Adjusted EBITDA and Diluted EPS Outlook Updated for Fiscal 2012

NASHVILLE, Tenn.--(BUSINESS WIRE)--Apr. 30, 2012-- Vanguard Health Systems, Inc. (NYSE: VHS) today announced financial and operating results for its third fiscal quarter and nine months ended March 31, 2012.

Third Quarter Fiscal 2012 Key Metrics (all percentage changes compare Q3 FY2012 to Q3 FY2011):

Consolidated:

• Total revenues increased $174.0 million or 12.4 percent
• Net income attributable to Vanguard Health Systems, Inc. stockholders was $44.0 million, or $0.55 per diluted share, compared to $2.8 million, or $0.05 per diluted share, during the prior year period
• Adjusted EBITDA increased 37.3 percent to $176.6 million
• The impact of the updates to Medicare reimbursement estimates, described further below, positively impacted total revenues by $49.7 million, net income attributable to Vanguard Health Systems, Inc. stockholders by $22.3 million, or $0.28 per diluted share, and Adjusted EBITDA by $34.6 million during the current year quarter

Same Hospital:

• Net patient service revenues increased 7.7 percent and health plan premium revenues declined 14.6 percent
• Adjusted discharges increased 2.0 percent
• Discharges declined 1.0 percent
• The impact of the updates to Medicare reimbursement estimates positively impacted same hospital patient service revenues by $48.6 million during the current year quarter

Year to Date Fiscal 2012 Key Metrics (all percentage changes compare nine months YTD FY2012 to nine months YTD FY2011):

Consolidated:

• Total revenues increased 41.3 percent
• Net income attributable to Vanguard Health Systems, Inc. stockholders was $38.0 million, or $0.47 per diluted share, compared to a loss of $1.0 million, or $(0.02) per diluted share, during the prior year period
• Adjusted EBITDA increased 48.6 percent to $434.9 million
• The impact of the updates to Medicare reimbursement estimates, described further below, positively impacted total revenues by $49.7 million, net income attributable to Vanguard Health Systems, Inc. stockholders by $22.3 million, or $0.28 per diluted share, and Adjusted EBITDA by $34.6 million during the current year period

Same Hospital:

• Net patient service revenues increased 5.2 percent and health plan premium revenues declined 11.6 percent
• Adjusted discharges increased 1.7 percent
• Discharges declined 2.0 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 and nine-month periods ended March 31, 2011 and 2012 is included in this release.

Updates to Medicare Reimbursement Estimates

Financial results for the quarter ended March 31, 2012 were positively impacted by two separate adjustments to update our estimates of Medicare reimbursement, one for settlement of the rural floor provision of the Balanced Budget Act of 1997 and the other for revised Supplemental Security Income (“SSI”) ratios used for calculating Medicare disproportionate share reimbursement. We described the background and recent developments related to each of these Medicare reimbursement components in our Current Report on Form 8-K filed on April 24, 2012.

We recognized approximately $40.6 million of additional revenues related to the rural floor provision settlement, proceeds from which we expect to receive on or about June 30, 2012. The SSI update increased our Medicare reimbursement by approximately $9.1 million for the quarter ended March 31, 2012. The combination of the rural floor provision settlement, net of legal expenses, the SSI factor update, and incremental incentive compensation costs related to these Medicare reimbursement updates resulted in increases to total revenues, net income attributable to Vanguard Health Systems, Inc. stockholders and Adjusted EBITDA of $49.7 million, $22.3 million and $34.6 million, respectively, for the quarter and nine months ended March 31, 2012. Diluted earnings per share was positively impacted by $0.28 per share for both the quarter and nine months ended March 31, 2012 related to these items.

Third Quarter Analysis Absent the Impact of Updates to Medicare Reimbursement Estimates

Consolidated total revenues, absent the impact of updates to Medicare reimbursement estimates, increased $124.3 million during the third quarter of fiscal 2012 compared to the prior year period, primarily due to the acquisition of Valley Baptist Health System in September 2011. Same hospital net patient service revenues increased 3.6 percent during the third quarter of fiscal 2012 resulting from a 1.1 percent increase in patient revenue per adjusted discharge and a 2.0 percent increase in adjusted discharges. During the third quarter of fiscal 2012, we recognized $2.4 million of other income related to Medicaid EHR incentives. Health plan premium revenues, on a same store basis, decreased 14.6 percent during the third quarter of fiscal 2012 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 since the third quarter of fiscal 2011.

Same hospital uncompensated care as a percentage of net patient revenues (prior to the uncompensated care deductions) increased from 15.5 percent during the third quarter of fiscal 2011 to 17.5 percent during the third quarter of fiscal 2012 as a result of price increases and greater difficulty in collecting patient copayment and deductible balances.

Fiscal Year To Date Analysis Absent the Impact of Updates to Medicare Reimbursement Estimates

Consolidated total revenues, absent the impact of updates to Medicare reimbursement estimates, increased $1,264.5 million during the nine months ended March 31, 2012 compared to the prior year period, primarily due to the acquisitions of The Detroit Medical Center (“DMC”) in January 2011 and Valley Baptist Health System in September 2011. Same hospital net patient service revenues increased 3.5 percent during the current year period resulting from a 1.8 percent increase in patient revenue per adjusted discharge and a 1.7 percent increase in adjusted discharges. Health plan premium revenues, on a same store basis, decreased 11.6 percent during the current year period due to the factors discussed above in the Third Quarter Analysis Absent the Impact of Updates to Medicare Reimbursement Estimates.

Same hospital uncompensated care as a percentage of net patient revenues (prior to the uncompensated care deductions) increased from 17.7 percent during the prior year period to 21.5 percent during the current year period as a result of price increases, a higher percentage of uninsured discharges and greater difficulty in collecting patient copayment and deductible balances.

A reconciliation of consolidated total revenues absent the impact of updates to Medicare reimbursement estimates, a non-GAAP financial measure, to total revenues for the quarter and nine months ended March 31, 2012 is included in this release.

Balance Sheet and Cash Flows

We had cash of $437.6 million and total debt of $2,710.9 million as of March 31, 2012. As previously disclosed, on March 30, 2012, we completed an offering of $375.0 million aggregate principal amount of 7.750% Senior Notes due 2019 (the “New Notes”). The New Notes were issued at an offering price of 99.25% plus accrued interest from February 1, 2012, and were issued as additional notes under the Indenture governing our previously issued 7.750% Senior Notes and have the same terms and features. The proceeds from the New Notes will be used for general corporate purposes, including working capital, capital expenditures, acquisitions and payment of expenses related to the offering. We used a portion of the net proceeds from the offering to repay all indebtedness outstanding under our revolving credit facility on March 30, 2012. Additionally, in April 2012, we received commitments from participating financial institutions to increase the borrowing availability under our revolving credit facility from $260.0 million to $365.0 million, subject to our satisfaction of certain conditions.

Cash flows from operating activities were $10.4 million during the first nine months of fiscal 2012. Working capital increased $303.1 million, and we made $144.7 million of interest and income tax payments. The increase to working capital primarily resulted from higher than normal net accounts receivable days due to significant payment delays from certain governmental programs and certain third party billing and coding delays; the impact of the rural floor settlement and SSI update; and higher supplemental program receivables with governmental entities. Capital expenditures increased 41.0 percent to $196.1 million during the first nine months of fiscal 2012 compared to the prior year period.

Updated Outlook for Fiscal Year 2012

We update below our previously issued fiscal year 2012 outlook for ranges of projected Adjusted EBITDA, excluding the updates to Medicare reimbursement estimates and related expenses; projected net income attributable to Vanguard Health Systems, Inc. stockholders, excluding the updates to Medicare reimbursement estimates and related expenses, debt extinguishment costs and acquisition related expenses; and projected diluted earnings per share attributable to Vanguard Health Systems, Inc. stockholders, excluding the updates to Medicare reimbursement estimates and related expenses, debt extinguishment costs and acquisition related expenses. These updates include the estimated additional interest incurred from the sale of the New Notes for the fourth quarter of fiscal 2012, which we expect to decrease diluted earnings per share by $0.06.

Projected Adjusted EBITDA - previous outlook $520-$545 million; revised outlook $525-$535 million

Projected net income attributable to Vanguard Health Systems, Inc. stockholders -
previous outlook $56.3-$69.1 million; revised outlook $56.3-$60.7 million

Projected diluted earnings per share attributable to Vanguard Health Systems, Inc. stockholders -
previous outlook $0.71-$0.86 per diluted share; revised outlook $0.70-$0.75 per diluted share

We are also adjusting our projected fiscal year 2012 capital expenditures to a range of $320 to $330 million from our previous estimate of $335 to $365 million.

Earnings Conference Call

We will host a conference call at 11:00 a.m. EST on May 1, 2012. All interested parties are invited to access a live webcast of the conference call on our website at http://investor.vanguardhealth.com or at www.earnings.com. If you are unable to participate during the live webcast, the webcast will be available on a replay basis at http://investor.vanguardhealth.com 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 healthcare delivery networks in urban markets.

Cautionary Statement about Preliminary Results and Other 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; post-payment claims reviews by governmental agencies could result in additional costs to us; our ability to grow our business and successfully implement our business strategies; our ability to successfully integrate DMC, Valley Baptist Health System, and hospitals 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 healthcare industry; governmental regulation of the healthcare 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, including disproportionate share payments, indirect medical education/graduate medical education payments 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 healthcare professionals, including physicians and nurses; the currently unknown effect on us of the major federal healthcare reforms enacted by Congress in March 2010 or other potential additional federal or state healthcare reforms; potential adverse impact of known and unknown governmental investigations and audits; 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 healthcare plans; failure of the Arizona Health Care Cost Containment System (“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, as noncompliance could subject it to fines, penalties or termination of the contract; 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; increased compliance costs from further government regulation of the healthcare industry and our failure to comply, or allegations of our failure to comply, with applicable laws and regulations; the geographic concentration of our operations; technological and pharmaceutical improvements that increase the cost of providing, or reduce the demand for, healthcare 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; volatility of materials and labor costs for, or state efforts to regulate, potential construction projects that may be necessary for future growth; changes in accounting practices; and our ability to demonstrate meaningful use of certified electronic health record technology and to receive the related Medicare or Medicaid incentive payments.

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. We advise you, however, to consult any additional disclosures we make in our filings with the Securities and Exchange Commission. 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.

Source: Vanguard Health Systems, Inc.

Vanguard Health Systems, Inc.
Gary Willis, 615-665-6098
Senior Vice President and Chief Accounting Officer