comprehensive income attributable to noncontrolling interests

     0        0         28,179         0        28,179   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to UHS

   $ 206,454      $ 250,305       $ 119,386       $ (369,691   $ 206,454   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF JUNE 30, 2012

(amounts in thousands)

 

      Parent      Guarantors     Non
Guarantors
    Consolidating
Adjustments
    Total
Consolidated
Amounts
 

Assets

           

Current assets:

           

Cash and cash equivalents

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

Accounts receivable, net

     3,786         705,845        310,298        0        1,019,929   

Supplies

     0         58,738        38,144        0        96,882   

Other current assets

     12,878         77,560        9,096        0        99,534   

Deferred income taxes

     81,565         41,230        322        (322     122,795   

Current assets held for sale

     0         84,365        0        0        84,365   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     98,229         990,886        367,653        (322     1,456,446   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Investments in subsidiaries

     5,504,955         1,251,474        0        (6,756,429     0   

Intercompany receivable

     475,833         0        129,403        (605,236     0   

Intercompany note receivable

     0         0        1,142,539        (1,142,539     0   

Property and equipment

     0         3,687,805        1,484,602        0        5,172,407   

Less: accumulated depreciation

     0         (1,205,261     (670,231     0        (1,875,492
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     0         2,482,544        814,371        0        3,296,915   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Other assets:

           

Goodwill

     820         2,115,465        494,352        0        2,610,637   

Deferred charges

     91,728         5,986        8,381        0        106,095   

Other

     9,450         192,612        86,493        0        288,555   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
   $ 6,181,015       $ 7,038,967      $ 3,043,192      $ (8,504,526   $ 7,758,648   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

           

Current liabilities:

           

Current maturities of long-term debt

   $ 0       $ 1,049      $ 1,448      $ 0      $ 2,497   

Accounts payable and accrued liabilities

     27,519         620,332        204,405        0        852,256   

Current liabilities held for sale

     0         15,966        0        0        15,966   

Federal and state taxes

     12,072         201        620        0        12,893   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     39,591         637,548        206,473        0        883,612   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payable

     0         605,236        0        (605,236     0   

Other noncurrent liabilities

     50,747         237,291        105,890        0        393,928   

Long-term debt

     3,405,069         1,411        52,029        0        3,458,509   

Intercompany note payable

     0         1,142,539        0        (1,142,539     0   

Deferred income taxes

     148,724         58,001        0        (322     206,403   

Redeemable noncontrolling interests

     0         0        226,537        0        226,537   

UHS common stockholders’ equity

     2,536,884         4,356,941        2,399,488        (6,756,429     2,536,884   

Noncontrolling interest

     0         0        52,775        0        52,775   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     2,536,884         4,356,941        2,452,263        (6,756,429     2,589,659   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
   $ 6,181,015       $ 7,038,967      $ 3,043,192      $ (8,504,526   $ 7,758,648   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

24


Table of Contents

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2011

(amounts in thousands)

 

      Parent      Guarantors     Non
Guarantors
    Consolidating
Adjustments
    Total
Consolidated
Amounts
 

Assets

           

Current assets:

           

Cash and cash equivalents

   $ 0       $ 33,221      $ 8,008      $ 0      $ 41,229   

Accounts receivable, net

     8,891         663,593        297,318        0        969,802   

Supplies

     0         59,467        37,308        0        96,775   

Other current assets

     33,057         56,864        9,938        0        99,859   

Deferred income taxes

     67,189         41,755        322        (942     108,324   

Current assets held for sale

     0         48,916        0        0        48,916   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     109,137         903,816        352,894        (942     1,364,905   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Investments in subsidiaries

     5,213,573         1,181,849        0        (6,395,422     0   

Intercompany receivable

     669,112         0        74,155        (743,267     0   

Intercompany note receivable

     0         0        1,148,839        (1,148,839     0   

Property and equipment

     0         3,650,025        1,456,135        0        5,106,160   

Less: accumulated depreciation

     0         (1,184,283     (633,897     0        (1,818,180
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     0         2,465,742        822,238        0        3,287,980   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Other assets:

           

Goodwill

     820         2,132,103        494,679        0        2,627,602   

Deferred charges

     103,434         5,972        2,374        0        111,780   

Other

     10,412         241,107        21,459        0        272,978   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
   $ 6,106,488       $ 6,930,589      $ 2,916,638      $ (8,288,470   $ 7,665,245   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

           

Current liabilities:

           

Current maturities of long-term debt

   $ 0       $ 1,133      $ 1,346      $ 0      $ 2,479   

Accounts payable and accrued liabilities

     14,201         616,026        201,898        0        832,125   

Current liabilities held for sale

     0         2,329        0        0        2,329   

Federal and state taxes

     0         0        620        (620     0   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     14,201         619,488        203,864        (620     836,933   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payable

     0         743,267        0        (743,267     0   

Other noncurrent liabilities

     49,840         249,033        103,035        0        401,908   

Long-term debt

     3,594,182         3,616        53,630        0        3,651,428   

Intercompany note payable

     0         1,148,839        0        (1,148,839     0   

Deferred income taxes

     151,913         58,001        0        (322     209,592   

Redeemable noncontrolling interests

     0         0        218,266        0        218,266   

UHS common stockholders’ equity

     2,296,352         4,108,345        2,287,077        (6,395,422     2,296,352   

Noncontrolling interest

     0         0        50,766        0        50,766   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     2,296,352         4,108,345        2,337,843        (6,395,422     2,347,118   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
   $ 6,106,488       $ 6,930,589      $ 2,916,638      $ (8,288,470   $ 7,665,245   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(amounts in thousands)

 

      Parent     Guarantors     Non
Guarantors
    Consolidating
Adjustments
     Total
Consolidated
Amounts
 

Net cash provided by operating activities

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

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash Flows from Investing Activities:

           

Property and equipment additions, net of disposals

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

Proceeds received from sale of assets and businesses

     0        49,984        3,477        0         53,461   

Acquisition of property and businesses

     0        (11,476     0           (11,476

Costs incurred for purchase and development of electronic health records application

     0        (28,008     0        0         (28,008

Return of deposit on terminated purchase agreement

     6,500        0        0        0         6,500   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

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

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash Flows from Financing Activities:

           

Reduction of long-term debt

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

Repurchase of common shares

     (2,927     0        0        0         (2,927

Dividends paid

     (9,673     0        0        0         (9,673

Issuance of common stock

     2,575        0        0        0         2,575   

Profit distributions to noncontrolling interests

     0        0        (13,565     0         (13,565

Changes in intercompany balances with affiliates, net

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

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash (used in) provided by financing activities

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

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Increase (decrease) in cash and cash equivalents

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

Cash and cash equivalents, beginning of period

     0        33,221        8,008        0         41,229   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents, end of period

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

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2011

(amounts in thousands)

 

     Parent     Guarantors     Non
Guarantors
    Consolidating
Adjustments
     Total
Consolidated
Amounts
 

Net cash provided by operating activities

   $ 13,222      $ 298,741        43,813      $ 0       $ 355,776   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash Flows from Investing Activities:

           

Property and equipment additions, net of disposals

     0        (88,240     (28,000     0         (116,240

Proceeds received from sale of assets and businesses

     0        2,041        0        0         2,041   

Costs incurred for purchase and development of electronic health records application

     0        (11,416     0        0         (11,416
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     0        (97,615     (28,000     0         (125,615
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash Flows from Financing Activities:

           

Reduction of long-term debt

     (188,161     (850     (11,555     0         (200,566

Additional borrowings

     36,000        0        0        0         36,000   

Financing costs

     (23,534     0        0        0         (23,534

Repurchase of common shares

     (6,163     0        0        0         (6,163

Dividends paid

     (9,763     0        0        0         (9,763

Issuance of common stock

     2,408        0        0        0         2,408   

Profit distributions to noncontrolling interests

     0        0        (23,201     0         (23,201

Changes in intercompany balances with affiliates, net

     175,991        (194,187     18,196           0   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash (used in) provided by financing activities

     (13,222     (195,037     (16,560     0         (224,819
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Increase (decrease) in cash and cash equivalents

     0        6,089        (747     0         5,342   

Cash and cash equivalents, beginning of period

     0        21,385        8,089        0         29,474   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $ 0      $ 27,474 $        7,342      $ 0       $ 34,816   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

(13) Recent Accounting Standards

Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities: During the first quarter of 2012, we adopted the Financial Accounting Standards Board’s Accounting Standards Update (“ASU”) No. 2011-07, “Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities,” which required certain health care entities to change the presentation in their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). As a result, the provision for doubtful accounts for our acute care and behavioral health care facilities is reflected as a deduction from net revenues in the accompanying consolidated statements of income for the three and six-month periods ended June 30, 2012 and 2011. The adoption of this standard had no impact on our financial position or overall results of operations.

Presentation of Comprehensive Income: In June 2011, the FASB amended its guidance governing the presentation of comprehensive income. The amended guidance eliminates the option to report other comprehensive income and its components in the statement of changes in equity. Under the new guidance, an entity can elect to present items of net income and other comprehensive income in one continuous statement referred to as the statement of comprehensive income or in two separate, but consecutive, statements. While the options for presenting other comprehensive income change under the guidance, other portions of the current guidance will not change. For public entities, these changes are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this standard did not have an impact on our consolidated financial position or results of operations.

 

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

Overview

Our principal business is owning and operating, through our subsidiaries, acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers and radiation oncology centers. As of June 30, 2012, we owned and/or operated 25 acute care hospitals and 194 behavioral health centers located in 36 states, Washington, D.C., Puerto Rico and the U.S. Virgin Islands. As part of our ambulatory treatment centers division, we manage and/or own outright or in partnerships with physicians, 6 surgical hospitals and surgery and radiation oncology centers located in 4 states and Puerto Rico.

During the first quarter of 2012, we adopted the Financial Accounting Standards Board’s Accounting Standards Update (“ASU”) No. 2011-07, “Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities,” which required certain health care entities to change the presentation in their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). As a result, the provision for doubtful accounts for our acute care and behavioral health care facilities is reflected as a deduction from net revenues in the accompanying consolidated statements of income for the three and six-month periods ended June 30, 2012 and 2011. The adoption of this standard had no impact on our financial position or overall results of operations.

As a percentage of our consolidated net revenues, net revenues from our acute care hospitals, surgical hospitals, surgery centers and radiation oncology centers accounted for 49% and 51% during the three-month periods ended June 30, 2012 and 2011, respectively, and 51% during each of the six-month periods ended June 30, 2012 and 2011. Net revenues from our behavioral health care facilities accounted for 51% and 49% during the three-month periods ended June 30, 2012 and 2011, respectively, and 49% during each of the six-month periods ended June 30, 2012 and 2011.

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

Forward-Looking Statements and Risk Factors

You should carefully review the information contained in this Quarterly Report, and should particularly consider any risk factors that we set forth in this Quarterly Report and in other reports or documents that we file from time to time with the Securities and Exchange Commission (the “SEC”). In this Quarterly Report, we state our beliefs of future events and of our future financial performance. This Quarterly Report contains “forward-looking statements” that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, and the benefits and synergies to be obtained from our completed and any future acquisitions, and statements of our goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “appears,” “projects” and similar expressions, as well as statements in future tense, identify forward-looking statements. In evaluating those statements, you should specifically consider various factors, including the risks related to healthcare industry trends and those detailed in our filings with the SEC including those set forth herein and in our Annual Report on Form 10-K for the year ended December 31, 2011 in Item 1A Risk Factors and in Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward Looking Statements and Risk Factors. Those factors may cause our actual results to differ materially from any of our forward-looking statements.

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

  demographic changes;

 

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

 

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

 

  we receive Medicaid revenues in excess of $90 million annually from each of Texas, Pennsylvania, Washington, D.C., Illinois, Massachusetts and Virginia, making us particularly sensitive to reductions in Medicaid and other state based revenue programs (which have been implemented in various forms with respect to our areas of operation in the respective 2013 state fiscal years) as well as regulatory, economic, environmental and competitive changes in those states. In the states in which we operate, based upon the state budgets for the 2012 fiscal year (which generally began at various times during the second half of 2011), we estimate that, on a blended basis, our aggregate Medicaid rates have been reduced by approximately 3% to 4% (or approximately $45 million to $55 million annually) from the average rates in effect during the states’ 2011 fiscal years (which generally ended during the third quarter of 2011). Our consolidated results of operations for the three and six-month periods ended June 30, 2012 include the pro rata portion of these Medicaid rate reductions. Based upon the state budgets for the 2013 fiscal year (which generally begin at various times during the second half of 2012), we estimate that, on a blended basis, our aggregate Medicaid rates will be reduced by approximately .5% to 1% (or approximately $8 million to $15 million annually) from the average rates in effect during the states’ 2012 fiscal years (which generally end during the third quarter of 2012). We can provide no assurance that further reductions to Medicaid revenues, particularly in the above-mentioned states, will not have a material adverse effect on our future results of operations;

 

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

 

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

 

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

 

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

 

  in August, 2011, the Budget Control Act of 2011 (the “2011 Act”) was enacted into law. The 2011 Act imposed annual spending limits for most federal agencies and programs aimed at reducing budget deficits by $917 billion between 2012 and 2021, according to a report released by the Congressional Budget Office. Among its other provisions, the law established a bipartisan Congressional committee, known as the Joint Select Committee on Deficit Reduction (the “Joint Committee”), which was tasked with making recommendations aimed at reducing future federal budget deficits by an additional $1.5 trillion over 10 years. The Joint Committee was unable to reach an agreement by the November 23, 2011 deadline and, as a result, across-the-board cuts to discretionary, national defense and Medicare spending were implemented which, if triggered, would result in Medicare payment reductions of up to 2% per fiscal year with a uniform percentage reduction across all Medicare programs starting in 2013. We cannot predict whether Congress will attempt to suspend or restructure the automatic budget cuts or what other deficit reduction initiatives may be proposed by Congress;

 

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  as of June 30, 2012 and December 31, 2011, our accounts receivable includes approximately $72 million and $54 million, respectively, due from Illinois. Collection of these receivables continues to be delayed due to state budgetary and funding pressures. Approximately $52 million as of June 30, 2012, and $41 million as of December 31, 2011, of the receivables due from Illinois have been outstanding in excess of 60 days, as of each respective date, and a large portion will likely remain outstanding for the foreseeable future. Since we expect to eventually collect all amounts due to us, no related reserves have been established in our consolidated financial statements. However, we can provide no assurance that we will eventually collect all amounts due to us from Illinois. Failure to ultimately collect all outstanding amounts due from Illinois would have an adverse impact on our future consolidated results of operations and cash flows;

 

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

 

  changes in our business strategies or development plans;

 

  fluctuations in the value of our common stock, and;

 

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

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

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. We consider our critical accounting policies to be those that require us to make significant judgments and estimates when we prepare our consolidated financial statements. For a summary of our significant accounting policies, please see Note 1 to the Consolidated Financial Statements as included in our Annual Report on Form 10-K for the year ended December 31, 2011.

Revenue recognition: We record revenues and related receivables for health care services at the time the services are provided. Medicare and Medicaid revenues represented 39% of our net patient revenues during each of the three and six-month periods ended June 30, 2012 and 41% of net patient revenues during each of the six-month periods ended June 30, 2012 and 2011. Revenues from managed care entities, including health maintenance organizations and managed Medicare and Medicaid programs, accounted for 50% and 46% of our net patient revenues during the three-month periods ended June 30, 2012 and 2011, respectively, and 49% and 46% of our net patient revenues during the six-month periods ended June 30, 2012 and 2011, respectively.

Provision for Doubtful Accounts: On a consolidated basis, we monitor our total self-pay receivables to ensure that the total allowance for doubtful accounts provides adequate coverage based on historical collection experience. Our accounts receivable are recorded net of allowance for doubtful accounts of $318 million at June 30, 2012 and $253 million at December 31, 2011.

Our accounts receivable includes $72 million as of June 30, 2012 and $54 million as of December 31, 2011 due from Illinois, the collection of which continues to be delayed due to budgetary and funding pressures experienced by the state. Although approximately $52 million of the receivables due from Illinois as of June 30, 2012 have been outstanding in excess of 60 days, and a large portion will likely remain outstanding for the foreseeable future, we expect to eventually collect all amounts due to us and therefore no related reserves have been established in our consolidated financial statements. However, we can provide no assurance that we will eventually collect all amounts due to us from Illinois. Failure to ultimately collect all outstanding amounts due from Illinois would have an adverse impact on our future consolidated results of operations and cash flows.

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

 

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Results of Operations

Three-month periods ended June 30, 2012 and 2011:

The following table summarizes our results of operations and is used in the discussion below for the three-month periods ended June 30, 2012 and 2011 (dollar amounts in thousands):

 

     Three months ended
June 30, 2012
    Three months ended
June 30, 2011
 
     Amount      % of Net
Revenues
    Amount      % of Net
Revenues
 

Net revenues before provision for doubtful accounts

   $ 1,914,463         $ 1,869,414      

Less: Provision for doubtful accounts

     184,660           154,950      
  

 

 

    

 

 

   

 

 

    

 

 

 

Net revenues

     1,729,803         100.0     1,714,464         100.0

Operating charges:

          

Salaries, wages and benefits

     856,878         49.5     836,559         48.8

Other operating expenses

     347,412         20.1     349,454         20.4

Supplies expense

     198,100         11.5     202,003         11.8

Depreciation and amortization

     73,078         4.2     71,215         4.2

Lease and rental expense

     24,003         1.4     22,996         1.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal-operating expenses

     1,499,471         86.7     1,482,227         86.5
  

 

 

    

 

 

   

 

 

    

 

 

 

Income from operations

     230,332         13.3     232,237         13.5

Interest expense, net

     45,888         2.7     49,808         2.9
  

 

 

    

 

 

   

 

 

    

 

 

 

Income before income taxes

     184,444         10.7     182,429         10.6

Provision for income taxes

     67,000         3.9     66,395         3.9
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

     117,444         6.8     116,034         6.8

Less: Income attributable to noncontrolling interests

     9,883         0.6     12,385         0.7
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income attributable to UHS

   $ 107,561         6.2   $ 103,649         6.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Net revenues increased 1% or $15 million to $1.73 billion during the three-month period ended June 30, 2012 as compared to $1.71 billion during the comparable quarter of the prior year. The increase was attributable to a $15 million or 1% increase in net revenues generated at our acute care hospitals and behavioral health care facilities owned during both periods (which we refer to as “same facility”);

Income before income taxes (before deduction for income attributable to noncontrolling interests) increased $2 million to $184 million during the three-month period ended June 30, 2012 as compared to $182 million during the comparable quarter of the prior year. Included in our income before income taxes during the second quarter of 2012, as compared to the comparable prior year quarter, was the following:

 

  a. a decrease of $18 million at our acute care facilities as discussed below in Acute Care Hospital Services, excluding impact of the implementation of electronic health records (“EHR”) applications at our acute care hospitals, as mentioned in e. below;

 

  b. an increase of $28 million at our behavioral health care facilities, as discussed below in Behavioral Health Services, excluding the impact of the item mentioned in c. below;

 

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

 

  d. an increase of $4 million due to a decrease in interest expense resulting primarily from a decrease in our average borrowings outstanding;

 

  e. a decrease of $10 million related to the revenues and expenses recorded in connection with the implementation of EHR applications at our acute care hospitals, and;

 

  f. $8 million of other combined net decreases including increased corporate overhead expenses.

Net income attributable to UHS increased $4 million to $108 million during the three-month period ended June 30, 2012 as compared to $104 million during the comparable prior year quarter. The increase during the second quarter of 2012, as compared to the comparable prior year quarter, consisted of:

 

  an increase of $2 million in income before income taxes, as discussed above;

 

  an increase of $3 million resulting from a decrease in income attributable to noncontrolling interests, and;

 

  a decrease of $1 million resulting from an increase in the provision for income taxes resulting primarily from the income tax provision recorded on the $5 million increase in pre-tax income ($2 million increase in income before income taxes and the $3 million increase in income due to a decrease in the income attributable to noncontrolling interests).

 

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Six-month periods ended June 30, 2012 and 2011:

The following table summarizes our results of operations and is used in the discussion below for the six-month periods ended June 30, 2012 and 2011 (dollar amounts in thousands):

 

     Six months ended
June 30, 2012
    Six months ended
June 30, 2011
 
     Amount      % of Net
Revenues
    Amount      % of Net
Revenues
 

Net revenues before provision for doubtful accounts

   $ 3,860,675         $ 3,744,842      

Less: Provision for doubtful accounts

     333,283           304,120      
  

 

 

      

 

 

    

Net revenues

     3,527,392         100.0     3,440,722         100.0

Operating charges:

          

Salaries, wages and benefits

     1,730,872         49.1     1,667,317         48.5

Other operating expenses

     700,985         19.9     688,811         20.0

Supplies expense

     403,740         11.4     405,282         11.8

Depreciation and amortization

     144,970         4.1     140,809         4.1

Lease and rental expense

     47,465         1.3     45,853         1.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal-operating expenses

     3,028,032         85.8     2,948,072         85.7
  

 

 

    

 

 

   

 

 

    

 

 

 

Income from operations

     499,360         14.2     492,650         14.3

Interest expense, net

     92,598         2.6     106,225         3.1
  

 

 

    

 

 

   

 

 

    

 

 

 

Income before income taxes

     406,762         11.5     386,425         11.2