filings.toolsItem 16. Form 10-K Summary
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Item 16. Form 10-K Summary
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None.
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/ MARC D. MILLER | |
| Marc D. Miller Chief Executive Officer |
February 25, 2021
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 | Executive Chairman of the Board | February 25, 2021 | |||||||||
| /s/ MARC D. MILLER Marc D. Miller | Director, Chief Executive Officer and President (Principal Executive Officer) | February 25, 2021 | |||||||||
| /s/ LAWRENCE S. GIBBS Lawrence S. Gibbs | Director | February 25, 2021 | |||||||||
| /s/ EILEEN C. MCDONNELL Eileen C. McDonnell | Director | February 25, 2021 | |||||||||
| /s/ WARREN J. NIMETZ Warren J. Nimetz | Director | February 25, 2021 | |||||||||
| /s/ MARIA SINGER Maria Singer | Director | February 25, 2021 | |||||||||
| /s/ ELLIOTT J. SUSSMAN M.D. Elliot J. Sussman M.D. | Director | February 25, 2021 | |||||||||
| /s/ STEVE FILTON Steve Filton | Executive Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) | February 25, 2021 |
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.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Universal Health Services, Inc. and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of income, of comprehensive income, of changes in equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 7 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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.
Definition and Limitations of Internal Control over Financial Reporting
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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of accounts receivable
As described in Notes 1, 10 and 12 to the consolidated financial statements, the Company’s Acute Care Hospital Services and Behavioral Health Care Services operating segments report net patient service revenue at the estimated net realizable amounts from patients and third-party payers and others for services rendered. The Company has agreements with third-party payers that provide for payments to the Company at amounts different from established rates. Payment arrangements include rates per discharge, reimbursed costs, discounted charges and per diem payments. Estimates of contractual allowances, which represent explicit price concessions, under managed care plans are based upon the payment terms specified in the related contractual agreements. Management estimates 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. Management monitors the 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. In addition to explicit price concessions, management estimates revenue adjustments for implicit price concessions based on general factors such as payer mix, the aging of the receivables and historical collection experience. Management routinely reviews 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 the allowances as warranted. As of December 31, 2020, the net accounts receivable balance was $1.7 billion.
The principal considerations for our determination that performing procedures relating to the valuation of accounts receivable is a critical audit matter are the significant judgment by management in estimating net accounts receivable, specifically as it relates to developing the estimate for explicit and implicit price concessions, which in turn led to significant auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence obtained related to the estimation of price concessions.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of accounts receivable, including controls over management’s valuation approach, assumptions and data used to estimate the explicit and implicit price concessions. These procedures also included, among others, (i) testing management’s process for developing the estimate for price concessions, as well as the relevance of the historical billing and collection data as an input to the valuation approach; (ii) testing the accuracy of a sample of revenue transactions and a sample of cash collections from the historical billing data and historical collection data used in management’s estimation of price concessions; (iii) evaluating the historical accuracy of management’s process for developing the estimate of the amount which will ultimately be collected by comparing actual cash collections to the previously recorded net accounts receivable balance; and (iv) for the Acute Care Hospital Services operating segment, developing an independent expectation of the net accounts receivable balance. Developing an independent expectation involved calculating the percentage of cash collections as compared to the recorded net accounts receivable balance as of the end of the prior year, applying those calculated percentages to the recorded accounts receivable balance as of December 31, 2020, and comparing the calculated balance to management’s estimate of the Acute Care Hospital Services net accounts receivable balance.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 25, 2021
We have served as the Company’s auditor since 2007.
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2018 | ||||||||||
| (in thousands, except per share data) | ||||||||||||
| Net revenues | $ | 11,558,897 | $ | 11,378,259 | $ | 10,772,278 | ||||||
| Operating charges: | ||||||||||||
| Salaries, wages and benefits | 5,613,097 | 5,588,893 | 5,254,536 | |||||||||
| Other operating expenses | 2,672,762 | 2,723,911 | 2,614,687 | |||||||||
| Supplies expense | 1,288,132 | 1,251,346 | 1,168,654 | |||||||||
| Depreciation and amortization | 510,493 | 490,392 | 453,045 | |||||||||
| Lease and rental expense | 116,059 | 107,809 | 106,094 | |||||||||
| 10,200,543 | 10,162,351 | 9,597,016 | ||||||||||
| Income from operations | 1,358,354 | 1,215,908 | 1,175,262 | |||||||||
| Interest expense, net | 106,285 | 162,733 | 154,956 | |||||||||
| Other (income) expense, net | (14 | ) | (13,162 | ) | (14,219 | ) | ||||||
| Income before income taxes | 1,252,083 | 1,066,337 | 1,034,525 | |||||||||
| Provision for income taxes | 299,293 | 238,794 | 236,642 | |||||||||
| Net income | 952,790 | 827,543 | 797,883 | |||||||||
| Less: Net income attributable to noncontrolling interests | 8,837 | 12,689 | 18,178 | |||||||||
| Net income attributable to UHS | $ | 943,953 | $ | 814,854 | $ | 779,705 | ||||||
| Basic earnings per share attributable to UHS | $ | 11.06 | $ | 9.16 | $ | 8.35 | ||||||
| Diluted earnings per share attributable to UHS | $ | 10.99 | $ | 9.13 | $ | 8.31 | ||||||
| Weighted average number of common shares—basic | 85,061 | 88,762 | 93,276 | |||||||||
| Add: Other share equivalents | 526 | 278 | 474 | |||||||||
| Weighted average number of common shares and equivalents—diluted | 85,587 | 89,040 | 93,750 |
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, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2018 | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
| Net income | $ | 952,790 | $ | 827,543 | $ | 797,883 | ||||||
| Other comprehensive income (loss): | ||||||||||||
| Unrealized derivative losses on cash flow hedges | 0 | (3,925 | ) | (2,805 | ) | |||||||
| Minimum pension liability | 4,428 | 8,503 | (6,892 | ) | ||||||||
| Foreign currency translation adjustment | 13,619 | 27,886 | 9,718 | |||||||||
| Other | 0 | 0 | 4,398 | |||||||||
| Other comprehensive income before tax | 18,047 | 32,464 | 4,419 | |||||||||
| Income tax expense related to items of other comprehensive income | 1,820 | 4,813 | 8,905 | |||||||||
| Total other comprehensive income (loss), net of tax | 16,227 | 27,651 | (4,486 | ) | ||||||||
| Comprehensive income | 969,017 | 855,194 | 793,397 | |||||||||
| Less: Comprehensive income attributable to noncontrolling interests | 8,837 | 12,689 | 18,178 | |||||||||
| Comprehensive income attributable to UHS | $ | 960,180 | $ | 842,505 | $ | 775,219 |
The accompanying notes are an integral part of these consolidated financial statements.
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | |||||||
| (Dollar amounts in thousands) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,224,490 | $ | 61,268 | ||||
| Accounts receivable, net | 1,728,928 | 1,560,847 | ||||||
| Supplies | 190,417 | 159,889 | ||||||
| Other current assets | 138,034 | 133,930 | ||||||
| Total current assets | 3,281,869 | 1,915,934 | ||||||
| Property and Equipment | ||||||||
| Land | 665,000 | 613,842 | ||||||
| Buildings and improvements | 6,030,183 | 5,646,508 | ||||||
| Equipment | 2,607,692 | 2,430,463 | ||||||
| Property under capital lease | 75,611 | 38,582 | ||||||
| 9,378,486 | 8,729,395 | |||||||
| Accumulated depreciation | (4,512,764 | ) | (4,089,679 | ) | ||||
| 4,865,722 | 4,639,716 | |||||||
| Construction-in-progress | 507,402 | 376,982 | ||||||
| 5,373,124 | 5,016,698 | |||||||
| Other assets: | ||||||||
| Goodwill | 3,882,715 | 3,869,760 | ||||||
| Deferred income taxes | 22,689 | 16,189 | ||||||
| Right of use assets-operating leases | 336,513 | 326,518 | ||||||
| Deferred charges | 4,985 | 6,373 | ||||||
| Other | 574,984 | 516,778 | ||||||
| 4,821,886 | 4,735,618 | |||||||
| Total Assets | $ | 13,476,879 | $ | 11,668,250 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Current maturities of long-term debt | $ | 331,998 | $ | 87,550 | ||||
| Accounts payable | 570,523 | 446,957 | ||||||
| Accrued liabilities | ||||||||
| Compensation and related benefits | 410,165 | 380,117 | ||||||
| Interest | 9,458 | 19,486 | ||||||
| Taxes other than income | 152,227 | 71,605 | ||||||
| Legal reserves | 12,625 | 144,509 | ||||||
| Operating lease liabilities | 59,796 | 56,442 | ||||||
| Medicare accelerated payments and deferred CARES Act and other grants | 376,151 | 0 | ||||||
| Other | 513,673 | 354,209 | ||||||
| Current federal and state income taxes | 44,423 | 2,515 | ||||||
| Total current liabilities | 2,481,039 | 1,563,390 | ||||||
| Other noncurrent liabilities | 458,549 | 329,932 | ||||||
| Medicare accelerated payments and deferred CARES Act noncurrent | 322,617 | 0 | ||||||
| Operating lease liabilities noncurrent | 278,303 | 270,076 | ||||||
| Long-term debt | 3,524,253 | 3,896,577 | ||||||
| Deferred income taxes | 5,582 | 25,071 | ||||||
| Commitments and contingencies (Note 8) | ||||||||
| Redeemable noncontrolling interest | 4,569 | 4,333 | ||||||
| Equity: | ||||||||
| Class A Common Stock, voting, $.01 par value; authorized 12,000,000 shares: issued and outstanding 6,577,100 shares in 2020 and 6,577,100 shares in 2019 | 66 | 66 | ||||||
| Class B Common Stock, limited voting, $.01 par value; authorized 150,000,000 shares: issued and outstanding 77,805,530 shares in 2020 and 79,449,349 shares in 2019 | 778 | 794 | ||||||
| Class C Common Stock, voting, $.01 par value; authorized 1,200,000 shares: issued and outstanding 661,688 shares in 2020 and 661,688 shares in 2019 | 7 | 7 | ||||||
| Class D Common Stock, limited voting, $.01 par value; authorized 5,000,000 shares: issued and outstanding 18,251 shares in 2020 and 18,491 shares in 2019 | 0 | 0 | ||||||
| Cumulative dividends | (479,503 | ) | (462,159 | ) | ||||
| Retained earnings | 6,747,678 | 5,933,504 | ||||||
| Accumulated other comprehensive income | 48,120 | 31,893 | ||||||
| Universal Health Services, Inc. common stockholders’ equity | 6,317,146 | 5,504,105 | ||||||
| Noncontrolling interest | 84,821 | 74,766 | ||||||
| Total Equity | 6,401,967 | 5,578,871 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 13,476,879 | $ | 11,668,250 |
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, 2020, 2019 and 2018
(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, 2018 | $ | 6,702 | $ | 66 | $ | 869 | $ | 7 | $ | 0 | $ | (371,814 | ) | $ | 5,353,209 | $ | 7,177 | $ | 4,989,514 | $ | 61,922 | $ | 5,051,436 | |||||||||||||||||||||
| Cumulative-effect adjustment due to adoption of ASU 2016-01 (net of income tax effect of $1,045) | (3,353 | ) | 3,353 | — | — | |||||||||||||||||||||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||||||||||||||||||||||
| Issued/(converted) including tax benefits from exercise of stock options | — | — | 6 | — | — | — | 11,882 | — | 11,888 | — | 11,888 | |||||||||||||||||||||||||||||||||
| Repurchased | — | — | (34 | ) | — | — | — | (413,968 | ) | — | (414,002 | ) | — | (414,002 | ) | |||||||||||||||||||||||||||||
| Restricted share-based compensation expense | — | — | — | — | — | — | 2,924 | — | 2,924 | — | 2,924 | |||||||||||||||||||||||||||||||||
| Dividends paid | — | — | — | — | — | (37,342 | ) | — | — | (37,342 | ) | — | (37,342 | ) | ||||||||||||||||||||||||||||||
| Stock option expense | — | — | — | — | — | — | 61,061 | — | 61,061 | — | 61,061 | |||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | (2,500 | ) | — | — | — | — | — | — | — | — | (12,095 | ) | (12,095 | ) | ||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | — | — | — | — | 8,616 | 8,616 | |||||||||||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||
| Net income to UHS / noncontrolling interests | 90 | — | — | — | — | — | 779,705 | — | 779,705 | 18,088 | 797,793 | |||||||||||||||||||||||||||||||||
| Reclassification due to adoption of ASU 2018-02 | — | — | — | — | — | — | 1,802 | (1,802 | ) | — | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments (net of income tax effect of $6,824) | — | — | — | — | — | — | — | 2,894 | 2,894 | — | 2,894 | |||||||||||||||||||||||||||||||||
| Unrealized derivative gains on cash flow hedges (net of income tax effect of $667) | — | — | — | — | — | — | — | (2,138 | ) | (2,138 | ) | — | (2,138 | ) | ||||||||||||||||||||||||||||||
| Minimum pension liability (net of income tax effect of $1,650) | — | — | — | — | — | — | — | (5,242 | ) | (5,242 | ) | — | (5,242 | ) | ||||||||||||||||||||||||||||||
| Subtotal - comprehensive income | 90 | — | — | — | — | — | 778,154 | (2,935 | ) | 775,219 | 18,088 | 793,307 | ||||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | $ | 4,292 | $ | 66 | $ | 841 | $ | 7 | $ | — | $ | (409,156 | ) | $ | 5,793,262 | $ | 4,242 | $ | 5,389,262 | $ | 76,531 | $ | 5,465,793 |
The accompanying notes are an integral part of these consolidated financial statements.
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY—(Continued)
For the Years Ended December 31, 2020, 2019 and 2018
(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 | — | — | 10 | — | — | — | 10,930 | — | 10,940 | — | 10,940 | |||||||||||||||||||||||||||||||||
| Repurchased | — | — | (57 | ) | — | — | — | (753,870 | ) | — | (753,927 | ) | — | (753,927 | ) | |||||||||||||||||||||||||||||
| Restricted share-based compensation expense | — | — | — | — | — | — | 8,222 | — | 8,222 | — | 8,222 | |||||||||||||||||||||||||||||||||
| Dividends paid | — | — | — | — | — | (53,003 | ) | — | — | (53,003 | ) | — | (53,003 | ) | ||||||||||||||||||||||||||||||
| Stock option expense | — | — | — | — | — | — | 60,106 | — | 60,106 | — | 60,106 | |||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | (500 | ) | — | — | — | — | — | — | — | — | (15,359 | ) | (15,359 | ) | ||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | — | — | — | — | 1,446 | 1,446 | |||||||||||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||
| Net income to UHS / noncontrolling interests | 541 | — | — | — | — | — | 814,854 | — | 814,854 | 12,148 | 827,002 | |||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments (net of income tax effect of $3,693) | — | — | — | — | — | — | — | 24,193 | 24,193 | — | 24,193 | |||||||||||||||||||||||||||||||||
| Unrealized derivative gains on cash flow hedges (net of income tax effect of $928) | — | — | — | — | — | — | — | (2,997 | ) | (2,997 | ) | — | (2,997 | ) | ||||||||||||||||||||||||||||||
| Minimum pension liability (net of income tax effect of $2,048) | — | — | — | — | — | — | — | 6,455 | 6,455 | — | 6,455 | |||||||||||||||||||||||||||||||||
| Subtotal - comprehensive income | 541 | — | — | — | — | — | 814,854 | 27,651 | 842,505 | 12,148 | 854,653 | |||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | 4,333 | $ | 66 | $ | 794 | $ | 7 | $ | — | $ | (462,159 | ) | $ | 5,933,504 | $ | 31,893 | $ | 5,504,105 | $ | 74,766 | $ | 5,578,871 |
The accompanying notes are an integral part of these consolidated financial statements.
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY—(Continued)
For the Years Ended December 31, 2020, 2019 and 2018
(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 | — | — | 4 | — | — | — | 12,754 | — | 12,758 | — | 12,758 | |||||||||||||||||||||||||||||||||
| Repurchased | — | — | (20 | ) | — | — | — | (206,699 | ) | — | (206,719 | ) | — | (206,719 | ) | |||||||||||||||||||||||||||||
| Restricted share-based compensation expense | — | — | — | — | — | — | 9,505 | — | 9,505 | — | 9,505 | |||||||||||||||||||||||||||||||||
| Dividends paid | — | — | — | — | — | (17,344 | ) | — | — | (17,344 | ) | — | (17,344 | ) | ||||||||||||||||||||||||||||||
| Stock option expense | — | — | — | — | — | — | 54,661 | — | 54,661 | — | 54,661 | |||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | (500 | ) | — | — | — | — | — | — | — | — | (19,305 | ) | (19,305 | ) | ||||||||||||||||||||||||||||||
| Purchase of ownership interests by minority members | — | — | — | — | — | — | — | — | — | 17,959 | 17,959 | |||||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | — | — | — | — | 3,300 | 3,300 | |||||||||||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||
| Net income to UHS / noncontrolling interests | 736 | — | — | — | — | — | 943,953 | — | 943,953 | 8,101 | 952,054 | |||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments (net of income tax effect of $749) | — | — | — | — | — | — | — | 12,870 | 12,870 | — | 12,870 | |||||||||||||||||||||||||||||||||
| Unrealized derivative gains on cash flow hedges (net of income tax effect of $928) | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
| Minimum pension liability (net of income tax effect of $1,071) | — | — | — | — | — | — | — | 3,357 | 3,357 | — | 3,357 | |||||||||||||||||||||||||||||||||
| Subtotal - comprehensive income | 736 | — | — | — | — | — | 943,953 | 16,227 | 960,180 | 8,101 | 968,281 | |||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | 4,569 | $ | 66 | $ | 778 | $ | 7 | $ | — | $ | (479,503 | ) | $ | 6,747,678 | $ | 48,120 | $ | 6,317,146 | $ | 84,821 | $ | 6,401,967 |
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, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2018 | ||||||||||
| (Amounts in thousands) | ||||||||||||
| Cash Flows from Operating Activities: | ||||||||||||
| Net income | $ | 952,790 | $ | 827,543 | $ | 797,883 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation & amortization | 510,493 | 490,392 | 453,076 | |||||||||
| Loss (Gain) on sales of assets and businesses, net of losses | 1,957 | (7,540 | ) | (2,513 | ) | |||||||
| Stock-based compensation expense | 65,837 | 69,431 | 66,581 | |||||||||
| Costs related to extinguishment of debt | 1,365 | 0 | 2,727 | |||||||||
| Provision for asset impairment | 0 | 97,631 | 49,310 | |||||||||
| Changes in assets & liabilities, net of effects from acquisitions and dispositions: | ||||||||||||
| Accounts receivable | (145,901 | ) | (42,056 | ) | (42,239 | ) | ||||||
| Accrued interest | (10,028 | ) | 209 | (4,478 | ) | |||||||
| Accrued and deferred income taxes | 9,593 | (25,194 | ) | (54,052 | ) | |||||||
| Other working capital accounts | 124,545 | 39,664 | 24,696 | |||||||||
| Medicare accelerated payments and deferred CARES Act and other grants | 698,768 | 0 | 0 | |||||||||
| Other assets and deferred charges | (4,555 | ) | (27,205 | ) | (31,429 | ) | ||||||
| Other | 109,167 | 7,703 | (1,536 | ) | ||||||||
| Accrued insurance expense, net of commercial premiums paid | 159,223 | 105,672 | 92,863 | |||||||||
| Payments made in settlement of self-insurance claims | (113,085 | ) | (97,781 | ) | (76,147 | ) | ||||||
| Net cash provided by operating activities | 2,360,169 | 1,438,469 | 1,274,742 | |||||||||
| Cash Flows from Investing Activities: | ||||||||||||
| Property and equipment additions, net of disposals | (731,307 | ) | (634,095 | ) | (664,962 | ) | ||||||
| Acquisition of property and businesses | (52,009 | ) | (8,005 | ) | (110,464 | ) | ||||||
| (Outflows) Inflows from foreign exchange contracts that hedge our net U.K. investment | (21,740 | ) | (19,763 | ) | 66,151 | |||||||
| Proceeds received from sales of assets and businesses | 8,168 | 9,450 | 13,502 | |||||||||
| Costs incurred for purchase and implementation of information technology applications | (2,902 | ) | (21,418 | ) | (36,243 | ) | ||||||
| Decrease (Increase) in capital reserves of commercial insurance subsidiary | (100 | ) | 0 | 100 | ||||||||
| Investment in, and advances to, joint venture and other | (2,672 | ) | (14,579 | ) | (15,331 | ) | ||||||
| Net cash used in investing activities | (802,562 | ) | (688,410 | ) | (747,247 | ) | ||||||
| Cash Flows from Financing Activities: | ||||||||||||
| Reduction of long-term debt | (962,567 | ) | (57,142 | ) | (830,496 | ) | ||||||
| Additional borrowings | 801,599 | 39,220 | 791,247 | |||||||||
| Financing costs | (10,300 | ) | 0 | (13,787 | ) | |||||||
| Repurchase of common shares | (206,719 | ) | (770,504 | ) | (397,425 | ) | ||||||
| Dividends paid | (17,344 | ) | (53,003 | ) | (37,342 | ) | ||||||
| Issuance of common stock | 12,318 | 10,806 | 10,196 | |||||||||
| Profit distributions to noncontrolling interests | (19,805 | ) | (15,859 | ) | (14,595 | ) | ||||||
| Purchase of ownership interests by minority member | 17,959 | 1,446 | 0 | |||||||||
| Net cash used in financing activities | (384,859 | ) | (845,036 | ) | (492,202 | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 739 | 959 | (2,905 | ) | ||||||||
| Increase (Decrease) in cash and cash equivalents | 1,173,487 | (94,018 | ) | 32,388 | ||||||||
| Cash, cash equivalents and restricted cash, beginning of period | 105,667 | 199,685 | 167,297 | |||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 1,279,154 | $ | 105,667 | $ | 199,685 | ||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||||||
| Interest paid | $ | 112,598 | $ | 157,406 | $ | 150,293 | ||||||
| Income taxes paid, net of refunds | $ | 286,247 | $ | 260,622 | $ | 293,837 | ||||||
| Noncash purchases of property and equipment | $ | 74,854 | $ | 63,514 | $ | 77,674 |
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:
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 intercompany accounts and transactions have been eliminated.
Revenue Recognition: On January 1, 2018, we adopted, using the modified retrospective approach, 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. The most significant change from the adoption of the new standard relates to our estimation for the allowance for doubtful accounts. Under the previous standards, our estimate for amounts not expected to be collected based upon our historical experience, were reflected as provision for doubtful accounts, included within net revenue. Under the new standard, 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, not reflected separately as provision for doubtful accounts. Under the new standard, subsequent changes in estimate of collectability due to a change in the financial status of a payer, for example a bankruptcy, will be recognized as bad debt expense in operating charges. The adoption of this ASU in 2018, and amounts recognized as bad debt expense and included in other operating expenses, did not have a material impact on our consolidated financial statements.
See Note 10-Revenue Recognition, for additional disclosure related to our revenues including a disaggregation of our consolidated net revenues by major source for each of the periods presented herein.
We report net patient service revenue at the estimated net realizable amounts from patients and third-party payers and others for services rendered. We have agreements with third-party payers that provide for payments to us at amounts different from our established rates. Payment arrangements include rates per discharge, reimbursed costs, discounted charges and per diem payments. Estimates of contractual allowances, which represent explicit price concessions under ASC 606, 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 payers 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 funding of both federal Medicare and state Medicaid programs 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 Medicare and Medicaid reimbursements. Adjustments related to the final settlement of these retrospectively determined amounts did not materially impact our results in 2020, 2019 or 2018. If it were to occur, each 1% adjustment to our estimated net Medicare revenues that are subject to retrospective review and settlement as of December 31, 2020, would change our after-tax net income by approximately $1 million.
Charity Care, Uninsured Discounts and Other Adjustments to Revenue: 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 revenue adjustments for implicit price concessions based on general factors such as payer mix, the aging 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.
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 of various amounts, dependent upon the state, ranging from 200% to 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, the transaction price is fully adjusted and there is no impact 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 net revenues in future periods. Although the patient’s ultimate eligibility determination may result in adjustments to net revenues, these adjustments do not have a material impact on our results of operations in 2020, 2019 or 2018 since our facilities make estimates at each financial reporting period to adjust revenue based on historical collections.
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, the transaction price is fully adjusted and there is no impact 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.
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, 2020, 2019 and 2018:
| (dollar amounts in thousands) | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2018 | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Charity care | $ | 622,668 | 28 | % | $ | 672,326 | 31 | % | $ | 761,783 | 40 | % | ||||||||||||
| Uninsured discounts | 1,578,470 | 72 | % | 1,511,738 | 69 | % | 1,132,811 | 60 | % | |||||||||||||||
| Total uncompensated care | $ | 2,201,138 | 100 | % | $ | 2,184,064 | 100 | % | $ | 1,894,594 | 100 | % |
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 adjustments to net revenues and uncompensated care provided could have a material unfavorable impact on our future operating results.
| (amounts in thousands) | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2018 | ||||||||||
| Estimated cost of providing charity care | $ | 73,690 | $ | 77,886 | $ | 94,088 | ||||||
| Estimated cost of providing uninsured discounts related care | 186,804 | 175,128 | 139,913 | |||||||||
| Estimated cost of providing uncompensated care | $ | 260,494 | $ | 253,014 | $ | 234,001 |
Concentration of Revenues: Our six acute care hospitals in the Las Vegas, Nevada market contributed, on a combined basis, 15% in 2020, 16% in 2019 and 15% in 2018 of our consolidated net revenues.
Cash, Cash Equivalents and Restricted Cash: We consider all highly liquid investments purchased with maturities of three months or less to be cash equivalents.
Cash, cash equivalents, and restricted cash as reported in the consolidated statements of cash flows are presented separately on our consolidated balance sheets as follow:
| (amounts in thousands) | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2018 | ||||||||||
| Cash and cash equivalents | $ | 1,224,490 | $ | 61,268 | $ | 105,220 | ||||||
| Restricted cash (a) | 54,664 | 44,399 | 94,465 | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 1,279,154 | $ | 105,667 | $ | 199,685 |
| (a)Restricted cash is included in other assets on the accompanying consolidated balance sheet and consists of statutorily required capital reserves related to our commercial insurance subsidiary. The fair value of our restricted cash was computed based upon quotes received from financial institutions. We consider these to be “level 1” in the fair value hierarchy as outlined in the authoritative guidance for disclosures in connection with financial securities. |
|---|
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.
See Provision for Asset Impairment-Foundations Recovery Network, in Other Assets and Intangible Assets below, for additional disclosure related to a provision for asset impairment recorded during 2019 to reduce the carrying value of real property assets of certain Foundations Recovery Network, L.L.C. facilities.
While in progress, we capitalized interest on major construction projects and the development and implementation of information technology applications amounting to $4.3 million during 2020, $3.4 million during 2019 and $2.3 million during 2018.
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 $478.8 million during 2020, $455.6 million during 2019 and $410.0 million during 2018.
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.
Goodwill: Goodwill is 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 quantitative impairment assessments as of October 1, 2020 which indicated no impairment of goodwill. There were also no goodwill impairments during 2019 or 2018. 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.
Changes in the carrying amount of goodwill for the two years ended December 31, 2020 were as follows (in thousands):
| Acute Care Services | Behavioral Health Services | Total Consolidated | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance, January 1, 2019 | $ | 442,462 | $ | 3,402,166 | $ | 3,844,628 | ||||||
| Goodwill acquired during the period | 5,926 | 0 | 5,926 | |||||||||
| Goodwill divested during the period | 0 | 0 | 0 | |||||||||
| Adjustments to goodwill (a) | 27 | 19,179 | 19,206 | |||||||||
| Balance, December 31, 2019 | 448,415 | 3,421,345 | 3,869,760 | |||||||||
| Goodwill acquired during the period | 127 | 0 | 127 | |||||||||
| Goodwill divested during the period | 0 | 0 | 0 | |||||||||
| Adjustments to goodwill (a) | (1,521 | ) | 14,349 | 12,828 | ||||||||
| Balance, December 31, 2020 | $ | 447,021 | $ | 3,435,694 | $ | 3,882,715 |
(a)The increases in the Behavioral Health Services’ goodwill consists primarily of foreign currency translation adjustments.
Other Assets and Intangible 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 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 ($73 million and $62 million as of December 31, 2020 and 2019, respectively); (v) deposits; (vi) investments in various businesses, including Universal Health Realty Income Trust ($5 million and $6 million as of as of December 31, 2020 and 2019, respectively) and Premier, Inc. ($78 million and $70 million as of December 31, 2020 and 2019, respectively); (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, and; (viii) other miscellaneous assets.
Intangible assets are reviewed for impairment 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 asset. We have designated October 1st as our annual impairment assessment date and performed impairment assessments as of October 1, 2020 which indicated no impairment of other and intangible assets. During 2019 and 2018, we recorded provisions for asset impairments related to Foundations Recovery Network, L.L.C., as discussed below.
Provision for Asset Impairment-Foundations Recovery Network:
Our financial results for the years ended December 31, 2019 and 2018 include pre-tax provisions for asset impairments of approximately $98 million and $49 million, respectively, recorded in connection with Foundations Recovery Network, L.L.C. (“Foundations”), which was acquired by us in 2015.
The pre-tax provision for asset impairment recording during 2019 includes: (i) a $75 million impairment provision to write-off the carrying value of the Foundations’ tradename intangible asset, and; (ii) a $23 million impairment provision to reduce the carrying value of real property assets of certain Foundations’ facilities. The $49 million pre-tax provision for asset impairment recorded during 2018 reduced the carrying value of a tradename intangible asset to approximately $75 million from its original value of approximately $124 million.
The provision for asset impairment recorded during 2019, which is included in other operating expenses in our consolidated statements of income, was recorded after evaluation of the estimated fair value of the Foundations’ tradename as well as certain related real property assets. The provision for asset impairment was impacted by the following: (i) decisions made by management during 2019 to cancel the opening of future planned de novo facilities; (ii) reductions in projected future patient volumes, revenues and cash flows resulting from continued operating trends and financial results experienced by existing facilities that significantly lagged expectations, and; (iii) competitive pressures experienced in certain markets that were deemed to be permanent.
The provision for asset impairment recorded during 2018, which is also included in other operating expenses, was recorded after an evaluation, at that time, of the estimated fair value of the Foundations’ tradename for its existing facilities, consisting of 4 inpatient and 12 outpatient facilities as of December 31, 2018, as well as estimated planned de novos. The 2018 asset impairment charge was impacted by the following: (i) the lost future revenue and cash flows resulting from the permanent closure of a Foundations’ inpatient facility located in Malibu, California that was severely damaged in the California wildfires during the fourth quarter of 2018; (ii) reduction in growth rates of projected future patient volumes, revenues and operating cash flows based upon pressures on reimbursement rates experienced from certain payers and competitive pressures experienced in certain markets, and; (iii) revisions made to the number and timing of planned de novo facilities.
The following table shows the amounts recorded as net intangible assets for the years ended December 31, 2020 and 2019:
| (amounts in thousands) | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | |||||||
| Medicare licenses | $ | 57,226 | $ | 57,226 | ||||
| Certificates of need | 8,253 | 8,267 | ||||||
| Contract relationships and other (net of $52,804 and $50,273 of accumulated amortization for 2020 and 2019, respectively) | 17,107 | 18,164 | ||||||
| Net Intangible Assets | $ | 82,586 | $ | 83,657 |
Supplies: Supplies, which consist primarily of medical supplies, are stated at the lower of cost (first-in, first-out basis) or market.
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.
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.
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, payment deferral of the employer’s share of Social Security taxes as provided for by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), and liabilities incurred in connection with split-dollar life insurance agreements on the lives of our chief executive officer and his wife.
Redeemable Noncontrolling Interests and Noncontrolling Interest: As of December 31, 2020, 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%, 30% and 20% in three behavioral health care facilities located in Pennsylvania, Ohio and Washington, respectively, and; (iv) approximately 5% in an acute care facility located in Nevada. The noncontrolling interest and redeemable noncontrolling interest balances of $85 million and $5 million, respectively, as of December 31, 2020, consist primarily of the third-party ownership interests in these hospitals.
In connection with the two behavioral health care facilities located in Pennsylvania and Ohio, the minority ownership interests of which are reflected as redeemable noncontrolling interests on our 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.
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 11 - Pension Plan for additional disclosure regarding the defined benefit pension plan.
The amounts recognized in AOCI for the two years ended December 31, 2020 were as follows (in thousands):
| Net Unrealized Gains (Losses) on Effective Cash Flow Hedges | Foreign Currency Translation Adjustment | Minimum Pension Liability | Total AOCI | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance, January 1, 2019, net of income tax | $ | 2,980 | $ | 15,375 | $ | (14,113 | ) | $ | 4,242 | |||||||
| 2019 activity: | ||||||||||||||||
| Pretax amount | (3,925 | ) | 27,886 | 8,503 | 32,464 | |||||||||||
| Income tax effect | 928 | (3,693 | ) | (2,048 | ) | (4,813 | ) | |||||||||
| Change, net of income tax | (2,997 | ) | 24,193 | 6,455 | 27,651 | |||||||||||
| Balance, January 1, 2020, net of income tax | (17 | ) | 39,568 | (7,658 | ) | 31,893 | ||||||||||
| 2020 activity: | ||||||||||||||||
| Pretax amount | 0 | 13,619 | 4,428 | 18,047 | ||||||||||||
| Income tax effect | 0 | (749 | ) | (1,071 | ) | (1,820 | ) | |||||||||
| Change, net of income tax | 0 | 12,870 | 3,357 | 16,227 | ||||||||||||
| Balance, December 31, 2020, net of income tax | $ | (17 | ) | $ | 52,438 | $ | (4,301 | ) | $ | 48,120 |
Accounting for Derivative Financial Investments and Hedging Activities and Foreign Currency Forward Exchange Contracts: 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. From time to time, 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 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.
In August 2017, the FASB issued new guidance on hedge accounting (ASU 2017-12) that is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. The new guidance amends the presentation and disclosure requirements, and changes how companies assess effectiveness. We adopted this guidance as of January 1, 2019 and applied to all existing hedges as of the adoption date. As of December 31, 2020 we have no cash flow hedges.
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. In conjunction with the January 1, 2019 adoption of ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities”, we reclassified our presentation of the net cash inflows or outflows, which were received or paid in connection with foreign exchange contracts that hedge our net investment in foreign operations against movements in exchange rates, to investing cash flows on the consolidated statements of cash flows.
Stock-Based Compensation: 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.
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, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2018 | ||||||||||
| Basic and diluted: | ||||||||||||
| Net Income | $ | 952,790 | $ | 827,543 | $ | 797,883 | ||||||
| Less: Net income attributable to noncontrolling interest | (8,837 | ) | (12,689 | ) | (18,178 | ) | ||||||
| Less: Net income attributable to unvested restricted share grants | (2,981 | ) | (2,028 | ) | (1,091 | ) | ||||||
| Net income attributable to UHS—basic and diluted | $ | 940,972 | $ | 812,826 | $ | 778,614 | ||||||
| Basic earnings per share attributable to UHS: | ||||||||||||
| Weighted average number of common shares—basic | 85,061 | 88,762 | 93,276 | |||||||||
| Total basic earnings per share | $ | 11.06 | $ | 9.16 | $ | 8.35 | ||||||
| Diluted earnings per share attributable to UHS: | ||||||||||||
| Weighted average number of common shares | 85,061 | 88,762 | 93,276 | |||||||||
| Net effect of dilutive stock options and grants based on the treasury stock method | 526 | 278 | 474 | |||||||||
| Weighted average number of common shares and equivalents—diluted | 85,587 | 89,040 | 93,750 | |||||||||
| Total diluted earnings per share | $ | 10.99 | $ | 9.13 | $ | 8.31 |
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 6.4 million during 2020, 5.5 million during 2019 and 7.9 million during 2018.
Fair Value of Financial Instruments: The fair values of our 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.
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.
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.
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 recognize 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. During the third quarter of 2020, we entered into an agreement with Premier pursuant to the terms of which, among other things, our ownership interest in Premier was converted into shares of Class A Common Stock of Premier. We have elected to retain a portion of the previously vested shares of Premier, the 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 $78 million and $70 million as of December 31, 2020 and 2019, respectively. The $8 million increase in market value at December 31, 2020, as compared to December 31, 2019, consists of $12 million of additional vested shares and $4
million of decrease in market value. In connection with our 2018 adoption of ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”, since our vested shares of Premier are held for investment and classified as available for sale, the change in market value of these shares are recorded as an unrealized gain and included in “Other (income) expense, net” on our consolidated statements of income. Additionally, during 2020, Premier paid cash dividends of $848,000 which is included in “Other (income) expense, net” in our condensed consolidated statements of income. Prior to 2018, changes in the market value of our vested Premier stock were recorded to other comprehensive income/loss on our consolidated balance sheet.
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 $488 million during 2020, $419 million during 2019 and $387 million during 2018. These revenues were offset by Provider Taxes of approximately $185 million during 2020, $194 million during 2019 and $179 million during 2018, which are recorded in other operating expenses on the Consolidated Statements of Income as included herein. The aggregate net benefit from these programs was $303 million during 2020, $225 million during 2019 and $208 million during 2018. 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 $73 million in 2020, $78 million in 2019 and $64 million in 2018.
CARES Act and Other Governmental Grants and Medicare Accelerated Payments: As of December 31, 2020, we have received an aggregate of $1.112 billion of funds consisting of: (i) $417 million received pursuant to various governmental stimulus programs, most notably the Public Health and Social Services Emergency Fund (the “PHSSEF”) as provided for by the CARES Act, of which approximately $413 million were recorded as net revenues during 2020 and approximately $4 million remain in the Medicare accelerated payments and deferred CARES Act and other grants liability account in our consolidated balance sheet, and; (ii) $695 million of Medicare accelerated payments received pursuant to the Medicare Accelerated and Advance Payment Program (“MAAPP”).
Pursuant to legislation enacted on October 1, 2020, the $695 million of Medicare accelerated payments received pursuant to the MAAPP are required to be repaid to the government beginning in the second quarter of 2021 through the third quarter of 2022 through withholding of future Medicare revenues earned during those periods. $372 million is included in the Medicare accelerated payments and deferred CARES Act and other grant liability account in our consolidated balance sheet and $323 million is included in the Medicare accelerated payments noncurrent account in our consolidated balance sheet. There was no impact on our earnings during 2020 in connection with receipt of the MAAPP funds.
Recent Accounting Standards: In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses," which introduced new guidance for an approach based on expected losses to estimate credit losses on certain types of financial instruments. Instruments in scope include loans, held-to-maturity debt securities, and net investments in leases as well as reinsurance and trade receivables. In November 2018, the FASB issued ASU 2018-19, which clarifies that operating lease receivables are outside the scope of the new standard. The standard was be effective for us in fiscal years beginning after December 15, 2019. The adoption of this guidance did not have a material impact on our consolidated financial statements.
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 was effective for the annual and interim periods beginning January 1, 2020 with early adoption permitted, and applied prospectively. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles- Goodwill and Other- Internal Use Software (Topic 350): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, ("ASU 2018-15"), which requires customers in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal use software guidance in ASC 350-40 to determine which implementation costs to capitalize or expense. ASU 2018-15 was effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU is intended to provide temporary optional expedients and exceptions to the US GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. This guidance was effective beginning on March 12, 2020, and the Company may
elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance may have on our consolidated financial statements.
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.
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, 2020:
2020 Acquisitions of Assets and Businesses:
During 2020, we spent $52 million on the acquisition of businesses and property, consisting primarily of the real estate assets of an acute care hospital located in Las Vegas, Nevada. The hospital is currently being renovated and scheduled to open during 2021.
2020 Divestiture of Assets and Businesses:
During 2020, we received $8 million from the sale of assets and businesses.
Year ended December 31, 2019:
2019 Acquisitions of Assets and Businesses:
During 2019, we spent $8 million to acquire various businesses and properties.
2019 Divestiture of Assets:
During 2019, we received $9 million from the sales of various assets.
Year ended December 31, 2018:
2018 Acquisitions of Assets and Businesses:
During 2018 we spent $110 million primarily to acquire:
| • | The Danshell Group, consisting of 25 behavioral health facilities located in the U.K. (acquired during the third quarter of 2018), and; |
|---|
| • | a 109-bed behavioral health care facility located in Gulfport, Mississippi (acquired during the first quarter of 2018). |
|---|
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 | $ | (3,988 | ) | |
| Property & equipment | 59,520 | |||
| Goodwill | 45,090 | |||
| Other assets | 8,409 | |||
| Income tax assets, net of deferred tax liabilities | 1,749 | |||
| Other | (316 | ) | ||
| Cash paid in 2018 for acquisitions | $ | 110,464 |
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).
2018 Divestiture of Assets and Businesses:
During 2018, we received $13 million in connection with the sale of a business and property including The Limes, an 18-bed facility located in the UK.
- FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENT
Fair Value Hedges:
During 2020, 2019 and 2018, 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 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. From time to time, 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 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. When applicable, we assess the effectiveness of our hedge instruments on a quarterly basis. Although we do not anticipate nonperformance by our counterparties to interest rate swap agreements, the counterparties expose us to credit risk in the event of nonperformance. We do not hold or issue derivative financial instruments for trading purposes.
During 2015, we entered into nine forward starting interest rate swaps whereby we paid a fixed rate on a total notional amount of $1.0 billion and received one-month LIBOR. The average fixed rate payable on these swaps, all of which matured on April 15, 2019, was 1.31%. As of December 31, 2020 we have no interest rate swaps.
When applicable, 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.
Foreign Currency Forward Exchange Contracts:
In August 2017, the FASB issued new guidance on hedge accounting (ASU 2017-12) that is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. The new guidance amends the presentation and disclosure requirements, and changes how companies assess effectiveness. We adopted this guidance as of January 1, 2019 and applied to all existing hedges as of the adoption date.
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. In conjunction with the January 1, 2019 adoption of ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities”, we reclassified our presentation of the net cash inflows or outflows, which were received or paid in connection with foreign exchange contracts that hedge our net investment in foreign operations against movements in exchange rates, to investing cash flows on the consolidated statements of cash flows. As previously disclosed within our footnotes, these cash flows were formerly reported as operating activities. Prior
period amounts have been reclassified from net cash provided by operating activities to net cash used in investing activities to conform with the current year presentation on the consolidated statements of cash flows. In connection with these forward exchange contracts, we recorded net cash outflows of $22 million during 2020, net cash outflows of $20 million during 2019 and net cash inflow of $66 million during 2018.
Derivatives Hedging Relationships:
The following table presents the effects of our interest rate swap agreements and our foreign currency foreign exchange contracts on our results of operations for the three years ended December 31 (in thousands):
| Gain/(Loss) recognized in AOCI | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, | December 31, | December 31, | |||||||||
| 2020 | 2019 | 2018 | |||||||||
| Cash Flow Hedge relationships | |||||||||||
| Interest rate swap agreements (a) | $ | 0 | $ | (3,925 | ) | $ | (2,805 | ) | |||
| Net Investment Hedge relationships | |||||||||||
| Foreign currency foreign exchange contracts | $ | (22,097 | ) | $ | (18,328 | ) | $ | 75,059 |
| (a) | The amount of gain reclassified out of AOCI into interest expense, net was $3.4 million and $6.7 million during 2019 and 2018, respectively. |
|---|
No other gains or losses were recognized in income related to derivatives in Subtopic 815-20.
Fair Value Measurement
Fair value is defined as the price that would be received to sell 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. The following fair value hierarchy classifies the inputs to valuation techniques used to measure fair value into one of three levels:
| • | Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities. |
|---|
| • | Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These included quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. |
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| • | Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions. |
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The following tables present the assets and liabilities recorded at fair value on a recurring basis:
| Balance at | Balance Sheet | Basis of Fair Value Measurement | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | December 31, 2020 | Location | Level 1 | Level 2 | Level 3 | ||||||||
| Assets: | |||||||||||||
| Term Deposits | $ | 540,000 | Cash and cash equivalents | $ | 540,000 | ||||||||
| Money market mutual funds | 37,100 | Cash and cash equivalents | 37,100 | ||||||||||
| Money market mutual funds | 70,995 | Other assets | 70,995 | ||||||||||
| Certificates of deposit | 2,300 | Other assets | 2,300 | ||||||||||
| Available for sale securities | 78,367 | Other assets | 78,367 | ||||||||||
| Deferred compensation assets | 42,044 | Other assets | 42,044 | ||||||||||
| Foreign currency exchange contracts | 9,987 | Other current assets | 9,987 | ||||||||||
| $ | 780,793 | $ | 228,506 | $ | 552,287 | - | |||||||
| Liabilities: | |||||||||||||
| Deferred compensation liability | $ | 42,044 | Other noncurrent liabilities | $ | 42,044 | ||||||||
| $ | 42,044 | $ | 42,044 | - | - | ||||||||
| Balance at | Balance Sheet | Basis of Fair Value Measurement | |||||||||||
| (in thousands) | December 31, 2019 | Location | Level 1 | Level 2 | Level 3 | ||||||||
| Assets: | |||||||||||||
| Money market mutual funds | $ | 60,175 | Other assets | $ | 60,175 | ||||||||
| Certificates of deposit | 2,200 | Other assets | 2,200 | ||||||||||
| Available for sale securities | 70,478 | Other assets | 70,478 | ||||||||||
| Deferred compensation assets | 35,510 | Other assets | 35,510 | ||||||||||
| Foreign currency exchange contracts | 10,343 | Other current assets | 10,343 | ||||||||||
| $ | 178,706 | $ | 166,163 | $ | 12,543 | - | |||||||
| Liabilities: | |||||||||||||
| Deferred compensation liability | $ | 35,510 | Other noncurrent liabilities | $ | 35,510 | ||||||||
| $ | 35,510 | $ | 35,510 | - | - |
The fair value of our money market mutual funds, certificates of deposit and available for sale securities are computed based upon quoted market prices in active market. The fair value of deferred compensation assets and offsetting liability are computed based on market prices in an active market held in a rabbi trust. The fair value of our interest rate swaps are based on quotes from our counter parties. The fair value of our foreign currency exchange contracts is valued using quoted forward exchange rates and spot rates at the reporting date
As of December 31, 2020, in addition to the $577 million reflected above in cash and cash equivalents, we have approximately $581 million of other cash accounts that earn interest at variable rates ranging from .20% to .25%.
- LONG-TERM DEBT
A summary of long-term debt follows:
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | |||||||
| (amounts in thousands) | ||||||||
| Long-term debt: | ||||||||
| Notes payable and Mortgages payable (including obligations under capitalized leases of $52,905 in 2020 and $17,818 in 2019) and term loans with varying maturities through 2050; weighted average interest rates of 6.8% in 2020 and 8.0% in 2019 (see Note 7 regarding capitalized leases) | $ | 61,638 | $ | 22,634 | ||||
| Revolving credit and on-demand credit facility | — | 30,900 | ||||||
| Term Loan A | 1,900,000 | 1,950,000 | ||||||
| Term Loan B | 490,000 | 495,000 | ||||||
| Accounts receivable securitization program | 225,000 | 400,000 | ||||||
| 4.75% Senior Secured Notes redeemed in 2020, including unamortized premium of $2,490 in 2019 and net of unamortized discount of $70 in 2019 | — | 702,420 | ||||||
| 5.00% Senior Secured Notes due 2026 | 400,000 | 400,000 | ||||||
| 2.65% Senior Secured Notes due 2030, net of unamortized discount of $2,193 in 2020 | 797,806 | — | ||||||
| Total debt before unamortized financing costs | 3,874,444 | 4,000,954 | ||||||
| Less-Unamortized financing costs | (18,193 | ) | (16,827 | ) | ||||
| Total debt after unamortized financing costs | 3,856,251 | 3,984,127 | ||||||
| Less-Amounts due within one year (net of unamortized financing costs) | (331,998 | ) | (87,550 | ) | ||||
| Long-term debt | $ | 3,524,253 | $ | 3,896,577 |
Credit Facilities and Outstanding Debt Securities
On October 23, 2018, we entered into a Sixth Amendment (the “Sixth Amendment”) to our credit agreement dated as of November 15, 2010, as amended on March 15, 2011, September 21, 2012, May 16, 2013, August 7, 2014 and June 7, 2016, among UHS, 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 (the “Senior Credit Agreement”).
The Sixth Amendment to the Senior Credit Agreement, among other things: (i) increased the aggregate amount of the revolving credit facility to $1 billion (increase of $200 million over the $800 million previous commitment); (ii) increased the aggregate amount of the tranche A term loan commitments to $2 billion (increase of approximately $290 million over the $1.71 billion of outstanding borrowings prior to the amendment), and; (iii) extended the maturity date of the revolving credit and tranche A term loan facilities to October 23, 2023 from August 7, 2019.
On October 31, 2018, we added a seven-year tranche B term loan facility in the aggregate principal amount of $500 million pursuant to the Senior Credit Agreement. The tranche B term loan matures on October 31, 2025. We used the proceeds to repay borrowings under the revolving credit facility, the Securitization (as defined below), to redeem our $300 million, 3.75% Senior Notes that were scheduled to mature in 2019 and for general corporate purposes.
As of December 31, 2020, we had no borrowings outstanding pursuant to our $1 billion revolving credit facility and we had $997 million of available borrowing capacity net of $3 million of outstanding letters of credit.
Pursuant to the terms of the Sixth Amendment, the tranche A term loan, which had $1.900 billion of borrowings outstanding as of December 31, 2020, provided for eight installment payments of $12.5 million per quarter which commenced in March of 2019 and continued through December of 2020. Payments of $25 million per quarter are scheduled, commencing in March of 2021 until maturity in October of 2023, when all outstanding amounts will be due.
The tranche B term loan, which had $490 million of borrowings outstanding as of December 31, 2020, provides for installment payments of $1.25 million per quarter, which commenced on March 31, 2019 and are scheduled to continue until maturity in October of 2025, when all outstanding amounts will be due.
Borrowings under the Senior Credit Agreement bear interest at our election at either (1) the ABR rate which is defined as the rate per annum equal to the greatest of (a) the lender’s prime rate, (b) the weighted average of the federal funds rate, plus 0.5% and (c) one month LIBOR rate plus 1%, in each case, plus an applicable margin based upon our consolidated leverage ratio at the end of each quarter ranging from 0.375% to 0.625% for revolving credit and term loan A borrowings and 0.75% for tranche B 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 1.375% to 1.625% for revolving credit and term loan A borrowings and 1.75% for the tranche B term loan. As of December 31, 2020, the applicable margins were 0.375% for ABR-based loans and 1.375% for LIBOR-based loans under the revolving credit and term loan A facilities. The revolving credit facility includes a $125 million sub-limit for letters of
credit. The Senior Credit Agreement is secured by certain assets of the Company and our material subsidiaries (which generally excludes asset classes such as substantially all of the patient-related accounts receivable of our acute care hospitals, and certain real estate assets and assets held in joint-ventures with third parties) and is guaranteed by our material subsidiaries.
The Senior Credit Agreement includes a material adverse change clause that must be represented at each draw. The Senior 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. We are in compliance with all required covenants as of December 31, 2020 and December 31, 2019.
In April, 2018, we entered into the sixth amendment to our accounts receivable securitization program (“Securitization”) dated as of October 27, 2010 with a group of conduit lenders, liquidity banks, and PNC Bank, National Association, as administrative agent, which provides for borrowings outstanding from time to time by certain of our subsidiaries in exchange for undivided security interests in their respective accounts receivable. The sixth amendment, among other things, extended the term of the Securitization program through April 26, 2021 and increased the borrowing capacity to $450 million (from $440 million previously). In July, 2020, we entered into the seventh amendment to the Securitization which temporarily waived the minimum borrowing requirement through September 30, 2020. Pursuant to the terms of our Securitization program, substantially all of the patient-related accounts receivable of our acute care hospitals (“Receivables”) serve as collateral for the outstanding borrowings. We have accounted for this Securitization as borrowings. We maintain effective control over the Receivables since, pursuant to the terms of the Securitization, the Receivables are sold from certain of our subsidiaries to special purpose entities that are wholly-owned by us. The Receivables, however, are owned by the special purpose entities, can be used only to satisfy the debts of the wholly-owned special purpose entities, and thus are not available to us except through our ownership interest in the special purpose entities. The wholly-owned special purpose entities use the Receivables to collateralize the loans obtained from the group of third-party conduit lenders and liquidity banks. The group of third-party conduit lenders and liquidity banks do not have recourse to us beyond the assets of the wholly-owned special purpose entities that securitize the loans. At December 31, 2020, we had $225 million of outstanding borrowings pursuant to the terms of the Securitization (which are included in current maturities of long-term debt at December 31, 2020) and $225 million of available borrowing capacity. We believe that our operating cash flows, cash and cash equivalents, as well as access to the capital markets, provides us with sufficient capital resources to fund our operating, investing and financing requirements over the next twelve months, including repayment or refinancing of our Securitization which is scheduled to mature in April, 2021.
As of December 31, 2020, we had combined aggregate principal of $1.2 billion from the following senior secured notes:
| • | $800 million aggregate principal amount of 2.65% senior secured notes due in October, 2030 (“2030 Notes”) which were issued on September 21, 2020. |
|---|
| • | $400 million aggregate principal amount of 5.00% senior secured notes due in June, 2026 (“2026 Notes”) which were issued on June 3, 2016. |
|---|
Interest on the 2026 Notes is payable on June 1 and December 1 until the maturity date of June 1, 2026. Interest on the 2030 Notes payable on April 15 and October 15, commencing April 15, 2021, until the maturity date of October 15, 2030. The 2026 Notes and 2030 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 2026 Notes and 2030 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.
The 2030 Notes are guaranteed (the “Guarantees”) on a senior secured basis by all of our existing and future direct and indirect subsidiaries (the “Subsidiary Guarantors”) that guarantee our Senior Credit Agreement, dated as of November 15, 2010, as amended, restated or supplemented from time to time, or other first lien obligations or any junior lien obligations. The 2030 Notes and the Guarantees are secured by first-priority liens, subject to permitted liens, on certain of the Company’s and the Subsidiary Guarantors’ assets now owned or acquired in the future by the Company or the Subsidiary Guarantors (other than real property, accounts receivable sold pursuant to the Company’s Existing Receivables Facility (as defined in the Indenture pursuant to which the 2030 Notes were issued (the “Indenture”)), and certain other excluded assets). The Company’s obligations with respect to the 2030 Notes, the obligations of the Subsidiary Guarantors under the Guarantees, and the performance of all of the Company’s and the Subsidiary Guarantors’ other obligations under the Indenture are secured equally and ratably with the Company’s and the Subsidiary Guarantors’ obligations under the Senior Credit Agreement and the Company’s 2026 Notes by a perfected first-priority security interest, subject to permitted liens, in the collateral owned by the Company and its Subsidiary Guarantors, whether now owned or hereafter acquired. However, the liens on the collateral securing the 2030 Notes and the Guarantees will be released if: (i) the 2030 Notes have investment grade ratings; (ii) no default has occurred and is continuing, and; (iii) the liens on the collateral securing all first lien obligations (including the Senior Credit Agreement and the 2026 Notes) and any junior lien obligations are released or the collateral under the Senior Credit Agreement, any other first lien obligations and any junior lien obligations is released or no longer required to be pledged. The liens on any collateral securing the 2030 Notes and the Guarantees will also be released if the liens on that collateral securing the Senior Credit Agreement, other first lien obligations and any junior lien obligations are released.
In connection with the issuance of the 2030 Notes, the Company, the Subsidiary Guarantors and the representatives of the several initial purchasers, entered into a Registration Rights Agreement (the “Registration Rights Agreement”), whereby the Company and the Subsidiary Guarantors have agreed, at their expense, to use commercially reasonable best efforts to: (i) cause to be filed a registration statement enabling the holders to exchange the 2030 Notes and the Guarantees for registered senior secured notes issued by the Company and guaranteed by the then Subsidiary Guarantors under the Indenture (the “Exchange Securities”), containing terms identical to those of the 2030 Notes (except that the Exchange Securities will not be subject to restrictions on transfer or to any increase in annual interest rate for failure to comply with the Registration Rights Agreement); (ii) cause the registration statement to become effective; (iii) complete the exchange offer not later than 60 days after such effective date and in any event on or prior to a target registration date of March 21, 2023, and; (iv) file a shelf registration statement for the resale of the 2030 Notes if the exchange offer cannot be effected within the time periods listed above. The interest rate on the 2030 Notes will increase and additional interest thereon will be payable if the Company does not comply with its obligations under the Registration Rights Agreement.
On September 28, 2020, we redeemed the entire $700 million aggregate principal amount of our previously outstanding 4.75% Senior Secured Notes due 2022 (the “2022 Notes”), at a cash redemption price equal to the sum of: (i) 100% of the aggregate principal amount of the 2022 Notes redeemed, and; (ii) accrued and unpaid interest on the 2022 Notes to the redemption date. Included in our financial results for the three and nine-month periods ended September 30, 2020, was a loss on extinguishment of debt of approximately $1 million recorded in connection with the redemption of the 2022 Notes.
At December 31, 2020, the carrying value and fair value of our debt were each approximately $3.9 billion. At December 31, 2019, the carrying value and fair value of our debt were each approximately $4.0 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, 2020 are as follows:
| (000s) | ||||
|---|---|---|---|---|
| 2021 | $ | 332,081 | ||
| 2022 | 107,587 | |||
| 2023 | 1,707,918 | |||
| 2024 | 8,284 | |||
| 2025 | 472,371 | |||
| Later | 1,246,203 | |||
| Total maturities before unamortized financing costs | 3,874,444 | |||
| Less-Unamortized financing costs, ($83) applicable to 2021 | (18,193 | ) | ||
| Total | $ | 3,856,251 |
- COMMON STOCK
Dividends
In April, 2020, as part of various COVID-19 initiatives, we suspended declaration and payment of quarterly dividends. Our Board of Directors have recently approved resumption of quarterly dividend payments, of $0.20 per share, beginning in the first quarter of 2021. All classes of our common stock have similar economic rights.
We declared and paid cash dividends of $17.3 million, or $.20 per share, during the first quarter of 2020. Cash dividends of $0.60 per share ($53.0 million in the aggregate) were declared and paid during 2019 and $0.40 per share ($37.3 million in the aggregate) were declared and paid during 2018.
Stock Repurchase Programs
In April, 2020, as part of various COVID-19 initiatives, we suspended our stock repurchase program. We are planning to resume stock repurchases, subject to approval by our Board of Directors, during the second quarter of 2021.
In July, 2019, our Board of Directors authorized a $1.0 billion increase to our stock repurchase program, which increased the aggregate authorization to $2.7 billion from the previous $1.7 billion authorization approved in various increments since 2014. Pursuant to this program, which had an aggregate available repurchase authorization of $559.6 million as of December 31, 2020, shares of our Class B Common Stock may be repurchased, from time to time as conditions allow, on the open market or in negotiated private transactions. 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, 2020. During 2020, 1,951,899 shares ($196.6 million in the aggregate) were repurchased pursuant to the terms of the
stock repurchase program and 81,057 shares ($10.2 million in the aggregate) were repurchased in connection with the income tax withholding obligations resulting from stock-based compensation programs. During 2019, 5,397,753 shares ($706.2 million in the aggregate) were repurchased pursuant to the terms of our stock repurchase program and 336,943 shares ($47.7 million in the aggregate) were repurchased in connection with the income tax withholding obligations resulting from stock-based compensation programs. During 2018, 3,321,968 shares ($401.3 million) were repurchased pursuant to the terms of our stock repurchase program and 102,800 shares ($12.7 million in the aggregate) were repurchased in connection with the income tax withholding obligations resulting from stock-based compensation programs.
| 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 paid 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 dollars that may yet be purchased under the program (in thousands) | ||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance as of January 1, 2018 | $ | 363,660 | ||||||||||||||||||||||||||||||||||
| 2018 | $ | 500,000 | 3,435,992 | 11,224 | $ | 0.01 | 3,321,968 | $ | 120.81 | $ | 414,002 | $ | 401,316 | $ | 462,344 | |||||||||||||||||||||
| 2019 | $ | 1,000,000 | 5,762,409 | 27,713 | $ | 0.01 | 5,397,753 | $ | 130.84 | $ | 753,928 | $ | 706,221 | $ | 756,123 | |||||||||||||||||||||
| 2020 | $ | — | 2,050,735 | 17,779 | $ | 0.01 | 1,951,899 | $ | 100.70 | $ | 206,719 | $ | 196,560 | $ | 559,563 | |||||||||||||||||||||
| Total for three year period ended December 31, 2020 | $ | 1,500,000 | 11,249,136 | 56,716 | $ | 0.01 | 10,671,620 | $ | 122.20 | $ | 1,374,649 | $ | 1,304,097 |
| (a.) | Includes 17,779, 27,713 and 11,224 of restricted shares that were forfeited by former employees pursuant to the terms of our restricted stock purchase plan during 2020, 2019 and 2018, respectively. |
|---|
Stock-based Compensation Plans
At December 31, 2020, 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 share-based compensation costs of $54.7 million during 2020, $60.1 million during 2019 and $61.1 million during 2018 were recognized related to outstanding stock options. In addition, pre-tax compensation costs of $11.2 million during 2020, $9.3 million during 2019 and $5.5 million during 2018 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, 2020, there was approximately $97.8 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 2.3 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 $65.8 million in 2020, $69.4 million in 2019 and $66.6 million in 2018. In connection with our January 1, 2017 adoption of ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”, our provision for income taxes and our net income attributable to UHS were unfavorably impacted by $7.4 million during 2020, and favorably impacted by $12.2 million during 2019 and $1.2 million during 2018.
In 2005, we adopted the 2005 Stock Incentive Plan (the “Stock Incentive Plan”) which was amended in 2008, 2010, 2015 and 2017 and was cancelled in 2020, as discussed below. An aggregate of 35.6 million shares of Class B Common Stock had been reserved under the Stock Incentive Plan, the remaining balance of which was cancelled in 2020. During 2020, 2019 and 2018, stock options, net of cancellations, of approximately 2.5 million, 2.2 million and 2.1 million, respectively, were granted under the Stock Incentive Plan. Stock options to purchase Class B Common Stock have been granted to our officers, key employees and members of our Board of Directors. Commencing in 2018, our key employees and non-executive officers began receiving a portion of their stock-based compensation in the form of restricted stock (as discussed below) in addition to receiving options to purchase Class B Common Stock.
In 2020, we adopted the 2020 Omnibus Stock and Incentive Plan (the “2020 Stock Incentive Plan”) which was approved by our shareholders in May, 2020. A total of 6.1 million shares of Class B Common Stock may be issued under the 2020 Stock Incentive Plan. Under the 2020 Stock Incentive Plan, shares that are subject to stock options shall be counted as one share for every one share
subject to stock options, and shares that are subject to restricted stock awards or restricted stock units shall be counted as four shares for every one share subject to restricted stock awards or restricted stock units. Various other types of equity awards are also permitted under the 2020 Stock Incentive Plan. During 2020, 44,000 stock options and 3,000 restricted stock units were granted under the 2020 Stock Incentive Plan to our key employees, and no shares were cancelled. Restricted stock and restricted stock units issued under the 2020 Stock Incentive Plan do not have rights to receive dividends on unvested restricted awards, however, the accrual of dividend equivalents on unvested restricted awards may be permitted. Upon adoption of the 2020 Stock Incentive Plan, no additional awards were granted under the 2005 Stock Incentive Plan or the 2010 Employees’ Restricted Stock Purchase Plan, and reserves for future issuance pursuant to each plan were cancelled.
The per option weighted-average grant-date fair value of options granted during 2020 (including the 2005 and 2020 Stock Incentive Plans), 2019 and 2018 was $14.60, $30.40 and $28.19, respectively. All stock options were granted with an exercise price equal to the fair market value on the date of the grant. The majority of 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, 2020, approximately 6.0 million shares of Class B Common Stock remain available for issuance pursuant to the 2020 Stock Incentive Plan. Shares that are subject to options are counted against the reserve balance as one share for every one share subject to such option; shares that are subject to restricted stock or restricted stock units are counted against the reserve balance as four shares for every one share subject to the restricted stock or unit.
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-six option grants for the five-year period ending December 31, 2020, twenty-nine option grants for the five-year period ending December 31, 2019 and twenty-seven option grants for the five-year period ending December 31, 2018.
| Year Ended December 31, | 2020 | 2019 | 2018 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Expected volatility | 28 | % | 27 | % | 27 | % | ||||||
| Risk free Interest rate | 2 | % | 2 | % | 1 | % | ||||||
| Expected life (years) | 3.5 | 3.4 | 3.4 | |||||||||
| Forfeiture rate | 8 | % | 9 | % | 13 | % | ||||||
| Dividend yield | 0.5 | % | 0.3 | % | 0.3 | % |
The risk-free rate is based on the U.S. Treasury zero coupon four year yield curve 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 forfeiture rate is based upon the actual historical forfeitures utilizing the 5-year term of the option.
The table below summarizes our stock option activity during the year ended December 31, 2020:
| Outstanding Options | Number of Shares | Weighted Average Exercise Price | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Balance, January 1, 2020 | 8,133,176 | $ | 124.52 | ||||||
| Granted | 2,589,966 | $ | 70.36 | ||||||
| Exercised | (1,534,741 | ) | $ | 118.99 | |||||
| Expired | (551,750 | ) | $ | 117.30 | |||||
| Cancelled | (397,685 | ) | $ | 114.79 | |||||
| Balance, December 31, 2020 | 8,238,966 | $ | 109.47 | ||||||
| Outstanding options vested and exercisable as of December 31, 2020 | 2,522,906 | $ | 124.62 |
The following table provides information about unvested options for the year ended December 31, 2020:
| Shares | Weighted Average Grant Date Fair Value | |||||||
|---|---|---|---|---|---|---|---|---|
| Unvested options as of January 1, 2020 | 5,581,909 | $ | 28.45 | |||||
| Granted | 2,589,966 | $ | 14.60 | |||||
| Vested | (2,184,896 | ) | $ | 27.40 | ||||
| Cancelled | (270,919 | ) | $ | 24.92 | ||||
| Unvested options as of December 31, 2020 | 5,716,060 | $ | 22.74 |
The following table provides information regarding all options outstanding at December 31, 2020:
| Options Outstanding | Options Exercisable | |||||||
|---|---|---|---|---|---|---|---|---|
| Number of options outstanding | 8,238,966 | 2,522,906 | ||||||
| Weighted average exercise price | $ | 109.47 | $ | 124.62 | ||||
| Aggregate intrinsic value as of December 31, 2020 | $ | 231,848,241 | $ | 32,525,812 | ||||
| Weighted average remaining contractual life | 2.9 | 1.9 |
The total in-the-money value of all stock options exercised during the years ended December 31, 2020, 2019 and 2018 were $22.2 million, $126.7 million and $39.9 million, respectively.
The weighted average remaining contractual life for options outstanding and weighted average exercise price per share for exercisable options at December 31, 2018, 2019 and 2020 were as follows:
| Year Ended: | 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 | Weighted Average Exercise Price Per Share | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Shares | Shares | Shares | ||||||||||||||||||||||||||
| 2018 | 9,674,791 | $ | 115.39 | 2.6 | 3,724,179 | $ | 106.77 | 4,414,324 | $ | 120.82 | ||||||||||||||||||
| 2019 | 8,133,176 | 124.52 | 2.7 | 2,551,267 | 119.86 | 5,073,423 | 126.62 | |||||||||||||||||||||
| 2020 | 8,238,966 | 109.47 | 2.9 | 2,522,906 | 124.62 | 5,099,823 | 110.47 |
Under our Amended and Restated 2010 Employees’ Restricted Stock Purchase Plan (the “Restricted Stock Plan”), which was cancelled during 2020 upon the approval of the 2020 Stock Incentive Plan, as mentioned above, allowed eligible participants to purchase shares of Class B Common Stock at par value, subject to certain restrictions and had 600,000 shares of Class B Common Stock reserved. The reserve balance in the Restricted Stock Plan was cancelled during 2020. During 2020, 2019 and 2018, restricted shares, net of cancellations, of approximately 119,844, 117,467, and 136,571, respectively, were granted and issued under the Restricted Stock Plan, with various ratable vesting periods ranging up to five years from the date of grant. The weighted-average grant-date fair value of the restricted shares granted during 2020, 2019 and 2018 under the Restricted Stock Plan was $68.06, $133.98 and $119.51, respectively. As mentioned above, in 2020, we adopted the 2020 Stock Incentive Plan. During 2020, 3,000 restricted stock units were granted under the 2020 Stock Incentive Plan with four-year vesting periods from the date of grant. The weighted average grant-date fair value of the restricted stock units issued under the 2020 Stock Incentive Plan was $109.72. The fair value of each restricted stock grant or restricted stock unit was determined as the closing UHS market price on the date of grant. Restricted shares of Class B Common Stock have been granted to our officers and key employees.
In addition to the 2020 Stock Incentive Plan, we have our 2005 Employee Stock Purchase Plan (the “Employee Stock Plan”) which allows eligible employees to purchase shares of Class B Common Stock at a ten percent discount. There were 115,008, 82,449 and 87,051 shares issued pursuant to the Employee Stock Purchase Plan during 2020, 2019 and 2018, respectively. In connection with the Employee Stock Plan, we have reserved 2.0 million shares of Class B Common Stock for issuance and have issued approximately 1.5 million shares as of December 31, 2020. As of December 31, 2020, approximately 500,000 shares of Class B Common Stock remain available for issuance pursuant to this plan.
At December 31, 2020, 22,087,459 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, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2018 | ||||||||||
| Current | ||||||||||||
| Federal | $ | 268,974 | $ | 225,663 | $ | 195,862 | ||||||
| Foreign | 13,978 | 9,284 | 13,699 | |||||||||
| State | 43,333 | 40,152 | 37,555 | |||||||||
| 326,285 | 275,099 | 247,116 | ||||||||||
| Deferred | ||||||||||||
| Federal | (20,382 | ) | (27,073 | ) | (6,216 | ) | ||||||
| Foreign | (2,496 | ) | 1,874 | (666 | ) | |||||||
| State | (4,114 | ) | (11,106 | ) | (3,592 | ) | ||||||
| (26,992 | ) | (36,305 | ) | (10,474 | ) | |||||||
| Total | $ | 299,293 | $ | 238,794 | $ | 236,642 |
On December 22, 2017, the President of the United States signed into law comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “TCJA-17”). The TCJA-17 made broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations through the implementation of a territorial tax system; (5) creating a new limitation on deductible interest expense; and (6) limiting certain other deductions. We provided a provisional estimate of the effects of the TCJA-17 in the fourth quarter of 2017 financial statements. In the fourth quarter of 2018, we completed our analysis to determine the effects of the TCJA-17 in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”) as follows:
Reduction of U.S. federal corporate tax rate: The TCJA-17 reduces the corporate tax rate to 21 percent, effective January 1, 2018. 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. For certain of our deferred tax assets and deferred tax liabilities, we recorded a provisional decrease of $97 million and $127 million, respectively, with a corresponding net adjustment to deferred tax benefit of $30 million for the year ended December 31, 2017. Upon completion of our 2017 U.S. Corporate Income Tax Return in the fourth quarter, an increase of $1 million attributable to certain deferred tax assets and a decrease of $5 million attributable to certain deferred tax liabilities was recorded resulting in an additional net deferred tax benefit of $6 million.
Deemed Repatriation Transition Tax: The Deemed Repatriation Transition Tax (“Transition Tax”) is a tax on previously untaxed accumulated and current earnings and profits (“E&P”) of certain of our foreign subsidiaries. The one-time Transition Tax is based upon the amount of post-1986 E&P of the relevant subsidiaries, the amount of non-U.S. income tax paid on such earnings, as well as other factors. We originally estimated and recorded a provisional Transition Tax obligation of $11.3 million. Upon completion of our 2017 U.S. Corporate Income Tax Return, the final Transition Tax increased by $100,000 for a total of $11.4 million.
The TCJA-17 contains two new anti-base erosion tax provisions, (1) the global intangible low-taxed income (“GILTI”) provisions and (2) the base erosion and anti-abuse tax (“BEAT”) provisions:
GILTI: The GILTI provisions require the inclusion of the earnings of certain foreign subsidiaries in excess of an acceptable rate of return on certain assets of the respective subsidiaries in our U.S. tax return for tax years beginning after December 31, 2017. An accounting policy election was made during 2018 to treat taxes related to GILTI as a period cost when the tax is incurred. We recorded a GILTI tax provision of zero for the years ended December 31, 2020 and 2019, respectively.
BEAT: The BEAT provisions limit the deduction for U.S. tax base erosion related payments made by U.S. operations to related foreign affiliates. We were not subject to BEAT for the years ended December 31, 2020 and 2019.
The foreign provision for income taxes is based on foreign pre-tax earnings of $72 million in 2020, $69 million in 2019 and $84 million in 2018. Prior to the TCJA-17, no deferred taxes were provided related to unremitted earnings from foreign subsidiaries. As a result of the mandatory repatriation tax provisions of the Transition Tax included in the TCJA-17, all undistributed earnings from foreign subsidiaries as of December 31, 2017, were subject to tax. Going forward, we anticipate repatriating only previously taxed foreign earnings subjected as well as any future earnings that would qualify for a full dividend received deduction permitted under the TCJA-17 for distributions post-December 31, 2017. As of December 31, 2020, the amount of previously taxed earnings and earnings that would qualify for a full dividend received deduction total $110 million. At this time, there are no material tax effects related to
future cash repatriation of undistributed foreign earnings. As such, we have not recognized a deferred tax liability related to existing undistributed earnings.
Our provision for income taxes for the year ended December 31, 2020, 2019 and 2018 included tax expense of $7 million, tax benefits of $12 million and $1 million, respectively, related to the adoption of ASU 2016-09, which changes how companies account for certain aspects of share-based payments to employees. Under ASU 2016-09, excess tax benefits (when the deductible amount related to the settlement of employee equity awards for tax purposes exceeds the cumulative compensation cost recognized for financial reporting purposes) and deficiencies, if applicable, are recorded as a component of our tax provision.
A reconciliation between the federal statutory rate and the effective tax rate is as follows:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2018 | ||||||||||
| Federal statutory rate | 21.0 | % | 21.0 | % | 21.0 | % | ||||||
| State taxes, net of federal income tax benefit | 2.5 | % | 2.2 | % | 2.6 | % | ||||||
| Tax effects of foreign operations | -0.3 | % | -0.3 | % | -0.5 | % | ||||||
| Tax benefit from settlement of employee equity awards | 0.5 | % | -1.0 | % | -0.1 | % | ||||||
| Enactment of the TCJA-17 | 0.0 | % | 0.0 | % | -0.6 | % | ||||||
| Other items | 0.4 | % | 0.8 | % | 0.9 | % | ||||||
| Impact of income attributable to noncontrolling interests | -0.2 | % | -0.3 | % | -0.4 | % | ||||||
| Effective tax rate | 23.9 | % | 22.4 | % | 22.9 | % |
Our effective tax rates were 23.9%, 22.4% and 22.9% for the years ended December 31, 2020, 2019 and 2018, respectively. The increase in our effective tax rate for the year ended December 31, 2020 as compared to 2019 is due primarily to tax expense of $7 million and tax benefit of $12 million from employee share-based payments during the year ended December 2020 and 2019, respectively. The decrease in our effective tax rate for the year ended December 31, 2019 as compared to 2018 is due primarily to tax benefits from employee share-based payments of $12 million and $1 million during the year ended December 2019 and 2018, respectively.
Included in “Other current assets” on our Consolidated Balance Sheet are prepaid federal, state and foreign income taxes amounting to approximately $11 million and $8 million as of December 31, 2020 and 2019, respectively.
The components of deferred taxes are as follows (amounts in thousands):
| Year Ended December 31, | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | ||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | ||||||||||||||||
| Self-insurance reserves | $ | 75,648 | $ | $ | 69,217 | $ | |||||||||||||
| Compensation accruals | 71,054 | 70,680 | |||||||||||||||||
| Doubtful accounts and other reserves | 94,295 | 77,665 | |||||||||||||||||
| Other currently non-deductible accrued liabilities | 61,634 | 36,500 | |||||||||||||||||
| Depreciable and amortizable assets | 296,588 | 275,901 | |||||||||||||||||
| Operating lease liabilities | 89,865 | 76,164 | |||||||||||||||||
| Right of use assets-operating leases | 89,493 | 76,164 | |||||||||||||||||
| State and foreign net operating loss carryforwards and other state and foreign deferred tax assets | 81,036 | 87,662 | |||||||||||||||||
| Net pension liabilities – OCI only | 1,356 | 2,427 | |||||||||||||||||
| Other liabilities | 3,697 | 1,855 | |||||||||||||||||
| $ | 474,888 | $ | 389,778 | $ | 420,315 | $ | 353,920 | ||||||||||||
| Valuation Allowance | (68,003 | ) | 0 | (75,277 | ) | 0 | |||||||||||||
| Total deferred income taxes | $ | 406,885 | $ | 389,778 | $ | 345,038 | $ | 353,920 |
At December 31, 2020, state net operating loss carryforwards (losses originating in tax years beginning prior to January 1, 2019, expiring in years 2021 through 2039), and credit carryforwards available to offset future taxable income approximated $951 million representing approximately $66 million in deferred state tax benefit (net of the federal benefit); and state related interest expense carryforwards approximated $141 million representing approximately $5 million in deferred state tax benefit (net of the federal benefit). At December 31, 2020, there were foreign net operating losses and interest expense carryforwards of approximately $45 million, most of which are carried forward indefinitely, representing approximately $10 million in deferred foreign tax benefit.
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 $64 million and $71 million have been reflected as of December 31, 2020 and 2019, respectively. During 2020, the valuation allowance on these state tax benefits decreased by $7 million primarily due to expired net operating losses not realized. In addition, valuation allowances of approximately $4 million have been reflected as of both December 31, 2020 and 2019 related to foreign net operating losses and credit carryforwards.
During 2020 and 2019, 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. The balance at each of the years ended December 31, 2020 and 2019, if subsequently recognized, that would favorably affect the effective tax rate and the provision for income taxes is approximately $2 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, 2020 and 2019, 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 2016 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, 2020, 2019 and 2018 is as follows (amounts in thousands):
| As of December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2018 | ||||||||||
| Balance at January 1, | $ | 2,164 | $ | 1,553 | $ | 1,096 | ||||||
| Additions based on tax positions related to the current year | 500 | 500 | 500 | |||||||||
| Additions for tax positions of prior years | 142 | 113 | 62 | |||||||||
| Reductions for tax positions of prior years | 0 | 0 | 0 | |||||||||
| Settlements | 0 | (2 | ) | (105 | ) | |||||||
| Balance at December 31, | $ | 2,806 | $ | 2,164 | $ | 1,553 |
- LEASE COMMITMENTS
In February 2016, the FASB issued ASU 2016-02 (Topic 842) "Leases." Topic 842 supersedes the lease requirements in Accounting Standards Codification Topic 840, "Leases." Under Topic 842, lessees are required to recognize assets and liabilities on the balance sheet for most leases and provide enhanced disclosures. Leases will be classified as either finance or operating.
We adopted Topic 842 effective January 1, 2019. We applied Topic 842 to all leases as of January 1, 2019 with comparative periods continuing to be reported under Topic 840. We have elected the practical expedient package to not reassess at adoption (i) expired or existing contracts for whether they are or contain a lease, (ii) the lease classification of any existing leases or (iii) initial indirect costs for existing leases. We have also elected the policy exemption that allows lessees to choose to not separate lease and non-lease components by class of underlying asset and are applying this expedient to all relevant asset classes.
We determine if an arrangement is or contains a lease at inception of the contract. Our right-of-use assets represent our right to use the underlying assets for the lease term and our lease liabilities represent our obligation to make lease payments arising from the leases. Right-of-use assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We use the implicit rate noted within the contract. If not readily available, we use our estimated incremental borrowing rate, which is derived using a collateralized borrowing rate for the same currency and term as the associated lease. A right-of-use asset and lease liability is not recognized for leases with an initial term of 12 months or less and we recognize lease expense for these leases on a straight-line basis over the lease term within lease and rental expense.
Our operating leases are primarily for real estate, including certain acute care facilities, off-campus outpatient facilities, medical office buildings, and corporate and other administrative offices. Our real estate lease agreements typically have initial terms of five to 10 years. These real estate leases may include one or more options to renew, with renewals that can extend the lease term from five to 10 years. The exercise of lease renewal options is at our sole discretion. When determining the lease term, we included options to extend or terminate the lease when it is reasonably certain that we will exercise that option.
Three of our hospital facilities are held under operating leases with Universal Health Realty Income Trust with two hospital terms expiring in 2021 and the third expiring in 2026 (see Note 9 for additional disclosure). We are also the leasee of the real property of certain facilities (see Item 2. Properties for additional disclosure).
The components of lease expense for the year ended December 31, 2020 and 2019 are as follows (in thousands):
| Twelve months ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2020 | 2019 | ||||||
| Operating lease cost | $ | 73,841 | $ | 72,098 | |||
| Variable and short term lease cost (a) | 42,218 | 35,711 | |||||
| Total lease and rental expense | $ | 116,059 | $ | 107,809 | |||
| Finance lease cost: | |||||||
| Amortization of property under capital lease | $ | 1,985 | $ | 1,877 | |||
| Interest on debt of property under capital lease | 1,763 | 1,876 | |||||
| Total finance lease cost | $ | 3,748 | $ | 3,753 |
(a) Includes equipment, month-to-month and leases with a maturity of less than 12 months.
Supplemental cash flow information related to leases for the year ended December 31, 2020 and 2019 are as follows (in thousands):
| Twelve months ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2020 | 2019 | ||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||
| Operating cash flows from operating leases | $ | 115,270 | $ | 107,239 | |||
| Operating cash flows from finance leases | $ | 1,885 | $ | 2,078 | |||
| Financing cash flows from finance leases | $ | 2,586 | $ | 1,959 | |||
| Right-of-use assets obtained in exchange for lease obligations: | |||||||
| Operating leases | $ | 69,678 | $ | 383,857 | |||
| Finance leases | $ | 37,029 | 0 |
Included in the $383.9 million of right-of-use assets obtained in exchange for operating lease obligations is $29.3 million of new and modified operating leases entered into during the year ended December 31, 2019.
Supplemental balance sheet information related to leases as of December 31, 2020 and 2019 are as follows (in thousands):
| December 31, | December 31, | ||||||
|---|---|---|---|---|---|---|---|
| 2020 | 2019 | ||||||
| Operating Leases | |||||||
| Right of use assets-operating leases | $ | 336,513 | $ | 326,518 | |||
| Operating lease liabilities | $ | 59,796 | $ | 56,442 | |||
| Operating lease liabilities noncurrent | 278,303 | 270,076 | |||||
| Total operating lease liabilities | $ | 338,099 | $ | 326,518 | |||
| Finance Leases | |||||||
| Property and equipment | $ | 75,611 | $ | 38,582 | |||
| Accumulated depreciation | (28,595 | ) | (26,610 | ) | |||
| Property and equipment, net | $ | 47,016 | $ | 11,972 | |||
| Current maturities of long-term debt | $ | 2,082 | $ | 1,650 | |||
| Long-term debt | 50,999 | 16,359 | |||||
| Total finance lease liabilities | $ | 53,081 | $ | 18,009 | |||
| Weighted Average remaining lease term, years | |||||||
| Operating leases | 10.9 | 9.7 | |||||
| Finance leases | 8.1 | 6.9 | |||||
| Weighted Average discount rate | |||||||
| Operating leases | 4.4 | % | 4.7 | % | |||
| Finance leases | 9.7 | % | 9.8 | % |
Future maturities of lease liabilities as of December 31, 2020 are as follows (in thousands):
| Operating Leases | Finance Leases | ||||||
|---|---|---|---|---|---|---|---|
| Year ending December 31, | |||||||
| 2021 | $ | 72,722 | $ | 5,662 | |||
| 2022 | 62,848 | 6,020 | |||||
| 2023 | 55,733 | 6,173 | |||||
| 2024 | 47,824 | 6,332 | |||||
| 2025 | 40,139 | 5,149 | |||||
| Later years | 163,102 | 48,563 | |||||
| Total lease payments | 442,368 | 77,899 | |||||
| less imputed interest | (104,269 | ) | (24,818 | ) | |||
| Total | $ | 338,099 | $ | 53,081 |
We assumed $37 million in finance lease obligations during 2020 and no finance leases in 2019. 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
The vast majority of our subsidiaries are self-insured for professional and general liability exposure up to: (i) $20 million for professional liability and $3 million for general liability per occurrence in 2021; (ii) $10 million and $3 million per occurrence in 2020 (professional liability claims are also subject to an additional annual aggregate self-insured retention of $2.5 million for claims in excess of $10 million for 2020); (iii) $5 million and $3 million per occurrence, respectively, during 2019, 2018 and 2017, and; (iv) $10 million and $3 million per occurrence, respectively, prior to 2017.
These subsidiaries are provided with several excess policies through commercial insurance carriers which provide for coverage in excess of the applicable per occurrence self-insured retention or underlying policy limits up to $155 million per occurrence and in the aggregate in 2021, $250 million per occurrence and in the aggregate for claims incurred from 2014-2020, $200 million per occurrence and in the aggregate for claims incurred from 2010-2013. 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.
As of December 31, 2020, the total accrual for our professional and general liability claims was $264 million, of which $74 million was included in current liabilities. As of December 31, 2019, the total accrual for our professional and general liability claims was $242 million, of which $42 million was included in current liabilities. As of December 31, 2018, the total accrual for our professional and general liability claims was $243 million, of which $42 million was included in current liabilities.
As a result of unfavorable trends experienced during the year, included in our consolidated results of operations during 2020, was a $25 million increase to our reserves related to prior years for self-insured professional and general liability claims. Our consolidated results of operations during 2019 and 2018 were not materially impacted by adjustments to our prior year reserves for professional and general liability 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, 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, 2020, the total accrual for our workers’ compensation liability claims was $105 million, $55 million of which was included in current liabilities. As of December 31, 2019, the total accrual for our workers’ compensation liability claims was $81 million, of which $40 million was included in current liabilities. As of December 31, 2018, the total accrual for our workers’ compensation liability claims was $72 million, of which $40 million was included in current liabilities. As a result of unfavorable trends experienced during the year, including, among other things, increased claims volumes and certain other factors resulting from the COVID-19 pandemic, our consolidated results of operations during 2020 included a $20 million increase to our reserves for workers’ compensation liability claims, a portion of which related to reserves for prior year. Our consolidated results of operations during 2019 and 2018 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 require updates to estimates for 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.
Below is a schedule showing the changes in our general and professional liability and workers’ compensation reserves during the three years ended December 31, 2020 (amount in thousands):
| General and | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Professional | Workers’ | |||||||||||
| Liability | Compensation | Total | ||||||||||
| Balance at January 1, 2018 | $ | 228,691 | $ | 69,531 | $ | 298,222 | ||||||
| Plus: Accrued insurance expense, net of commercial premiums paid | 54,387 | 38,476 | 92,863 | |||||||||
| Less: Payments made in settlement of self-insured claims | (40,027 | ) | (36,117 | ) | (76,144 | ) | ||||||
| Balance at January 1, 2019 | 243,051 | 71,890 | 314,941 | |||||||||
| Plus: Accrued insurance expense, net of commercial premiums paid | 56,452 | 49,220 | 105,672 | |||||||||
| Less: Payments made in settlement of self-insured claims | (57,683 | ) | (40,106 | ) | (97,789 | ) | ||||||
| Balance at January 1, 2020 | 241,820 | 81,004 | 322,824 | |||||||||
| Plus: Accrued insurance expense, net of commercial premiums paid | 91,518 | 67,705 | 159,223 | |||||||||
| Less: Payments made in settlement of self-insured claims | (69,559 | ) | (43,524 | ) | (113,083 | ) | ||||||
| Balance at December 31, 2020 | $ | 263,779 | $ | 105,185 | $ | 368,964 |
Property Insurance
We have commercial property insurance policies for our properties covering catastrophic losses, including windstorm damage, up to a $1 billion policy limit, subject to a per occurrence/per location deductible of $2.5 million as of June 1, 2020. Losses resulting from named windstorms are subject to deductibles between 3% and 5% of the total insurable value of the property. In addition, we have commercial property insurance policies covering catastrophic losses resulting from earthquake and flood damage, each subject to aggregated loss limits (as opposed to per occurrence losses). Commercially insured earthquake coverage for our facilities is subject to various deductibles and limitations including: (i) $300 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 facilities located in Puerto Rico, and; (v) $250 million limitation for many of our facilities located in other states. Our commercially insured flood coverage has a limit of $100 million annually. There is also a $10 million sublimit for one of our facilities located in Houston, Texas, and a $1 million sublimit for our facilities located in Puerto Rico. Property insurance for our behavioral health facilities located in the U.K. are provided on an all risk basis up to a £1.5 billion policy limit, with coverage caps per location, that includes coverage for real and personal property as well as business interruption losses.
Information Technology Incident
We experienced an information technology security incident in the early morning hours of September 27, 2020. As a result of this cyberattack, we suspended user access to our information technology applications related to operations located in the United States. While our information technology applications were offline, patient care was delivered safely and effectively at our facilities across the country utilizing established back-up processes, including offline documentation methods. Our information technology applications were substantially restored at our acute care and behavioral health hospitals at various times in October, 2020, on a rolling/staggered basis, and our facilities generally resumed standard operating procedures at that time.
Immediately after the incident, we worked diligently with our information technology security partners to restore our information technology infrastructure and business operations as quickly as possible. In parallel, we began investigating the nature and potential impact of the security incident and engaged third-party information technology and forensic vendors to assist. No evidence of unauthorized access, copying or misuse of any patient or employee data has been identified to date.
Given the disruption to the standard operating procedures at our facilities during the period of September 27, 2020 into October, 2020, certain patient activity, including ambulance traffic and elective/scheduled procedures at our acute care hospitals, were diverted to competitor facilities. We also incurred significant incremental labor expense, both internal and external, to restore information technology operations as expeditiously as possible. Additionally, certain administrative functions such as coding and billing were delayed into December, 2020, which had a negative impact on our operating cash flows during the fourth quarter of 2020.
Other Contractual Commitments:
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, 2020 as follows: (i) other combined estimated future purchase obligations of $349 million related to a long-term contract with third-parties consisting primarily of certain revenue cycle data processing services for our acute care facilities ($27 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 and other applications for our acute care facilities ($218 million), healthcare infrastructure in Washington D.C. in connection with various agreements with the District of Columbia ($75 million), and other software applications
($29 million); (ii) estimated construction commitment of $95 million representing our share of the construction costs of four behavioral health care facilities, that we are required to build pursuant to joint-venture agreements with third-parties, that are under construction and scheduled to be completed at various times in 2021, 2022 and 2023; (iii) combined estimated future payments of $181 million related to our non-contributory, defined benefit pension plan ($159 million consisting of estimated payments through 2078) and other retirement plan liabilities ($22 million), and; (iv) accrued and unpaid estimated claims expense incurred in connection with our commercial health insurers and self-insured employee benefit plans ($91 million).
Legal Proceedings
We operate in a highly regulated and litigious industry which subjects us to various claims and lawsuits in the ordinary course of business as well as regulatory proceedings and government investigations. These claims or suits include claims for damages for personal injuries, medical malpractice, commercial/contractual disputes, wrongful restriction of, or interference with, physicians’ staff privileges, and employment related claims. In addition, health care companies are subject to investigations and/or actions by various state and federal governmental agencies or those bringing claims on their behalf. Government action has increased with respect to investigations and/or allegations against healthcare providers concerning possible violations of fraud and abuse and false claims statutes as well as compliance with clinical and operational regulations. Currently, and from time to time, we and some of our facilities are subjected to inquiries in the form of subpoenas, Civil Investigative Demands, audits and other document requests from various federal and state agencies. These inquiries can lead to notices and/or actions including repayment obligations from state and federal government agencies associated with potential non-compliance with laws and regulations. Further, the federal False Claims 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 Claims Act matter. In September 2014, the Criminal Division of the Department of Justice (“DOJ”) announced that all qui tam cases will be shared with their Division to determine if a parallel criminal investigation should be opened. The DOJ has also announced an intention to pursue civil and criminal actions against individuals within a company as well as the corporate entity or entities. In addition, health care facilities are subject to monitoring by state and federal surveyors to ensure compliance with program Conditions of Participation. In the event a facility is found to be out of compliance with a Condition of Participation and unable to remedy the alleged deficiency(s), the facility faces termination from the Medicare and Medicaid programs or compliance with a System Improvement Agreement to remedy deficiencies and ensure compliance.
The laws and regulations governing the healthcare industry are complex covering, among other things, government healthcare participation requirements, licensure, certification and accreditation, privacy of patient information, reimbursement for patient services as well as fraud and abuse compliance. These laws and regulations are constantly evolving and expanding. Further, the Legislation has added additional obligations on healthcare providers to report and refund overpayments by government healthcare programs and authorizes the suspension of Medicare and Medicaid payments “pending an investigation of a credible allegation of fraud.” We monitor our business and have developed an ethics and compliance program with respect to these complex laws, rules and regulations. Although we believe our policies, procedures and practices comply with government regulations, there is no assurance that we will not be faced with the sanctions referenced above which include fines, penalties and/or substantial damages, repayment obligations, payment suspensions, licensure revocation, and expulsion from government healthcare programs. Even if we were to ultimately prevail in any action brought against us or our facilities or in responding to any inquiry, such action or inquiry could have a material adverse effect on us.
Certain legal matters are described below:
Litigation:
Shareholder Class Action
In December 2016 a purported shareholder class action lawsuit was filed in U.S. District Court for the Central District of California against UHS and certain UHS officers alleging violations of the federal securities laws. The case was originally filed as Heed v. Universal Health Services, Inc. et. al. (Case No. 2:16-CV-09499-PSG-JC). The court subsequently appointed Teamsters Local 456 Pension Fund and Teamsters Local 456 Annuity Fund to serve as lead plaintiffs. The case has been transferred to the U.S. District Court for the Eastern District of Pennsylvania and the style of the case has been changed to Teamsters Local 456 Pension Fund, et. al. v. Universal Health Services, Inc. et. al. (Case No. 2:17-CV-02817-LS). In September, 2017, Teamsters Local 456 Pension Fund filed an amended complaint. The amended class action complaint alleges violations of federal securities laws relating to disclosures made in public filings associated with alleged practices and operations at our behavioral health facilities. Plaintiffs seek monetary damages for shareholders during the defined class period as a result of the decrease in share price following various public disclosures or reports. In December, 2017, we filed a motion to dismiss the amended complaint. In August, 2019, the court granted our motion to dismiss. Plaintiffs subsequently filed a motion with the court seeking leave to file a second amended complaint. In April, 2020, the
court denied Plaintiffs’ motion to file a second amended complaint. Plaintiffs have filed an appeal with the 3d Circuit Court of Appeals. During the fourth quarter of 2020, and during the pendency of the appeal, we reached an agreement to settle this matter, pending court approval. The net settlement amount, after anticipated commercial insurance proceeds, did not have a material impact on our consolidated financial statements for the year ended December 31, 2020. The settlement is not an admission of liability.
Shareholder Derivative Cases
In March 2017, a shareholder derivative suit was filed by plaintiff David Heed in the Court of Common Pleas of Philadelphia County. A notice of removal to the United States District Court for the Eastern District of Pennsylvania was filed (Case No. 2:17-cv-01476-LS). Plaintiff filed a motion to remand. In December 2017, the Court denied plaintiff’s motion to remand and retained the case in federal court. In May, June and July 2017, additional shareholder derivative suits were filed in the United States District Court for the Eastern District of Pennsylvania. The plaintiffs in those cases are: Central Laborers’ Pension Fund (Case No. 17-cv-02187-LS); Firemen’s Retirement System of St. Louis (Case No. 17—cv-02317-LS); Waterford Township Police & Fire Retirement System (Case No. 17-cv-02595-LS); and Amalgamated Bank Longview Funds (Case No. 17-cv-03404-LS). The Fireman’s Retirement System case has since been voluntarily dismissed. The federal court consolidated all of the cases pending in the Eastern District of Pennsylvania and appointed co-lead plaintiffs and co-lead counsel. Lead Plaintiffs filed a consolidated, amended complaint. We filed a motion to dismiss the amended complaint. In addition, a shareholder derivative case was filed in Chancery Court in Delaware by the Delaware County Employees’ Retirement Fund (Case No. 2017-0475-JTL). In December 2017, the Chancery Court stayed this case pending resolution of other contemporaneous matters. Each of these cases have named certain current and former members of the Board of Directors individually and certain officers of Universal Health Services, Inc. as defendants. UHS has also been named as a nominal defendant in these cases. The derivative cases make substantially similar allegations and claims as the shareholder class action relating to practices at our behavioral health facilities and board and corporate oversight of these facilities as well as claims relating to the stock trading by the individual defendants and company repurchase of shares during the relevant time period. The cases make claims of breaches of fiduciary duties by the named board members and officers; alleged violations of federal securities laws; and common law causes of action against the individual defendants including unjust enrichment, corporate waste, abuse of control, constructive fraud and gross mismanagement. The cases seek monetary damages allegedly incurred by the company; restitution and disgorgement of profits, benefits and other compensation from the individual defendants and various forms of equitable relief relating to corporate governance matters. In August, 2019, the court granted our motion to dismiss. Plaintiffs subsequently filed a motion with the court seeking leave to file a second amended complaint. In April, 2020, the court denied Plaintiffs motion to file a second amended complaint. Plaintiffs have filed an appeal with the 3d Circuit Court of Appeals. The defendants deny liability and intend to defend these cases vigorously. The parties continue settlement negotiations during the pendency of the appeal, however, we can provide no assurance that a settlement will be reached. We are uncertain as to potential liability or financial exposure, if any, which may be associated with these matters.
The George Washington University v. Universal Health Services, Inc., et. al.
In December 2019, The George Washington University (“University”) filed a lawsuit in the Superior Court for the District of Columbia against Universal Health Services, Inc. as well as certain subsidiaries and individuals associated with the ownership and management of The George Washington University Hospital (“GW Hospital”) in Washington, D.C. (case No. 2019 CA 008019 B). The lawsuit claims that UHS failed to provide sufficient financial compensation to the University under the terms of various agreements entered into in 1997 between the University and UHS for the joint venture ownership of GW Hospital. The lawsuit includes claims for breach of contract, breach of fiduciary duty, and unjust enrichment. We deny liability and intend to defend this matter vigorously. We filed a motion to dismiss the complaint. In June, 2020, the Court granted the motion in part dismissing the majority of the claims against UHS. At this time, we are uncertain as to potential liability or financial exposure, if any, which may be associated with this matter.
Disproportionate Share Hospital Payment Matter:
In late September, 2015, many hospitals in Pennsylvania, including certain 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”), primarily consisting of managed care payments characterized as DSH payments, for the federal fiscal year (“FFY”) 2011 amounting to approximately $4 million in the aggregate. Since that time, certain of our behavioral health care hospitals in Pennsylvania have received similar requests for repayment for alleged DSH overpayments for FFYs 2012 through 2015. For FFY 2012, the claimed overpayment amounts to approximately $4 million. For FY 2013, FY 2014 and FY 2015 the initial claimed overpayments and attempted recoupment by the Department were approximately $7 million, $8 million and $7 million, respectively. The Department has agreed to a change in methodology which, upon confirmation of the underlying data being accepted by the Department, could reduce the initial claimed overpayments for FY 2013, FY 2014 and FY 2015 to approximately $2 million, $2 million and $3 million, respectively. We filed administrative appeals for all of our facilities contesting the recoupment efforts for FFYs 2011 through 2015 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 for FY 2011 to 2013 until all hospital appeals are resolved but started recoupment of the federal share. For FY 2014 and FY 2015, the Department has initiated the recoupment of the alleged overpayments. Starting in FFY 2016, the first full fiscal year after the January 1, 2015 effective date of Medicaid expansion in Pennsylvania, the Department no longer characterized managed care payments received by the hospitals as DSH payments. 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.
Other Matters:
Various other suits, claims and investigations, including government subpoenas, arising against, or issued to, us are pending and additional such matters may arise in the future. Management will consider additional disclosure from time to time to the extent it believes such matters may be or become material. The outcome of any current or future litigation or governmental or internal investigations, including the matters described above, cannot be accurately predicted, nor can we predict any resulting penalties, fines or other sanctions that may be imposed at the discretion of federal or state regulatory authorities. We record accruals for such contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time regarding the matters described above or that are otherwise pending because the inherently unpredictable nature of legal proceedings may be exacerbated by various factors, including, but not limited to: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the matter is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties, or; (vii) there is a wide range of potential outcomes. It is possible that the outcome of these matters could have a material adverse impact on our future results of operations, financial position, cash flows and, potentially, our reputation.
- RELATIONSHIP WITH UNIVERSAL HEALTH REALTY INCOME TRUST AND OTHER RELATED PARTY TRANSACTIONS
Relationship with Universal Health Realty Income Trust:
At December 31, 2020, we held approximately 5.7% of the outstanding shares of Universal Health Realty Income Trust (the “Trust”). We serve as Advisor to the Trust under an annually renewable advisory agreement, 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. The advisory agreement was renewed by the Trust for 2021 at the same rate as the prior three years, providing for an advisory computation at 0.70% of the Trust’s average invested real estate assets. We earned an advisory fee from the Trust, which is included in net revenues in the accompanying consolidated statements of income, of approximately $4.1 million during 2020, $4.0 million during 2019 and $3.8 million during 2018.
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.
Our pre-tax share of income from the Trust was $1.1 million during each of 2020 and 2019 and $1.4 million during 2018, which are included in other income, net, on the accompanying consolidated statements of income for each year. We received dividends from the Trust amounting to $2.2 million during 2020 and $2.1 million during each of 2019 and 2018.
The carrying value of our investment in the Trust was $5.4 million and $6.4 million at December 31, 2020 and 2019, respectively, and is included in other assets in the accompanying consolidated balance sheets. The market value of our investment in the Trust was $50.6 million at December 31, 2020 and $92.4 million at December 31, 2019, based on the closing price of the Trust’s stock on the respective dates.
The Trust commenced operations in 1986 by purchasing certain hospital properties from us and immediately leasing the properties back to our respective subsidiaries. Most of the leases were entered into at the time the Trust commenced operations and provided for initial terms of 13 to 15 years with up to six additional 5-year renewal terms. Each lease also provided for additional or bonus rental, as discussed below. The base rents are paid monthly and the bonus rents are computed and paid on a quarterly basis, based upon a computation that compares current quarter revenue to a corresponding quarter in the base year. The leases with those subsidiaries are unconditionally guaranteed by us and are cross-defaulted with one another.
Total rent expense under the operating leases on the three wholly-owned hospital facilities with the Trust was $17.1 million, $16.4 million and $16.0 million during 2020, 2019 and 2018, respectively. Pursuant to the terms of the three wholly-owned hospital leases with the Trust, we have the option to renew the leases at the lease terms described above and below 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 their appraised fair market value upon any of the following: (i) at the end of the lease terms or any renewal terms; (ii) upon one month’s notice should a change of control of the Trust occur, or; (iii) within the time period as specified in the lease in the event that we provide notice to the Trust of our intent to offer a substitution property/properties in exchange for one (or more) of the three hospital properties leased from the Trust should we be unable to reach an agreement with the Trust on the properties to be substituted. 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.
The table below details the renewal options and terms for each of our three wholly-owned acute care hospital facilities leased from the Trust:
| Hospital Name | Annual Minimum Rent | End of Lease Term | Renewal Term (years) | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| McAllen Medical Center | $ | 5,485,000 | December, 2026 | 5 | (a) | |||||||
| Wellington Regional Medical Center | $ | 3,030,000 | December, 2021 | 10 | (b) | |||||||
| Southwest Healthcare System, Inland Valley Campus | $ | 2,648,000 | December, 2021 | 10 | (b) |
| (a) | We have one 5-year renewal option at existing lease rates (through 2031). |
|---|
| (b) | We have two 5-year renewal options at fair market value lease rates (2022 through 2031). |
|---|
The existing lease on Southwest Healthcare System, Inland Valley Campus is scheduled to expire on December 31, 2021 and we are considering terminating the lease at that time. As permitted pursuant to the terms of the lease, we have the right to purchase the leased property at its appraised fair market value at the end of the existing lease term. However, we are planning to offer the Trust potential substitution properties, with a fair market value substantially equal to that of the existing leased property, in exchange for the Inland Valley Campus. We expect to submit our proposal to the Trust, which is subject to the Trust’s approval, during the first quarter of 2021. Should a property substitution agreement be reached with the Trust, we anticipate that the transaction would be effective December 31, 2021, upon expiration of the existing lease on the Inland Valley Campus. We can provide no assurance that we will ultimately agree on a property substitution with the Trust in connection with the Inland Valley Campus.
In addition, certain of our subsidiaries are tenants in several medical office buildings (“MOBs”) and two free-standing emergency departments owned by the Trust or by limited liability companies in which the Trust holds 95% to 100% of the ownership interest.
During the third quarter of 2019, the Trust commenced construction on a new 75,000 rentable square feet MOB that is located on the campus of Texoma Medical Center, a hospital that is owned and operated by one of our subsidiaries. The construction on this MOB was substantially completed in December, 2020. In connection with this MOB, a master flex lease was executed between a wholly-owned subsidiary of ours and a Trust limited partnership that owns the MOB. Pursuant to the terms of this master flex lease, our subsidiary will master lease approximately 50% of the rentable square feet of the MOB, allocated to specific floors of the building, which could be reduced during the term if certain conditions are met, for a ten-year term at an initial minimum annual rent of $644,000. As of December 31, 2020, as a result of fully executed leases between the Trust and third-party tenants, the master lease flex commitment has been reduced to 5,840 rentable square feet on the third floor of the MOB.
During the third quarter of 2019, a joint-venture agreement between us and a non-related third-party was finalized in connection with the development of a newly constructed behavioral health care facility located in Clive, Iowa. Pursuant to the terms of the agreement, we hold a majority ownership interest in the venture and will act as manager of the facility when completed and opened. This joint-venture also entered into an agreement with the Trust whereby a wholly-owned subsidiary of the Trust constructed the 108-bed behavioral health care hospital, which was substantially completed in December, 2020 and the property received a temporary certificate of occupancy on December 31, 2020. Upon completion and issuance of the temporary certificate of occupancy, the joint venture lease from the Trust commenced pursuant to a 20-year, triple net lease with five, 10-year renewal options. Construction of the approximately 82,000 square foot hospital was managed by a wholly-owned subsidiary of ours for an aggregate fee of approximately $750,000. The approximate cost of the project is estimated at $35.1 million and the initial annual rent is estimated at approximately $2.5 million.
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 $1.1 million, net, in premium payments during each of 2020, 2019 and 2018.
In August, 2015, Marc D. Miller, our President and Chief Executive Officer 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. During the third quarter of 2020, we entered into an agreement with Premier pursuant to the terms of which, among other things, our ownership interest in Premier was converted into shares of Class A Common Stock of Premier. 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 $78 million as of December 31, 2020 and $70 million as of December 31, 2019. The $8 million increase in market value at December 31, 2020, as compared to December 31, 2019, is the result of $12 million of additional vested shares and $4 million of decreased market value. The $4 million decrease in market value of our vested Premier shares since December 31, 2020 was recorded as an unrealized loss and included in “Other (income) expense, net” in our consolidated statements of income for the year ended December 31, 2020. Additionally, during 2020, Premier declared a quarterly cash dividend during each of the third and fourth quarters of $0.19 per share per quarter. Our share of the dividends for the year ended December 31, 2020 is approximately $800,000 and is included in “Other (income) expense, net” in our condensed consolidated statements of income for the year ended December 31, 2020.
A member of our Board of Directors and member of the Executive Committee and Finance Committee is a partner in Norton Rose Fulbright US LLP, a law firm engaged by us for a variety of legal services. The Board member and his law firm also provide personal legal services to our Executive Chairman and acts as trustee of certain trusts for the benefit of our Executive Chairman and his family.
- REVENUE RECOGNITION
The company recognizes 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. 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 payer, for example a bankruptcy, will be recognized as bad debt expense in operating charges.
The performance obligation is separately identifiable from other promises in the customer contract. As the performance obligations are met (i.e.: room, board, ancillary services, level of care), revenue is recognized based upon allocated transaction price. The transaction price is allocated to separate performance obligations based upon the relative standalone selling price. In instances where we determine there are multiple performance obligations across multiple months, the transaction price will be allocated by applying an estimated implicit and explicit rate to gross charges based on the separate performance obligations*.*
In assessing collectability, we have elected the portfolio approach. This portfolio approach is being used as we have large volume of similar contracts with similar classes of customers. We reasonably expect that the effect of applying a portfolio approach to a group of contracts would not differ materially from considering each contract separately. Management’s judgment to group the contracts by portfolio is based on the payment behavior expected in each portfolio category. As a result, aggregating all of the contracts (which are at the patient level) by the particular payer or group of payers, will result in the recognition of the same amount of revenue as applying the analysis at the individual patient level.
We group our revenues into categories based on payment behaviors. Each component has its own reimbursement structure which allows us to disaggregate the revenue into categories that share the nature and timing of payments. The other patient revenue consists primarily of self-pay, government-funded non-Medicaid, and other.
The following table disaggregates our revenue by major source for the years ended December 31, 2020, 2019 and 2018 (in thousands):
| For the year ended December 31, 2020 | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Acute Care | Behavioral Health | Other | Total | |||||||||||||||||||||
| Medicare | $ | 1,242,268 | 20 | % | $ | 448,323 | 9 | % | $ | 1,690,591 | 15 | % | ||||||||||||
| Managed Medicare | 869,488 | 14 | % | 235,442 | 5 | % | 1,104,930 | 10 | % | |||||||||||||||
| Medicaid | 551,551 | 9 | % | 651,081 | 12 | % | 1,202,632 | 10 | % | |||||||||||||||
| Managed Medicaid | 491,234 | 8 | % | 1,224,205 | 24 | % | 1,715,439 | 15 | % | |||||||||||||||
| Managed Care (HMO and PPOs) | 2,146,018 | 34 | % | 1,280,919 | 25 | % | 3,426,937 | 30 | % | |||||||||||||||
| UK Revenue | 0 | 0 | % | 584,000 | 11 | % | 584,000 | 5 | % | |||||||||||||||
| Other patient revenue and adjustments, net | 248,047 | 4 | % | 497,297 | 10 | % | 745,344 | 6 | % | |||||||||||||||
| Other non-patient revenue (a) | 788,698 | 12 | % | 287,455 | 6 | % | 12,871 | 1,089,024 | 9 | % | ||||||||||||||
| Total Net Revenue | $ | 6,337,304 | 100 | % | $ | 5,208,722 | 100 | % | $ | 12,871 | 11,558,897 | 100 | % | |||||||||||
| For the year ended December 31, 2019 | ||||||||||||||||||||||||
| Acute Care | Behavioral Health | Other | Total | |||||||||||||||||||||
| Medicare | $ | 1,336,200 | 22 | % | $ | 553,045 | 11 | % | $ | 1,889,245 | 17 | % | ||||||||||||
| Managed Medicare | 827,216 | 13 | % | 220,543 | 4 | % | 1,047,759 | 9 | % | |||||||||||||||
| Medicaid | 519,508 | 8 | % | 688,141 | 13 | % | 1,207,649 | 11 | % | |||||||||||||||
| Managed Medicaid | 560,029 | 9 | % | 1,118,612 | 21 | % | 1,678,641 | 15 | % | |||||||||||||||
| Managed Care (HMO and PPOs) | 2,271,002 | 37 | % | 1,363,815 | 26 | % | 3,634,817 | 32 | % | |||||||||||||||
| UK Revenue | 0 | 0 | % | 553,831 | 11 | % | 553,831 | 5 | % | |||||||||||||||
| Other patient revenue and adjustments, net | 191,422 | 3 | % | 505,144 | 10 | % | 696,566 | 6 | % | |||||||||||||||
| Other non-patient revenue | 459,183 | 7 | % | 206,932 | 4 | % | 3,636 | 669,751 | 6 | % | ||||||||||||||
| Total Net Revenue | $ | 6,164,560 | 100 | % | $ | 5,210,063 | 100 | % | $ | 3,636 | 11,378,259 | 100 | % | |||||||||||
| For the year ended December 31, 2018 | ||||||||||||||||||||||||
| Acute Care | Behavioral Health | Other | Total | |||||||||||||||||||||
| Medicare | $ | 1,296,152 | 23 | % | $ | 579,723 | 12 | % | $ | 1,875,875 | 17 | % | ||||||||||||
| Managed Medicare | 730,387 | 13 | % | 199,003 | 4 | % | 929,390 | 9 | % | |||||||||||||||
| Medicaid | 487,197 | 9 | % | 696,421 | 14 | % | 1,183,618 | 11 | % | |||||||||||||||
| Managed Medicaid | 554,438 | 10 | % | 975,567 | 19 | % | 1,530,005 | 14 | % | |||||||||||||||
| Managed Care (HMO and PPOs) | 2,093,890 | 37 | % | 1,395,980 | 28 | % | 3,489,870 | 32 | % | |||||||||||||||
| UK Revenue | 0 | 0 | % | 504,721 | 10 | % | 504,721 | 5 | % | |||||||||||||||
| Other patient revenue and adjustments, net | 167,570 | 3 | % | 483,417 | 10 | % | 650,987 | 6 | % | |||||||||||||||
| Other non-patient revenue | 390,271 | 7 | % | 204,042 | 4 | % | 13,499 | 607,812 | 6 | % | ||||||||||||||
| Total Net Revenue | $ | 5,719,905 | 100 | % | $ | 5,038,874 | 100 | % | $ | 13,499 | 10,772,278 | 100 | % |
(a) The 2020 other non-patient revenue includes Acute Care CARES Act and other grant revenue of $316 million and Behavioral Health CARES Act and other grant revenue of $97 million. As an accounting policy election, we have utilized ASC 958 by analogy to recognize funds received under the CARES Act from the Provider Relief Fund as revenue, given no direct authoritative guidance available to for-profit organizations to recognize revenue for government contributions and grants. CARES Act revenues may be subject to future adjustments based on future changes to statutes.
- PENSION PLAN
We maintain contributory and non-contributory retirement plans for eligible employees. Our contributions to the contributory plan amounted to $67.1 million, $56.3 million and $56.6 million in 2020, 2019 and 2018, 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.
For defined benefit pension plans, the benefit obligation is the “projected benefit obligation”, the actuarial present value, as of December 31 measurement date, of all benefits attributed by the pension benefit formula to employee service rendered to that date. The amount of benefit to be paid depends on a number of future events incorporated into the pension benefit formula, including estimates of the average life of employees/survivors and average years of service rendered. It is measured based on assumptions
concerning future interest rates and future compensation levels. The following table shows the reconciliation of the defined benefit pension plan as of December 31, 2020 and 2019:
| 2020 | 2019 | |||||||
|---|---|---|---|---|---|---|---|---|
| (000s) | ||||||||
| Change in plan assets: | ||||||||
| Fair value of plan assets at beginning of year | $ | 120,287 | $ | 104,591 | ||||
| Actual return (loss) on plan assets | 18,169 | 22,331 | ||||||
| Benefits paid | (6,260 | ) | (6,168 | ) | ||||
| Administrative expenses | (511 | ) | (467 | ) | ||||
| Fair value of plan assets at end of year | $ | 131,685 | $ | 120,287 | ||||
| Change in benefit obligation: | ||||||||
| Benefit obligation at beginning of year | $ | 117,556 | $ | 108,428 | ||||
| Service cost | $ | 615 | $ | 725 | ||||
| Interest cost | $ | 3,357 | $ | 4,237 | ||||
| Benefits paid | $ | (6,260 | ) | $ | (6,168 | ) | ||
| Actuarial (gain) loss | $ | 7,969 | $ | 10,334 | ||||
| Benefit obligation at end of year | $ | 123,237 | $ | 117,556 | ||||
| Amounts recognized in the Consolidated Balance Sheet: | ||||||||
| Other non-current assets | $ | 8,449 | $ | 2,731 | ||||
| Total amounts recognized at end of year | $ | 8,449 | $ | 2,731 |
| 2020 | 2019 | 2018 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (000s) | ||||||||||||
| Components of net periodic cost (benefit) | ||||||||||||
| Service cost | $ | 615 | $ | 725 | $ | 689 | ||||||
| Interest cost | 3,357 | 4,237 | 4,063 | |||||||||
| Expected return on plan assets | (5,261 | ) | (4,558 | ) | (5,197 | ) | ||||||
| Amortization of actuarial loss | — | 1,533 | — | |||||||||
| Net periodic cost | $ | (1,289 | ) | $ | 1,937 | $ | (445 | ) |
| 2020 | 2019 | |||
|---|---|---|---|---|
| Measurement Dates | ||||
| Benefit obligations | 12/31/2020 | 12/31/2019 | ||
| Fair value of plan assets | 12/31/2020 | 12/31/2019 |
| 2020 | 2019 | |||||||
|---|---|---|---|---|---|---|---|---|
| Weighted average assumptions as of December 31 | ||||||||
| Discount rate | 2.08 | % | 2.94 | % | ||||
| Rate of compensation increase | 4.00 | % | 4.00 | % |
| 2020 | 2019 | 2018 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Weighted-average assumptions for net periodic benefit cost calculations | ||||||||||||
| Discount rate | 2.94 | % | 4.03 | % | 3.60 | % | ||||||
| Expected long-term rate of return on plan assets | 4.50 | % | 4.50 | % | 4.50 | % | ||||||
| Rate of compensation increase | 4.00 | % | 4.00 | % | 4.00 | % |
The “accumulated benefit obligation” for our pension plan represents the actuarial present value of benefits based on employee service and compensation as of a certain date and does not include an assumption about future compensation levels. The accumulated benefit obligation for our plan was $123.2 million and $117.5 million as of December 31, 2020 and 2019, respectively. The fair value of plan assets exceeded the accumulated benefit obligation by $8.4 million and $2.7 million as of December 31, 2020 and 2019, respectively.
We estimate that there will be no net loss or prior service cost amortized from accumulated other comprehensive income during 2020.
The market values of our pension plan assets at December 31, 2020 and December 31, 2019, reported using net asset value as a practical expedient, by asset category are as follows:
| 2020 | 2019 | |||||||
|---|---|---|---|---|---|---|---|---|
| Equities: | ||||||||
| U.S. Large Cap | $ | 10,946 | $ | 9,867 | ||||
| U.S. Mid Cap | $ | 3,403 | $ | 3,054 | ||||
| U.S. Small Cap | $ | 3,581 | $ | 3,160 | ||||
| International Developed | $ | 8,315 | $ | 7,317 | ||||
| Emerging Markets | $ | 5,631 | $ | 4,957 | ||||
| Fixed income: | ||||||||
| Core Fixed Income | $ | 27,782 | $ | 25,390 | ||||
| Long Duration Fixed Income | $ | 68,886 | $ | 63,515 | ||||
| Real Estate: | ||||||||
| REIT Fund | $ | 2,474 | $ | 2,372 | ||||
| Cash/Currency: | ||||||||
| Cash Equivalents | $ | 667 | $ | 655 | ||||
| Total market value | $ | 131,685 | $ | 120,287 |
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 2021 through 2030 for our defined pension plan. There will be benefit payments under this plan beyond 2030.
| Estimated Future Benefit Payments (000s) | ||||
|---|---|---|---|---|
| 2021 | $ | 6,790 | ||
| 2022 | 6,889 | |||
| 2023 | 6,920 | |||
| 2024 | 6,915 | |||
| 2025 | 6,886 | |||
| 2026-2030 | 33,298 | |||
| Total | $ | 67,698 |
| 2020 | 2019 | |||||||
|---|---|---|---|---|---|---|---|---|
| Plan Assets | ||||||||
| Asset Category | ||||||||
| Equity securities | 24 | % | 24 | % | ||||
| Fixed income securities | 73 | % | 74 | % | ||||
| Other | 3 | % | 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 12/31/2020 | Permitted Range | |||||
|---|---|---|---|---|---|---|
| Total Equity | 24 | % | 10-30% | |||
| Total Fixed Income | 73 | % | 70-90% | |||
| Other | 3 | % | 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 Note 1-Business and Summary of Significant Accounting Policies. 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.
| 2020 | Acute Care Hospital Services | Behavioral Health Services (a.) | Other | Total Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollar amounts in thousands) | ||||||||||||||||
| Gross inpatient revenues | $ | 30,562,093 | $ | 9,718,934 | $ | — | $ | 40,281,027 | ||||||||
| Gross outpatient revenues | $ | 16,272,520 | $ | 963,799 | $ | — | $ | 17,236,319 | ||||||||
| Total net revenues | $ | 6,337,304 | $ | 5,208,722 | $ | 12,871 | $ | 11,558,897 | ||||||||
| Income (loss) before allocation of corporate overhead and income taxes | $ | 693,427 | $ | 1,023,257 | $ | (464,601 | ) | $ | 1,252,083 | |||||||
| Allocation of corporate overhead | $ | (223,921 | ) | $ | (170,849 | ) | $ | 394,770 | $ | 0 | ||||||
| Income (loss) after allocation of corporate overhead and before income taxes | $ | 469,506 | $ | 852,408 | $ | (69,831 | ) | $ | 1,252,083 | |||||||
| Total assets | $ | 4,927,456 | $ | 7,044,617 | $ | 1,504,806 | $ | 13,476,879 |
| 2019 | Acute Care Hospital Services | Behavioral Health Services (a.) | Other | Total Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollar amounts in thousands) | ||||||||||||||||
| Gross inpatient revenues | $ | 28,430,922 | $ | 10,100,903 | $ | — | $ | 38,531,825 | ||||||||
| Gross outpatient revenues | $ | 17,666,629 | $ | 1,066,704 | $ | — | $ | 18,733,333 | ||||||||
| Total net revenues | $ | 6,164,560 | $ | 5,210,063 | $ | 3,636 | $ | 11,378,259 | ||||||||
| Income (loss) before allocation of corporate overhead and income taxes | $ | 713,410 | $ | 900,965 | $ | (548,038 | ) | $ | 1,066,337 | |||||||
| Allocation of corporate overhead | $ | (230,166 | ) | $ | (166,571 | ) | $ | 396,737 | $ | 0 | ||||||
| Income (loss) after allocation of corporate overhead and before income taxes | $ | 483,244 | $ | 734,394 | $ | (151,301 | ) | $ | 1,066,337 | |||||||
| Total assets | $ | 4,405,643 | $ | 6,910,790 | $ | 351,817 | $ | 11,668,250 |
| 2018 | Acute Care Hospital Services | Behavioral Health Services (a.) | Other | Total Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollar amounts in thousands) | ||||||||||||||||
| Gross inpatient revenues | $ | 24,814,959 | $ | 9,735,521 | $ | — | $ | 34,550,480 | ||||||||
| Gross outpatient revenues | $ | 14,967,313 | $ | 1,025,721 | $ | — | $ | 15,993,034 | ||||||||
| Total net revenues | $ | 5,719,905 | $ | 5,038,874 | $ | 13,499 | $ | 10,772,278 | ||||||||
| Income (loss) before allocation of corporate overhead and income taxes | $ | 708,680 | $ | 915,517 | $ | (589,672 | ) | $ | 1,034,525 | |||||||
| Allocation of corporate overhead | $ | (199,823 | ) | $ | (161,282 | ) | $ | 361,105 | $ | 0 | ||||||
| Income (loss) after allocation of corporate overhead and before income taxes | $ | 508,857 | $ | 754,235 | $ | (228,567 | ) | $ | 1,034,525 | |||||||
| Total assets | $ | 4,094,537 | $ | 6,786,369 | $ | 384,574 | $ | 11,265,480 |
| (a.) | Includes net revenues generated from our behavioral health care facilities located in the U.K. amounting to approximately $584 million in 2020, $554 million in 2019 and $505 million in 2018. Total assets at our U.K. behavioral health care facilities were approximately $1.334 billion as of December 31, 2020, $1.270 billion as of December 31, 2019 and $1.224 billion as of December 31, 2018. In addition, included in our 2019 Behavioral Health Services operating segment Income (loss) before allocation of corporate overhead and income taxes is a pre-tax $98 million provision for asset impairment to reduce the carrying value of a tradename intangible asset and real property assets. Included in our 2018 Behavioral Health Services operating segment Income (loss) before allocation of corporate overhead and income taxes is a pre-tax $49 million provision for asset impairment to reduce the carrying value of a tradename intangible asset. |
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- QUARTERLY RESULTS (unaudited)
The quarterly financial data is prepared on the same basis as the audited annual financial statements, and include all adjustments, which include only normal recurring adjustments, necessary for the fair statement of our results of operations for these periods. The following tables summarize the quarterly financial data for the two years ended December 31, 2020 and 2019:
| 2020 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (amounts in thousands, except per share amounts) | ||||||||||||||||||||
| Net revenues | $ | 2,829,667 | $ | 2,729,754 | $ | 2,912,541 | $ | 3,086,935 | $ | 11,558,897 | ||||||||||
| Net income | $ | 144,460 | $ | 256,504 | $ | 244,092 | $ | 307,734 | $ | 952,790 | ||||||||||
| Less: Net income attributable to noncontrolling interests | $ | 2,423 | $ | 4,575 | $ | 2,813 | $ | (974 | ) | $ | 8,837 | |||||||||
| Net income attributable to UHS | $ | 142,037 | $ | 251,929 | $ | 241,279 | $ | 308,708 | $ | 943,953 | ||||||||||
| Earnings per share attributable to UHS-Basic: | ||||||||||||||||||||
| Total basic earnings per share | $ | 1.64 | $ | 2.97 | $ | 2.84 | $ | 3.63 | $ | 11.06 | ||||||||||
| Earnings per share attributable to UHS-Diluted: | ||||||||||||||||||||
| Total diluted earnings per share | $ | 1.64 | $ | 2.95 | $ | 2.82 | $ | 3.60 | $ | 10.99 |
First Quarter:
| • | an unfavorable after-tax impact of $770,000 or $.01 per diluted share, resulting from our January 1, 2017 adoption of ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”); |
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| • | an unfavorable after-tax impact of $7.4 million or $.08 per diluted share, resulting from recording the unrealized loss on marketable securities held for sale. |
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Second Quarter:
| • | an unfavorable after-tax impact of $505,000 or $.01 per diluted share, resulting from our January 1, 2017 adoption of ASU 2016-09; |
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| • | a favorable after-tax impact of $2.2 million or $.03 per diluted share, resulting from recording the unrealized gain on marketable securities held for sale. |
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Third Quarter:
| • | an unfavorable after-tax impact of $3.1 million or $.04 per diluted share, resulting from our January 1, 2017 adoption of ASU 2016-09; |
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| • | an unfavorable after-tax impact of $2.1 million or $.02 per diluted share, resulting from recording the unrealized loss on marketable securities held for sale. |
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Fourth Quarter:
| • | an unfavorable after-tax impact of $3.0 million or $.04 per diluted share, resulting from our January 1, 2017 adoption of ASU 2016-09; |
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| • | a favorable after-tax impact of $3.9 million or $.05 per diluted share, resulting from recording the unrealized gain on marketable securities held for sale. |
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| 2019 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (amounts in thousands, except per share amounts) | ||||||||||||||||||||
| Net revenues | $ | 2,804,391 | $ | 2,855,168 | $ | 2,822,453 | $ | 2,896,247 | $ | 11,378,259 | ||||||||||
| Net income | $ | 237,398 | $ | 241,265 | $ | 100,870 | $ | 248,010 | $ | 827,543 | ||||||||||
| Less: Net income attributable to noncontrolling interests | $ | 3,230 | $ | 2,945 | $ | 3,680 | $ | 2,834 | $ | 12,689 | ||||||||||
| Net income attributable to UHS | $ | 234,168 | $ | 238,320 | $ | 97,190 | $ | 245,176 | $ | 814,854 | ||||||||||
| Earnings per share attributable to UHS-Basic: | ||||||||||||||||||||
| Total basic earnings per share | $ | 2.57 | $ | 2.67 | $ | 1.10 | $ | 2.81 | $ | 9.16 | ||||||||||
| Earnings per share attributable to UHS-Diluted: | ||||||||||||||||||||
| Total diluted earnings per share | $ | 2.57 | $ | 2.66 | $ | 1.10 | $ | 2.79 | $ | 9.13 |
The 2019 quarterly financial data presented above includes the following:
First Quarter:
| • | a favorable after-tax impact of $10.9 million, or $.12 per diluted share, resulting from our January 1, 2017 adoption of ASU 2016-09. |
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Second Quarter:
| • | an unfavorable $11.0 million pre-tax impact ($8.4 million, or $.09 per diluted share, net of taxes) increase in the reserve established in connection with the discussions with the Department of Justice related to the civil aspects of the government’s investigation of certain of our behavioral health care facilities (“ DOJ Reserve”); |
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| • | a favorable after-tax impact of $509,000, or $.01 per diluted share, resulting from our January 1, 2017 adoption of ASU 2016-09. |
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Third Quarter:
| • | an unfavorable $6.2 million after-tax impact, or $.07 per diluted share recorded to provide income taxes on the portion of the DOJ reserve that is deemed non-deductible; |
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| • | an unfavorable $97.6 million pre-tax impact ($74.6 million, or $.84 per diluted share, net of taxes) recorded in connection with provision for asset impairment. |
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| • | a favorable after-tax impact of $1.7 million, or $.02 per diluted share, resulting from our January 1, 2017 adoption of ASU 2016-09. |
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SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
| Balance at | Charges to | Balance | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| beginning | costs and | at end | ||||||||||
| Valuation Allowance for Deferred Tax Assets: | of period | expenses | of period | |||||||||
| Year ended December 31, 2020 | $ | 75,277 | $ | (7,274 | ) | $ | 68,003 | |||||
| Year ended December 31, 2019 | $ | 79,264 | $ | (3,987 | ) | $ | 75,277 | |||||
| Year ended December 31, 2018 | $ | 70,227 | $ | 9,037 | $ | 79,264 |
Previous: Item 15. Exhibits and Financial Statement Schedules