HCA Holdings, Inc. (HCA) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011; comparative periods are 2010. Figures are in U.S. dollars. HCA operates hospitals and related health care facilities; at quarter-end it operated 157 hospitals and 98 freestanding surgery centers.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue, net of doubtful-account provision | $7.310B | $6.926B | $22.004B | $20.874B |
| Income before taxes | $123M | $468M | $1.107B | $1.667B |
| Net income attributable to HCA | $61M | $243M | $530M | $924M |
| Diluted EPS | $0.11 | $0.55 | $1.04 | $2.11 |
| Adjusted segment EBITDA | $1.412B | $1.357B | $4.422B | $4.421B |
| Interest expense | $519M | $525M | $1.572B | $1.571B |
- Quarterly revenue rose 5.5%; same-facility revenue increased 3.7%. Equivalent admissions grew 5.4% consolidated and 3.8% same-facility, while revenue per equivalent admission was up 0.2% consolidated and down 0.1% same-facility.
- For the first nine months, revenue rose 5.4%, but HCA-attributable net income declined 42.6%. The filing attributes much of the decline to a $481M pretax debt-retirement loss and a $181M management-agreement termination charge.
- Q3 net income included the $406M pretax debt-retirement loss ($256M after tax; $0.49 per diluted share). Q3 2010 included $10M of long-lived-asset impairments. Adjusted segment EBITDA is a non-GAAP measure defined by the company.
- Operating costs pressured margins: salaries and benefits were 45.6% of revenue in Q3 versus 45.2% a year earlier; other operating expenses were 18.7% versus 18.4%. Supplies improved to 17.3% from 17.8%.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $2.546B, essentially unchanged from $2.551B in 2010. Investing cash outflow was $1.240B, including $1.170B of property and equipment purchases and $209M of acquisitions. Financing cash outflow was $1.358B. Cash ended the period at $359M.
- Management reported Q3 operating cash flow of $880M, down from $1.256B, primarily due to working-capital changes.
- Total debt was $26.596B at September 30, down from $28.225B at year-end 2010; long-term debt due within one year was $725M. Cash was $359M and working capital was $2.422B. Stockholders’ deficit was $9.062B.
- HCA issued $5.0B of notes in August and used net proceeds principally to redeem second-lien debt. It recorded a $406M pretax loss on those redemptions. The company also extended certain term-loan maturities and increased and extended its asset-based revolving facility; $1.929B was available under senior secured credit facilities at September 30.
- Capital expenditures were $1.170B for the first nine months; management expected approximately $1.6B for 2011. Projects under construction had an estimated $1.550B of remaining costs over five years.
Material changes, outlook and risks
- The March 2011 IPO generated $2.506B of net proceeds. In September, HCA repurchased 80.8M shares from Bank of America affiliates for $1.503B ($18.61 per share), approximately 15.6% of shares outstanding.
- Management estimated 2011 Medicare and Medicaid EHR incentive revenue of $190M–$220M, with related operating expenses of $75M–$85M. It expected further incentive revenue in Q4; actual amounts depend on funding, state approvals and demonstrating meaningful use.
- On October 14, 2011, after quarter-end, HCA acquired the remaining approximately 40% of HCA-HealthONE for $1.450B, gaining full ownership of its Denver-area hospitals and surgery centers. Management expected the acquisition to be immediately accretive.
- Self-pay pressures increased: Q3 provision for doubtful accounts, uninsured discounts and charity care totaled $2.879B, versus $2.485B in Q3 2010; the combined measure rose to 28.3% of the related revenue base from 26.4%. Same-facility uninsured admissions increased 8.8%.
- Management identified substantial indebtedness and refinancing needs, potential Medicare and Medicaid reimbursement cuts, possible reductions to Medicaid supplemental-payment programs, uninsured-account collectability, labor and cost pressures, and healthcare reform as important risks. Florida and Texas Medicaid changes were estimated to reduce payments by about $35M in each of the second half of 2011 and first half of 2012 in Florida, and by about $20M in 2011 and $60M in 2012 in Texas.
- Tax disputes remained unresolved for several years, and HCA reported $462M of unrecognized tax benefits including accrued interest. A DOJ review of ICD billing at 95 hospitals could lead to claims; the potential effect was not estimable. A securities class action filed after quarter-end alleged IPO registration-statement disclosure deficiencies. Management said ordinary-course claims were not expected to have a material adverse effect.
- No earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results and that forward-looking statements are subject to significant risks.
Important facts for investors to verify
- How much of revenue growth and EBITDA performance reflects underlying volume, payer/service mix, and EHR incentives, versus acquisition or other effects.
- Whether rising uninsured deductions and uninsured admissions affect collections, receivable reserves and future margins.
- Debt refinancing progress, interest-rate exposure, credit-facility availability and liquidity after the $1.503B share repurchase and $1.450B HealthONE acquisition.
- Final outcomes and financial exposure from IRS disputes, the DOJ ICD review and the IPO-related securities litigation.
- Actual 2011 EHR incentive receipts and implementation costs, Medicaid supplemental-payment changes, and realized reimbursement reductions in Florida and Texas.