HCA Healthcare, Inc. - 10-Q Summary (Period Ended September 30, 2010)
Business Context and Reporting Period
This is a quarterly report (Form 10-Q) for HCA Inc., a holding company whose affiliates own and operate hospitals and related health care entities. As of September 30, 2010, the company operated 154 hospitals and 96 freestanding surgery centers across 20 U.S. states and England. The reporting period covers the quarter and nine months ended September 30, 2010. The company is preparing for an initial public offering (IPO), having filed a Form S-1 in May 2010.
Key Financial Metrics
| Metric (in millions) | Quarter 2010 | Quarter 2009 | 9 Months 2010 | 9 Months 2009 |
|---|---|---|---|---|
| Revenues | $7,647 | $7,533 | $22,947 | $22,447 |
| Net Income (HCA Inc.) | $243 | $196 | $924 | $838 |
| Diluted EPS | $2.49 | $2.04 | $9.55 | $8.75 |
| Operating Cash Flow (9mo) | $2,611 (2010) vs $2,315 (2009) | |||
| Total Debt | $26,079 (Sep 30, 2010) | |||
| Cash & Equivalents | $377 (Sep 30, 2010) | |||
| Provision for Doubtful Accounts | $721 (9.4% of Rev) | $910 (12.1% of Rev) | $2,073 (9.0% of Rev) | $2,583 (11.5% of Rev) |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 1.5% for the quarter and 2.2% for the nine months. Growth was driven by a 1.1% increase in revenue per equivalent admission and a 0.4% increase in equivalent admissions for the quarter.
- Profitability: Net income attributable to HCA Inc. rose 24.3% for the quarter and 10.3% for the nine months. This improvement was largely due to a significant decline in the provision for doubtful accounts ($189 million decrease in the quarter), offsetting higher operating expenses.
- Volume Trends: Consolidated admissions declined 1.0% in the quarter, while emergency department visits increased 1.1%. Inpatient and outpatient surgeries declined 3.0% and 2.5%, respectively.
- Impairments: The company recorded $119 million in impairments of long-lived assets for the nine months ended September 30, 2010, compared to $16 million in the prior year. This included charges related to revised cash flow projections for a Central Group hospital and building safety requirements in California.
- Debt Structure: In March 2010, the company issued $1.4 billion in senior secured first lien notes to repay term loan facilities. Total debt increased slightly to $26.079 billion.
Guidance, Outlook, Risks, and Unusual Items
- Capital Distributions: The company paid $2.251 billion in cash distributions to stockholders during the first nine months of 2010. Management contemplates an approximate $2 billion distribution in the fourth quarter of 2010, to be funded by credit facilities and new indebtedness.
- Uninsured Accounts: The company increased uninsured discount percentages in August 2009. This resulted in higher revenue deductions (charity care and uninsured discounts) but significantly reduced the provision for doubtful accounts. Total uninsured-related deductions (provision + discounts + charity) as a percentage of total revenue increased to 26.4% in Q3 2010 from 24.9% in Q3 2009.
- Legal and Regulatory Risks:
- DOJ Review: The Department of Justice is reviewing billing for implantable cardio-defibrillators (ICDs) at 87 HCA hospitals covering the period from October 2003 to present.
- Tax Disputes: The company is contesting IRS audits regarding 2005-2006 returns and has eight taxable periods (1997-2004) pending. The liability for unrecognized tax benefits was $387 million as of September 30, 2010.
- New Hampshire Litigation: A trial regarding a 1999 intra-corporate transaction breach is set for May 2011, with potential remedies including monetary damages or asset rescission.
- Market Risk: The company holds $260 million in auction rate securities (ARS) that are experiencing market illiquidity. While currently accruing interest, there is a risk of other-than-temporary impairment if issuers default or valuations deteriorate.
Investor Verification Checklist
- Debt Service Capacity: Verify the company's ability to service $26 billion in debt while funding a potential $2 billion fourth-quarter distribution and capital expenditures of approximately $1.4 billion for 2010.
- Uninsured Patient Mix: Monitor the trend of uninsured admissions (up 3.9% same-facility in Q3) and the sustainability of the current discount policy versus the provision for doubtful accounts.
- Regulatory Exposure: Assess the potential financial impact of the DOJ ICD review and the resolution of pending IRS tax disputes, which could materially affect future earnings.
- Asset Valuation: Review the specific details of the $119 million impairment charges, particularly regarding the Central Group hospital and California building safety costs, to gauge future capital requirements.
- Liquidity of Investments: Evaluate the risk associated with the $260 million holding in illiquid auction rate securities and the company's ability to access capital markets if these assets cannot be sold.