HCA Holdings, Inc. (now HCA Healthcare) — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods. The filing reports unaudited results. HCA operated 163 hospitals and 110 freestanding surgery centers at quarter-end.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue, net of doubtful-account provision | $8.112B | $7.249B | $16.517B | $14.655B |
| Net income attributable to HCA Holdings | $391M | $229M | $931M | $469M |
| Diluted EPS | $0.85 | $0.43 | $2.03 | $0.94 |
| Adjusted segment EBITDA | $1.569B | $1.420B | $3.392B | $3.010B |
| Interest expense | $448M | $520M | $890M | $1.053B |
Q2 revenue rose 11.9% and first-half revenue rose 12.7%. Management attributed much of consolidated growth to the consolidation of HCA-HealthONE after HCA acquired control in October 2011. Same-facility revenue increased 3.8% in Q2 and 4.5% in the first half. Q2 net income attributable to HCA was 4.8% of revenue, versus 3.2% a year earlier; first-half figures were 5.6% and 3.2%, respectively.
- Q2 equivalent admissions increased 9.7% consolidated and 3.9% same facility; same-facility revenue per equivalent admission declined 0.1%.
- Q2 same-facility inpatient surgeries declined 0.6%, while emergency department visits increased 8.8%.
- The doubtful-account provision was $1.041B in Q2, up $266M year over year. Charity-care deductions and uninsured discounts also rose. Combined charity care, uninsured discounts, and doubtful-account provision equaled 29.5% of the related revenue base in Q2, up from 27.7%.
- Interest expense fell as the average effective long-term debt rate declined to 6.5% in Q2 from 8.2% a year earlier; average debt balances were higher.
Cash flow, debt, and liquidity
- First-half operating cash flow was $2.257B, up from $1.666B. Capital expenditures were $784M; investing cash outflow was $886M.
- Cash and cash equivalents were $518M at June 30, 2012. Working capital was $1.690B.
- Total debt was $27.041B, including $1.309B due within one year. The filing describes HCA as highly leveraged; stockholders’ deficit attributable to HCA was $8.243B.
- HCA issued $1.350B of 5.875% senior secured notes due 2022 and extended $726M of term loans to February 2016. It declared and paid a $2.00-per-share distribution totaling approximately $971M, funded using available credit-facility funds.
- Available capacity under senior secured credit facilities was $3.100B at June 30 and $3.475B at July 31. Management stated that operating cash flow, facility availability, and anticipated debt-market access should cover expected liquidity needs for the next 12 months.
Outlook, unusual items, and risks
- Management expected 2012 capital expenditures of approximately $1.83B; projects under construction were expected to require a further $1.69B over five years.
- For 2012, management estimated EHR incentive income of $325M–$350M and related operating expenses of $90M–$115M. These estimates depend on funding, approvals, and continued demonstration of meaningful use.
- First-half 2012 Medicare adjustments for prior periods increased revenue by a net $188M and income before tax, after related expenses, by $170M (about $0.22 per diluted share). The net included a $271M Rural Floor settlement payment and an approximately $83M reduction from revised Medicare SSI ratios.
- Comparability also reflects 2011 charges: $75M of debt-retirement losses in Q2 and a $181M management-agreement termination fee in the first half. HCA had no corresponding 2012 charges.
- Material exposures include rising uninsured and patient-responsibility balances, changing Medicare/Medicaid reimbursement and supplemental-payment programs, and uncertainty over state participation in the Health Reform Law Medicaid expansion. Medicare and Medicaid generated 44.1% of first-half 2012 revenue.
- Government reviews include a DOJ review of ICD billing and records at 95 hospitals and a July 2012 information request concerning medical-necessity reviews of interventional cardiology services at approximately 10 affiliated hospitals, primarily in Florida. HCA said outcomes could not be predicted.
- A consolidated securities class action alleges IPO disclosure deficiencies, including matters related to prior accounting and revenue growth; related derivative actions were stayed pending developments. HCA also disclosed IRS disputes and other legal and regulatory proceedings.
- The filing states that operating results for the quarter and half-year are not necessarily indicative of full-year results. No specific full-year revenue or earnings guidance was provided.
Investor verification priorities
- Separate underlying same-facility growth from HealthONE consolidation and the $170M pretax Medicare-related benefit.
- Track uninsured receivables, collection performance, and the rising doubtful-account provision and charity-care/discount deductions.
- Review debt maturities, refinancing needs, variable-rate exposure, and available revolver capacity; a 1% interest-rate increase was estimated to reduce annual pretax earnings by about $41M.
- Assess whether EHR incentive income and projected expenses are achieved, and whether planned capital spending remains consistent with cash generation.
- Monitor Medicare/Medicaid policy and supplemental payments, the disclosed government investigations, securities litigation, and IRS disputes.