HCA Holdings, Inc. (now HCA Healthcare, Inc.) — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; unaudited. The company operated 157 hospitals and 98 freestanding surgery centers at quarter-end.
Financial results and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $8.063B | $7.756B | $16.118B | $15.300B |
| Income before taxes | $467M | $514M | $984M | $1.199B |
| Net income attributable to HCA | $229M | $293M | $469M | $681M |
| Diluted EPS | $0.43 | $0.67 | $0.94 | $1.56 |
| Adjusted segment EBITDA | $1.420B | $1.490B | $3.010B | $3.064B |
- Revenue grew 4.0% in Q2 and 5.3% year to date. Same-facility revenue grew 2.4% and 4.1%, respectively. Q2 equivalent admissions rose 3.4% consolidated and 1.9% same facility; revenue per equivalent admission increased 0.5% in both measures.
- HCA-attributable net income margin was 2.8% in Q2 versus 3.8% a year earlier, and 2.9% for six months versus 4.5%. Salaries and benefits rose to 41.2% of revenue in Q2 from 39.6%; other operating expenses rose to 16.4% from 15.9%.
- Six-month operating cash flow was $1.666B, up from $1.295B. Investing activities used $812M, including $776M of capital expenditures and $168M for acquisitions; financing activities used $726M. Cash ended the period at $539M.
- At June 30, total debt was $25.320B, down from $28.225B at December 31, 2010; cash was $539M. Current assets were $6.891B and current liabilities $4.278B; reported working capital was $2.613B. HCA reported $2.854B available under secured credit facilities at June 30.
- Six-month interest expense was $1.053B versus $1.046B. The average effective long-term debt rate increased to 8.0% from 7.9%. The filing describes HCA as highly leveraged.
Material changes and unusual items
- Q2 included a $75M pretax loss on retirement of debt. Six-month results also included a $181M pretax fee to terminate the Investors’ management agreement following the March IPO. These items contributed to lower reported earnings; the prior-year comparison included $91M of Q2 and $109M of six-month asset impairments.
- The March IPO issued 87.7M shares at $30 per share and generated $2.506B net proceeds for HCA; the offering also increased diluted shares, from 437.1M to 538.6M in Q2. HCA used proceeds to reduce revolving credit borrowings.
- Uninsured discounts and charity care increased materially. The combined provision for doubtful accounts, uninsured discounts and charity care was $2.774B in Q2, up from $2.459B; as a share of the relevant revenue base, the combined measure rose to 27.6% from 26.1%. Same-facility uninsured admissions increased 10.6% in Q2.
- In May, HCA extended certain term-loan maturities to 2016 and 2018. In June, it redeemed $1.108B of secured notes, producing the reported debt-retirement loss.
Outlook, management commentary and risks
- Management expected 2011 capital expenditures of approximately $1.6B and estimated $1.710B of additional costs to complete and equip projects under construction over five years. It estimated 2011 Medicare and Medicaid EHR incentive revenue of $290M–$340M and related operating expenses of $100M–$125M; no earnings guidance was provided.
- Management said operating cash flow, available credit facilities and anticipated debt-market access should cover expected liquidity needs for the next 12 months. It cautioned that interim results are not necessarily indicative of full-year results.
- After quarter-end, HCA issued $5.0B of notes on August 1, 2011, intending to redeem $4.778B of second-lien notes; the expected pretax retirement charge was approximately $396M. On August 2, HCA agreed to acquire the Colorado Health Foundation’s remaining HCA-HealthONE interest for $1.45B, subject to regulatory review, with closing expected in Q3 and funding planned from the revolver.
- Key business risks include substantial debt and refinancing needs; Medicare and Medicaid reimbursement changes; possible reductions or restructuring of Medicaid supplemental-payment programs; higher uninsured exposure and collection risk; labor and operating-cost pressure; and the ability to achieve EHR meaningful-use requirements. HCA estimated Florida Medicaid payment reductions of about $25M in each half-year period cited, beginning in the second half of 2011.
- Contingencies include IRS disputes and audits, with $399M of unrecognized tax benefits including accrued interest; the DOJ’s ICD billing review at 95 hospitals for the period from October 2003 onward; and pending New Hampshire litigation concerning Portsmouth Regional Hospital. The filing says outcomes and potential effects of the DOJ review cannot currently be predicted.
Important facts for investors to verify
- Whether revenue and admission growth persist while service mix shifts toward less acute medical cases and away from more complex surgery.
- Trends in uninsured admissions, discounts, charity care, receivable aging and collections, including the concentration of operations in Texas and Florida.
- Execution and cash-flow impact of the planned second-lien refinancing, the $1.45B HealthONE transaction, and the resulting debt and interest burden.
- Actual EHR incentive receipts and implementation costs versus management’s estimates, and any changes to Medicare, Medicaid or supplemental-payment programs.
- Developments in IRS disputes, the DOJ ICD review and New Hampshire litigation, including any material financial or operational consequences.