HCA Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2012; filed May 8, 2012. The filing registrant is HCA Holdings, Inc. (the company identified in the request as HCA Healthcare). HCA operated 164 hospitals and 109 freestanding surgery centers in 20 states and England.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 or prior date |
|---|---|---|
| Revenue, net of doubtful-account provision | $8.405 billion | $7.406 billion; up 13.5% |
| Provision for doubtful accounts | $794 million | $649 million |
| Income before taxes | $963 million | $517 million |
| Net income attributable to HCA | $540 million | $240 million |
| Diluted earnings per share | $1.18 | $0.52 |
| Adjusted segment EBITDA | $1.823 billion | $1.590 billion |
| Cash from operating activities | $797 million | $918 million |
| Capital expenditures | $335 million | $329 million |
| Cash and cash equivalents | $471 million | $373 million at December 31, 2011 |
| Total debt | $27.902 billion | $27.052 billion at December 31, 2011 |
| Working capital | $1.667 billion | $1.679 billion at December 31, 2011 |
Reported pretax income margin was 11.5%, versus 7.0%; net income attributable to HCA was 6.4% of revenue, versus 3.2%. Salaries and benefits remained 44.5% of revenue; supplies declined to 16.9% from 17.2%, and other operating expenses to 17.6% from 17.8%. Adjusted segment EBITDA is a non-GAAP measure defined by the company and is not a substitute for GAAP results.
Cash from operations fell $121 million, primarily reflecting a $465 million adverse year-over-year working-capital impact, partly offset by a $305 million increase in net income. Investing activities used $437 million; financing activities used $262 million. HCA reported stockholders’ deficit attributable to HCA of $8.613 billion.
Changes versus the prior comparable period
- Revenue rose 13.5% consolidated and 5.1% on a same-facility basis. Consolidated equivalent admissions increased 11.4% and same-facility equivalent admissions increased 4.8%; consolidated growth primarily reflects consolidation of HealthONE after HCA acquired control in October 2011.
- Two retroactive Medicare adjustments increased revenue by a net $188 million and pretax income by $170 million, or $0.22 per diluted share. The prior-period Rural Floor settlement added about $271 million to Q1 revenue; revised SSI ratios reduced revenue by about $83 million.
- Q1 2011 included a $181 million pretax charge for termination of the investor management agreement, which did not recur. These items make the reported earnings comparison less representative of underlying trends.
- Interest expense declined $91 million to $442 million, mainly due to lower average effective interest rates. The average rate on long-term debt fell to 6.5% from 7.9%, while average debt balances were broadly similar.
- Self-pay pressure increased: the combined measure of charity care, uninsured discounts, and doubtful accounts was 27.8% of the specified revenue base, versus 25.7%. Same-facility uninsured admissions rose 11.6%.
Debt, liquidity, outlook, and risks
- HCA issued $1.350 billion of 5.875% senior secured notes due 2022 in February 2012. At March 31, total debt was $27.902 billion, including $1.841 billion due within one year. Available capacity under senior secured credit facilities was $2.750 billion at March 31 and $2.860 billion at April 30.
- The company paid a $2.00-per-share distribution, approximately $971 million in total, in February, funded through its senior secured credit facilities. Management stated operating cash flow, facility availability, and expected debt-market access should meet liquidity needs for the next 12 months.
- Management estimated 2012 capital expenditures of approximately $1.85 billion. Projects under construction had an estimated $1.61 billion of remaining costs over the next five years. For 2012, HCA estimated EHR incentive income of $325–$350 million and related operating expense of $125–$150 million.
- Key operating and policy risks include substantial indebtedness and refinancing, reimbursement changes under Medicare and Medicaid, health reform uncertainty, increased uninsured balances and collection risk, wage and staffing pressures, and the ability to achieve volume and cost targets. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- Contingencies include IRS disputes concerning 2005–2006 tax returns and audits of 2007–2009 returns; unrecognized tax benefits were $513 million, including accrued interest. HCA also disclosed a DOJ review of ICD billing records at 95 hospitals, securities class actions and related derivative suits, and other regulatory and ordinary-course claims. The financial effect of the DOJ review could not be predicted.
- Market risks include $4.544 billion of variable-rate debt; a hypothetical 1% rise in interest rates was estimated to reduce annual pretax earnings by about $45 million. Insurance subsidiaries held $95 million of illiquid auction-rate securities. Professional-liability net reserves for self-insured risks were $926 million, and expected net claim payments for the next 12 months were about $289 million.
Important facts for investors to verify
- How much of revenue and earnings growth is attributable to HealthONE consolidation and the $188 million of prior-period Medicare revenue adjustments, rather than continuing same-facility performance.
- Whether rising uninsured admissions, doubtful-account provisions, and the 27.8% combined self-pay deduction measure lead to further pressure on collections and cash flow.
- Debt maturities, refinancing access, revolver availability, interest-rate exposure, and the capacity to fund planned capital spending after the large stockholder distribution.
- Developments in Texas and other state Medicaid supplemental-payment programs, EHR incentive eligibility and timing, and the pending IRS and DOJ matters and shareholder litigation.