HCA Holdings, Inc. (HCA Healthcare) — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and nine months ended September 30, 2012; financial statements are unaudited. HCA Holdings reported 162 hospitals and 112 freestanding surgery centers across 20 states and England. Comparisons are affected by the consolidation of HCA-HealthONE after HCA acquired a controlling interest in October 2011.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue, net of doubtful-account provision | $8.062bn | $7.258bn | $24.579bn | $21.913bn |
| Income before taxes | $677m | $123m | $2.339bn | $1.107bn |
| Net income attributable to HCA | $360m | $61m | $1.291bn | $530m |
| Diluted EPS | $0.78 | $0.11 | $2.81 | $1.04 |
| Adjusted segment EBITDA | $1.533bn | $1.412bn | $4.925bn | $4.422bn |
Q3 net margin was approximately 5.6% of reported revenue, versus 0.8% a year earlier; nine-month net margin was approximately 6.4%, versus 3.6%. Adjusted segment EBITDA is a non-GAAP measure. Q3 salaries and benefits were 46.9% of revenue (45.9% prior year); supplies were 17.1% (17.4%); other operating expenses were 18.7% (18.8%).
- Cash flow: Operating cash flow for the first nine months was $2.912bn, up from $2.546bn. Investing used $1.340bn, including $1.268bn of property and equipment purchases; financing used $1.473bn. Cash rose to $472m from $373m at year-end 2011. Management expected 2012 capital expenditures of approximately $1.83bn.
- Debt and liquidity: Total debt was $26.933bn at September 30, including $1.751bn due within one year; long-term debt carrying value was $25.182bn. Cash plus available senior secured credit facilities of $3.155bn provided reported liquidity sources. Working capital was $1.411bn, down from $1.679bn at year-end 2011. Stockholders’ deficit attributable to HCA was $7.859bn.
- Interest and tax: Q3 interest expense was $446m, compared with $519m; nine-month expense was $1.336bn, compared with $1.572bn. Average effective long-term debt rates fell from 8.0% to 6.6%, while average debt balances increased. Nine-month tax expense was $760m; the effective tax rate was 37.1%.
Material changes versus prior periods
- Q3 revenue increased 11.1%, but same-facility revenue rose 3.3%; same-facility equivalent admissions increased 2.6% and revenue per equivalent admission 0.7%. Consolidated growth was substantially affected by HealthONE consolidation.
- Q3 HCA-attributable income rose to $360m from $61m. The comparison is amplified by a $406m debt-retirement loss in Q3 2011; 2012 included a $7m facility-sale gain.
- For nine months, revenue increased 12.2%; same-facility revenue increased 4.1%. Reported 2012 results included prior-period Medicare adjustments: a $271m Rural Floor settlement benefit and an approximately $83m reduction from revised SSI ratios. Net Medicare revenue benefit was $188m; the adjustments and related expenses added $170m to pretax income, or $0.22 per diluted share.
- Uninsured-related deductions increased: charity care, uninsured discounts and doubtful-account provision totaled $3.545bn in Q3 versus $2.879bn, and $10.170bn for nine months versus $8.210bn. These combined deductions were 30.5% and 29.3% of the respective defined revenue bases, compared with 28.4% and 27.3%.
- In February 2012 HCA paid a $971m stockholder distribution ($2.00 per share). Nine-month financing cash flows also included $303m of distributions to noncontrolling interests.
Outlook, commentary, risks and unusual items
- Management estimated 2012 electronic health record incentive income of $325m–$350m and related operating expenses of $75m–$100m. Nine-month amounts recognized were $256m and $61m, respectively; estimates depend on funding and continued demonstration of meaningful use.
- Management said operating cash flow, credit-facility availability and anticipated debt-market access should meet expected liquidity needs for the next 12 months. It also reported approximately $1.44bn of estimated costs to complete and equip projects under construction over five years.
- After quarter-end, the board declared a $2.50-per-share distribution, approximately $1.2bn, expected to be funded using existing credit facilities. In October, HCA issued $2.5bn of notes and replaced its $2.0bn revolving facility, extending its maturity to November 2016.
- Key risks include substantial indebtedness and refinancing needs; reimbursement and regulatory changes, including health reform and Medicaid supplemental-payment programs; rising uninsured balances and collection risk; labor and operating costs; and government investigations and litigation.
- The DOJ was reviewing implantable cardio-defibrillator billing and records at 95 HCA hospitals, and a Miami U.S. Attorney’s Office request concerned interventional cardiology medical-necessity reviews at eight hospitals. HCA was cooperating and said potential effects could not be predicted. IRS disputes and a securities class action relating to IPO disclosures were also pending.
- HCA reported that disclosure controls were effective and that there had been no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much revenue and EBITDA growth reflects HealthONE consolidation versus same-facility performance.
- Whether uninsured deductions, aging receivables and collections continue to worsen; the allowance covered approximately 92% of the $4.891bn patient-due receivable balance.
- Whether Medicare adjustments, EHR incentives and Texas or other state Medicaid supplemental payments recur, and how results look excluding these items.
- Debt maturities, variable-rate exposure, refinancing terms and liquidity after the declared distribution; HCA estimated a $40m annualized pretax earnings reduction from a 1% rate increase.
- Developments and potential financial exposure from DOJ reviews, IRS disputes and securities litigation; the filing does not provide a clear estimate of possible losses for these matters.