HCA Holdings, Inc. (now HCA Healthcare) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016; filed November 3, 2016. HCA operated 169 hospitals and 117 freestanding surgery centers across 20 states and England. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue, net of doubtful-account provision | $10.270bn | $9.856bn | $30.849bn | $29.429bn |
| Income before income taxes | $1.018bn | $843m | $3.245bn | $2.905bn |
| Net income attributable to HCA | $618m | $449m | $1.970bn | $1.547bn |
| Diluted EPS | $1.59 | $1.05 | $4.93 | $3.60 |
| Adjusted segment EBITDA | $1.957bn | $1.815bn | $6.012bn | $5.784bn |
- Revenue grew 4.2% in Q3 and 4.8% for the nine months. Q3 same-facility revenue rose 4.0%; equivalent admissions increased 1.5% consolidated and 1.3% same-facility, while revenue per equivalent admission rose 2.7% in both measures.
- Q3 pretax margin was 9.9% versus 8.6% a year earlier; attributable net margin was 6.0% versus 4.6%. Nine-month pretax margin was 10.5% versus 9.9%; attributable net margin was 6.4% versus 5.3%. Adjusted segment EBITDA is a non-GAAP measure.
- Q3 salaries and benefits were 46.1% of revenue (46.9% prior year); supplies were 16.5% (16.7%); other operating expenses rose to 18.5% from 18.2%. Nine-month other operating expenses increased to 18.2% of revenue from 17.9%.
- Operating cash flow for the first nine months was $3.954bn, up from $3.176bn. Capital expenditures excluding acquisitions were $1.884bn; acquisitions used $468m. Cash and equivalents were $677m at quarter-end, down from $741m at year-end 2015. Working capital was $3.688bn.
- Debt totaled $31.441bn, versus $30.488bn at December 2015; cash-adjusted debt was approximately $30.764bn. Average debt cost 5.5%; $2.966bn of long-term debt was variable-rate. A hypothetical 1% rate increase was estimated to reduce annual pretax earnings by about $30m. Available credit-facility capacity was $2.057bn at September 30.
Material changes and unusual items
- HCA reported Q3 tax benefits of $51m from resolution of 2011–2012 federal tax issues and $11m from adoption of share-based-payment accounting guidance. For the first nine months, the corresponding benefits were $51m and $129m. Excluding these benefits, management said the effective tax rate would have been 37.6% for both Q3 and the nine-month period.
- Q3 legal claim costs were $11m versus $77m in 2015; nine-month costs were $33m versus $77m. The prior-year nine-month period also included $125m of debt-retirement losses, compared with $4m in 2016. Q3 2016 included a $3m facility-sale gain and $4m debt-retirement loss.
- Share repurchases totaled $2.213bn for the first nine months, covering 29.064m shares; $390m remained under the $3bn authorization at September 30. Average diluted shares fell to 389.592m in Q3 from 426.441m.
- HCA issued $1.2bn of 4.5% secured notes due 2027 in August and completed related term-loan refinancing. It also issued $1.5bn of 5.25% secured notes due 2026 in March.
Outlook, risks and contingencies
- No specific earnings guidance was provided. Management expected 2016 capital expenditures, excluding acquisitions, of approximately $2.7bn; projects under construction had an estimated $2.9bn of remaining costs over five years. Management believed operating cash flow, available credit and expected debt-market access would cover liquidity needs for the next 12 months.
- HCA expected approximately $363m of net professional-liability claim payments over the next 12 months, including about $314m subject to its self-insured retention. Net reserves for retained professional-liability risk were $1.275bn.
- The Health Midwest case was under appeal; HCA had accrued $468m for damages, costs and interest. The judgment accrued interest at 9%, compounded annually; oral arguments were scheduled for December 20, 2016.
- Texas Medicaid supplemental payments were $109m in Q3 and $293m for the first nine months, both above prior-year levels. The Texas waiver was extended through December 2017, but future extensions and changes to state supplemental-payment programs remained uncertain.
- On October 26, 2016, HCA announced an agreement to transfer its Oklahoma hospital operations and end related arrangements for $750m, subject to adjustments, approvals and other conditions; completion was expected in the first half of 2017.
- Other stated risks include substantial leverage and refinancing, payer reimbursement and health-care regulation changes, patient self-pay collection, labor costs, competition, government investigations and litigation. The filing said there were no material changes to previously disclosed risk factors. Management reported disclosure controls were effective.
Important facts for investors to verify
- How much of earnings growth reflects recurring operating performance versus the $62m Q3 tax benefits and the lower year-over-year legal costs?
- Whether rising charity care and uninsured discounts, alongside the 96.1% allowance against patient-due receivables, affect future collections and reported revenue.
- The timing, proceeds after adjustments, and operating impact of the proposed $750m Oklahoma transaction.
- The outcome of the Health Midwest appeal and potential changes to Texas and other states’ Medicaid supplemental-payment programs.
- Debt refinancing needs, variable-rate exposure, planned capital spending, and continued share repurchases relative to cash generation and liquidity.