Vanguard Health Systems Reports First Quarter Fiscal 2013 Results

Vanguard Health Systems Reports First Quarter Fiscal 2013 Results

Fiscal Year 2013 Outlook Confirmed

NASHVILLE, Tenn.--(BUSINESS WIRE)-- Vanguard Health Systems, Inc. (NYS: VHS) today announced financial and operating results for its first fiscal quarter of 2013 and confirmed its outlook for fiscal year 2013.

First Quarter Fiscal 2013 Key Metrics (all percentage changes compare Q1 FY2013 to Q1 FY2012):


  • Net income attributable to Vanguard Health Systems, Inc. stockholders was $13.9 million, or $0.17 per diluted share, compared to a net loss of $21.7 million, or $(0.29) per diluted share, during the prior year period
  • Adjusted EBITDA increased 12.2 percent to $133.2 million

Same Store:

  • Patient revenue per adjusted discharge increased 2.0 percent
  • Discharges decreased 1.9 percent
  • Adjusted discharges decreased 0.8 percent

A reconciliation of Adjusted EBITDA, a non-GAAP financial measure, to net income (loss) attributable to Vanguard Health Systems, Inc. stockholders for the quarters ended September 30, 2011 and 2012 is included in this release.

First Quarter Analysis

Consolidated total revenues increased $34.4 million during the first quarter of fiscal 2013 compared to the prior year period, primarily due to the acquisition of Valley Baptist Health System in September 2011. Same store net patient service revenues increased 0.6 percent during the first quarter of fiscal 2013 resulting from a 2.0 percent increase in patient revenue per adjusted discharge combined with a 0.8 percent decrease in adjusted discharges. Health plan premium revenues, on a same store basis, decreased 21.5 percent during the first quarter of fiscal 2013 due to the impact on Phoenix Health Plan of a combination of capitation rate decreases, program eligibility cuts and health plan profitability limitations for certain groups of covered members adopted by the Arizona Health Care Cost Containment System ("AHCCCS") during fiscal 2012.

Same store uncompensated care as a percentage of net patient revenues (prior to the uncompensated care deductions) increased from 17.9 percent during the first quarter of fiscal 2012 to 20.8 percent during the first quarter of fiscal 2013 primarily due to an increase in uninsured discharges as a percentage of total discharges.

Balance Sheet and Cash Flows

As of September 30, 2012, we had cash of $330.2 million and total debt of $2,704.6 million.

Cash flows from operating activities improved by $31.4 million during the first quarter of fiscal 2013 compared to the prior year period. Changes in net operating assets and liabilities negatively impacted operating cash flows by $144.6 million during the first quarter of fiscal 2013 compared to a negative impact of $166.5 million during the prior year period. We made $89.0 million of interest and income tax payments during the first quarter of fiscal 2013, which was $17.9 million higher than these payments during the prior year period. Cash flows from operations during the first quarter of fiscal 2013 were negatively impacted by the timing of payments of accounts payable and certain accrued expenses and significant employer contributions to The Detroit Medical Center ("DMC") defined benefit pension plan, but were positively impacted by improved cash collections of accounts receivable and the receipt of certain settlement receivables from the federal government.

Capital expenditures increased 30.4 percent to $82.7 million during the first quarter of fiscal 2013 compared to the prior year period due to increased spending related to the DMC specified capital project commitments and the start of construction of a new hospital in New Braunfels, Texas.

Outlook for Fiscal Year 2013

We are confirming our previously issued fiscal year 2013 outlook for ranges of projected Adjusted EBITDA, projected net income attributable to Vanguard Health Systems, Inc. stockholders, projected diluted earnings per share and projected capital expenditures.

Earnings Conference Call

We will host a conference call at 11:00 a.m. EDT on October 31, 2012. All interested parties are invited to access a live webcast of the conference call on the Investor Relations Section of our website at you are unable to participate during the live webcast, the webcast will be available on a replay basis for 90 days.

We own and operate 28 acute care and specialty hospitals and complementary facilities and services in metropolitan Chicago, Illinois; metropolitan Detroit, Michigan; metropolitan Phoenix, Arizona; San Antonio, Texas; Harlingen and Brownsville, Texas; and Worcester and metropolitan Boston, Massachusetts. Our strategy is to develop locally branded, comprehensive health care delivery networks in urban markets.

Cautionary Statement about Forward-Looking Information

This press release contains "forward-looking statements" within the meaning of the federal securities laws that are intended to be covered by safe harbors created thereby. Forward-looking statements are those statements that are based upon management's plans, objectives, goals, strategies, future events, future revenue or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, business trends and other information that is not historical information. These statements are based upon estimates and assumptions made by our management that, although believed to be reasonable, are subject to numerous factors, risks and uncertainties that could cause actual outcomes and results to be materially different from those projected. When used in this press release, the words "estimates," "expects," "anticipates," "projects," "plans," "intends," "believes," "forecasts," "continues" or future or conditional verbs, such as "will," "should," "could" or "may," and variations of such words or similar expressions are intended to identify forward-looking statements. These factors, risks and uncertainties include, among others, the following: our high degree of leverage and interest rate risk; our ability to incur substantially more debt; operating and financial restrictions in our debt agreements; our ability to generate cash necessary to service our debt; weakened economic conditions and volatile capital markets; potential liability related to disclosures of relationships between physicians and our hospitals; potential adverse impact of pre-payment and post-payment claims reviews by governmental agencies; our ability to grow our business and successfully implement our business strategies, including growing our ambulatory care services platform; our ability to successfully integrate hospitals or ambulatory care facilities acquired in the future or to recognize expected synergies from such acquisitions; potential acquisitions could be costly, unsuccessful or subject us to unexpected liabilities; conflicts of interest that may arise as a result of our control by a small number of stockholders; the highly competitive nature of the health care industry; the geographic concentration of our operations; governmental regulation of the health care industry, including Medicare and Medicaid reimbursement levels in general and with respect to the impact of the Budget Control Act of 2011 and other future deficit reduction plans; a reduction or elimination of supplemental Medicare and Medicaid payments on which we depend, including disproportionate share payments, indirect medical education/graduate medical education payments, upper payment limit programs and other similar payments; pressures to contain costs by managed care organizations and other insurers and our ability to negotiate acceptable terms with these third party payers; our ability to attract and retain qualified management and health care professionals, including physicians and nurses; the currently unknown effect on us of the major federal health care reforms enacted by Congress in March 2010, including the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or other potential additional federal or state health care reforms, including that states may opt out of the Medicaid expansion; potential adverse impact of known and unknown governmental investigations and audits; increased compliance costs from further government regulation of the health care industry and our failure to comply, or allegations of our failure to comply, with applicable laws and regulations; our failure to adequately enhance our facilities with technologically advanced equipment; the availability of capital to fund our corporate growth strategy and improvements to our existing facilities; potential lawsuits or other claims asserted against us; our ability to maintain or increase patient membership in and to control the costs of our managed health care plans; failure of AHCCCS to renew its contract with, or award future contracts to, Phoenix Health Plan; Phoenix Health Plan's ability to comply with the terms of its contract with AHCCCS; our inability to manage health plan claims expense within our health plans; reductions in the enrollment of our health plans; changes in general economic conditions nationally and regionally in our markets; our exposure to the increased amounts of and collection risks associated with uninsured accounts and the co-pay and deductible portions of insured accounts; dependence on our senior management team and local management personnel; volatility of professional and general liability insurance for us and the physicians who practice at our hospitals and increases in the quantity and severity of professional liability claims; our ability to achieve operating and financial targets and to maintain and increase patient volumes and control the costs of providing services, including salaries and benefits, supplies and other operating expenses; technological and pharmaceutical improvements that increase the cost of providing, or reduce the demand for, health care services and shift demand for inpatient services to outpatient settings; a failure of our information systems; delays in receiving payments for services provided, especially from governmental payers; changes in revenue mix, including changes in Medicaid eligibility criteria and potential declines in the population covered under managed care agreements; costs and compliance risks associated with Section 404 of the Sarbanes-Oxley Act of 2002; material non-cash charges to earnings from impairment of goodwill associated with declines in the fair market value of our reporting units; cash payments that may be necessary to fund an underfunded defined benefit pension plan of the DMC; volatility of materials and labor costs for, or state efforts to regulate, potential construction projects that may be necessary for future growth; our reliance on payments from our subsidiaries, which may be restricted by our credit agreement and the indentures governing our senior notes; changes in accounting practices; our ability to demonstrate meaningful use of certified electronic health record technology and to receive the related Medicare or Medicaid incentive payments; and other risk factors described in our Annual Report on Form 10-K and other filings with the Securities and Exchange Commission.

Our forward-looking statements speak only as of the date made. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements contained herein, whether as a result of new information, future events or otherwise. You are cautioned not to rely on such forward-looking statements when evaluating the information contained in this press release. In light of significant uncertainties inherent in the forward-looking statements included in this press release, you should not regard the inclusion of such information as a representation by us that the objectives and plans anticipated by the forward-looking statements will occur or be achieved or, if any of them do, what impact they will have on our financial condition, results of operations or cash flows.

We use our company website to provide important information to investors about the company, including the posting of important announcements regarding financial performance and corporate developments.

Condensed Consolidated Statements of Operations (Unaudited)
(In millions, except share and per share amounts)
    Quarter ended September 30,
2011  2012
Patient service revenues$1,351.5  94.1%$1,463.9  99.5%
Less: Provision for doubtful accounts (126.2)(8.8) (169.6)(11.5)
Patient service revenues, net1,225.385.31,294.388.0
Premium revenues 211.0 14.7  176.4 12.0 
Total revenues1,436.3100.01,470.7100.0
Costs and expenses:
Salaries and benefits (includes stock compensation)665.046.3680.246.3
Health plan claims expense164.711.5134.39.1
Purchased services127.08.8147.210.0
Non-income taxes34.52.434.92.4
Rents and leases18.01.319.01.3
Other operating expenses98.66.9109.37.4
Medicare and Medicaid EHR incentives(3.1)(0.2)(11.3)(0.8)
Depreciation and amortization62.64.465.64.5
Interest, net45.
Debt extinguishment costs38.92.7
Acquisition related expenses12.20.8
Other (2.4)(0.2) (5.1)(0.3)
Total costs and expenses1,475.4102.71,451.098.7

Income (loss) from continuing operations before income taxes

Income tax benefit (expense) 15.2 1.1  (4.9)(0.3)
Income (loss) from continuing operations(23.9)(1.7)14.81.0
Income (loss) from discontinued operations, net of taxes (0.1)  0.1  
Net income (loss)(24.0)(1.7)14.91.0
Net loss (income) attributable to non-controlling interests 2.3 0.2  (1.0)(0.1)

Net income (loss) attributable to Vanguard Health Systems, Inc. stockholders

$(21.7)(1.5)%$13.9 0.9%
Earnings (loss) per share attributable to Vanguard Health Systems, Inc. stockholders
Basic earnings (loss) per share$(0.29)$0.18 
Diluted earnings (loss) per share$(0.29)$0.17 
Weighted average shares outstanding (in thousands):
Basic 74,854  75,697 
Diluted 74,854  78,813 
Supplemental Financial Information (Unaudited)
Reconciliation of Adjusted EBITDA to Net Income (Loss)
Attributable to Vanguard Health Systems, Inc. Stockholders
(In millions)
    Quarter ended
September 30,
2011  2012

Net income (loss) attributable to Vanguard Health Systems, Inc. stockholders

Interest, net45.850.8
Income tax expense (benefit)(15.2)4.9
Depreciation and amortization62.665.6
Non-controlling interests(2.3)1.0
Gain on disposal of assets(1.2)(0.9)
Equity method income(0.1)(0.6)
Stock compensation0.72.2
Realized losses on investments0.2
Acquisition related expenses12.2
Debt extinguishment costs38.9
Impairment and restructuring charges(0.1)
Pension credits(1.0)(3.8)
Discontinued operations, net of taxes 0.1  (0.1)
Adjusted EBITDA (1)$118.7 $133.2 


(1) Adjusted EBITDA is defined as income (loss) before interest expense (net of interest income), income taxes, depreciation and amortization, non-controlling interests, gain or loss on disposal of assets, equity method income or loss, stock compensation, monitoring fees and expenses, realized gains or losses on investments, acquisition related expenses, debt extinguishment costs, impairment and restructuring charges, pension expense (credits) and discontinued operations, net of taxes. Adjusted EBITDA is not intended as a substitute for net income (loss) attributable to Vanguard Health Systems, Inc. stockholders, operating cash flows or other cash flow data determined in accordance with accounting principles generally accepted in the United States. Due to varying methods of calculation, Adjusted EBITDA as presented may not be comparable to similarly titled measures of other companies.

Condensed Consolidated Balance Sheets (Unaudited)
(In millions)
ASSETS    June 30, 2012  September 30, 2012
Current assets:
Cash and cash equivalents$455.5$330.2
Restricted cash2.43.9

Accounts receivable, net of allowance for doubtful accounts of approximately $366.5 and $363.8, respectively

Deferred tax assets89.689.8
Prepaid expenses and other current assets 236.4  214.8 
Total current assets1,583.01,407.9
Property, plant and equipment, net of accumulated depreciation2,110.12,106.7
Intangible assets, net of accumulated amortization89.087.5
Deferred tax assets, noncurrent71.267.9
Investments in securities51.856.8
Escrowed cash for capital commitments20.3
Other assets 94.3  96.2 
Total assets$4,788.1<
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