HCA Holdings, Inc. (HCA Healthcare) — Q2 2015 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2015, compared with the corresponding 2014 periods. HCA operated 168 hospitals and 112 freestanding surgery centers in 20 states and England.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue, net of doubtful-account provision | $9.897bn | $9.230bn | $19.573bn | $18.062bn |
| Income before income taxes | $984m | $904m | $2.062bn | $1.584bn |
| Net income attributable to HCA | $507m | $483m | $1.098bn | $830m |
| Diluted EPS | $1.18 | $1.07 | $2.54 | $1.82 |
| Adjusted segment EBITDA | $2.008bn | $2.000bn | $3.969bn | $3.644bn |
- Q2 revenue rose 7.2% (6.2% same facility); equivalent admissions rose 6.0% consolidated and 4.9% same facility. Revenue per equivalent admission increased 1.2% in each measure.
- Q2 HCA-attributable net income increased 4.9%; six-month income increased 32.3%. Six-month revenue grew 8.4% and pretax income 30.2%.
- Q2 net income margin was 6.7% versus 6.8% in 2014; HCA-attributable margin was 5.1% versus 5.2%. Adjusted segment EBITDA was essentially flat in Q2 despite higher revenue; six-month EBITDA increased about 8.9%. EBITDA is a non-GAAP measure.
- Q2 salaries and benefits rose to 45.4% of revenue from 44.4%; supplies rose to 16.9% from 16.6%. For the six months, salaries were 45.4% versus 45.1%, while supplies were 16.9% versus 17.0%.
Cash flow, debt and liquidity
- Six-month operating cash flow was $2.075bn, up from $1.693bn. Investing used $1.009bn, including $1.004bn in property and equipment spending; financing used $959m. Cash ended June at $673m, up from $566m at year-end.
- Management reported Q2 operating cash flow of $1.057bn versus $1.250bn a year earlier, citing primarily the net effects of working-capital changes and lower cash-tax benefit/income-tax effects.
- Reported total debt was $29.737bn at June 30, versus $29.426bn at December 31; $1.374bn was due within one year, compared with $338m at year-end. Average debt was higher year over year, but the average effective rate declined to 5.8% from 6.3% for the six-month period.
- Cash and current assets exceeded current liabilities; reported working capital was $2.983bn, down from $3.450bn at year-end. Available senior secured credit facilities were $2.627bn at June 30 ($2.857bn at July 31). Management said expected liquidity needs over the next 12 months could be met through operating cash flow, credit facilities and debt-market access.
- Capital expenditures, excluding acquisitions, were $1.004bn for the first half; the company expected approximately $2.5bn for 2015. Projects under construction had estimated remaining costs of approximately $2.1bn over five years.
Material changes, outlook and notable items
- The doubtful-account provision rose to $1.035bn in Q2 from $728m. Combined charity care, uninsured discounts and doubtful-account provision equaled 30.7% of the relevant revenue base, versus 29.0%. Same-facility uninsured admissions increased 8.7% year over year in Q2, reversing declines in the preceding four quarters. Management attributed the trend partly to the anniversary of earlier coverage gains from exchanges and Medicaid expansion.
- Q2 2014 revenue included a $142m favorable adjustment for the Texas Medicaid Waiver indigent-care program. Medicaid revenue also fell year over year partly because of that comparison. HCA recorded $17m of estimated revenue in Q2 2015 for affected waiver components following updated information and a final program-year payment; future supplemental-payment program changes could reduce or eliminate payments.
- Debt refinancing included issuing $1.6bn of 5.375% notes due 2025 and redeeming $1.525bn of 7.75% notes, resulting in a $122m pretax debt-retirement loss. A new $1.4bn secured term loan due 2020 replaced certain term loans. The company also issued $1bn of 5.375% notes in January and repaid $750m of notes at maturity.
- HCA repurchased $940m of stock in the first half and authorized an additional $1bn repurchase program in May; no purchases had been made under that newer authorization as of June 30. The February authorization had $60m remaining.
- For 2015, management estimated EHR incentive income of $40m–$50m. No broader earnings or revenue guidance is stated in the provided filing text. Management cautioned interim results are not necessarily indicative of full-year results.
- Key exposures include substantial indebtedness and refinancing needs; reimbursement, health-care reform and uninsured-account collection risk; labor and supply-cost pressures; and regulatory, tax and litigation matters. A DOJ ICD-billing settlement entered July 27 required approximately $15.8m, already accrued, and included no admission of wrongdoing. Other proceedings include a Miami interventional-cardiology review, a London competition remedy remanded for further proceedings, a shareholder class action set for trial in January 2016, and Health Midwest litigation with rulings anticipated in late 2015. The company could not predict the effect of several unresolved matters.
- The IRS was auditing 2011 and 2012 federal returns. Unrecognized tax benefits were $546m, including $67m accrued interest; possible changes over the next 12 months could not be estimated. A hypothetical 1% increase in interest rates was estimated to reduce annualized pretax earnings by approximately $43m.
Most important facts for investors to verify
- Whether admission and revenue growth can persist while doubtful-account provisions and uninsured discounts remain elevated.
- How Texas and other states’ Medicaid supplemental-payment programs evolve, and the revenue impact of any changes.
- Debt maturities, refinancing access, interest-rate sensitivity and the effect of continued share repurchases on leverage and liquidity.
- Progress on 2015 capital spending and the company’s ability to fund its construction pipeline with cash flow and borrowing.
- Outcomes and potential financial exposure from the pending tax, regulatory and legal matters, especially the Health Midwest case and shareholder litigation.