HCA Holdings, Inc. (HCA Healthcare) — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014; unaudited. Comparisons are with the corresponding 2013 periods. HCA operated 165 hospitals and 115 freestanding surgery centers across 20 states and England.
Financial performance
- Revenue: Q2 net revenue was $9.230 billion, up 9.2%; first-half revenue was $18.062 billion, up 6.9%. Results include $142 million of additional Texas Medicaid Waiver reimbursements for the prior program year.
- Profit and EPS: Q2 net income attributable to HCA was $483 million versus $423 million; diluted EPS was $1.07 versus $0.91. First-half attributable net income was $830 million versus $767 million; diluted EPS was $1.82 versus $1.66.
- Margins: Q2 income before taxes was 9.8% of revenue versus 9.5%, and attributable net income margin was 5.2% versus 5.0%. For the first half, these margins were 8.8% versus 8.6% and 4.6% versus 4.5%, respectively.
- Adjusted segment EBITDA: Q2 was $2.000 billion versus $1.689 billion; first-half EBITDA was $3.644 billion versus $3.257 billion. This is a non-GAAP measure defined by the company.
- Cash flow and capital spending: First-half operating cash flow was $1.693 billion versus $1.554 billion; investing cash use was $864 million, including $913 million of property and equipment purchases; financing cash use was $585 million. Cash ended June at $658 million. Management reported Q2 operating cash flow of $1.250 billion versus $814 million.
- Debt and liquidity: Total debt was $28.988 billion at June 30, including $1.046 billion due within one year, compared with $28.376 billion at year-end 2013. Cash plus reported current assets were $8.772 billion against current liabilities of $5.895 billion; working capital was $2.877 billion. $1.662 billion was available under secured credit facilities at June 30. HCA reported a stockholders’ deficit of $6.588 billion, including noncontrolling interests.
- Margins and costs: Q2 salaries and benefits were 44.4% of revenue versus 45.5%; supplies were 16.6% versus 17.4%. First-half other operating expenses rose to 18.2% of revenue from 17.8%.
Changes versus the prior comparable period
- Q2 same-facility revenue increased 7.7%, driven by 5.4% higher revenue per equivalent admission and 2.2% more equivalent admissions. Consolidated equivalent admissions rose 3.6%.
- Q2 consolidated admissions rose 2.3%; emergency visits rose 7.1%. Same-facility outpatient surgeries declined 0.3%, while same-facility inpatient surgeries increased 1.0%.
- The provision for doubtful accounts fell $295 million in Q2 and $198 million in the first half. HCA attributed favorable uninsured trends in part to coverage through exchanges and Medicaid expansion; same-facility uninsured admissions fell 14.7% in Q2.
- Interest expense declined to $427 million in Q2 and $887 million in the first half, mainly reflecting lower average interest rates. The average effective long-term debt rate fell to 5.9% in Q2 from 6.5%, and to 6.2% for the first half from 6.6%.
Outlook, unusual items and risks
- Outlook: HCA estimated 2014 EHR incentive income and related operating expenses each at $110–$130 million. It expected 2014 capital expenditures, excluding acquisitions, of approximately $2.2 billion; projects under construction had about $2.04 billion of estimated costs to complete over five years. Management said available operating cash flow, credit facilities and anticipated debt-market access should meet liquidity needs for the next 12 months.
- Debt refinancing and buyback: HCA issued $3.5 billion of senior secured notes and used proceeds to refinance or redeem higher-cost debt. The redemptions generated a $226 million pretax loss. In May, HCA repurchased 14.6 million shares for $750 million, or $51.53 per share.
- Other unusual items: First-half results included $78 million of Health Midwest legal claim costs and $32 million of gains on facility and other asset sales. A $22 million tax provision reduction related primarily to prior-year audit resolutions benefited 2014; HCA reported a $507 million liability for unrecognized tax benefits.
- Legal and regulatory matters: The Health Midwest case remained unresolved; HCA accrued interest at 9% on the recorded amounts, with further accounting and judgment pending and an appeal planned. The UK competition authority ordered a potential London hospital divestiture; HCA appealed, with a decision expected in 2015. DOJ reviews of ICD billing at 95 hospitals and interventional cardiology medical-necessity reviews were ongoing; the company said outcomes could not be predicted.
- Principal risks: Substantial indebtedness and refinancing access; changes to Medicare, Medicaid and health reform; reimbursement-program changes; collection risk and uninsured/deductible balances; labor and operating costs; litigation, investigations and tax audits; and execution of EHR meaningful-use requirements. A hypothetical 1% interest-rate increase was estimated to reduce annual pretax earnings by about $38 million.
Most important facts for investors to verify
- How much reported revenue and earnings growth depended on the $142 million Texas Medicaid reimbursement and whether such supplemental payments recur.
- Whether the decline in doubtful-account provisions and uninsured admissions persists, given the large patient receivable allowance and continued charity-care and uninsured discounts.
- Debt maturities, covenant headroom, refinancing capacity and the effect of the debt transactions on future interest costs and leverage.
- The final financial exposure and timing of the Health Midwest litigation, UK divestiture appeal, DOJ reviews and tax examinations.
- Whether 2014 EHR income, related expenses and capital expenditure estimates are achieved; interim results are not necessarily indicative of full-year results.