HCA Holdings, Inc. — 2011 Form 10-K
Business context and period: The filing covers the fiscal year ended December 31, 2011; the fourth-quarter figures are unaudited supplemental data. HCA operated 163 hospitals and 108 freestanding surgery centers across 20 U.S. states and England. The company provides acute, psychiatric and rehabilitation care, along with outpatient services.
Key financial metrics
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue, net of doubtful-account provision | $29.682 billion | $28.035 billion |
| Revenue before doubtful-account provision | $32.506 billion | $30.683 billion |
| Net income attributable to HCA | $2.465 billion | $1.207 billion |
| Diluted earnings per share | $4.97 | $2.76 |
| Adjusted segment EBITDA | $6.061 billion | $5.868 billion |
| Cash from operating activities | $3.933 billion | $3.085 billion |
| Capital expenditures | $1.679 billion | $1.325 billion |
| Total debt | $27.052 billion | $28.225 billion |
| Cash and cash equivalents at year-end | $373 million | $411 million |
| Working capital at year-end | $1.679 billion | $2.650 billion |
Operating cash flow improved by $848 million, primarily due to lower income-tax payments. Investing cash use was $2.995 billion, including $1.682 billion for acquisitions. Financing cash use was $976 million. Stockholders’ deficit was $7.014 billion at year-end.
Adjusted segment EBITDA margin was approximately 20.4% of reported revenue, versus 20.9% in 2010. Salaries and benefits rose to 45.3% of revenue from 44.5%; supplies declined to 17.4% from 17.7%, while other operating expenses increased to 18.5% from 17.9%. Interest expense was $2.037 billion, down from $2.097 billion. Approximately $5.082 billion of debt was variable-rate; management estimated a 1 percentage-point rate increase could reduce annual pretax earnings by about $51 million.
Material changes versus the prior comparable period
- Revenue increased 5.9%; same-facility revenue rose 3.3%. Consolidated equivalent admissions increased 5.2%, while revenue per equivalent admission rose only 0.7%. Management cited a shift from more complex surgical cases toward less acute medical cases.
- Admissions increased 4.2% overall and 2.3% on a same-facility basis. Emergency-room visits rose 7.7% overall; inpatient surgeries declined 0.5%.
- Uncompensated-care deductions—charity care, uninsured discounts and doubtful accounts—rose to $11.214 billion from $9.626 billion. Their share of revenue plus these deductions increased to 27.4% from 25.6%. The allowance covered about 92% of $4.478 billion in patient-due receivables.
- HCA acquired the remaining approximately 40% of its HealthONE Denver joint venture for $1.450 billion and began consolidating it in November. The transaction generated a $1.522 billion pretax remeasurement gain; reported 2011 net income also reflected $481 million of debt-retirement losses, $181 million of management-agreement termination costs and $142 million of facility-sale gains.
- The 2011 effective tax rate was 22.6% by management’s presentation, versus 35.3% in 2010, principally reflecting the nontaxable HealthONE gain. Excluding identified adjustments, management reported rates of 37.3% and 37.6%, respectively.
Fourth quarter: Revenue was $7.769 billion, net income was $2.042 billion, net income attributable to HCA was $1.935 billion, and diluted EPS was $4.25. The quarter included $1.424 billion of pretax gain on the HealthONE acquisition and $84 million of facility-sale gains; therefore, reported quarterly earnings are not a clean indicator of recurring performance.
Outlook, commentary, risks and unusual items
- Management gave no consolidated 2012 revenue or earnings guidance in the provided filing text. It expected operating cash flow, available credit facilities and access to debt markets to meet liquidity needs for the next 12 months.
- Management planned approximately $1.9 billion of 2012 capital expenditures; projects under construction were expected to require about $1.5 billion more over five years. It estimated 2012 EHR incentive income of $325–$350 million and related operating expense of $140–$160 million.
- Debt remained substantial, with covenants, collateral pledges and significant scheduled debt service. The filing identifies refinancing, variable interest rates and restricted financial flexibility as risks. Available capacity under the senior secured and asset-based revolving facilities was reported at $1.935 billion and $202 million, respectively, after specified adjustments.
- Medicare and Medicaid represented 44.5% of 2011 revenue. The filing highlights prospective reimbursement reductions, productivity adjustments, readmission and quality-based penalties, and future Medicare and Medicaid disproportionate-share payment cuts. Florida and Texas accounted for about 50% of consolidated revenue, creating geographic concentration risk.
- Florida and Texas Medicaid budget actions were estimated to reduce payments to HCA hospitals by approximately $35 million and $60 million, respectively, during 2012. Texas supplemental Medicaid payments were $540 million in 2011 and depended on state and federal program arrangements.
- Other principal risks include payer pressure and contract negotiations, rising labor costs, uninsured and patient-responsibility receivables, regulatory compliance and government audits, litigation, severe weather exposure, and execution of EHR and ICD-10 systems. The DOJ was reviewing ICD billing and medical records at 95 hospitals; the potential effect was unclear. Securities class actions related to IPO disclosures and derivative suits were pending. HCA also contested IRS matters related to 2005–2006 returns.
- The board declared a post-year-end distribution of approximately $975 million, expected to be funded with cash and borrowings under existing credit facilities. HCA repurchased $1.503 billion of stock in 2011 and completed a $2.506 billion IPO, net of offering costs.
Important facts for investors to verify
- How much of 2011 and fourth-quarter earnings reflects recurring operations versus the HealthONE remeasurement gain and other unusual items.
- Whether growth in uninsured discounts, charity care and patient receivables continues to pressure collections and operating cash flow.
- Debt maturities, covenant headroom, revolving-credit availability and sensitivity to interest rates and refinancing conditions.
- The sustainability of Medicaid supplemental payments, particularly in Texas, and the impact of planned public-payer reimbursement changes.
- Progress against 2012 capital spending and EHR incentive and expense estimates, alongside the status and potential exposure of regulatory reviews, litigation and tax disputes.