HCA Holdings, Inc. (now HCA Healthcare) — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; comparative periods ended September 30, 2014. Unaudited. Dollars in millions unless noted.
Business context and financial performance
HCA operated 168 hospitals and 114 freestanding surgery centers across 20 states and England. It reported one business line, organized into National, American, and Corporate and other groups.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue, net of doubtful-account provision | $9,856 | $9,220 | $29,429 | $27,282 |
| Income before taxes | $843 | $929 | $2,905 | $2,513 |
| Net income | $573 | $611 | $1,958 | $1,697 |
| Net income attributable to HCA | $449 | $518 | $1,547 | $1,348 |
| Diluted EPS | $1.05 | $1.16 | $3.60 | $2.98 |
| Adjusted segment EBITDA | $1,815 | $1,828 | $5,784 | $5,472 |
| Operating cash flow | Not separately stated for the quarter in the summary table | Not separately stated for the quarter in the summary table | $3,176 | $2,821 |
Q3 diluted EPS and HCA-attributable income fell 9.5% and 13.4%, respectively, despite revenue growth of 6.9%. HCA cited a $77 million legal claim charge, increased doubtful-account provision and lower EHR incentive income. Nine-month HCA-attributable income rose 14.7% and diluted EPS rose 20.8%. Adjusted segment EBITDA is a non-GAAP measure; it declined slightly in Q3 but increased 5.7% for the nine months.
Q3 HCA-attributable net margin was 4.6%, versus 5.6% a year earlier; nine-month margin was 5.3%, versus 4.9%. Q3 adjusted segment EBITDA was about 18.4% of revenue, versus 19.8%; nine-month margin was about 19.7%, versus 20.1%.
Liquidity, cash flow, debt, and capital allocation
- Nine-month operating cash flow was $3.176 billion, up $355 million year over year; investing cash outflow was $1.631 billion and financing cash outflow was $1.523 billion. Cash ended at $588 million.
- Capital expenditures, excluding acquisitions, were $1.571 billion. HCA expected approximately $2.4 billion for full-year 2015; projects under construction carried an estimated additional $2.4 billion of costs over five years.
- Total debt was $29.752 billion, with a 5.4% average rate and 6.1-year average life. Debt due within one year was $1.377 billion; long-term debt excluding current maturities was $28.375 billion. Cash was $588 million. Available credit-facility capacity was $2.587 billion at September 30.
- Working capital was $2.908 billion. HCA reported a $5.812 billion total stockholders’ deficit, including a $7.294 billion deficit attributable to HCA.
- HCA repurchased $1.386 billion of stock in the first nine months and paid $367 million in distributions to noncontrolling interests. An additional $3 billion repurchase authorization was approved October 26, 2015.
Material changes and operating trends
- Q3 consolidated revenue increased 6.9%; same-facility revenue increased 5.5%. Equivalent admissions rose 4.8% consolidated and 3.6% same facility, while revenue per equivalent admission increased 2.0% and 1.9%, respectively.
- Q3 admissions increased 3.8% consolidated and 2.9% same facility; emergency visits rose 7.2% and 5.8%, respectively. Inpatient and outpatient surgeries also increased modestly.
- The provision for doubtful accounts rose $400 million to $1.158 billion in Q3. Uninsured discounts increased $677 million; uninsured admissions rose 13.6% same facility. Combined charity care, uninsured discounts, and doubtful-account provision equaled 33.1% of the related revenue base, versus 29.8% in Q3 2014.
- Q3 salaries and benefits increased to 46.9% of revenue from 45.7%; contract labor expense rose 35.5%. For the first nine months, salaries and benefits were 45.9% of revenue versus 45.3%.
- Interest expense declined to $411 million in Q3 and $1.255 billion for nine months, reflecting lower average interest rates despite higher average debt balances. Nine-month average effective debt rates declined to 5.7% from 6.2%.
- Nine-month results included $125 million of debt-retirement losses, compared with $226 million in 2014. 2015 refinancing included $2.6 billion of 5.375% senior notes due 2025 and a $1.4 billion term loan maturing in 2020.
Outlook, risks, contingencies, and unusual items
- HCA estimated 2015 EHR incentive income of $46 million to $50 million; it recognized $46 million in the first nine months. The filing gives no full-year earnings guidance.
- Management stated that operating cash flow, available credit facilities, and anticipated debt-market access should cover expected liquidity needs for the next 12 months. HCA is highly leveraged and identified refinancing, interest rates, reimbursement policy, uninsured collections, labor costs, regulation, and litigation as risks.
- The Health Midwest litigation generated a $77 million Q3 charge for court-awarded prejudgment interest. The accrued liability was $382 million at September 30; interest continues at 9% until resolution, and HCA planned to appeal after final judgment.
- The Miami U.S. Attorney’s Office continued reviewing the medical necessity of certain interventional cardiology services. HCA said it could not predict the outcome or potential effect. A securities class action remained pending, with trial likely in 2016 if unresolved.
- In the UK, the competition authority’s proposed hospital-divestiture remedy was returned for further proceedings after an appeal overturned certain findings; a decision was anticipated in early 2016.
- Unrecognized tax benefits, including accrued interest, were $541 million. HCA said a significant increase or decrease within 12 months was reasonably possible but could not estimate a range.
- Management cautioned that interim results are not necessarily indicative of full-year results. It reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Track self-pay exposure, doubtful-account reserves, uninsured admissions, and the collection profile of patient receivables.
- Review the Health Midwest liability, ongoing 9% interest accrual, final judgment, and appeal outcome.
- Assess debt maturities, refinancing capacity, variable-rate exposure, and the effect of further rate increases.
- Check whether projected capital spending and share repurchases remain consistent with cash generation and leverage.
- Monitor reimbursement-program changes, including Texas Medicaid supplemental payments, EHR incentives, and the UK competition proceedings.