HCA Holdings, Inc. (now HCA Healthcare) — Q1 2016 Form 10-Q
Reporting period: Quarter ended March 31, 2016; unaudited. The company operated 168 hospitals and 116 freestanding surgery centers across 20 states and England. Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Financial performance
- Revenue: $10.260 billion, up 6.0% year over year; same-facility revenue rose 5.4%. Growth reflected higher equivalent admissions and revenue per equivalent admission, each up 3.7% and 2.2%, respectively, on a consolidated basis.
- Profit: Net income was $811 million versus $720 million; net income attributable to HCA was $694 million versus $591 million. Diluted EPS increased to $1.69 from $1.36. Q1 2016 included a $74 million tax benefit from adopting ASU 2016-09; management said diluted EPS would have been $0.18 lower without it.
- Margins and costs: Net income attributable to HCA was 6.8% of revenue versus 6.1%; pretax margin was 10.7% versus 11.1%. Salaries and benefits were 45.8% of revenue (45.5% prior year), supplies 16.7% (16.9%), and other operating expenses 18.1% (17.7%). Adjusted segment EBITDA was $2.003 billion versus $1.961 billion.
- Cash flow and investment: Operating cash flow was $1.399 billion versus $1.018 billion. Capital expenditures were $509 million versus $446 million; simple operating cash flow less capital expenditures was $890 million. Investing cash use totaled $496 million. Cash ended at $852 million, up from $741 million at year-end 2015.
- Debt and liquidity: Total debt was $30.554 billion, including $226 million due within one year; long-term debt on the balance sheet, net of issuance costs and current maturities, was $30.328 billion. Average debt was $30.532 billion and the average effective interest rate was 5.5%, down from 5.8%. Working capital was $3.803 billion. $2.907 billion was available under senior secured credit facilities at March 31; management stated liquidity sources were expected to cover needs over the next 12 months.
Material changes versus Q1 2015
- Operating volumes improved: consolidated admissions rose 1.8%, equivalent admissions 3.7%, outpatient surgeries 5.6%, and emergency visits 7.6%. Same-facility equivalent admissions grew 3.1%.
- Revenue before doubtful-account provision rose 7.1%, but the provision for doubtful accounts increased $144 million to $790 million. Charity care and uninsured discounts also rose; combined with doubtful-account provisions, these deductions totaled $4.842 billion versus $4.064 billion. The combined deductions were 32.1% of the specified revenue base, up from 29.6%.
- Shares used for diluted EPS fell to 410.6 million from 435.3 million, reflecting repurchases. HCA repurchased 8.9 million shares for $621 million during the quarter.
- Operating cash flow increased by $381 million, which management attributed primarily to higher net income and a $311 million net positive change in working-capital items.
Outlook, risks, contingencies, and unusual items
- Spending outlook: 2016 capital expenditures, excluding acquisitions, were expected to approximate $2.7 billion. Projects under construction had an estimated $2.2 billion of remaining costs over five years. Estimated 2016 EHR incentive income was not expected to exceed $10 million.
- Claims and litigation: Q1 included $12 million of Health Midwest litigation interest costs. HCA had accrued $448 million for that case at March 31 and appealed a $434 million judgment, with interest accruing at 9% compounded annually. A separate shareholder class-action settlement required a $215 million HCA payment; derivative settlements included $19 million of insurance proceeds to HCA and $5.5 million of attorneys’ fees. Courts granted final approval in April 2016; HCA had recorded $120 million of net legal claim costs in Q4 2015 for the settlements and related costs.
- Regulatory and reimbursement exposure: The UK Competition and Markets Authority had not issued its final decision on remedies affecting HCA’s London hospitals; a decision was anticipated in May or June 2016. Texas’s Medicaid waiver was extended by CMS through December 2017, as reported in the filing, but future changes to supplemental payment programs could reduce revenue. Texas Medicaid supplemental payments were $102 million in Q1 2016 versus $77 million a year earlier.
- Other key risks: Management highlighted substantial indebtedness and refinancing needs, reimbursement and health-care reform uncertainty, collection risk and uninsured volumes, wage and staffing costs, litigation and government investigations, and tax audits. Unrecognized tax benefits totaled $537 million; management could not estimate the range of possible changes over the next 12 months.
- Interest-rate exposure: $3.262 billion of debt was variable-rate. Management estimated a 1% rate increase could reduce annualized pretax earnings by approximately $33 million. Swaps had $6 billion of notional principal; an estimated $89 million was expected to be reclassified from OCI to interest expense over the next 12 months.
- Accounting and controls: The $74 million share-based-payment tax benefit was recognized in the tax provision under prospective adoption of ASU 2016-09. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of the reported earnings and EPS increase is attributable to the one-time $74 million tax benefit and share repurchases.
- Whether higher uninsured admissions and the increase in charity care, uninsured discounts, and doubtful-account provisions persist or affect cash collections.
- The final outcome and financial implications of the Health Midwest appeal and UK competition proceedings.
- Progress against the $2.7 billion capital-spending outlook, liquidity availability, and the company’s ability to service and refinance approximately $30.6 billion of debt.
- Whether Texas and other states maintain supplemental Medicaid payment programs and whether changes affect HCA’s reimbursement.