HCA Holdings, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; compared with the corresponding 2015 periods. The filing identifies the registrant as HCA Holdings, Inc. (the hospital and related health care business associated with HCA Healthcare). Amounts are in U.S. dollars unless otherwise noted. Unaudited interim results are not necessarily indicative of full-year results.
Business context and financial performance
At June 30, affiliates operated 169 hospitals and 116 freestanding surgery centers in 20 states and England. HCA reports one operating line of business, organized geographically into the National and American groups and corporate and other.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue, net of doubtful-account provision | $10.319B | $9.897B | $20.579B | $19.573B |
| Income before income taxes | $1.132B | $984M | $2.227B | $2.062B |
| Net income attributable to HCA | $658M | $507M | $1.352B | $1.098B |
| Diluted EPS | $1.65 | $1.18 | $3.34 | $2.54 |
| Adjusted segment EBITDA | $2.052B | $2.008B | $4.055B | $3.969B |
| Operating cash flow | $1.349B | $1.057B | $2.748B | $2.075B |
Revenue grew 4.3% in Q2 and 5.1% in the first half. Q2 growth reflected higher revenue per equivalent admission (+2.4%) and equivalent admissions (+1.9%); same-facility revenue rose 3.7%. For the first half, equivalent admissions increased 2.8% and revenue per equivalent admission rose 2.3%. Q2 admissions were up 0.6%, surgeries 2.4%, and emergency department visits 4.3% on a consolidated basis.
Reported net income attributable to HCA increased 29.8% in Q2 and 23.1% year to date. Comparisons include material items: 2016 benefited from tax benefits of $44M in Q2 and $118M in the first half from adopting share-based payment accounting guidance; excluding that benefit, management calculated effective tax rates of 38.5% for Q2 and 37.6% for the first half. 2015 included a $125M debt-retirement loss. Reported attributable net-income margins were 6.4% versus 5.1% in Q2 and 6.6% versus 5.6% in the first half. Adjusted segment EBITDA was about 19.9% of revenue in Q2 versus 20.3%, and 19.7% year to date versus 20.3%; EBITDA is a non-GAAP measure as defined by the company.
Financial position, liquidity and capital allocation
- Cash and working capital: Cash was $691M at June 30, down from $741M at December 31, 2015. Working capital was $3.699B, compared with $3.716B at year-end.
- Debt: Total debt was $31.452B, up from $30.488B at year-end; average debt in the first half was $30.863B. Debt averaged 5.5% interest, versus 5.8% in the first half of 2015. About $4.165B was variable-rate debt. A hypothetical 1% rate increase was estimated to reduce annual pretax earnings by about $42M. The company reported $1.983B available under secured credit facilities at June 30.
- Cash flow and investment: First-half operating cash flow was $2.748B, up $673M year over year, driven principally by higher net income and favorable working-capital changes. Investing used $1.555B, including $1.172B of property and equipment purchases and $430M of acquisitions. Capital expenditures excluding acquisitions were expected to be approximately $2.7B for 2016; projects under construction carried an estimated $2.7B of additional costs over five years.
- Financing and repurchases: Financing activities used $1.243B in the first half, including $1.858B of share repurchases and $205M of distributions to noncontrolling interests. HCA repurchased 24.427M shares at an average $76.04 per share; $746M remained under the $3B authorization at June 30. In March, it issued $1.5B of 5.25% secured notes due 2026 and arranged a $1.5B secured term loan due 2023, using proceeds in part to refinance term debt.
Material changes, outlook and risks
- Although the doubtful-account provision fell to $762M in Q2 from $1.035B, charity-care and uninsured discounts increased. Combined charity care, uninsured discounts and doubtful-account provisions equaled 32.5% of the related revenue base in Q2, versus 30.7% a year earlier; the comparable first-half measure was 32.3% versus 30.1%. The allowance for doubtful accounts was 95.7% of the $5.273B patient-due receivable balance. Management reported same-facility uninsured admissions rose 5.7% in Q2.
- Salary and benefit costs rose to 45.5% of revenue in Q2 from 45.4%; other operating expenses rose to 18.0% from 17.7%. First-half other operating expenses were 18.1% of revenue versus 17.7%. EHR incentive income fell to $5M in Q2 from $18M and to $9M for the first half from $37M. Management estimated 2016 EHR incentive income of $10M–$15M.
- Management said operating cash flows, facility availability and expected debt-market access should meet liquidity needs for the next 12 months. Expected net professional-liability claim payments over the next 12 months were approximately $364M, including $313M related to retained self-insured claims.
- Contingencies: The Health Midwest litigation had a $458M accrued liability at June 30; the judgment was $434M, with interest accruing at 9% compounded annually. HCA appealed, with briefing expected to be completed by November 2016. In the UK, a Competition and Markets Authority final decision on its London private-hospital review was expected in Q3 2016; prior proposed remedies had included divestiture, though the authority’s March 2016 provisional decision found none of the additional remedies effective and proportionate.
- Other risks: HCA cited substantial leverage and refinancing needs; changes to Medicare, Medicaid and health reform; possible reductions or restructuring of supplemental-payment programs; uninsured-account collectability; labor costs and staffing; managed-care pricing and volumes; regulatory scrutiny, investigations and litigation; tax audits; and interest-rate exposure. Texas’s Medicaid waiver was extended through December 2017, but future terms and supplemental payments remained uncertain. Unrecognized tax benefits were $542M, including accrued interest, and the company could not estimate the range of possible changes within 12 months.
No full-year earnings or revenue guidance is stated in the supplied filing text. Management cautioned that interim performance should not be treated as a forecast of full-year results.
Most important facts for investors to verify
- How much of earnings growth reflects operating performance versus the $118M year-to-date share-based tax benefit and the prior-year $125M debt-retirement charge.
- Whether the rise in charity care, uninsured discounts and the high receivable allowance signals worsening collections or a change in payer mix.
- Progress toward the approximately $2.7B 2016 capital-spending plan, the multiyear construction commitment and acquisition spending, relative to operating cash flow and debt levels.
- Developments in the Health Midwest appeal, the UK competition review, tax examinations and government inquiries, including any changes to recorded reserves or potential remedies.
- Debt refinancing access, variable-rate exposure, credit-facility availability and the continued scale of share repurchases relative to leverage and liquidity needs.