HCA Holdings, Inc. (HCA Healthcare) — Q3 2014 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2014, compared with the same periods in 2013. HCA operated 165 hospitals and 113 freestanding surgery centers across 20 states and England. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue, net of doubtful accounts | $9,220 | $8,456 | $27,282 | $25,346 |
| Income before income taxes | $929 | $701 | $2,513 | $2,146 |
| Net income attributable to HCA | $518 | $365 | $1,348 | $1,132 |
| Diluted EPS | $1.16 | $0.79 | $2.98 | $2.44 |
| Adjusted segment EBITDA | $1,828 | $1,603 | $5,472 | $4,860 |
- Q3 revenue rose 9.0% (same-facility 8.1%); nine-month revenue rose 7.6% (same-facility 6.4%). Adjusted segment EBITDA margin was approximately 19.8% versus 19.0% in Q3, and 20.1% versus 19.2% for nine months. This is a non-GAAP measure defined by the company.
- Q3 GAAP net margin was approximately 6.6% versus 5.5%; nine-month net margin was 6.2% versus 5.7%. Salaries and benefits were 45.7% of revenue in Q3 (46.3% prior year); supplies were 16.7% (17.2%).
- Operating cash flow for the first nine months was $2.821 billion, versus $2.454 billion. Q3 operating cash flow was $1.128 billion, versus $900 million. Nine-month capital expenditures were $1.482 billion; investing cash outflow was $1.512 billion.
- At September 30, cash was $515 million, working capital was $2.895 billion, and total debt was $28.470 billion, including $1.044 billion due within one year. Long-term debt carried an average rate of 5.9% and average life of 6.2 years. The company reported $2.163 billion available under secured credit facilities. Stockholders’ deficit was $6.018 billion.
Material changes versus the prior comparable period
- HCA-attributable net income increased 42% in Q3 and 19.1% for the first nine months; diluted EPS rose as weighted-average diluted shares declined following a May repurchase of 14.6 million shares for $750 million.
- Volume and pricing both contributed to Q3 growth: equivalent admissions increased 5.5% consolidated and 4.1% same-facility; revenue per equivalent admission increased 3.3% and 3.8%, respectively. Emergency visits rose 8.6% consolidated and 7.3% same-facility.
- Provision for doubtful accounts fell to $758 million from $955 million in Q3 and to $2.337 billion from $2.732 billion year to date. The company attributed lower uninsured admissions in part to expanded insurance coverage; same-facility uninsured admissions declined 14.8% in Q3.
- Interest expense declined to $427 million from $458 million in Q3 and to $1.314 billion from $1.392 billion year to date, primarily reflecting lower average interest rates. The average effective long-term debt rate fell to 5.9% in Q3 from 6.4%.
- Year-to-date earnings included a $226 million pretax debt-retirement loss and $78 million in legal claim costs; 2013 included a $17 million debt-retirement loss. Q3 also included $12 million of facility-sale losses.
Outlook, commentary, risks and unusual items
- No overall earnings or revenue guidance is provided. Management expected 2014 capital expenditures, excluding acquisitions, of approximately $2.2 billion; projects under construction were expected to require another $2.22 billion over five years. For 2014, estimated EHR incentive income and related operating expenses were each $110–$130 million.
- Q3 estimates increased Medicare revenue by $94 million for claims in RAC appeals and reduced Texas Medicaid revenue by $68 million, a net revenue increase of $26 million. A CMS review led Texas to defer the federal portion of certain Medicaid Waiver payments; HCA said it expected to stop recognizing some related indigent-care revenue while the review and deferral continued.
- March 2014 debt issuance and subsequent redemptions refinanced higher-cost notes. In October 2014, after quarter-end, HCA issued $2.0 billion of secured notes and the board authorized up to $1.0 billion of additional share repurchases. The company expected a further $108 million pretax debt-retirement loss from a planned November redemption.
- Key risks include substantial indebtedness and refinancing needs, Medicare/Medicaid reimbursement and supplemental-payment changes, uninsured receivables and collection risk, labor and operating costs, regulation, and pending investigations and litigation. HCA disclosed DOJ reviews concerning ICD billing at 95 hospitals and interventional cardiology services at eight hospitals; outcomes were uncertain.
- In the UK, the Competition and Markets Authority ordered HCA to divest either two London hospitals or Wellington Hospital and imposed other remedies. HCA appealed; a decision was expected in 2015. In the Health Midwest litigation, HCA recorded $78 million of additional costs after a stipulated capital-expenditure shortfall; final judgment was not expected before 2015, and HCA planned to appeal.
- The IRS began examining HCA’s 2011 and 2012 federal tax returns. Unrecognized tax benefits, including accrued interest, were $503 million; HCA could not estimate the possible range of changes within 12 months. Management stated operating cash, available credit and expected debt-market access should cover liquidity needs for the next 12 months.
Important facts for investors to verify
- Whether revenue growth and lower doubtful-account provisions persist, and how uninsured admissions, patient receivables and collection experience evolve.
- Resolution and financial effects of the Texas Medicaid Waiver review, other supplemental-payment program reviews, and the RAC claim appeals/settlement process.
- Debt refinancing, required debt service, facility availability and capital-spending needs; the company’s leverage remains substantial.
- Developments in the UK divestiture appeal, Health Midwest case, securities class action and government investigations, including any new estimates or contingencies.
- Impact of the $226 million debt-retirement loss and $78 million legal charge when assessing underlying earnings; also note the $26 million net revenue estimate benefit in Q3.