filings.toolsItem 15. Exhibits and Financial Statement Schedules
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Item 15. Exhibits and Financial Statement Schedules
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(a) Documents filed as part of this report:
(1) Financial Statements:
See “Index to Financial Statements and Financial Statement Schedule.”
(2) Financial Statement Schedules:
See “Index to Financial Statements and Financial Statement Schedule.”
(3) Exhibits:
3.1 Registrant’s Restated Certificate of Incorporation, and Amendments thereto, previously filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, are incorporated herein by reference.
3.2 Bylaws of Registrant, as amended, previously filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1987, is incorporated herein by reference.
3.3 Amendment to the Registrant’s Restated Certificate of Incorporation previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K dated July 3, 2001 is incorporated herein by reference.
4.1 Indenture, dated as of August 7, 2014, among Universal Health Services, Inc., its subsidiaries specified therein, MUFG Union Bank, N.A., as Trustee, JPMorgan Chase Bank, N.A., as Collateral Agent (including forms of the 3.750% Senior Secured Notes due 2019 and the 4.750% Senior Secured Notes due 2022), previously filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated August 12, 2014, is incorporated herein by reference.
4.2 Supplemental Indenture, dated as of June 3, 2016, to Indenture, dated as of August 7, 2014, by and among the Company, the subsidiary guarantors party thereto, MUFG Union Bank, N.A., as trustee, and JPMorgan Chase Bank, N.A., as collateral agent, previously filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 8, 2016, is incorporated herein by reference.
4.3 Indenture, dated as of June 3, 2016, between the Company, the subsidiary guarantors party thereto, MUFG Union Bank, N.A., as trustee, and JPMorgan Chase Bank, N.A., as collateral agent, previously filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K dated June 8, 2016, is incorporated herein by reference.
4.4 Additional Authorized Representative Joinder Agreement, dated as of June 3, 2016, among the Company, the subsidiary guarantors party thereto and JPMorgan Chase Bank, N.A., as collateral agent, previously filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K dated June 8, 2016, is incorporated herein by reference.
10.1* Employment Agreement, dated as of July 24, 2013, by and between Universal Health Services, Inc. and Alan B. Miller, previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated July 26, 2013, is incorporated herein by reference.
10.2 Advisory Agreement, dated as of December 24, 1986, between Universal Health Realty Income Trust and UHS of Delaware, Inc., previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated December 24, 1986, is incorporated herein by reference.
10.3 Agreement, dated December 1, 2016, to renew Advisory Agreement, dated as of December 24, 1986, between Universal Health Realty Income Trust and UHS of Delaware, Inc.
10.4 Form of Leases, including Form of Master Lease Document for Leases, between certain subsidiaries of the Company and Universal Health Realty Income Trust, filed as Exhibit 10.3 to Amendment No. 3 of the Registration Statement on Form S-11 and Form S-2 of Registrant and Universal Health Realty Income Trust (Registration No. 33-7872), is incorporated herein by reference.
10.5 Corporate Guaranty of Obligations of Subsidiaries Pursuant to Leases and Contract of Acquisition, dated December 24, 1986, issued by the Company in favor of Universal Health Realty Income Trust, previously filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K dated December 24, 1986, is incorporated herein by reference.
10.6* Universal Health Services, Inc. Executive Retirement Income Plan dated January 1, 1993, previously filed as Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, is incorporated herein by reference.
10.7 Asset Purchase Agreement dated as of February 6, 1996, among Amarillo Hospital District, UHS of Amarillo, Inc. and Universal Health Services, Inc., previously filed as Exhibit 10.28 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference.
10.8 Agreement of Limited Partnership of District Hospital Partners, L.P. (a District of Columbia limited partnership) by and among UHS of D.C., Inc. and The George Washington University, previously filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarters ended March 30, 1997, and June 30, 1997, is incorporated herein by reference.
10.9 Contribution Agreement between The George Washington University (a congressionally chartered institution in the District of Columbia) and District Hospital Partners, L.P. (a District of Columbia limited partnership), previously filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, is incorporated herein by reference.
10.10* Amended and Restated Universal Health Services, Inc. Supplemental Deferred Compensation Plan dated as of January 1, 2002, previously filed as Exhibit 10.29 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, is incorporated herein by reference.
10.11* Universal Health Services, Inc. Employee Stock Purchase Plan, previously filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (File No. 333-122188), dated January 21, 2005 is incorporated herein by reference.
10.12* Universal Health Services, Inc. Third Amended and Restated 2005 Stock Incentive Plan, previously filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 7, 2015, is incorporated herein by reference.
10.13* Form of Stock Option Agreement, previously filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K, dated June 8, 2005, is incorporated herein by reference.
10.14* Form of Stock Option Agreement for Non-Employee Directors, previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated October 3, 2005, is incorporated herein by reference.
10.15 Amendment No. 1 to the Master Lease Document, between certain subsidiaries of Universal Health Services, Inc. and Universal Health Realty Income Trust, dated April 24, 2006, previously filed as Exhibit 10.29 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, is incorporated herein by reference.
10.16* Amended and Restated Universal Health Services, Inc. 2010 Employees’ Restricted Stock Purchase Plan, previously filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on August 7, 2015, is incorporated herein by reference
10.17* Universal Health Services, Inc. 2010 Executive Incentive Plan, previously filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on August 7, 2015, is incorporated herein by reference.
10.18 Omnibus Amendment to Receivables Sale Agreements, dated as of October 27, 2010, previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated November 2, 2010, is incorporated herein by reference.
10.19 Amended and Restated Credit and Security Agreement, dated as of October 27, 2010, previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated November 2, 2010, is incorporated herein by reference.
10.20 Second Amendment to Amended and Restated Credit and Security Agreement, dated as of October 25, 2013, previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated October 30, 2013, is incorporated herein by reference.
10.21 Third Amendment to Amended and Restated Credit and Security Agreement, dated as of August 1, 2014, previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated August 4, 2014, is incorporated herein by reference.
10.22 Fourth Amendment to Amended and Restated Credit and Security Agreement, dated as of December 22, 2015, previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated December 22, 2015, is incorporated herein by reference
10.23 Assignment and Assumption Agreement, dated as of October 27, 2010, previously filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K dated November 2, 2010, is incorporated herein by reference.
10.24 Credit Agreement, dated as of November 15, 2010, by and among Universal Health Services, Inc., JPMorgan Chase Bank, N.A. and the various financial institutions as are or may become parties thereto, as Lenders, SunTrust Bank, The Royal Bank of Scotland, Plc, Bank of Tokyo-Mitsubishi UFJ Trust Company and Credit Agricole Corporate and Investment Bank, as co-documentation agents, Deutsche Bank Securities Inc. and Bank of America N.A. as co-syndication agents, and JPMorgan Chase Bank, N.A., as administrative agent for the Lenders and as collateral agent for the secured parties, previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated November 17, 2010, is incorporated herein by reference.
10.25 First Amendment, dated as of March 15, 2011, to the Credit Agreement, dated as of November 15, 2010, by and among Universal Health Services, Inc., JPMorgan Chase Bank, N.A. and the various financial institutions as are or may become parties thereto, as Lenders, certain banks as co-documentation agents, and as co-syndication agents, and JPMorgan Chase Bank, N.A., as administrative agent for the Lenders and as collateral agent for the secured parties, previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated March 15, 2011, is incorporated herein by reference.
10.26 Credit Agreement, dated as of November 15, 2010 and amended and restated as of September 21, 2012, by and among Universal Health Services, Inc. (the borrower), the several lenders from time to time parties thereto, Credit Agricole Corporate and Investment Bank, Mizuho Corporate Bank LTD., Royal Bank of Canada and The Royal Bank of Scotland PLC (as co-documentation agents), Bank of Tokyo-Mitsubishi UFJ Trust Company, Bank of America N.A. and SunTrust Bank (as co-syndication agents), and JPMorgan Chase Bank, N.A. (as administrative agent), previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated September 26, 2012, is incorporated herein by reference.
10.27 Second Amendment, dated as of September 21, 2012, to the Credit Agreement, dated as of November 15, 2010 (as amended from time to time), among Universal Health Services, Inc., a Delaware corporation, the several banks and other financial institutions from time to time parties thereto, JPMorgan Chase Bank, N.A., as administrative agent and the other agents party thereto, previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated September 26, 2012, is incorporated herein by reference.
10.28 Third Amendment, dated as of May 16, 2013, to the Credit Agreement, dated as of November 15, 2010, as amended from time to time, among Universal Health Services, Inc., a Delaware corporation, the several banks and other financial institutions from time to time parties thereto, JPMorgan Chase Bank, N.A., as administrative agent and the other agents party thereto, previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 17, 2013, is incorporated herein by reference.
10.29 Fourth Amendment, dated as of August 7, 2014, to the Credit Agreement, dated as of November 15, 2010, as previously amended from time to time, by and among Universal Health Services, Inc., the several banks and other financial institutions from time to time parties thereto, JPMorgan Chase Bank, N.A., as administrative agent and the other agents party thereto, previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated August 12, 2014, is incorporated herein by reference.
10.30 Fifth Amendment to the 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 the Company, as borrower, the several banks and other financial institutions from time to time parties thereto, as lenders, JPMorgan Chase Bank, N.A., as administrative agent, and the other agents party thereto, previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 8, 2016, is incorporated herein by reference.
10.31 Credit Agreement, dated as of November 15, 2010 and amended and restated as of August 7, 2014, by and among Universal Health Services, Inc., the several banks and other financial institutions from time to time parties thereto, JPMorgan Chase Bank, N.A., as administrative agent and the other agents party thereto, previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated August 12, 2014, is incorporated herein by reference.
10.32* Form of Supplemental Life Insurance Plan and Agreement Part A: Alan B. Miller 1998 Dual Life Insurance Trust (effective December 9, 2010, by and between Universal Health Services, Inc., a Delaware corporation (the “Company”), and Anthony Pantaleoni as Trustee), previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated December 10, 2010, is incorporated herein by reference.
10.33* Form of Supplemental Life Insurance Plan and Agreement Part B: Alan B. Miller 2002 Trust (effective December 9, 2010, by and between Universal Health Services, Inc., a Delaware corporation (the “Company”), and Anthony Pantaleoni as Trustee), previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated December 10, 2010, is incorporated herein by reference.
10.34* Universal Health Services, Inc. Termination, Assignment and Release Agreement (effective December 9, 2010, by and between Universal Health Services, Inc., a Delaware corporation (the “Company”), Anthony Pantaleoni as Trustee of the Alan B.
Miller 1998 Dual Life Insurance Trust, and Alan B. Miller, Executive), previously filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K dated December 10, 2010, is incorporated herein by reference.
10.35* Universal Health Services, Inc. Termination, Assignment and Release Agreement (effective December 9, 2010, by and between Universal Health Services, Inc., a Delaware corporation (the “Company”), Anthony Pantaleoni as Trustee of the Alan B. Miller 2002 Trust, and Alan B. Miller, Executive), previously filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K dated December 10, 2010, is incorporated herein by reference.
10.36 Collateral Agreement, dated as of August 7, 2014, among Universal Health Services, Inc., the subsidiary guarantors party thereto, MUFG Union Bank, N.A., as 2014 Trustee, The Bank of New York Mellon Trust Company, N.A., as 2006 Trustee, and JPMorgan Chase Bank, N.A., as collateral agent, previously filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K dated August 12, 2014, is incorporated herein by reference.
11 Statement regarding computation of per share earnings is set forth in Note 1 of the Notes to the Consolidated Financial Statements.
21 Subsidiaries of Registrant.
23.1 Consent of Independent Registered Public Accounting Firm-PricewaterhouseCoopers LLP.
31.1 Certification from the Company’s Chief Executive Officer Pursuant to Rule 13a-14(a)/15(d)-14(a) of the Securities Exchange Act of 1934.
31.2 Certification from the Company’s Chief Financial Officer Pursuant to Rule 13a-14(a)/15(d)-14(a) of the Securities Exchange Act of 1934.
32.1 Certification from the Company’s Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification from the Company’s Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
| * | Management contract or compensatory plan or arrangement. |
|---|
Exhibits, other than those incorporated by reference, have been included in copies of this Annual Report filed with the Securities and Exchange Commission. Stockholders of the Company will be provided with copies of those exhibits upon written request to the Company.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| UNIVERSAL HEALTH SERVICES, INC. | ||
| By: | /s/ ALAN B. MILLER | |
| Alan B. Miller Chairman of the Board and Chief Executive Officer |
February 28, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signatures | Title | Date | |||||||||
| /s/ ALAN B. MILLER Alan B. Miller | Chairman of the Board and Chief Executive Officer (Principal Executive Officer) | February 28, 2017 | |||||||||
| /s/ MARC D. MILLER Marc D. Miller | Director and President | February 28, 2017 | |||||||||
| /s/ LAWRENCE S. GIBBS Lawrence S. Gibbs | Director | February 28, 2017 | |||||||||
| /s/ JOHN H. HERRELL John H. Herrell | Director | February 28, 2017 | |||||||||
| /s/ ROBERT H. HOTZ Robert H. Hotz | Director | February 28, 2017 | |||||||||
| /s/ EILEEN C. MCDONNELL Eileen C. McDonnell | Director | February 28, 2017 | |||||||||
| /s/ ANTHONY PANTALEONI Anthony Pantaleoni | Director | February 28, 2017 | |||||||||
| /s/ STEVE FILTON Steve Filton | Executive Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) | February 28, 2017 |
UNIVERSAL HEALTH SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Universal Health Services, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Universal Health Services, Inc. and its subsidiaries at December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, financial statement schedule, and for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Item 9A as Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded the acquisition of Cambian Group, PLC’s adult services division from the assessment of internal control over financial reporting as of December 31, 2016 because the facilities were acquired by the Company in a purchase business combination in late December, 2016. We have also excluded the acquisition of the Cambian Group, PLC’s adult services division from our audit of internal control over financial reporting. The acquisition of the Cambian Group, PLC’s adult services division had no impact on the consolidated net revenues for the year ended December 31, 2016 and represented 0.4% of the consolidated total assets as of December 31, 2016.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 28, 2017
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | 2014 | ||||||||||
| (in thousands, except per share data) | ||||||||||||
| Net revenues before provision for doubtful accounts | $ | 10,507,788 | $ | 9,784,724 | $ | 8,904,071 | ||||||
| Less: Provision for doubtful accounts | 741,578 | 741,273 | 698,983 | |||||||||
| Net revenues | 9,766,210 | 9,043,451 | 8,205,088 | |||||||||
| Operating charges: | ||||||||||||
| Salaries, wages and benefits | 4,585,530 | 4,212,387 | 3,845,461 | |||||||||
| Other operating expenses | 2,359,339 | 2,119,805 | 1,922,743 | |||||||||
| Supplies expense | 1,031,337 | 974,088 | 895,693 | |||||||||
| Depreciation and amortization | 416,608 | 398,618 | 375,624 | |||||||||
| Lease and rental expense | 97,324 | 94,973 | 93,993 | |||||||||
| Electronic health records incentive income | (5,339 | ) | (15,815 | ) | (27,902 | ) | ||||||
| Costs related to extinguishment of debt | 0 | 0 | 36,171 | |||||||||
| 8,484,799 | 7,784,056 | 7,141,783 | ||||||||||
| Income from operations | 1,281,411 | 1,259,395 | 1,063,305 | |||||||||
| Interest expense, net | 125,053 | 113,494 | 133,638 | |||||||||
| Income before income taxes | 1,156,358 | 1,145,901 | 929,667 | |||||||||
| Provision for income taxes | 409,187 | 395,203 | 324,671 | |||||||||
| Net income | 747,171 | 750,698 | 604,996 | |||||||||
| Less: Net income attributable to noncontrolling interests | 44,762 | 70,170 | 59,653 | |||||||||
| Net income attributable to UHS | $ | 702,409 | $ | 680,528 | $ | 545,343 | ||||||
| Basic earnings per share attributable to UHS | $ | 7.22 | $ | 6.89 | $ | 5.52 | ||||||
| Diluted earnings per share attributable to UHS | $ | 7.14 | $ | 6.76 | $ | 5.42 | ||||||
| Weighted average number of common shares—basic | 97,208 | 98,797 | 98,826 | |||||||||
| Add: Other share equivalents | 1,172 | 1,897 | 1,718 | |||||||||
| Weighted average number of common shares and equivalents—diluted | 98,380 | 100,694 | 100,544 |
The accompanying notes are an integral part of these consolidated financial statements.
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | 2014 | ||||||||||
| Net income | $ | 747,171 | $ | 750,698 | $ | 604,996 | ||||||
| Other comprehensive income (loss): | ||||||||||||
| Unrealized derivative gains on cash flow hedges | 1,438 | 4,970 | 17,668 | |||||||||
| Amortization of terminated hedge | (167 | ) | (336 | ) | (336 | ) | ||||||
| Minimum pension liability | 13,356 | 2,177 | (14,270 | ) | ||||||||
| Unrealized loss on marketable security | (2,229 | ) | 0 | 0 | ||||||||
| Foreign currency translation adjustment | (10,038 | ) | (1,728 | ) | (2,431 | ) | ||||||
| Other comprehensive income before tax | 2,360 | 5,083 | 631 | |||||||||
| Income tax expense related to items of other comprehensive income | 4,648 | 2,980 | 1,053 | |||||||||
| Total other comprehensive income (loss), net of tax | (2,288 | ) | 2,103 | (422 | ) | |||||||
| Comprehensive income | 744,883 | 752,801 | 604,574 | |||||||||
| Less: Comprehensive income attributable to noncontrolling interests | 44,762 | 70,170 | 59,653 | |||||||||
| Comprehensive income attributable to UHS | $ | 700,121 | $ | 682,631 | $ | 544,921 |
The accompanying notes are an integral part of these consolidated financial statements.
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | |||||||
| (Dollar amounts in thousands) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 33,747 | $ | 61,228 | ||||
| Accounts receivable, net | 1,439,553 | 1,302,429 | ||||||
| Supplies | 125,365 | 116,037 | ||||||
| Deferred income taxes | 0 | 135,120 | ||||||
| Other current assets | 82,706 | 103,490 | ||||||
| Total current assets | 1,681,371 | 1,718,304 | ||||||
| Property and Equipment | ||||||||
| Land | 492,731 | 451,717 | ||||||
| Buildings and improvements | 4,676,752 | 4,181,576 | ||||||
| Equipment | 1,820,468 | 1,659,485 | ||||||
| Property under capital lease | 45,768 | 45,665 | ||||||
| 7,035,719 | 6,338,443 | |||||||
| Accumulated depreciation | (2,983,481 | ) | (2,694,591 | ) | ||||
| 4,052,238 | 3,643,852 | |||||||
| Construction-in-progress | 278,718 | 192,126 | ||||||
| 4,330,956 | 3,835,978 | |||||||
| Other assets: | ||||||||
| Goodwill | 3,784,106 | 3,596,114 | ||||||
| Deferred income taxes | 1,234 | 0 | ||||||
| Deferred charges | 13,520 | 16,688 | ||||||
| Other | 506,615 | 448,360 | ||||||
| 4,305,475 | 4,061,162 | |||||||
| Total Assets | $ | 10,317,802 | $ | 9,615,444 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Current maturities of long-term debt | $ | 105,895 | $ | 62,722 | ||||
| Accounts payable | 439,672 | 366,238 | ||||||
| Accrued liabilities | ||||||||
| Compensation and related benefits | 275,288 | 245,117 | ||||||
| Interest | 23,050 | 13,284 | ||||||
| Taxes other than income | 68,199 | 60,255 | ||||||
| Other | 403,120 | 348,803 | ||||||
| Current federal and state income taxes | 2,149 | 3,987 | ||||||
| Total current liabilities | 1,317,373 | 1,100,406 | ||||||
| Other noncurrent liabilities | 275,167 | 278,834 | ||||||
| Long-term debt | 4,030,230 | 3,368,634 | ||||||
| Deferred income taxes | 88,119 | 315,900 | ||||||
| Commitments and contingencies (Note 8) | ||||||||
| Redeemable noncontrolling interest | 9,319 | 242,509 | ||||||
| Equity: | ||||||||
| Class A Common Stock, voting, $.01 par value; authorized 12,000,000 shares: issued and outstanding 6,595,308 shares in 2016 and 6,595,308 shares in 2015 | 66 | 66 | ||||||
| Class B Common Stock, limited voting, $.01 par value; authorized 150,000,000 shares: issued and outstanding 89,348,958 shares in 2016 and 91,013,487 shares in 2015 | 893 | 910 | ||||||
| Class C Common Stock, voting, $.01 par value; authorized 1,200,000 shares: issued and outstanding 663,940 shares in 2016 and 663,940 shares in 2015 | 7 | 7 | ||||||
| Class D Common Stock, limited voting, $.01 par value; authorized 5,000,000 shares: issued and outstanding 22,100 shares in 2016 and 23,742 shares in 2015 | 0 | 0 | ||||||
| Cumulative dividends | (333,603 | ) | (294,728 | ) | ||||
| Retained earnings | 4,891,274 | 4,566,521 | ||||||
| Accumulated other comprehensive loss | (25,417 | ) | (23,129 | ) | ||||
| Universal Health Services, Inc. common stockholders’ equity | 4,533,220 | 4,249,647 | ||||||
| Noncontrolling interest | 64,374 | 59,514 | ||||||
| Total Equity | 4,597,594 | 4,309,161 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 10,317,802 | $ | 9,615,444 |
The accompanying notes are an integral part of these consolidated financial statements.
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Years Ended December 31, 2016, 2015 and 2014
(in thousands)
| Accumulated | UHS | |||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Redeemable | Other | Common | ||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling | Class A | Class B | Class C | Class D | Cumulative | Retained | Comprehensive | Stockholders' | Noncontrolling | |||||||||||||||||||||||||||||||||||
| Interest | Common | Common | Common | Common | Dividends | Earnings | Income (Loss) | Equity | Interest | Total | ||||||||||||||||||||||||||||||||||
| Balance, January 1, 2014 | $ | 218,107 | $ | 66 | $ | 910 | $ | 7 | $ | 0 | $ | (225,531 | ) | $ | 3,499,337 | $ | (24,810 | ) | $ | 3,249,979 | $ | 50,250 | $ | 3,300,229 | ||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||||||||||||||||||||||
| Issued/(converted) including tax benefits from exercise of stock options | — | — | 14 | — | — | — | 41,787 | — | 41,801 | — | 41,801 | |||||||||||||||||||||||||||||||||
| Repurchased | — | — | (10 | ) | — | — | — | (100,739 | ) | — | (100,749 | ) | — | (100,749 | ) | |||||||||||||||||||||||||||||
| Restricted share-based compensation expense | — | — | — | — | — | — | 491 | — | 491 | — | 491 | |||||||||||||||||||||||||||||||||
| Dividends paid | — | — | — | — | — | (29,665 | ) | — | — | (29,665 | ) | — | (29,665 | ) | ||||||||||||||||||||||||||||||
| Stock option expense | — | — | — | — | — | — | 29,168 | — | 29,168 | — | 29,168 | |||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | (26,016 | ) | — | — | — | — | — | — | — | — | (7,666 | ) | (7,666 | ) | ||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | — | — | — | — | 358 | 358 | |||||||||||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||
| Net income to UHS / noncontrolling interests | 47,461 | — | — | — | — | — | 545,343 | — | 545,343 | 12,192 | 557,535 | |||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | — | (2,431 | ) | (2,431 | ) | — | (2,431 | ) | ||||||||||||||||||||||||||||||
| Amortization of terminated hedge (net of income tax effect of $120) | — | — | — | — | — | — | — | (216 | ) | (216 | ) | — | (216 | ) | ||||||||||||||||||||||||||||||
| Unrealized derivative gains on cash flow hedges (net of income tax effect of $6,529) | — | — | — | — | — | — | — | 11,139 | 11,139 | — | 11,139 | |||||||||||||||||||||||||||||||||
| Minimum pension liability (net of income tax effect of $5,356) | — | — | — | — | — | — | — | (8,914 | ) | (8,914 | ) | — | (8,914 | ) | ||||||||||||||||||||||||||||||
| Subtotal - comprehensive income | 47,461 | — | — | — | — | — | 545,343 | (422 | ) | 544,921 | 12,192 | 557,113 | ||||||||||||||||||||||||||||||||
| Balance, December 31, 2014 | $ | 239,552 | $ | 66 | $ | 914 | $ | 7 | $ | — | $ | (255,196 | ) | $ | 4,015,387 | $ | (25,232 | ) | $ | 3,735,946 | $ | 55,134 | $ | 3,791,080 |
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY—(Continued)
For the Years Ended December 31, 2016, 2015 and 2014
(in thousands)
| Accumulated | UHS | |||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Redeemable | Other | Common | ||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling | Class A | Class B | Class C | Class D | Cumulative | Retained | Comprehensive | Stockholders' | Noncontrolling | |||||||||||||||||||||||||||||||||||
| Interest | Common | Common | Common | Common | Dividends | Earnings | Income (Loss) | Equity | Interest | Total | ||||||||||||||||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||||||||||||||||||||||
| Issued/(converted) including tax benefits from exercise of stock options | — | — | 14 | — | — | — | 56,473 | — | 56,487 | — | 56,487 | |||||||||||||||||||||||||||||||||
| Repurchased | — | — | (18 | ) | — | — | — | (224,242 | ) | — | (224,260 | ) | — | (224,260 | ) | |||||||||||||||||||||||||||||
| Restricted share-based compensation expense | — | — | — | — | — | — | 393 | — | 393 | — | 393 | |||||||||||||||||||||||||||||||||
| Dividends paid | — | — | — | — | — | (39,532 | ) | — | — | (39,532 | ) | — | (39,532 | ) | ||||||||||||||||||||||||||||||
| Stock option expense | — | — | — | — | — | — | 37,982 | — | 37,982 | — | 37,982 | |||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | (51,106 | ) | — | — | — | — | — | — | — | — | (11,114 | ) | (11,114 | ) | ||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | — | — | — | — | (613 | ) | (613 | ) | |||||||||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||
| Net income to UHS / noncontrolling interests | 54,063 | — | — | — | — | — | 680,528 | — | 680,528 | 16,107 | 696,635 | |||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | — | (1,728 | ) | (1,728 | ) | — | (1,728 | ) | ||||||||||||||||||||||||||||||
| Amortization of terminated hedge (net of income tax effect of $120) | — | — | — | — | — | — | — | (216 | ) | (216 | ) | — | (216 | ) | ||||||||||||||||||||||||||||||
| Unrealized derivative gains on cash flow hedges (net of income tax effect of $2,283) | — | — | — | — | — | — | — | 2,687 | 2,687 | — | 2,687 | |||||||||||||||||||||||||||||||||
| Minimum pension liability (net of income tax effect of $817) | — | — | — | — | — | — | — | 1,360 | 1,360 | — | 1,360 | |||||||||||||||||||||||||||||||||
| Subtotal - comprehensive income | 54,063 | — | — | — | — | — | 680,528 | 2,103 | 682,631 | 16,107 | 698,738 | |||||||||||||||||||||||||||||||||
| Balance, December 31, 2015 | $ | 242,509 | $ | 66 | $ | 910 | $ | 7 | $ | — | $ | (294,728 | ) | $ | 4,566,521 | $ | (23,129 | ) | $ | 4,249,647 | $ | 59,514 | $ | 4,309,161 |
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY—(Continued)
For the Years Ended December 31, 2016, 2015 and 2014
(in thousands)
| Accumulated | UHS | |||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Redeemable | Other | Common | ||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling | Class A | Class B | Class C | Class D | Cumulative | Retained | Comprehensive | Stockholders' | Noncontrolling | |||||||||||||||||||||||||||||||||||
| Interest | Common | Common | Common | Common | Dividends | Earnings | Income (Loss) | Equity | Interest | Total | ||||||||||||||||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||||||||||||||||||||||
| Issued/(converted) including tax benefits from exercise of stock options | — | — | 13 | — | — | — | 54,840 | — | 54,853 | — | 54,853 | |||||||||||||||||||||||||||||||||
| Repurchased | — | — | (30 | ) | — | — | — | (346,860 | ) | — | (346,890 | ) | — | (346,890 | ) | |||||||||||||||||||||||||||||
| Restricted share-based compensation expense | — | — | — | — | — | — | 1,439 | — | 1,439 | — | 1,439 | |||||||||||||||||||||||||||||||||
| Dividends paid | — | — | — | — | — | (38,875 | ) | — | — | (38,875 | ) | — | (38,875 | ) | ||||||||||||||||||||||||||||||
| Stock option expense | — | — | — | — | — | — | 45,777 | — | 45,777 | — | 45,777 | |||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | (51,847 | ) | — | — | — | — | — | — | — | — | (17,735 | ) | (17,735 | ) | ||||||||||||||||||||||||||||||
| Acquisition of noncontrolling interests in majority owned businesses | (206,200 | ) | — | — | — | — | — | (132,852 | ) | — | (132,852 | ) | — | (132,852 | ) | |||||||||||||||||||||||||||||
| Other | — | — | — | — | — | — | — | — | — | 2,690 | 2,690 | |||||||||||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||
| Net income to UHS / noncontrolling interests | 24,857 | — | — | — | — | — | 702,409 | — | 702,409 | 19,905 | 722,314 | |||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | — | (10,038 | ) | (10,038 | ) | — | (10,038 | ) | ||||||||||||||||||||||||||||||
| Amortization of terminated hedge (net of income tax effect of $60) | — | — | — | — | — | — | — | (107 | ) | (107 | ) | — | (107 | ) | ||||||||||||||||||||||||||||||
| Unrealized loss on marketable security (net of income tax effect of $831) | (1,398 | ) | (1,398 | ) | — | (1,398 | ) | |||||||||||||||||||||||||||||||||||||
| Unrealized derivative gains on cash flow hedges (net of income tax effect of $536) | — | — | — | — | — | — | — | 902 | 902 | — | 902 | |||||||||||||||||||||||||||||||||
| Minimum pension liability (net of income tax effect of $5,003) | — | — | — | — | — | — | — | 8,353 | 8,353 | — | 8,353 | |||||||||||||||||||||||||||||||||
| Subtotal - comprehensive income | 24,857 | — | — | — | — | — | 702,409 | (2,288 | ) | 700,121 | 19,905 | 720,026 | ||||||||||||||||||||||||||||||||
| Balance, December 31, 2016 | $ | 9,319 | $ | 66 | $ | 893 | $ | 7 | $ | 0 | $ | (333,603 | ) | $ | 4,891,274 | $ | (25,417 | ) | $ | 4,533,220 | $ | 64,374 | $ | 4,597,594 |
The accompanying notes are an integral part of these consolidated financial statements.
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | 2014 | ||||||||||
| (Amounts in thousands) | ||||||||||||
| Cash Flows from Operating Activities: | ||||||||||||
| Net income | $ | 747,171 | $ | 750,698 | $ | 604,996 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation & amortization | 416,608 | 398,618 | 375,624 | |||||||||
| Gains on sales of assets and businesses, net of losses | 0 | (3,615 | ) | (7,837 | ) | |||||||
| Stock-based compensation expense | 48,109 | 39,971 | 31,092 | |||||||||
| Costs related to extinguishment of debt | 0 | 0 | 19,730 | |||||||||
| Changes in assets & liabilities, net of effects from acquisitions and dispositions: | ||||||||||||
| Accounts receivable | (87,881 | ) | (45,814 | ) | (105,708 | ) | ||||||
| Accrued interest | 9,766 | (693 | ) | 4,400 | ||||||||
| Accrued and deferred income taxes | 22,068 | (34,394 | ) | 33,920 | ||||||||
| Other working capital accounts | 74,489 | (125,556 | ) | 73,912 | ||||||||
| Other assets and deferred charges | (25,671 | ) | 6,631 | 13,667 | ||||||||
| Other | 81,139 | 23,295 | 2,449 | |||||||||
| Accrued insurance expense, net of commercial premiums paid | 84,638 | 90,895 | 59,276 | |||||||||
| Payments made in settlement of self-insurance claims | (81,962 | ) | (79,138 | ) | (69,645 | ) | ||||||
| Net cash provided by operating activities | 1,288,474 | 1,020,898 | 1,035,876 | |||||||||
| Cash Flows from Investing Activities: | ||||||||||||
| Property and equipment additions, net of disposals | (519,939 | ) | (379,321 | ) | (391,150 | ) | ||||||
| Acquisition of property and businesses | (613,803 | ) | (533,655 | ) | (431,386 | ) | ||||||
| Proceeds received from sales of assets and businesses | 0 | 3,391 | 15,178 | |||||||||
| Costs incurred for purchase and implementation of information technology applications | (21,475 | ) | 0 | (13,488 | ) | |||||||
| Increase in capital reserves of commercial insurance subsidiary | (32,000 | ) | (3,300 | ) | (12,000 | ) | ||||||
| Net cash used in investing activities | (1,187,217 | ) | (912,885 | ) | (832,846 | ) | ||||||
| Cash Flows from Financing Activities: | ||||||||||||
| Reduction of long-term debt | (459,183 | ) | (68,166 | ) | (879,129 | ) | ||||||
| Additional borrowings | 1,170,800 | 234,400 | 830,000 | |||||||||
| Acquisition of noncontrolling interests in majority owned businesses | (418,000 | ) | 0 | 0 | ||||||||
| Financing costs | (12,449 | ) | (515 | ) | (14,976 | ) | ||||||
| Repurchase of common shares | (353,380 | ) | (209,782 | ) | (100,749 | ) | ||||||
| Dividends paid | (38,875 | ) | (39,532 | ) | (29,665 | ) | ||||||
| Issuance of common stock | 9,503 | 8,441 | 6,863 | |||||||||
| Excess income tax benefits related to stock based compensation | 45,219 | 47,364 | 33,912 | |||||||||
| Profit distributions to noncontrolling interests | (69,583 | ) | (62,220 | ) | (33,680 | ) | ||||||
| Proceeds received from sale/leaseback of real property | 0 | 12,765 | 0 | |||||||||
| Net cash used in financing activities | (125,948 | ) | (77,245 | ) | (187,424 | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (2,790 | ) | (1,609 | ) | (775 | ) | ||||||
| Increase (decrease) in cash and cash equivalents | (27,481 | ) | 29,159 | 14,831 | ||||||||
| Cash and cash equivalents, beginning of period | 61,228 | 32,069 | 17,238 | |||||||||
| Cash and cash equivalents, end of period | $ | 33,747 | $ | 61,228 | $ | 32,069 | ||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||||||
| Interest paid, including early redemption premium and original issue discount write-off in 2014 | $ | 107,079 | $ | 107,054 | $ | 130,279 | ||||||
| Income taxes paid, net of refunds | $ | 344,611 | $ | 380,658 | $ | 258,612 | ||||||
| Noncash purchases of property and equipment | $ | 65,702 | $ | 49,086 | $ | 35,469 |
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Services provided by our hospitals, all of which are operated by subsidiaries of ours, include general and specialty surgery, internal medicine, obstetrics, emergency room care, radiology, oncology, diagnostic care, coronary care, pediatric services, pharmacy services and/or behavioral health services. We, through our subsidiaries, provide capital resources as well as a variety of management services to our facilities, including central purchasing, information services, finance and control systems, facilities planning, physician recruitment services, administrative personnel management, marketing and public relations.
The more significant accounting policies follow:
A) Principles of Consolidation: The consolidated financial statements include the accounts of our majority-owned subsidiaries and partnerships controlled by us or our subsidiaries as the managing general partner. All significant intercompany accounts and transactions have been eliminated.
B) Revenue Recognition: We record revenues and related receivables for health care services at the time the services are provided. Medicare and Medicaid revenues represented 32% of our net patient revenues during 2016, 34% during 2015 and 38% during 2014. Revenues from managed care entities, including health maintenance organizations and managed Medicare and Medicaid programs accounted for 56% of our net patient revenues during 2016, 54% during 2015 and 52% during 2014.
We report net patient service revenue at the estimated net realizable amounts from patients and third-party payors and others for services rendered. We have agreements with third-party payors that provide for payments to us at amounts different from our established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges and per diem payments. Estimates of contractual allowances under managed care plans are based upon the payment terms specified in the related contractual agreements. We closely monitor our historical collection rates, as well as changes in applicable laws, rules and regulations and contract terms, to assure that provisions are made using the most accurate information available. However, due to the complexities involved in these estimations, actual payments from payors may be different from the amounts we estimate and record.
We estimate our Medicare and Medicaid revenues using the latest available financial information, patient utilization data, government provided data and in accordance with applicable Medicare and Medicaid payment rules and regulations. The laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation and as a result, there is at least a reasonable possibility that recorded estimates will change by material amounts in the near term. Certain types of payments by the Medicare program and state Medicaid programs (e.g. Medicare Disproportionate Share Hospital, Medicare Allowable Bad Debts and Inpatient Psychiatric Services) are subject to retroactive adjustment in future periods as a result of administrative review and audit and our estimates may vary from the final settlements. Such amounts are included in accounts receivable, net, on our Consolidated Balance Sheets. The vast majority of the net revenues generated at our behavioral health facilities located in the United Kingdom are derived from government based payors. The funding of both federal Medicare and state Medicaid programs, and the government based payor programs in the United Kingdom, are subject to legislative and regulatory changes. As such, we cannot provide any assurance that future legislation and regulations, if enacted, will not have a material impact on our future government based reimbursements. Adjustments related to the final settlement of these retrospectively determined amounts did not materially impact our results in 2016, 2015 and 2014. We provide care to patients who meet certain financial or economic criteria without charge or at amounts substantially less than our established rates. Because we do not pursue collection of amounts determined to qualify as charity care, they are not reported in net revenues or in accounts receivable, net. See additional disclosure below in Charity Care, Uninsured Discounts and Provision for Doubtful Accounts for our estimated uncompensated care provided and estimated cost of providing uncompensated care.
C) Charity Care, Uninsured Discounts and Provision for Doubtful Accounts: Collection of receivables from third-party payers and patients is our primary source of cash and is critical to our operating performance. Our primary collection risks relate to uninsured patients and the portion of the bill which is the patient’s responsibility, primarily co-payments and deductibles. We estimate our provisions for doubtful accounts based on general factors such as payer mix, the agings of the receivables and historical collection experience. We routinely review accounts receivable balances in conjunction with these factors and other economic conditions which might ultimately affect the collectability of the patient accounts and make adjustments to our allowances as warranted. At our acute care hospitals, third party liability accounts are pursued until all payment and adjustments are posted to the patient account. For those accounts with a patient balance after third party liability is finalized or accounts for uninsured patients, the patient receives statements and collection letters. Our hospitals establish a partial reserve for self-pay accounts in the allowance for doubtful accounts for both unbilled balances and those that have been billed and are under 90 days old. All self-pay accounts are fully reserved at 90 days from the date of discharge. Third party liability accounts are fully reserved in the allowance for doubtful accounts when the balance ages past 180 days from the date of discharge. Patients that express an inability to pay are reviewed for potential sources of financial
assistance including our charity care policy. If the patient is deemed unwilling to pay, the account is written-off as bad debt and transferred to an outside collection agency for additional collection effort.
Historically, a significant portion of the patients treated throughout our portfolio of acute care hospitals are uninsured patients which, in part, has resulted from patients who are employed but do not have health insurance or who have policies with relatively high deductibles. Patients treated at our hospitals for non-elective services, who have gross income less than 400% of the federal poverty guidelines, are deemed eligible for charity care. The federal poverty guidelines are established by the federal government and are based on income and family size. Because we do not pursue collection of amounts that qualify as charity care, they are not reported in our net revenues or in our accounts receivable, net.
A portion of the accounts receivable at our acute care facilities are comprised of Medicaid accounts that are pending approval from third-party payers but we also have smaller amounts due from other miscellaneous payers such as county indigent programs in certain states. Our patient registration process includes an interview of the patient or the patient’s responsible party at the time of registration. At that time, an insurance eligibility determination is made and an insurance plan code is assigned. There are various pre-established insurance profiles in our patient accounting system which determine the expected insurance reimbursement for each patient based on the insurance plan code assigned and the services rendered. Certain patients may be classified as Medicaid pending at registration based upon a screening evaluation if we are unable to definitively determine if they are currently Medicaid eligible. When a patient is registered as Medicaid eligible or Medicaid pending, our patient accounting system records net revenues for services provided to that patient based upon the established Medicaid reimbursement rates, subject to the ultimate disposition of the patient’s Medicaid eligibility. When the patient’s ultimate eligibility is determined, reclassifications may occur which impacts the reported amounts in future periods for the provision for doubtful accounts and other accounts such as Medicaid pending. Although the patient’s ultimate eligibility determination may result in amounts being reclassified among these accounts from period to period, these reclassifications did not have a material impact on our results of operations in 2016, 2015 or 2014 since our facilities make estimates at each financial reporting period to reserve for amounts that are deemed to be uncollectible.
We also provide discounts to uninsured patients (included in “uninsured discounts” amounts below) who do not qualify for Medicaid or charity care. Because we do not pursue collection of amounts classified as uninsured discounts, they are not reported in our net revenues or in our net accounts receivable. In implementing the discount policy, we first attempt to qualify uninsured patients for governmental programs, charity care or any other discount program. If an uninsured patient does not qualify for these programs, the uninsured discount is applied.
On a consolidated basis, we monitor our total self-pay receivables to ensure that the total allowance for doubtful accounts provides adequate coverage based on historical collection experience. Our accounts receivable are recorded net of allowance for doubtful accounts of $410 million and $399 million at December 31, 2016 and 2015, respectively.
Uncompensated care (charity care and uninsured discounts):
The following table shows the amounts recorded at our acute care hospitals for charity care and uninsured discounts, based on charges at established rates, for the years ended December 31, 2016, 2015 and 2014:
| (dollar amounts in thousands) | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | 2014 | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Charity care | $ | 733,585 | 50 | % | $ | 506,571 | 42 | % | $ | 515,435 | 45 | % | ||||||||||||
| Uninsured discounts | 720,205 | 50 | % | 696,463 | 58 | % | 620,587 | 55 | % | |||||||||||||||
| Total uncompensated care | $ | 1,453,790 | 100 | % | $ | 1,203,034 | 100 | % | $ | 1,136,022 | 100 | % |
The provision for doubtful accounts at our acute care hospitals was approximately $628 million during 2016, $631 million during 2015 and $590 million during 2014.
The estimated cost of providing uncompensated care:
The estimated cost of providing uncompensated care, as reflected below, were based on a calculation which multiplied the percentage of operating expenses for our acute care hospitals to gross charges for those hospitals by the above-mentioned total uncompensated care amounts. The percentage of cost to gross charges is calculated based on the total operating expenses for our acute care facilities divided by gross patient service revenue for those facilities. An increase in the level of uninsured patients to our facilities and the resulting adverse trends in the provision for doubtful accounts and uncompensated care provided could have a material unfavorable impact on our future operating results.
| (amounts in thousands) | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | 2014 | ||||||||||
| Estimated cost of providing charity care | $ | 107,887 | $ | 77,557 | $ | 78,475 | ||||||
| Estimated cost of providing uninsured discounts related care | 105,920 | 106,630 | 94,484 | |||||||||
| Estimated cost of providing uncompensated care | $ | 213,807 | $ | 184,187 | $ | 172,959 |
Our accounts receivable as of December 31, 2016 and December 31, 2015 include amounts due from Illinois of approximately $38 million and $28 million, respectively. Collection of the outstanding receivables continues to be delayed due to state budgetary and funding pressures. Approximately $25 million as of December 31, 2016 and $12 million as of December 31, 2015, 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 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.
D) Concentration of Revenues: Our six acute care hospitals in the Las Vegas, Nevada market contributed, on a combined basis, 14% in 2016, 13% in 2015 and 14% in 2014 of our consolidated net revenues.
E) Accounting for Medicare and Medicaid Electronic Health Records Incentive Payments: In July 2010, the Department of Health and Human Services published final regulations implementing the health information technology provisions of the American Recovery and Reinvestment Act. The regulation defines the “meaningful use” of Electronic Health Records (“EHR”) and established the requirements for the Medicare and Medicaid EHR payment incentive programs. The implementation period for these new Medicare and Medicaid incentive payments started in federal fiscal year 2011 and ended as late as 2016 for Medicare and can end as late as 2021 for the state Medicaid programs. We recognize income related to Medicare and Medicaid incentive payments using a gain contingency model that is based upon when our eligible hospitals have demonstrated “meaningful use” of certified EHR technology for the applicable period and the cost report information for the full cost report year that will determine the final calculation of the incentive payment is available.
Medicare EHR incentive payments: Federal regulations require that Medicare EHR incentive payments be computed based on the Medicare cost report that begins in the federal fiscal period in which a hospital meets the applicable “meaningful use” requirements. Since the annual Medicare cost report periods for each of our acute care hospitals ends on December 31st, we have recognized Medicare EHR incentive income for each hospital during the fourth quarter of the year in which the facility meets the “meaningful use” criteria.
Medicaid EHR incentive payments: Medicaid EHR incentive payments are determined based upon prior period cost report information available at the time our hospitals met the “meaningful use” criteria. Therefore, the majority of the Medicaid EHR incentive income recognition occurred in the period in which the applicable hospitals were deemed to have met initial “meaningful use” criteria.
F) Cash and Cash Equivalents: We consider all highly liquid investments purchased with maturities of three months or less to be cash equivalents.
G) Property and Equipment: Property and equipment are stated at cost. Expenditures for renewals and improvements are charged to the property accounts. Replacements, maintenance and repairs which do not improve or extend the life of the respective asset are expensed as incurred. We remove the cost and the related accumulated depreciation from the accounts for assets sold or retired and the resulting gains or losses are included in the results of operations. Construction-in-progress includes both construction projects and equipment not yet placed into service.
While in progress, we capitalized interest on major construction projects and the development and implementation of information technology applications amounting to $1.9 million during 2016 and $304,000 during 2015. There was no interest capitalized during 2014.
Depreciation is provided on the straight-line method over the estimated useful lives of buildings and improvements (twenty to forty years) and equipment (three to fifteen years). Depreciation expense was $350.8 million during 2016, $337.5 million during 2015 and $314.5 million during 2014.
H) Long-Lived Assets: We review our long-lived assets, including intangible assets, for impairment whenever events or circumstances indicate that the carrying value of these assets may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of our asset based on our estimate of its undiscounted future cash flow. If the analysis indicates that the carrying value is not recoverable from future cash flows, the asset is written down to its estimated fair value and an impairment loss is recognized. Fair values are determined based on estimated future cash flows using appropriate discount rates.
I) Goodwill: Goodwill and indefinite-lived intangible assets are reviewed for impairment at the reporting unit level on an annual basis or sooner if the indicators of impairment arise. Our judgments regarding the existence of impairment indicators are based on market conditions and operational performance of each reporting unit. We have designated October 1st as our annual impairment assessment date and performed impairment assessments as of October 1, 2016 which indicated no impairment of goodwill or indefinite-lived intangible assets. There were also no impairments during 2015 or 2014. Future changes in the estimates used to conduct the impairment reviews, including profitability and market value projections, could indicate impairment in future periods potentially resulting in a write-off of a portion or all of our goodwill or indefinite-lived intangible assets.
Changes in the carrying amount of goodwill for the two years ended December 31, 2016 were as follows (in thousands):
| Acute Care Services | Behavioral Health Services | Total Consolidated | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance, January 1, 2015 | $ | 387,099 | $ | 2,904,114 | $ | 3,291,213 | ||||||
| Goodwill acquired during the period | 2,480 | 316,427 | 318,907 | |||||||||
| Goodwill divested during the period | 0 | (1,497 | ) | (1,497 | ) | |||||||
| Adjustments to goodwill (a) | (72 | ) | (12,437 | ) | (12,509 | ) | ||||||
| Balance, December 31, 2015 | 389,507 | 3,206,607 | 3,596,114 | |||||||||
| Goodwill acquired during the period | 50,897 | 183,761 | 234,658 | |||||||||
| Adjustments to goodwill (a) | (110 | ) | (46,556 | ) | (46,666 | ) | ||||||
| Balance, December 31, 2016 | $ | 440,294 | $ | 3,343,812 | $ | 3,784,106 |
| (a) | The decrease in the Behavioral Health Services’ goodwill consists primarily of foreign currency translation adjustments. |
|---|
J) Other Assets: Other assets consist primarily of amounts related to: (i) intangible assets acquired in connection with our acquisitions of Cambian Group, PLC’s adult services’ division, Foundations Recovery Network, LLC during 2015, Ascend Health Corporation during 2012 and Psychiatric Solutions, Inc. during 2010; (ii) prepaid fees for various software and other applications used by our hospitals; (iii) costs incurred in connection with the purchase and implementation of an electronic health records application for each of our acute care facilities; (iv) statutorily required capital reserves related to our commercial insurance subsidiary ($100 million as of December 31, 2016); (v) deposits; (vi) investments in various businesses, including Universal Health Realty Income Trust ($8 million as of December 31, 2016) and Premier, Inc. ($23 million as of December 31, 2016); (vii) the invested assets related to a deferred compensation plan that is held by an independent trustee in a rabbi-trust and that has a related payable included in other noncurrent liabilities; (viii) the estimated future payments related to physician-related contractual commitments, as discussed below, and; (ix) other miscellaneous assets. As of December 31, 2016, net intangible assets were $228 million and consisted of the following: tradename ($124 million), Medicare licenses ($57 million), certificates of need ($12 million), and contract relationships and other ($35 million, which is net of $34 million of accumulated amortization). As of December 31, 2015, net intangible assets were $219 million and consisted of the following: tradename ($124 million), Medicare licenses ($57 million), certificates of need ($12 million), and contract relationships and other ($25 million, which is net of $25 million of accumulated amortization).
K) Physician Guarantees and Commitments: As of December 31, 2016 and 2015, our accrued liabilities-other, and our other assets included $2 million and $1 million, respectively, of estimated future payments related to physician-related contractual commitments. The $2 million of potential future financial obligations outstanding as of December 31, 2016 are potential 2017 obligations.
L) Self-Insured/Other Insurance Risks: We provide for self-insured risks, primarily general and professional liability claims and workers’ compensation claims. 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, estimate of incurred but not reported claims based on historical experience, and estimates of amounts recoverable under our commercial insurance policies. All relevant information, including our own historical experience is used in estimating the expected amount of claims. 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. Our estimated self-insured reserves are reviewed and changed, if necessary, at each reporting date and changes are recognized currently as additional expense or as a reduction of expense. See Note 8 - Commitments and Contingencies for discussion of adjustments to our prior year reserves for claims related to our self-insured general and professional liability and workers’ compensation liability.
In addition, we also: (i) own commercial health insurers headquartered in Nevada and Puerto Rico, and; (ii) maintain self-insured employee benefits programs for employee healthcare and dental claims. The ultimate costs related to these programs/operations include expenses for claims incurred and paid in addition to an accrual for the estimated expenses incurred in connection with claims incurred but not yet reported. Given our significant insurance-related exposure, 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.
M) Income Taxes: Deferred tax assets and liabilities are recognized for the amount of taxes payable or deductible in future years as a result of differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. We believe that future income will enable us to realize our deferred tax assets net of recorded valuation allowances relating to state net operating loss carry-forwards.
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. See Note 6 - Income Taxes, for additional disclosure.
N) Other Noncurrent Liabilities: 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.
O) Redeemable Noncontrolling Interests and Noncontrolling Interest: As of December 31, 2016, 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, and; (iv) approximately 5% in an acute care facility located in Nevada. The noncontrolling interest and redeemable noncontrolling interest balances of $64 million and $9 million, respectively, as of December 31, 2016, consist primarily of the third-party ownership interests in these hospitals.
In May, 2016, we purchased the minority ownership interests held by a third-party in our six acute care hospitals located in Las Vegas, Nevada, for an aggregate cash payment of $445 million which included both the purchase price ($418 million) and the return of reserve capital ($27 million). The ownership interests purchased, which ranged from 26.1% to 27.5%, were previously reflected as redeemable noncontrolling interests on our Consolidated Balance Sheet as of December 31, 2015. In connection with this transaction, the aggregate excess purchase price over the book value of the minority ownership interests acquired, net of income taxes, amounted to approximately $133 million which was recorded as a reduction to retained earnings on our Consolidated Balance Sheet.
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 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.
P) Accumulated Other Comprehensive Income: The accumulated other comprehensive income (“AOCI”) component of stockholders’ equity includes: net unrealized gains and losses on effective cash flow hedges, foreign currency translation adjustments and the net minimum pension liability of a non-contributory defined benefit pension plan which covers employees at one of our subsidiaries. See Note 10 - Pension Plan for additional disclosure regarding the defined benefit pension plan.
The amounts recognized in AOCI for the two years ended December 31, 2016 were as follows (in thousands):
| Net Unrealized Gains (Losses) on Effective Cash Flow Hedges | Foreign Currency Translation Adjustment | Unrealized loss on marketable security | Minimum Pension Liability | Total AOCI | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance, January 1, 2015, net of income tax | $ | (3,247 | ) | $ | (2,431 | ) | $ | — | $ | (19,554 | ) | $ | (25,232 | ) | ||||||
| 2015 activity: | ||||||||||||||||||||
| Pretax amount | 4,634 | (1,728 | ) | — | 2,177 | 5,083 | ||||||||||||||
| Income tax effect | (2,163 | ) | — | — | (817 | ) | (2,980 | ) | ||||||||||||
| Change, net of income tax | 2,471 | (1,728 | ) | — | 1,360 | 2,103 | ||||||||||||||
| Balance, January 1, 2016, net of income tax | (776 | ) | (4,159 | ) | — | (18,194 | ) | (23,129 | ) | |||||||||||
| 2016 activity: | ||||||||||||||||||||
| Pretax amount | 1,271 | (10,038 | ) | (2,229 | ) | 13,356 | 2,360 | |||||||||||||
| Income tax effect | (476 | ) | — | 831 | (5,003 | ) | (4,648 | ) | ||||||||||||
| Change, net of income tax | 795 | (10,038 | ) | (1,398 | ) | 8,353 | (2,288 | ) | ||||||||||||
| Balance, December 31, 2016, net of income tax | $ | 19 | $ | (14,197 | ) | $ | (1,398 | ) | $ | (9,841 | ) | $ | (25,417 | ) |
Q) Accounting for Derivative Financial Investments and Hedging Activities and Foreign Currency Forward Exchange Contracts: We manage our ratio of fixed to floating rate debt with the objective of achieving a mix that management believes is appropriate. To manage this risk in a cost-effective manner, we, from time to time, enter into interest rate swap agreements in which we agree to exchange various combinations of fixed and/or variable interest rates based on agreed upon notional amounts.
We account for our derivative and hedging activities using the Financial Accounting Standard Board’s (“FASB”) guidance which requires all derivative instruments, including certain derivative instruments embedded in other contracts, to be carried at fair value on the balance sheet. For derivative transactions designated as hedges, we formally document all relationships between the hedging instrument and the related hedged item, as well as its risk-management objective and strategy for undertaking each hedge transaction.
Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability, with a corresponding amount recorded in accumulated other comprehensive income (“AOCI”) within stockholders’ equity. Amounts are reclassified from AOCI to the income statement in the period or periods 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.
Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Fair value hedges are accounted for by recording the changes in the fair value of both the derivative instrument and the hedged item 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.
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.
R) Stock-Based Compensation: At December 31, 2016, we have a number of stock-based employee compensation plans. Pursuant to the FASB’s guidance, we expense the grant-date fair value of stock options and other equity-based compensation pursuant to the straight-line method over the stated vesting period of the award using the Black-Scholes option-pricing model.
The expense associated with share-based compensation arrangements is a non-cash charge. In the Consolidated Statements of Cash Flows, share-based compensation expense is an adjustment to reconcile net income to cash provided by operating activities. The
applicable FASB guidance for 2016 permits that cash flows resulting from tax deductions in excess of compensation cost recognized be classified as financing cash flows.
S) Earnings per Share: Basic earnings per share are based on the weighted average number of common shares outstanding during the year. Diluted earnings per share are based on the weighted average number of common shares outstanding during the year adjusted to give effect to common stock equivalents.
The following table sets forth the computation of basic and diluted earnings per share, for the periods indicated:
| Twelve Months Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | 2014 | ||||||||||
| Basic and diluted: | ||||||||||||
| Net Income | $ | 747,171 | $ | 750,698 | $ | 604,996 | ||||||
| Less: Net income attributable to noncontrolling interest | (44,762 | ) | (70,170 | ) | (59,653 | ) | ||||||
| Less: Net income attributable to unvested restricted share grants | (314 | ) | (281 | ) | (236 | ) | ||||||
| Net income attributable to UHS—basic and diluted | $ | 702,095 | $ | 680,247 | $ | 545,107 | ||||||
| Basic earnings per share attributable to UHS: | ||||||||||||
| Weighted average number of common shares—basic | 97,208 | 98,797 | 98,826 | |||||||||
| Total basic earnings per share | $ | 7.22 | $ | 6.89 | $ | 5.52 | ||||||
| Diluted earnings per share attributable to UHS: | ||||||||||||
| Weighted average number of common shares | 97,208 | 98,797 | 98,826 | |||||||||
| Net effect of dilutive stock options and grants based on the treasury stock method | 1,172 | 1,897 | 1,718 | |||||||||
| Weighted average number of common shares and equivalents—diluted | 98,380 | 100,694 | 100,544 | |||||||||
| Total diluted earnings per share | $ | 7.14 | $ | 6.76 | $ | 5.42 |
The “Net effect of dilutive stock options and grants based on the treasury stock method”, for all years presented above, excludes certain outstanding stock options applicable to each year since the effect would have been anti-dilutive. The excluded weighted-average stock options totaled approximately 2.2 million during 2016, 765,000 during 2015 and 2,250 during 2014.
T) Fair Value of Financial Instruments: The fair values of our registered debt and investments are based on quoted market prices. The fair values of other long-term debt, including capital lease obligations, are estimated by discounting cash flows using period-end interest rates and market conditions for instruments with similar maturities and credit quality. The carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable, and short-term borrowings approximates their fair values due to the short-term nature of these instruments. Accordingly, these items have been excluded from the fair value disclosures included elsewhere in these notes to consolidated financial statements.
U) Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
V) Mergers and Acquisitions: The acquisition method of accounting for business combinations requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values with limited exceptions. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Any excess of the purchase price (consideration transferred) over the estimated fair values of net assets acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired company are expensed as incurred. The fair value of intangible assets, including Medicare licenses, certificates of need, tradenames and certain contracts, is based on significant judgments made by our management, and accordingly, for significant items we typically obtain assistance from third party valuation specialists.
W) GPO Agreement/Minority Ownership Interest: During 2013, we entered into a new group purchasing organization agreement (“GPO”) with Premier, Inc. (“Premier), a healthcare performance improvement alliance, and acquired a minority interest in the GPO 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, which were recorded as deferred income, on a pro rata basis, as a reduction to our supplies expense over the initial expected life of the GPO agreement. Also
in connection with this GPO agreement, we received shares of restricted stock in 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 are recognizing the fair value of this restricted stock, as a reduction to our supplies expense, in our consolidated statements of income, on a pro rata basis, over the vesting period. We have elected to retain of portion of the previously vested shares of Premier, the value of which is included in other assets on our consolidated balance sheet. Premier shares held by us after the restrictions have lapsed are adjusted, through accumulated other comprehensive income/loss, to the then current market value as of each respective balance sheet date ($23 million and $13 million as of December 31, 2016 and 2015, respectively).
X) Provider Taxes: We incur health-care related taxes (“Provider Taxes”) imposed by states in the form of a licensing fee, assessment or other mandatory payment which are related to: (i) healthcare items or services; (ii) the provision of, or the authority to provide, the health care items or services, or; (iii) the payment for the health care items or services. Such Provider Taxes are subject to various federal regulations that limit the scope and amount of the taxes that can be levied by states in order to secure federal matching funds as part of their respective state Medicaid programs. We derive a related Medicaid reimbursement benefit from assessed Provider Taxes in the form of Medicaid claims based payment increases and/or lump sum Medicaid supplemental payments.
Under these programs, including the impact of the Texas Uncompensated Care and Upper Payment Limit program, the Texas Delivery System Reform Incentive program, and various other state programs, we earned revenues (before Provider Taxes) of approximately $327 million during 2016, $307 million during 2015 and $295 million during 2014. These revenues were offset by Provider Taxes of approximately $166 million during 2016, $137 million during 2015, $140 million during 2014, which are recorded in other operating expenses on the Consolidated Statements of Income as included herein. The aggregate net benefit from these programs was $161 million during 2016, $170 million during 2015 and $155 million during 2014. The aggregate net benefit pursuant to these programs is earned from multiple states and therefore no particular state’s portion is individually material to our consolidated financial statements. In addition, under various disproportionate share hospital payment programs and the Nevada state plan amendment program, we earned revenues of $53 million in 2016, $46 million in 2015 and $61 million in 2014.
Y) Recent Accounting Standards: In November, 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”, which eliminates the guidance in Topic 740, Income Taxes, that required an entity to separate deferred tax liabilities and assets between current and noncurrent amounts in a classified balance sheet. The amendments require that all deferred tax liabilities and assets of the same tax jurisdiction or a tax filing group, as well as any related valuation allowance, be offset and presented as a single noncurrent amount in a classified balance sheet. The amendments are effective for public business entities for annual fiscal years beginning after December 15, 2016. We early adopted this standard effective January 1, 2016, on a prospective basis and did not adjust prior periods presented. The adoption of this standard had no impact on our Consolidated Statements of Income or Consolidated Statement of Cash Flows.
In August, 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, which adds or clarifies guidance of the classification of certain cash receipts and payments in the statement of cash flows with the intent to alleviate diversity in practice for classifying various types of cash flows. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the impact of this ASU on our statement of cash flows.
In April and August 2015, the FASB issued ASU No. 2015-03 and ASU No. 2015-15, “Interest- Imputation of Interest,” respectively, to simplify the presentation of debt issuance costs. The standard requires debt issuance costs be presented in the balance sheet as a direct deduction from the carrying value of the debt liability. The FASB clarified that debt issuance costs related to line-of-credit arrangements can be presented as an asset and amortized over the term of the arrangement. The guidance is effective for annual fiscal periods beginning after December 15, 2015. We adopted this standard on January 1, 2016, on a retrospective basis and adjusted prior periods presented. In connection with the adoption of this ASU, debt issuance costs of $26 million as of December 31, 2016 and $19 million as of December 31, 2015 were recorded as deductions from the carrying value of our long-term debt liabilities. The adoption of this standard had no impact on our financial position or overall results of operations.
In March, 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”, which amends the accounting for employee share-based payment transactions to require recognition of the tax effects resulting from the settlement of stock-based awards as income tax expense or benefit in the income statement in the reporting period in which they occur. In addition, the ASU requires that all tax-related cash flows resulting from share-based payments, including the excess tax benefits related to the settlement of stock-based awards, be classified as cash flows from operating activities in the statement of cash flows. The ASU also requires that cash paid by directly withholding shares for tax withholding purposes be classified as a financing activity in the statement of cash flows. In addition, the ASU also allows companies to make an accounting policy election to either estimate the number of awards that are expected to vest, consistent with current U.S. GAAP, or account for forfeitures when they occur. We have adopted this new standard, which is effective for annual reporting periods beginning after December 15, 2016, as of January 1, 2017. Since the impact of ASU 2016-09 on our future
Consolidated Statements of Income and Consolidated Statements of Cash Flows is dependent upon the timing of stock option exercises, and the market price of our stock at the time of exercise, we are unable to estimate the impact this adoption will have on our future financial statements.
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. This ASU also requires additional disclosures. The FASB updated the new revenue standard by clarifying the principal versus agent implementation guidance, but does not change the core principle of the new standard. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016; however, in July 2015, the FASB approved a one-year deferral of this standard, with a new effective date for fiscal years beginning after December 15, 2017. We anticipate the most significant change will be how the estimate for the allowance for doubtful accounts will be recognized under the new standards. Under the current standards, our estimate for amounts not expected to be collected based upon our historical experience have been included within net revenue. 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. We will continue to evaluate the impact that the adoption of this ASU may have on our consolidated financial statements and related disclosures.
In February, 2016, the FASB issued ASU 2016-02, “Leases (Topic 842): Amendments to the FASB Accounting Standards Codification (“Update 2016-02”), which requires an entity to recognize lease assets and lease liabilities on the balance sheet and to disclose key qualitative and quantitative information about the entity’s leasing arrangements. This update is effective for annual reporting periods beginning after December 15, 2018 with early adoption permitted. A modified retrospective approach is required. Upon adoption of this new standard, we will recognize significant right of use assets and lease obligation liabilities on the consolidated balance sheet as a result of our operating lease obligations. Operating lease expense will still be recognized on a straight-line basis over the remaining life of the lease within lease and rental expense in the consolidated statements of income. We are currently evaluating the effect that ASU 2016-02 will have on our consolidated financial statements and related disclosures.
In January, 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment” (“ASU 2017-04”), which removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for us for the annual and interim periods beginning January 1, 2020 with early adoption permitted, and applied prospectively. We do not expect ASU 2017-04 to have a material impact on our financial statements.
In January, 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805) - Clarifying the Definition of a Business” to clarify the definition of a business in order to allow for the evaluation of whether transactions should be accounted for as acquisitions or disposals of assets or businesses. ASU 2017-01 will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The future impact of ASU 2017-01 will be dependent upon the nature of future acquisitions or dispositions made by us, if any.
From time to time, new accounting guidance is issued by the FASB or other standard setting bodies that is adopted by the Company as of the effective date or, in some cases where early adoption is permitted, in advance of the effective date. The Company has assessed the recently issued guidance that is not yet effective and, unless otherwise indicated above, believes the new guidance will not have a material impact on our results of operations, cash flows or financial position.
Z) Foreign Currency Translation: Assets and liabilities of our U.K. subsidiaries are denominated in pound sterling and translated into U.S. dollars at: (i) the rates of exchange at the balance sheet date, and; (ii) average rates of exchange prevailing during the year for revenues and expenses. The currency translation adjustments are reported as a component of accumulated other comprehensive income. See Note 3 - Financial Instruments, Foreign Currency Forward Exchange Contracts for additional disclosure.
- ACQUISITIONS AND DIVESTITURES
Year ended December 31, 2016:
2016 Acquisitions of Assets and Businesses:
During 2016 we spent $614 million to:
| • | acquire the adult services division of Cambian Group, PLC consisting of 79 inpatient and 2 outpatient behavioral health facilities located in the U.K. (acquired late in the fourth quarter); |
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| • | acquire Desert View Hospital, a 25-bed acute care facility located in Pahrump, Nevada (acquired during the third quarter), and; |
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| • | acquire various other businesses and real property assets. |
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The aggregate net purchase price of the facilities, which were acquired to enhance and expand our existing operations in the U.S. and the U.K, was allocated to assets and liabilities based on their preliminary estimated fair values as follows:
| Amount (000s) | |||||
|---|---|---|---|---|---|
| Working capital, net | $ | 6,680 | |||
| Property & equipment | 343,846 | ||||
| Goodwill (see Note 1 (I)) | 234,658 | ||||
| Other assets (includes $18 million of contract-based relationships intangible assets) | 19,910 | ||||
| Income tax assets, net of deferred tax liabilities | 11,551 | ||||
| Debt | (152 | ) | |||
| Noncontrolling interest | (2,690 | ) | |||
| Cash paid in 2016 for acquisitions | $ | 613,803 |
Goodwill of the facilities acquired during each of the last 3 years is computed, pursuant to the residual method, by deducting the fair value of the acquired assets and liabilities from the total purchase price. The factors that contribute to the recognition of goodwill, which may also influence the purchase price, include the following for each of the acquired facilities: (i) the historical cash flows and income levels; (ii) the reputations in their respective markets; (iii) the nature of the respective operations, and; (iv) the future cash flows and income growth projections. The vast majority of the goodwill resulting from these transactions is not deductible for federal income tax purposes (see Note 6 - Income Taxes).
On December 28, 2016, we completed the acquisition of Cambian Group, PLC’s adult services’ division (the “Cambian Adult Services”) for a total purchase price of approximately $473 million. The Competition and Markets Authority (“CMA”) in the U.K. is currently reviewing our acquisition of the Cambian Adult Services. We estimate that the CMA’s review of our acquisition will be completed during the second quarter of 2017. However, until such review is completed, we are not permitted to integrate the Cambian Adult Services business into our existing businesses located in the U.K. Further, we can provide no assurance that the CMA will not require us to divest certain parts of the Cambian Adult Services division or certain parts of our existing business located in the U.K. Accordingly, the preliminary purchase price allocations reflected above, related primarily to working capital accounts, property and equipment and residual goodwill, are subject to revision as additional information is obtained about the facts and circumstances that existed as of the acquisition date. The allocations of purchase price will be finalized once all the information is obtained, but not to exceed one year from the acquisition date.
Our consolidated statement of income for the year ended December 31, 2016 was not impacted by our acquisition of the Cambian Adult Services business since the acquisition occurred in late December, 2016. Our consolidated net revenues for the year ended December 31, 2016 included approximately $12 million of net revenues generated at the above-mentioned Desert View Hospital representing the facility’s net revenues from the date of acquisition through December 31, 2016. The earnings generated by the hospital since its date of acquisition was not material to our 2016 consolidated net income attributable to UHS and net income attributable to UHS per diluted share.
Assuming the acquisition of the Cambian Adult Services business and Desert View Hospital occurred on January 1, 2016, our 2016 unaudited pro forma net revenues would have been approximately $9.98 billion and our unaudited pro forma net income attributable to UHS would have been approximately $730 million, or $7.25 per diluted share. Assuming the above-mentioned acquisitions occurred on January 1, 2015, our 2015 unaudited pro forma net revenues would have been approximately $9.28 billion and our unaudited pro forma net income attributable to UHS would have been approximately $708 million and $7.03 per diluted share.
2016 Divestiture of Assets and Businesses:
There were no divestitures during 2016.
Year ended December 31, 2015:
2015 Acquisitions of Assets and Businesses:
During 2015 we spent $534 million to:
| • | acquire a 46-bed behavioral health care facility located in the U.K. (acquired during the first quarter); |
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| • | acquire Alpha Hospitals Holdings Limited consisting of four behavioral health care hospitals with 305 beds located in the U.K. (acquired during the third quarter); |
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| • | acquire Foundations Recovery Network, LLC (“Foundations”) consisting of 4 inpatient facilities (322 beds) as well as 8 outpatient centers (during the fourth quarter), and; |
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| • | various other businesses, a management contract and real property assets. |
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The aggregate net purchase price of the facilities was allocated to assets and liabilities based on their preliminary estimated fair values as follows:
| Amount (000s) | ||||
|---|---|---|---|---|
| Working capital, net | $ | (7,000 | ) | |
| Property & equipment | 116,000 | |||
| Goodwill | 319,000 | |||
| Other assets | 128,000 | |||
| Income tax assets, net of deferred tax liabilities | (22,000 | ) | ||
| Cash paid in 2015 for acquisitions | $ | 534,000 |
Other assets includes an indefinite lived tradename for $124 million recorded in connection with the Foundations acquisition.
Included in our consolidated net revenues for the year ended December 31, 2015 was an aggregate of approximately $30 million representing the net revenues generated at the newly acquired facilities from their respective dates of acquisition through December 31, 2015. The aggregate effect of the earnings generated by these facilities since the dates of acquisition, less the cost on the borrowings utilized to finance the acquisition, was not material to our 2015 net income attributable to UHS and net income attributable to UHS per diluted share.
Assuming the acquisitions occurred on January 1, 2015, our 2015 unaudited pro forma net revenues would have been approximately $9.17 billion and our unaudited pro forma net income attributable to UHS would have been approximately $690 million, or $6.85 per diluted share. Assuming the above-mentioned acquisitions occurred on January 1, 2014, our 2014 unaudited pro forma net revenues would have been approximately $8.35 billion and our unaudited pro forma net income attributable to UHS would have been approximately $545 million and $5.42 per diluted share.
2015 Divestiture of Assets and Businesses:
During 2015 we received $3 million in connection with the divestiture of a small operator of behavioral health care services.
Year ended December 31, 2014:
2014 Acquisitions of Assets and Businesses:
During 2014 we spent $431 million to:
| • | acquire the stock of Cygnet Health Care Limited (“Cygnet”) which consists of 17 facilities located throughout the United Kingdom including 15 inpatient behavioral health hospitals and 2 nursing homes with a total of 723 beds (during the third quarter); |
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| • | acquire and fund the required capital reserves related to Prominence Health Plan, a commercial health insurer headquartered in Reno, Nevada (during the second quarter); |
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| • | acquire the Psychiatric Institute of Washington, a 124-bed behavioral health care facility and outpatient treatment center located in Washington, D.C. (during the second quarter); |
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| • | acquire the operations of Palo Verde Behavioral Health, a 48-bed behavioral health facility in Tucson, Arizona (during the first quarter); |
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| • | acquire the real property of The Bridgeway, a 103-bed behavioral health care facility located in North Little Rock, Arkansas, that was previously leased from Universal Health Realty Income Trust (during the fourth quarter); |
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| • | acquire the previously leased real property of Cygnet Hospital-Harrow, a 44-bed behavioral health care facility located in the U.K., the operations of which were acquired as part of our acquisition of Cygnet (during the fourth quarter), and; |
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| • | acquire physician practices. |
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The aggregate net purchase price of the facilities was allocated to assets and liabilities based on their preliminary estimated fair values as follows:
| Amount (000s) | ||||
|---|---|---|---|---|
| Working capital, net | $ | (41,000 | ) | |
| Property & equipment | 174,000 | |||
| Goodwill | 250,000 | |||
| Other assets | 59,000 | |||
| Income tax assets, net of deferred tax liabilities | 4,000 | |||
| Debt | (16,000 | ) | ||
| Other | 1,000 | |||
| Cash paid in 2014 for acquisitions | $ | 431,000 |
Included in our consolidated net revenues for the year ended December 31, 2014 was an aggregate of approximately $175 million representing the net revenues generated at the Cygnet facilities, the commercial health insurer located in Reno, Nevada and the 124-bed behavioral health care facility and outpatient treatment center located in Washington, D.C., from their respective dates of acquisition through December 31, 2014. The aggregate effect of the earnings generated by these facilities since the dates of acquisition, less the cost on the borrowings utilized to finance the acquisition, was not material to our 2014 net income attributable to UHS and net income attributable to UHS per diluted share.
Assuming the acquisitions occurred on January 1, 2014, our 2014 unaudited pro forma net revenues would have been approximately $8.28 billion and our unaudited pro forma net income attributable to UHS would have been approximately $558 million, or $5.55 per diluted share.
2014 Divestiture of Assets and Businesses:
During 2014 we received $15 million in connection with the divestiture of a non-operating investment (during the first quarter) and the real property of a closed behavioral health facility (during the second quarter).
- FINANCIAL INSTRUMENTS
Fair Value Hedges:
During 2016, 2015 and 2014, we had no fair value hedges outstanding.
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 2016 and 2015 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. Four of these swaps, with a total notional amount of $600 million, became effective in December, 2011 and provided that we receive three-month LIBOR while the average fixed rate payable was 2.38%. The remaining three swaps, with a total notional amount of $225 million, became effective in March, 2011 and provided that we receive three-month LIBOR while the average fixed rate payable was 1.91%.
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:
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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;
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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 December 31, 2016, the fair value of our interest rate swaps was de minimis on a net basis comprised of a $4 million asset which is included in other assets offset by a $4 million liability which is included in other current liabilities on the accompanying consolidated balance sheet. At December 31, 2015, the fair value of our interest rate swaps was a net liability of $1 million comprised of a $5 million asset which is included in other assets offset by a $6 million liability which is included in other current liabilities.
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. For the years ended December 31, 2016, 2015 and 2014, we recorded net favorable cash inflows of $79 million, $23 million and $16 million, respectively, associated with these forward exchange contracts.
- LONG-TERM DEBT
A summary of long-term debt follows:
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | |||||||
| (amounts in thousands) | ||||||||
| Long-term debt: | ||||||||
| Notes payable and Mortgages payable (including obligations under capitalized leases of $23,446 in 2016 and $24,900 in 2015) and term loans with varying maturities through 2027; weighted average interest rates of 8.9% in 2016 and 6.8% in 2015 (see Note 7 regarding capitalized leases) | $ | 25,246 | $ | 27,513 | ||||
| Revolving credit and on-demand credit facility | 469,700 | 304,900 | ||||||
| Term Loan A, net of unamortized discount of $1,151 in 2016 and $1,593 in 2015 | 1,862,915 | 1,717,940 | ||||||
| Accounts receivable securitization program | 398,700 | 400,000 | ||||||
| 3.75% Senior Secured Notes due 2019, net of unamortized discount of $112 in 2016 and $155 in 2015 | 299,888 | 299,845 | ||||||
| 4.75% Senior Secured Notes due 2022, including unamortized premium of $5,400 in 2016 and net of unamortized discount of $150 in 2016 and $177 in 2015 | 705,250 | 299,823 | ||||||
| 5.00% Senior Secured Notes due 2026 | 400,000 | 0 | ||||||
| 7.125% Senior Secured Notes repaid in June, 2016, including unamortized net premium of $4 in 2015 | — | 400,004 | ||||||
| Total debt before unamortized financing costs | 4,161,699 | 3,450,025 | ||||||
| Less-Unamortized financing costs | (25,574 | ) | (18,669 | ) | ||||
| Total debt after unamortized financing costs | 4,136,125 | 3,431,356 | ||||||
| Less-Amounts due within one year | (105,895 | ) | (62,722 | ) | ||||
| Long-term debt | $ | 4,030,230 | $ | 3,368,634 |
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 ($455 million of borrowings outstanding as of December 31, 2016), and; (ii) a term loan A facility with $1.864 billion of borrowings outstanding as of December 31, 2016.
Borrowings under the Credit Agreement bear interest at either (1) the ABR rate which is defined as the rate per annum equal to, at our election: 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 December 31, 2016, 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 December 31, 2016, we had $455 million of borrowings outstanding pursuant to the terms of our $800 million revolving credit facility and we had $297 million of available borrowing capacity net of $33 million of outstanding letters of credit and $15 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 installment payments of approximately $22 million per quarter 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.
Pursuant to the terms of our $400 million accounts receivable securitization program with a group of conduit lenders and liquidity banks (“Securitization”), which is scheduled to mature in December, 2018, 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 December 31, 2016, we had $399 million of outstanding borrowings and $1 million of additional borrowing capacity pursuant to the terms of the Securitization.
As of December 31, 2016, 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 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 2022 (“2022 Notes”) which were issued as follows: |
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| o | $300 million aggregate principal amount issued on August 7, 2014 at par. |
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| o | $400 million aggregate principal amount issued on June 3, 2016 at 101.5% to yield 4.35%. |
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| • | $400 million aggregate principal amount of 5.00% senior secured notes due in 2026 (“2026 Notes”) which were issued on June 3, 2016. |
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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.
In June, 2016, we repaid the $400 million, 7.125% senior secured notes which matured on June 30, 2016.
The average amounts outstanding during each of years 2016, 2015 and 2014 under the current and prior Credit Agreements, demand notes and accounts receivable securitization programs was $2.3 billion, $2.1 billion and $2.4 billion, respectively, with corresponding interest rates of 2.0%, 1.7% and 1.8%, respectively, including commitment and facility fees. The maximum amounts outstanding at any month-end were $2.7 billion in 2016, $2.3 billion in 2015 and $2.7 billion in 2014. The effective interest rate on our current and prior Credit Agreements, accounts receivable securitization programs, and demand notes, which includes the respective interest expense, commitment and facility fees, designated interest rate swaps expense and amortization of deferred financing costs and original issue discounts, was 2.3% in 2016, 2.4% in 2015 and 3.1% in 2014.
Our Credit Agreement includes a material adverse change clause that must be represented at each draw. The Credit Agreement contains covenants that include a limitation on sales of assets, mergers, change of ownership, liens and indebtedness, transactions with affiliates, 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 December 31, 2016.
At December 31, 2016, the net carrying value and fair value of our debt were each approximately $4.1 billion. At December 31, 2015, the carrying value and fair value of our debt were each approximately $3.5 billion. 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.
The aggregate scheduled maturities of our total debt outstanding as of December 31, 2016 are as follows:
| (000s) | ||||
|---|---|---|---|---|
| 2017 | $ | 105,895 | ||
| 2018 | 490,096 | |||
| 2019 | 2,442,448 | |||
| 2020 | 1,650 | |||
| 2021 | 1,696 | |||
| Later | 1,119,914 | |||
| Total maturities before unamortized financing costs | 4,161,699 | |||
| Less-Unamortized financing costs | (25,574 | ) | ||
| Total | $ | 4,136,125 |
- COMMON STOCK
Dividends
Cash dividends of $0.40 per share ($38.9 million in the aggregate) were declared and paid during 2016, $0.40 per share ($39.5 million in the aggregate) were declared and paid during 2015, and $.30 per share ($29.7 million in the aggregate) were declared and paid during 2014. All classes of our common stock have similar economic rights.
Stock Repurchase Programs
In July, 2014, our Board of Directors authorized a stock repurchase program whereby, from time to time as conditions allow, we may spend up to $400 million to purchase shares of our Class B Common Stock on the open market at prevailing market prices or in negotiated private transactions. In February, 2016, our Board of Directors authorized a $400 million increase to our stock repurchase program, which increased the aggregate authorization to $800 million from the previous $400 million mentioned above. There is no expiration date for our stock repurchase programs.
The following schedule provides information related to our stock repurchase program for each of the three years ended December 31, 2016. During 2016, 2,512,592 shares ($289.9 million) were repurchased pursuant to the terms of our stock repurchase program, 468,228 shares ($57.0 million in the aggregate) were repurchased in connection with the income tax withholding obligations resulting from the exercise of stock options and the vesting of restricted stock grants and 2,500 shares were repurchased as a result of forfeited restricted shares. During 2015, 1,326,207 shares ($166.2 million) were repurchased pursuant to the terms of our stock repurchase program and 493,296 shares ($58.0 million in the aggregate) were repurchased in connection with the income tax withholding obligations resulting from the exercise of stock options and the vesting of restricted stock grants. During 2014, 548,192 shares ($58.0 million in the aggregate) were repurchased pursuant to the terms of our stock repurchase program and 480,972 shares ($42.7 million in the aggregate) were repurchased in connection with income tax withholding obligations resulting from the exercise of stock options and the vesting of restricted stock grants.
| Additional dollars authorized for repurchase (in thousands) | Total number of shares purchased (a.) | Total number of shares cancelled | Average price paid per share for forfeited restricted shares | Total number of shares purchased as part of publicly announced programs | Average price pad per share for shares purchased as part of publicly announced program | Aggregate purchase price paid (in thousands) | Aggregate purchase price paid for shares purchased as part of publicly announced program | Maximum number of shares that may yet be purchased under the program | Maximum number of dollars that may yet be purchased under the program (in thousands) | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance as of January 1, 2014 | 767,704 | N/A | ||||||||||||||||||||||||||||||||||||||
| 2014 | $ | 400,000 | 1,029,164 | 767,704 | N/A | 548,192 | $ | 105.71 | $ | 100,749 | $ | 57,950 | N/A | $ | 342,050 | |||||||||||||||||||||||||
| 2015 | $ | — | 1,819,503 | — | N/A | 1,326,207 | $ | 125.34 | $ | 224,260 | $ | 166,222 | N/A | $ | 175,828 | |||||||||||||||||||||||||
| 2016 | $ | 400,000 | 2,983,320 | — | $ | 0.01 | 2,512,592 | $ | 115.39 | $ | 346,890 | $ | 289,937 | N/A | $ | 285,891 | ||||||||||||||||||||||||
| Total for three year period ended December 31, 2016 | $ | 800,000 | 5,831,987 | 767,704 | $ | 0.01 | 4,386,991 | $ | 117.19 | $ | 671,899 | $ | 514,109 |
| (a.) | Includes 2,500 of restricted shares that were forfeited by a former employee pursuant to the terms of our restricted stock purchase plan. |
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Stock-based Compensation Plans
At December 31, 2016, we have a number of stock-based employee compensation plans. Pursuant to the FASB’s guidance, we expense the grant-date fair value of stock options and other equity-based compensation pursuant to the straight-line method over the stated vesting period of the award using the Black-Scholes option-pricing model.
Pre-tax compensation costs of $45.8 million during 2016, $38.0 million during 2015 and $29.2 million during 2014 were recognized related to outstanding stock options. In addition, pre-tax compensation costs of $2.3 million during 2016, $2.0 million during 2015 and $1.9 million during 2014 were recognized related to amortization of restricted stock and discounts provided in connection with shares purchased pursuant to our 2005 Employee Stock Purchase Plan. As of December 31, 2016, there was approximately $82.1 million of unrecognized compensation cost related to unvested stock options and restricted stock which is expected to be recognized over the remaining average vesting period of 2.7 years.
The expense associated with stock-based compensation arrangements is a non-cash charge. In the 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 $48.1 million in 2016, $40.0 million in 2015 and $31.1 million in 2014. In accordance with ASC 718, excess income tax benefits related to stock-based compensation are classified as cash inflows from financing activities on the Consolidated Statement of Cash Flows. During 2016, 2015 and 2014 we generated $45.2 million, $47.4 million and $33.9 million, respectively, of excess income tax benefits related to stock based compensation which are reflected as cash inflows from financing activities in our Consolidated Statements of Cash Flows, as included herein.
In 2005, we adopted the 2005 Stock Incentive Plan which was amended in 2008, 2010 and 2015 (the “Stock Incentive Plan”). An aggregate of 29.5 million shares of Class B Common Stock has been reserved under the Stock Incentive Plan. During 2016, 2015 and 2014, stock options, net of cancellations, of approximately 2.8 million, 2.9 million and 2.8 million, respectively, were granted. The per option weighted-average grant-date fair value of options granted during 2016, 2015 and 2014 was $23.80, $21.37 and $17.23, respectively. Stock options to purchase Class B Common Stock have been granted to our officers, key employees and members of our Board of Directors. All stock options were granted with an exercise price equal to the fair market value on the date of the grant. Options are exercisable ratably over a four-year period beginning one year after the date of the grant. All outstanding options expire
five years after the date of the grant. As of December 31, 2016, approximately 4.4 million shares of Class B Common Stock remain available for issuance pursuant to the Stock Incentive Plan.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were derived from averaging the number of options granted during the most recent five-year period. The weighted-average assumptions reflected below were based upon twenty-seven option grants for the five-year period ending December 31, 2016, twenty-five option grants for the five-year period ending December 31, 2015 and twenty-one option grants for the five-year period ending December 31, 2014.
| Year Ended December 31, | 2016 | 2015 | 2014 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Volatility | 31 | % | 33 | % | 35 | % | ||||||
| Interest rate | 1 | % | 1 | % | 1 | % | ||||||
| Expected life (years) | 3.4 | 3.4 | 3.4 | |||||||||
| Forfeiture rate | 10 | % | 10 | % | 10 | % | ||||||
| Dividend yield | 0.4 | % | 0.4 | % | 0.4 | % |
The risk-free rate is based on the U.S. Treasury zero coupon four year yield in effect at the time of grant. The expected life of the stock options granted was estimated using the historical behavior of employees. Expected volatility was based on historical volatility for a period equal to the stock option’s expected life. Expected dividend yield is based on our dividend yield at the time of grant.
The table below summarizes our stock option activity during each of the last three years:
| Outstanding Options | Number of Shares | Average Option Price | Range (High-Low) | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Balance, January 1, 2014 | 7,620,958 | $ | 43.63 | $79.79-$30.32 | ||||||
| Granted | 2,845,500 | $ | 78.65 | $102.21-$78.17 | ||||||
| Exercised | (2,277,469 | ) | $ | 38.50 | $73.65-$30.32 | |||||
| Cancelled | (291,538 | ) | $ | 55.63 | $78.17-$36.95 | |||||
| Balance, January 1, 2015 | 7,897,451 | $ | 57.29 | $102.21-$36.95 | ||||||
| Granted | 3,039,350 | $ | 117.70 | $142.43-$108.29 | ||||||
| Exercised | (2,256,454 | ) | $ | 48.97 | $102.21-$36.95 | |||||
| Cancelled | (280,164 | ) | $ | 83.63 | $134.70-$36.95 | |||||
| Balance, January 1, 2016 | 8,400,183 | $ | 80.50 | $142.43-$36.95 | ||||||
| Granted | 2,945,550 | $ | 118.72 | $138.00-$107.39 | ||||||
| Exercised | (2,162,850 | ) | $ | 53.02 | $117.29-$36.95 | |||||
| Cancelled | (412,750 | ) | $ | 103.01 | $130.32-$36.95 | |||||
| Balance, December 31, 2016 | 8,770,133 | $ | 99.06 | $142.43-$36.95 | ||||||
| Outstanding options vested and exercisable as of December 31, 2016 | 2,074,867 | $ | 78.58 | $142.43-$36.95 |
The following table provides information about unvested options for the year December 31, 2016:
| Shares | Weighted Average Grant Date Fair Value | |||||||
|---|---|---|---|---|---|---|---|---|
| Unvested options as of January 1, 2016 | 6,728,967 | $ | 17.77 | |||||
| Granted | 2,945,550 | $ | 23.79 | |||||
| Vested | (2,566,501 | ) | $ | 15.99 | ||||
| Cancelled | (412,750 | ) | $ | 20.34 | ||||
| Unvested options as of December 31, 2016 | 6,695,266 | $ | 20.94 |
The following table provides information regarding all options outstanding at December 31, 2016:
| Options Outstanding | Options Exercisable | |||||||
|---|---|---|---|---|---|---|---|---|
| Number of options outstanding | 8,770,133 | 2,074,867 | ||||||
| Weighted average exercise price | $ | 99.06 | $ | 78.58 | ||||
| Aggregate intrinsic value as of December 31, 2016 | $ | 128,620,135 | $ | 63,939,686 | ||||
| Weighted average remaining contractual life | 3.0 | 2.0 |
The total in-the-money value of all stock options exercised during the years ended December 31, 2016, 2015 and 2014 were $149.4 million, $154.1 million and $112.5 million, respectively.
The weighted average remaining contractual life for options outstanding and weighted average exercise price per share for exercisable options at December 31, 2016 were as follows:
| Exercise Price | Options Outstanding | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Life (in Years) | Exercisable Options | Weighted Average Exercise Price Per Share | Expected to Vest Options (a) | Weighted Average Exercise Price Per Share | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Shares | Shares | Shares | ||||||||||||||||||||||||||
| $36.95 – $53.38 | 1,397,457 | $ | 52.82 | 1.0 | 822,455 | $ | 52.43 | 569,396 | $ | 53.38 | ||||||||||||||||||
| $66.98 – $102.21 | 1,938,250 | 78.64 | 2.2 | 704,425 | 78.60 | 1,083,541 | 78.63 | |||||||||||||||||||||
| $107.39 – $117.29 | 2,543,876 | 117.26 | 3.2 | 531,987 | 117.28 | 1,572,128 | 117.26 | |||||||||||||||||||||
| $118.62 – $142.43 | 2,890,550 | 119.09 | 4.2 | 16,000 | 134.77 | 1,703,318 | 119.09 | |||||||||||||||||||||
| Total | 8,770,133 | $ | 99.06 | 3.0 | 2,074,867 | $ | 78.58 | 4,928,383 | $ | 106.71 |
| (a) | Assumes a weighted average forfeiture rate of 9.75%. |
|---|
In addition to the Stock Incentive Plan, we have the following stock incentive and purchase plans: (i) the 2010 Employees’ Restricted Stock Purchase Plan, as amended in 2015, (“2010 Plan”) which allows eligible participants to purchase shares of Class B Common Stock at par value, subject to certain restrictions, and; (ii) a 2005 Employee Stock Purchase Plan which allows eligible employees to purchase shares of Class B Common Stock at a ten percent discount. There were 14,146, 17,789 and 26,189 shares of restricted stock granted pursuant to the 2010 Plan during 2016, 2015 and 2014, respectively, with various ratable vesting periods ranging up to five years from the date of grant. There were 75,792, 68,213 and 75,303 and shares issued pursuant to the Employee Stock Purchase Plan during 2016, 2015 and 2014, respectively.
We have reserved 2.8 million shares of Class B Common Stock for issuance under these various plans (excluding terminated plans and including a reserve reduction during 2015) and have issued approximately 1.4 million shares, net of cancellations, pursuant to the terms of these plans (excluding terminated plans) as of December 31, 2016. As of December 31, 2016, approximately 1.4 million shares of Class B Common Stock remain available for issuance pursuant to these various plans.
At December 31, 2016, 21,805,773 shares of Class B Common Stock were reserved for issuance upon conversion of shares of Class A, C and D Common Stock outstanding, for issuance upon exercise of options to purchase Class B Common Stock and for issuance of stock under other incentive plans. Class A, C and D Common Stock are convertible on a share for share basis into Class B Common Stock.
- INCOME TAXES
Components of income tax expense/(benefit) are as follows (amounts in thousands):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | 2014 | ||||||||||
| Current | ||||||||||||
| Federal | $ | 368,957 | $ | 363,734 | $ | 248,172 | ||||||
| Foreign | 8,513 | 3,151 | 4,167 | |||||||||
| State | 42,166 | 38,987 | 23,224 | |||||||||
| 419,636 | 405,872 | 275,563 | ||||||||||
| Deferred | ||||||||||||
| Federal | (12,092 | ) | (15,912 | ) | 41,583 | |||||||
| Foreign | 2,463 | 5,545 | — | |||||||||
| State | (820 | ) | (302 | ) | 7,525 | |||||||
| (10,449 | ) | (10,669 | ) | 49,108 | ||||||||
| Total | $ | 409,187 | $ | 395,203 | $ | 324,671 |
The foreign provision for income taxes is based on foreign pre-tax earnings of $58 million in 2016, $41 million in 2015 and $15 million in 2014. Our consolidated financial statements provide for any related tax liability on undistributed earnings that we do not intend to be indefinitely reinvested outside the U.S. Certain of our undistributed international earnings intended to be indefinitely reinvested in operations outside the U.S. have a statutory rate of 20.0%. As of December 31, 2016, U.S. income taxes have not been provided on a cumulative total of $99 million of such earnings. The amount of unrecognizable deferred tax liability related to these temporary differences is estimated to be approximately $15 million.
A reconciliation between the federal statutory rate and the effective tax rate is as follows:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | 2014 | ||||||||||
| Federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
| State taxes, net of federal income tax benefit | 2.4 | % | 2.3 | % | 2.3 | % | ||||||
| Other items | -0.6 | % | -0.6 | % | 0.0 | % | ||||||
| Impact of income attributable to noncontrolling interests | -1.4 | % | -2.2 | % | -2.4 | % | ||||||
| Effective tax rate | 35.4 | % | 34.5 | % | 34.9 | % |
Our effective tax rates were 35.4%, 34.5% and 34.9% for the years ended December 31, 2016, 2015 and 2014, respectively. The increase in our effective tax rate for the year ended December 31, 2016 is primarily impacted by the decrease in net income attributable to noncontrolling interests due to our purchase of the minority ownership interests held by a third-party in our six acute care hospitals located in Las Vegas, Nevada, which is not tax effected in the statement of income. Including the expense related to income attributable to noncontrolling interests, the effective tax rate for the years ended December 31, 2016, 2015 and 2014 were 36.8%, 36.7% and 37.3%, respectively.
Included in “Other current assets” on our Consolidated Balance Sheet are prepaid federal and state income taxes amounting to approximately $10 million and $42 million as of December 31, 2016 and 2015, respectively.
Deferred income taxes are based on the estimated future tax effects of differences between the financial statement carrying amounts and the tax bases of assets and liabilities under the provisions of the enacted tax laws. The components of deferred taxes are as follows (amounts in thousands):
| Year Ended December 31, | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | ||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | ||||||||||||||||
| Self-insurance reserves | $ | 85,940 | $ | $ | 88,401 | $ | |||||||||||||
| Compensation accruals | 83,328 | 66,399 | |||||||||||||||||
| Doubtful accounts and other reserves | 38,017 | 29,616 | |||||||||||||||||
| Other currently non-deductible accrued liabilities | 24,058 | 17,213 | |||||||||||||||||
| Depreciable and amortizable assets | 332,326 | 400,809 | |||||||||||||||||
| State and foreign net operating loss carryforwards and other state and foreign deferred tax assets | 66,639 | 62,541 | |||||||||||||||||
| Net pension liabilities – OCI only | 5,926 | 10,929 | |||||||||||||||||
| Other combined items – OCI only | 815 | 457 | |||||||||||||||||
| Other liabilities | 2,949 | 2,960 | |||||||||||||||||
| $ | 304,723 | $ | 335,275 | $ | 275,556 | $ | 403,769 | ||||||||||||
| Valuation Allowance | (56,333 | ) | 0 | (52,567 | ) | 0 | |||||||||||||
| Total deferred income taxes | $ | 248,390 | $ | 335,275 | $ | 222,989 | $ | 403,769 |
Decreases in deferred tax liabilities relating to depreciable and amortizable assets primarily reflect the impact of deferred taxes recorded in conjunction with our purchase of the minority ownership interests held by a third-party in our six acute care hospitals located in Las Vegas, Nevada.
At December 31, 2016, state net operating loss carryforwards (expiring in years 2017 through 2036), and credit carryforwards available to offset future taxable income approximated $1.04 billion representing approximately $52 million in deferred state tax benefit (net of the federal benefit). At December 31, 2016, there were foreign net operating losses and credit carryforwards of approximately $21 million expiring through 2023 representing approximately $5 million in deferred foreign tax benefit. Increases in deferred tax assets relating to foreign net operating loss carryforwards reflect the impact of deferred taxes recorded in conjunction with the acquisition of Cambian Adult Services located in the U.K. during 2016. At December 31, 2016, related to the acquisition of Foundations Recovery Network, LLC, there were federal net operating losses of approximately $7 million expiring through 2032 representing approximately $2 million in deferred federal tax benefits.
A valuation allowance is required when it is more likely than not that some portion of the deferred tax assets will not be realized. Based on available evidence, it is more likely than not that certain of our state tax benefits will not be realized. Therefore, valuation allowances of approximately $52 million and $51 million have been reflected as of December 31, 2016 and 2015, respectively. During 2016, the valuation allowance on these state tax benefits increased by $1 million due to additional net operating losses incurred. In addition, valuation allowances of approximately $4 million and $2 million have been reflected as of December 31, 2016 and 2015 related to foreign net operating losses and credit carryforwards. The foreign valuation allowance increased approximately $3 million due to the acquisition of Cambian Adult Services. There were no significant increases in valuation allowances as a result of the acquisition of Foundations.
We adopted the provisions of Accounting for Uncertainty in Income Taxes effective January 1, 2007. During 2016 and 2015, the estimated liabilities for uncertain tax positions (including accrued interest and penalties) were increased less than $1 million due to tax positions taken in the current and prior years. During 2016, the estimated liabilities for uncertain tax positions (including accrued interest and penalties) were reduced due to the lapse of the statute of limitations resulting in a net income tax benefit of less than $1 million. The balance at each of December 31, 2016 and 2015, if subsequently recognized, that would favorably affect the effective tax rate and the provision for income taxes is approximately $1 million as of each date.
We recognize accrued interest and penalties associated with uncertain tax positions as part of the tax provision. As of December 31, 2016 and 2015, we have accrued interest and penalties of less than $1 million as of each date. The U.S. federal statute of limitations remains open for the 2013 and subsequent years. Foreign and U.S. state and local jurisdictions have statutes of limitations generally ranging for 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 unrecognized 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.
The tabular reconciliation of unrecognized tax benefits for the years ended December 31, 2016, 2015 and 2014 is as follows (amounts in thousands).
| As of December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | 2014 | ||||||||||
| Balance at January 1, | $ | 1,982 | $ | 2,402 | $ | 3,369 | ||||||
| Additions based on tax positions related to the current year | 50 | 50 | 50 | |||||||||
| Additions for tax positions of prior years | 74 | 111 | 195 | |||||||||
| Reductions for tax positions of prior years | (94 | ) | (524 | ) | (1,212 | ) | ||||||
| Settlements | (753 | ) | (57 | ) | — | |||||||
| Balance at December 31, | $ | 1,259 | $ | 1,982 | $ | 2,402 |
- LEASE COMMITMENTS
Three of our hospital facilities are held under operating leases with Universal Health Realty Income Trust with terms expiring in 2021 (see Note 9 for additional disclosure). We also lease the real property of certain facilities (see Item 2. Properties for additional disclosure).
A summary of property under capital lease follows (amounts in thousands):
| As of December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | |||||||
| Land, buildings and equipment | $ | 45,768 | $ | 45,665 | ||||
| Less: accumulated amortization | (28,864 | ) | (27,169 | ) | ||||
| $ | 16,904 | $ | 18,496 |
Future minimum rental payments under lease commitments with a term of more than one year as of December 31, 2016, are as follows (amounts in thousands):
| Year | Capital Leases | Operating Leases | ||||||
|---|---|---|---|---|---|---|---|---|
| (000s) | ||||||||
| 2017 | $ | 4,010 | $ | 66,086 | ||||
| 2018 | 4,078 | 55,248 | ||||||
| 2019 | 3,998 | 46,943 | ||||||
| 2020 | 3,339 | 37,611 | ||||||
| 2021 | 3,429 | 32,060 | ||||||
| Later years | 18,626 | 132,085 | ||||||
| Total minimum rental | $ | 37,480 | $ | 370,033 | ||||
| Less: Amount representing interest | (14,034 | ) | ||||||
| Present value of minimum rental commitments | 23,446 | |||||||
| Less: Current portion of capital lease obligations | (1,661 | ) | ||||||
| Long-term portion of capital lease obligations | $ | 21,785 |
We assumed capital lease obligations of approximately $152,000 in 2016, $7 million in 2015 and $16 million in 2014, in connection with the leases on certain real estate assets. In the ordinary course of business, our facilities routinely lease equipment pursuant to new lease arrangements that will likely result in future lease and rental expense in excess of amounts indicated above.
- COMMITMENTS AND CONTINGENCIES
Professional and General Liability, Workers’ Compensation Liability and Property Insurance
Professional and General Liability and Workers Compensation Liability:
Effective November, 2010, the vast majority of our subsidiaries are 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 (either $3 million or $10 million) 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% of the claims paid pursuant to the commercially insured coverage in excess of $10 million up to $60 million per occurrence and in the aggregate. 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 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 have been included in the above-mentioned U.K. insurance program.
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.
As of December 31, 2016, the total accrual for our professional and general liability claims was $207 million, of which $48 million is included in current liabilities. As of December 31, 2015, the total accrual for our professional and general liability claims was $204 million, of which $48 million is included in current liabilities.
Below is a schedule showing the changes in our general and professional liability and workers’ compensation reserves during the three years ended December 31, 2016 (amount in thousands):
| General and | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Professional | Workers’ | |||||||||||
| Liability | Compensation | Total | ||||||||||
| Balance at January 1, 2014 | $ | 206,290 | $ | 63,798 | $ | 270,088 | ||||||
| Plus: Accrued insurance expense, net of commercial premiums paid (a) | 22,601 | 36,675 | 59,276 | |||||||||
| Less: Payments made in settlement of self-insured claims | (35,987 | ) | (33,659 | ) | (69,646 | ) | ||||||
| Balance at January 1, 2015 | 192,904 | 66,814 | 259,718 | |||||||||
| Plus: Accrued insurance expense, net of commercial premiums paid | 58,460 | 32,435 | 90,895 | |||||||||
| Less: Payments made in settlement of self-insured claims | (47,391 | ) | (31,746 | ) | (79,137 | ) | ||||||
| Balance at January 1, 2016 | 203,973 | 67,503 | 271,476 | |||||||||
| Liabilities assumed in acquisition | 0 | 661 | 661 | |||||||||
| Plus: Accrued insurance expense, net of commercial premiums paid | 54,671 | 29,967 | 84,638 | |||||||||
| Less: Payments made in settlement of self-insured claims | (51,185 | ) | (30,775 | ) | (81,960 | ) | ||||||
| Balance at December 31, 2016 | $ | 207,459 | $ | 67,356 | $ | 274,815 |
| (a) | General and professional liability amount is net of adjustment recorded during 2014, as discussed below. |
|---|
Our consolidated results of operations during 2016 and 2015 were not materially impacted by adjustments to our prior year reserves for professional and general liability claims. During 2014, based upon a reserve analysis of our estimated future claims payments, we recorded a reduction to our professional and general liability self-insurance reserves (relating to prior years) amounting to $20 million.
As of December 31, 2016, the total accrual for our workers’ compensation liability claims was $67 million, of which $33 million is included in current liabilities. As of December 31, 2015, the total accrual for our workers’ compensation liability claims was $68 million, of which $34 million is included in current liabilities. Our consolidated results of operations during 2016, 2015 or 2014 were not materially impacted by adjustments to our prior year reserves for workers’ compensation claims.
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 per occurrence, 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 declared total insurable value of the property. In addition, we have commercial property insurance policies covering catastrophic losses resulting from earthquake and flood damage, each subject to aggregated loss limits (as opposed to per occurrence losses). 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 to cover a substantial portion of the applicable deductible. 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 limit that includes coverage for real and personal property as well as business interruption losses.
Legal Proceedings
We are subject to claims and suits in the ordinary course of business, including those arising from care and treatment afforded by our hospitals and are party to various government investigations, regulatory matters and litigation, as outlined below.
Office of Inspector General (“OIG”) and Government Investigations:
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 receiving this subpoena: (i) the Keys of Carolina and Old Vineyard received notification during the second half of 2012 from the DOJ of its intent to proceed with an investigation following requests for documents for the period of January, 2007 to the date of the subpoenas from the North Carolina state Attorney General’s Office; (ii) Harbor Point Behavioral Health Center received a subpoena in December, 2012 from the Attorney General of the Commonwealth of Virginia requesting various documents from July, 2006 to the date of the subpoena, and; (iii) The Meadows Psychiatric Center received a subpoena from the OIG in February, 2013 requesting certain documents from 2008 to the date of the subpoena. Unrelated to these matters, the Keys of Carolina was closed and the real property was sold in January, 2013. We were advised that a qui tam action had been filed against Roxbury Treatment Center but the government declined to intervene and the case was dismissed.
In April, 2013, the OIG served facility specific subpoenas on Wekiva Springs Center and River Point Behavioral Health requesting various documents from January, 2005 to the date of the subpoenas. In July, 2013, another subpoena was issued to Wekiva Springs Center and River Point Behavioral Health requesting additional records. 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. Subsequent subpoenas have since been issued to River Point Behavioral Health and Wekiva Springs Center requesting additional 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 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 suspension remains in effect. We cannot predict if and/or when the facility’s suspended payments will resume. Although the operating results of River Point Behavioral Health did not have a material impact on our consolidated results of operations during the years ended December 31, 2016 or 2015, the payment suspension has had a material adverse effect on the facility’s results of operations and financial condition.
In June, 2013, the OIG served a subpoena on Coastal Harbor Health System in Savannah, Georgia requesting documents from January, 2009 to the date of the subpoena.
In February, 2014, we were notified that the investigation conducted by the Criminal Frauds Section had been expanded to include the National Deaf Academy. In March, 2014, a Civil Investigative Demand (“CID”) was served on the National Deaf Academy requesting documents and information from the facility from January 1, 2008 through the date of the CID. We have been advised by the government that the National Deaf Academy has been added to the facilities which are the subject of the coordinated investigation referenced above.
In March, 2014, CIDs were served on Hartgrove Hospital, Rock River Academy and Streamwood Behavioral Health requesting documents and information from those facilities from January, 2008 through the date of the CID.
In September, 2014, the DOJ Civil Division advised us that they were expanding their investigation to include four additional facilities and were requesting production of documents from these facilities. These facilities are Arbour-HRI Hospital, Behavioral Hospital of Bellaire, St. Simons by the Sea, and Turning Point Care Center.
In December, 2014, the DOJ Civil Division requested that Salt Lake Behavioral Health produce documents responsive to the original subpoenas issued in February, 2013.
In March, 2015, the OIG issued subpoenas to Central Florida Behavioral Hospital and University Behavioral Center requesting certain documents from January, 2008 to the date of the subpoena.
In late March, 2015, we were notified that the investigation conducted by the Criminal Frauds Section had been expanded to include UHS as a corporate entity arising out of the coordinated investigation of the facilities described above and, in particular, Hartgrove Hospital.
In December, 2015, we were notified by the DOJ Civil Division that the civil investigation also includes Arbour Hospital, Arbour-Fuller Hospital, Pembroke Hospital and Westwood Lodge located in Massachusetts. To date, these facilities have not received any requests for documentation or other information.
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 payers in relation to services provided at those facilities. At present, we are uncertain as to potential liability and/or financial exposure of the Company and/or named facilities, if any, in connection with these matters.
In December, 2015, we were advised that the DOJ opened an investigation involving the El Paso Behavioral Health System in El Paso, Texas. The DOJ was investigating potential Stark law violations relating to arrangements between the facility and physician(s) at the facility. These agreements were entered into before we acquired the facility as a part of our acquisition of Ascend Health Corporation in October, 2012. To our knowledge, this matter is not a part of the omnibus investigation referenced above. We have reached a settlement with the DOJ, which did not have a material impact on our consolidated financial statements, concluding this matter.
In January, 2016, we were notified that the Department of Justice opened an investigation of the South Texas Health System of a potential False Claim Act case regarding compensation paid to cardiologists pursuant to employment agreements entered into in 2005. In February, 2017, we were notified that the Department of Justice decided not to intervene in an under seal qui tam case and filed a notice of declination. Further, we have been informed that the relator is dismissing the case.
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. 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.
Heed v. Universal Health Services, Inc., et al. 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. Although we have not been served with the complaint at this time, 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.
Other Matters:
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. In September, 2016, we received similar requests for repayment for alleged DSH overpayments for FFY2012. We filed administrative appeals for all of our facilities contesting the recoupment efforts for FFYs 2011 and 2012 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 recently started recoupment of the federal share. If the Department is ultimately successful in its demand related to FFY2011 and FFY2012, it could take similar action with regards to FFY2013 and FFY2014. 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 FFY2011 and FFY2012 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 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.
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 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.
General:
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 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.
The outcome of any current or future litigation or governmental or internal investigations, including the matters described above, cannot be accurately predicted, nor can we predict any resulting penalties, fines or other sanctions that may be imposed at the discretion of federal or state regulatory authorities. We record accruals for such contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time regarding the matters specifically described above because the inherently unpredictable nature of legal proceedings may be exacerbated by various factors, including, but not limited to: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties, or; (vii) there is a wide range of potential outcomes. It is possible that the outcome of these matters could have a material adverse impact on our future results of operations, financial position, cash flows and, potentially, our reputation.
In addition, various suits and claims arising against us in the ordinary course of business are pending. In the opinion of management, the outcome of such claims and litigation will not materially affect our consolidated financial position or results of operations.
In addition to our long-term debt obligations as discussed in Note 4 - Long-Term Debt and our operating lease obligations as discussed in Note 7 - Lease Commitments, we have various other contractual commitments outstanding as of December 31, 2016 as follows: (i) other combined estimated future purchase obligations of $350 million related to a long-term contract with third-parties consisting primarily of certain revenue cycle data processing services for our acute care facilities ($101 million), expected future costs to be paid to a third-party vendor in connection with the ongoing operation of an electronic health records application and purchase implementation of a revenue cycle application for our acute care facilities ($247 million) and estimated minimum liabilities for physician commitments expected to be paid in the future ($2 million); (ii) estimated construction commitment of $43 million representing our share of the construction costs of two new behavioral health care facilities located in Pennsylvania and Washington that we are required to build pursuant to joint-venture agreements with third-parties; (iii) combined estimated future payments of $213 million related to our non-contributory, defined benefit pension plan ($194 million consisting of estimated payments through 2089) and other retirement plan liabilities ($19 million), and; (iv) accrued and unpaid estimated claims expense incurred in connection with our commercial health insurers and self-insured employee benefit plans ($90 million).
- RELATIONSHIP WITH UNIVERSAL HEALTH REALTY INCOME TRUST AND OTHER RELATED PARTY TRANSACTIONS
Relationship with Universal Health Realty Income Trust:
At December 31, 2016, we held approximately 5.8% 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, which is scheduled to expire on December 31st of each year, pursuant to the terms of which we conduct the Trust’s day-to-day affairs, provide administrative services and present investment opportunities. In December, 2016, the advisory agreement was renewed by the Trust for 2017 pursuant to the
same terms in place during each of the last three years. During 2016, 2015 and 2014, the advisory fee was computed at 0.70% of the Trust’s average invested real estate assets. 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 $3.3 million during 2016, $2.8 million during 2015 and $2.5 million during 2014.
Our pre-tax share of income from the Trust was $1.0 million during 2016, $1.4 million during 2015 and $3.2 million during 2014, and is included in net revenues in the accompanying consolidated statements of income for each year. Included in our share of the Trust’s income was approximately $500,000 in 2015, and $2.3 million in 2014, related to our share of gains on various transactions recorded by the Trust.
The carrying value of our investment in the Trust was $7.7 million and $8.7 million at December 31, 2016 and 2015, respectively, and is included in other assets in the accompanying consolidated balance sheets. The market value of our investment in the Trust was $51.7 million at December 31, 2016 and $39.4 million at December 31, 2015, based on the closing price of the Trust’s stock on the respective dates.
Total rent expense under the operating leases on the three hospital facilities with the Trust during 2016 and 2015 was $15.9 million and $15.6 million, respectively. Total rent expense under the operating leases on the four hospital facilities with the Trust during 2014 (as discussed below) was $16.8 million. In addition, certain of our subsidiaries are tenants in several medical office buildings and two free-standing emergency departments (“FEDs”) owned by the Trust or by limited liability companies in which the Trust holds 95% to 100% of the ownership interest.
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.
In June, 2016, we provided the required notice to the Trust, exercising the 5-year renewal options on McAllen Medical Center, Wellington Regional Medical Center and Southwest Healthcare System, Inland Valley Campus. The renewals extend the lease terms on these facilities, at existing lease rates, through December, 2021.
During the first quarter of 2015, wholly-owned subsidiaries of ours sold to and leased back from the Trust, two newly constructed FEDs located in Texas which were completed and opened during the first quarter of 2015. In conjunction with these transactions, ten-year lease agreements with six, five-year renewal options have been executed with the Trust. We have the option to purchase the properties upon the expiration of the fixed terms and each five-year renewal terms at the fair market value of the property. The aggregate construction cost/sales proceeds of these facilities was approximately $13 million, and the aggregate rent expense paid to the Trust at the commencement of the leases was approximately $900,000 annually.
In December, 2014, upon the expiration of the lease term, we elected to purchase from the Trust for $17.3 million, the real property of The Bridgeway, a 103-bed behavioral health care facility located in North Little Rock, Arkansas. Pursuant to the terms of the lease, we and the Trust were both required to obtain appraisals of the property to determine its fair market value/purchase price. The rent expense paid by us to the Trust, prior to our purchase of The Bridgeway’s real property in December, 2014, was approximately $1.1 million annually.
The table below details the renewal options and terms for each of our three hospital facilities leased from the Trust:
| Hospital Name | Type of Facility | Annual Minimum Rent | End of Lease Term | Renewal Term (years) | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| McAllen Medical Center | Acute Care | $ | 5,485,000 | December, 2021 | 10 | (a) | |||||||
| Wellington Regional Medical Center | Acute Care | $ | 3,030,000 | December, 2021 | 10 | (b) | |||||||
| Southwest Healthcare System, Inland Valley Campus | Acute Care | $ | 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). |
|---|
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.
Other Related Party Transactions:
In December, 2010, our Board of Directors approved the Company’s entering into supplemental life insurance plans and agreements on the lives of our chief executive officer (“CEO”) 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 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 paid approximately $1.3 million in premium payments during each of 2016 and 2015.
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 $23 million as of December 31, 2016 and $13 million as of December 31, 2015. See Note 1 to the Consolidated Financial Statements-Business and Summary of Significant Accounting Policies, W) GPO Agreement/Minority Ownership Interest for additional disclosure related to this agreement.
A member of our Board of Directors and member of the Executive Committee is Of Counsel to the law firm used by us as our principal outside counsel. This Board member is also the trustee of certain trusts for the benefit of our CEO and his family. This law firm also provides personal legal services to our CEO.
- PENSION PLAN
We maintain contributory and non-contributory retirement plans for eligible employees. Our contributions to the contributory plan amounted to $45.7 million, $40.7 million and $35.7 million in 2016, 2015 and 2014, respectively. The non-contributory plan is a defined benefit pension plan which covers employees of one of our subsidiaries. The benefits are based on years of service and the employee’s highest compensation for any five years of employment. Our funding policy is to contribute annually at least the minimum amount that should be funded in accordance with the provisions of ERISA.
The following table shows the reconciliation of the defined benefit pension plan as of December 31, 2016 and 2015:
| 2016 | 2015 | |||||||
|---|---|---|---|---|---|---|---|---|
| (000s) | ||||||||
| Change in plan assets: | ||||||||
| Fair value of plan assets at beginning of year | $ | 106,839 | $ | 116,697 | ||||
| Actual return (loss) on plan assets | 8,858 | (3,223 | ) | |||||
| Benefits paid | (5,651 | ) | (6,086 | ) | ||||
| Administrative expenses | (369 | ) | (549 | ) | ||||
| Fair value of plan assets at end of year | $ | 109,677 | $ | 106,839 | ||||
| Change in benefit obligation: | ||||||||
| Benefit obligation at beginning of year | $ | 118,180 | $ | 127,342 | ||||
| Service cost | 926 | 1,051 | ||||||
| Interest cost | 4,997 | 4,912 | ||||||
| Benefits paid | (5,651 | ) | (6,086 | ) | ||||
| Actuarial (gain) loss | (7,503 | ) | (9,039 | ) | ||||
| Benefit obligation at end of year | $ | 110,949 | $ | 118,180 | ||||
| Amounts recognized in the Consolidated Balance Sheet: | ||||||||
| Other non-current liabilities | 1,272 | 11,341 | ||||||
| Total amounts recognized at end of year | $ | 1,272 | $ | 11,341 |
| 2016 | 2015 | 2014 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (000s) | ||||||||||||
| Components of net periodic cost (benefit) | ||||||||||||
| Service cost | $ | 926 | $ | 1,051 | $ | 966 | ||||||
| Interest cost | 4,997 | 4,912 | 4,985 | |||||||||
| Expected return on plan assets | (5,708 | ) | (6,254 | ) | (7,772 | ) | ||||||
| Recognized actuarial loss | 3,072 | 3,164 | 1,107 | |||||||||
| Net periodic cost | $ | 3,287 | $ | 2,873 | $ | (714 | ) |
| 2016 | 2015 | |||
|---|---|---|---|---|
| Measurement Dates | ||||
| Benefit obligations | 12/31/2016 | 12/31/2015 | ||
| Fair value of plan assets | 12/31/2016 | 12/31/2015 |
| 2016 | 2015 | |||||||
|---|---|---|---|---|---|---|---|---|
| Weighted average assumptions as of December 31 | ||||||||
| Discount rate | 4.14 | % | 4.34 | % | ||||
| Rate of compensation increase | 4.00 | % | 4.00 | % |
| 2016 | 2015 | 2014 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Weighted-average assumptions for net periodic benefit cost calculations | ||||||||||||
| Discount rate | 4.34 | % | 3.95 | % | 4.95 | % | ||||||
| Expected long-term rate of return on plan assets | 5.50 | % | 5.50 | % | 7.50 | % | ||||||
| Rate of compensation increase | 4.00 | % | 4.00 | % | 4.00 | % |
The accumulated benefit obligation was $110.6 million and $117.7 million as of December 31, 2016 and 2015, respectively. As of December 31, 2016, the accumulated benefit obligation exceeded the fair value of plan assets by $0.9 million. As of December 31, 2015, the accumulated benefit obligation exceeded the fair value of plan assets by $10.9 million.
We estimate that there will be a $0.9 million net loss amortized from accumulated other comprehensive income during 2017.
In May, 2015, the FASB issued ASU No. 2015-07, "Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent)," which is effective for annual reporting periods beginning after December 15, 2015. The standard removes the requirement to categorize investments for which fair value is measured using the net asset value (NAV) per share practical expedient within the fair value hierarchy. We have adopted this standard effective January 1, 2016, and applied the guidance retrospectively. This standard impacts financial statement disclosure only. In previous reporting periods, we disclosed the full fair
value hierarchy and disclosed our pension assets as level 2 within the hierarchy. Going forward, we will disclose our pension assets by asset category reported using NAV as a practical expedient for comparative years.
The market values of our pension plan assets at December 31, 2016 and December 31, 2015 by asset category are as follows:
| 2016 | 2015 | |||||||
|---|---|---|---|---|---|---|---|---|
| Equities: | ||||||||
| U.S. Large Cap | $ | 8,547 | $ | 8,520 | ||||
| U.S. Mid Cap | 2,651 | 2,613 | ||||||
| U.S. Small Cap | 2,669 | 2,649 | ||||||
| International Developed | 6,534 | 6,406 | ||||||
| Emerging Markets | 4,360 | 4,114 | ||||||
| Fixed income: | ||||||||
| Core Fixed Income | 23,719 | 23,782 | ||||||
| Long Duration Fixed Income | 58,312 | 55,931 | ||||||
| Real Estate: | ||||||||
| REIT Fund | 2,216 | 2,212 | ||||||
| Cash/Currency: | 0 | |||||||
| Cash Equivalents | 669 | 612 | ||||||
| Total market value | $ | 109,677 | $ | 106,839 |
To develop the expected long-term rate of return on plan assets assumption, we considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio.
The following table shows expected benefit payments for the years ended December 31, 2017 through 2026 for our defined pension plan. There will be benefit payments under this plan beyond 2026.
| Estimated Future Benefit Payments (000s) | ||||
|---|---|---|---|---|
| 2017 | $ | 6,180 | ||
| 2018 | 6,421 | |||
| 2019 | 6,596 | |||
| 2020 | 6,716 | |||
| 2021 | 6,799 | |||
| 2022-2026 | 34,353 | |||
| Total | $ | 67,065 |
| 2016 | 2015 | |||||||
|---|---|---|---|---|---|---|---|---|
| Plan Assets | ||||||||
| Asset Category | ||||||||
| Equity securities | 23 | % | 23 | % | ||||
| Fixed income securities | 75 | % | 75 | % | ||||
| Other | 2 | % | 2 | % | ||||
| Total | 100 | % | 100 | % |
Investment Policy, Guidelines and Objectives have been established for the defined benefit pension plan. The investment policy is in keeping with the fiduciary requirements under existing federal laws and managed in accordance with the Prudent Investor Rule. Total portfolio risk is regularly evaluated and compared to that of the plan’s policy target allocation and judged on a relative basis over a market cycle. The following asset allocation policy and ranges have been established in accordance with the overall risk and return objectives of the portfolio:
| As of 12/31/2016 | Permitted Range | |||||
|---|---|---|---|---|---|---|
| Total Equity | 23 | % | 10-30% | |||
| Total Fixed Income | 75 | % | 70-90% | |||
| Other | 2 | % | 0-10% |
In accordance with the investment policy, the portfolio will invest in high quality, large and small capitalization companies traded on national exchanges, and investment grade securities. The investment managers will not write or buy options for speculative
purposes; securities may not be margined or sold short. The manager may employ futures or options for the purpose of hedging exposure, and will not purchase unregistered sectors, private placements, partnerships or commodities.
- 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 this Annual Report on Form 10-K for the year ended December 31, 2016. 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, based upon each segment’s respective percentage of total operating expenses.
| 2016 | Acute Care Hospital Services | Behavioral Health Services (a.) | Other | Total Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollar amounts in thousands) | ||||||||||||||||
| Gross inpatient revenues | $ | 19,042,627 | $ | 8,017,585 | $ | — | $ | 27,060,212 | ||||||||
| Gross outpatient revenues | $ | 11,374,098 | $ | 902,102 | $ | — | $ | 12,276,200 | ||||||||
| Total net revenues | $ | 5,112,950 | $ | 4,645,007 | $ | 8,253 | $ | 9,766,210 | ||||||||
| Income (loss) before allocation of corporate overhead and income taxes | $ | 550,050 | $ | 1,030,734 | $ | (424,426 | ) | $ | 1,156,358 | |||||||
| Allocation of corporate overhead | $ | (170,767 | ) | $ | (154,843 | ) | $ | 325,610 | $ | 0 | ||||||
| Income (loss) after allocation of corporate overhead and before income taxes | $ | 379,283 | $ | 875,891 | $ | (98,816 | ) | $ | 1,156,358 | |||||||
| Total assets | $ | 3,723,075 | $ | 6,440,195 | $ | 154,532 | $ | 10,317,802 |
| 2015 | Acute Care Hospital Services | Behavioral Health Services (a.) | Other | Total Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollar amounts in thousands) | ||||||||||||||||
| Gross inpatient revenues | $ | 16,847,944 | $ | 7,456,397 | $ | — | $ | 24,304,341 | ||||||||
| Gross outpatient revenues | $ | 9,604,952 | $ | 839,884 | $ | 15,794 | $ | 10,460,630 | ||||||||
| Total net revenues | $ | 4,632,564 | $ | 4,400,335 | $ | 10,552 | $ | 9,043,451 | ||||||||
| Income (loss) before allocation of corporate overhead and income taxes | $ | 519,630 | $ | 1,021,823 | $ | (395,552 | ) | $ | 1,145,901 | |||||||
| Allocation of corporate overhead | $ | (197,699 | ) | $ | (117,203 | ) | $ | 314,902 | $ | 0 | ||||||
| Income (loss) after allocation of corporate overhead and before income taxes | $ | 321,931 | $ | 904,620 | $ | (80,650 | ) | $ | 1,145,901 | |||||||
| Total assets | $ | 3,413,879 | $ | 5,867,088 | $ | 334,477 | $ | 9,615,444 |
| 2014 | Acute Care Hospital Services | Behavioral Health Services (a.) | Other | Total Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollar amounts in thousands) | ||||||||||||||||
| Gross inpatient revenues | $ | 14,943,102 | $ | 6,689,753 | — | $ | 21,632,855 | |||||||||
| Gross outpatient revenues | $ | 8,147,031 | $ | 784,309 | $ | 34,238 | $ | 8,965,578 | ||||||||
| Total net revenues | $ | 4,178,103 | $ | 4,012,216 | $ | 14,769 | $ | 8,205,088 | ||||||||
| Income (loss) before allocation of corporate overhead and income taxes | $ | 465,328 | $ | 944,068 | $ | (479,729 | ) | $ | 929,667 | |||||||
| Allocation of corporate overhead | $ | (178,781 | ) | $ | (98,811 | ) | $ | 277,592 | $ | 0 | ||||||
| Income (loss) after allocation of corporate overhead and before income taxes | $ | 286,547 | $ | 845,257 | $ | (202,137 | ) | $ | 929,667 | |||||||
| Total assets | $ | 3,362,870 | $ | 5,286,960 | $ | 301,442 | $ | 8,951,272 |
| (a.) | Includes net revenues generated from our behavioral health care facilities located in the U.K. amounting to approximately $241 million in 2016, $203 million in 2015 and $45 million in 2014. |
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- QUARTERLY RESULTS (unaudited)
The following tables summarize the quarterly financial data for the two years ended December 31, 2016 and 2015:
| 2016 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (amounts in thousands, except per share amounts) | ||||||||||||||||||||
| Net revenues | $ | 2,449,798 | $ | 2,430,855 | $ | 2,409,872 | $ | 2,475,685 | $ | 9,766,210 | ||||||||||
| Net income | $ | 215,719 | $ | 195,449 | $ | 157,265 | $ | 178,738 | $ | 747,171 | ||||||||||
| Less: Net income attributable to noncontrolling interests | $ | 24,960 | $ | 9,872 | $ | 5,400 | $ | 4,530 | $ | 44,762 | ||||||||||
| Net income attributable to UHS | $ | 190,759 | $ | 185,577 | $ | 151,865 | $ | 174,208 | $ | 702,409 | ||||||||||
| Earnings per share attributable to UHS-Basic: | ||||||||||||||||||||
| Total basic earnings per share | $ | 1.95 | $ | 1.91 | $ | 1.56 | $ | 1.80 | $ | 7.22 | ||||||||||
| Earnings per share attributable to UHS-Diluted: | ||||||||||||||||||||
| Total diluted earnings per share | $ | 1.93 | $ | 1.89 | $ | 1.54 | $ | 1.78 | $ | 7.14 |
The 2016 quarterly financial data presented above includes the following:
First Quarter:
| • | an unfavorable $8.3 million pre-tax impact ($5.2 million, or $.05 per diluted share, net of taxes) recorded in connection with the implementation of EHR applications; |
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Second Quarter:
| • | an unfavorable $8.7 million pre-tax impact ($5.5 million, or $.05 per diluted share, net of taxes) recorded in connection with the implementation of EHR applications. |
|---|
Third Quarter:
| • | an unfavorable $8.5 million pre-tax impact ($5.3 million, or $.06 per diluted share, net of taxes) recorded in connection with the implementation of EHR applications; |
|---|
Fourth Quarter:
| • | an unfavorable $2.8 million pre-tax impact ($1.8 million, or $.02 per diluted share, net of taxes) recorded in connection with the implementation of EHR applications; |
|---|
| 2015 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (amounts in thousands, except per share amounts) | ||||||||||||||||||||
| Net revenues | $ | 2,225,353 | $ | 2,275,204 | $ | 2,227,655 | $ | 2,315,239 | $ | 9,043,451 | ||||||||||
| Net income | $ | 194,323 | $ | 201,404 | $ | 163,654 | $ | 191,317 | $ | 750,698 | ||||||||||
| Less: Net income attributable to noncontrolling interests | $ | 20,024 | $ | 19,211 | $ | 13,367 | $ | 17,568 | $ | 70,170 | ||||||||||
| Net income attributable to UHS | $ | 174,299 | $ | 182,193 | $ | 150,287 | $ | 173,749 | $ | 680,528 | ||||||||||
| Earnings per share attributable to UHS-Basic: | ||||||||||||||||||||
| Total basic earnings per share | $ | 1.76 | $ | 1.84 | $ | 1.52 | $ | 1.76 | $ | 6.89 | ||||||||||
| Earnings per share attributable to UHS-Diluted: | ||||||||||||||||||||
| Total diluted earnings per share | $ | 1.73 | $ | 1.80 | $ | 1.48 | $ | 1.74 | $ | 6.76 |
The 2015 quarterly financial data presented above includes the following:
First Quarter:
| • | an unfavorable $8.3 million pre-tax impact ($5.3 million, or $.05 per diluted share, net of taxes) recorded in connection with the implementation of EHR applications; |
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Second Quarter:
| • | an unfavorable $6.9 million pre-tax impact ($4.4 million, or $.05 per diluted share, net of taxes) recorded in connection with the implementation of EHR applications. |
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Third Quarter:
| • | an unfavorable $8.0 million pre-tax impact ($5.0 million, or $.05 per diluted share, net of taxes) recorded in connection with the implementation of EHR applications; |
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Fourth Quarter:
| • | a favorable $4.9 million pre-tax impact ($3.1 million, or $.03 per diluted share, net of taxes) recorded in connection with the implementation of EHR applications. |
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SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
| Balance at | Charges to | Write-off of | Balance | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| beginning | costs and | Acquisitions | uncollectible | at end | ||||||||||||||||
| Allowance for Doubtful Accounts Receivable: | of period | expenses | of business | accounts | of period | |||||||||||||||
| Year ended December 31, 2016 | $ | 398,797 | $ | 741,578 | $ | - | $ | (730,001 | ) | $ | 410,374 | |||||||||
| Year ended December 31, 2015 | $ | 324,648 | $ | 741,273 | $ | - | $ | (667,124 | ) | $ | 398,797 | |||||||||
| Year ended December 31, 2014 | $ | 395,035 | $ | 698,983 | $ | 506 | $ | (769,876 | ) | $ | 324,648 |
| Balance at | Charges to | Balance | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| beginning | costs and | Acquisitions | at end | |||||||||||||||||
| Valuation Allowance for Deferred Tax Assets: | of period | expenses | of business | Write-offs | of period | |||||||||||||||
| Year ended December 31, 2016 | $ | 52,567 | $ | 3,766 | $ | - | $ | - | $ | 56,333 | ||||||||||
| Year ended December 31, 2015 | $ | 52,764 | $ | (197 | ) | $ | - | $ | - | $ | 52,567 | |||||||||
| Year ended December 31, 2014 | $ | 46,841 | $ | 5,923 | $ | - | $ | - | $ | 52,764 |
Previous: Item 14. Principal Accountant Fees and Services.