Business context and reporting period
HCA Holdings, Inc. filed this Form 10-K for the fiscal year ended December 31, 2012. HCA operated 162 hospitals and 112 freestanding surgery centers in 20 states and England. The filing also provides unaudited fourth-quarter results; it is an annual filing, not a standalone quarterly report.
Financial and operating performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue, net of doubtful accounts | $33.013 billion | $29.682 billion |
| Income before income taxes | $2.894 billion | $3.561 billion |
| Net income | $2.006 billion | $2.842 billion |
| Net income attributable to HCA | $1.605 billion; diluted EPS $3.49 | $2.465 billion; diluted EPS $4.97 |
| Adjusted segment EBITDA | $6.531 billion | $6.061 billion |
| Cash provided by operating activities | $4.175 billion | $3.933 billion |
| Capital expenditures | $1.862 billion | $1.679 billion |
| Debt at year-end | $28.930 billion | $27.052 billion |
Revenue before doubtful-account provisions was $36.783 billion. The $3.770 billion provision for doubtful accounts reduced it to reported revenue. Adjusted segment EBITDA is a non-GAAP measure defined by HCA; it equaled approximately 19.8% of reported revenue, calculated from the disclosed figures.
At December 31, 2012, cash and cash equivalents were $705 million, working capital was $1.591 billion, and total assets were $28.075 billion. HCA reported a stockholders’ deficit of $8.341 billion. Available capacity under its senior secured credit facilities was reported as $2.964 billion at year-end. Approximately $2.930 billion of long-term debt had variable rates; the remainder was fixed-rate.
Fourth-quarter 2012 revenue was $8.434 billion, net income was $427 million, and net income attributable to HCA was $314 million (diluted EPS $0.68). Fourth-quarter 2011 revenue was $7.769 billion and net income attributable to HCA was $1.935 billion (diluted EPS $4.25), substantially affected by the $1.522 billion pretax HealthONE remeasurement gain.
Material changes versus the prior comparable period
- Annual revenue increased 11.2%; same-facility revenue rose 4.5%. Consolidated equivalent admissions rose 9.1%, while revenue per equivalent admission rose 2.0%. HCA said the consolidated increase primarily reflected full-period consolidation of HealthONE, whose revenue included in HCA’s results increased to $2.203 billion from $347 million in 2011.
- Despite revenue growth, net income attributable to HCA fell 34.9%. The comparison is affected by 2011’s $1.522 billion pretax HealthONE gain; 2012 also included $175 million of legal claim costs. HCA reported 2012 gains on facility sales of $15 million, versus $142 million in 2011.
- Interest expense declined $239 million to $1.798 billion, primarily because the average interest rate fell to 6.6% from 7.7%, even as average debt increased.
- Operating cash flow increased $242 million. Management attributed much of the increase to a $236 million favorable working-capital impact, partly offset by higher tax payments.
- Uncompensated-care deductions and doubtful-account provisions rose to $13.841 billion from $11.214 billion. Their combined ratio to revenue plus these deductions increased to 29.5% from 27.4%. The allowance for doubtful accounts was 93% of the $5.228 billion patient-due receivables balance.
- HCA paid $3.142 billion in 2012 distributions to stockholders and holders of certain vested awards, totaling $6.50 per share and award. The distributions were funded in part with revolving-credit availability and proceeds from $1.000 billion of notes issued in December.
Outlook, risks, contingencies and unusual items
- Management expected 2013 capital expenditures of approximately $2.0 billion and stated that operating cash flow, available credit facilities and anticipated debt-market access should cover expected liquidity needs for the next 12 months. Projects under construction had an estimated $1.9 billion remaining cost over five years.
- For 2013, HCA estimated EHR incentive income of $200 million to $225 million and related operating expenses of $110 million to $130 million. These estimates depend on continued meaningful use and program funding.
- HCA is highly leveraged and warned that debt service, refinancing, covenants, variable interest rates and access to financing could constrain investment and flexibility. Contractual obligations totaled $45.081 billion, including scheduled debt and interest payments and operating leases.
- Government reimbursement is a material exposure: Medicare and Medicaid represented 43% of 2012 revenue. HCA cited scheduled reimbursement reductions, quality and readmission penalties, Medicare and Medicaid DSH cuts, budget-sequestration uncertainty, and uncertainty over state participation in Medicaid expansion. The company estimated its Medicare DSH payments could decline by approximately $200 million in federal fiscal 2014.
- Rising uninsured and self-pay exposure, payer mix, collection performance, managed-care contracting, labor costs, competition, and concentration in Florida and Texas are key operating risks. Florida and Texas together generated about 47% of 2012 revenue.
- In the Health Midwest litigation, a Missouri court ruled for the plaintiff in January 2013 and awarded at least $162 million, ordered an accounting of capital and charity-care commitments, and indicated it would award attorney fees. HCA recorded $175 million of legal claim costs in fourth-quarter 2012 and planned to appeal; the award could increase depending on the accounting.
- HCA disclosed ongoing DOJ reviews of implantable cardio-defibrillator billing at 95 hospitals and a government request for interventional-cardiology medical-necessity records at eight hospitals. The potential effect of either matter was not predictable from the filing. An IPO-related securities class action and appeals in the New Hampshire hospital litigation also remained pending.
- Management reported effective disclosure controls and internal control over financial reporting as of year-end. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much of revenue and volume growth reflects HealthONE consolidation versus underlying same-facility performance.
- Whether self-pay deductions, bad-debt provisions, patient receivables and collection trends continue to worsen, and how they affect cash conversion.
- The debt maturity and refinancing profile, covenant headroom, variable-rate exposure, and the sustainability of large shareholder distributions alongside capital needs.
- The outcome and possible financial exposure from the Health Midwest judgment and the DOJ billing and medical-necessity reviews.
- The realized effect of Medicare and Medicaid payment changes, DSH reductions, state Medicaid-expansion decisions and supplemental-payment programs.
- Whether 2013 capital spending and EHR income and expense estimates were achieved; the filing provides estimates, not subsequent results.