UNIVERSAL HEALTH SERVICES INC - 10-Q Quarterly Report

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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(MARK ONE)

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

For the quarterly period ended March 31, 2004

¨ 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 office) (Zip Code)

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common shares outstanding, as of April 30, 2004:


Class A		3,328,404
Class B		54,471,245
Class C		335,800
Class D		30,223

UNIVERSAL HEALTH SERVICES, INC.

I N D E X


		PAGE NO.
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Statements of Income - Three Months Ended March 31, 2004 and 2003		3

Condensed Consolidated Balance Sheets - March 31, 2004 and December 31, 2003		4

Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 2004 and 2003		5

Notes to Condensed Consolidated Financial Statements		6 through 13

Item 2. Management’s Discussion and Analysis of Operations and Financial Condition		14 through 26

PART II. Other Information		27 through 28

Signatures		29

Page 2 of 29 Pages

PART I. FINANCIAL INFORMATION

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(000s omitted except per share amounts)

(unaudited)


	Three Months Ended March 31,
	2004		2003
Net revenues	$	1,035,482	$	886,079

Operating charges:
Salaries, wages and benefits		421,157		351,357
Other operating expenses		235,871		201,518
Supplies expense		144,937		119,329
Provision for doubtful accounts		87,227		65,247
Depreciation and amortization		39,378		34,189
Lease and rental expense		18,336		15,683

		946,906		787,323

Income before interest expense, minority interests, income taxes, and discontinued operations		88,576		98,756
Interest expense, net		10,911		9,849
Minority interests in earnings of consolidated entities		4,919		5,030

Income from continuing operations before income taxes		72,746		83,877
Provision for income taxes		26,946		30,990

Income from continuing operations		45,800		52,887
Income (loss) from discontinued operations, net of income tax expense of $219 in 2004 and benefit of ($58) in 2003		383		(97	)

Net income	$	46,183	$	52,790

Basic earnings per share:
From continuing operations	$	0.80	$	0.91
From discontinued operations		—		—

Total basic earnings per share	$	0.80	$	0.91

Diluted earnings per share:
From continuing operations	$	0.74	$	0.84
From discontinued operations		—		—

Total diluted earnings per share	$	0.74	$	0.84

Weighted average number of common shares - basic		57,564		58,277
Add: Shares for conversion of convertible debentures		6,577		6,577
Other share equivalents		946		742

Weighted average number of common shares and equivalents - diluted		65,087		65,596

See accompanying notes to these condensed consolidated financial statements.

Page 3 of 29 Pages

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(000s omitted, except number of shares)


	March 31, 2004			December 31, 2003
Assets
Current assets:
Cash and cash equivalents	$	38,381		$	35,068
Accounts receivable, net		602,159			499,074
Supplies		64,571			61,368
Deferred income taxes		18,132			25,271
Other current assets		41,543			19,752

Total current assets		764,786			640,533

Property and equipment		2,214,395			2,064,813
Less: accumulated depreciation		(795,434	)		(762,788	)

		1,418,961			1,302,025
Other assets:
Goodwill		587,180			442,504
Deferred charges		14,489			15,832
Other		133,367			330,436

		735,036			788,772

Assets of facilities held for sale		46,438			41,400

	$	2,965,221		$	2,772,730

Liabilities and Stockholders’ Equity
Current liabilities:
Current maturities of long-term debt	$	12,528		$	10,871
Accounts payable and accrued liabilities		431,870			368,245
Liabilities of facilities held for sale		9,382			2,014
Federal and state taxes		30,095			14,623

Total current liabilities		483,875			395,753

Other noncurrent liabilities		229,961			216,094

Minority interest		178,419			159,554

Long-term debt, net of current maturities		895,882			868,566

Deferred income taxes		43,755			41,841

Common stockholders’ equity:
Class A Common Stock, 3,328,404 shares outstanding in 2004, 3,328,404 in 2003		33			33
Class B Common Stock, 54,462,175 shares outstanding in 2004, 54,376,706 in 2003		545			544
Class C Common Stock, 335,800 shares outstanding in 2004, 335,800 in 2003		3			3
Class D Common Stock, 30,339 shares outstanding in 2004, 31,259 in 2003		—			—
Capital in excess of par, net of deferred compensation of $9,309 in 2004 and $9,456 in 2003		45,758			42,480
Cumulative dividends		(9,294	)		(4,644	)
Retained earnings		1,096,877			1,050,694
Accumulated other comprehensive (loss) income		(593	)		1,812

		1,133,329			1,090,922

	$	2,965,221		$	2,772,730

See accompanying notes to these condensed consolidated financial statements.

Page 4 of 29 Pages

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(000s unaudited)


	Three Months Ended March 31,
	2004			2003
Cash Flows from Operating Activities:
Net income	$	46,183		$	52,790
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation & amortization		40,706			34,537
Accretion of discount on convertible debentures		3,291			3,159
Changes in assets & liabilities, net of effects from acquisitions and dispositions:
Accounts receivable		(71,645	)		(20,762	)
Accrued interest		4,510			2,329
Accrued and deferred income taxes		25,667			31,288
Other working capital accounts		16,310			(35,087	)
Other assets and deferred charges		7,310			9,783
Other		5,035			(1,103	)
Minority interest in earnings of consolidated entities, net of distributions		5,279			3,581
Accrued insurance expense, net of commercial premiums paid		19,024			15,399
Payments made in settlement of self-insurance claims		(6,544	)		(15,148	)

Net cash provided by operating activities		95,126			80,766

Cash Flows from Investing Activities:
Property and equipment additions, net of disposals		(70,436	)		(43,549	)
Proceeds received from sales of assets and businesses		425			2,978
Acquisition of business		(37,665	)		(45,482	)

Net cash used in investing activities		(107,676	)		(86,053	)

Cash Flows from Financing Activities:
Additional borrowings, net of financing costs		19,637			38,738
Capital contributions from minority member		0			3,207
Issuance of common stock		1,431			525
Repurchase of common shares		(350	)		(22,517	)
Dividends paid		(4,650	)		0

Net cash provided by financing activities		16,068			19,953

Increase in cash		3,518			14,666
Cash, Beginning of Period		34,863			17,750

Cash, End of Period	$	38,381		$	32,416

Supplemental Disclosures of Cash Flow Information:
Interest paid	$	3,187		$	4,367

Income taxes paid, net of refunds	$	1,498		$	656

See accompanying notes to these condensed consolidated financial statements.

Page 5 of 29 Pages

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) General

This Report on Form 10-Q is for the Quarterly period ended March 31, 2004. In this Quarterly Report, “we,” “us,” “our” and the “Company” refer to Universal Health Services, Inc. and its subsidiaries.

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 SEC. In this Quarterly Report, we state our beliefs of future events and of our future financial performance. In some cases, you can identify those so-called “forward-looking statements” by words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of those words and other comparable words. You should be aware that those statements are only our predictions. Actual events or results may differ materially. In evaluating those statements, you should specifically consider various factors, including the risks outlined in Item 2. Management’s Discussion and Analysis of Operations and Financial Condition – Forward Looking Statements and Risk Factors. Those factors may cause our actual results to differ materially from any of our forward-looking statements.

The consolidated financial statements include the accounts of our majority-owned subsidiaries and partnerships controlled by us, or our subsidiaries, as managing general partner. The consolidated financial statements included herein have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all normal and recurring adjustments which, in our opinion, are necessary to fairly present results for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although we believe that the accompanying disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements, significant accounting policies and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2003. Certain prior year amounts have been reclassified to conform with current year financial statement presentation.

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

At March 31, 2004, we held approximately 6.6% 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 connection with this advisory agreement, we earned advisory fees from the Trust of $374,000 and $350,000 during the three month periods ended March 31, 2004 and 2003, respectively, which are included in net revenues in the accompanying consolidated statements of income. 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 and therefore we account for our investment in the Trust using the equity method of accounting. Our pre-tax share of income from the Trust was $342,000 and $409,000 during the three month periods ended March 31, 2004 and 2003, respectively, and is included in net revenues in the accompanying consolidated statements of income.

As of March 31, 2004, we leased six hospital facilities from the Trust with terms expiring in 2004 through 2006. Total rent expense under these operating leases was $4.5 million during each of the three month periods ended March 31, 2004 and 2003. These leases contain up to five, five-year renewal options. The leases on the Virtue Street Pavilion and The Bridgeway are scheduled to expire in December, 2004. The lessees on both of these facilities have an option at the end of the lease terms to: (i) renew the leases at the same terms for another five years, exercisable on at least three months notice, or; (ii) purchase the properties at their fair market value at the end of the lease terms,

Page 6 of 29 Pages

exercisable on at least six months notice. Pursuant to the terms of the leases with the Trust, 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. In addition, certain of our subsidiaries are tenants

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