HCA Holdings, Inc. — Q1 2013 Form 10-Q
Reporting period: Quarter ended March 31, 2013; unaudited. HCA operates hospitals and related healthcare businesses. At quarter-end, it operated 162 hospitals and 113 freestanding surgery centers.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue, after doubtful-account provision | $8.440 billion | $8.405 billion | +0.4% |
| Income before income taxes | $639 million | $963 million | -33.6% |
| Net income attributable to HCA | $344 million | $540 million | -36.3% |
| Diluted EPS | $0.74 | $1.18 | Down $0.44 |
| Adjusted segment EBITDA | $1.568 billion | $1.823 billion | -14.0% |
| Cash from operating activities | $740 million | $797 million | -$57 million |
- HCA-attributable net margin was approximately 4.1%, versus 6.4% a year earlier. Adjusted segment EBITDA margin was approximately 18.6%, versus 21.7%. Adjusted segment EBITDA is a non-GAAP measure defined by the company.
- Operating cost pressure was broad: salaries and benefits rose to $3.917 billion (46.4% of revenue, versus 44.5%); supplies rose to $1.479 billion (17.5%, versus 16.9%); and other operating expenses rose to $1.523 billion (18.1%, versus 17.6%). Interest expense increased to $472 million from $442 million.
- Cash and cash equivalents were $594 million at March 31, down from $705 million at year-end. Working capital was $1.796 billion. Total debt was $28.608 billion, including $1.438 billion due within one year; debt averaged 6.5% interest and had a 6.9-year average life.
- Investing activities used $373 million, including $404 million of property and equipment purchases. Financing activities used $478 million. Cash declined by $111 million during the quarter.
Material changes and operating trends
- Revenue growth was modest despite a 0.9% increase in revenue per equivalent admission; equivalent admissions declined 0.4%. Same-facility revenue increased 0.1%, with same-facility equivalent admissions down 0.7%.
- Admissions increased 0.2%, while inpatient surgeries fell 2.8% and outpatient surgeries fell 2.9%. Emergency department visits rose 3.6%. Management noted that comparisons were affected by the extra leap-year day in Q1 2012.
- Uninsured pressure remains significant: charity care and uninsured discounts increased by $107 million and $311 million, respectively. Combined charity care, uninsured discounts, and doubtful-account provision were $3.609 billion, or 30.0% of the specified revenue-and-deduction base, versus $3.231 billion and 27.8% a year earlier. Same-facility uninsured admissions rose 5.4%.
- Q1 2012 included Medicare settlement and SSI-ratio adjustments that net increased revenue by $188 million and pretax income by $170 million ($0.22 per diluted share). This makes reported year-over-year earnings comparisons less representative of underlying trends.
- Q1 2013 included $16 million of losses on facility and real estate sales and a $17 million pretax debt-retirement loss. HCA redeemed $201 million of 9⅞% second-lien notes at a premium.
Outlook, liquidity, and risks
- Management expected 2013 capital expenditures of approximately $2.0 billion; projects under construction had an estimated $1.97 billion of additional costs to complete and equip over five years. The company expected to fund capital spending with operating cash and borrowings.
- For 2013, HCA estimated EHR incentive income of $200–$225 million and related operating expenses of $130–$150 million. Q1 EHR incentive income was $39 million; related operating expenses were $26 million.
- Management stated that operating cash flow, available credit facilities, and anticipated debt-market access should cover expected liquidity needs for the next 12 months. Available capacity under senior secured credit facilities was $2.575 billion at March 31 and $2.695 billion at April 30.
- HCA is highly leveraged and exposed to refinancing, interest-rate, reimbursement, payer-mix, labor-cost, and patient-collection risks. Approximately $3.303 billion of debt was variable-rate; management estimated a 1% rate increase could reduce annual pretax earnings by about $33 million. The company also cited potential changes to Medicare/Medicaid funding and supplemental-payment programs.
- Significant contingencies include the Health Midwest litigation: a January 2013 court ruling awarded at least $162 million, ordered an accounting of commitments, and indicated attorney fees of about $12 million. HCA had recorded $175 million of legal claim costs in Q4 2012 and planned to appeal; the award could increase depending on the accounting. DOJ reviews of implantable defibrillator billing at 95 hospitals and interventional cardiology medical-necessity reviews at eight hospitals remained unresolved.
- Other legal matters included securities class and derivative actions, with a motion-to-dismiss decision anticipated in mid-to-late 2013, and an appeal in New Hampshire hospital litigation. The filing states outcomes of investigations and claims may adversely affect results, financial position, or liquidity.
- HCA reported effective disclosure controls and no material change in internal control over financial reporting. The filing provides no general earnings or revenue guidance.
Key facts for investors to verify
- Whether cost growth, especially labor and supplies, can be moderated against weak equivalent-admission trends.
- Trends in uninsured admissions, self-pay deductions, receivables aging, and actual collections.
- Progress and financial outcome of the Health Midwest appeal and the pending government billing reviews.
- Debt maturities, borrowing costs, credit-facility availability, and cash generation relative to the $2.0 billion capital-spending plan.
- Whether expected EHR incentives are earned and recognized, and whether related expenses remain within management’s estimates.