HCA Holdings, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; filed May 6, 2014. The filing identifies the registrant as HCA Holdings, Inc. HCA operated 165 hospitals and 115 freestanding surgery centers in 20 states and England.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue, net of doubtful-account provision | $8.832 billion | $8.440 billion; up 4.6% |
| Revenue before doubtful-account provision | $9.683 billion | $9.194 billion; up 5.3% |
| Income before taxes | $680 million | $639 million |
| Net income attributable to HCA | $347 million | $344 million |
| Diluted EPS | $0.76 | $0.74 |
| Adjusted segment EBITDA | $1.644 billion | $1.568 billion |
| Cash from operating activities | $443 million | $740 million |
- Net income margin attributable to HCA was approximately 3.9% of reported revenue, versus 4.1% a year earlier. Adjusted segment EBITDA margin was approximately 18.6%, broadly unchanged. These percentages are calculated from reported amounts; adjusted EBITDA is a non-GAAP measure.
- Salaries and benefits were 45.9% of revenue (46.4% in Q1 2013); supplies were 17.3% (17.5%); other operating expenses rose to 18.6% from 18.1%.
- Cash and cash equivalents were $850 million at March 31, up from $414 million at year-end. Working capital was $2.986 billion. Total debt was $28.924 billion, including $1.041 billion due within one year; stockholders’ deficit was $7.828 billion.
- Capital expenditures were $400 million. Cash from operations less property-and-equipment purchases was approximately $43 million, a simple calculation that excludes acquisitions and other investing activity.
Changes and operating trends
- Revenue growth reflected a 3.9% increase in revenue per equivalent admission and a 0.7% increase in equivalent admissions. Same-facility revenue rose 3.4%, while same-facility equivalent admissions declined 0.3%.
- Consolidated admissions increased 0.2%; same-facility admissions declined 0.6%. Inpatient surgeries rose 1.3% consolidated, while outpatient surgeries declined 0.3%.
- The doubtful-account provision increased $97 million to $851 million. Charity care and uninsured discounts also rose; combined with the provision, these deductions equaled 31.6% of the relevant revenue base, versus 30.0% a year earlier. The allowance for doubtful accounts represented approximately 94% of the $5.810 billion patient-due accounts receivable balance.
- Operating cash flow fell $297 million year over year. Management attributed the decline primarily to a $170 million adverse change in working-capital items and a $206 million decline related to income taxes.
- Interest expense decreased to $460 million from $472 million, as the average effective long-term debt rate fell to 6.5% from 6.7%; average debt balances were similar.
Outlook, risks and unusual items
- No full-year revenue or earnings guidance is provided. HCA estimated 2014 capital expenditures, excluding acquisitions, of approximately $2.2 billion, with about $2.16 billion of remaining costs for projects under construction over the next five years. It expected to fund spending with internally generated cash and borrowings.
- Management estimated 2014 EHR incentive income and related operating expenses each at $110 million to $130 million. Q1 EHR incentive income was $30 million; related operating expense was $43 million.
- Q1 included a $21 million pretax gain on facility and other asset sales and $78 million of legal claim costs. The legal charge followed an April 25 stipulation in the Health Midwest case concerning an additional capital-expenditure shortfall; HCA reserved its right to contest the underlying ruling. The company was accruing interest at 9%; further accounting and hearings remained pending.
- In March, HCA issued $3.5 billion of senior secured notes and repaid $500 million of notes at maturity. In April, it used proceeds to redeem $2.75 billion of higher-coupon secured notes; the expected pretax debt-retirement loss was approximately $226 million. Debt remained substantial, though management said available cash flows, credit facilities and expected market access should meet liquidity needs for the next 12 months.
- Risks include significant leverage and refinancing needs; reimbursement and health-reform changes; uninsured and deductible collection exposure; and government investigations and litigation. DOJ reviews include ICD billing at 95 hospitals and interventional-cardiology medical-necessity reviews at eight hospitals; possible effects were not estimable. The IRS began examining 2011–2012 federal returns; unrecognized tax benefits were $484 million, including interest.
- The UK Competition and Markets Authority ordered HCA to sell either London Bridge and Princess Grace hospitals or Wellington Hospital, including the Platinum Medical Centre. HCA disagreed and intended to appeal. A securities class action remained in discovery. HCA reported disclosure controls as effective and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether revenue growth and future margins hold up as doubtful-account provisions and uninsured discounts remain elevated.
- Actual operating cash generation, working-capital trends, and funding available for planned capital spending and near-term debt maturities.
- Final outcomes and cash exposure from the Health Midwest case, DOJ reviews, tax examinations, securities litigation, and the UK hospital-divestiture order.
- Completion and economics of the April debt redemptions, including the expected $226 million loss and resulting interest-cost savings.
- Whether HCA achieves EHR meaningful-use requirements and realizes the estimated incentive income and expense levels.