HCA Holdings, Inc. (HCA Healthcare) — 2013 Q2 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; unaudited. The company operated 161 hospitals and 114 freestanding surgery centers across 20 states and England.
Financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue, net of doubtful accounts | $8.450bn | $8.112bn | $16.890bn | $16.517bn |
| Income before income taxes | $806m | $699m | $1.445bn | $1.662bn |
| Net income attributable to HCA | $423m | $391m | $767m | $931m |
| Diluted EPS | $0.91 | $0.85 | $1.66 | $2.03 |
| Adjusted segment EBITDA | $1.689bn | $1.569bn | $3.257bn | $3.392bn |
Q2 revenue increased 4.2%; same-facility revenue rose 4.0%. Consolidated equivalent admissions increased 1.1% and revenue per equivalent admission rose 3.0%. Q2 net income attributable to HCA increased 8.1%; approximate net margin was 5.0%, versus 4.8%. For the first half, revenue increased 2.3%, but HCA-attributable net income declined 17.7%; approximate net margin was 4.5%, versus 5.6%.
Q2 adjusted segment EBITDA rose about 8%; first-half adjusted segment EBITDA fell about 4%. First-half results included a $17m pretax debt-retirement loss and $12m in pretax facility-sale losses. First-half 2012 benefited from Medicare adjustments that added $170m to pretax income, or $0.22 per diluted share.
Q2 salaries and benefits were 45.5% of revenue versus 45.7%; supplies were 17.4% versus 17.5%; other operating expenses were 17.8% versus 18.5%. First-half salaries and benefits and supplies increased as a share of revenue, to 46.0% and 17.5%, respectively, from 45.1% and 17.2%.
Cash flow, debt and liquidity
- First-half operating cash flow was $1.554bn, down from $2.257bn. Management attributed the decline principally to a $466m unfavorable working-capital impact, lower net income and higher income tax payments. Q2 operating cash flow was $814m, down from $1.460bn.
- First-half capital expenditures were $896m, compared with $784m; investing cash outflow was $790m. Cash and cash equivalents fell to $462m from $705m at year-end 2012. Working capital was $1.771bn, up from $1.591bn.
- Total debt was $28.200bn at June 30, down from $28.930bn at year-end; $1.456bn was due within one year. First-half interest expense was $934m versus $890m. Available credit under secured facilities was $2.985bn at June 30 and $2.645bn at July 31.
- First-half financing cash outflow was $1.007bn, including $768m of long-term debt repayments and $196m of distributions to noncontrolling interests. The company redeemed $201m of second-lien notes in March at a premium, recording a $17m pretax loss.
Changes, outlook and material risks
- Uninsured-related revenue deductions (charity care, uninsured discounts and doubtful-account provision) totaled $3.838bn in Q2, up from $3.394bn; they were 31.2% of the related revenue measure, versus 29.5%. Same-facility uninsured admissions rose 6.3% in Q2. The allowance for doubtful accounts was about 93% of the $5.356bn patient-due receivables balance.
- Management estimated 2013 capital expenditures of approximately $2.0bn; projects under construction required an estimated additional $1.73bn over five years. It expected 2013 EHR incentive income of $200m–$225m and related operating expense of $120m–$140m. Management said operating cash flow, available credit and anticipated debt-market access should meet expected liquidity needs for the next 12 months.
- Risks include substantial indebtedness and refinancing needs; Medicare, Medicaid and health-reform payment changes; uninsured receivable collectibility and charity-care costs; labor and supply cost pressures; and regulatory, litigation and tax matters. Management stated the effect of health reform remained uncertain. A hypothetical 1% increase in interest rates was estimated to reduce annual pretax earnings by about $29m.
- Significant legal matters include the Health Midwest case: a 2013 court ruling awarded at least $162m and ordered a further accounting of capital and charity-care commitments; the judgment could increase. HCA had recorded $175m of legal claim costs in Q4 2012 and planned to appeal after final judgment. DOJ reviews of ICD billing at 95 hospitals and interventional cardiology medical-necessity reviews at eight hospitals remained ongoing; outcomes were not predictable.
- Unrecognized tax benefits were $408m at June 30. The company expected an IRS audit of its 2010 and 2011 federal returns to begin in 2013 and said potential changes to tax-benefit liabilities could not then be estimated.
Most important facts for investors to verify
- Whether the rise in uninsured discounts and charity-care deductions, and the high doubtful-account allowance, affect future collections and reported revenue.
- Whether operating cash flow rebounds from the first-half decline and supports the planned capital spending and debt service.
- Progress and potential financial exposure in the Health Midwest accounting and appeal, DOJ reviews, and remaining securities litigation claims.
- Whether Medicare/Medicaid supplemental payment programs and EHR incentive assumptions remain supportable.
- Debt maturities, credit availability and interest-rate exposure, including the company’s ability to refinance on acceptable terms.