HCA Healthcare, Inc. quarterly report, Q3 FY2013

HCA Holdings, Inc. — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2013. Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise. HCA operated 162 hospitals and 114 freestanding surgery centers across 20 states and England.

Financial performance

Metric	Q3 2013	Q3 2012	Nine months 2013	Nine months 2012
Revenue, net of doubtful-account provision	$8,456	$8,062	$25,346	$24,579
Income before income taxes	$701	$677	$2,146	$2,339
Net income attributable to HCA	$365	$360	$1,132	$1,291
Diluted EPS	$0.79	$0.78	$2.44	$2.81
Adjusted segment EBITDA	$1,603	$1,533	$4,860	$4,925

Q3 revenue rose 4.9%; same-facility revenue rose 4.5%. Growth reflected higher revenue per equivalent admission (+3.9% consolidated; +3.4% same facility) and increased equivalent admissions (+0.9%; +1.1% same facility, respectively).
Q3 attributable net income increased 1.5%, while its margin declined to 4.3% from 4.5%. Adjusted segment EBITDA increased about 4.6%; its margin was approximately 19.0%, broadly flat year over year.
For the first nine months, revenue increased 3.1%, but attributable net income declined 12.3% and adjusted segment EBITDA declined about 1.3%. Attributable net income margin fell to 4.5% from 5.3%; adjusted segment EBITDA margin fell to about 19.2% from 20.0%.
Q3 operating indicators improved modestly: admissions +0.5% consolidated and +0.7% same facility; inpatient surgeries +3.4% and +2.9%; outpatient surgeries +1.5% and +0.4%; emergency visits +0.8% and +0.9%.
Self-pay pressure worsened. Q3 provision for doubtful accounts was $955 million versus $831 million; charity-care deductions and uninsured discounts increased $67 million and $185 million, respectively. Combined charity care, uninsured discounts, and doubtful-account provision were 31.7% of the related revenue base, versus 30.5%. Same-facility uninsured admissions rose 10.1%.

Cash flow, liquidity, and debt

Cash from operations for the first nine months was $2.454 billion, down from $2.912 billion. Management attributed the decline principally to lower net income and a $330 million adverse year-over-year effect from working-capital changes. Q3 operating cash flow was $900 million versus $655 million.
Investing cash outflow was $1.674 billion, including $1.347 billion of property and equipment purchases and $463 million of acquisitions. Financing cash outflow was $1.001 billion. Cash declined $221 million from year-end 2012 to $484 million.
At September 30, cash was $484 million, working capital was $2.352 billion, and total debt was $28.377 billion, including $988 million due within one year. Long-term debt carried an average stated/effective rate of 6.3% and an average life of 6.5 years. Debt was modestly below the December 2012 balance of $28.930 billion.
Credit-facility availability was $2.334 billion at September 30 and $2.594 billion at October 31. Management said operating cash flow, available facilities, and expected capital-market access should meet liquidity needs for the next 12 months.
Capital expenditures excluding acquisitions were $1.347 billion for the nine months; 2013 spending was expected to approximate $2.0 billion. Projects under construction were estimated to require an additional $1.60 billion over five years. Expected net professional-liability claim payments over the next 12 months were approximately $321 million.

Material changes and unusual items

Q3 electronic health record incentive income fell to $75 million from $131 million. Nine-month income was $166 million versus $256 million.
Nine-month 2013 results included a $17 million pretax loss on redemption of $201 million of second-lien notes and $13 million of net losses on facility sales. Nine-month 2012 results benefited from Medicare adjustments that added $170 million to pretax income, or $0.22 per diluted share; this makes the year-over-year earnings comparison less favorable.
Interest expense increased to $458 million in Q3 from $446 million, and to $1.392 billion for nine months from $1.336 billion, principally reflecting higher average debt balances.
On November 1, 2013, selling stockholders sold 30 million shares in a secondary offering and received the proceeds. HCA separately repurchased approximately $500 million of shares from those sellers at $46.92 per share.

Outlook, commentary, and risks

Management estimated 2013 EHR incentive income of $200–$225 million and related operating expenses of $120–$140 million. These estimates depend on incentive funding and continued demonstration of meaningful use.
Management cautioned that the Affordable Care Act’s effects were uncertain, citing marketplace enrollment problems, delayed employer-mandate implementation, and uncertainty over state Medicaid expansions. Medicare and Medicaid payment changes, including sequestration and supplemental-payment programs, could affect revenue.
Uninsured admissions, patient deductibles and copayments, and collection risk are material sensitivities. Texas and Florida generated 55% of Q3 admissions and 46% of revenue; they represented 63% of uninsured admissions.
HCA is highly leveraged and exposed to refinancing, interest-rate, and capital-market risks. Approximately $3.545 billion of long-term debt was variable-rate; management estimated that a 1% rate increase could reduce annualized pretax earnings by about $35 million.
Legal and regulatory matters include DOJ reviews of implantable cardio-defibrillator billing at 95 hospitals and interventional-cardiology medical-necessity reviews at eight hospitals. The company said it could not predict their effects.
In the Health Midwest litigation, a court awarded at least $162 million and ordered an accounting; the amount could increase, and approximately $12 million of plaintiff attorneys’ fees were stipulated. HCA had recorded $175 million of related legal-claim costs in Q4 2012 and planned to appeal after final judgment.
Shareholder class-action claims were proceeding to discovery on remaining issues; related derivative actions were also pending. HCA reported no material changes to previously disclosed risk factors. Management stated disclosure controls were effective and no material change in internal control occurred during the quarter.

Investor verification priorities

Track uninsured admissions, charity and discount deductions, doubtful-account provisions, and patient receivables aging; the filing reported a 92% allowance relative to the stated patient-due receivables balance.
Reconcile earnings trends against the 2012 Medicare benefit, lower EHR incentive income, higher labor and supply costs, and rising interest expense.
Verify progress on operating cash flow and working capital, debt maturities and refinancing, facility availability, and the planned capital-spending program.
Monitor Medicaid supplemental-payment programs, including Texas waiver funding, and the rollout and financial effects of health reform.
Follow developments in the Health Midwest accounting and appeal, DOJ inquiries, securities litigation, and tax examinations; the filing did not quantify potential outcomes for several matters.