uhs-10q_20180331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

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

For the quarterly period ended March 31, 2018

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      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      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

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common shares outstanding, as of April 30, 2018:

 

Class A

 

6,577,100

Class B

 

87,149,150

Class C

 

661,688

Class D

 

18,673

 

 


UNIVERSAL HEALTH SERVICES, INC.

INDEX

 

 

 

PAGE NO.

 

 

 

PART I. FINANCIAL INFORMATION

  

 

 

 

 

Item 1. Financial Statements (unaudited)

 

 

 

 

 

Condensed Consolidated Statements of Income—Three Months Ended March 31, 2018 and 2017

 

3

 

 

 

Condensed Consolidated Statements of Comprehensive Income—Three Months Ended March 31, 2018 and 2017

 

4

 

 

 

Condensed Consolidated Balance Sheets—March 31, 2018 and December 31, 2017

 

5

 

 

 

Condensed Consolidated Statements of Cash Flows—Three Months Ended March 31, 2018 and 2017

 

6

 

 

 

          Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

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

 

22

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

46

 

 

 

Item 4. Controls and Procedures

 

46

 

 

 

PART II. Other Information

 

 

 

 

 

Item 1. Legal Proceedings

 

47

 

 

 

Item 1A. Risk Factors

 

50

 

 

 

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

 

50

 

 

 

Item 6. Exhibits

 

52

 

 

 

EXHIBIT INDEX

 

53

 

 

 

Signatures

 

54

This Quarterly Report on Form 10-Q is for the quarter ended March 31, 2018. This Report modifies and supersedes documents filed prior to this Report. Information that we file with the Securities and Exchange Commission (the “SEC”) in the future will automatically update and supersede information contained in this Report.

In this Quarterly Report, “we,” “us,” “our” “UHS” 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.

 

 

2


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

March 31,

 

 

2018

 

 

2017

 

Net revenues before provision for doubtful accounts

 

 

 

 

$

2,825,472

 

Less: Provision for doubtful accounts

 

 

 

 

 

212,614

 

Net revenues

$

2,687,516

 

 

 

2,612,858

 

Operating charges:

 

 

 

 

 

 

 

Salaries, wages and benefits

 

1,300,148

 

 

 

1,237,964

 

Other operating expenses

 

620,819

 

 

 

607,360

 

Supplies expense

 

292,929

 

 

 

277,614

 

Depreciation and amortization

 

113,103

 

 

 

110,798

 

Lease and rental expense

 

26,703

 

 

 

25,189

 

 

 

2,353,702

 

 

 

2,258,925

 

Income from operations

 

333,814

 

 

 

353,933

 

Interest expense, net

 

37,576

 

 

 

35,507

 

Income before income taxes

 

296,238

 

 

 

318,426

 

Provision for income taxes

 

67,569

 

 

 

107,899

 

Net income

 

228,669

 

 

 

210,527

 

Less: Net income attributable to noncontrolling interests

 

4,837

 

 

 

4,472

 

Net income attributable to UHS

$

223,832

 

 

$

206,055

 

 

 

 

 

 

 

 

 

Basic earnings per share attributable to UHS

$

2.37

 

 

$

2.13

 

Diluted earnings per share attributable to UHS

$

2.36

 

 

$

2.12

 

 

 

 

 

 

 

 

 

Weighted average number of common shares - basic

 

94,226

 

 

 

96,585

 

Add: Other share equivalents

 

457

 

 

 

787

 

Weighted average number of common shares and

   equivalents - diluted

 

94,683

 

 

 

97,372

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

3


UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in thousands, unaudited)

 

 

 

Three months ended

March 31,

 

 

 

2018

 

 

2017

 

Net income

 

$

228,669

 

 

$

210,527

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Unrealized derivative gains on cash flow hedges

 

 

2,124

 

 

 

3,066

 

Foreign currency translation adjustment

 

 

(4,341

)

 

 

7,236

 

Other

 

 

2,367

 

 

 

1,094

 

Other comprehensive income before tax

 

 

150

 

 

 

11,396

 

Income tax expense related to items of other

   comprehensive income

 

 

1,077

 

 

 

1,551

 

Total other comprehensive income (loss), net of tax

 

 

(927

)

 

 

9,845

 

Comprehensive income

 

 

227,742

 

 

 

220,372

 

Less: Comprehensive income attributable to noncontrolling

   interests

 

 

4,837

 

 

 

4,472

 

Comprehensive income attributable to UHS

 

$

222,905

 

 

$

215,900

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

4


UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, unaudited)

 

 

March 31,

2018

 

 

December 31,

2017

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

73,053

 

 

$

74,423

 

Accounts receivable, net

 

1,569,803

 

 

 

1,500,898

 

Supplies

 

137,246

 

 

 

136,177

 

Other current assets

 

104,624

 

 

 

86,504

 

Total current assets

 

1,884,726

 

 

 

1,798,002

 

 

 

 

 

 

 

 

 

Property and equipment

 

8,144,555

 

 

 

7,921,126

 

Less: accumulated depreciation

 

(3,444,003

)

 

 

(3,349,289

)

 

 

4,700,552

 

 

 

4,571,837

 

Other assets:

 

 

 

 

 

 

 

Goodwill

 

3,843,126

 

 

 

3,825,157

 

Deferred charges

 

8,882

 

 

 

9,787

 

Deferred income taxes

 

3,072

 

 

 

3,007

 

Other

 

583,159

 

 

 

554,038

 

Total Assets

$

11,023,517

 

 

$

10,761,828

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current maturities of long-term debt

$

126,248

 

 

$

545,619

 

Accounts payable and accrued liabilities

 

1,366,333

 

 

 

1,284,081

 

Federal and state taxes

 

86,996

 

 

 

18,334

 

Total current liabilities

 

1,579,577

 

 

 

1,848,034

 

 

 

 

 

 

 

 

 

Other noncurrent liabilities

 

311,900

 

 

 

306,304

 

Long-term debt

 

3,795,087

 

 

 

3,494,390

 

Deferred income taxes

 

44,850

 

 

 

54,962

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

6,081

 

 

 

6,702

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

UHS common stockholders’ equity

 

5,215,646

 

 

 

4,989,514

 

Noncontrolling interest

 

70,376

 

 

 

61,922

 

Total equity

 

5,286,022

 

 

 

5,051,436

 

Total Liabilities and Stockholders’ Equity

$

11,023,517

 

 

$

10,761,828

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

5


UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands, unaudited)

 

 

 

Three months

ended March 31,

 

 

 

2018

 

 

2017

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

228,669

 

 

$

210,527

 

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

 

 

 

 

 

 

 

 

Depreciation & amortization

 

 

113,134

 

 

 

110,798

 

Stock-based compensation expense

 

 

19,700

 

 

 

15,348

 

Gain on sale of assets and businesses

 

 

(703

)

 

 

0

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(72,526

)

 

 

(5,362

)

Accrued interest

 

 

(6,209

)

 

 

(6,123

)

Accrued and deferred income taxes

 

 

61,674

 

 

 

102,269

 

Other working capital accounts

 

 

59,032

 

 

 

66,877

 

Other assets and deferred charges

 

 

(5,438

)

 

 

(7,654

)

Other

 

 

(37,642

)

 

 

(229

)

Accrued insurance expense, net of commercial premiums paid

 

 

23,125

 

 

 

22,007

 

Payments made in settlement of self-insurance claims

 

 

(18,765

)

 

 

(25,349

)

Net cash provided by operating activities

 

 

364,051

 

 

 

483,109

 

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Property and equipment additions, net of disposals

 

 

(189,041

)

 

 

(144,338

)

Acquisition of property and businesses

 

 

(20,931

)

 

 

(17,832

)

Proceeds received from sales of assets and businesses

 

 

839

 

 

 

0

 

Costs incurred for purchase and implementation of information technology application

 

 

(8,570

)

 

 

(9,456

)

Decrease (increase) in capital reserves of commercial insurance subsidiary

 

 

100

 

 

 

(3,000

)

Investment in, and advances to, joint venture

 

 

(8,675

)

 

 

0

 

Net cash used in investing activities

 

 

(226,278

)

 

 

(174,626

)

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Reduction of long-term debt

 

 

(140,676

)

 

 

(260,633

)

Additional borrowings

 

 

20,500

 

 

 

21,600

 

Repurchase of common shares

 

 

(9,441

)

 

 

(29,167

)

Dividends paid

 

 

(9,422

)

 

 

(9,662

)

Issuance of common stock

 

 

2,545

 

 

 

2,540

 

Profit distributions to noncontrolling interests

 

 

(4,217

)

 

 

(4,118

)

Net cash used in financing activities

 

 

(140,711

)

 

 

(279,440

)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

1,857

 

 

 

285

 

 

 

 

 

 

 

 

 

 

(Decrease) increase in cash, cash equivalents and restricted cash

 

 

(1,081

)

 

 

29,328

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

167,297

 

 

 

121,950

 

Cash, cash equivalents and restricted cash, end of period

 

$

166,216

 

 

$

151,278

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

 

Interest paid

 

$

41,539

 

 

$

39,404

 

Income taxes paid, net of refunds

 

$

2,749

 

 

$

5,253

 

Noncash purchases of property and equipment

 

$

84,708

 

 

$

56,427

 

 

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

 

6


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 March 31, 2018. In this Quarterly Report, “we,” “us,” “our” “UHS” and the “Company” refer to Universal Health Services, Inc. and its subsidiaries.

The condensed consolidated interim 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 interim financial statements included herein have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and reflect all adjustments (consisting only of normal recurring adjustments) which, in our opinion, are necessary to fairly state results for the interim periods. Certain information and footnote disclosures normally included in audited consolidated 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 interim financial statements should be read in conjunction with the audited 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, 2017.

 

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

Relationship with Universal Health Realty Income Trust:

At March 31, 2018, we held approximately 5.7% 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 consolidated statements of income, of approximately $900,000 during each of the three-month periods ended March 31, 2018 and 2017.

Our pre-tax share of income from the Trust was approximately $284,000 and $1.8 million during the three-month periods ended March 31, 2018 and 2017, respectively.  Included in our share of the Trust’s income for the three months ended March 31, 2017, is our share of a gain realized by the Trust in connection with the divestiture of property that was completed during the first quarter of 2017.  The carrying value of this investment was approximately $8.5 million and $8.2 million at March 31, 2018 and December 31, 2017, respectively, and is included in other assets in the accompanying consolidated balance sheets. The market value of our investment in the Trust was $47.3 million at March 31, 2018 and $59.2 million at December 31, 2017, based on the closing price of the Trust’s stock on the respective dates.

The Trust commenced operations in 1986 by purchasing certain properties from us and immediately leasing the properties back to our respective subsidiaries. Most of the leases were entered into at the time the Trust commenced operations and provided for initial terms of 13 to 15 years with up to six additional 5-year renewal terms. Each lease also provided for additional or bonus rental, as discussed below. The base rents are paid monthly and the bonus rents are computed and paid on a quarterly basis, based upon a computation that compares current quarter revenue to a corresponding quarter in the base year. The leases with those subsidiaries are unconditionally guaranteed by us and are cross-defaulted with one another. 

Total rent expense under the operating leases on the three hospital facilities reflected in the table below was approximately $4 million during each of the three months ended March 31, 2018 and 2017. Pursuant to the terms of the three hospital leases with the Trust, we have the option to renew the leases at the lease terms described above by providing notice to the Trust at least 90 days prior to the termination of the then current term. We also have the right to purchase the respective leased hospitals at the end of the lease terms or any renewal terms at their appraised fair market value as well as purchase any or all of the three leased hospital properties at the appraised fair market value upon one month’s notice should a change of control of the Trust occur. In addition, we have rights of first refusal to: (i) purchase the respective leased facilities during and for 180 days after the lease terms at the same price, terms and conditions of any third-party offer, or; (ii) renew the lease on the respective leased facility at the end of, and for 180 days after, the lease term at the same terms and conditions pursuant to any third-party offer.

 

7


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

 

Hospital Name

 

Annual

Minimum

Rent

 

 

End of Lease Term

 

Renewal

Term

(years)

McAllen Medical Center

 

$

5,485,000

 

 

December, 2021

 

10(a)

Wellington Regional Medical Center

 

$

3,030,000

 

 

December, 2021

 

10(b)

Southwest Healthcare System, Inland Valley Campus

 

$

2,648,000

 

 

December, 2021

 

10(b)

 

(a)

We have two 5-year renewal options at existing lease rates (through 2031).

(b)

We have two 5-year renewal options at fair market value lease rates (2022 through 2031).

In addition, certain of our subsidiaries are tenants in several medical office buildings and two FEDs owned by the Trust or by limited liability companies in which the Trust holds 95% to 100% of the ownership interest.

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 Alan B. Miller (our chief executive officer) and his wife. As a result of these agreements, as amended in October, 2016, based on actuarial tables and other assumptions, during the life expectancies of the insureds, we would pay approximately $28 million in premiums, and certain trusts owned by our chief executive officer (“CEO”), would pay approximately $9 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 approximately $37 million representing the $28 million of aggregate premiums paid by us as well as the $9 million of aggregate premiums paid by the trusts. In connection with these policies, we will pay/we paid approximately $1.1 million and $1.2 million in premium payments during each of 2018 and 2017, respectively.

In August, 2015, Marc D. Miller, our President and member of our Board of Directors, was appointed to the Board of Directors of Premier, Inc. (“Premier”), a healthcare performance improvement alliance.  During 2013, we entered into a new group purchasing organization agreement (“GPO”) with Premier. In conjunction with the GPO agreement, we acquired a minority interest in Premier for a nominal amount. During the fourth quarter of 2013, in connection with the completion of an initial public offering of the stock of Premier, we received cash proceeds for the sale of a portion of our ownership interest in the GPO. Also in connection with this GPO agreement, we received shares of restricted stock of Premier which vest ratably over a seven-year period (2014 through 2020), contingent upon our continued participation and minority ownership interest in the GPO.  We have elected to retain a portion of the previously vested shares of Premier, the market value of which is included in other assets on our consolidated balance sheet.  Based upon the closing price of Premier’s stock on each respective date, the market value of our shares of Premier on which the restrictions have lapsed was $35 million as of March 31, 2018 and $33 million as of December 31, 2017.

A member of our Board of Directors and member of the Executive Committee and Finance Committee is a Partner in Norton Rose Fulbright US LLP, a law firm engaged by us for a variety of legal services. This Board member also provides personal legal services to our CEO and acts as trustee of certain trusts for the benefit of our CEO and his family.

 

(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 and deferred compensation liabilities, and liabilities incurred in connection with split-dollar life insurance agreements on the lives of our chief executive officer and his wife.

As of March 31, 2018, outside owners held noncontrolling, minority ownership interests of: (i) 20% in an acute care facility located in Washington, D.C.; (ii) approximately 11% in an acute care facility located in Texas; (iii) 20% and 30% in two behavioral health care facilities located in Pennsylvania and Ohio, respectively; (iv) approximately 5% in an acute care facility located in Nevada, and; (v) approximately 20% in an under-construction behavioral health care facility located in Spokane, Washington with an expected October 2018 opening. The noncontrolling interest and redeemable noncontrolling interest balances of $70 million and $6 million, respectively, as of March 31, 2018, consist primarily of the third-party ownership interests in these hospitals.

 

In connection with the two behavioral health care facilities located in Pennsylvania and Ohio, the minority ownership interests of which are reflected as redeemable noncontrolling interests on our Condensed Consolidated Balance Sheet, the outside owners have “put options” to put their 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.

 

 

8


 

 

(4) Treasury

Debt:

On June 7, 2016, we entered into a  Fifth Amendment (the “Fifth Amendment”) to our credit agreement dated as of November 15, 2010, as amended on March 15, 2011, September 21, 2012, May 16, 2013 and August 7, 2014, among UHS, as borrower, the several banks and other financial institutions from time to time parties thereto, as lenders (“Credit Agreement”). The Fifth Amendment increased the size of the term loan A facility by $200 million and those proceeds were utilized to repay outstanding borrowings under the revolving credit facility of the Credit Agreement. The Credit Agreement, as amended, which is scheduled to mature in August, 2019, consists of: (i) an $800 million revolving credit facility ($285 million of borrowings outstanding as of March 31, 2018), and; (ii) a term loan A facility with $1.753 billion of borrowings outstanding as of March 31, 2018.

Borrowings under the Credit Agreement bear interest at our election at either (1) the ABR rate which is defined as the rate per annum equal to the greatest of (a) the lender’s prime rate, (b) the weighted average of the federal funds rate, plus 0.5% and (c) one month LIBOR rate plus 1%, in each case, plus an applicable margin based upon our consolidated leverage ratio at the end of each quarter ranging from 0.50% to 1.25% for revolving credit and term loan-A borrowings, or (2) the one, two, three or six month LIBOR rate (at our election), plus an applicable margin based upon our consolidated leverage ratio at the end of each quarter ranging from 1.50% to 2.25% for revolving credit and term loan-A borrowings. As of March 31, 2018, the applicable margins were 0.50% for ABR-based loans and 1.50% for LIBOR-based loans under the revolving credit and term loan-A facilities.

As of March 31, 2018, we had $285 million of borrowings outstanding pursuant to the terms of our $800 million revolving credit facility and we had $446 million of available borrowing capacity net of $34 million of outstanding letters of credit and $35 million of outstanding borrowings pursuant to a short-term, on demand-credit facility. The revolving credit facility includes a $125 million sub-limit for letters of credit. The Credit Agreement is secured by certain assets of the Company (which generally excludes asset classes such as substantially all of the patient-related accounts receivable of our acute care hospitals, certain real estate assets and assets held in joint-ventures with third-parties) and our material subsidiaries and guaranteed by our material subsidiaries.

Pursuant to the terms of the Credit Agreement, term loan-A quarterly installment payments of approximately $22 million commenced during the fourth quarter of 2016 and are scheduled through June, 2019.  Previously, approximately $11 million of quarterly installment payments were made from the fourth quarter of 2014 through the third quarter of 2016.  

The 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, dividends and stock repurchases; and requires compliance with financial covenants including maximum leverage and minimum interest coverage ratios. We are in compliance with all required covenants as of March 31, 2018.

In late April, 2018, we entered into the sixth amendment to our accounts receivable securitization program (“Securitization”), dated as of October 27, 2010 with a group of conduit lenders, liquidity banks, and PNC Bank, National Association, as administrative agent, which provides for borrowings outstanding from time to time by certain of our subsidiaries in exchange for undivided security interests in their respective accounts receivable. The sixth amendment, among other things, extended the term of the Securitization program through April 26, 2021 and increased the borrowing capacity to $450 million (from $440 million previously). Although the program fee and certain other fees were adjusted in connection with the sixth amendment, substantially all other provisions of the Securitization program remained unchanged.  Pursuant to the terms of our Securitization program, substantially all of the patient-related accounts receivable of our acute care hospitals (“Receivables”) serve as collateral for the outstanding borrowings. We have accounted for this Securitization as borrowings. We maintain effective control over the Receivables since, pursuant to the terms of the Securitization, the Receivables are sold from certain of our subsidiaries to special purpose entities that are wholly-owned by us. The Receivables, however, are owned by the special purpose entities, can be used only to satisfy the debts of the wholly-owned special purpose entities, and thus are not available to us except through our ownership interest in the special purpose entities. The wholly-owned special purpose entities use the Receivables to collateralize the loans obtained from the group of third-party conduit lenders and liquidity banks. The group of third-party conduit lenders and liquidity banks do not have recourse to us beyond the assets of the wholly-owned special purpose entities that securitize the loans. At March 31, 2018, we had $440 million of outstanding borrowings pursuant to the terms of the Securitization and no available borrowing capacity, before giving effect to the $10 million increase in borrowing capacity effective in April, 2018 pursuant to the terms of the sixth amendment.  

As of March 31, 2018, we had combined aggregate principal of $1.4 billion from the following senior secured notes:

 

$300 million aggregate principal amount of 3.75% senior secured notes due in August, 2019 (“2019 Notes”) which were issued on August 7, 2014.  

 

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$700 million aggregate principal amount of 4.75% senior secured notes due in August, 2022 (“2022 Notes”) which were issued as follows:

 

o

$300 million aggregate principal amount issued on August 7, 2014 at par.

 

o

$400 million aggregate principal amount issued on June 3, 2016 at 101.5% to yield 4.35%.

 

 

$400 million aggregate principal amount of 5.00% senior secured notes due in June, 2026 (“2026 Notes”) which were issued on June 3, 2016.

Interest is payable on the 2019 Notes and the 2022 Notes on February 1 and August 1 of each year until the maturity date of August 1, 2019 for the 2019 Notes and August 1, 2022 for the 2022 Notes.  Interest on the 2026 Notes is payable on June 1 and December 1 until the maturity date of June 1, 2026. The 2019 Notes, 2022 Notes and 2026 Notes were offered only to qualified institutional buyers under Rule 144A and to non-U.S. persons outside the United States in reliance on Regulation S under the Securities Act of 1933, as amended (the “Securities Act”). The 2019 Notes, 2022 Notes and 2026 Notes have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

At March 31, 2018, the carrying value and fair value of our debt were each approximately $3.9 billion.  At December 31, 2017, the carrying value and fair value of our debt were approximately $4.0 billion and $4.1 billion, respectively.  The fair value of our debt was computed based upon quotes received from financial institutions. We consider these to be “level 2” in the fair value hierarchy as outlined in the authoritative guidance for disclosures in connection with debt instruments.

Cash Flow Hedges:

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

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

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

The fair value of interest rate swap agreements approximates the amount at which they could be settled, based on estimates obtained from the counterparties. We assess the effectiveness of our hedge instruments on a quarterly basis. We performed periodic assessments of the cash flow hedge instruments during the first three months of 2018 and the full year of 2017 and determined the hedges to be highly effective. We also determined that any portion of the hedges deemed to be ineffective was de minimis and therefore there was no material effect on our consolidated financial position, operations or cash flows. The counterparties to the interest rate swap agreements expose us to credit risk in the event of nonperformance. We do not anticipate nonperformance by our counterparties. We do not hold or issue derivative financial instruments for trading purposes.

Seven interest rate swaps on a total notional amount of $825 million matured in May, 2015. During 2015, we entered into nine forward starting interest rate swaps whereby we pay a fixed rate on a total notional amount of $1.0 billion and receive one-month LIBOR. The average fixed rate payable on these swaps, which are scheduled to mature on April 15, 2019, is 1.31%. These interest rates swaps consist of:

 

Four forward starting interest rate swaps, entered into during the second quarter of 2015, whereby we pay a fixed rate on a total notional amount of $500 million and receive one-month LIBOR. Each of the four swaps became effective on July 15, 2015 and are scheduled to mature on April 15, 2019. The average fixed rate payable on these swaps is 1.40%;

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Four forward starting interest rate swaps, entered into during the third quarter of 2015, whereby we pay a fixed rate on a total notional amount of $400 million and receive one-month LIBOR. One swap on a notional amount of $100 million became effective on July 15, 2015, two swaps on a total notional amount of $200 million became effective on September 15, 2015 and another swap on a notional amount of $100 million became effective on December 15, 2015. All of these swaps are scheduled to mature on April 15, 2019. The average fixed rate payable on these four swaps is 1.23%, and;

 

 

One interest rate swap, entered into during the fourth quarter of 2015, whereby we pay a fixed rate on a total notional amount of $100 million and receive one-month LIBOR. The swap became effective on December 15, 2015 and is scheduled to mature on April 15, 2019.  The fixed rate payable on this swap is 1.21%.

We measure our interest rate swaps at fair value on a recurring basis. The fair value of our interest rate swaps is based on quotes from our counterparties.  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. At March 31, 2018, the fair value of our interest rate swaps was a net asset of $9 million, $8 million of which is included in net accounts receivable and $1 million of which is included in other assets on the accompanying balance sheet.  At December 31, 2017, the fair value of our interest rate swaps was a net asset of $7 million, $4 million of which is included in net accounts receivable and $3 million of which is included in other assets on the accompanying consolidated balance sheet.    

Foreign Currency Forward Exchange Contracts:

We use forward exchange contracts to hedge our net investment in foreign operations against movements in exchange rates. The effective portion of the unrealized gains or losses on these contracts is recorded in foreign currency translation adjustment within accumulated other comprehensive income and remains there until either the sale or liquidation of the subsidiary. The cash flows from these contracts are reported as operating activities in the consolidated statements of cash flows. In connection with these forward exchange contracts, we recorded net cash outflows of $46 million and $8 million during the three-month periods ended March 31, 2018 and 2017, respectively.   

Cash, Cash Equivalents and Restricted Cash:

Cash, cash equivalents, and restricted cash as reported in the condensed consolidated statements of cash flows are presented separately on our condensed consolidated balance sheets as follow (in thousands):

 

March 31,

 

 

December 31,

 

 

2018

 

 

2017

 

Cash and cash equivalents

$

73,053

 

 

$

74,423

 

Restricted cash (a)

 

93,163

 

 

 

92,874

 

Total cash, cash equivalents and restricted cash

$

166,216

 

 

$

167,297

 

 

 

 

 

 

 

 

 

(a) Restricted cash, associated with an insurance subsidiary, is included in other assets on the accompanying consolidated balance sheet.

 

The fair value of our restricted cash was computed based upon quotes received from financial institutions. We consider these to be “level 1” in the fair value hierarchy as outlined in the authoritative guidance for disclosures in connection with financial securities.

 

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(5) Commitments and Contingencies

Professional and General Liability, Workers’ Compensation Liability

Effective January, 2017, the vast majority of our subsidiaries are self-insured for professional and general liability exposure up to $5 million and $3 million per occurrence, respectively, subject to certain aggregate limitations.  Prior to January, 2017, the vast majority of our subsidiaries were self-insured for professional and general liability exposure up to $10 million and $3 million per occurrence, respectively. These subsidiaries are provided with several excess policies through commercial insurance carriers which provide for coverage in excess of the applicable per occurrence self-insured retention or underlying policy limits up to $250 million per occurrence and in the aggregate for claims incurred after 2013 and up to $200 million per occurrence and in the aggregate for claims incurred from 2011 through 2013. We remain liable for 10%, up to an annual aggregate limitation of $5 million, of the claims paid pursuant to the commercially insured excess coverage. In addition, from time to time based upon marketplace conditions, we may elect to purchase additional commercial coverage for certain of our facilities or businesses.  Our behavioral health care facilities located in the U.K. have policies through a commercial insurance carrier located in the U.K. that provides for £10 million of professional liability coverage and £25 million of general liability coverage. The coverage for the facilities located in the U.K. acquired in late December, 2016 in connection with our acquisition of the Cambian Group, PLC’s adult services division is similar to the above-mentioned U.K. insurance program.  

As of March 31, 2018, the total accrual for our professional and general liability claims was $232 million, of which $54 million was included in current liabilities. As of December 31, 2017, the total accrual for our professional and general liability claims was $229 million, of which $54 million was included in current liabilities.  

At each of March 31, 2018 and December 31, 2017, the total accrual for our workers’ compensation liability claims was $70 million, of which $35 million is included in current liabilities.  

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. Although we are unable to predict whether or not our future financial statements will include adjustments to our prior year reserves for self-insured general and professional and workers’ compensation claims, given the relatively unpredictable nature of the these potential liabilities and the factors impacting these reserves, as discussed above, it is reasonably likely that our future financial results may include material adjustments to prior period reserves.

Property Insurance:

We have commercial property insurance policies for our properties covering catastrophic losses, including windstorm damage, up to a $1 billion policy limit, subject to a deductible ranging from $50,000 to $250,000 per occurrence. Losses resulting from named windstorms are subject to deductibles between 3% and 5% of the 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). Commercially insured earthquake coverage for our facilities is subject to various deductibles and limitations including: (i) $500 million limitation for our facilities located in Nevada; (ii) $130 million limitation for our facilities located in California; (iii) $100 million limitation for our facilities located in fault zones within the United States; (iv) $40 million limitation for our facility located in Puerto Rico, and; (v) $250 million limitation for many of our facilities located in other states. Deductibles for flood losses vary in amount, up to a maximum of $500,000, based upon location of the facility. Since certain of our facilities have been designated by our insurer as flood prone, we have elected to purchase policies from The National Flood Insurance Program.  Property insurance for our behavioral health facilities located in the U.K. are provided on an all risk basis up to a £1.29 billion policy limit, with coverage caps per location, that includes coverage for real and personal property as well as business interruption losses.

Other

Our accounts receivable as of March 31, 2018 and December 31, 2017 include amounts due from Illinois of approximately $35 million and $25 million, respectively. Collection of the outstanding receivables continues to be delayed due to state budgetary and funding pressures. Approximately $15 million as of March 31, 2018 and $8 million as of December 31, 2017, of the receivables due from Illinois were outstanding in excess of 60 days, as of each respective date. Although the accounts receivable due from Illinois could remain outstanding for the foreseeable future, since we expect to eventually collect all amounts due to us, no related reserves have been established in our consolidated financial statements. However, we can provide no assurance that we will eventually collect

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all amounts due to us from Illinois. Failure to ultimately collect all outstanding amounts due to us from Illinois would have an adverse impact on our future consolidated results of operations and cash flows.

As of March 31, 2018 we were party to certain off balance sheet arrangements consisting of standby letters of credit and surety bonds which totaled $117 million consisting of: (i) $108 million related to our self-insurance programs, and; (ii) $9 million of other debt and public utility guarantees.

Legal Proceedings

We operate in a highly regulated and litigious industry which subjects us to various claims and lawsuits in the ordinary course of business as well as regulatory proceedings and government investigations. These claims or suits include claims for damages for personal injuries, medical malpractice, commercial/contractual disputes, wrongful restriction of, or interference with, physicians’ staff privileges, and employment related claims. In addition, health care companies are subject to investigations and/or actions by various state and federal governmental agencies or those bringing claims on their behalf. Government action has increased with respect to investigations and/or allegations against healthcare providers concerning possible violations of fraud and abuse and false claims statutes as well as compliance with clinical and operational regulations. Currently, and from time to time, we and some of our facilities are subjected to inquiries in the form of subpoenas, Civil Investigative Demands, audits and other document requests from various federal and state agencies. These inquiries can lead to notices and/or actions including repayment obligations from state and federal government agencies associated with potential non-compliance with laws and regulations. Further, the federal False Claim Act allows private individuals to bring lawsuits (qui tam actions) against healthcare providers that submit claims for payments to the government. Various states have also adopted similar statutes. When such a claim is filed, the government will investigate the matter and decide if they are going to intervene in the pending case. These qui tam lawsuits are placed under seal by the court to comply with the False Claims Act’s requirements. If the government chooses not to intervene, the private individual(s) can proceed independently on behalf of the government. Health care providers that are found to violate the False Claims Act may be subject to substantial monetary fines/penalties as well as face potential exclusion from participating in government health care programs or be required to comply with Corporate Integrity Agreements as a condition of a settlement of a False Claim Act matter. In September 2014, the Criminal Division of the Department of Justice (“DOJ”) announced that all qui tam cases will be shared with their Division to determine if a parallel criminal investigation should be opened. The DOJ has also announced an intention to pursue civil and criminal actions against individuals within a company as well as the corporate entity or entities. In addition, health care facilities are subject to monitoring by state and federal surveyors to ensure compliance with program Conditions of Participation. In the event a facility is found to be out of compliance with a Condition of Participation and unable to remedy the alleged deficiency(s), the facility faces termination from the Medicare and Medicaid programs or compliance with a System Improvement Agreement to remedy deficiencies and ensure compliance.

The laws and regulations governing the healthcare industry are complex covering, among other things, government healthcare participation requirements, licensure, certification and accreditation, privacy of patient information, reimbursement for patient services as well as fraud and abuse compliance. These laws and regulations are constantly evolving and expanding. Further, the Affordable Care Act has added additional obligations on healthcare providers to report and refund overpayments by government healthcare programs and authorizes the suspension of Medicare and Medicaid payments “pending an investigation of a credible allegation of fraud.” We monitor our business and have developed an ethics and compliance program with respect to these complex laws, rules and regulations. Although we believe our policies, procedures and practices comply with government regulations, there is no assurance that we will not be faced with the sanctions referenced above which include fines, penalties and/or substantial damages, repayment obligations, payment suspensions, licensure revocation, and expulsion from government healthcare programs. Even if we were to ultimately prevail in any action brought against us or our facilities or in responding to any inquiry, such action or inquiry could have a material adverse effect on us.

Certain legal matters are described below:

Government Investigations:

UHS Behavioral Health

In February, 2013, the Office of Inspector General for the United States Department of Health and Human Services (“OIG”) served a subpoena requesting various documents from January, 2008 to the date of the subpoena directed at Universal Health Services, Inc. (“UHS”) concerning it and UHS of Delaware, Inc., and certain UHS owned behavioral health facilities including: Keys of Carolina, Old Vineyard Behavioral Health, The Meadows Psychiatric Center, Streamwood Behavioral Health, Hartgrove Hospital, Rock River Academy and Residential Treatment Center, Roxbury Treatment Center, Harbor Point Behavioral Health Center, f/k/a The Pines Residential Treatment Center, including the Crawford, Brighton and Kempsville campuses, Wekiva Springs Center and River Point Behavioral Health.   Prior to receipt of this subpoena, some of these facilities had received independent subpoenas from state or federal agencies. Subsequent to the February 2013 subpoenas, some of the facilities above have received additional, specific subpoenas or other document and information requests.  In addition to the OIG, the DOJ and various U.S. Attorneys’ and state Attorneys’ General Offices are also involved in this matter. Since February 2013, additional facilities have also received subpoenas and/or document and information requests or we have been notified are included in the omnibus investigation.  Those facilities

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include: National Deaf Academy, Arbour-HRI Hospital, Behavioral Hospital of Bellaire, St. Simons By the Sea, Turning Point Care Center, Salt Lake Behavioral Health, Central Florida Behavioral Hospital, University Behavioral Center, Arbour Hospital, Arbour-Fuller Hospital, Pembroke Hospital, Westwood Lodge, Coastal Harbor Health System, Shadow Mountain Behavioral Health, Cedar Hills Hospital, Mayhill Hospital, Southern Crescent Behavioral Health (Anchor Hospital and Crescent Pines campuses), Valley Hospital (AZ), Peachford Behavioral Health System of Atlanta, University Behavioral Health of Denton, and El Paso Behavioral Health System.

In October, 2013, we were advised that the DOJ’s Criminal Frauds Section had opened an investigation of River Point Behavioral Health and Wekiva Springs Center. Since that time, we have been notified that the Criminal Frauds section has opened investigations of National Deaf Academy, Hartgrove Hospital and UHS as a corporate entity. In April 2017, the DOJ’s Criminal Division issued a subpoena requesting documentation from Shadow Mountain Behavioral Health. In August 2017, Kempsville Center of Behavioral Health (a part of Harbor Point Behavioral Health previously identified above) received a subpoena requesting documentation.

In April, 2014, the Centers for Medicare and Medicaid Services (“CMS”) instituted a Medicare payment suspension at River Point Behavioral Health in accordance with federal regulations regarding suspension of payments during certain investigations. The Florida Agency for Health Care Administration (“AHCA”) subsequently issued a Medicaid payment suspension for the facility. River Point Behavioral Health submitted a rebuttal statement disputing the basis of the suspension and requesting revocation of the suspension. Notwithstanding, CMS continued the payment suspension. River Point Behavioral Health provided additional information to CMS in an effort to obtain relief from the payment suspension but the Medicare suspension remains in effect. In June 2017, AHCA advised that while they were maintaining the suspension for dual eligible and cross-over Medicare beneficiaries, the Medicaid payment suspension was lifted effective June 27, 2017. We cannot predict if and/or when the facility’s remaining suspended payments will resume in total. From inception through March 31, 2018, the aggregate funds withheld from us in connection with the River Point Behavioral Health payment suspension amounted to approximately $10 million. Although the operating results of River Point Behavioral Health did not have a material impact on our consolidated results of operations during the three-month period ended March 31, 2018 or the year ended December 31, 2017, the payment suspension has had a material adverse effect on the facility’s results of operations and financial condition.

The DOJ has advised us that the civil aspect of the coordinated investigation referenced above is a False Claims Act investigation focused on billings submitted to government payors in relation to services provided at those facilities. During the first quarter of 2018, we recorded a $13 million pre-tax increase to the reserve established in connection with the civil aspects of these matters increasing the aggregate pre-tax reserve to $35 million. Changes in the reserve may be required in future periods as discussions with the DOJ continue and additional information becomes available. We cannot predict the ultimate resolution of these matters and therefore can provide no assurance that final amounts paid in settlement or otherwise, if any, or associated costs, will not differ materially from our established reserve.  

Litigation:

U.S. ex rel Escobar v. Universal Health Services, Inc. et.al.

This is a False Claims Act case filed against Universal Health Services, Inc., UHS of Delaware, Inc. and HRI Clinics, Inc. d/b/a Arbour Counseling Services in U.S. District Court for the District of Massachusetts.  This qui tam action primarily alleges that Arbour Counseling Services failed to appropriately supervise certain clinical providers in contravention of  regulatory requirements and the submission of claims to Medicaid were subsequently improper.  Relators make other claims of improper billing to Medicaid associated with alleged failures of Arbour Counseling to comply with state regulations.  The U.S. Attorney’s Office and the Massachusetts Attorney General’s Office initially declined to intervene.  UHS filed a motion to dismiss and the trial court originally granted the motion dismissing the case.  The First Circuit Court of Appeals (“First Circuit”) reversed the trial court’s dismissal of the case.  The United States Supreme Court subsequently vacated the First Circuit’s opinion and remanded the case for further consideration under the new legal standards established by the Supreme Court for False Claims Act cases.  During the 4th quarter of 2016, the First Circuit issued a revised opinion upholding their reversal of the trial court’s dismissal.  The case was then remanded to the trial court for further proceedings.  In January 2017, the U.S. Attorney’s Office and Massachusetts Attorney General’s Office advised of the potential for intervention in the case.  The Massachusetts Attorney General’s Office subsequently filed its motion to intervene which was granted and, in April 2017, filed their Complaint in Intervention. We are defending this case vigorously.  At this time, we are uncertain as to potential liability or financial exposure, if any, which may be associated with this matter.  

Shareholder Class Action

In December 2016 a purported shareholder class action lawsuit was filed in U.S. District Court for the Central District of California against UHS, and certain UHS officers alleging violations of the federal securities laws.  Plaintiff alleges that defendants violated federal securities laws relating to the disclosures made in public filings associated with practices at our behavioral health facilities.  The case was originally filed as Heed v. Universal Health Services, Inc. et. al. (Case No. 2:16-CV-09499-PSG-JC). The court subsequently appointed Teamsters Local 456 Pension Fund and Teamsters Local 456 Annuity Fund to serve as lead plaintiffs.  The case has been transferred to the U.S. District Court for the Eastern District of Pennsylvania and the style of the case has been changed to Teamsters Local 456 Pension Fund, et. al. v. Universal Health Services, Inc. et. al. (Case No. 2:17-CV-02817-LS). In September, 2017, Teamsters Local 456 Pension Fund filed an amended complaint. In December 2017, we filed a motion to dismiss the amended

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complaint. We deny liability and intend to defend ourselves vigorously. At this time, we are uncertain as to potential liability or financial exposure, if any, which may be associated with this matter.

Shareholder Derivative Cases  

In March 2017, a shareholder derivative suit was filed by plaintiff David Heed in the Court of Common Pleas of Philadelphia County. A notice of removal to the United States District Court for the Eastern District of Pennsylvania was filed (Case No. 2:17-cv-01476-LS). Plaintiff filed a motion to remand. In December 2017, the Court denied plaintiff’s motion to remand and has retained the case in federal court. The suit alleges breaches of fiduciary duties and other allegedly wrongful conduct by the members of the Board of Directors and certain officers of Universal Health Services, Inc. relating to practices at our behavioral health facilities. UHS has been named as a nominal defendant in the case.  In May, June and July 2017, additional shareholder derivative suits were filed in the United States District Court for the Eastern District of Pennsylvania. The plaintiffs in those cases are: Central Laborers’ Pension Fund (Case No. 17-cv-02187-LS); Firemen’s Retirement System of St. Louis (Case No. 17—cv-02317-LS); Waterford Township Police & Fire Retirement System (Case No. 17-cv-02595-LS); and Amalgamated Bank Longview Funds (Case No. 17-cv-03404-LS). The Fireman’s Retirement System case has since been voluntarily dismissed. The federal court has consolidated all of the cases pending in the Eastern District of Pennsylvania and has appointed Amalgamated Bank Longview Funds as the lead plaintiff and their counsel as lead counsel. In addition, a shareholder derivative case was filed in Chancery Court in Delaware by the Delaware County Employees’ Retirement Fund (Case No. 2017-0475-JTL). In December 2017, the Chancery Court stayed this case pending resolution of other contemporaneous matters. These additional cases make substantially similar allegations and claims based upon alleged violations of federal securities laws as well common law causes of action against the individual defendants. All of these additional cases have also named members of the UHS Board of Directors as well as certain officers of the Company.  The defendants deny liability and intend to defend these cases vigorously.  At this time, we are uncertain as to potential liability or financial exposure, if any, which may be associated with these matters.

Chowdary v. Universal Health Services, Inc., et. al.

This is a lawsuit filed in 1999 in state court in Hidalgo County, Texas by a physician and his professional associations alleging tortious interference with contractual relationships and retaliation against McAllen Medical Center in McAllen, Texas as well as Universal Health Services, Inc. The state court has entered a summary judgment order awarding plaintiff $3.85 million in damages.  With prejudgment interest, the total amount of the order amounts to approximately $9 million, for which a reserve is included in our financial statements as of December 31, 2017. A trial on punitive damages, emotional distress and attorneys’ fees remains to be conducted if the summary judgment order is not vacated.  The case has been removed to federal court. Plaintiffs filed a motion to remand. In February 2018, the federal court denied plaintiffs’ motion to remand and retained the case in federal court. Plaintiffs have filed a writ of mandamus with the 5th Circuit Court of Appeals seeking to overturn the federal court’s decision denying remand. We have filed a motion for reconsideration of state court’s summary judgment order in the federal court proceeding.  

Disproportionate Share Hospital Payment Matter:

In late September, 2015, many hospitals in Pennsylvania, including seven of our behavioral health care hospitals located in the state, received letters from the Pennsylvania Department of Human Services (the “Department”) demanding repayment of allegedly excess Medicaid Disproportionate Share Hospital payments (“DSH”) for the federal fiscal year 2011 (“FFY2011”) amounting to approximately $4 million in the aggregate. Since that time, we have received similar requests for repayment for alleged DSH overpayments for FFYs 2012 and 2013 aggregating to approximately $11 million. We filed administrative appeals for all of our facilities contesting the recoupment efforts for FFYs 2011 through 2013 as we believe the Department’s calculation methodology is inaccurate and conflicts with applicable federal and state laws and regulations. The Department has agreed to postpone the recoupment of the state’s share of the DSH payments until all hospital appeals are resolved but started recoupment of the federal share.  The Department will likely make similar repayment demand for FFY 2014. Due to a change in the Pennsylvania Medicaid State Plan and implementation of a CMS-approved Medicaid Section 1115 Waiver, we do not believe the methodology applied by the Department to FFYs 2011 through 2013 is applicable to reimbursements received for Medicaid services provided after January 1, 2015 by our behavioral health care facilities located in Pennsylvania. We can provide no assurance that we will ultimately be successful in our legal and administrative appeals related to the Department’s repayment demands.  If our legal and administrative appeals are unsuccessful, our future consolidated results of operations and financial condition could be adversely impacted by these repayments.        

Matters Relating to Psychiatric Solutions, Inc. (“PSI”):

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

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. All documents requested and produced pertained to the operations of the facility while under PSI’s ownership prior to our

15


acquisition. 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 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 were collected and provided to the DOJ for review and examination. Another subpoena was issued to the facility in July, 2011 requesting additional documents, which have also been delivered to the DOJ. All documents requested and produced pertained to the operations of the facility while under PSI’s ownership prior to our acquisition. 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.

Other Matters:

Various other suits, claims and investigations, including government subpoenas, arising against, or issued to, us are pending and additional such matters may arise in the future. Management will consider additional disclosure from time to time to the extent it believes such matters may be or become material. 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 described above or that are otherwise pending 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 matter  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.

 

16


(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, but not limited to, information technology, purchasing, reimbursement, accounting and finance, taxation, legal, advertising and design and construction. The chief operating decision making group for our acute care services and behavioral health care services is comprised of our Chief Executive Officer, the President and the Presidents of each operating segment. The Presidents for 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, 2017. 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, and overhead expenses incurred on behalf of both segments are captured and allocated to each segment based upon each segment’s respective percentage of total operating expenses.

 

 

 

Three months ended March 31, 2018

 

 

 

Acute Care

Hospital

Services

 

 

Behavioral

Health

Services (a)

 

 

Other

 

 

Total

Consolidated

 

 

 

(Amounts in thousands)

 

Gross inpatient revenues

 

$

6,361,766

 

 

$

2,402,258

 

 

$

0

 

 

$

8,764,024

 

Gross outpatient revenues

 

$

3,714,661

 

 

$

255,181

 

 

$

0

 

 

$

3,969,842

 

Total net revenues

 

$

1,445,632

 

 

$

1,237,996

 

 

$

3,888

 

 

$

2,687,516

 

Income/(loss) before allocation of corporate overhead and

   income taxes

 

$

203,711

 

 

$

238,748

 

 

$

(146,221

)

 

$

296,238

 

Allocation of corporate overhead

 

$

(49,891

)

 

$

(40,332

)

 

$

90,223

 

 

$

0

 

Income/(loss) after allocation of corporate overhead and

   before income taxes

 

$

153,820

 

 

$

198,416

 

 

$

(55,998

)

 

$

296,238

 

Total assets as of March 31, 2018

 

$

3,924,302

 

 

$

6,649,732

 

 

$

449,483

 

 

$

11,023,517

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2017

 

 

 

Acute Care

Hospital

Services

 

 

Behavioral

Health

Services (a)

 

 

Other

 

 

Total

Consolidated

 

 

 

(Amounts in thousands)

 

Gross inpatient revenues

 

$

5,597,850

 

 

$

2,183,002

 

 

$

0

 

 

$

7,780,852

 

Gross outpatient revenues

 

$

3,294,177

 

 

$

246,460

 

 

$

0

 

 

$

3,540,637

 

Total net revenues

 

$

1,389,547

 

 

$

1,218,122

 

 

$

5,189

 

 

$

2,612,858

 

Income/(loss) before allocation of corporate overhead and

   income taxes

 

$

187,804

 

 

$

251,931

 

 

$

(121,309

)

 

$

318,426

 

Allocation of corporate overhead

 

$

(45,676

)

 

$

(39,661

)

 

$

85,337

 

 

$

0

 

Income/(loss) after allocation of corporate overhead and

   before income taxes

 

$

142,128

 

 

$

212,270

 

 

$

(35,972

)

 

$

318,426

 

Total assets as of March 31, 2017

 

$

3,757,311

 

 

$

6,517,608

 

 

$

173,340

 

 

$

10,448,259

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Includes net revenues generated from our behavioral health care facilities located in the U.K. amounting to approximately $115 million and $100 million for the three-month periods ended March 31, 2018 and 2017, respectively.  Total assets at our U.K. behavioral health care facilities were approximately $1.176 billion and $992 million as of March 31, 2018 and 2017, respectively.

 

(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.

17


The following table sets forth the computation of basic and diluted earnings per share for classes A, B, C and D common stockholders for the periods indicated (in thousands, except per share data): 

 

 

 

Three months ended

March 31,

 

 

 

2018

 

 

2017

 

Basic and Diluted:

 

 

 

 

 

 

 

 

Net income attributable to UHS

 

$

223,832

 

 

$

206,055

 

Less: Net income attributable to unvested restricted share

   grants

 

 

(104

)

 

 

(94

)

Net income attributable to UHS – basic and diluted

 

$

223,728

 

 

$

205,961

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares - basic

 

 

94,226

 

 

 

96,585

 

Net effect of dilutive stock options and grants based on the

   treasury stock method

 

 

457

 

 

 

787

 

Weighted average number of common shares and

   equivalents - diluted

 

 

94,683

 

 

 

97,372

 

Earnings per basic share attributable to UHS:

 

$

2.37

 

 

$

2.13

 

Earnings per diluted share attributable to UHS:

 

$

2.36

 

 

$

2.12

 

 

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 2.9 million for the three months ended March 31, 2018. The excluded weighted-average stock options totaled 5.7 million for the three months ended March 31, 2017.  All classes of our common stock have the same dividend rights.

Stock-Based Compensation:

During the three-month periods ended March 31, 2018 and 2017, pre-tax compensation cost of $18.9 million and $14.9 million, respectively, was recognized related to outstanding stock options.  In addition, during the three-month periods ended March 31, 2018 and 2017, pre-tax compensation cost of approximately $545,000 and $150,000 (net of cancellations), respectively, was recognized related to restricted stock.  As of March 31, 2018 there was approximately $87.0 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 2.4 years. There were 4,000 stock options granted during the first three months of 2018 with a weighted-average grant date fair value of $29.6425 per share.  There were 16,926 shares of restricted shares granted during the first three months of 2018 with a weighted-average grant date fair value of $117.98 per share.

The expense associated with stock-based compensation arrangements is a non-cash charge. In the Condensed Consolidated Statements of Cash Flows, stock-based compensation expense is an adjustment to reconcile net income to cash provided by operating activities and aggregated to $19.7 million and $15.3 million during the three-month periods ended March 31, 2018 and 2017, respectively. 

 

(8) Dispositions and acquisitions

Three-month period ended March 31, 2018:

Acquisitions:

During the first quarter of 2018, we paid approximately $21 million to acquire businesses and property consisting primarily of the acquisition of a 109-bed behavioral health care facility located in Gulfport, Mississippi. 

Divestitures:

During the first quarter of 2018, there were no significant divestitures.

 

Three-month period ended March 31, 2017:

Acquisitions:

During the first quarter of 2017, we paid approximately $18 million to acquire various property assets.

Divestitures:

During the first quarter of 2017, there were no divestitures.

 

18


(9) Dividends

We declared and paid dividends of $9.4 million, or $.10 per share, during the first quarter of 2018 and $9.7 million or $.10 per share during the first quarter of 2017.

 

(10) Income Taxes

 

Our effective income tax rate was 22.8% for the three months ended March 31, 2018, compared with 33.9% for the three months ended March 31, 2017.  The decrease in the effective tax rates for the three months ended March 31, 2018, compared with the same period in 2017, was primarily due to the Tax Cuts and Jobs Act of 2017 (the “TCJA-17”), which reduced the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018, partially offset by a $5 million increase in our provision for income taxes due to an unfavorable change resulting from our January 1, 2017 adoption of ASU 2016-09,“Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”, which decreased our provision for income taxes by $2 million during the first quarter of 2018 as compared to $7 million during the first quarter 2017.

 

The TCJA-17 enacted on December 22, 2017 makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations through the implementation of a territorial tax system; and (5) creating a new limitation on deductible interest expense.  Due to the complexities involved in accounting for the TCJA-17, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118"), which allows a measurement period of up to one year after the enactment date of the TCJA-17 to finalize the recording of the related tax impacts.  We applied the guidance in SAB 118 and at December 31, 2017, recorded provisional estimates to re-measure our deferred taxes using the new 21% rate ($30 million tax benefit) and to record an estimated transition tax ($11.3 million expense).  During the three months ended March 31, 2018, we have not made any additional measurement period adjustments related to the provisional estimates recorded at December 31, 2017.  However, we are continuing to gather additional information to complete our accounting for these items and expect to complete our accounting within the prescribed measurement period.

 

The global intangible low-taxed income (“GILTI”) provisions from the TCJA-17 require the inclusion of the earnings of certain foreign subsidiaries in excess of an acceptable rate of return on certain assets of the respective subsidiaries in our U.S. tax return for tax years beginning after December 31, 2017.  We recorded an estimate in our effective tax rate for the three months ended March 31, 2018.  Due to the complexities around the calculation we have not recorded any provisional deferred tax effects related to the GILTI tax and will not make an accounting policy election at this time with respect to deferred tax effects of GILTI for our consolidated financial statements three months ended March 31, 2018.

 

As of January 1, 2018, our unrecognized tax benefits were approximately $1 million. The amount, if recognized, that would favorably affect the effective tax rate is approximately $1 million. During the three months ended March 31, 2018, 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 March 31, 2018, we have less than $1 million of accrued interest and penalties. The U.S. federal statute of limitations remains open for 2014 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.  It is reasonably possible that the amount of uncertain tax benefits will change during the next 12 months, however, it is anticipated that any such change, if it were to occur, would not have a material impact on our results of operations.

 

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.

 

(11) Revenue

In May 2014 and March 2016, the FASB issued ASU 2014-09 and ASU 2016-08, “Revenue from Contracts with Customers (Topic 606)” and “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”, respectively, which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Under the new standards, our estimate for amounts not expected to be collected based on historical experience will continue to be recognized as a reduction to net revenue. However, subsequent changes in estimate of collectability due to a change in the financial status of a payor, for example a bankruptcy, will be recognized as bad debt expense in operating charges.

19


The performance obligation is separately identifiable from other promises in the contract. As the performance obligations are met (i.e.: room, board, ancillary services, level of care), revenue is recognized based upon allocated transaction price. The transaction price is allocated to separate performance obligations based upon the relative standalone selling price. In instances where we determine there are multiple performance obligations across multiple months, the transaction price will be allocated by applying an estimated implicit and explicit rate to gross charges based on the separate performance obligations.

In assessing collectability, we have elected the portfolio approach.  This portfolio approach is being used as we have large volume of similar contracts with similar classes of customers. We reasonably expect that the effect of applying a portfolio approach to a group of contracts would not differ materially from considering each contract separately.  Management’s judgment to group the contracts by portfolio is based on the payment behavior expected in each portfolio category.  As a result, aggregating all of the contracts (which are at the patient level) by the particular payor or group of payors, will result in the recognition of the same amount of revenue as applying the analysis at the individual patient level.

On January 1, 2018, we adopted the new accounting standard using the modified retrospective method. The information in comparative periods have not been restated and continues to be reported under the accounting standards in effect for those periods. In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our condensed consolidated income statement was as follows (in thousands):

 

 

 

 

 

 

Balances

 

 

 

 

 

 

 

 

 

 

Without

 

 

 

 

 

 

As

 

 

Adoption

 

 

Effect

 

2018

Reported

 

 

ASC 606

 

 

of Change

 

Net Revenue before provision for doubtful accounts

 

 

 

 

$

2,931,527

 

 

 

 

 

Less: Provision for doubtful accounts

 

 

 

 

 

246,543

 

 

 

 

 

Net Revenues

$

2,687,516

 

 

$

2,684,984

 

 

$

2,532

 

 

 

 

 

 

 

 

 

 

 

 

 

Other operating expenses

$

620,819

 

 

$

618,287

 

 

$

2,532

 

 

We group our revenues into categories based on payment behaviors.  Each component has its own reimbursement structure which allows us to disaggregate the revenue into categories that share the nature and timing of payments.  The other patient revenue consists primarily of self-pay, government-funded non-Medicaid, and other.

 

The following table disaggregates our revenue by major source for the three month periods ended March 31, 2018 and 2017 (in thousands):

 

2018

Acute Care

 

 

Behavioral Health

 

 

Other

 

 

Total

 

Medicare

$

342,718

 

 

24

%

 

$

142,527

 

 

12

%

 

 

 

 

 

$

485,245

 

 

18

%

Managed Medicare

 

176,957

 

 

12

%

 

 

44,995

 

 

4

%

 

 

 

 

 

 

221,952

 

 

8

%

Medicaid

 

105,966

 

 

7

%

 

 

177,336

 

 

14

%

 

 

 

 

 

 

283,302

 

 

11

%

Managed Medicaid

 

111,277

 

 

8

%

 

 

230,776

 

 

19

%

 

 

 

 

 

 

342,053

 

 

13

%

Managed Care (HMO and PPOs)

 

497,780

 

 

34

%

 

 

358,062

 

 

29

%

 

 

 

 

 

 

855,842

 

 

32

%

UK Revenue

 

0

 

 

0

%

 

 

114,741

 

 

9

%

 

 

 

 

 

 

114,741

 

 

4

%

Other patient revenue

 

112,570

 

 

8

%

 

 

116,985

 

 

9

%

 

 

 

 

 

 

229,555

 

 

9

%

Other non-patient revenue

 

98,364

 

 

7

%

 

 

52,574

 

 

4

%

 

 

3,888

 

 

 

154,826

 

 

6

%

Total Net Revenue

$

1,445,632

 

 

100

%

 

$

1,237,996

 

 

100

%

 

$

3,888

 

 

 

2,687,516

 

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

Acute Care

 

 

Behavioral Health

 

 

Other

 

 

Total

 

Medicare

$

316,385

 

 

23

%

 

$

146,645

 

 

12

%

 

 

 

 

 

$

463,030

 

 

18

%

Managed Medicare

 

144,047

 

 

10

%

 

 

36,674

 

 

3

%

 

 

 

 

 

 

180,721

 

 

7

%

Medicaid

 

92,657

 

 

7

%

 

 

180,949

 

 

15

%

 

 

 

 

 

 

273,606

 

 

10

%

Managed Medicaid

 

114,552

 

 

8

%

 

 

217,645

 

 

18

%

 

 

 

 

 

 

332,197

 

 

13

%

Managed Care (HMO and PPOs)

 

477,266

 

 

34

%

 

 

355,338

 

 

29

%

 

 

 

 

 

 

832,604

 

 

32

%

UK Revenue

 

0

 

 

0

%

 

 

100,022

 

 

8

%

 

 

 

 

 

 

100,022

 

 

4

%

Other patient revenue

 

123,374

 

 

9

%

 

 

124,798

 

 

10

%

 

 

 

 

 

 

248,172

 

 

9

%

Other non-patient revenue

 

121,266

 

 

9

%