HCA Holdings, Inc. (HCA Healthcare) — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015, compared with the three months ended March 31, 2014, unless otherwise noted. Amounts are in millions of dollars except per-share data. HCA operated 168 hospitals and 113 freestanding surgery centers in 20 states and England.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue, net of doubtful-account provision | $9,676 | $8,832 |
| Income before taxes | $1,078 | $680 |
| Net income | $720 | $454 |
| Net income attributable to HCA | $591 | $347 |
| Diluted EPS | $1.36 | $0.76 |
| Operating cash flow | $1,018 | $443 |
| Capital expenditures, excluding acquisitions | $446 | $400 |
- Revenue grew 9.5%; same-facility revenue increased 8.5%. Equivalent admissions rose 7.9% consolidated and 6.8% same-facility, while revenue per equivalent admission rose 1.5% and 1.6%, respectively.
- Reported net margin attributable to HCA was 6.1% of revenue, versus 3.9%; pretax margin was 11.1%, versus 7.7%. Adjusted segment EBITDA was $1,961, up from $1,644 (approximately 20.3% and 18.6% of revenue, respectively). Adjusted segment EBITDA is a non-GAAP measure.
- Operating cash flow increased by $575, primarily reflecting higher net income and a $294 tax-related benefit. Investing cash use was $432; financing cash use was $566. Cash ended the quarter at $586, compared with $850 a year earlier.
- At March 31, cash was $586, current assets were $9,130 and current liabilities were $7,172. Working capital was $1,958, down from $3,450 at year-end 2014, primarily because debt due within one year increased by $1,699.
- Total debt was $29,443, including $2,037 due within one year; the average debt rate was 5.6% and average debt life 6.2 years. Interest expense was $419, down from $460. HCA reported a stockholders’ deficit of $6,222.
Material changes and operating drivers
- HCA’s provision for doubtful accounts fell to $646 from $851. Uninsured revenue was $68 versus $388, while uninsured discounts increased to $2,526 from $2,301. HCA attributed lower uninsured admissions and related trends mainly to coverage gains through exchanges and Medicaid expansion. The combined provision, uninsured discounts and charity-care deductions were 29.6% of the stated revenue base, down from 31.6%.
- Admissions increased 5.8% consolidated and 5.1% same-facility; emergency department visits increased 12.3% and 11.5%, respectively. Inpatient surgeries rose 3.0%; outpatient surgeries rose 1.9% consolidated and 1.4% same-facility.
- Salaries and benefits were 45.5% of revenue versus 45.9%; supplies were 16.9% versus 17.3%; and other operating expenses were 17.7% versus 18.6%. Depreciation and amortization rose to $473 from $447. EHR incentive income declined to $19 from $30.
- Q1 2015 included $9 of facility-sale gains; Q1 2014 included $21 of gains and $78 of legal claim costs. The absence of the prior-year legal charge and lower interest expense contributed to the earnings comparison. Diluted weighted-average shares fell to 435.3 million from 457.4 million, reflecting repurchases.
- HCA repurchased 5.2 million shares for $366 during Q1 under a $1 billion authorization. It subsequently agreed to repurchase 3.8 million shares from Bain-affiliated holders and related charities in April.
Outlook, risks and contingencies
- Management estimated 2015 capital expenditures, excluding acquisitions, at approximately $2.5 billion; projects under construction had an estimated $2.1 billion of remaining costs over five years. HCA expected to fund capital spending from operations and borrowing.
- Estimated 2015 EHR incentive income was $40–$50; actual amounts depend in part on funding and continued demonstration of meaningful use. Management expected operating cash flows, credit-facility availability and debt-market access to cover liquidity needs for the next 12 months. Available secured-credit capacity was $2,587 at March 31.
- Management highlighted substantial indebtedness and refinancing needs, reimbursement and healthcare-law changes, payer mix and collection risk, cost and staffing pressures, competition, and government scrutiny. A hypothetical 1% rise in interest rates was estimated to reduce annual pretax earnings by approximately $41.
- Texas Medicaid supplemental payments were $77 in Q1 2015 versus $113 in Q1 2014. HCA had stopped recognizing estimated revenue from certain Texas waiver components in 2014; broader reviews of supplemental-payment programs could lead to restructuring, reductions or elimination.
- Legal and regulatory matters include DOJ reviews of ICD billing at 95 hospitals and interventional-cardiology medical necessity, a qui tam case concerning two facilities, and a securities class action scheduled for trial in January 2016. HCA could not estimate the outcomes or potential effects of the government reviews.
- In the Health Midwest dispute, HCA settled the charity/uncompensated-care portion for $15, while capital-expenditure claims remained contested. HCA planned to appeal after final judgment, then anticipated in 2015. Other risks include the UK competition authority’s London hospital divestiture remedy, which was sent back for further proceedings, and tax examinations. Unrecognized tax benefits were $544; HCA could not estimate the range of possible changes over the next 12 months.
- HCA expected net professional-liability claim payments of approximately $325 over the next 12 months, including an estimated $273 related to self-insured retentions. The filing states that legal or regulatory outcomes could materially affect results, financial position or liquidity.
Important facts for investors to verify
- Whether improved earnings and cash generation persist, particularly given the tax-related contribution to Q1 operating cash flow and the large doubtful-account allowance.
- Debt maturities, refinancing terms, variable-rate exposure and the effect of the increase in debt classified as due within one year on liquidity.
- Whether Texas and other states maintain supplemental Medicaid payments, and the potential revenue impact of program reviews or changes.
- Developments and possible financial exposure in the Health Midwest dispute, government investigations, securities litigation and UK competition proceedings.
- Actual capital spending, EHR incentive income, share repurchases and the company’s ability to sustain volume growth while controlling labor and other costs.