Vanguard Health Systems Reports Fourth Quarter and Year End Fiscal 2013 Results

Vanguard Health Systems Reports Fourth Quarter and Year End Fiscal 2013 Results

NASHVILLE, Tenn.--(BUSINESS WIRE)-- Vanguard Health Systems, Inc. (NYS: VHS) today announced financial and operating results for its fourth fiscal quarter and year ended June 30, 2013.

Fourth Quarter Fiscal 2013 Key Metrics (all percentage changes compare Q4 FY2013 to Q4 FY2012):

Consolidated and Same Store:

• Net income attributable to Vanguard Health Systems, Inc. stockholders was $14.5 million, or $0.18 per diluted share, compared to $19.3 million, or $0.24 per diluted share, during the prior year period. The prior year period was positively impacted by a lower than expected 9 percent effective income tax rate resulting from changes to state laws in Michigan and adjustments to state deferred tax asset valuation allowances on loss carryforwards in other states.

• Adjusted EBITDA was $141.5 million compared to $140.8 million during the prior year period.

• Discharges decreased 3.3 percent.

• Adjusted discharges decreased 1.6 percent.

• Patient revenue per adjusted discharge increased 1.5 percent.

Fiscal 2013 Key Metrics (all percentage changes compare fiscal year 2013 to fiscal year 2012):

Consolidated:

• Total revenues increased $50.4 million or 0.8 percent.

• Net income attributable to Vanguard Health Systems, Inc. stockholders was $61.9 million, or $0.75 per diluted share, compared to $57.3 million, or $0.71 per diluted share, during the prior year. The prior year amount was positively impacted by $22.3 million, or $0.28 per diluted share, related to reimbursement updates for the rural floor provision of the Balanced Budget Act of 1997 and revised Supplemental Security Income ratios.

• Adjusted EBITDA was $555.5 million compared to $575.7 million during the prior year. The prior year amount was positively impacted by $34.6 million related to the reimbursement updates.

Same Store:

• Patient revenue per adjusted discharge increased 1.2 percent, absent the impact of the prior year reimbursement updates.

• Discharges decreased 2.6 percent.

• Adjusted discharges decreased 1.2 percent.

A reconciliation of Adjusted EBITDA, a non-GAAP financial measure, to net income attributable to Vanguard Health Systems, Inc. stockholders for the quarters and years ended June 30, 2012 and 2013 is included in this release.

As previously announced, we have signed a definitive agreement and plan of merger to be acquired by Tenet Healthcare Corporation (NYS: THC) ("Tenet"). Completion of the transaction remains subject to the satisfaction or waiver of certain customary closing conditions. The transaction is expected to close early in our second quarter of fiscal 2014. As a result of the proposed merger, we will not have a conference call to discuss our financial results for the fourth quarter and fiscal year ended June 30, 2013.

Fourth Quarter Analysis

Consolidated total revenues increased $62.7 million, or 4.3 percent, during the fourth quarter of fiscal 2013 compared to the prior year period. Health plan premium revenues increased $18.5 million, or 11.1 percent, during the fourth quarter of fiscal 2013 compared to the prior year period as a result of a capitation rate increase at Phoenix Health Plan ("PHP"), increased enrollment at Abrazo Advantage Health Plan in Arizona and the addition of ProCare Health Plan in Michigan. Health plan claims expense increased significantly during the fourth quarter of fiscal 2013 compared to the prior year period due to provider rate increases mandated by the Arizona Health Care Cost Containment System ("AHCCCS") for certain services, most of which were effective April 1, 2013, and changes in actuarial assumptions related to the acuity of certain member groups. Uncompensated care as a percentage of net patient revenues (prior to uncompensated care deductions) was 21.6 percent during the fourth quarter of fiscal 2013 compared to 19.5 percent during the prior year period.

Substantially all of the acquisition related expenses of $7.9 million during the fourth quarter of fiscal 2013 related to legal, advisory and other costs associated with the Tenet transaction. During the fourth quarter of fiscal 2013, we also incurred $5.2 million in severance costs related to our restructuring of the Detroit market operations and recognized a $14.6 million gain on disposal of assets, substantially all of which related to our sale of a portion of our laboratory business in Illinois in June 2013.

Fiscal Year Analysis

Consolidated total revenues increased $50.4 million, or 0.8 percent, during the year ended June 30, 2013 compared to the prior year. Health plan premium revenues, on a same store basis, decreased $34.4 million, or 4.7 percent, during the year ended June 30, 2013 compared to the prior year due to the full year impact of the changes to Medicaid eligibility made by AHCCCS, effective October 1, 2011, and the resulting impact on PHP's enrollment. Uncompensated care as a percentage of net patient revenues (prior to uncompensated care deductions) was 21.3 percent during the year ended June 30, 2013 compared to 19.1 percent for the prior year, absent the impact of the prior year reimbursement updates.

Balance Sheet and Cash Flows

As of June 30, 2013, we had cash of $624.0 million and total debt of $2,996.2 million. These balances reflect the impact of the additional $300.0 million of borrowings under our term loan credit facility during the third quarter of fiscal 2013.

Cash flows from operating activities improved by $187.2 million during the year ended June 30, 2013 compared to the prior year. Changes in net operating assets and liabilities negatively impacted operating cash flows by $64.8 million during the year ended June 30, 2013 compared to a negative impact of $292.8 million during the prior year. We made $206.3 million of interest and income tax payments during the year ended June 30, 2013, which was $39.4 million higher than these payments during the prior year. Interest payments were higher due to the additional senior notes issued in March 2012, while income tax payments increased as a result of the utilization of significantly all of our federal net operating loss carryforwards during the year ended June 30, 2012. Net days in accounts receivable decreased to 46 days at June 30, 2013 compared to 50 days at June 30, 2012.

Capital expenditures increased 43.4 percent to $420.5 million during the year ended June 30, 2013 compared to the prior year primarily due to increased spending related to The Detroit Medical Center specified capital project commitments and the start of construction of a new hospital in New Braunfels, Texas and other expansion projects.

About Vanguard Health Systems

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 and suburban 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: the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement with Tenet; the failure of the merger to close for any reason, including the failure to satisfy the conditions to consummation of the merger, including receipt of regulatory approvals; the outcome of any legal proceedings that have been or may be instituted against us and others relating to the merger agreement; risks that the proposed merger disrupts our current plans and operations and the potential difficulties in employee retention as a result of the merger; the effect of the pending merger on our physician and patient relationships, operating results and businesses generally; the amount of the costs, fees, expenses and charges related to the merger; the merger agreement restricts our ability to take certain actions without Tenet's approval, including making certain acquisitions, dispositions, investments or capital expenditures and entering into, terminating or amending material contracts; our high degree of leverage and interest rate risk; 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; weakened economic conditions and volatile capital markets; 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; the highly competitive nature of the health care industry; potential lawsuits or other claims asserted against us; 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; our ability to grow our business and successfully implement our business strategies, including growing our ambulatory care services platform; the ability to hire and retain health care professionals; the ability to meet capital needs, including the ability to manage indebtedness; 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.

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